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Here is why last 2 years have been a rollercoaster for auto sector

The worst could be over for the industry. Typically, automotive demand is deferred rather than destroyed. A healthy economic recovery can trigger a strong growth in the sector backed by pent-up demand

September 25, 2021 / 12:16 PM IST

The last two years have been a roller coaster for the automotive sector that faced not one but multiple hurdles during the period and an unfortunate turn of events that further impeded recovery.

Fastest BS6 transition

India implemented BS6 norms from April 1, 2020, just three years after bringing in BS4 emission standards to reduce pollution. This made India the fastest country to successfully adopt and implement BS6 norms.

The automotive industry went through its own struggles to achieve this speedy transition, which included more use of precious metals like platinum group metals (PGM), higher electronic content and new technology to cut the tailpipe emissions.

This entailed a price hike of as high as 20 percent for two-wheelers and 3-4 percent for passenger vehicles—reasonably significant inflation that affected demand in the short term.

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Also read: Tata Motors to hike commercial vehicle prices by around 2% from October 1

Covid strikes

After a successful transition to BS6 things were looking up but the coronavirus outbreak led to a nationwide lockdown from late March 2020, shuttering factories. One of the most stringent lockdowns in the world at that time took a toll on the economy, especially the lower and middle classes, further affecting demand.

Also read: Semiconductor shortage may ease from January 2022

Recovery and the second wave

India announced a series of measures, amounting to a around Rs 20 lakh crore, to shore up the economy ravaged by the outbreak. This led to a swifter than expected recovery, with passenger vehicle and two-wheeler segments reporting a 15 percent and 7 percent YoY average growth for Q2/Q3FY21.

This too, unfortunately, didn’t last long. The second COVID wave was furious, taking a huge toll on life, overwhelming India’s medical infrastructure and leading to a series of lockdowns.

Also read: Until 2023? Parts shortage will keep auto prices sky-high

The global recovery, however, was strong and so were commodities. While India struggled with the second wave, the global economy marched ahead, leading to a sharp rebound in commodity prices.

Steel and aluminium prices nearly doubled from March 2020, while rhodium was up three times as global demand for PGM increased due to stringent emission norms. This started hurting margins of Indian original equipment makers (OEMs) who were already up against weaker demand, leading to another round of price hikes.

Chip shortage, the final blow

As the second wave has ebbed, vaccination has gained pace and the economy is reopening. Pockets of growth are visible in passenger vehicles, premium motorcycles and even the commercial vehicle segment, perhaps one of the worst0hit in the auto segment, is expected to pick up as well.

However, the auto world, like other sectors of the economy, is now grappling with a shortage of semi-conductors, which has hit production, especially of PVs where the waiting period is now up to four months.

The shortage is the result of disruption of the supply chain, pent-up demand and a fire at one of the global semiconductor manufacturers.

Also read: As Maruti Suzuki, Mahindra struggle to source chips, Hyundai keeps its lines rolling

While the near-term outlook is hazy with the sector grappling with multiple issues, it is reasonable to conclude that the present situation is as bad as it can get.

Typically, automotive demand is deferred rather than destroyed. Given how significantly aged the present fleet of mobility is, a confident revival of growth can lead to a strong catch-up in sales led by pent-up demand. India still has a strong runway to grow with ample penetration growth opportunities.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Shrey Loonker is the Associate Director & Fund Manager- PMS at Motilal Oswal AMC.
first published: Sep 25, 2021 12:16 pm

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