Covid-19 effect: Auto industry may cut R&D funds, exit unprofitable segments
The domestic automobile industry might resort to cuts in spending on research and development (R&D) and also exit unprofitable businesses and segments with the coronavirus pandemic taking a toll on companies' revenues and cash flows, according to a report by Deloitte.
The reduction in R&D activities may impact progress made in the alternative fuel technologies till now, the report noted.
"The Covid-19 lockdown has had a multiplier effect -- the industry has been at a complete standstill since March 24. A prolonged truncation of consumer demand due to the lockdown is significantly affecting auto sector revenues and cash flows," Deloitte India Partner and Automotive Sector Lead Rajeev Singh said.
In response, companies may resort to starving their R&D funding in order to sustain core operations, and potentially set back the progress made on alternative fuel and mobility technologies by 2-4 quarters, he added.
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"Eventually, some companies may even choose to take a strategic call to exit unprofitable markets and vehicle segments," Singh said.
The auto industry in India has already undergone considerable slowdown over the past 12-18 months due to structural changes beginning with goods and services tax (GST), shift to shared mobility, axle-load reforms, the BS-IV to BS-VI transition and liquidity crunch, he noted.
The domestic automotive industry is likely to witness a prolonged U-shape recovery, with a best-case recovery to 2018-19 sales volumes expected by 2021-22, the report said.
Elaborating further, the report said the automotive dealers will have to resort to heavy discounting after the lockdown in order to clear inventory build-up.
"Dealers face significant burden to liquidate unsold BS-IV inventory, estimated to be worth ₹6,300 crore," it added.
In this scenario, original equipment manufactures (OEMs) will need to support dealer groups, both financially and otherwise, further stressing their own balance sheet, the report said.
Despite several difficulties, the report also outlines few positives for the industry.
"The industry has responded in a very matured manner taking care of employees, customers and other stakeholders," Singh said.
Some of the leaders in the industry are gearing up to the new normal -- working on digitising sales and marketing processes, setting up mechanism for contactless sales of new cars, automating backend processes to get more efficient and setting up new systems to start operations across the value chain, he added.