Life after Covid-19: How the Indian automotive sector can be future-ready

Dovie Salais

The Indian automotive sector was already struggling in FY20. before the Covid-19 crisis. It saw an overall degrowth of nearly 18 per cent. This situation was worsened by the onset of the Covid-19 pandemic and the ongoing lockdowns across India and the rest of the world. These two […]

The Indian automotive sector was already struggling in FY20. before the Covid-19 crisis. It saw an overall degrowth of nearly 18 per cent. This situation was worsened by the onset of the Covid-19 pandemic and the ongoing lockdowns across India and the rest of the world. These two years (FY20 and FY21) are challenging times for the Indian automotive sector on account of slow economic growth, negative consumer sentiment, BS-VI transition, changes to the axle load norms, liquidity crunch, low capacity utilisation and potential bankruptcies.

Post-Covid-19 world: When will that be?

The return of daily life and manufacturing activity to near normalcy in China and South Korea, along with extended lockdown in India, gives hope for a U-shaped economic recovery. Our analysis indicates that the Indian automotive sector will start to see recovery in the third quarter of FY21. We expect the industry demand to be down 15-25 per cent in FY21. With such degrowth, OEMs, dealers and suppliers with strong cash reserves and better access to capital will be better positioned to sail through.

Automotive landscape: How will it change?

Taking a cue from the Chinese automotive market, there will be significant changes in buying behavior after the lockdown. Consumer preference will be more towards individual health, hygiene and cleanliness during travel. Post the pandemic, we expect consumers to switch more towards personal mobility. Shared mobility will take a backseat in the medium term. But with subdued sentiments and an aversion to higher discretionary spends like buying new vehicles, there is expected to be increased demand for used vehicles in the next 3 – 6 months. Service based models such as pay-as-you-go, and lease rentals may also see uptake from Indian consumers. Recently, many OEMs launched online sales channels to digitally connect with consumers indicating new ways of doing business.

On the other side of the value chain, suppliers are expected to face significant financial and operational burdens. Due to domestic as well as global exposure, Indian automotive suppliers will face multifold challenges. Lower domestic sales will lead to reduced revenues and lower capacity utilisation. Lockdowns in North America and Europe will lead to both import and export limitations. We expect global supply chain disruption impact on India to last till end of Q2FY21.

What should companies do to navigate this environment?

The automotive sector must quickly execute plans to ride the Covid-19 storm in the short term and devise long term strategies to minimize the future impact.

We propose a ‘Protect-Restore-Rebound’ approach to navigate the Covid-19 turbulence for the automotive sector.

In the ‘Protect’ stage i.e. next 6 months, it is crucial to simulate supply chain scenarios based on Covid-19 spread and ramp up expectations. OEMs must quickly assess financial and operational viability of dealers and suppliers, and categorise them into healthy, moderate and high-risk ones. OEMs should devise support plans for high risk dealers and suppliers through liquidity planning, operations restart and cost reduction ideas. OEMs and Dealers must devise newer ways to stay in touch with consumers to enhance sentiments. Suppliers must evaluate current liquidity and arrange for near term working capital.

They should prioritise customer allocations for regular payment inflow, honor contractual terms and higher demand in specific geographies. Also, it is crucial to map out the impact of the ramp-up on capacity and in-bound supply considering limited manpower, social distancing norms and lockdowns. Suppliers should proactively engage with OEMs about delays, protect orders, and gain support to address any material shortages and deviations on altered parts.

ALSO READ: Coronavirus LIVE updates: 770,764 samples tested in India; cases at 31,332

In the ‘Restore

stage i.e. 6 -12 months, it is crucial to work on the gaps found in the Protect stage. OEMs will have better clarity about consumer sentiments, global supply base developments (e.g. relevance of China), and viability of dealers and suppliers. On the customer front, OEMs should plan product launches basis segment trends and conduct digital or soft launches. Both OEMs and suppliers should focus on rationalising SKUs and programs, driving production and logistics efficiencies, and off-loading assets with low utilisation to optimise the cost structure. Workforce optimisation, policy restructuring, resource reallocation (core vs. non-core) and remote working should be chalked out clearly. Further, identify savings through hedging strategies on raw material, logistics and forex rates. This will be the time for finalising digital transformation initiatives across the organization. Building digital thread for automation, monitoring, real time decisions, removal of redundancies and human intervention, and remote working will significantly improve organization’s agility for future.

In the ‘Rebound’ stage i.e. post 12 months, OEMs and suppliers should focus on creating differentiated capabilities for future. They should leverage low valuations to acquire or co-create capabilities in the space of digital tools (e.g. automation, AI, blockchain, e-commerce), mobility platforms, EVs and advanced safety systems. Both should define right mix of new product and services portfolio considering new customer segments, health, hygiene and connectivity needs. Suppliers must reinvent, respond faster and hone ‘quality first’ mindset to capture larger share of the global business. On the front end, focus should be on enhancing digital customer experience, building analytics backbone, and optimising network footprint and showroom sizes considering future consumer behavior. R&D and Product teams should rapidly relook at product spec changes, lowering product and technology costs and driving increased modularity to enhance per unit margins.

Finally, OEMs must trace entire supply chain to evaluate geographical risk (China, North America & Europe) and shift share of business to Indian suppliers, as required, to minimise long term disruptions. The inventory strategies for critical parts must be revisited. New investments may be required to build sanitised and automated warehousing and logistics solutions for future quarantine needs. Digitising the supply chain for tracing financial and operational parameters will highlight risks in real time. Automotive players must also build emergency cash reserves over time to address any future disturbances.

Due to Covid-19, automotive demand will be significantly impacted in FY21. At the same time, India has low levels of vehicle penetration and the demand is expected to rebound in FY22 positively. Companies, who will use this as an opportunity to restructure and rewire, will emerge as winners. Companies will also require greater situational leadership and creativity to deftly navigate the crisis. Deploying strategies identified in the three stages above along with building differentiated capabilities for the data driven, agile and future ready organisation will help create long term value for the Indian automotive players.

Kavan Mukhtyar is Partner & Leader – Automotive and Yogesh Thakar is Associate Director – Automotive at PwC India

Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.

Source Article

Next Post

New Bicycle Bike Cycling Roswheel Frame Pannier Bag Front Tube Bag Phone Cell 100g Green

Loading… Overall Rating (based on real customer reviews): 4.3 out of 5 stars Features and Specifications: Manufacturer: JFLY Product Dimensions: 8.4x4x3.2 inches Shipping Weight: 0.3 pounds Package:1x bag Can stick on the tube Colour:Green Material:600D Polyester fiber More features Here are some REAL customer reviews: “Much better than expected” I […]

Subscribe US Now