Do we need to talk about automobiles?

Short answer: probably from a different angle. Production has been suspended due to the lockdown but even before that, the industry was having a really bad year with cumulative volumes shrinking by 42 percent (in 8MY20) for cars, commercial vehicles and tractors combined, the biggest hit of which was seen among passenger cars and jeeps. One-month of COVID-19 in, the cumulative decline has grown to 45 percent with passenger car sales dropping by 47 percent. It is probably going to get worse before it can get better.

Volumes are showing a sobering trend and the decline in sales has come in across variants (some discussion on volumes and who is buying cars today can be read here: “Automobiles: Is the middle-class squeezed out?” March 17, 2020).The more pressing concern however is on employment. It is almost certain that a lot of workers will be losing jobs in the sector—even if the big automakers do not take the layoff route. The industry has an entire value chain from automotive parts and component makers (over 850 players, mostly SMEs) to the end of the line consisting of dealers and after-market vendors (Nearly 2000 players, micro and SMEs).

Auto vendors have been laying people off for the past year as commercial vehicles and tractors saw a marked decline since the economy was in doldrums. Vendors providing to passenger cars persevered, though Mehran being phased out led to a lot of parts suppliers adrift looking to shift production and not finding abode. After-market players remained above water as the replacement market kept going.

Meanwhile, local dealers not associated with OEMs had also been having it tough for a while since the government introduced restrictions that essentially halted the import of used cars. Since a good share of their sales were from imported cars, a lot of dealers struggled to keep doors open.

The loss in employment that will ensue now will be doubly hard. Daily wage workers, contractors and other laborers will find it difficult to keep their factory jobs. Some auto parts makers are smartly moving into ventilator and face shield production (read more: “War on Coronavirus: Businesses must say aye!” March 30, 2020) which bodes well for laborers already engaged, though the volumes currently planned (20,000 for ventilators over the next six months) are not a lot and the regulatory approvals they require to reach these volumes may pose conflict with this optimism.

A quick note on industry future is a question we will ask. A JS global research to clients argued: “since COVID-19, the rupee has depreciated further and this bodes negatively for OEMs’ profitability and might cause them to raise prices further once the lockdown ends”. This is an oddly simplistic view. OEM’s profitability will hurt, but not because of rupee depreciation alone. Demand may not follow supply at all in these unprecedented times, specially coming out of a lockdown. Let’s also remember that COVID-19 is not ending. Countries will have to try different strategies for months at end, sometimes opening and sometimes closing down cities and towns to thwart the spread. It will be an intermittent process to tackle coronavirus. While leasing costs are down, incomes are already being slashed and if automakers raise prices further, cars may not find a lot of buyers. Who will be buying cars in FY21—that is a question to explore.