Absorb price hike to navigate new rules: experts advise auto sector

Industry observers say that the onus of weathering the price hike that would ensue post the implementation of the new mandate of installing six airbags, is on automobile manufacturers, and the ideal way to do it is by bearing the added expense. This will ensure consumers, especially first-time car buyers looking at offerings in the entry-level segment, will be spared the brunt of the move. Customers in this segment are the ones who upgrade from a two-wheeler, and are therefore very price conscious.

Nitin Gadkari, the Union Minister for Road Transport & Highways, took to Twitter on January 14, to announce that he has approved a draft GSR notification, which mandates passenger vehicles—which can seat up to eight passengers (including the driver)—to have six airbags. According to Gadkari, the decision has been taken to minimise the impact of frontal and lateral collisions to the occupants seated in both front and rear compartments.

“It has been decided that four additional airbags be mandated in the M1 vehicle category, i.e., two side/side torso airbags and two side curtain/tube airbags covering all outboard passengers. This is a crucial step to make motor vehicles in India safer than ever,” reads Gadkari’s tweet. The minister has also said that the airbags will be fitted in all cars—irrespective of their variants and price range.

“All PV OEMs must absorb the price hike due to additional airbags by as much as possible so that demand recovery is not delayed,” Vinkesh Gulati, President of the Federation of Automobile Dealers Association (FADA) tells Fortune India.

What is an obvious yet significant ramification of this move is that the cost of vehicles under this category will increase, especially the entry-level segment of vehicles. “The entry-level PV segment, which is already witnessing a tepid demand, will see a cost increase to the tune of ₹5,000-₹15,000,” tells Gulati.

Shamsher Dewan, the vice president and group head of corporate ratings at ICRA Limited concurs. “The Government's decision also means higher vehicle cost due to increase in content per vehicle.”

Following this mandate is another task to an overburdened automobile industry grappling with the double blow of the relentless pandemic and the ongoing semiconductor chip crisis.

According to ICRA’s monthly report, retail sales of passenger vehicles declined by 10.9%, on a year-on-year basis during December 2021, on account of low inventory level across dealerships. “Semiconductor chip shortage and consequent lower production levels remain the bottlenecks; demand-supply mismatch has depleted inventory at dealerships, with most dealerships currently maintaining less than ten days of inventory,” the report reads. Gulati avers that with the supply chain already stressed due to semiconductor shortage, mandating six airbags may also put effect on production.

What will get the going tougher for automobile manufacturers is the fact that components required to manufacture airbags are sourced from abroad. “At present, the key component of airbags viz. sensors and inflators are imported,” Dewan tells. However, with an imminent increase in demand, this practice might no longer be prevalent. “With increase in volumes, auto component companies engaged in airbags are likely to explore opportunities to locally develop and manufacture the same,” he adds.

2022 looks gloomy for OEMs in the Indian automobile sector. They are expected to continue to grapple with supply shortage for a major part of the year as well, with recent spike in infections across the globe further heightening uncertainty regarding supplies, according to the ICRA report. “I hope, by the time October comes, India is out of pandemic and demand for vehicles—especially entry level segment rises, and thus negates the price hike,” says Gulati.

Gadkari’s announcement adds to extensive, spearheading measures taken by the minister to ensure road safety. The road transport ministry had earlier made it mandatory to fit all cars with only two airbags—driver (which was mandated in July 2019) and co-passenger (which was mandated in January 2022). Additionally, it had also mandated the fitment of the anti-lock braking system (ABS) in all the two and four-wheelers manufactured in India. ABS, as the name suggests, prevents brakes from locking up—which can trigger the vehicle to stop abruptly, which in turn, can cause the vehicle to skid. The technology is acknowledged worldwide for averting life-threatening accidents.

The slew of safety measures is critical for a country where road accidents are not uncommon.

India recorded 1,54,732 road accidents, according to data tabulated by the National Crime Records Bureau (NCRB). National highways, which include high-speed expressways, and comprised 2.03% of total road network, had a disproportionate share of 35.7% of total deaths appurtenant to road accidents in 2019, according to the ministry’s data. State highways, which comprised 3.01% of the road length in India, accounted for 24.8% of deaths in 2019. Overspeeding was the major cause of deaths in road accidents in 2019—accounting for 67% of the persons killed, followed by driving on the wrong side of the road (6%). The deaths have “pointed to a need for improved enforcement and correctives to be put on National Highways,” the report reads.

Light motor vehicles (LMVs)—which includes cars, taxis and vans—accounted for 18.6% of the total deaths in road accidents on national highways under NHAI in 2019. It comes as no surprise that industry observers have welcomed the move. “MoRTH's move to increase airbags to the tune of six shows the seriousness of the government towards reducing road accidents due to vehicle crashes,” says Gulati.