Auto in reverse gear due to Covid 19

To fight novel coronavirus disease (Covid 2019), the government ordered a 21-day nation-wide lockdown, starting March 25. The auto industry is worried as it expects an income loss of Rs 483 billion due to the 3-week shut down of the automotive trade. Similarly, the auto components sector is estimated to face production loss of Rs 10 to 12 billion per day during this lockdown.

After tepid response throughout 2019, the industry was expecting better performance in the fourth quarter (especially in March 2020) with a jump in sales backed by offering higher than normal discounts to clear inventories of BS VI vehicles. But, Covid 2019 has wreaked havoc resulting in very low footfalls at the showrooms and automakers are looking at huge unsold inventory.

Dealers of PVs and MHCVs seem to be in more comfortable position as they have manageable BS IV inventory. However, the average inventory for two-wheelers (2Ws) remained alarmingly high at 20-25 days in February 2020 (compared to 25-30 days in January 2020). It is estimated that over 7-lakh 2Ws confirming to now obsolete BS IV standards are stuck in the pipeline. Though the Supreme Court has granted a conditional extension of the BS IV deadline by allowing dealers to sell 10 percent of their BS IV stocks for up to 10 days after the nationwide lockdown ends, it will be of little help.

Analysis by Infisum Modeling suggests that there may be a production loss of Rs 1.23 trillion (Rs 1.23 lakh crores) for auto and auto component industry in this period of shut down. Similarly, the decline in exports in the motor vehicle sector will be around Rs 510 billion.

Meanwhile, auto sales numbers for March 2020, as expected, were highly disheartening. The passenger car market witnessed almost 51 percent drop in sales in March 2020 over the last March as all plants are shut and the supply chain in complete jeopardy. In 2Ws segment, the sales of most companies like Hero MotoCorp, Honda Motorcycle and Scooter India along with TVS Motors remained muted.

According to India Ratings and Research, a combination of an extended shutdown followed by a weak demand in the next two to three months, as collective measures are being taken to overcome Covid 19, is likely to intensify the woes of the automotive industry.

The automotive industry in India has already been reeling under significant pressure to cope with plummeting vehicle sales for over a year now as also transitioning from BS IV to BS VI. The industry is now faced with the onslaught of a much bigger challenge of the Covid 19 pandemic which now threatens to destabilise the entire automotive value chain.

Covid 19 episode may lead to some critical learning experiences - both by choice as well as compulsion - leading to a transformation of Indian automotive industry once this pandemic is under control and the economy gradually limps back.