Auto sector may recover in fourth quarter of 2020-21, says PwC

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Experts expect the Indian automobile sector to start seeing recovery in the fourth quarter of 2020-21 in a “realistic” scenario, while facing challenges such as delayed launches, higher costs, shortage of labour and material, and productivity losses.

Also read | India’s Industrial output grows 4.5% in February

According to a report ‘Automotive sector: Impact of COVID-19 and navigating the turbulence’ by PwC, in an “optimistic” scenario we could see a recovery by third quarter (October-December) of the current fiscal. In a “realistic” scenario, PwC expects a two quarter slowdown in the economy, along with pay cuts and temporary job losses in the informal sector, with recovery by the fourth quarter of 2020-21. Under a “pessimistic” scenario, it expects the economy to recover by Q4-FY21, pushing the recovery of the auto sector to April-June 2021 quarter.

The analysis, based on the situation as on April 08, 2020, suggested that under a realistic scenario, two-wheeler sales are likely to decline by 18% to 14.2 million from 17.2 million, passenger vehicles sales may fall 12% to 2.43 million (from 2.75 million) and commercial vehicles sales are forecast to decline 21% to 1.06 million from 1.34 million.

‘Worst hit regions’

Another report on the sector by Nomura Research Institute (NRI) Consulting & Solutions India pointed that some of the worst hit regions in the country are Maharashtra, Tamil Nadu, Kerala, Andhra Pradesh and Delhi-NCR, which are major automotive demand and supply clusters.

“So it is a double whammy for the sector… restrictions are likely to continue in these regions, and if OEMs (original equipment manufacturer) don’t operate, the whole value chain is impacted…it has a ripple effect on the component makers and dealerships,” Ashim Sharma, Partner & Group Head at NRI Consulting & Solutions (NRICS) told The Hindu.

He stressed that there is a need to re-start “controlled operation” in factories to mitigate some of the impact. “The government will have to look at a clear guideline and policy for safe working similar to running of hospitals to start work at factories, else the situation may get worse,” he said.

Demand for vehicles

Asked if he sees demand for vehicles in the current situation, Mr. Sharma said, “To start with the production will not be very high… then there was demand anyways even before we went into lockdown, dealers work on a pipeline kind of system…bookings were made… so demand in there is the system. Second, some sort of rural income will get generated with the harvest season, which could push demand.”

He added that there will be aversion to use of shared mobility and public transportation by people for the larger part of the financial year, which could also lead to some demand. “Can we suddenly ramp up for this demand? I don’t think that will be possible,” he said.

In addition, he pointed out that as the different countries in the world recover, there will be demand for auto components from India. “There were pending orders already which need to be fulfilled. It is very important. Some global players have seen the impact of lockdown in China… we don’t want the same thing to happen in India. We don’t want them to rethink their supply source,” Mr.Sharma said

Need for policy

NRICS has suggested that the government can set up procedures for manufacturers to do self-certification of the workplace and large OEMs can take up certification for their respective supply chains. It added that there is a need for policy for operation of dealerships and workshops so that they may reopen.

As per the NRICS report, some of the challenges the sector faces include delay in product development activities; financial and labour distress at domestic suppliers, especially Tier II and below; increased cost of imported raw materials due to rupee devaluation; high volatility in prices of a few commodities due to pandemic induced demand-supply imbalances; drop in footfall and changing customer behavior due to safe distancing and contactless shopping; and lower demand from the fleet segment.

“In a nutshell, we need to live with this new normal and while saving lives is and should be the primary objective, we must implement strategies to ensure livelihoods can also be saved to limit the devastating effect it could have on the millions in our country as well as the positioning of our country in the global ecosystem,” Mr. Sharma added.

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