June 4, 2020

Auto OEMs Status Check as Lockdowns Ease across India

Automotive industry has reported May dispatch numbers with some interesting trends visible from early data including some segments seeing faster recovery than others


Ridhish Talwar

Before the lockdown was initiated towards the end of March’20 in India, the Automotive industry had already been suffering from a poor year with production below FY18 levels for most categories (except three-wheelers).

Just as the industry thought things couldn't get any worse, April 2020 arrived and was a near washout for the entire auto industry with every OEM reporting near-zero sales during the month due to the lockdown. The industry has started getting back on its feet in May, as restrictions have been eased with every new version of the lockdown.

In this article, we wanted to do a quick status check to get a pulse on how things are shaping up with many OEMs reporting May dispatch numbers

Most OEM production plants have become operational in May across categories, even though they are mostly running well below capacity at 25-30% utilisation.

India’s largest 4W OEM, Maruti Suzuki has 3 manufacturing plants in India and all 3 are operational now with the Manesar one starting on 12th May, the Gurugram one on 18th May and the Suzuki Motor Gujarat (SMG) one being the last to come online on 25th May (SMG manufactures cars on contract basis for Maruti Suzuki). Other 4W OEMs have also commenced production at their plants like Toyota (Bidadi), TATA Motors (all plants), MG Motors (Halol), etc.

Hero MotoCorp, India’s largest 2W manufacturer was the first 2W OEM to resume production in India on 4th May, with dispatches starting from 7th May. Now, all their 6 production units at Gurugram, Dharuhera, Haridwar, Neemrana, Halol and Chittoor, in addition to their plants in Bangladesh and Colombia are operational. Other 2W OEM production plants have also come online like TVS (all 3 plants), Royal Enfield (Chennai), however, Honda only restarted operations at its Narsapura plant and its 3 other plants at Manesar, Tapukara and Vithalapur are expected to open after the first week of June.

On the dealership side, across the industry, broadly 70-80% of dealerships have also started operations across brands with a reduced workforce. This is positive, however many dealers who had availed of the moratorium provided by banks on their loans are facing challenges in getting further financing from banks to buy inventory. This could be a possible overhang given the fact that many dealerships were already under stress pre-covid.

Sales performance across categories is varied, however, the farm equipment sector is seeing the strongest recovery with M&M reporting a 2% increase in domestic sales in May’20 vs May’19.

The worst performing sector is the commercial vehicles space with sales down 90-95%. In May 2020, the entire industry only sold around 2,000 units in the 5+ tonne gross vehicle weight (GVW) category, where pre-covid levels were around 35,000-40,000. Within CVs, the higher GVW vehicles are faring the worst. Demand for CVs is generally linked to the level of economic activity in the country and the low utilisation of existing CVs in the economy (only 35-40% assets operational) is denting demand.

With limited data from May, early indications are that 2Ws are doing relatively better than 4Ws, but we need to be cautious with extrapolation from this data, as the dates of restarting operations varied between OEMs in the month. However, the expectation is that 2W demand should be more robust than 4W demand, given the lower price point and lesser reliance on metro cities.

A clear trend visible is also that companies with larger % of exports are performing better, as other economies may not have had as stringent a lockdown as we did in India. Hence, for the 2W segment, Bajaj Auto performed better than Hero MotoCorp. Further, some OEMs also reported strong order books for exports that they were unable to fulfil in May due to logistical issues with road transport, ports, etc and this relative performance difference may remain.

Within the country as well, East and South India, as well as rural and semi-urban segments are reporting stronger demand and this would be expected, given the distribution of covid hotspots and red zones in the country.

Given the preference for personal mobility in the current crisis, we would expect downtrading by customers to fit tighter budgets - one category to another or within a category. But as per Rakesh Sharma, ED, Bajaj Auto, the data for Bajaj Auto from the last 2 weeks of May does not indicate any change in the % of different segments within their product portfolio. However, this may be the case, as early buyers are those with existing budgets and pre-decided preferences from before the lock-down.

The Indian auto market should bounce back to 80-90% of the previous year's demand within the next quarter from the low base formed last year, given adequate liquidity, lockdown restrictions easing and no second wave, but the key question remains, how long will the last 10% of demand recovery take?