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A new world order will emerge after Covid-19

Murali Gopalan | Updated on April 09, 2020 Published on April 09, 2020

A radical rethink With Covid-19 engulfing the entire world, companies have to revisit all their plans, including those on exports   -  Jens Meyer

Europe could see greater consolidation among auto brands, while electric vehicles may take a backseat

When the Lehman crisis broke out a little over a decade ago and caused the world to go into a tailspin, it had a massive fallout on the auto industry.

One of the biggest casualties was Detroit, which went belly-up and big brands like General Motors and Chrysler found themselves in a bottomless abyss. This, however, turned out to be an opportunity for a company like Fiat to throw its hat into the ring and snap up Chrysler, a move that has paid dividends since then, thanks largely to the resurgence of the Jeep brand.

In the aftermath of the Lehman crisis, GM also reset its priorities, exiting from a slew of markets like Thailand, Russia, Australia, South Africa and India. Today, GM has prioritised China, the US and Latin America as its key focus growth areas in a bid to stay lean and mean.

It was also during this global slowdown that Peugeot shelved its India project, planned in Gujarat, since it was virtually skating on thin ice. There were tie-ups forged with GM globally but it was finally Dongfeng Motor of China which played the knight in shining armour and bailed out the French automaker.

Fast forward now to the present global catastrophe, where a minuscule assassin going by the name of Covid-19 has wreaked the kind of havoc which makes the 2008-09 global slowdown look insignificant in comparison. The European automotive industry is virtually haemorrhaging with big brands gasping for survival.

Trail of death

As Covid-19 continues to spread its trail of death, it is only natural to expect the world to never be the same again when the virus eventually runs out of steam. Big automotive markets will be in ruins and the process of collecting and putting together the pieces all over again will be a tough and arduous task.

As in the case of 2008-09, there will be another exercise of alignments or even buyouts as the weak look to the strong for survival. Before even attempting to speculate what is in store, it perhaps makes sense to take stock of the present scenario first. In France, the two big brands are Renault and Groupe PSA, which have a common shareholder in the form of the French government. While Renault has had a decades’ long association with Nissan, there have lately been cracks in this alliance even while leadership teams have been put in place to stem the rot.

In the case of PSA, which makes the Peugeot and Citroen brands, it has staged a successful comeback after the 2008-09 crisis and has acquired Opel and Vauxhall from GM while forging a merger with Fiat Chrysler Automobiles (FCA). There have reports doing the rounds that all is not well on the partnership with Dongfeng but this still remains unconfirmed news.

Will the French government now prevail upon Renault and PSA to work more closely together, especially with the kind of destruction that Covid-19 has brought about? Likewise, will these companies take a relook at their investments in high growth markets like India when their balance sheets will have been battered by the virus?

Fighting back

These are early days yet but if the experience of 2008-09 is any indication, these companies will end up taking some real tough measures, largely in an attempt to stay float. From their point of view, they will first have to revisit their business plans which would have gone completely awry. Covid-19 has spared nobody in its lethal path which literally means that all global plans on exports will now need to be rewritten keeping in mind the new scenario. All countries will be near broke with perhaps the exception of China, South Korea and Japan. The last thing the millions of jobless people will want at that point in time is buying a car.

In their turn, manufacturers will now need to collaborate closer in order to survive. It is perhaps not entirely unlikely that the PSA-FCA combine could also rope in Renault as part of a new business model to save on costs in key areas like sourcing.

Whether Nissan ends up being part of this alliance is a million dollar question considering that it has its own issues to sort out with Renault. The Japanese automaker also been struggling in recent times and the alliance will also now need to factor in the presence of Mitsubishi, which came into its fold three years ago.

Likewise, it remains to be seen if Germany follows a similar model and urges closer bonding between its three big brands — Volkswagen, Daimler and BMW. Again, this will be on the backend, largely where the focus will be on common sourcing of parts and the need to keep costs in check.

Electric plans on hold

What is especially significant in Europe is that carmakers have earmarked huge investments for electric and may just not be able to sustain this spending in the post-Covid 19 era. In the process of putting their smashed homes back in order, the last thing they will want is to put a lot of money into a domain where the returns will be slow in coming.

Further, it would be unrealistic to expect their governments to fund generously for electric car initiatives when there are substantial social costs to reckon with. There will be a staggering number of people who will now be on the dole and countries across Europe will be hard pressed to throw them a lifeline.

It is very likely that the focus on electric mobility will take a backseat for the next two or three years. There is also bound to be some geopolitical anxiety on this issue considering that China has been the centre of gravity for electric but now faces public wrath for Covid-19. This anger will be good reason for carmakers to steer clear of the electric arena, at least in the short term.

In the UK, it will also be a far weakened Jaguar Land Rover that will need to address new challenges once the Covid-19 scourge ends. Its parent company, Tata Motors, has already announced its intent to hive off its passenger car business back home in India.

Will JLR also be put eventually on the block? If this happens, the most likely suitor will be a Chinese company unless they are prohibited from doing so in the event of huge global resentment. As for the US, Ford has already prioritised its global plans and it is a moot point if it will commit more investments to the newly created joint venture with Mahindra & Mahindra.

In Japan, there has been a recent spate of consolidation happen with Toyota-Suzuki/Toyota-Mazda, Honda-Yamaha (for sub 50cc scooters right now but this could grow to other areas) and Nissan-Mitsubishi. Will Honda Cars now be part of a new group as part of the ‘coming together’ business model which could include Nissan?

For now, there is nothing in store but surprises could be thrown up, especially if the Japanese government believes that homegrown companies need to be protected at any cost. The world after Covid-19 could see Chinese automakers play an aggressive game in getting a foothold elsewhere (including ancillary suppliers) except that not all governments across the world will be prepared to play ball.

Published on April 09, 2020

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