Impact of COVID-19: 2% production slowdown in China to affect Indian auto sector by Rs 259 crore

A recent analysis report by Deloitte states that the pandemic is expected to lead the country towards a major slowdown. Major financial institutions have lowered growth estimates for India by 0.5-1.5 percent.

By:Published: April 2, 2020 5:15:18 PM
Maruti suzuki, mahindra, honda cars and other automakers suspended production, two wheeler companies also put brakes, hero motocorp, honda motorcycle and scooter india, tvsImage: Reuters

As India and the world alike grapple through the ongoing Coronavirus pandemic, it is a unanimous opinion that consumer business segments will take a negative hit that will cause long term effects. The automobile industry is one of those segments. Deloitte India recently issued a report on the impact of COVID-19 on India’s consumer business segments. According to the report, the sector has inventories sufficient for short-term support, but lack of single, critical components can hurt OEMs. The analysis report takes various approaches to possible outcomes of this pandemic from the points of view of an optimist and pessimist.

The report begins by stating that the pandemic is expected to lead the country towards a major slowdown. Major financial institutions have lowered growth estimates for India by 0.5-1.5 percent. For example, Moody’s FY20 projection for growth in India was 6.6% but has now been slashed to 5.43%. This will have a negative impact on markets and would likely put downward pressure of 23.1% on the Indian automotive market.

Based on data from ADB, UNCTAD, the report suggests that China’s slowdown is expected to significantly impact various industries in India. The total impact of a 2 percent slowdown in Chinese production is estimated to be close to US$350 million for Indian industries, of which the automotive industry will take a hit of $34 million (approximately Rs 259 crore).

The report highlights:

– The Auto sector has a moderate dependency on China for imports with an overall 18% of automobile component imports and ~30% of tyre imports

– Wuhan is a large Auto hub with not only OEMs but a large number of part manufacturers supplying parts to many tier 1 manufacturers and OEMs in India – many players started to feel the impact of COVID-19 in India in Jan itself with parts not reaching on time

– The import dependency is higher in the two-wheelers segment as more than four-fifths of the imported components in two-wheelers are from China. Hence, this segment is likely to be impacted more

– Chinese import ranges around 20 to 25 percent of the total imports, in other segments including buses, passenger vehicles and commercial vehicles and demand has been highly sluggish

Alternatives for the Indian automobile industry:

– The sector has inventories sufficient for short-term support, but lack of single, critical components can hurt OEMs

– Local Indian auto-component manufacturers are unlikely to immediately capitalise on the void created by China, as it takes time for OEMs to recalibrate their supply chain

– In a scenario of disruption in the supply of key components, the industry could look at sourcing them either locally or from other countries such as Germany, South Korea, Japan, and Thailand (currently accounting for around one-third of the total imports)

– However, the change in procurement channels could be costlier and the supply could be insufficient to meet the demand

With the rapid spread of the COVID-19 outbreak across the world, global auto industry and consumption is likely to be impacted significantly. This is likely to also pose challenges to export-oriented ancillary component manufacturers. This coupled with the previous slowdown observed in the sector in India, is expected to be a double whammy for the sector.

Government interventions: regulatory measures taken to offset impacts (to some extent) of COVID-19 in the consumer industry

Monetary stimulus – The central government has already announced some relief packages including working capital support, loan restructuring and credit terms alteration, a stimulus to increase the spending power of consumers, etc. State governments need to ensure the proper execution of these relief packages through continuous monitoring.

Other measures for industries:

– It is important to retain new consumers who were onboarded during any extension of service

– Growing a decentralised supply chain can provide stability to operations and reduce external dependencies

– Even when things start going back to normalcy, several people will lose their purchasing power or be more conscious of making purchases. Hence, customers will prefer brands that promise value for money, and meet customer expectations during dire conditions

Also read: Coronavirus hits Indian carmakers hard: Most report about 50% sales decline

– Work closely with identified tier suppliers to obtain visibility, and understand flexibility and allocation logic

– Having built a solid reputation, retailers should focus their supply chain to only work with partners who also stand by similar principles

– On a positive note, Indian manufacturers have the opportunity to establish themselves as manufacturing hubs and leverage the void created in Chinese manufacturing

– Good management of cash flows to ensure that any business disruption does not affect employees or outsourced workers

– Engage with key customers to support business continuity and reinforce loyalty

– Be open and provide customers with updates regarding service outings and ways to deal with COVID queries, without prompting

– With the recent shutdowns in local transportation across the country, retailers have to focus more of their efforts on e-commerce

– Maintain a positive presence with employees and build a “people-are-first” ethos; mass lay-offs can damage the company’s reputation

– Prepare and reinforce “COVID-friendly” policies such as flexible working for employees

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