The automobile sector is often considered to be the barometer of any economy. This article will focus on deciphering the impact of the novel coronavirus on the auto industry; throwing some light on the historical data and try to conjecture what the future has in store for this dynamic industry.

The pre-covid phase was marked by several setbacks for the auto industry; in fact, 2019 is considered to be one of the most recessive years sparking discernible slowdown and worrying numbers for the owners, as well as workers in this sector.

Data in the public domain disclosed that passenger vehicles sales had been declining at an exponential rate, compounded by a hit in the sales of utility and small commercial vehicle segments. Not only this, an estimated 2.30 lakh people lost their livelihood in the process.

The performance of a few esteemed companies in this domain can further vindicate our claims. Tata motors had spotted a dip of 12% compared to December 2018 when the domestic sales were 50,440 units, whereas in 2019 it was recorded at 44,254.

The total sales in 2018 were 497,972 units which declined to a 30% low in 2019. In December, the car company Mahindra and Mahindra (M&M) sold 39,230 units while registering a decline of 1%. In the same month, Hyundai Motor India Limited (HMIL) sold 37,953 units which were less than the domestic sales of the previous month by 9.8%. It makes one wonder why would an industry worth Rs.4.8 lakh crores, which contributes around 7.5% of the total GDP, being one of the largest employers with around 37 million workers, suffer such a blow? Well, a few economists suggest that the problem is structural.

From an industrial point of view, the problem arose due to oversaturation. Too much optimism of industrial dealers led to large scale production of automobiles and with the demand not relatively matching the supply, it pushed the auto companies to the backseat. To minimise the losses, the large scale corporations laid off people and cut down on the purchase of raw material, ultimately leading to a large number of small scale Original Equipment Manufacturers (OEMs) shut down their operations.

Moving on to the global scenario, it was primarily due to the worsening trade wars between nations, rising geopolitical tensions and international crude oil prices, which had been witnessing frequent shocks owing to political tensions in the Middle East and the price war between Russia and Saudi Arabia.

From the consumer’s point of view, shared mobility had a key role to play in the falling demand for automobiles. Millennials prefer Ola and Uber cabs to owning personal vehicles. As a result, the demand in the taxi market in India has shown significant growth but at the expense of the automobile industry.

Some policies that were undertaken by the government also led to the downfall of the automobile industry. The introduction of GST and axle-load reforms aggravated the already existing problems in the auto sector. The Government’s announcement to move to 100% electric vehicles by the year 2030 and ban of diesel vehicles caused further tensions in the auto sector. In the commercial vehicles space, revised axle load and hike in prices by manufacturers have played their part in squeezing the demand for such vehicles. Moreover, the Government’s decision to increase the maximum load-carrying capacity of heavy vehicles by 20-25% to bring down logistics costs also harmed this sector. These decisions coupled with the Non-Banking Financial Company (NBFC) crisis sent all hopes for survival down the drain, as NBFCs were a paramount source of finance for personal and commercial vehicles.

Subsequently, the worldwide pandemic came at a time when both the Indian economy and the automotive sector were hoping for a revival. The Indian Government made efforts to curb this pandemic and like many others, enforced a nationwide lockdown. While the lockdown may have helped restrict the range of the virus, it was harsh on the economy, disrupting the entire value-chain of prime industries in India, and the automotive industry is no different. Thus, the hopes for recovery were crushed severely by COVID-19.

The automobile sector was already experiencing stagnancy. Considering the pandemic, multiple lockdowns were imposed in the country in April and May which further aggravated the problem and the already suffering automotive industry and its operations came to a standstill. This caused disturbances in supply chains and brought manufacturing to a pause for nearly 30 days.

The Indian automotive industry suffered a loss of 2300 crore rupees per day. OEMs cut down their production by 18-20 per cent due to weak demand and a decline in sales of the vehicles. Production cuts in the automobile sector also harmed the component industry, adversely affecting the Micro, Small and Medium Enterprises (MSME) engaged in automobile spare parts manufacturing.

Consequently, the employment situation in the automobile sector continued to deteriorate. An estimate of the job loss that occurred in the auto sector is 3.45 lakh people; the hiring of the workforce was halted and 286 auto dealers closed down.

With the easing of restrictions in June 2020, however, automobiles production, sales and exports increased after the previous standstill that it suffered for the last two months.

Following zero sales in April 2020 and partial resumption of operations in May and June, passenger vehicle (PV) sales plunged to 78.43%, that is 1,53,734 units in April-June 2020 as compared to 7,12,684 units in April-June 2019, according to the Society of Indian Automobile Manufacturers’ (SIAM) data. Cumulative sales across all vehicle types (PVs, CVs, 2W and 3W) declined 17.97% to 21,546,390 units, a stark contrast from driving past the 25-million-vehicle mark for the first time in FY2019.

Meanwhile, sales of electric four-wheelers declined to 3,400 units, according to the Society of Manufacturers of Electric Vehicles (SMEV).

Furthermore, the share of diesel-run vehicles among PV sales dropped from 36 % to 29%, while that of petrol-run vehicles increased to 71% from 64%.

During the past 4-5 quarters, consumer attitude has been indifferent, which is reflected in the declining sales figures of commercial vehicles, passenger vehicles, as well as two and three-wheelers’ sales. Although the two and three-wheelers have had more sales in comparison to the others.

As the price of fuel is regularly increasing, this is going to be a major factor in the consumer’s decision of purchasing an automobile and could lead to delays in this decision. It will be a critical challenge for the sector in the short term.

OEMs would be required to support dealer groups financially, which is going to strain their position statement. These suppliers also rely heavily on migrant labour whose absence is going to hinder the revival of the industry post-lockdown.

Captive finance companies are also likely to suffer the brunt, as loan defaults are anticipated to shoot up. Moreover, given the challenges in ascertaining customers’ creditworthiness, fresh loans are expected to drop, further denting the firms’ profitability.

Furthermore, the lockdown is likely to create stress on mobility solutions, used-car, and aftermarket service providers, whose funding depends on aggressive growth projections. Shared mobility players (ride-sharing, car-sharing, ride-hailing) may have to rethink their offerings in the short term, as consumers grow reluctant to transportation that violates social distancing standards and norms.

Most companies do not have enough R&D funding, even to sustain their core operations. This is going to potentially obstruct the growth they have made on substitute fuel and mobility technologies. In due course, some enterprises may even take a strategic call to exit unprofitable markets and vehicle divisions.

With some serious doubts hovering over the future of automobile industries, the remarks and reports of some of the esteemed research companies show a promising future for this sector. The recovery is expected to be U-shaped. Although it may take some time for the industry to bounce back, it will well and truly be a turning point for them. The manufacturing of automobiles in China and South Korea have already returned to normalcy, if India could follow their steps, the country could restart operations on a full-fledged basis. As the world has lost trust in China, the Indian automobile industry could use this as an opportunity.

India could take comparative advantage of having a huge labour force and cater to the global market by boosting its production capacities. The Government could also cash into the bargain and provide easy credit, defer timelines for GST returns, TDS payments, as well as provide interest subsidies. The Government has already made it clear that there will be a shift to electric vehicles and slashed the GST to a meagre 5%. The pandemic has resulted in people becoming more health-conscious while paying extra attention to cleanliness and safety measures. This could potentially induce them to have personal mobility thereby leading to an increase in demand for automobiles.

In conclusion, with so much going around in the world economy and the major setback for all the nations due to the pandemic, what an interesting time it is to be alive. Some big corporations will bite the dust while some will rise from the ashes and to be able to witness all this is something pre-eminent. The dynamism of the auto industry is something that attracts even the best minds. Well, only time will tell whether the auto industry is in here for a good time or not.

By Yash Verma and Aishwarya Chadha