The impact of the demonetisation drive in India on the India automotive sector, how are you evaluating it prima facie?
I have just arrived in India yesterday. Initial impressions were from afar and I think a lot of people outside the country are impressed with the scale or the ambition of the undertaking. So that is certainly the impression from distance. Obviously as you get closer to the market on the ground and you listen to colleagues, then clearly there will be some disruption in the short term and this is where we beginning with our interpretation.
At the moment, we think that the effect is likely to be felt most in the first quarter of 2017 basically that lack of liquidity in the market place.
In times of uncertainty, consumers tend to hold on to their cash whether it is something that is physical, obviously the bank notes, whether or not it is the money which is held in their accounts. So we see that consumers are likely to stand back from the market place through the first quarter of FY17. But our initial expectations are that as we move into the balance of the year, we should start to see an improvement because the government is able to deliver with clarity on this initiative. That should be felt both in terms of consumer and business confidence.
Our initial impact on both vehicle demand and vehicle build is that we are probably expecting to lose somewhere in the region of around 100,000-120,000 units whichever way you look at it build or consumption and the majority of that impact would be felt in the first quarter of 2017. Then if we look longer term, I guess then we would start to imagine that the policy has a positive effect, certainly bringing more clarity to business life in India.
But perhaps we are also then start to look at the impact of the GST, certainly efforts have been made to simplify the taxation system, should have a net positive effect on the vehicle market and again that is going to help us with some of our longer term view for the Indian market place.
I would say certainly with the demonetisation argument what we are looking at is perhaps the impact of most harshly felt, most sharply felt in the rural areas. We think despite the kind of disruption shocked the system, certainly in the larger urban market places, dealers can make finance available to their consumers and they can really help people get over and beyond the short term challenge of what is happening with the actual bank notes.
That is where we are with demonetisation at the moment. I have colleagues out here in the office who are tracking this every day and as we get more and more clarity, we will start to interpret them further. But we are expecting perhaps a 100,000 to 120,000 units to be lost from the system in 2017.
Eicher Motors had approximately an 8% drop in walk-ins and bookings for November and that is really in line with what you have been talking about the short-term impact that could be felt on account of demonetisation. When it comes to the rural sector as you flagged off, how long do you think we could see pain on account of the note ban and even by and large what is the long-term impact?
The supportive impact of simplifying the taxation system is also giving consumers the sense that there is less black money floating around in the system. They will be very subtle but there should be positive effect. Coming back to how long we expect the negative impact to run in the rural sectors, taking the market as a whole, we are expecting the disruption to continue in the rural market right throughout 2017. It is difficult to get visibility on this but what we are aware of is that far more transactions have been processed with hard cash in the rural environment and most OEMs are perhaps a little less sophisticated in their dealership offerings especially finance to consumers in the rural market. So it is difficult to put an absolute end date on it but again I think the point that we want to make today is that it is likely to be a longer lasting effect in those rural market places.
What is happening with Jaguar Land Rover business across the globe and how are you seeing trends there? For some time, China is slowing down and that is impacting the sales number. The sluggishness in Europe is being a bit of an overhang and then one keeps monitoring the data that comes out of the US. Which way is the JLR brand headed in terms of generating that growth traction and sustaining it globally?
Well we do think they can get pretty close to delivering on their ambitions. They have talked about getting to of over a million units or so by the end of this decade. We have them slightly short of that but clearly a positive development from where we are right now. And the impact is a mixture of markets and it is a mixture of the reactions of the brand.
First of all, you talked about those market places, in China this is where we expect the greatest growth opportunities both for Land Rover and for the Jaguar brand. And to be fair, they are coming off a relatively low base in that environment. So we think there is plenty of headroom for them to grow. The sort of premium sedan and SUV space has been largely dominated by the actions of the German premium brands and Jaguar with a new broader fresher product portfolio can certainly take the challenge to those competitors in a way that it has lacked in the past.
If we move to Europe and North America, the traditional and the largest markets for both Jaguar and Land Rover, again what we are seeing there is probably not so much year-on-year growth rates being hugely positive. We are going to see a slowdown in those growth rates but again it is expanding the product portfolio and starting to position both brands in the spaces that consumers are interested in.
Fortunately for the Land Rover side of the business, both Range Rover and Land Rover itself are strong brands in the sector or SUVs and increasingly the smaller, more compact crossover SUVs. So they are developing their product line up to attack those spaces. I think the interesting thing is now how does Jaguar develop going forward and clearly with the recent launch of the F-Pace which is their first crossover SUV, they are going to start to move into some of the space which is occupied not just by the German premium brands but also of course by Land Rover and Range Rover themselves.
It is a great upside opportunity but I think it will have to be a careful blend of the brand and engineering to make sure that Jaguar can be sufficiently differentiated from its internal competition.
How do you see India’s position in the global auto manufacturing industry? Do you see it as becoming an export hub or just the domestic led story is so strong that that will drive sales and investment also actually?
It is very strong domestic led story. I mean, in the next five year or so, we expect output levels in India to overtake those in Germany. We expect in a very short space of time to overtake output levels from South Korea. And that is largely a function of the growth that we expect in domestic demand. Adding exports on top is always a favourable development both for the local industry but of course for OEM to get involved in that because it does give them some insulation from any slowdown in the domestic marketplace so it is a great position to aim to be in.
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