The GDP indicator on wheels

Wed, 12 May Pre-Open

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If there is any number that clearly indicates the potential of India's GDP growth, it's this. It is a growth number that is purely a multiple of an economy's GDP growth. Companies from the sector sporting this growth have featured amongst the highest profit earners during the latest quarter's results. It is thus with good reason that investors keep a close eye on the auto numbers in India and China these days. That is besides those coming from the US and Europe.

Auto numbers in Asia do seem quite strong when compared to those in the West. However, it has its own set of challenges. Increasing raw material costs and inflation are some of the major problems. With China and Indian growing at a rapid pace, these countries need to make huge investments to curtail emissions. Bringing the vehicles' emission in line with global standards even over a long duration could cost billions of dollars. This would in turn strain the automakers to spend more on cleaner technologies. The challenge is even steep in an economy like India where more than 70% of the demand is for small cars. Or those that offer maximum value for money.

India recently posted its highest ever car sales figure in the decade. The auto manufacturers' association (SIAM) expects the growth to sustain. The key levers being easy availability of finance at affordable rates. While passenger car sales have grown by 40% YoY, commercial vehicles too rode a swell of investments in infrastructure. The sales of the latter grew more than 64% YoY. The key concern for SIAM now is strains on capacity.

China, the world's largest automotive market posted a 33% increase in car sales in April 2010. The China Association of Auto Manufacturers (CAAM) forecasts 10% annual growth in sales in 2010. But both Chinese and Indian car manufacturers could be up for some disappointment. This is given the unwillingness of respective central banks to let the inflation numbers go berserk. A quick uptick in interest rates could easily shave off several percentage points from the auto sales growth.

Car manufacturers in Japan, US and Europe have also seen better days in recent times. Same time last year the US auto industry was facing its worst turmoil. Behemoths like and GM and Chrysler were en-route to bankruptcy filings. But with bailouts and small cars filling in assembly lines, these car makers too are foreseeing improved profits.

Thus the global automotive industry seems to have put the economic crisis at the back of its mind now. Nonetheless, it cannot ignore the impact of GDP growth and interest rates on its growth numbers. The global economy is far from showing signs of stability. And inflation is threatening to make financing expensive. Thus it will be a long time before the industry completely recovers from its vulnerable state. The only way to remain profitable is to be proactive in aligning with future demand. Only such measures could help the players avert another crisis.