Impact of Lockdown on the Pricing Strategy of Automobile Industry

The onset of COVID-19 has shocked the entire world and sent Global Economies spinning. Due to the lockdown, many businesses are fighting to survive. The automobile industry is one of them. These two years (FY20 and FY21) are challenging times for the Indian automotive sector on account of slow economic growth, potential bankruptcies, and low capacity utilization. The auto sector had already undergone a considerable slowdown over the last 12-18 months due to structural changes caused by the Goods and Services Tax, beginning of shared mobility, amendments in axle-load norms, the Bharat Stage-IV to Bharat Stage-VI transition, liquidity Crunch and many more.

The COVID-19 lockdown has had a multiplier effect on an already stagnant industry. The automobile industry has almost been at a complete standstill since the 24th of March, 2020. A prolonged reduction of consumer demands due to the lockdown is being observed by the automobile industry. This is significantly affecting automobile manufacturers’ revenues and cash flows.

Post-COVID-19 world: When will that be?
The normalcy of daily life and commencement of manufacturing activities in South Korea and China, along with an extended lockdown in India, gives hope to a U-shaped economic recovery. Industry analysts predict that the Indian automobile sector will start to see recovery in the third quarter of FY21. The expected industry demand will be down by 15-25 percent in FY21. In such an Economic scenario, OEMs, suppliers, and dealers with strong cash reserves and better access to capital will be in a better position to sail through.

In response to the crisis, most of the companies are starving research and development (R&D) funding to sustain their core operations and thereby altering the progress made on alternate fuel and mobility technologies by at least 2-4 quarters. And eventually, many companies may even choose to take a strategic call to exit vehicle segments and unprofitable markets.

Impact of COVID-19 on the Automobile Industry

Wrecked by the outbreak of COVID-19 and the resultant lockdown which has led to a huge economic slowdown, most of the automakers are now expected to price their BSVI models closer to the BSIV models in order to promote car sales after the lockdown gets lifted. The Coronavirus impact on India’s auto sector has been so unfavorable that the entire industry is going through an economic downturn due to the prolonged slowdown last year by the introduction of BSVI vehicles, with the troubles getting further amplified this year by the COVID-19 lockdown scenario. To harbor safely through these tough times auto companies will tend to price their models competitively to revamp the auto market back to life.

Pricing strategy used by various Car Manufacturers

Major car manufacturers like Toyota, which started off with the sale of BSVI models back in January this year, had already taken the decision to not pass the entire burden of BSVI up-gradation on to the consumers. Owing to this the BSVI version of the Toyota Fortuner was launched at the same price as the BSIV models. Likewise the Toyota Innova Crysta saw its prices getting increased by up to Rs 80,000 instead of Rs 1.5 lakh as expected earlier. Though the company had already made it clear that the vehicles were launched at introductory prices and their prices would only be increased at a later stage. So industry experts were speculating that these prices would be hiked by a considerable margin by June 2020. But now looking at the impacts of the lockdown, the company would not tend to increase prices before it regains the lost sales of passenger vehicles.

With auto industry leaders like Maruti Suzuki, Volkswagen and Tata vacating the small car diesel engine segment, maybe at least temporarily, Hyundai is having the opportunity to play in this segment and has managed to price the diesel-powered vehicles very competitively. Big automakers like Hyundai and Mahindra, which are still offering a diesel engine in the BSVI stage, they may choose to not offer a huge discount on their respective diesel cars. Hence pertaining to the low competition, discounts on diesel cars could be quite low.

Now speaking about the country’s largest carmaker, Maruti Suzuki, it had introduced BSVI model cars way back in April 2019. The introduction of BSVI engines led to an increase in the prices of its vehicles increased by up to Rs 11,000. Since the company has already been selling BSVI engine vehicles with some discounts on offer, therefore it might not have enough margin-left to provide its consumers with any more discounts.

Also, it is important to mention here about 1 high selling car this year that is MG hector. Being launched in June 2019, this car has its roots in China. Since it has become a general notion to blame China for the outbreak of COVID-19 pandemic, this could take a toll on the popularity and sales of this vehicle. Actually , the MG Hector is a rebadged Baojun 530, which is a pure breed Chinese SUV. By now, many people are already aware of this SUV’s Chinese roots and the potential buyers could be skeptical about buying this car. Hence, to boost its sales, we can expect some decent discounts from the automaker.

How can the companies navigate these challenging times?

The automobile sector must quickly implement plans to ride through the COVID-19 storm in the shortest time possible and devise long term strategies to minimize future impacts. The chief analysts of the auto industry have suggested a few important steps for battling the COVID-19 like a regular batch testing of employees before joining, essential social distancing, GST cuts, retail chain support, supplier support employment support, liquidity support, etc. Those auto companies which have been operating with excellent operational features like high quality, high productivity, well-trained workmen, really well-maintained machines, etc will be able to recover faster than other companies. Now coming back to the profitability, for this companies will have to work to recover about 3% to 4 % of their PAT/ Sales.

Let us all hope that the Automobile industry, which had been accelerating tremendously for the last two decades and has now gone into the reverse gear, has seen the worst. But the present crisis of global pandemic with the lockdown has led to job losses and also a declining demand. This scenario clearly casts a spell of gloom for the industry in the near future. So stringent action must be taken by the Government keeping in mind the interest of all to prevent the downfall of this industry.