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Extremely difficult to predict Covid-19 impact, says Skoda-VW India chief

Murali Gopalan | Updated on March 26, 2020

But India also has bigger issues to address, says Gurpratap Boparai

Like everyone else, Gurpratap Boparai is keeping his fingers crossed about the ticking time bomb called Covid-19.

“Let’s see what impact it has even while there is definitely some disruption in the supply chain for everyone,” says the Managing Director of Skoda Auto Volkswagen India. When the outbreak first happened in China, it resulted in a near 80 per cent fall in sales last month.

“That would be a disaster and hopefully we don't get to that in India,” says Boparai (since the time of the interview, the Centre has clamped a 21-day lockdown across the country). Over the last few months, Covid-19 has been wreaking havoc worldwide.

India has had its share of infections/casualties too and the only hope is that it stays within some range of control. “It would be extremely difficult to predict a scenario here; it depends how careful people are in taking precautions,” says Boparai. Despite all efforts now underway, India’s large population and the grim reality of supply versus demand in medicare facilities is something that cannot be wished away.

The Skoda-VW chief is pragmatic about the fact that in this scenario it is impossible to predict what could happen since “it is far too big” at this point in time. “We will just have to accept the situation and try to do the best we can. If there is a collapse of the auto market here like in China, there is little we can do,” he says.

For now, the only option is to wait and watch while everyone hopes that it will blow over eventually. Boparai reiterates that none of this will have a bearing on India 2.0, which is “towards the future… and the future has not changed”.

The reference is to the Volkswagen Group’s initiative to have Skoda lead the way in developing a cost-effective platform that will pave the way for a new generation of SUVs. These are meant for both Skoda and VW as part of an effort to meet the India challenge.

Right now, Covid-19 has in all likelihood derailed the timing but that is true for all automakers across the world which have their backs to the wall. “Of course the going will be tough but I don't see things changing so dramatically,” says Boparai. From his point of view, the VW Group is investing for the future and this commitment has not changed.

Bigger issues

Even while Covid-19 will eventually pass over, there are no two ways about the fact that India has bigger issues to address. “As a country, we need to focus a little more on the economy too since all growth projections could go awry otherwise. In the medium term, the overall growth of the market has to happen for bigger plans to materialise,” cautions Boparai.

The transition to the Bharat Stage-VI emission norms will take place in less than a week from now. Yet, availability of some models could still be a bit of a challenge since some components come from China. The Covid-19 crisis has affected assembly of BS-VI cars because parts were not available.

“Without certain components, you cannot even produce the car…the fact is that you do have a bit of a gap and are unable to fill the pipeline,” says Boparai. However, reports now indicate that things are now settling down in China where most factories have opened up.

Yet, even while the worst seems over in China, the epidemic has now spread rapidly to Europe and the US. “European supply chains are deeply interconnected which means that is going to hit everyone who is dependent. This is an added problem since we depend on Europe, too, for certain parts and are keeping our fingers crossed,” says Boparai.

The crisis has thrown up debates on the auto industry’s excessive dependence on China but, as he explains, there is more to this than meets the eye. For instance, a supplier may be sourcing some parts from overseas for his needs. This effectively means that the most localised manufacturer has an import content “that is up to 15 per cent minimum”.

By the end of the day, it is a globalised arena and “you will always have certain parts concentrated in some parts of the world because of economies of scale”. Hence, if 20 million parts are produced in one location and a million elsewhere, there is no way of being cost-competitive.

“This is just how the world is and you cannot change what has happened in the last 30 years. There is really no choice and it is not reversible any more,” says Boparai.

As he puts it, everybody may want to de-risk for the future, especially after the present crisis, but it costs money to create capacity. “Any fallback will allow you to survive for a brief period of time. However, if the bigger capacity does not come back on stream, there is no way you can carry on business forever,” he says.

In his view, one may have all the arrangements in terms of an inventory pipeline or alternative sourcing to manage for a month or two till the crisis subsides in one part of the world. This, however, cannot be a long-term solution “because for everything you will need to double capacity which is just not doable”.

Right now, the crisis could be happening in China or Europe but the future could see some other part of the world coping with another challenge. “One should not look at it from the present situation alone; these are things that will blow over eventually,” says Boparai.

Scale is key

In the case of future products for instance, the company could be focussing on localisation to the maximum extent possible given the economics and technology. Eventually, it boils down to scale and for that India needs to grow its automobile market beyond the present levels of three million units. “Scale is key by the end of the day,” reiterates Boparai.

Even a die-hard optimist will concede that there is no way that India will reach China’s annual tally of 30 million cars for many, many years. At best, it could hope for 10 million (three times the present number) cars over the next 15 years even while its two-wheeler population will grow exponentially.

From Boparai’s point of view, India would have been a significant car manufacturing hub but perhaps limited itself by not having enough free trade agreements (FTAs) with bigger markets. Similarly, the differential of favouring sub-4 metre cars meant that “our competencies lie here” since these dimensions are not the global norm.

“India is limiting its export potential because of these issues. We need to address them if we want to be a bigger player with a larger manufacturing footprint in the auto space,” says Boparai. From his company’s point of view, an FTA with Europe clearly becomes more significant though it is a million dollar question if this will happen.

History will show that when India did not conclude such a pact with Europe (import of cars was duty free into the EU till about seven years ago), they imposed a retaliatory duty of10 per cent. This was hefty enough to deter shipments from here to stop. Suzuki started selling in Europe out of Hungary and Hyundai out of Turkey, which ended up being a loss for India.

Doubtless, protectionism is a global trend in recent times but how long this lasts remain to be seen, says Boparai. “In a globalised world, you cannot hope to be making everything,” he adds. To that extent, it perhaps makes sense for India to source from say Bangladesh or Vietnam for some productss while focusing on other things and developing competencies around them.

“These things can only happen when trade barriers go. We want to be competitive on the one hand but you cannot do this if you are protectionist,” says Boparai.

Published on March 26, 2020

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