Plant closures costing Indian auto industry Rs 2,300 crore loss of turnover per day

To say the coronavirus outbreak has wreaked havoc in the Indian automotive industry would be an understatement. March 2020 started with fewer footfalls at dealerships, then came the voluntary plant closures, and we’re now in the first few days of a 21-day nation-wide lockdown that has ground everyday life, let alone the auto industry, to a halt. These unprecedented steps present some worrisome figures regarding their financial implications on the auto industry.

In an official statement issued by apex auto body SIAM, its president Rajan Wadhera said, “As per quick estimates by the Society of Indian Automobile Manufacturers, it is expected that plant closure of auto manufacturers and component suppliers will lead to loss of more than Rs 2,300 crore in turnover for each day of closure.” And the fear is that the disruption due to the virus outbreak could remain for a significant period of time. “The experience from China tells us that in the peak circumstances it may start with two weeks of full shutdown and may prolong to four to six weeks of after-effects in the industry,” Rama Shankar Pandey, MD, Hella India Lighting, told our sister publication, Autocar Professional.

The picture is just as grim from the customer facing-side of the industry – the sales network. With buyers refraining from dealership visits in the wake of the coronavirus outbreak and the subsequent lockdown, the retail side of the industry has had a terrible March that caps off a tough financial year. What makes matters worse for many retailers is that they still have a sizeable inventory of BS4-spec stock which cannot be sold after March 31, 2020. Should the Supreme Court not extend the deadline allowing for sale of BS4 vehicles, the auto retail ecosystem in the country could be in for some very troubled times.     

From the looks of it, two-wheeler dealers are the ones this will impact the most. Without disclosing any concrete numbers of piled-up vehicle inventory (as they are not tabulated in one single database when they are with dealers), Nikunj Sanghi, Managing Director, JS 4Wheel Motors, told Autocar Professional, "There are sufficiently large numbers to create panic and the lockdown is only making it worse. If you take the average 15-day inventory of Hero MotoCorp, Honda Motorcycle & Scooter India and four to five other principal manufacturers, you'll end up reaching upwards of 7,00,000 units in two-wheelers; but any figure will be a guesstimate and there's no way to substantiate that," explains Sanghi. It is also estimated that about 15,000 BS4 cars and SUVs remain unsold with dealers. The losses that dealers face from such a situation would run into hundreds of crores of rupees.

It is to be noted that automobile dealers work on a cash-credit limit with banks, with about 30 percent of their own margins invested to acquire the inventory from OEMs. "So, even if the vehicle stock remains unsold, dealers still have to pay back the dues or they default," says Sanghi. Such a scenario will wreak havoc for dealers, a significant number of whom might need to shut shop because of the overlooking losses, "as their inventory value plummets to less than 10 percent, which is the scrap value in most cases," explains Sanghi. "OEMs' resources are far greater than that of dealers. Dealerships will perish if help doesn't come," he adds.

To make the government aware of the stressed levels of business, the business community and traders have submitted a memorandum to the special economic response task force, christened 'COVID-19 Task Force', instituted by the Prime Minister and to be chaired by Finance Minister Nirmala Sitharaman. They are seeking a relaxation of repayment terms by 90-180 days. Dealer body FADA is hopeful that an announcement would be made very soon to prevent NPAs from dealers.

While the hope is that the spread of COVID-19 will be curbed soon, the outbreak is almost certain to leave the Indian auto industry reeling for a long time to come.