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How to beat coronavirus impact on automotive sector?

How to beat coronavirus impact on automotive sector

Automotive | Jun, 2020

The coronavirus outbreak that started from Wuhan, China, has now infected 8,578,283 people and resulted in 456,286 deaths as of June 19, 2020. As the global pandemic coronavirus continues to spread, no industry could escape from its impact, which is evident on the global economy as well. Automotive is one such sector which has witnessed massive setback due to the coronavirus. Globally, different countries are taking measures to fight the COVID-19 outbreak. However, this kind of pandemic outbreak exposed that there is very little preparedness to confront such issues on a broader scale. Strengthening the supply chain and incorporation of new technologies will play a key role in minimizing further impact. Additionally, government leaders from different nations should invest in any preparedness gaps and coordinate internationally to tackle financing and emergency response needs.

 

If we briefly look back, we can conclude that the India automotive sector is one of the significant contributors to Indian GDP last year, i.e., 2019-20, contributing 7.5% to the GDP. The country's automotive industry relies heavily on imports of auto components such as fuel injection pumps, EGR modules, electronic components, turbochargers, airbag components, from China. The country imported USD4.5 billion of auto-components from China in 2018-2019, which contributed to roughly 27%. The situation worsened when the Chinese government's suspended shipments by sea until further notice and only allowed air shipments, which is not suitable for auto components and forging industries; therefore, the OEMs in India couldn’t plan production beyond the inventory available to them.

 

Even before the lockdown, the country's automotive industry was witnessing low sales. Sales of 20.4 million vehicles in April-February, 2019-2020 in comparison to sales of 24.3 million in April-February, 2018-2019 clearly indicated towards decline in demand by 15.85%.



Additionally, President of Society of Automobile Manufacturers (SIAM) pointed out that the plant closures of auto original equipment manufacturers (OEMs) and components makers would lead to loss of more than INR2,300 crore in turnover for each day of closure. In addition to this, impending change from BS-IV to BS-VI for reducing greenhouse emissions from 1st of April 2020 compelled OEMs to reduce the inventory & production rate and move to new assembly with new engine design and improved fuel efficiency.


Challenges before the automotive industry post lockdown:

Post government’s order for shutting down factories and assembly plants, restarting production facility is a challenge before the automakers. Restarting or resumption of halted production process requires capital investment, coordination with logistic partners, local partners, and employees. Even when companies resuming operation in the plants, they would not have sufficient manpower and continuous parts supply. 

 

All the inventory stocks are cleared and very few dealers have resumed service department but not showrooms. This is another challenge before the companies to kick start the sector. Furthermore, several companies have either launched or in process of launching online platform for vehicle sales, which is still under development phase and has low penetration among customers.

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Finance minister announced INR1.7 lakh crore economic stimulus package to revive the economy which was brought to standstill due to lockdown. Also, lack of introduction of policies for boosting the sector in economic stimulus package from government's is expected to negatively affect the sales of vehicles in the country. 

 

How can demand be restored and automotive sector can be brought on track?

 

·     As we know that the pandemic is here to stay, atleast until a vaccine is developed, automotive sector across India and world is observing varied growth, thanks to ease in lockdown. Automotive industry is projected to witness positive growth in the second half of the year as automakers are replenishing their inventories to overcome uptick in demand for vehicles, as consumer are dodging or avoiding car sharing/pooling and public transport amidst COVID-19 crisis. Social distancing and preventive measures are expected to ramp up the demand for individual automobile ownerships, despite several efforts by several ride-hailing platforms like Uber, Ola and Lyft, among others for ensuring the safety of driver and riders.

 

·  The industry is projected to bounce back during festive season with increased demand particularly in two-wheeler segment. During 2008-09 recession, United States and Europe implemented automotive scrappage policies to encourage customers to replace older vehicles. Introduction of similar automotive scrappage policy and lowering interest rates of auto loans coupled with reduction in road taxes might boost the sector and bring it back on its track of continuous growth.

 

·     One solution to kick start the sector can be reducing reliance on other countries and switching to domestic manufacturers or alternate suppliers outside China. However, the shift cannot be sudden but action plan comprising acquisition of multiple vendors on global scale can definitely put the industry back on track. Also, launching domesticized production system can be a long-term solution of the problem. At the similar front, Japan has earmarked USD2.2 billion to help companies for shifting manufacturing bases from China to Japan.

 

·    GDP of any country has a direct correlation with the growth of the automotive sector and India is no different. Initiatives and steps taken by the government in the house for normalizing and reviving the demand from marketplaces are projected to fuel the demand for automobiles as well.

 

·    Auto-makers generally follow a decentralized approach for selling vehicles, which includes automakers, dealers and consumers but this is expected to change in the long run. Electric vehicle major Tesla sells vehicles through digital retailing and by removing distributors from the sales channel, thereby saving on dealer commissions and improving customer engagement. The company has shown upward trajectory in terms of vehicle sales in Q1, 2020. The success of the company can encourage others to follow the similar footprint.

 

·     Emergence of ‘Safety and Health’: Several companies have been offering safety and health features in their vehicles for a long time now. Coronavirus outbreak has further fueled the demand for such features, therefore, OEMs are developing and incorporating features in automobiles. For instance, Geely Motors, a China based automaker, introduced N95 intelligent air purification systems for preventing cars from viruses and bacteria. At the similar front, Jaguar is focusing on adding UV-C light sanitizing unit as part of future HVAC systems. 

 

·     Automobile industry is a blend of skilled and unskilled labor but today, the production has completely come to a halt and work from home is not an option for unskilled labor. Therefore, companies should work on something new, be it on design or comfort or technology, whichever is possible, while working from home.

 

 

What should companies do to navigate this environment?

With the pandemic disrupting supply chains within the country, several industries and businesses including automotive will have to bear the estimated revenue loss as they were forced to shut down their operations. Outbreak of COVID-19 had a negative effect on the customer’ confidence also; thereby impacting both supply and demand for automobiles. Recommended minimal travel guidelines laid down by the government might also negatively influence the market. As business resume their operations, there may be a surge in growth in the automotive market but it will take time to go back to normal. Nevertheless, the COVID-19 outbreak will surely accelerate the industry consolidation and transformation.

 

·   Automakers and suppliers need to promote safe production environment and minimize community transmission post reopening of manufacturing plants. In order to incorporate social distancing, workstations need to be rearranged and PPEs such as gloves, helmet, masks need to be provided to workers. Additionally, companies also need to frequently schedule sanitization and cleaning of facilities.

·   Companies need to prioritize their offerings. They should initially work on vehicles which are expected to witness high demand such as SUVs, two wheelers and include consumer centric features in vehicles.

·    Automakers can also follow 3 step approach comprising:

1.    Assessment of operational and financial viability of dealers/suppliers.

2.    Working on the gaps found in the supply chain.

3.    Investment in product development.