How Indian Auto Industry Needs to Change Post COVID-19?

By Angel Broking | Published on 26th May 2020 | 203

How Indian Auto Industry Needs to Change Post COVID-19?

Experts believe that COVID-19 is going to bring some permanent changes in economics that will impact several sectors, including automobile. The Indian automobile sector, already struggling under suspension of work and weak demand, needs to adjust in more than one frontier to cope with the changes.

Indian automobile sector was struggling with increasing overhead, economic slowdown, and demand shrinkage even before COVID-19 outbreak brought India to a standstill. It suffered almost 18 percent reduction in growth in the first months of FY20. It worsened further due to the outbreak.  Many of the carmakers are struggling to survive with increasing loss volume, suspended production, and almost non-existence of consumer demand. Besides, customer focus is now shifting towards digital platform, and there will be a rise in no-contact business demands, forcing carmakers to rethink their traditional way of business, which emphasises on human interaction. It is going to be a challenge for them to rethink a business model and adapt to virtual sales mode with no handshaking to close a deal. Overall, COVID-19 impact on Indian auto sector is going to bring unprecedented changes to it.

Indian automobile sector before COVID-19 situation

Indian automobile arena is dominated by some indigenous players and few foreign automobile giants. Asia’s third-largest economy, India creates a massive market for family-sized cars in the middle-income group. Increasing urbanisation and growing middle-income group section with high disposable family income made international carmakers to explore India’s potential market. With favourable economic conditions, government initiatives to transform India into a global manufacturing centre, policy relaxations, India became the 4th largest auto market in 2018.  Sales during this phase increased by 8.3 per cent year-on-year to 3.99 million units. India also became the 7th largest manufacturer of commercial cars during this period. Domestic demand experienced a rise of CAGR 6.71 per cent between 2013 and 2019 with 26.27 units of vehicles sold in 2019.

What does the future hold?

COVID-19 outbreak has completely transformed the landscape of the industry. As the economy is reeling under forced lockdown, Indian automobile industry is facing an unprecedented slump in demand. In a never before situation, automobile sector registered zero sales and production in all the vehicle categories in April 2020.  Although industry wheels have started to churn again, the challenges are far from over. As a result, outlook for the 1st half of FY21 also remains weak, and pundits believe recovery might not take place before 3rd quarter of FY21.

“With the already existing slowdown during FY20, the industry is likely to suffer huge losses going forward. Even if the pandemic is curtailed, the consumer sentiments are expected to be unfavourable, and demand is expected to remain muted during H1 FY21 led by volatile economic conditions. Also, government spending on infrastructure is expected to be low during the period, further impacting the demand for commercial vehicles,” suggested CARE Ratings in one of its reports.

Impact of CoronaVirus on Indian car market is going to bring some long-term changes to it.

Cash crunch will continue

As everyone is trying to navigate through this challenging time, demand for cash will remain high. There will be a rise in demand for cars that will offer more value for their prices, rather than high-end, top model vehicles. The industry might witness a surge in demand in hatchbacks and compact crossover vehicle segment. And, possibilities are there that SUV & MPV segment might suffer a backlash.

“The Rs 10-20 lakh price bracket might be a challenge to sell, while the Rs 20 lakh price upwards would be facing some shrinkage in demand. Indian customers would be looking at affordable mobility with safer means to travel. The cost would supersede brands and categories across the market,”  observed Amit Kaushik, MD Urban Science, a US-based consultancy.

Change in preferences: Used car section will gain

COVID-19 will significantly change customer preferences. Focus will shift to a safe mode of travelling, and ride-sharing might take a backseat, will promote demand in the used car segment as more customers will switch to a personal way of transport.

Work from home will become normal

Not only under current condition, but many companies will extend work from home flexibility to minimise travelling to avoid contamination. While demand for safe contamination-free travel might fuel demand for cars and two-wheelers, there will be an overall decline in travel needs by users.

Increasing production cost will lower profit

Given the highly contagious nature of the virus, there is a surge in demand for safer manufacturing, sterilised workplaces, protective gears for workers, screening and monitoring. It will significantly increase the cost of production and eat into the profit shares, leave many carmakers struggling.

Overall conclusion

Demand slowdown, new emission norms, and CoronaVirus pandemic have delivered a fatal blow to the Indian automobile industry. Production has reduced in each vehicle segment, pushed it back to the level of 2016. But as production has started again in some plants and some dealers started operating in less affected areas, we can see some activities returning to the sector.  Cheaper fossil fuel is also likely to push demand upward in the post-COVID-19 situation.

Overall the market is going to remain lukewarm for carmakers. It is expected to plummet further by 15-20 percent going by the current predictions and may see some revival only in the third quarter of 2021.