Opinion | How automakers can steer themselves out of this crisis4 min read . Updated: 13 May 2020, 11:41 PM IST
A five-stage navigation guide for automobile businesses to get through today’s coronavirus obstacle course and regain pace
The rapid emergence and spread of the novel coronavirus is an unprecedented human tragedy. It is threatening the health of millions of people across the world, disrupting industry supply chains and decimating demand and consumption. With multi-week lockdowns becoming the norm, the impact on businesses is bound to be steep and getting back to normalcy might take time. Experts predicted a significant contraction (-20%) in India’s gross domestic product (GDP) in the first quarter of fiscal year 2020-21, with the lockdown extending till early-May; this could mean FY21 GDP could contract by 2-3 percentage points. In a scenario that lockdowns need to be imposed a few further times during the year on account of a covid resurgence, the economy could shrink this fiscal year, and the automotive industry’s sales could contract by approximately 20-25% in FY21.
The automotive sector could be particularly affected by this health crisis and its impact on the economy. The bigger segments of the automotive sector, especially passenger cars and two wheelers, could be most affected as they depend significantly on discretionary spending—typically the first casualty in an uncertain environment. Sub-sectors such as commercial vehicles, which depend on underlying industrial and economic activity, could also see a significant downturn. The covid crisis has hit a market which had already been weak the past 12-15 months, and has accentuated that downturn.
For automotive and industrial companies, surviving and emerging stronger at the far end of this crisis will require thinking beyond the next quarter and even the next fiscal year. Success in the long run could require a journey across five stages—resolve, resilience, return, re-imagination and reform. Let’s consider them one by one.
Resolve: In this phase, automakers need to think about business continuity. While shorter-term business strengthening actions (freezing hiring, postponing capex decisions, renegotiating service contracts, cutting indirect spends, gathering cash, reducing cash outflows) are necessary, along with screening and safeguarding supply chains, it is also important to support channel partners and the workforce by increasing employee engagement and offering financial support.
Resilience: Automakers need to move quickly to address near-term cash management challenges and broader resiliency issues. The Indian automotive industry lags in its overall productivity—it performs at a -40% rate when compared to Japan, and a -60% rate compared to China. Automakers could aim to reduce their operational complexity and lower cost structures—by rationalizing variant spreads, optimizing supply chain workflows by consolidating supplier bases, and imbibing new age manufacturing practices—to reach an operating model that makes money even at 50% capacity utilization. It is also imperative that automakers sustain momentum on organic growth in whichever segments this is possible (for example, two wheelers and small commercial vehicles) during this downturn.
Return: Restarting production facilities could be more challenging than shutting them down; this requires a thoughtful approach, given the complexity of intertwined supply chains. Automakers will need to quickly prime their dealerships and ensure a coordinated ramp up of the supplier universe, while working to avert supply-chain shocks.
Following nuanced back-to-work protocols will also be important to help safeguard business routines against the challenge of coronavirus affecting work places. A razor-sharp focus on productivity could potentially help automakers achieve 80% production with half their usual workforce, keeping operations agile while being prepared for any elongated covid-19 scenarios.
Re-imagination: This crisis provides the backdrop for completely re-imagining and preparing for the next normal. Automakers can innovate on the sales and marketing dimension, and build a “network of the future" that is suitably enabled by digital and augmented/virtual reality, digitizing marketing communications, promotions and transactions as much as possible. Automakers could optimize their product cycle plans, and re-evaluate launch plans in the light of updated market volume scenarios and customer requirements (for example, filtering and sanitization systems). Automakers could also re-look at their platform strategy and bring in modularity transformations that could drive down direct material costs (by 6-8%) and complexity (reduction in part count by 25-30 %). The time could also be right for automakers to evaluate and undertake proactive partnerships or mergers and acquisitions, and rejig footprints on sourcing (imports) and market presence (exports) as global supply chains strive to find a new balance.
Reform: Coming out of the coronavirus crisis, governments are likely to take a more active role in shaping economic activity, and automakers could help guide this process in support of their sector. First and foremost, a significant refocus will be needed towards the core sectors of the economy, especially construction, mining and agriculture, to prime auto sales back. The automotive sector also requires a significant uptick in the availability of credit, particularly on the back of the recent reduction in the central bank’s repo rate to 4.4%. A case could also be made for the rationalization of taxation in comparison with other developing economies (13% value added tax on automobiles in China, versus 29-50% goods and services tax in India). Finally, work can be done to ensure a coherent and consistent tech-agnostic regulatory stance which solves for outcomes (like emission standards), but lets market forces decide preferences (between petrol/diesel and electric vehicles, etc.). On their part, automakers could structurally build greater workforce flexibility, which could also prepare them to leverage global talent pools.
The above five-step approach could be a holistic way to address the sector’s coronavirus challenge, while ensuring there is due emphasis on all the dimensions that could help automakers emerge stronger from this crisis.
Shivanshu Gupta and Brajesh Chhibber are, respectively, senior partner in the Bangalore office of McKinsey & Company, and partner in the Delhi office of McKinsey & Company.