Good morning. In today’s edition —the year 2025 will be a perfect storm for the auto industry; pharma stocks have justified higher investor expectations; and a bizarre calculation error in India’s gold export numbers. 

THE TAKE

The Auto Industry Is In For A Perfect Storm In 2025

The year 2025 is set to shake up the automotive industry as we know it. The early symptoms were already visible in 2024 — auto sales slowed down in markets like India, German auto giants like Volkswagen cut back on business and now Japanese automakers Nissan and Honda are reportedly in talks for a merger.

Nissan Motor Co. is fighting for its life, reported Bloomberg and is now headed into the arms of Honda Motor Co. to pool resources in an alliance that could rival Toyota Motor Corp. Nissan, a prominent Japanese auto brand, was hit by weak sales in the US and China that triggered a huge profit slump, forcing it to cut jobs and a fifth of its manufacturing capacity. 

Nissan launched the world’s first mass-market electric vehicle (EV) — the Leaf — in 2010. However, it was never able to capitalise and create a global model like Toyota did with its Prius hybrid. Now, Nissan doesn’t have the EVs or the hybrids to compete in either the US or China.

Churn In The Auto Industry

Volkswagen plans to shut at least three factories in Germany, lay off tens of thousands of staff, shrinking its remaining plants in Europe's biggest economy as it plots a deeper-than-expected overhaul, Reuters reported in October.

Right now, Volkswagen unions are facing off against the management but it looks like there will be no return to the glorious past. 

In the past, it was auto companies launching new models that determined market trends, today a mobile manufacturing company, for instance, is planning to make cars. 

Reports also suggest that Foxconn, best known for making mobile phones for Apple, wants to wade into the Nissan and Honda party.

Which means the auto industry is in itself not what we knew of it, Foxconn being just the latest example.

Back in India, sales have been slowing steadily with manufacturers finally cutting back production to allow for dealerships to reduce their inventories, now down to around 60-65 days from the peak of more than 80 days two months ago. 

Be that as it may, electric car vehicle sales, after shooting up encouragingly in the early days, are now slowing down with hybrids selling more. 

Problems That Lie Ahead

There is a bigger problem. Entry-level cars, particularly the kind made by Maruti, have slowed the most, as the company has acknowledged in recent interactions with analysts and the media. One reason is rising prices. Cars that cost around Rs 6.5 lakh four years ago now cost around Rs 10-11 lakh, dealers have told me in recent months. 

Another problem is that affluent customers are driving demand for high-end automobiles — and for matter most premium products — while lower segments have remained stagnant. This reflects a deeper problem of income distribution in the economy and not just high prices. 

The problem that lies ahead for manufacturers is that while people continue to buy cars, demand will grow at a very slow, maybe single-digit, rate in the foreseeable future.

On the other hand, car makers in India are betting high on electric.

If SUVs (sport utility vehicles) were the flavour of 2024, EVs may turn out to be the big theme for 2025. Automakers are gearing up for some 15 to 20 EV launches in the coming year, doubling from a modest seven to eight in 2024, reported the Business Standard. 

This means that car makers have to invest huge sums to add capacities for electrics and hybrids if they want to compete there. Conversely, the capacity to make internal combustion engine cars may not be utilised fully. 

This is to put things mildly. A lot of manufacturing capacity will likely lie idle till it is converted into electric or hybrid. 

This has the making of a perfect storm for the auto industry. The coming year promises to be exciting and challenging in more ways than one.

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CO:RELATION

Pharma Stocks Fortify Gains 

Investor expectations were high right from the start of 2024. Pharma stocks have justified higher investor expectations by clocking the most substantial revenue growth in 13 months. The latest industry data for November 2024 is encouraging on many counts. After a long time, all three major therapeutic segments, acute, sub-chronic and chronic, reported strong monthly growth. A combination of price growth and new launches helped these companies. 

According to India Ratings, an affiliate of the global rating agency FITCH, domestic formulations sales account for 45% of the pharmaceutical sector's sales. Investors are very optimistic about the second half of the financial year in 2024-25. The Nifty Pharma index has given three times more returns in 2024 than the Nifty 50. Even when there is a selloff in other sectors, pharma shares are holding firm. Shares of companies like Glenmark, Lupin, and Sun Pharma, with significant generic drug exports and a strong presence in domestic formulations, have outperformed most other listed drug companies.

CORE NUMBER

Rs. 15.82 lakh crore

This is how much the net direct tax collection was this fiscal year till December 17, a 16.45% year-on-year increase, buoyed by higher advance tax mop-up, Business Standard reported. Advance tax collection during this period rose 21% to Rs 7.56 lakh crore. The collections include corporate tax of over Rs 7.42 lakh crore and non-corporate tax of Rs 7.97 lakh crore. Securities Transaction Tax (STT) stood at Rs 40,114 crore. Refunds issued amounted to Rs 3.39 lakh crore, up 42.49%. Gross direct tax collection reached over Rs 19.21 lakh crore, up 20.32% from the previous year.

FROM THE PERIPHERY

—🤦 India's record-breaking trade deficit of $37.9 billion in November, fueled by a surge in gold imports, may be the result of a calculation error, according to sources cited by Bloomberg. Officials reportedly double-counted gold shipments in warehouses following a change in methodology in July. This potential overestimation, which could be as high as 50 tons or 30% of November's gold imports, has prompted efforts to reconcile the data. In November, gold imports quadrupled to $14.9 billion, making it the second-largest import item after petroleum, with a 21% share of all imports. This discrepancy in trade data reporting raises concerns as the Bloomberg report also stated that the double-counting may have gone unnoticed earlier but became evident in November when domestic prices fell significantly below international prices.

—🕵️‍♂️ After a second alleged Starlink device was seized by Indian authorities, SpaceX CEO Elon Musk said, “Starlink satellite beams are turned off over India.” SpaceX wholly owns Starlink, an international satellite constellation. Musk was responding to a post on X of the Indian Army about a search operation in Manipur on December 13 where the photo showed a satellite dish and receiver with a Starlink logo. Indian authorities had seized another such satellite in a drug bust. Musk also claimed that Starlink satellites had never been turned on. Musk reportedly faces federal reviews in the US over “disclosure protocols intended to protect state secrets”, according to The New York Times. 

—⚖️ Finance minister Nirmala Sitharaman told the Parliament on Tuesday that India’s public sector banks had recovered Rs 14,131.6 crore by selling the assets of fugitive businessman Vijay Mallya. The minister said this was part of the effort to recover funds from financial crimes. Mallya is accused of financial irregularities related to now-defunct Kingfisher Airlines.  

—🚨 Fifty-nine percent of Indian firms faced financial fraud in the past two years, 18% above the global average of 41%, revealed PwC’s ‘Global Economic Crime Survey 2024 — India Outlook'. Procurement fraud emerged as a significant concern, cited by 50% of respondents — a significant jump from 2022’s focus on customer fraud. Corruption and bribery accounted for 33% of crimes, with 26% of firms ranking it highly disruptive. While 82% expressed confidence in compliance programs, gaps remain: 34% skipped anti-corruption audits, and 13% lacked third-party risk management. Forced labour risks also loom, with 26% of firms unaware of its significance.

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