A security officer walks past several cars ready for sale at an industrial complex in Cikarang, West Java on Sep 4, 2020. (Antara Photo/ Fakhri Hermansyah)

How Automakers Can Survive when Pandemic Puts Cars on Ignore List

BY :HENDRA LIE

SEPTEMBER 24, 2020

The Covid-19 pandemic has swept through almost all industries globally, like a combined tsunami of the disrupted global supply chain, weakening purchasing power, and shrinking economies, leaving companies around the world gasping for a lifeline. The automotive industry is among those hit the hardest during the pandemic as customers who suffer from declining income opt to spend their money on staples.

PwC Global Consumer Insights Survey 2020 found that 69 percent of global consumers were more focused on mental health and wellbeing as they spent less in most non-food categories, such as clothing and footwear, sports equipment and outdoor and restaurant food pickup or delivery.

The survey also revealed that 40 percent of the global respondents experienced a drop in income due to job loss, causing a jump in the number of respondents who would spend less in the next 12 months to 36 percent from only 19 percent in a survey held before the pandemic.

Consequently, the automotive industry in various countries worldwide, which already faced a slowing demand due to the cooling economy even before the pandemic, saw plummeted sales. Sales in China, the world's largest auto market, plunged 79 percent in February 2020 and 43 percent in March 2020 due to strict stay-at-home orders implemented to curb the coronavirus spread.

The sales, however, have started to pick up since April 2020, the first rise in 22 months and the growth in July 2020 stood at 16.4 percent annually to 2.11 million vehicles as the pandemic restrictions lifted. In the United States, another largest auto market, a 1.2 percent decline in receipts at auto dealerships caused
a slowdown in July 2020 retail sales rose just 1.2 percent in the month after jumping 8.4 percent in June 2020.

The falling demand has battered automakers and forced some of them to close manufacturing facilities to survive the southward trend in the industry. Japan's Nissan Motor announced its plan in May 2020 to close its plant in Barcelona, Spain, as a part of its efforts to improve efficiency, a program that is met with strong rejection from the Spanish government.

The carmaker eventually said in late July 2020 that it is willing to postpone the Barcelona plant closure until June next year following the government's move to convince Nissan to reconsider the closing while looking for another investor.

General Motors also announced in February 2020 that it would end the struggling Australian car brand Holden as it was unable to invest for the brand to be competitive and profitable in the long run.

The same condition happens to aftermarket component manufacturers - in Germany, aftermarket company and Formula One and Indycar supplier BBS filed for bankruptcy protection in July 2020 as the coronavirus pandemic caused the company to face financial trouble due to sudden omissions of confirmed payments.

Automotive industry players should seek ways to improve their efficiency to survive the downturn. Although it may be operationally challenging, allying with brands can be an option that has become the preference of more and more global manufacturers.

Toyota Motor Corporation and Mazda Motor Corporation are building their new joint venture factory in Alabama, the US, worth $2.3 billion with production is expected to start next year.

Nissan has allied with Mitsubishi Motors and Renault so that the three names can share their production facilities and costs and market focus. The alliance has allowed Nissan to produce engine blocks after it decided to close its factory in Purwakarta, West Java, earlier this year. We may see more brands will apply this alliance business model, and rebadging becomes common in the future.

The situation in the domestic automotive industry is no different. Indonesia's car wholesales crashed 90.6 percent annually in April 2020 as the government implemented the large-scale social restrictions (PSBB) to curb the virus and further dropped 95 percent in May 2020 with only over 3,500 cars sold.

The sales have started to rebound since June 2020, although the figure in July 2020 itself was still over 71 percent lower than the same period last year. With the achievement to date, it is almost impossible to reach last year's sales number.

A similar condition happens to the sales of two-wheeled vehicles domestically. The two-wheeled vehicle distribution data from the Indonesian Motorcycle Association (AISI) — quoting Industry Ministry source data — shows that domestic sales dropped by 40 percent to 1.9 million in the first six months this year from 3.2 million in the same period last year.

The PSBB disrupted the industry's supply chain at the early time of the outbreak in Indonesia in March 2020 and hit the sector. However, the case is now different as local automakers have overcome the situation and prepared protocols and alternatives for other emergencies.

The work for the automakers now is how to market their products amid the lower demand. A combination amongst stimulating the market, creating a new trend, incentive, and marketing gimmick may be a way to lift the demand.

Bank Indonesia's (BI) decision to cut interest rate to a four-year low in July 2020 can give a boost to the marketing efforts as the lower benchmark rate will translate into lower car loans'' interest rates. The lower interest rate on borrowing should impact the demand positively as more than 70 percent of sales are financed by borrowing.

The automakers may also learn from the recent bike phenomenon where consumers give no second thought to buy trending bike products.

Other than that, expanding their markets overseas can be a way to maintain production and sustain sales. The newly implemented Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) can open a chance for the country's automakers to push export.

Australia indeed is a small market compared to Indonesia, but relying only on a stagnated domestic market and compete over the same size cake without thinking about expanding business overseas will not do any good. In the end, surviving carmakers are those who are not focused only on a domestic market but can expand their market to other countries, even to other regions. 

Despite the slowing demand for cars, on a regulatory aspect, the Transportation Minister's new regulation on electric vehicles tests also paves the way for manufacturers to produce and sell more electric cars domestically. This showcases continued support to the electric vehicle industry from the government.

Another good news comes from electric two-wheeled vehicle makers. An Industry Ministry's official recently said several companies submitted investment proposals to invest in the electric two-wheeled vehicles industry.

That indicates the right perspective of the industry players about the Indonesia market, which is in line with the result of the PwC survey; Indonesians are the most confident consumers globally. Even though 65 percent of Indonesian respondents experienced a declining income, 64 percent of the consumers remained optimistic about the future and would spend more of their household income. 

In this challenging time, surviving is key for growth in the future.

Hendra Lie is the automotive industry leader of PwC Indonesia, a business consulting company.

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