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Post-Covid, auto sector is on a slow recovery

Paran Balakrishnan | Updated on July 08, 2020 Published on July 07, 2020

Road safety: Post-Covid, private vehicles may be preferred over public transport, potentially pushing up demand   -  Vijay Bate

Two-wheelers, compact vehicles saw an uptick in sales in June. But how sustainable will this growth be in the post-Covid era?

Could it be the Covid-19 effect that has pushed up sales of larger SUVs ever since the nationwide lockdown ended? Nobody knows for sure, but word doing the rounds in the automobile industry is that people who can afford it are buying larger vehicles because it will give them a chance to stay socially distanced from their chauffeurs. If so, that must count as one of the stranger fallouts of the pandemic, which has, in the last 100 days or so, changed the way we live and behave in countless different ways.

The automobile industry has been one of India’s great success stories, and how it revs back into life will give us a good indication of how the economy will come off the sick-bed it has been on for months. For now, it’s neither a thumbs-up nor a thumbs-down. Sales are sharply lower, but some segments are showing signs of returning to health.

Post-Covid mindset

It is hardly surprising that two-wheelers are among those motorised transport forms leading the way. It’s largely the rural areas that are pushing up sales for now. Hero Motocorp, the market leader, sold 4,50,774 vehicles in June. That was 26 per cent down from sales of over 6,00,000 in June 2019, but everyone is heaving sighs of relief that it wasn’t worse. Other two-wheeler companies like TVS and Bajaj Auto have posted similar results, with the June domestic sales down by 26 per cent year-over-year for Bajaj and 36 per cent for TVS. Caution is the watchword in the pandemic era, and with the desire of many to avoid crowded public transport, everyone is hoping that that two-wheelers will be back on the road quickly.

A similar scenario is playing out for smaller automobiles (in the sub 4-metre category), which have suddenly become hot favourites, mainly in rural areas. In the future, too, though, the mini and compact segments are expected to see interest even from urban customers — again because anyone who plans to return to office has realised public transit is a no-go for the foreseeable future. For Maruti Suzuki, the mini segment (cars like the Alto and the S-presso) was the best performer and, along with the compact segment, accounted for 72 per cent of June sales (overall, Maruti sales slumped 54 per cent year-on-year in June to 57,428 units).

Figures for Hyundai are similar (its overall sales were down 54 per cent year-on-year to 26,820 units). Companies which don’t offer small cars have taken a harder hit. For Mahindra, however, the Bolero has done well.

Another big winner is the light commercial vehicle (LCVs) segment. Sales of LCVs are being driven almost entirely by the booming e-commerce industry, which needs to get goods from its godowns to the sheltering customers.

Some highs

Are these sales figures a sign that the Indian auto industry is on the road to recovery? Industry executives and analysts are keeping their fingers crossed; but in truth, it’s unclear exactly what pushed the June sales figures. Says one industry analyst: “Is this sustainable? Or is it just pent-up demand that has pushed up June sales?”

Covid-19 has, of course, thrown all sales predictions out the window. And this is particularly true in the two-wheeler segment, which had three booming years and then saw sales plummet by 18 per cent in 2019. This year’s downward movement comes on top of last year’s steep fall. In fact, some analysts — in the pre-Covid-19 era, obviously — had predicted that two-wheeler sales would surge strongly this year.

But there’s one industry segment breaking open the champagne. That’s the tractor manufacturers like Mahindra and Escorts. Mahindra, the market leader, actually saw year-on-year domestic sales rise 12 per cent in June to 35,844 units thanks to recovery signs in rural India. The company called this its second-best performance ever, and attributed it to the good rabi crop combined with a strong South-West Monsoon. At Escorts, too, sales climbed by a formidable 22.8 per cent over June 2019. Even more impressively, Sonalika Tractors reported a 55 per cent growth in domestic sales over the same month last year.

But if the tractor manufacturers are in exuberant high spirits, seeing a normal monsoon as their lifesaver, they are celebrating on their own. Everyone else knows there are numerous imponderables that will unfold in the coming months. The automobile majors are only slowly getting production back on track. And while a company like Maruti may have sufficient cash to keep operating, many of its components manufacturers have been pushed to the wall by the total shutdown in April, when sales tanked to zero, and in May, when the sales were extremely low.

Struggle ahead

All the auto companies are grappling with getting suppliers back online and also ensuring that their retail showrooms are able to open once again. Most companies, because of social distancing rules, are running one or two shifts, and are only just looking at running a full three shifts.

At the customer end too, uncertainties loom large. App-based aggregators like Ola and Uber are back on the road. But it’s not clear if they have the pre-Covid number of cars or reduced fleets. Many drivers who found themselves out of work during the shutdown have been unable to pay instalments on their vehicles and some have even gone back to their villages. Currently, retail buyers are returning to the market faster than bigger players.

Amidst all this, there’s the grim scenario in the commercial vehicles segment. Ashok Leyland’s June domestic sales crashed 82 per cent over the same month last year from 12,085 units sold to just 2,132. Commercial vehicle sales were down even in 2019, and the industry blames this on the government, which allowed truckers to increase the axle load on vehicles by 30 per cent. This has led many fleet owners to delay purchases. Many had predicted that commercial vehicle sales would not revive till about 2021 but, in the event, they’ve taken an even bigger hit because of the pandemic. Industry analysts say sales are unlikely to pick up in any big way until more infrastructure projects come back online.

In many ways, the automobile industry is a mirror for the whole of the Indian industry. Except for the commercial vehicles segment, the emerging picture is not as bad as might have been feared. After all, a return to status quo ante couldn’t have been expected at once after almost such a long total shutdown. But we also have to keep in mind that 2019 was already a year of slowing growth. In the automobile industry, growth was down about 18 per cent over the previous year. It will be a very long road back to the peak.

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Published on July 07, 2020
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