Covid-19 effect on Automobile Industry
The coronavirus (COVID-19) outbreak is massively causing widespread concern and economic hardship for consumers, businesses, and communities across India. The COVID-19 pandemic has pushed humanity and the global economy into a crisis not seen since The Great Depression. To curb the effect of this pandemic, The Indian Government has enforced a national lockdown, but it has severely affected the economy, upsetting entire value-chains of most major industries in India. The automotive industry is no different and one of the most affected due to the pandemic.
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The auto sector had already undergone considerable slowdown over the last 12-18 months due to structural changes beginning with the Goods and Service Tax, shift to Shared Mobility, Axle-load reforms, (BS-IV) To (BS-VI) transition, Liquidity Crunch, and so on. The Covid-19 lockdown has had a multiplier effect – the industry has almost been at a complete standstill since 24th March. Consumer’s demand has been slashed drastically due to the lockdown affecting auto manufacturers (OEM) revenues and cash flows.
Sales of almost each of the vehicle segments, including commercial vehicles (CV), passenger vehicles (PV), and luxury cars, clocked in FY20 are at the same level as FY16, according to data available with the Society of Indian Automobile Manufacturers. Domestic sales of trucks and buses (CV) in FY20 stood at 7.17 lakh units. FY17 had seen sales of 7.14 lakh units. In FY19 the CV segment saw its best year ever with sales crossing 1 million units for the first time. The biggest cause of the fall in CV volumes last year was the excess load capacity created in the market due to changes made to the axle load norms. Though the loading norms, which legalized overloading by 25-30 percent, were changed in the middle of 2018, its effects continued well into FY20.
Understanding the Covid-19 effect on Automobile Industry
Positives to navigate this environment:
The automobile sector must quickly execute plans to ride the Covid-19 storm in the short term and framing long term strategies to minimize the future impact.
Proposing a ‘Protect-Restore-Rebound’ approach to navigate the Covid-19 effect on Automobile Industry.
- In the ‘Protect’ stage i.e. next 6 months, it is crucial to simulate supply chain scenarios based on Covid-19 spread and ramp up expectations. OEMs must quickly assess the financial and operational viability of dealers and suppliers, and categorize them into healthy, moderate, and high-risk ones. OEMs should draw up support plans for high-risk dealers and suppliers through liquidity planning, operations restart and cost reduction ideas. Framing newer ways to stay in touch with consumers to enhance sentiments for OEMs and Dealers. Suppliers must evaluate current liquidity and arrange for near term working capital. Also, it is crucial to map out the impact of the ramp-up on capacity and in-bound supply considering limited manpower, social distancing norms, and lockdowns. Suppliers should proactively engage with OEMs about delays, protect orders, and gain support to address any material shortages and deviations on altered parts.
- In the ‘Restore stage i.e. 6 -12 months, it is crucial to work on the gaps found in the Protect stage. On the customer front, OEMs should plan product launches basis segment trends and conduct digital or soft launches. Workforce optimization, policy restructuring, resource reallocation (core vs. non-core), and remote working should be chalked out clearly. Further, identify savings through hedging strategies on raw material, logistics, and forex rates. This will be the time for finalizing digital transformation initiatives across the organization. Building digital threads for automation, monitoring, real-time decisions, removal of redundancies and human intervention, and remote working will significantly improve the organization’s agility for the future.
- In the ‘Rebound’ stage i.e. post 12 months, OEMs and suppliers should focus on creating differentiated capabilities for the future. They should leverage low valuations to acquire or co-create capabilities in the space of digital tools (e.g. automation, AI, blockchain, e-commerce), mobility platforms, EVs, and advanced safety systems. Both should define the right mix of new product and services portfolios considering new customer segments, health, hygiene, and connectivity needs. Suppliers must reinvent, respond faster, and hone ‘quality first’ mindset to capture a larger share of the global business. On the front end, the focus should be on enhancing digital customer experience, building an analytics backbone, and optimizing network footprint and showroom sizes considering future consumer behavior. R&D and Product teams should rapidly relook at product spec changes, lowering product and technology costs, and driving increased modularity to enhance per-unit margins.
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Covid-19 negative effect on Automobile Industry:
The first is to address the challenges, in the short term and over the long term, that lie ahead of us. Of the former, there are primarily two types: operational challenges and market challenges.
While short-term operational challenges are something the automotive industry can surmount on its own, that is not the case with getting the market back to its vibrant levels without external intervention. Over the last two years, the automotive industry has been battered by many factors that have been reported extensively. Now, owing to Covid-19, we are back to facing an extended period of low and negative sentiment. The industry has been in this state for a staggering 18 months now and one can reasonably expect it to continue for another 12 months.
The strength of the domestic automotive industry always has been the unquenched thirst of Indian customers for comfortable and safe personal mobility and an overarching desire to improve one’s living standards. The industry derives energy from these emotions. Unfortunately, the effect of Covid-19 is that now customers are in no hurry to do so, and are willing to wait it out.
A downward revision in the overall GST rate can bring down the cost-to-consumer, making new automobiles much more attractive, thus stimulating demand and consequently creating a trickle-down impact that can bring about a rapid recovery of the industry and the economy. Of course, this will also have an enormous social multiplier effect across the entire value chain and has the potential to positively affect the lives of 37 million people employed directly or indirectly by the auto industry and their families.
Predictions are that from a high of around 3.2 million units in 2018, the domestic market in the calendar year 2020 will contract to around 2.4-2.5 million units. Perhaps clever lessons learned and applied from this situation will help automakers and ancillary industries seek new business opportunities, bring in operational excellence, engineer levers for cost control, expand into new areas of operations, and bring in flexibility to the business.
Though the innate exuberance of Indian consumers will be negative in the short-term horizon, the challenge is to be able to hold on till they are ready to drive out of their homes in new cars. One thing is certain: it’s not business as usual anymore. Consumer behavior will change drastically — it will become more need-based and rational. The retail business will come up for an overhaul, where physical footfalls into showrooms will come down but digital footfalls will increase.
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Outlook for FY21
April recorded a first-ever washout month in the history of the Indian automotive scene when zero sales were recorded by each vehicle category. With a staggering ramp-up in production beginning this month the first half of the year will be challenging, say experts.
“With the already existing slowdown during FY20, the industry is likely to suffer huge losses going forward. Even if the pandemic is curtailed, the consumer sentiments are expected to be unfavorable and demand is expected to remain muted during H1 FY21 led by volatile economic conditions. Also, government spending on infrastructure is expected to be low during the period, further impacting the demand for commercial vehicles,” stated a report by CARE Ratings.
Companies are looking to postpone new model launches and go slow on new capacity additions in light of the expected slowdown after the lockdown is lifted. Investments are being relooked and cost-cutting is being pursued aggressively by every company.
“The outlook for FY21, especially the first half, remains weak given the macroeconomic headwinds given because of recent pandemic outbreak coupled with significant price hikes because of transition to the new emission norms. Any recovery in the latter half hinges on pick-up in construction activity,” said a report from ICRA talking about the medium and heavy commercial vehicle.
If there is no direct government intervention to uplift demand then the auto industry is staring at its worst year ever.
Author: Yash Tanwar
About the Author: Commerce graduate from the University of Delhi who is currently pursuing FRM Part-1 2020. He wants to obtain a stronger track record of result making and gain something new skill sets that are applicable to Finance specifically in the risk domain.