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Indian auto sector: Adapting to a new post-Covid era

Gurpratap Boparai | Updated on April 16, 2020 Published on April 16, 2020

File photo   -  Reuters

India needs to rewrite its automobile story brick by brick, carefully addressing its short- and long-term challenges

In order to stop the spread of the Covid-19 outbreak, many countries across the world, including India, have taken very tough measures.

We are still not certain how this crisis will play out, but we are aware of its effects on our economic, physical and mental well-being. The automotive industry was pulling itself up from a prolonged slump when the pandemic threw everything out of gear. How can it surmount the many challenges it now faces?

At the time of writing this, the lockdown has been extended till May 3. Normal operations of establishments, services, factories, plants, organised and unorganised sector businesses, from the micro, self-owned levels to gigantic MNCs, have all been severely disrupted, and we still do not know what lies ahead.

As businesses close, financial concerns and job losses are one of the first human impacts of this pandemic. The World Trade Organisation has predicted that global trade will sharply fall by 13-32 per cent in various markets in 2020 and over 20 per cent in 2021.

While all of us are rightly concerned about the free falling economic and business growth numbers, we also need to prioritise our response to this ever-changing scenario. In my opinion, unless human lives and people are safeguarded there would be no commercial activity, no markets, no demand and supply mechanism. It is our people who drive the economy and without a healthy population there is no economy.

Though it may feel premature, we must act on the basis of hope. We must be prepared for a return to normalcy and cannot afford any complacence in helping the country get back on its path to recovery. As a contributor to over 7 per cent of India’s GDP, the entire automotive industry has a vital role to play.

The industry also contributes to almost 50 per cent of India’s manufacturing GDP. Given this critical aspect of the business, we need to map out our journey towards growth before we set off. We do not know how it is going to turn out, but we must attempt to accomplish it to the best of our abilities.

Facing the odds

The first is to address the challenges, in the short term and over the long term, that lie ahead of us. Of the former, there are primarily two types: operational challenges and market challenges.

Operationally speaking, reopening of manufacturing facilities, especially the shopfloor, ensuring an uninterrupted logistics and supply chain and getting dealerships back on line is the biggest one of them all. To get our plants humming, we will need to arrive at a roster system that will ensure the safety of employees and staff.

It could even mean a change in the standard eight-hour shifts that we are used to, considering that their safety is paramount. Production lines and processes may need to be structurally adapted to follow extensive safety norms and recommended practices of maintaining hygiene and social distancing. At the same time, the importance of keeping motivation levels high and maintain positive sentiments among employees cannot be overstated.

As is the case with the automotive industry, OEMs have to work along with their partners, both upstream and downstream, to implement similar measures that will bring operations back on track without compromising on safety and keeping motivation levels high.

Needless to say, it will take time to return to status quo and, for the moment, industry players may have to lower their standards and expectations of optimum capacity operations owing to these factors.

Long-term woes

While short-term operational challenges are something the automotive industry can surmount on its own, that is not the case with getting the market back to its vibrant levels without external intervention. Over the last two years, the automotive industry has been battered by many factors that have been reported extensively.

Now, owing to Covid-19, we are back to facing an extended period of low and negative sentiment. The industry has been in this state for a staggering 18 months now and one can reasonably expect it to continue for another 12 months.

The strength of the domestic automotive industry always has been the unquenched thirst of Indian customers for comfortable and safe personal mobility and an overarching desire to improve one’s living standards.

The industry derives energy from these emotions. Unfortunately, the effect of Covid-19 is that now customers are in no hurry to do so, and are willing to wait it out.

Need for stimulus

The automotive market therefore needs a powerful stimulus that will make prospective car buyers shed their negative sentiments and fall in love with new cars once again. And that stimulus can be in the form of a tax reduction. Even if it is temporary, a revenue neutral taxation policy can substantially help boost the automotive industry in the quickest possible way.

One only needs to look at the GST rates applied on automobiles. All cars fall under the highest GST slab of 28 per cent. Over and above this, different rates of cess are applied, based on the type of vehicle, engine capacity, fuel type, etc, ranging from 1 per cent to 22 per cent. On every vehicle sold, Central and State governments receive anywhere between 29 and 50 per cent via GST-plus-cess, depending on the type of vehicle.

A downward revision in the overall GST rate can bring down the cost-to-consumer, making new automobiles much more attractive, thus stimulating demand and consequently creating a trickle-down impact that can bring about a rapid recovery of the industry and the economy.

Of course, this will also have an enormous social multiplier effect across the entire value chain, and has the potential to positively affect the lives of 37 million people employed directly or indirectly by the auto industry and their families.

Inevitability of tomorrow

Predictions are that from a high of around 3.2 million units in 2018, the domestic market in calendar year 2020 will contract to around 2.4-2.5 million units. Perhaps clever lessons learnt and applied from this situation will help automakers and ancillary industries seek new business opportunities, bring in operational excellence, engineer levers for cost control, expand into new areas of operations and bring in flexibility and nimbleness to the business.

Though the innate exuberance of Indian consumers will be negative in the short term horizon, the challenge is to be able to hold on till they are ready to drive out of their homes in new cars. One thing is certain: it’s not business as usual any more. Consumer behaviour will change drastically — it will become more need-based and rational. The retail business will come up for an overhaul, where physical footfalls into showrooms will come down but digital footfalls will increase.

Dealerships will have to find new ways of attracting, engaging and attending to customers. Driving or commuting behaviour, too, is up for an overhaul, leading to OEMS having to engineer automobiles to suit the needs of the fleet segment.

Life after Covid-19 will have to be a totally fresh start. It is certain that the automotive business as we know it will have to adapt to a new post-Covid-19 era. We need to re-write the Indian automobile story brick by brick with a lot of patience.

While there are multiple challenges, it also provides us with a major opportunity to reinvent, innovate and rebuild the industry. How quickly and how well we adapt to it will make the difference between success and failure.

The writer is Managing Director, Skoda Auto Volkswagen India

Published on April 16, 2020

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