Even before the COVID-19 crisis, the Indian automotive sector was facing a severe downturn, but the problems were amplified by the Covid-19 pandemic and the lockdowns across India and the rest of the world. The situation was compounded because India was transitioning from BS-IV to the BS-VI era.
These are challenging times for the Indian automotive sector because of slow economic growth, negative consumer sentiment, axle load norms, a liquidity crunch, low capacity utilization and potential bankruptcies. The current lockdown has severely affected the entire ecosystem of engine driven applications in India.
For the first time, automobile OEMs reported zero domestic sales and very limited exports in April. According to the Society of Indian Automobile Manufacturers (SIAM), the industry is losing more than $300 million per day.
Resumption of Operating Activities
Since the entire automotive value chain – suppliers, manufacturers, and distributors–is not opening at full capacity, resumption of operating activities remains a hurdle for the automotive OEMs despite the government’s permission to start operations in a phased manner in select geographies. Today, operating an uninterrupted supply chain is the biggest hurdle for OEMs. At the same time, dealerships have not resumed operations, production in isolation means increased inventory and limited working capital
Many OEMs claim that the production of new vehicles is last on their list. With the resumption of operations, OEMs will focus on reducing spare parts in the after-market, delivering finished goods inventory to dealerships, audits and maintenance activities.
Impact on Business Models
Once we complete this phase, customer priorities will change, and it will be more towards individual cleanliness, hygiene, and health during travel. Following the pandemic, we expect customers’ inclination will be more towards personal mobility. Shared mobility will take a toll on the short term. But with an aversion to higher discretionary spending like buying new vehicles and subdued sentiments, demand for used cars will rise significantly in the next 3 – 6 months. Service-based models such as pay-as-you-go and lease rentals may also see uptake from Indian consumers.
Evolving business operating activities, including working from home and virtual meetings, might result in people driving fewer kilometers in their vehicles on average, thus downgrading their budget. Also, it will make way for new business models – Online/ digital vehicle sales are likely to gain traction as customers would incline towards contactless modes of buying. Recently, many OEMs launched online sales channels to connect with customers indicating new ways of doing business digitally.
On the other side of the value chain, ancillary manufacturers are anticipated to face considerable operational and financial hurdles. Owing to domestic as well as global issues, Indian automotive suppliers will face several challenges. Lower domestic sales will lead to lower capacity utilization, reduced revenues, and reduced profit margins
The sourcing practices are also likely to be impacted – many OEMs and tier 1 suppliers will evaluate to source more parts locally. This risk-mitigation measure is anticipated to boost the local auto components industry and to avoid the adverse impact of the overdependence on other countries. PSR
Aditya Kondejkar is Research Analyst – South Asia Operations
