By Somya Mathur, Badri Narayanan Gopalakrishnan and Yogesh Kulkarni
As the country is grappling in the worst crisis of the century, amidst the country wide lockdown and daily upsurge in the number of covid-19 positive cases, a section of commercial transport sector is ensuring that the supplies of “essential goods” are not disrupted. Yet over 15 lakh trucks and 35 lakh drivers of trucks carrying “non-essential” goods are stranded on the highways amidst the lockdown.
As per a study of KPMG, the lockdown will lead to a plummet in the sale of the commercial vehicles. The recent pandemic outbreak coupled with financial profiles of fleet operators and price hikes because of transition to BS-VI emission norms will have an impact on the commercial vehicles sales, which are likely to contract further by 8 – 10 % in FY 21.
India’s commercial vehicle sector’s dependency on China is moderate.~
Automotive industry is considered as a barometer of a country’s growth and also remains on the frontline in any economic downturn. It contributes to 50% of the nation’s manufacturing GDP and provides employment to nearly 37 million people. It’s a double whammy for automotive commercial vehicles industry which has been badly hit by “the worst economic fallout since the Great Depression”.
The impact will be felt not only in the commercial vehicles manufacturing and its allied industry, but also by the transport sector. Therefore it becomes imperative to reshape the business processes in the automotive industry.
Our analysis done on the widely used GTAP data and model as well as India’s Input-Output table suggests that auto-components form about 48% of all total imported inputs by Indian commercial vehicles industry, while the share of China as a source in total auto-component imports is about 75%. Furthermore, the share of imports in total auto-components used in commercial vehicles production is about 37%. Therefore, the commercial vehicles sector’s dependency on China, in terms of the share of Chinese exports of auto-components in total consumption of auto-components is about 28%.
Hence, India’s commercial vehicle sector’s dependency on China is moderate. The crisis on the upside has given an opportunity to redesign the business processes with an extensive use of new emerging technologies and thus paved way for innovation. It is of foremost importance to understand the value chains of the commercial vehicles manufacturers and access the impact of the Covid-19 crisis on various stakeholders on their international supply chain and their financial health.
Though the Original Equipment Manufacturers (OEM) are shielded by higher brand value, the most vulnerable are the tier 2 and tier 3 auto component suppliers. Local Indian auto-component manufacturers are unlikely to immediately capitalize on the void created by China, as it takes time for OEMs to recalibrate their supply chain, as per a Deloitte study on the impact of Covid-19 on Consumer Business in India.
When the lockdown is opened in a staggered manner, it is extremely important to safeguard the health of the employees, especially the vulnerable frontline employees working on-site in assembly lines.~
It is crucial to identify the critical component suppliers located in the pandemic’s international hotspots. Their supplies would be disrupted for a considerable period of time and hence it’s important for the OEMs and tier 2 component suppliers to ascertain the alternative sources, along with the potential price escalations and potential tax and tariff implications due to the changes in the suppliers.
Another crucial aspect is to improve the supply chain visibility and communications for early detection of potential issues. While planning for such contingencies everything should be on table for consideration, including changes in vehicle design and materials. Hence digitization of supply chains would help to address the customized requirements, supply bottlenecks identification and efficiency improvement. Over the passage of time, it may be worthwhile to develop indigenous suppliers of auto components which may supply along with the foreign suppliers. A good collaboration may help in reducing the prices and increasing quality of the indigenous product and generating employment.
When the lockdown is opened in a staggered manner, it is extremely important to safeguard the health of the employees, especially the vulnerable frontline employees working on-site in assembly lines. Educational campaigns on hand hygiene and social distancing in factories maybe planned. Those working from home may be provided with documented guide on unfamiliar tools.
The transport sector to see driver shortages due to epidemic exodus, under-utilization of capacity truck fleet due to low demand levels, low freight rates due to low demand and cash flow crunch may adversely impact the sector.~
Cyber security is a top issue in such cases especially for those who are given remote access to the core systems. This is also an opportunity to check the merit of the existing business continuity plan. An empathetic outlook is required to deal with the issues of pay cuts and lay-offs which may create a negative sentiments amongst the employees. Another issue is the availability of contract labour, which constitute for 40% of the organized automobile manufacturing sector, for operations and support functions even after the situation normalizes.
The nation-wide lockdown happened in the third week of the last quarter, the financial books wouldn’t have been completed and there would idle cash trapped in the market leading to liquidity crunch and working-capital shortfalls. An updating of forecasts and identifying liquidity challenges by analyzing the cash flow statements and alternate financing sources is required.
A probable government intervention in the form GST rate cuts and deferment of GST payments to boost liquidity will help. Cost cutting strategies maybe adopted by firms. Strategy realignment on periodic basis can be done to make dynamically agile systems by extensive use of analytics, scenario mapping, financial modeling and identification of potential risks.
The freight transport industry will also having its share of challenges once the lockdown is opened. It is in the form of driver shortages due to epidemic exodus, under-utilization of capacity truck fleet due to low demand levels, low freight rates due to low demand and cash flow crunch may adversely impact the sector. To deal with these issues, industry consolidation should take place with small players merging together or with a big player, digitalization of trucks for better monitoring and efficiency and last mile delivery will be the way forward post corona.
(Somya Mathur is the Senior Economist at Infisum Modeling Pvt Ltd. Badri Narayanan Gopalakrishnan is Consulting Economist at McKinsey & Company. Yogesh Kulkarni is a Project Leader (DGM), Mahindra Truck and Bus, Pune.)
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