Russia Ukraine War | Rising oil prices: Rising oil prices due to the Russian-Ukrainian war may have an indirect impact on the automotive industry: Shashank Srivastava, Maruti Suzuki
What will be the impact of the Russian-Ukrainian war resulting in supply chain disruption on the automotive industry and Maruti in particular?
So far, there does not appear to be any immediate impact from the conflict. We are still evaluating and it will depend on how long this conflict lasts. There doesn’t seem to be any direct impact for us at the moment. We might see an indirect impact because we’re not just talking about chip supply or market disruption, but also fuel prices and other things that impact the whole industry as well .
What about the shortage of semiconductor chips? Is the problem behind us, close to being solved, or is the status quo maintained?
The chip shortage situation seems to be improving over the past few months. In September our production was only 40% of our capacity, October was 60%, November was 83-84%, December was 90%, January was 92-93%. February was also very good. So overall there seems to have been an improvement in the situation but it won’t be 100% even by the end of this year. So it’s a bit difficult to predict exactly when this will become normal due to the complex supply chain that’s involved and it’s not just Maruti Suzuki in India but also all OEMs around the world that have been affected by this process.
So while you saw record exports in February, we saw passenger vehicle sales in the month of February drop 7%. It could be a whole host of issues, but a conversation is ongoing about the impact of demand. But there is inflation. How are you going to balance that? Will there be price increases in prospect?
When it comes to material cost, in any automotive OEM, around 75-77% of the cost structure is material cost and therefore any change in raw material prices negatively affects the cost structure and that is what’s happened in the last – and -a year and a half and that’s why we’ve seen all the OEMs increase their prices by around 8% to 10% over the last year and a half .
That’s not enough to cover the entirety of the commodity price increases, because the commodity price increases have been quite large and it was hoped that they would come down, but probably because of the Russian-Ukrainian conflict, that has been a problem so far. We have to look long term, how long the conflict will last and what the long term impact will be. Certainly, we are monitoring the situation very closely and monitoring its effects on both turnover and net income.
Does that mean Maruti won’t raise prices?
What I’m trying to tell you is that it’s hard to say exactly that. It’s not like the company at some point starts looking at the situation and decides to raise its prices; it’s an ongoing process, and we’re doing those assessments all the time. I keep saying that we walk this very fine line between revenue and bottom line and that we cannot compromise on the volume part of revenue by raising prices as much as costs increase. On the other hand, you can’t just look at the top line. You also have to look at the bottom line. This is an ongoing process and we will constantly monitor and make a decision at the appropriate time.
Sales forecast in the coming months, what is the outlook here as we are seeing the fuel price spike which seems rather inevitable, so what are your expectations?
On the demand side, the industry will likely end this fiscal year with around three million vehicles and counting, which is only the fourth time. So with the shortage of semiconductors this year, that seems like a good number. The industry is expected to end up with around 15% growth or 14% to 15% growth from last year. But remember last year and the year before were smaller years and we are still a long way from the numbers we saw at the peak of 2018-19. Compared to that, we will probably be 13-14% less.
The rebound in demand appears to have been strong despite the shortage of semiconductors. I think the projections for the industry next year are between 3.36 million and 3.52 million. This seems to be the consensus of SIAM. So there is optimism but we have to be careful because the fuel hike scenario is negative for the industry in general.
One positive thing is that we have a CNG option where the running cost is much less impacted. Therefore, we believe that while the fuel price increase is negative for the industry in terms of consumer sentiment as it affects the cost of ownership, we have the CNG option and we remain optimistic for next year. .
This fiscal, exports as well are likely to double. So what is the way forward and what are some of the key geographies that will be targeted?
This year, with exports exceeding 200,000, this is the highest exports Maruti has ever achieved in a fiscal year, primarily in the geographies of Latin America, the Middle East, Southeast Asia and Africa. These are the four main geographical areas where we have had good export results.
On the new Baleno, the last time we spoke you had 20,000 pre-booked. How are you now ?
Now it has crossed the 32,000 mark for the new Baleno and the response seems to have been good. We launched it last Wednesday and across the country it was very appreciated for its technical characteristics and in any case Baleno is a very strong brand and has always been in the top five and in February it is in the top five.