The Indian commercial vehicle industry, which is generally considered the barometer for the country’s economy, has been hit hardest, recording a contraction of about 89% in March when compared to the same period last year. It has, therefore, become even more pressing for automotive industry stakeholders to understand and respond effectively to the impacts and challenges that have been triggered by the virus outbreak, states Satendra Kumar, Program Manager, Mobility Practice, Frost & Sullivan
The year 2020, thus far, has been full of challenges for the Indian automotive industry. For the first time in history, zero domestic sales were recorded in April by leading manufacturers. However, this is not a region or country-specific situation; it’s a worldwide crisis not only for the automotive industry, but also for the manufacturing, services and related industries and has created a massive dent in the global economy. Hence, the International Monetary Fund (IMF) has declared that the global economy has entered a year-long recession.
In the short to medium terms, any economic recovery from the current tempestuous situation ishinged on the global containment of the virus and preventing liquidity from becoming a solvency issue. The pandemic-related setback has unleashed a massive blow to the Indian automotive industry, which was already stressed with debilitated customer demand, diminished private investment, lethargic FDI equity inflows and a liquidity crisis that made it harder to access credit. Added to this has been the general economic slowdown and regulatory pressures triggered by BS VI implementation.
According to SIAM, the total automotive industry generates almost USD 104 billion and, along with the USD 57 billion automotive component sector, employs between 38 million to 40 million people. The decision to temporarily halt production from mid-March caused the automotive industry to suffer an estimated production loss of 800,000 to 1 million units in March alone. In revenue terms, every day of production shutdown has cost the industry a staggering USD 2 billion. Not only has the lockdown left companies incapable of generating revenue, but it has also left them bleeding money on fixed expenses while completely skewing profit and loss statements for all industry stakeholders.
The Ground Realities
It has, therefore, become even more pressing for automotive industry stakeholders to understand and respond effectively to the impacts and challenges that have been triggered by the virus outbreak. The Indian commercial vehicle industry, which is generally considered the barometer for the country’s economy, has been hit hardest, recording a contraction of about 89% in March when compared to the same period last year. Annual sales have also declined by about 28%. The industry has been under constant turmoil due to overcapacity caused by changing regulations, a malignant financing ecosystem, shifting customer preferences and overall weak economic progress.
The pandemic added to the ongoing turmoil in the commercial vehicle segment in India. Within the segment, medium and heavy commercial vehicles were the most impacted, registering a steep decline of about 51% in FY2020. This contraction is a result of the reduced cargo turnaround times post-GST and revised axle load norms causing an oversupply of trucks, thereby impacting freight availability in the market. The light commercial vehicles segment has witnessed a decline in sales by about 21%, largely attributed to a decrease in the consumption demand from rural and urban areas in the country.
The bus segment has also dipped by 8.5%, despite the government’s continued effort to maintain a sustainable mass public transportation system. The overall commercial vehicle customer sentiment was largely subdued due to lethargic manufacturing and infrastructure activity, liquidity crisis in the market and uncertainty about regulations, forcing a reduction in footfall and postponement of purchase decisions. After the virus outbreak, the countrywide lockdown imposed by the government restricted cargo movement in India to essential items only. With the industry facing the worst slowdown in two decades, OEMs cut down on production and dealers reduced inventory to minimise the impact.
The Journey Ahead
All OEMs have already witnessed a sharp drop in wholesales in March due to the lockdown and BS VI transition. With all of these factors, Frost & Sullivan estimates subdued demand in the first two-quarters of FY2021. Also, an anticipated price increase to the tune of 12% to 15% post-BS VI implementation will further add to the challenges for fleet operators already reeling under the cash crunch. Looking ahead, the volume growth in the first quarter of FY2021 is going to be a complete washout due to the lockdown, restricting both demand and supply. Any recovery of the commercial vehicle segment can be expected in the latter half of the fiscal year, subject to economic reclamation, liquidity assurance and increasing demand from the pick-up in manufacturing and construction activity in India.
Regardless of recovery expectations during the latter half, the light commercial vehicle segment is expected to decline further by 8% to 9% with hopes pinned on the e-commerce sector during FY21; the medium and heavy commercial vehicle segment is expected to witness a dip of 10% to 12%, leveraging the recovery from consumption-driven sectors. The passenger carrier segment is also anticipated to be under stress for two or more quarters as public transportation might take a backseat due to social distancing. This segment is also affected due to the slowdown in replacement-led demand from STUs (state transportation units) and CTUs (city transportation units), resulting in a decline of another 4% to 5% in FY2021.
With the ongoing economic slowdown, the virus pandemic and transition to stricter BS VI norms, FY2021 is going to be a tough year for commercial vehicle OEMs, fleet operators, and industry stakeholders. While most of the OEMs have already taken necessary action to mitigate the impact of the pandemic risks, there is a need for strong measures from the government in terms of stimulus packages for the automotive sector. Back-up support from the banking sector to finance dealership networks, sanction overdraft and provision of interest subsidy to cope with working capital requirements will benefit the dealer network.
Focus on Priorities
Industry players are doing the right thing in prioritizing employee health with firm operational and remote working policies, sanitization protocols and travel guidelines. They have also provided financial support to dealers to manage cash and liquidity. This means that OEMs need to evaluate risk exposure concerning financial insinuations and supplementary financing to steady the cash flows and safeguard liquidity. Dealers need to be financially supported because they are the face of OEMs and sustainability is more important for the ecosystem. For the long term, OEMs need to focus more on the local supply chain and reduce the dependency on imports from international hotspots. This might be a slow exercise, however, given the circumstances causing unwanted disruptions; contingency plans should include localisation as a key strategy. Although the current lockdown seems to be painstakingly unending, government authorities have allowed the revival of plant operations.
OEMs should align leaders who review business continuity and ensure supplier stability. It also will be important to ensure the availability of critical components as there might be a sudden surge in service and maintenance at sales, service and spares (3S) facilities. Thus, ensuring real-time monitoring of supply to manage in-transit inventory will be important. Frost & Sullivan recommends additional government measures, including a reassessment of tax cuts, incentive-based scrappage policy and rationalisation of GST for the short term. Commercial vehicle OEMs, regulatory bodies and the government should devise a solution to rebuild the ecosystem. As per Frost & Sullivan’s analysis, to survive the current situation, Indian commercial vehicle OEMs will have to focus more on value-based trucking by targeting the right set of customers and business models.
The rising confluence of technologies should provide a platform for various stakeholders in the commercial vehicle industry to offer service solution-based operating models such as trucks as a service. In this regard, collaborations between commercial vehicle manufacturers, freight aggregators, logistics service providers and technology companies should become more pronounced with the need to push the envelope on shared freight transportation. OEMs should explore the opportunity for digital sales (OE and aftermarket) as social distancing might curb footfall for at least one more quarter. This will help commercial vehicle OEMs and fleet operators return to normalcy sooner and support their respective businesses to push ahead from such critical situations.