Business Today

Stuck in Reverse Gear

The pandemic is set to push the auto industry back by over a decade. Partial recovery in June and July has raised hopes, but will it sustain?
twitter-logoSumant Banerji | Print Edition: September 6, 2020
Stuck in Reverse Gear
Photograph by Rajwant Rawat

On March 29, four days after the country went into the lockdown, Ram Krishna Pal, a machine operator at a component unit in Dundahera village of Gurgaon was told his services were no longer needed. Going back to his home in Sitamarhi in Bihar was not an option. Now, he is finding it increasingly difficult to make ends meet. "My contractor said the company has reduced the output due to new regulations and, hence, does not require as many people as before. Factories have opened up all around but employment has shrunk," he says.

Dealerships, the front end of the automobile industry, tell a similar story of despair and loss of optimism. Cut to the last fortnight of March, the first phase of the lockdown, when sales executives were putting in extra hours to liquidate stocks of BS IV vehicles by the end of the month, before BS VI emission norms kicked in from April 1. "There was a lot of pressure on us and we had stiff targets but at least the business was good," says Ambuj Sahu, who works in a two-wheeler dealership in Gonda in Uttar Pradesh. "The lockdown was a major disruption. The showroom remained shut till May 12 but the momentum had been lost. I am lucky to have the job even though I got half the salary for April. I know so many people who were doing well in March but were jobless in May."

Like Pal and Sahu, millions of others who earn their livelihood from the automobile industry had hoped at the start of the year that the new decade would bring an end to an excruciatingly long and dark period (the unprecedented slowdown was already 18 months old by December 2019). The successful culmination of the biennial Auto Expo in the first week of February, under the shadow of the coronavirus, was seen as a bold show of confidence by an industry eager to move on. The onset of the pandemic the very next month felt like a cruel joke. A complete lockdown in the last week of March, which continued till the end of April, meant not a single automobile could be sold in the first month of the fiscal year. That was a harbinger of the industry logging its worst-ever performance in a quarter; less than 1.5 million vehicles were sold in the first quarter of FY21, over 75 per cent less than in Q1 of FY20. Passenger vehicle market leader Maruti Suzuki registered its first-ever loss in a quarter since it was listed on the Bombay Stock Exchange in July 2003.

The months after April have given the industry a little hope. As governments eased lockdown restrictions in May, factories sprung back to life. Dealerships opened a tad slower but by July almost all showrooms across the country had switched on their neon lights. Monthly sales have improved in tandem with resumption of business activity, and by some estimates, the recovery has been better than expected. Decline in passenger vehicle sales, for example, improved from over 80 per cent in May (when only 36,576 cars were dispatched from factories) to 47.2 per cent in June when 1,16,928 units reached dealers. In July, the numbers improved to 1,82,779, down less than 4 per cent compared to a year ago (1,90,115 units). Two-wheelers mirrored the trend. Sales declined almost 90 per cent in May but recovered partially in June (40 per cent fall). In July, the numbers were short of the July 2019 tally by 15.24 per cent. Sale of motorcycles that account for bulk of two-wheeler sales were less by only 5 per cent.

"If we see it in the context of the current scenario where supply chain was disrupted and resumption was staggered in many parts of the country, the recovery has been remarkable. These are unusual times but it gives us hope," says Tarun Garg, Director (Sales, Marketing and Service), Hyundai Motor India Ltd.

However, considering the low base of 2019/20 - when sales had declined 18 per cent - even a recovery to the same level in the rest of this fiscal will not mean much in the larger scheme of things. The industry will still end the year with second straight double-digit decline in sales. It will signal that things have bottomed out after two years. The bigger question is whether it will sustain. There are no clear answers.

Another False Dawn?

The initial revival is largely due to two factors - robust demand from rural markets and assumption that a section of consumers is avoiding public transport to reduce the risk of contracting coronavirus.

A bumper rabi crop, harvested post-spring (in April), has kept up demand in the hinterland. Near normal rains this year and higher kharif sowing augur well for the future too. Also, villages and small towns have not been as badly impacted by the pandemic as big cities like Delhi, Mumbai, Pune, Ahmedabad, Chennai or Bangalore. "The rabi crop has been good and farm incomes will be higher. The effect of Covid-19 seems to be more in urban clusters than in rural areas. So, that is also positive," says Shashank Srivastava, Executive Director, Marketing and Sales, Maruti Suzuki.

A good harvest is great news for the two-wheeler industry. India's largest two-wheeler maker, Hero MotoCorp, says it has been a beneficiary of the upbeat sentiment in rural markets. "A major part of demand is emanating from rural and semi-urban markets. A combination of factors, including forecast of a normal monsoon, bumper rabi crop and upcoming festive season, are expected to keep the momentum going over the next few months," says Pawan Munjal, Chairman & CEO, Hero MotoCorp.

There are a number of caveats, though. The dealer community, for one, isn't fully convinced by the narrative dished out by manufacturers. They say footfalls in showrooms do not reflect the euphoria of wholesale numbers. "The manufacturers are painting a rosy picture. Maybe that is what they need to do but it's not something we are seeing on the ground right now," says Vinkesh Gulati, Vice President, Federation of Automobile Dealers Association. "June was of course better than May and July was better than June but that is because the pipeline was dry and dealers were building up stocks. This month onwards, we will have to see. It doesn't look that great in terms of offtake."

Experts say wholesale data by manufacturers does not give the full picture and needs to be seen with retail data by dealers. "The wholesale numbers are encouraging to the extent that they show as to what level manufacturers are able to produce and ship automobiles. But it should be tempered with retail sales data as that is a better barometer of demand," says Vinay Piparsania, Consulting Director, Automotive, Counterpoint Research.

Pushed Back by a Decade

Claims of a quick recovery notwithstanding, the outlook for the fiscal year remains downcast. Industry body Society of Indian Automobile Manufacturers (SIAM) has said the industry is set to post 26-45 per cent decline in sales across segments. For one, it will be nearly impossible to offset the massive sales dip in the first quarter in the remaining months of the year. Further, there are numerous uncertainties as the pandemic is yet to subside and its full impact on economy - loss of employment, salary reduction, consumers choosing to save more - haven't been factored in yet.

"We are staring into a deep slowdown. According to the most optimistic scenario, production levels are at 40 per cent as of July," says Rajan Wadhera, President, SIAM. "We do not foresee normalcy any time soon. There are too many uncertainties. It is going to take at least three-four years to go back to the peak of FY19 and this is a very aggressive assumption. For many, survival is going to be difficult."

Coming on the back of an 18 per cent fall in sales in FY20, which itself was the worst in nearly two decades, the industry would see a nearly 50 per cent contraction in just two years. "Automobile sales are running out of steam as urban incomes wilt under the pandemic. We assessed 26,000 companies that have a total employee cost of Rs 7 lakh crore. Our study indicates that over 60 per cent of this cost resides in companies expected to see a sharp reduction in revenue growth, and where employees are a meaningful cost head," says Hetal Gandhi, Director, CRISIL Research. "This is expected to lead to higher risk of job losses/pay cuts."

CRISIL says the pandemic has intensified the headwinds the industry had been facing for the last two years. Passenger vehicles, where 60-70 per cent sales involve replacing the vehicle, are expected to be hit badly. Also, close to 70-80 per cent cost is met by loans, and given the income uncertainty, fewer consumers will be willing to take a loan to buy a car.

In the commercial vehicle space, which has still not recovered from the new axle-load norms that allowed trucks to carry more load, the sentiment is equally bearish. The reason: freight demand is low. Two-wheelers and tractors are likely to recover faster because of low dependence on finance in rural markets. But if the pandemic spreads to the villages, even the expected buoyancy in rural markets may come under a cloud. Having run out of ideas, the industry is looking for government support. "It will take at least three years for the industry to recover. That is an optimistic projection," says Gaku Nakanishi, President and CEO, Honda Cars India Ltd. "We need some support from the government."

Clamour for Lower Taxes

The industry's biggest demand from the government is reduction of taxes under the GST regime. Automobiles fall under the highest tax slab of 28 per cent. Cess of 1-22 per cent takes the effective rate to 29-50 per cent. This is the highest rate for manufactured goods. The demand for lowering this rate has been rejected on many occasions in the past, most notably last September, when state governments stonewalled the Centre's rate cut move in the GST Council meeting. With the industry feeling the need for a demand stimulus, a rate cut has come back on the table. "Across the world, governments are being supportive of the industry by way of direct stimulus to demand. Even in India, we got stimulus in December 2008 after the global financial crisis and also in September 2014. As of now, we have not seen any action, but the government is listening to us," says Wadhera of SIAM. "What we are asking for is simple, a 10 per cent reduction in GST across the board."

The industry's another long-pending demand has been a scrappage policy that encourages replacement of old commercial vehicles. The industry says it will create demand for new trucks while removing older polluting vehicles from the road. Such schemes have been in place in developed economies for decades now. In India, it has been talked about since 2008."It is in the interest of the government that the industry recovers soon. It earns much more revenues from taxes than what companies earn through profits," says Vinod Aggarwal, MD and CEO, Volvo Eicher. "It is high time the scrappage policy is introduced. It has been in the making for a long time. We are told it is now in final stages and will hopefully come before it is too late."

Temporary Fix

Even before the virus struck, the component industry was in doldrums. It witnessed its worst-ever performance in almost two decades in the first half of 2019/20, the period for which latest figures are available, when revenues contracted 10.1 per cent to Rs 1.79 lakh crore. This resulted in around 1,00,000 people losing their jobs and an estimated investment loss of about $2 billion (that would have happened had the industry continued to grow). Revenues are estimated to have declined 20 per cent to Rs 3.4 lakh crore by the end of 2019/20. Another 30 per cent fall over this in the current fiscal will wipe out a big chunk of the industry.

"This is the most challenging period we will see in our lifetimes," says Soumitra Bhattacharya, Managing Director, Bosch India. "We were struggling even before Covid-19. We were losing three-four years due to the slowdown in industry volumes. Now, you can add another one-two years to that. So, we are looking at well beyond 2024 for full recovery. All of that, of course, will change if government acts fast and announces sops or if GDP grows fast."

There is, however, a ray of hope in export potential. Relatively stable demand in the US, along with a number of companies now looking at re-aligning their global supply chains to reduce dependence on China, have opened up opportunities for those flexible enough to exploit it.

"The domestic industry will not recover to peak levels any time soon. The component industry needs to be flexible," says Sunjay Kapur, Chairman, Sona Comstar. "Exports present a good opportunity to offset some of the losses. We have always been open to exports and have the know-how to make parts for all markets. That is the biggest takeaway from the pandemic; you cannot put all your eggs in one basket."

However, beyond Tier-I firms such as Bosch or Sona Comstar, not many have either the vision or the capital to quickly shift gears and cater to new customers. "It is a matter of scale and that comes only from the domestic market. Exports can be a cushion but only for the short term. A businessman will not invest only thinking about exports as our policies do not encourage that," says the owner of a forging business in Gurgaon.

Yet, as always, the industry remains confident in India's long-term potential. "In the near term, the situation will be very painful, but in the medium term, I anticipate a quick rebound for India as well as for our company, while in the long term, this remains one of the markets to be in," says Bhattacharya of Bosch.

The vehicles may not be flying off the shelves but optimism is not in short supply.


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