With the government looking for ways to come out of a 40-day national lockdown in stages and thinking of a graded easing, the auto industry has begun preparing to restart their closed factories. The strategy of most vehicle manufacturers will be to gradually ramp up production and counteract the supply-chain disruptions and a tepid market.
But it would be easier said than done. They will have to negotiate stretched balance sheets, a new government-mandated workplace guideline, an out-of-breath vendor ecosystem battling severe financial headwinds, and a rickety distribution network already reeling from historically low sales.
ET Prime spoke to senior officials and industry experts to measure up how the comeback will play out. Here’s what we have found out.
Challenge #1: The supply chain will take time to ramp up
Many vehicle manufacturers have begun sanitisation and fumigation work at their facilities. However, those falling under the red or critical Covid-19 zones may continue to remain out of action.
To be sure, three processes are common to every vehicle-manufacturing plant — inbound supplies, manufacturing, and dispatches. There could be problems in inbound supplies, as raw-material stocks of only two months are normally available.
Even if there is a large stock of raw material at the plants, the question is how to optimise its use.
R Jayaraman, professor, operations and supply-chain management, Bhavan’s SP Jain Institute of Management & Research, Mumbai, agrees that the bigger problem at the back end will be raw-material stocks.
The auto industry runs on just-in-time or JIT inventory. Many critical parts such as seats and headlamps are supplied as and when required and have bare minimum stocks of a couple of days. Although the JIT suppliers will have to ramp up production, many of them keep some stock close to the auto companies’ facilities. So, the buffer may cover for a few days.
Non-JIT supplies would be a tad better off, but in general the auto industry does not keep parts supplies of more than 10-15 days. The main plants of most vehicle manufacturers, which make engines and crankshafts in-house, will re-start production and may have a few more days of inventory. The bigger problem will be thatnon-JIT suppliers may not be in the close vicinity of the vehicle-manufacturing plants and will have to transport parts from far-flung areas.
“Vehicle manufacturers will have to prioritise at three levels — build an inventory of 15-20 days at the ground level, then make assembly lines operational as a steady supply of auto components has to be first ensured so that lines don’t stop working [mid-way]. At the front end, dealers must be ready to go,” says Jayaraman.
Suppliers are expected to take three months to ramp up production.
It is clearly easier to stop production than restart it. The integrity of the supply chain will be a key focus, according to Justin Cox, director, global production forecasts, LMC Automotive. Automakers globally will exert pressure on their tier I suppliers to root out weaknesses and deficiencies in the supply chain that could trigger interruptions in the final vehicle assembly.
“It’s no accident that Volkswagen, for example, has restarted engine manufacturing prior to restarting final assembly operations. Vehicle manufacturers are likely to focus on supporting modules, kits, and finished vehicles to regions where demand activity is already returning like China and Korea,” he feels.
Automakers are maintaining close contact with their supply base during lockdown. Programme managers and support staff are busy pressurising the supply chain to meet targets. However, the focus and effort will be targeted to those programmes which are seen as key.
MG Motor India says May-June will be critical months with partial work, limited revenue, and minimal demand and supply.
“Our focus is how to unblock issues of supply chain. Right now, all suppliers are closed in India and they have to restart slowly with new norms of social distancing,” admits Rajeev Chaba, president and managing director at MG Motor India. He feels the biggest challenge in procuring BS -VI parts will be from Indian suppliers as they have been under lockdown. “The China issue was sorted out before lockdown, some risk from Europe, especially Italy, persists, while Germany has been streamlined as plants are up and running now,” he adds.
Challenge #2: balancing social distancing and productivity
The plants are expected to reach 50% capacity in two-three months after restarting manufacturing, as inbound supplies will take that much time to get streamlined. But with a high level of automation, Jayaraman feels it may not be difficult to ramp from 10%-15% capacity at start to 30% (without too much manpower) within 15 days.
“There will be some challenges over the next few weeks on restarting manufacturing operations, but we have put in place a robust manual for getting back to work,” says Veejay Nakra, CEO, automotive division, Mahindra & Mahindra (M&M).
For Maruti Suzuki, safety and implementation of norms laid down by the government will be top priority after the lockdown. “We will support dealers and suppliers and make them ready for resumption of operations as well as adopt the sales digitalisation approach towards customers,” Shashank Srivastava, executive director, sales and marketing, Maruti Suzuki, tells ET Prime.
Before restarting work, the carmakers are busy tweaking manufacturing processes in line with the new government guidelines on social distancing. Small- and medium-scale companies can start with a 50% workforce, as their automation levels are lower, complexity of operations is also not very high, value chains are of shorter distance, and fewer activities are involved to make a product.
“The plants have been shut for a long time and hence require utility and infrastructure-related stock-taking as well. Start of production would also depend upon our supply chain and dealers which are non-operational in most cases at present,” says Rajesh Goel, senior vice-president and director, sales and marketing, Honda Cars India. While the company’s Tapukara plant is located in the green zone, its Greater Noida facility falls in the red zone.
Currently, the teams at Honda Cars are involved in reworking all the processes to comply with the social-distancing norms apart from implementing the detailed protocols related to health screening, arranging transportation, canteen, and other workplace activities.
But social distancing and staggered operating patterns could undermine optimal efficiency. Tweaking manufacturing processes to meet social-distancing guideline is bound to impact production output. For instance, the distance between work station 1 and 2 on the shop floor, where four people work simultaneously, is normally two feet. If this has to be extended to six feet, then only two options are available. Move the stations apart which means a physical change of the production line which may or may not be possible. Or change the production process — from a continuous one to sequences. This will impact production rates.
Identifying the percentage of workers to be brought in shifts, based on the zones (green, orange , or red) they are located in, will be another challenge.
Similarly, categorising suppliers and sales chains according to containment zones they are in is also a time-consuming process.
Challenge #3: getting the dealerships back on their feet
The primary challenge the front end of the business will face is inventory – either stuck at the plants or lying with the distributors.
“We are also working on scenarios for matching demand and supply. We have a finished-goods inventory which will enable us to meet demand immediately once the lockdown is lifted,” Nakra from M&M says.
Goel from Honda Cars admits the company needs to ship the cars to dealers as it cannot stock beyond a certain level in the plant. “Which means the dealers will have to become functional,” he points out.
But getting the dealerships back on their feet won’t be easy.
The biggest challenge for dealers will be to maintain a safe and hygienic environment for both employees and customers if demand has to pick up. Carmakers such as Hyundai Motor India, Maruti Suzuki, M&M, and Honda Cars have published a standard-operating procedure (SOP) manual for showrooms and service workshops listing the dos and don’ts.
At Hyundai, training of all dealership staffers is underway based on the SOP manual.
For instance, for a test drive, or in case of delivery of a new car, the seat cover or polythene cover wrapping the steering wheel would be removed in front of the buyer to allay fears of catching an infection.
Jayaraman of SP Jain Institute of Management & Research feels vehicle manufacturers will have to talk to their dealers and that might be the easiest way to start. According to him, maintaining social distancing may not be very difficult at showrooms, as they are situated at multiple locations.
But can dealerships work atfull capacity considering a lot of people had left the cities for their hometowns right after the lockdown?
Each dealership employs 70-150 people on an average. Ashish Kale, president of the Federation of Automobile Dealers Association, says almost 95% of the employees are locally concentrated within the vicinity of the dealerships. So, bringing them back won’t be a problem. He says no dealership has downed shutters during the lockdown. But in the 15 months till March 2019, 275 dealerships had to be closed causing job losses to thousands of employees.
Hyundai is handholding its dealers on how to get their business back on track and showing them ways to manage expenses and revenue streams. But the biggest worry is that the workshops won’t get much business initially, as consumers will think twice before sending their cars for servicing.
Training is being imparted to dealer associates on the product, digital tool, sanitisation programme, and safety of employees as well as how to woo consumers. There is a concern on cash flow and getting funds from the banks.
MG Motor has been engaging with its dealers and suppliers through weekly communication calls during the lockdown. Payments have been made to them along with extending some advance credit and enhanced insurance for their employees.
Honda Cars, too, has provided advance payments to its dealers. The carmaker has shortened the payment cycle so that the money reaches the dealers as quickly as possible. Ditto is the story for suppliers – almost all vehicle manufacturers have made timely payments or given advances .
M&M says it has been in constant dialogue with its dealers and customers to respond to their needs.
Almost 80% of the suppliers are MSMEs and they require additional loan facility, extension of moratorium, and lower interest rates on loans. Two big cost components of dealers are salary and inventory-carrying expenses. A lot of dealers have taken loans for building their facilities, and two-three months of repayment holiday would come as a booster dose.
A new world of cost cutting is waiting out there
Post lockdown, marketing budgets will come under the scanner. The focus will be on revised annual business plans as revenue takes a hit.
“To me, a quarter’s budget will definitely be slashed right away,” says Avik Chattopadhyay, brand strategy consultant, Expereal India. “Spends might be in spurts – for the festive season and for the financial year-end.”
Marketing and sales-related travel budgets will see major cuts as digital platforms become a viable alternative to physical meetings and discussions. Personalised digital communication will take centrestage. Overseas shoots for ads will be ‘banned’ for this year. The periodicity of reviews and discussions might increase as physical trips reduce at every level, a likely drop of 40%-50%. Service-related travel will continue, as the function demands on-ground supervision, hand-holding, and redressals.
Chaba from MG Motor India agrees that marketing budgets could see a 30%-60% decline. “Cost has to balance revenue so that you can recover variable costs. But we are not doing a single job cut.” While MG Motor has not resorted to salary cuts so far, if the current scenario continues beyond June, the senior-level management might have to take some reduction in salary.
Marketing money will be used for customer retention rather than getting fresh ones. With the pie shrinking and customers becoming extremely sensitive about cost of vehicle maintenance, the marketing focus will be more pointed. There will also be a new ‘tribe’ of prospects that will pitch a personal vehicle after the lockdown as an alternative to using public transport, including ride-hailing.
Marketing budgets will be down by 25%-30% across the board, according to Chattopadhyay. “Within the revised budgets, allocations to digital and experiential media will increase. Travel budgets will go down by 50% across all front-end functions like marketing, sales, and service,” he adds.
Chaba from MG Motor feels most of the car companies will be up and working by June. He expects demand to rise by October-November when numbers will come close to last year’s level.
M&M, on the other hand, is bullish that demand for its SUVs, especially Bolero, Scorpio, and its pickup range, will gain momentum in the short term on the back of a rural outreach.
M&M’s customer insights have also indicated that buyers will prefer personal ownership of vehicles for safety once sales open. Nakra also reveals that the company is looking to go digital at its sales and service touch points.
The bottom line
The carmakers are cautiously optimistic about getting the industry back on its feet. They are likely to line up ‘banner’ launches to arouse market interests after the lockdown.
Will things pan out differently compared to other big markets globally?
“In India, there is also the additional burden of securing the labour force, especially the migrant labour. We suspect this will take time and thus delay production restarts and ramp-ups,” says Ammar Master, senior manager, Asia Pacific Vehicle Forecasts, LMC Automotive. Global automakers based in India would be looking to increase sourcing from local suppliers. “This will be an opportunity for Indian suppliers to diversify further and move up the value chain to focus on critical components that vehicle manufacturers are currently sourcing from overseas markets,” he adds.
While safety on the shop floor will be paramount for the auto companies, working with the supply chain will be critical. It will be important to source components seamlessly and ensure that supply-chain disruptions do not crop up once the plant restarts operations.
The life after the pandemic will be different. Many traditional styles of working will vanish. Those who adapt to the new ways of functioning will be the winners in the long term.
For, when the going gets tough, the tough get going.
(Research support by Rochelle Britto)
via Automakers are preparing a lockdown exit plan. Three hurdles they need to factor in. – ET Prime
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