Rebuilding And Restoring The Auto Components Sector
The unprecedented human crisis created by the outbreak of Coronavirus is forcing countries and communities across the world to mitigate its consequence through social distancing and lockdowns of various degrees. From India to Italy, the crisis has brought an uncertainty keeping billions of people homebound for the last couple of weeks and months. In many ways, the impact of COVID-19 has been far more devastating than any other crisis faced by the human race, simultaneously impacting families, businesses, and economies. The profound impact on human capital is likely to have repercussion on productivity in the long term as well.
The result in supply and demand shock has already snarled global production and logistics networks. As per the UN’s report, the global economy could shrink by up to 1 per cent in 2020 due to the coronavirus pandemic, a reversal from the previous forecast of 2.5 per cent growth. The US economy has reported having shrunk by 4.8% in the first quarter of the year (the fastest decline since 2008).
The nationwide lockdown in India reflects the scale of the challenges posed by COVID-19. This scale of lockdown meant barring essential services, shutting of the majority of the factories and businesses, suspension of passenger flights and trains and restricted movement of vehicles and people.
Amidst this, the frontline workers from the doctors and the nurses to the police force, from grocery and foodservice providers to sanitation workers are proving to be strong pillars supporting the country at this tough hour. The central and the state government, businesses and India’s common man have risen to work together to fight COVID-19. The small and big contributions by the corporates and individuals to reach out to the people who need help reflects India’s massive collective effort. In addition to adherence to social distancing, coordinated effort by multiple entities is the only way to fight the impact of COVID-19.
Despite this, the uncertainty of lives and livelihood prevails, and the deeper impact of the crisis is still being evaluated.
Unlikely partnerships enabled by the auto sector and impact on auto-components sector
Even before the COVID-19 crisis, the auto sector was already facing a myriad of challenges which were aggravated by this pandemic. In FY20, the sector was struggling with challenges of declined in automobile volumes due to weak economic scenario BSVI transition leading to a price increase, inventory correction by OEMs as well as the impact of COVID-19. Now, the lockdown has suspended production in factories.
However, the resilience of this sector has stood out as OEMs stepped up to support the country’s effort to boost capacity to manufacture ventilators, crucial to the treatment of COVID-19 cases. For example, MG Motor India partnered with MAX Ventilators and Hyundai Motor India partnered with Air Liquide Medical Systems.
Indian auto ancillaries and original equipment manufacturers (OEMs) have huge import dependence on China for key parts and accessories. Additionally, multiple reports have already highlighted that domestic automobile demand is expected to be impacted for an extended period as consumers cut discretionary spending. The chain reaction will hurt the auto components sector both domestically and for exports as well.
There is no doubt that there will be an adverse impact for multiple quarters, the sector’s ability to innovate during this adversity indicates the potential of the industry to revamp and revive.
Revamping and reviving auto components post COVID-19
There are a number of uncertainties on the business front, but one thing is for sure, the unprecedented challenges induced by COVID-19 is making the auto components sector relook at its ecosystem. In fact, the government should consider a major economic stimulus to help industries and some countries have even earmarked 10% of the GDP for this. In the absence of significant incentives, many companies will fail and will be forced to close shop. This will have a cascading effect on banks and NBFCs which are already not in the best shape.
Demand: There are mixed opinions on how the demand for auto components will be impacted. Some believe that people will invest in essentials first and automotive will be low on the priority list. However, a contrary view is that people might be inclined to buy personal vehicles to avoid taking public transport which might expose them to the virus. The next six to eight months will guide the behavioural trend. While the industry will take some time to come to terms with the situation. The GDP is already predicted to be a very low number which might be revised further based on the prevailing circumstances. In the medium-term, we might see a pent-up demand which will lead to a sharp rise in the GDP.
Supply: On the supply side, 80% of components firms utilise tier 2 or 3 vendors and they are the ones who will be in deep pressure due to cash flow, leading to supply chain disruption.
Labour: Another important factor to consider is the migrant workforce. After the lockdown, their first priority, perhaps, would be to go to their hometowns and be with their loved ones. This would mean a sharp shortage of labour which will also impact the supply.
Currently, the priority clearly is to reduce Capex to maintain cashflow.
New Normal: Meanwhile, as the sector responds to what is being termed as the new normal, it is assessing all the aspects of its operations -- manufacturing, people practices, strategy, sourcing, communication and business continuity processes. Right now, the mantra seems to be finding ways to enhance demand for parts and risk mitigation.
Many also view this crisis as an opportunity to do better when the lockdown ends. Some possibilities post COVID-19 for the auto components industry could be:
Post lockdown, companies need to adhere to government guidelines to ensure that the infection and disease do not recur. This will help to keep all stakeholders in the ecosystem (employees, suppliers, vendors etc) safe, securing the most valuable asset - people.
