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India Focus

Once the current crisis is over, auto companies expect sops to make parts in India. The aim is to diversify sourcing away from a single destination like China
twitter-logoSumant Banerji | Print Edition: April 19, 2020
India Focus
Photograph by Sandeep Sahdev

If one has to understand the chronology of the spread of the COVID-19 pandemic in India, one needs to just look at developments in the domestic automobile industry over the last two months. When reports of the first casualty came from China in mid-January, they were ignored. It was then just a local virus after all.

Things became serious when China's Wuhan province was quarantined and the World Health Organization (WHO) declared a public health emergency in late January. Then, the worry was more about the virus jeopardising the biennial Indian Auto Expo in early February. This year, there was a significant Chinese presence, but after contemplating a cancellation, the organisers took a chance, helped by the fact that no cases had been reported in India till then. While the gamble paid off, the first strain on business became evident as shipment of parts from China started getting impacted.

It has quickly gone downhill since then. With the virus gaining a firm foothold in the country, operations started getting impacted at the start of the month. The 21-day country lockdown that came into effect from March 25 was only the next logical step. Not only has the $120 billion industry, which accounts for 49 per cent of the country's manufacturing GDP, been brought to a grinding halt, the future is also very hazy. Battling a protracted near two-year slowdown in the domestic industry, the sector was hoping for a revival and sustainable growth from the second half of fiscal 2021. That is history now. In its latest report, research firm Crisil has said it does not foresee a recovery across the sector in FY2021.

"Clearly, recovery is now off-track and further challenged by the COVID-19 impact. Entering into the fourth month of the growing global pandemic, the Indian auto industry is beginning to feel the heat with rampant disruptions to its supply chain and having to suspend operations with the lock-down," says Vinay Piparsania, consulting director for automotive at Counterpoint Research. "With no clear relief in sight, OEMs (automobile companies) are scrambling to put in place countermeasures to salvage the year. The situation is fairly fluid and with every passing week, the recovery timeline is getting pushed further. Revised projections for this fiscal will be bleak. It will surely take time for consumer confidence to return to normal."

The industry was lumbering along - set to log the biggest decline in sales in two decades this fiscal, when the virus struck. While the period of lockdown will be a complete washout, in the post Corona stage, revival is expected to be very gradual. Another sharp decline in FY21 even on a low base of FY20, cannot be ruled out. The crisis staring in the face is of giant proportions - factories running at low capacities for months on end, companies bleeding, which can manifest itself in big layoffs.

"This is the most unprecedented crisis that we have even seen in our lives. It is bigger than any other pandemic, be it SARS or Zika or swine flu or even the Spanish flu of the last century," says R.C. Bhargava, Chairman, Maruti Suzuki India Ltd. "Restarting operations once the clampdown is lifted does not take more than five-seven days but the crucial thing is how the demand situation will be." A definite fallout of the crisis would be industry realigning itself to reduce dependence on China. It is something where the industry expects the government to provide sops for import substitution. In the area of electric vehicles for example, China is a big supplier of lithium ion batteries. "It is a very capital intensive business but the industry will be wary of putting all its eggs in one basket after Covid 19," says a senior executive who works in an electric vehicle startup in Bangalore. "We are already looking at alternative sourcing destinations. The scale that China has is such that it is difficult for others to match their prices. But something needs to be done. The best scenario will be to make it all in India but that can happen only with strong government support."

For now, the industry is counting its losses and hoping for a quick turnaround once the lockdown ends. But it will not be easy. Each day that factories remain shut, the production loss is estimated at Rs 2,300 crore. For three weeks and more, since factories were shut from March 21 itself, the figure balloons to close to Rs 50,000 crore. It does not end there. Picking up the pieces and restarting, an exercise that has never been done before, will be even more challenging.

"There are chances the lockdown could be extended. In China, it took nearly three months to bring the virus under control," says a senior executive at a Gurgaon-based auto firm. "Even if operations were to start from mid-April, the ramp-up will be slow. It will be like building from scratch after a tsunami has ravaged a city. Consumers are not likely to return to showrooms anytime soon, so demand will be weak. We are preparing for the worst while hoping for the best."

For an industry that is already battling an unprecedented slowdown in demand - sales have fallen in the domestic market for more than 20 months now - early indicators suggest the virus has exacerbated matters. Till January this year, when the virus started spreading outside China, automobile sales in India were declining at an average of 13-14 per cent. In February, this worsened to over 19 per cent. Hero MotoCorp and TVS said the virus impacted 10 per cent sales during the month.

With its origin in China, the world's second-largest economy and the largest automobile market, the first impact for the industry was on supply of parts from across the border. India has a fledgling $57 billion domestic automobile component industry but it is not completely insulated and depends on China for many critical components like printed circuit boards. In fact, import of components from China has been on the rise. In FY19, India imported auto components worth $4.6 billion from China. In the first six months of FY20, imports from China were worth $2 billion.

"There is not a single country in the world that produces everything. It's the same with the automotive industry. (In India) we are weak as far as electronics are concerned. Depending on the product, there's always a piece of China," says Guenter Butschek, Managing Director and CEO of Tata Motors.

It also comes at a crucial time for the industry which is in the process of leapfrogging into the more stringent BSVI emission regime starting April. "The epidemic comes at a time when the auto industry was already grappling with lower volumes and transition to BSVI norms, which were already impacting pricing. While governments around the world have taken effective steps to contain the spread of the virus, the approach to normalcy might still take some time. This may impact the cost situation," says Gurpratap Boparai, Managing Director, Skoda Auto Volkswagen India. "We had in place a situation team from early January and while it can have some cost implication with respect to certain critical components, we will not pass on the same to the customer."

According to a recent report by Fitch Solutions, vehicle production in India is likely to contract 8.3 per cent in 2020 following an estimated 13.2 per cent decline in 2019. Supply constraints due to the spread of the virus are cited as one of the reasons for the contraction. Another Crisil report said while the domestic industry has inventories for up to 30-60 days, which could help them tide over the crisis for the short term, any shortage of critical components such as printed circuit boards could impair ability of manufacturers to produce vehicles.

"Till January, it was a crisis of consumer confidence. Fixing that is in our hands with new products or aggressive marketing strategies. In a pandemic like this when you are forced to lock down, what can one do?" says a senior executive with a Gurgaon-based auto firm. "Frankly, it looks quite dark from here. We do not know how long this will last but hope things begin to normalise early April onwards. Even then, it will take months for the economy to get back on track."

While big companies that have deeper pockets would be able to ride the storm, the virus could sound the death knell for many component makers. The component industry accounts for 2.3 per cent of the country's GDP and employs over five million people. Like the industry at large, is also witnessing its worst-ever performance in almost two decades. In the first half of 2019/20, overall revenues contracted 10.1 per cent to Rs 1.79 lakh crore, which resulted in around 100,000 people losing their jobs and an estimated investment loss of about $2 billion that would have happened had the industry continued to grow.

"This was quite unexpected and is unprecedented. It all depends on the situation now. The epidemic has to be controlled. Business is secondary," says Nirmal Minda, Chairman and Managing Director, Minda Industries. "Factories can be restarted in the near future but the impact on consumers will be far-reaching. In such a scenario of uncertainty, consumers tend to conserve money and buying a vehicle is low on priority."

The third arm of the industry that is currently bearing the brunt of the lockdown is the 15,000-odd car dealer community. Footfalls at showrooms had already started falling since the start of the month. The lockdown has brought it to a standstill. This puts these dealers at a grave risk as they are yet to liquidate all BS-IV vehicles, which will become unsaleable from April.

Estimates with the Federation of Automobile Dealers Association indicate the 26,000 dealerships in the country are left with BS-IV stocks worth Rs 6,340 crore. Of this, around seven lakh units are two-wheelers worth Rs 3,850 crore. Passenger vehicles account for 15,000 units worth Rs 1,050 crore. Another 12,000 units are slow moving trucks and buses worth Rs 1,440 crore. As all dealers in the country will remain closed till April 14, this inventory will be reduced to junk on the morning of April 1.

"It is our worst nightmare come true. I do not wish to be critical of the government as the virus was unforeseen and the lockdown was a necessity but they have to make an exception for us and extend the deadline," says a sales officer who works at a Hero MotoCorp showroom. "The losses either at a dealer or cumulative level will be huge. I am not sure how many will be able to survive this blow. I dont know if I will have a job next month."

@sumantbanerji

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