Change and challenges for automakers as India eases lockdown for coronavirus

March and April were the cruellest months for automakers as India locked down to contain the coronavirus. The industry suffered a loss Rs 69,000 crore in April, according to one estimate. As the lockdown eases, companies are reporting that demand is picking up quickly. Maruti Suzuki, the country’s largest carmaker, says the problem is not demand but a damaged supply chain. As economic activity picks up, automakers find their business has changed. People would want a vehicle for their daily commute but they worry about their jobs. Surajeet Das Gupta explains how automakers can get business in these uncertain times.

Surajeet Das Gupta, Business Standard
23rd June

As India eases a weeks-long lockdown to contain the spread of the coronavirus, auto companies say demand is picking up sooner than they had expected. Maruti Suzuki, the country’s largest carmaker, said it expected demand for its passenger cars to outstrip supply in June and July.

The Society of Indian Automobile Manufacturers (SIAM) estimated in April, a month into the lockdown, a revenue loss to the tune of Rs 69,000 crore for the industry. Things are looking up since then. German carmaker Volkswagen's India unit resumed production a few weeks ago, but if the booking trend continues the sale of it sub Rs 4-lakh passenger car Polo in June should hit 50-60 per cent of the volumes before the coronavirus outbreak.

Hero MotorCorp, the country largest two-wheeler manufacturer, announced in a conference call in June that sales have already hit 70-80 per of its normal levels. Bajaj Auto—the company's managing director, Rajiv Bajaj, is a critic of the lockdown—said demand is reaching normal levels much sooner than it had anticipated.

R C Bhargava, managing director of Maruti Suzuki, said his company did not have to sell cars at discounted rates because of high demand. “We will not be able to assemble more than 30-40 per cent of what is normal production in June. So we will have no problem in selling what we make,” Bhargava, told Business Standard lin an interview earlier this month.

Demand and reality

The industry’s statements appear euphoric. The reality is that companies were reporting declining sales for months before coronovirus hit the world. Now, they must brace for a steep decline in sales as consumers worry about their income. The drop in sales in passenger cars could range from 25 per cent to even 45 per cent depending on which analyst you believe in. “The industry, I think, will be go back to levels of 2010 or even earlier in terms of sales this year. So no amount of new demand coming from consumers looking at personal transportation because it is safe can fill in this gap,” said Gurpratap S Boparai, managing director of Volkswagen India: Two-wheeler sales are projected to fall by 18 per cent to 26 per cent, doing better than cars because of rural demand. Car companies like Maruti Suzuki, M G Motors, and Kia had in the last three years invested in new capacity, hoping for a demand surge that never came.

Realistically, the first task auto players are concentrating on is to normalise month-on-month sales to levels last year, which in any case was lower than 2019. Maruti's Bhargava said the auto industry is witnessing pent-up demand after delivery and bookings stopped in the last week of March and entirely in April. There were no domestic sales at all in April when vehicle production stopped and dealers shut shop for the lockdown.

The wheels moved mid-May when some auto companies opened up their factories and dealers their outlets. Demand first picked up for two-wheelers and small cars.

Recovery time

So what is a reasonable frame for recovery? Even Bhargava, a veteran of the industry, is not ready to hazard a guess about demand trends beyond July. Analysts' predictions varies from fourth quarter of financial year 2021-21 to middle of FY 2022.

The most optimistic projection is for fourth quarter of FY21 when sales stopped in April and picked up slightly in May. Maruti's car sales were down 86 per cent in May and it sold a mere 18, 539 units (domestic and exports). Hyundai’s car sales fell by 79 per cent. Two-wheelers sales did as bad in May. Hero’s sales fell by 82 per cent and Bajaj's declined by 70 per cent. Clearly, returning to normalcy could be herculean for auto companies.

Boparai said customers are reluctant to buy vehicles as they fear for their jobs, salaries, or a second outbreak of the coronavirus. The other problem is that finance companies have become strict in offering loans, scrutinising salaries and shunning professionals in the hotel, tourism, and aviation industries.

PricewaterhouseCoopers, in a presentation to SIAM, said that shared mobility (Uber and Ola) will lose its lustre consumers in the pandemic and people will prefer personal transport. In China, preference for taxis and ride-hailing services fell 15 per cent and that for public transportation (buses and metros) dipped by 3 per cent after the country started easing its coronavirus lockdowns. India should expect a similar change in customer behavior.

Some companies like Honda Motorcycle have already caught on to this change. The company’s research showed two things: 80 per cent of the people surveyed said they would buy a two-wheeler in three months after the lockdown ends. Secondly, a majority of them preferred a two-wheeler than public transport for daily commuting as they could maintain social distancing.

The other clear shift automakers are talking about is down trading. People would like to have their own transport, but they have to balance that with their limited financial means as household incomes fall because of the economic impact of the coronavirus and the lockdown.

The industry would see three clear trends: consumers will choose a two-wheeler over a car, or an entry-level model over a higher engine cc two-wheeler, and a small car over a sedan. Some experts believe a more pronounced change will be customers opting for a pre-owned vehicle—a car or a two-wheeler—which could be at half or even a third of the cost of a new one. Customers will save money and get their personal vehicle too.

These changes in customer behaviour would help some auto companies positioned to take the advantage. Analysts said Maruti Suzuki, Hyundai and Volkswagen Polo might see sales quickly improving as most of their vehicles sold are in the small car segment.

Hero Motors dominates the entry-level market in two wheelers, having 69 per cent share in the economy segment. It could be quicker on its feet than rivals like Bajaj Auto, which is the king in the 150 cc segment (Bajaj disagrees with such analyses). Hero also has a strong rural presence: that market (around 55 per cent of the total) had it easier in the lockdown and it is expected to recover faster than cities.

But the biggest beneficiary could be the pre-owned vehicle market, as it will get customers looking at down trading or upgrading (a two-wheeler customer might want to upgrade to a second-hand car). Initial feedback shows the market is doing brisk business.

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