April Full at 40%

RAKESH BATRA NATIONAL LEADER, E&Y

Capacity crunch may spoil party CAR COS POST STRONGEST APRIL SALES IN AT LEAST A DECADE

THE automobile industry has begun the new financial year where it left off the last with another spectacular leap in sales in April, but a severe capacity crunch is threatening to be a blight on growth. 

    Passenger car sales overlooked price hikes to rise 40% while two-wheeler sales increased 22.07% in April. Likewise, commercial vehicles rode a swell of investments in infrastructure to jump more than 64%. 
    But the industry is in no mood to celebrate because of stresses and strains on capacity. Society of Indian Automobile Manufacturers (SIAM) says the sector will clock 10-14% growth in 2010-11 compared to a 26% growth a year ago. 
    Consultants, industry experts and auto CEOs say demand forecasts have halved because of capacity troubles. 
    "A number of vehicle makers as well as key suppliers cut back on production when the slowdown hit. Since the demand turnaround was faster than expected, the capacity crisis has hit the sector suddenly," says CII president Venu Srinivasan. 
    Leading carmakers such as Maruti Suzuki India, Hyundai Motor India and Tata Motors are already facing this problem. 
    Maruti, which has already hit peak capacity of 1 million units a year, has announced a Rs 1,700-crore plant. Till its launch early next year, the country's largest carmaker has to make do with existing capacity. Top company officials say it can manage 2 lakh units more this year by making its factories more efficient. "We are managing and debottling our supplies," says Maruti Suzuki India marketing head Mayank Pareek. 
    Rival Hyundai too has barely enough to pull by. The company sold around 5.6 lakh units last year, but is targeting sales of around 6 lakh cars this year including exports because of capacity troubles. A spokesman said the company can produce nearly 6.3 lakh cars a year. 
    Maruti and Hyundai have issues in both assembly capacity as well as supply chain capacity, says Ernst & Young automotive sector national leader Rakesh Batra. In the case of Tata Motors, the bottleneck is limited to non-car segments. Its production of the Ace mini-trucks in Pantnagar is facing a capacity strain because of diverting an assembly line of 50,000 units for the Nano. 
    Similarly, in the two-wheeler market, motorcycle market leader Hero Honda has launched plans to build a fourth plant though the new capacity will not come on stream this year. 
    Auto analysts say the only companies smiling are new volume players like Volkswagen, General Motors and Ford, which have launched small cars. "Between the VW Polo, GM Beat and Ford Figo, the industry is looking to add another 10,000 units a month or around 150,000 units a year. For the passenger vehicle market, that number constitutes around 10% growth," says the CEO of a top auto financing firm. 
    But even here, capacity could play spoilsport. Although the new hatchbacks will have a smoother entry due to capacity worries of rivals, a crunch at the supplier end could pose problems. "While new players have additional assembly capacity, suppliers will still give priority to established players," says Mr Batra. 
    Even so, companies will take heart from the robust sales of April, the highest in a decade after the record 50.29% growth in April 1999. 
SHIFTING GEARS 
Maruti, which has already hit peak capacity of 1 m units a year, has announced a Rs 1,700-crore new plant 
Hyundai India can, at a stretch, crank out around a maximum 6,30,000 cars a year 
Tata Motors' Ace production line in Pantnagar is straining for capacity, thanks to the 50,000 unit diversion to the Nano assembly line 
In two-wheelers too, motorcycle market leader Hero Honda has started its fourth plant plans. But the new capacity will not come on-stream this year 
Auto analysts say the supply bottleneck will be a boon for new volume players like Volkswagen as well as General Motors and Ford, all of which have launched new small cars 
Capacity is a problem in the automobile industry.A number of vehicle makers as well as key suppliers cut back on production when the slowdown hit. Since the demand turnaround was faster than expected, the capacity crisis has hit the sector suddenly 
VENU SRINIVASAN 
CII PRESIDENT