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Economy

India carmakers shut plants for maintenance after demand slows on demonetization

MUMBAI (NewsRise) -- Indian carmakers are shutting down factories for annual maintenance as well as to align production with demand after growth slipped last month amid a cash shortage in Asia's third-largest economy.

India last month banned 500- and 1,000-rupee notes that account for 86% of the currency in circulation in a bid to crack down on corruption and unaccounted wealth. The move has resulted in a cash crunch as the government was unable to keep pace with the demand for new currency notes of 500 and 2,000-rupee notes.

Growth of India's car sales slumped to a nine-month low in November, as customers kept away from showrooms. South Korea's Hyundai Motors, Japan's Honda Motor and sport-utility vehicle maker Mahindra & Mahindra suffered drop in demand.

Mahindra will observe "on need basis" a few days as "no production days" at some of its automotive and tractor plants as part of "its efforts to optimize inventories during December year-end," the company said in a statement on Friday. This is apart from the scheduled maintenance shutdown at some of its plants for three to five days, said Pravin Shah, president and chief executive of the company's automotive division.

However, Mahindra said it doesn't expect any "adverse impact" on the availability of products in the market as it has adequate stocks available.

"Traditionally, December is a month when demand is low, and additionally the demonetization has come up, which has impacted the overall demand," Shah told reporters. "With all other things being positive, I am sure the customer will come back in a couple of months."

India's automakers are barely recovering from a spell of weak demand in rural areas after two consecutive years of drought. The onset of strong monsoon so far this year, as well as the government move to increase salaries and pensions for millions of its employees and pensioners by at least 14% was set to boost demand in coming months.

Last week, Mahindra, India's largest SUV maker, reported a 33% decline in sales, citing demonetization and subsequent deferral of purchases by prospective buyers.

According to an Economic Times report, Honda Motor has also planned four non-production days at both its India plants this month, and may even take more such steps if demand declines further.

"The market prospects are not clear," the Economic Times quoted Yoichiro Ueno, managing director of Honda Cars India, as saying. "We are carefully monitoring it and will take necessary production alignment in case we judge it is necessary."

A spokeswoman for Honda didn't immediately respond to a query.

Last month, Honda saw its India monthly sales plunging a 45%. Ueno cited disruptions in the market due to the on-going effects of demonetization for the sales fall.

"We have taken several constructive steps to neutralize the impact of demonetization, which includes squeezing the wholesale to avoid the stock piling up at the dealerships," he said in a statement on Dec.1.

Analysts say it is difficult to quantify the impact of demonetization, as companies trimming output in December is not a new trend.

"However, as November wholesale data indicates, the situation is quite bad for the industry, and it has the potential to impact demand, especially if the currency supply doesn't ease in the month," said Anil Sharma, principal analyst at IHS Automotive.

IHS expects India's light vehicles industry that includes passenger cars, SUVs and vans to grow 7.5% to 3.38 million units.

The cash crunch has resulted in an environment of uncertainty among buyers, effectively stopping them from spending on big-ticket items such as vehicles, Sharma said.

To be sure, Maruti Suzuki India, the nation's largest automaker, said its plant shut downs are part of a routine maintenance it undertakes twice every year. The company said its two plants in northern India will remain closed between Dec. 26 and Jan. 2.

Maruti, a unit of Japan's Suzuki Motor, was the odd one out in the industry with an over 14% jump in sales last month, as the company continued to dispatch stocks to beef up inventory of its retailers.

Shares of Mahindra & Mahindra lost 1.43%, while that of Maruti Suzuki ended 0.10% down in Mumbai trading. The benchmark S&P BSE Sensex gained 0.20%.

-Dhanya Ann Thoppil

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