As the automobile companies’ spending on R&D rises (4.7% YoY growth in FY18) the permanent job creation appears to be missing in the country’s employment-intensive automobile industry.
Why is this important
- The current financial year’s R&D expense is expected to rise further due to the implementation of BS-VI emission norms in 2020 and the extra expenditure needed for testing and validating safety regulations for the new BS-VI compliant engines.
- After rising ~20% in each of FY2014-2015, the R&D expense declined by 0.9% per cent in FY17. It then rose 4.7% per cent in FY18.
- Tata Motors (excluding JLR) led the pack in FY18 with R&D spend at ~Rs 2400 crore.
- M&M has been spending >Rs 1000 crore a year. However, its R&D expense dropped to Rs 1990 crore in FY18, from Rs 2080 crore in FY17.
- While Hero MotoCorp saw its R&D expense fall to Rs 490 crore in FY18 from a little over Rs 700 crore in FY17 the shift from newly implemented BS-IV to BS-VI in a short duration of 2 years will drive the R&D expense higher.
Another trend emerging amongst top automakers is that they are resorting to hiring contractual staff to meet the rising demand for vehicles across segments.
- As the consumer taste shifts and demand fluctuates, the automakers feel that having a higher temporary workforce will be beneficial in the long-run. This can be corroborated by the fact that in FY2018, out of the 24,350 additional staff hired by Maruti, Hero, Ashok Leyland and TVS Motors, less than 4% were permanent.
- The complexity of future technologies will tend to change the nature of R&D expense and the companies might be well positioned if they co-create, collaborate or outsource instead of doing it all in-house.
- As the new regulations’ cloud hovers over the automobile sector, it is imperative that the automobile players keep the cost down and higher contractual hiring seems like a step in that right direction.
- The risk of having a higher contractual workforce is the higher training costs and attrition rates at crucial vehicle lifecycle. As long as the incremental cost of training new employees is lower than hiring permanently, it can be a good move by the industry.
Maruti Suzuki India Ltd. (CMP: Rs. 9,263 ,Market Cap: Rs. 2,79,786, FY2020 P/E: 24.4)
Tata Motors Ltd. (CMP: Rs. 270, Market Cap: Rs. 78,059, FY2020 P/E: 6.78)
Hero MotoCorp Ltd. (CMP: Rs. 3199, Market Cap: Rs. 63,897, FY2020 P/E: 14.50)
TVS Motor Company Ltd. (CMP: Rs. 513, Market Cap: Rs. 24,371, FY2020 P/E: 22.04)