Coronavirus' impact on India's auto sector
COVID-19 led to supply chain disruptions and production halt in the latter half of March 2020.
By ETMarkets.com | Updated:
The impact of the coronavirus pandemic and the lockdown it triggered is clearly visible in financial markets. But there is still no clarity on the deeper impact that it is having across businesses and industrial sectors. Based on assessments made by different analysts and industry body Ficci, here is an impact analysis of the auto sector.
- How bad has the supply disruption from China been?
- China accounts for 27 per cent of India's automotive part imports and major global auto part makers such as Robert Bosch GmbH, Valeo AS and ZF Friedrichshafen AG have factories located in the Hubei province. Owing to the closure of the factories of these companies, there has reportedly been a delay in the production and delivery of vehicles like Bharat Stage Four (BS-IV) compliant models.
- Post coronavirus related lockdown in China, demand resurfaced swiftly indicating signs of a V-shaped recovery. OEMs expect domestic PV sales to recover by the festive season of CY20. JM Financial says despite the ongoing slowdown in economic activity arising from COVID-19, the medium-term outlook for tractor sales remains positive, driven by strong rabi output, good reservoir levels and expectation of normal monsoon in CY20. It said the tractor industry will recover ahead of PVs, followed by 2Ws and CVs.
- How bad has the impact been on demand?
- In March 2020, all OEMs witnessed a sharp drop in wholesales due to COVID-19 related lockdown and BSVI transition. COVID-19 led to supply chain disruptions and production halt in the latter half of March 2020.
- In case of PVs, OEMs like MSIL, Hyundai and Toyota outperformed its peers, driven by early shift to BSVI and low BSIV inventory. While MSIL dispatched c.77,000 units in the domestic market with sales declining 48% YoY, sales of Toyota/Hyundai declined 45%/41%, respectively. In 2Ws, OEMs faced issues over existing BSIV inventory with the dealers, which was exacerbated by COVID-19 related lockdown and a limited relief from SC on sale of BSIV inventory.
- MHCV sales were impacted the most, due to the planned BSVI transition in the latter half of March and early April. Tractors’ sales remained the only outperformer in the industry. Market leader M&M’s tractor sales declined 27% YoY against >40% decline across PVs/2Ws and MHCVs.
- According to a report released by the Fitch Solutions, vehicle production in India is likely to contract by 8.3 per cent in 2020 following an estimated 13.2 per cent decline in 2019. Covid-19 will also make the transition to BSVI emission norms difficult.
- What’s the near-term outlook for the auto sector?
- HDFC Securities says the auto industry in India is expected to witness multiple disruptions, from Mobility services and Electric Vehicles in the medium term. It said EVs are at the startup stage of the S-Curve, while shared mobility is in the growth stage. However, sustained profitability is essential to ensure scale and longevity of operations and business models will continue to evolve on the roadmap to profitable growth.
- The growth is now originating from 2W-based operators as the traditional cab-based aggregators (Ola, Uber) are unable to expand beyond the large metros. Start-ups such as Bounce, Vogo, Yulu are focusing on the bike rental model while Rapido has adopted the bike aggregation model. The latter segment is growing exponentially (off a low base) with a current market size of $150mn. These services are expanding across tier-I and tier-II towns due to the economical fares/improved connectivity.
- How has the takeoff of electric vehicles been in India?
- There has been a spurt of electric vehicles development activity post the FAME-II scheme. 2W OEMs have launched premium scooters (Ather 450x, Bajaj Chetak, TVS i-Qube), passenger car OEMs have launched high end products and electric buses are being promoted by Chinese and domestic OEMs. Mass adoption of EVs is expected only in the medium term though.
- As EV technology evolves and ride sharing services make inroads into tier-II cities, the growth rates for 2-wheelers will be impacted over the medium term. Industry growth has already moderated to 6-8% (versus double digit growth earlier) as penetration levels have exceeded 50% of households in India. We believe that as the second vehicle usage in households get cannibalised, industry growth rates are likely to moderate to sub 5% levels.
- Passenger cars will adopt alternate technologies such as hybrids on the winding road to electrification, while commercial vehicles (passenger buses) are early adopters of EV technology, led by state incentives under the FAME-II scheme. Limited charging infrastructure and elevated product prices is a key constraint though.
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