Warren Harris: ‘Covid-19 is a wake-up call for the industry to re-look at legacy practices such as single low-cost sourcing and diversify to a more globally distributed sourcing model.’

Tata Technologies’ CEO and MD, Warren Harris shares his views on the ongoing Covid 19 pandemic, impact on the automotive industry, and how the global auto industry will need to take a re-look at legacy practices. An interview by Nilesh Wadhwa.

How do you view the global and Indian automotive industry reacting to and tackling the challenge of Covid-19?
Covid-19 has created an unprecedented impact on global markets, trade, and commerce. The initial disruption in China (led by the lockdown in the automotive hub of Wuhan) led to disruption in exports associated with automotive value chain including auto components. 

This has now given way to more significant manufacturing disruptions across Europe, North America and other parts of Asia. As per S&P Global Ratings, automotive sales are expected to fall by almost 15 percent this year to less than 80 million vehicles. Even as China tries to get back to work and some OEMs have restarted their factories, auto and parts factories will likely run at low capacity and need time to ramp up. There will be a significant impact on the automotive industry in the next few months:   

Disruption in the supply chain: With close to 80 percent of the world’s automotive supply chain linked to China in some way, we will continue to see production shortfalls resulting from supply chain disruptions, even though there is cautious optimism that the operations in China will slowly resume over the next few months.

Several leading automakers and automotive component manufacturers in Asia, Europe, and North America have suspended production to protect workers and mitigate the transmission of Covid-19. As the entire automotive ecosystem is deeply integrated, any sustainable recovery will take at least 3-6 months as suppliers and OEMs look to resume operations and align their ecosystem and suppliers to the revised demand and supply scenario.

Liquidity crunch: Revenue disruption due to Covid-19 could lead to a liquidity crisis for many automotive businesses as it is a capital intensive, labour-intensive business and it is not clear how governments across the world are going to support this loss.

Over the past two weeks, Moody’s Investors Services has downgraded some of the leading auto manufacturers and put several others on review, citing ‘weaknesses in their credit profiles including their exposure to final consumer demand for light vehicles’.

OEMs will be forced to redirect capital towards operational processes as we prepare for restart, instead of spending on R&D initiatives and new product launches, which will impact various parts of the value chain in the near term. It is also possible that many suppliers may not be able to restart operations, owing to impairment and impact in the balance sheet, which in turn will impact the automotive ecosystem in a big way.

Muted consumer demand: As various lockdown scenarios and other economic disruptions play out, there is a huge concern that this supply problem will quickly spill over to become a demand problem. Consumers are likely to focus on basic needs and preserve cash while delaying discretionary spending such as vehicle purchases amidst an uncertain economic environment, significantly impacting automaker revenues and profitability.

Demand may become a bigger problem than supply for the industry in the coming few months and hence the time for recovery would not just be the restart of production, but also scale-up of demand sentiment.

The Indian automotive industry has had to deal with two major challenges at the same time – Migration from BS IV to BS VI and disruption caused by Covid-19. Indian automobile sales volumes have been falling over the last few months (fell 19% YoY in February 2020) on lower consumer sentiments and demand as OEMs continued the regulated wholesale billing to grapple with the effects of switching to Bharat Stage (BS) VI vehicles.

To tackle Covid-19, a lot of Indian OEMs have already halted production and the situation is unlikely to improve in the near-term with a government-mandated lockdown in force. Amidst this nation-wide lockdown, some dealers with BSIV stock would be unable to liquidate the compliant vehicles completely before the March 31, deadline even after the relief given by the Indian Supreme Court.

A combination of an extended shutdown followed by weak demand in the next three months, is likely to intensify the woes of the India automotive industry which is already struggling with tepid demand over the previous 12 months.  

Which automotive segments, do you think, will be the worst impacted?
While there would be an overall impact on consumer sentiment and demand, the recovery is likely to be faster for basic/entry-level vehicles and slowest for premium vehicles as customers focus on cash preservation in the aftermath of the crisis.

Within the basic/entry-level car segments, we expect the recovery to be slower for the salaried workers who might have taken a hit due to pay cuts, unpaid wages, unemployment or a drop in their savings, even though the commercial segment may see a faster recovery as lockdown ends and operations resume.

How is Tata Technologies working with its clients to handle the current situation?
In this unprecedented time, our customers and employees remain our top priorities.  Several measures are being undertaken to contain the impact of Covid-19 on our operations.

We have enabled a cloud-based ‘work-from-home’ model for most of our project team/s in affected areas so that they have access to tools and solutions needed to deliver our customer projects in a secure environment and intend to complete the enablement of remaining projects within the next few days.

We have reached out to all our customers directly to assure them of our commitment and service delivery as well as inform them about the change in the work model; most customers have been supportive of our approach. We are continuously monitoring the situation, and we will continue strengthening our business continuity processes as the situation evolves.

By when do you see things improving?
A pandemic of such an unprecedented impact has not been seen in the recent past and the future recovery is very uncertain. This depends on various scenarios that could play out over the next 3-9 months, starting with possibilities of a swift recovery and ranging to the possibility of a prolonged shutdown and slow recovery.

While governments worldwide are trying to minimise the impact through financial/ liquidity measures, testing, quarantine and ‘lockdowns’, it is likely that medical intervention in the form of a cure or vaccine will lead to a long-term solution.

A study of past pandemic trends (e.g. Spanish flu) has indicated that flu-shocks have all been followed by a v-shaped recovery which means that recovery is as dramatic as the shortfall. While the historical precedents do not guarantee future performance or recovery, we remain optimistic that things will start looking up from July - September 2020 time frame.

We are already seeing green shoots in China within 4 months of the pandemic breakout, and as other counties learn from the China experience and undertake corrective and preventive actions, we could hope for recovery across global markets in the same line even if some countries which have been more severely impacted (e.g. Italy) may lag others, like Korea and Japan, who have managed to flatten the curve.

We see Covid-19 as a wake-up call for the industry which has been heavily reliant on legacy practices such as single low-cost sourcing and is likely to diversify to a more globally distributed sourcing model.

The world, after Covid-19, will likely be very different to pre-Covid-19 with social distancing becoming a behavioural practice and digital becoming a way of life. This adversity also presents an opportunity for many companies as they adopt digital as a way of life and skill their workforce for the new world after Covid-19.