Can two-wheeler OEMs aim for swift recovery once coronavirus abates?

With the novel coronavirus, Covid-19 having spread to almost every part of the globe, affecting millions of people, paralyzing healthcare systems and destroying livelihoods, it has hit economies across the world hard.

Global markets are grappling with uncertainties as country after country restricts movements of people as well as of goods and services. India’s prolonged lockdown period is further set to bog down an already slowing economy and like all industries the automobile sector has also taken a jolt.

With many component manufacturing plants closed, sales dipping and declining consumer footfalls in showrooms, the automobile sector is forecasting a 10 percent slowdown in sales due to raw material shortage as well as 8.3 percent contraction in production.

So, what will be the long-term impact of this economic jolt on the automotive industry, particularly the two-wheeler space? Will the sector emerge stronger and more resilient from this crisis? Will the sales pick up swiftly or will they continue to remain in the doldrums? Most importantly, will the sector use this crisis to reinvent itself? These are questions that will need to be considered and answered over the coming days.

Decline in production and sales
Overall the growth of two-wheeler segment in India fell around 13.7 percent in February 2020 when compared to the past year amidst the coronavirus outbreak. The production has been severely affected with many manufacturing units shutting down as well as procurement of parts from factories in China impossible due to import bans which have caused a massive supply chain disruption. Apart from the lockdown, regulatory intervention, weak consumer sentiment and economic slowdown are other factors that have impacted sales of two-wheelers in the country.

This serves as a wakeup call for the automotive industry to switch to alternate suppliers outside of China as acquiring multiple vendors will reduce its dependency on one region entirely. Another alternative is to have an indigenous production system which will take years to build but will enable India to become more self-sufficient and crisis-resilient economy.

Industry yet to clear BS IV stocks
The supreme court of India had directed in 2018 that no BS IV compliant vehicles will be sold or registered in the country after April 1, 2020. The automobile sector had been facing the impact of an economic slowdown since last year. However, the Covid-19 lockdown has resulted in major sales slump with 90 per cent of all retail networks shut. With over Rs 2,500 crores worth of BS IV inventory of two-wheelers still piled up, the sector faces the spectre of huge losses. As the epidemic spreads it remains to be seen whether the Supreme Court will extend the deadline for sale and registration of BS-IV vehicles. Appeals have already been made to the court seeking an extension in this regard. The sector needs clearance of these vehicles to pump in much-needed money to make the transition to BS-VI vehicles smoother.

Impact on the EV industry
India’s emerging electric vehicles (EV) industry is also set to witness a decline in growth due to shortage of critical components like lithium cells which are mainly imported from China, Japan and Korea. Although most Indian manufacturers make battery packs, none of them produces cells in-house which is why until the lockdown is lifted electric vehicle production as well as assembly will not be able to resume.

Furthermore, start-ups as well as big companies cannot procure large quantities of cells at once since they come with a limited warranty and are thereby imported in small batches. This is why EV manufacturers must reflect during this difficult time on their existing business model and push the government for more domestic manufacturing. This will help localize the supply chain and reduce over reliance on other countries.

The way forward
While the sales plunge has been severe, it could not have been averted. A country wide lockdown was a necessary course of action given the extraordinary circumstances facing the entire world. While the losses are inevitable, lessons are valuable. The automobile sector must learn from this crisis and work towards reinventing itself.

As mentioned above, we need to diversify our sources of raw material imports apart from developing indigenous capacity to produce the same. It will help us provide greater resilience against external shocks in the future. The industry must also work to strengthen its R&D capacity as innovation is the most useful tool to tide over such monumental shocks and engineer a recovery. The sector must also work a shift towards more eco-friendly technology choices and invest harder to make Electric Vehicle technology more affordable.

Decline in incomes nation-wide will also limit the capacity of a large section of people to make two-wheeler purchases particularly in rural areas. This is where the government must step in to infuse a revival as soon as the health crisis abates. The government must launch policy initiatives to generate more employment, announce sector wise packages to help the industry overcome the losses and create more avenues for rural incomes. The economic impact has been hard, but we are sure the recovery will be swift and strong for India when the world picks up its pieces post this crisis.