As the world braces itself for the new Omicron threat, there are other issues that will continue to bother the automotive industry. Beyond the chip shortage, geopolitical tensions could disrupt the already fragile global supply chain and fire up crude oil prices.
10 Jan 2022 | 8248 Views | By Murali Gopalan
Uncertainty looms large as the Indian automotive industry steps into 2022. Over the last 21 months since the first lockdown was imposed way back in March 2020, the economy has virtually been going through a rollercoaster ride.
At one end of the spectrum, there is tremendous optimism that growth ...
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Uncertainty looms large as the Indian automotive industry steps into 2022. Over the last 21 months since the first lockdown was imposed way back in March 2020, the economy has virtually been going through a rollercoaster ride.
At one end of the spectrum, there is tremendous optimism that growth is back on track even while the heartrending stories of despair continuing in many small towns and villages cannot be wished away. Spending has certainly plunged and this trend needs to be remedied in a hurry for an industry like auto which thrives on positive customer sentiment. All eyes will be on the Budget next month to see if there will be some good news coming in by way of tax reliefs for the salaried class.
The biggest challenge is, however, Omicron which serves as a grim reminder that the virus is here to stay in a host of new avatars. This time around, things may not seem so bad given what top medical professionals across the world have to say. To those whose lives were destroyed by Delta last year, this is welcome news . . . nobody has the energy to go through another phase of lockdowns, job losses and bereavement in families.
Automakers have also realised that there is really no point shutting down operations since this serves no purpose except to drag down manufacturing GDP. Quite unlike 2020, when Covid was the unfamiliar foe, stakeholders now have a remedy (even if it is a temporary one) in the form of vaccines. With employee protection now in place coupled with greater knowledge of other preventive measures, companies are better placed to take on the Omicron challenge.
Chip-wrecked but the show must go on
The fear factor may have gone but there are other realities to contend with. The chip shortage crisis continues and CEOs are now unanimous in their thinking that this will last until September even while the intensity of the pain will begin ebbing some months earlier. Till that happens, car and two-wheeler buyers will have to grin and bear it since there is really no other alternative. Some will want to buy a vehicle at any cost which will push used car sales in a big way and also puts in context why they have become dearer in recent months.
The chip crisis also puts in perspective the fragility of the global supply chain and here is where Omicron could put a spanner in the works. Many parts of Europe are reacting with panic and going in for stringent lockdowns. China is also clamping down on certain regions and this is not good news considering that it is the epicentre of auto parts.
The country may not win a popularity contest for its macho aggression in the political arena but holds the aces by virtue of scale both in cars and components. If there are glitches happening because of the virus spreading, it is not good news for the rest of the world which depends massively on China.
If the Omicron paranoia spreads to the ASEAN region and impacts production of semiconductors across Malaysia, Taiwan and Korea, this may have severe repercussions from the viewpoint of supplies to India. The shortage woes could then continue longer and even stretch into 2023, something that manufacturers will be hoping does not happen given their already bulging order waitlist.
The Centre is trying to do its bit by earmarking fiscal sops for local manufacture of chips but not everybody is convinced that this will create miracles overnight. Even while there is no doubting the intent, there are practical challenges that need to be overcome like availability of water and power for instance.
Equally, it remains to be seen if the incentives are adequate for more participants to enter the arena. “Nobody is being cynical but it just makes sense to see the fine print and then take one thing at a time,” says an industry official.
India has always been right on top when it comes to intent but policymakers often miss the wood for the trees. In their eagerness to usher in change overnight, what emerges is impulsive decision making which affects manufactures who prefer a steady roadmap. There have been far too many arbitrary moves taken in recent years going back to 2019 when NITI Aayog decided that all sub-150cc internal combustion engine motorcycles would have to be abolished by 2025 as part of the clean air exercise.
Fortunately, this died a quiet death but there is no telling if another brainwave is around the corner especially when electric has become the buzzword and some wise men in New Delhi may just consider reviving the earlier NITI Aayog proposal. They need to know that right now electric two-wheelers are on the fast track thanks to massive subsidies doled out by the Centre and states. It is not something that can last forever especially when revenue remains a constant worry and something that can be put to better use like social welfare programmes.
Geopolitical impact
Beyond this, there is the anxiety of geopolitics that can queer the pitch for the automotive industry. Crude oil prices have been seeing a lot of volatility in recent times and if tensions were to break out in the Middle East or elsewhere, the immediate impact will be felt by way of a further price escalation. As it is often said, and not without any concrete evidence, oil is more a political commodity. Economics plays a part but, more often than not, takes the backseat as apparent in recent weeks. Should crude oil prices flare up in 2022 and reach levels of over $100/barrel, this is not going to be any easy burden to bear for India’s import bill.
Further, the impact this will have on inflation which is already at precarious levels can well be imagined. The typical reaction from those backing electric mobility would be on the lines of ‘I told you so’ except that it is not as if the infrastructure is in place for this option either. Yes, it is not going to be easy coping with high auto fuel prices but it is not as if electric will be the magical solution especially for intercity travel.
Commercial vehicle manufacturers, in particular, will be hoping that diesel prices do not spin out of control because that will lead to higher freight costs and hit demand. And the moment trucks enter the slow lane, economic growth is directly impacted and this is where it is in India’s interests to operate in a regime of stable crude oil prices even while this is not in its control.
Political tensions could also erupt if China invades Taiwan as is widely feared by global commentators. Beijing has made its leadership intent clear across the Asia-Pacific region though it is facing its own challenges back home be it with the pandemic or, more worryingly, an economic slowdown. This will not discourage its motives as the aggressor especially with Taiwan where it will need to assert its might and supremacy. If this were to happen, it will have its fallout on the global supply chain once again…especially in an area like chips where Taiwan is a key source.
Whilst on the subject of invasion, Russia is also expected to do this with Ukraine and is not going to be remotely discouraged by any threat of being slapped with economic sanctions. The move will have its fallout and there could be some wild fluctuations in commodity prices. Nobody is comfortable in an era of instability except that this will be the new global norm across Asia (and Russia) especially when the US is in good mood to interfere any longer given its recent decision to withdraw from Afghanistan.
Taking cognizance of climate change
Moving on, climate change will continue to pose concern to the world and this could again create tremors across the global automotive ecosystem from the viewpoint of supplies. The year that went by was characterised by fires, floods and avalanches and there is no reason to believe that things will get better in 2022. Global warming is real and many parts of the planet will continue to see abnormal occurrences happening which will put pressure on a host of countries.
Automakers in India will be encouraged by the fact that more and more people are looking for personal mobility options which augurs well for their products. Yet, they also have their own challenges in terms of high input costs and shortage of key materials like magnesium and the like.
Exporters will also have to factor in the realities of global lockdowns and perhaps scaling down overseas shipments as a result. They have faced tremendous problems with the container shortage in 2021 and there are no signs of this easing during the course of this calendar either. One way or the other, this problem has to be sorted out quickly because the shortage has led to companies paying up huge bucks for hiring containers.
State governments in Maharashtra, Tamil Nadu and Gujarat will also need to sort out the problems of deserted automobile plants in the near future. General Motors announced its intent to hand over the Talegaon facility near Pune to Great Wall Motors in early 2020. Thanks to Beijing flexing its muscles on the Ladakh border, there is no way Great Wall is going to be able to take over the plant with little love lost between India and China.
The Maharashtra government will also be concerned about the labour impasse at the GM plant where workers have simply refused to accept the separation package. Neither is the American automaker going to sit and wait forever — it has made it known that it is no longer interested in India (and a host of other markets ) and will now confine its presence only to the US, China and Brazil. Unless India and China bury the hatchet, Great Wall Motors can effectively bury its plans for the country and the Talegaon facility will go the way of other deserted plants like PAL-Peugeot and Daewoo.
The same holds true for Ford which had announced its India departure plans in early 2021 which meant that its two facilities — Maraimalainagar near Chennai and Sanand in Gujarat — would be emptied out. Speculation was rife that the Hyundai Motor Group would be ideally suited to take over the Tamil Nadu plant while Tata Motors would step into Ford’s Gujarat unit. Then began the rumours of Ola Electric for Chennai and right now, there is no news of any suitor for Ford’s facilities.
The fact that senior leadership teams from Tata Motors have met the political top brass in Tamil Nadu has fuelled hopes of the Ford plant in Chennai being revived but there is really no basis for this news. The Tatas already have enough and more capacity in their car plants and there is no compelling reason for them to acquire yet another one which will not come in cheap either. Perhaps — and this is a wild possibility — the group could consider dismantling/rebooting Ford plant in Chennai for its electric car foray or even to make semiconductors.
In the case of Ford’s Gujarat facility, a logical candidate would be MG Motors which already has a plant in Halol (acquired from GM by its parent, SAIC Motor Corp in 2017) and will need more capacity. However, given the current tensions between India and China, it is not entirely clear if the Centre will be inclined to showing any generosity to a Chinese auto brand for its growth plans, never mind that MG already has a presence here.
It was this reality that prompted Changan Automobile to shelve its plans for India and focus on the ASEAN region instead. The company was apparently in talks with Ford for the Maraimalainagar facility but nothing materialised eventually. Changan then began looking for other sites in Tamil Nadu and Andhra Pradesh till it realised that there was no point hanging on when hostilities between India and China began to escalate.
Automakers in India have learnt valuable lessons from the pandemic in terms of keeping a tight cost structure and boosting efficiencies at their plants. They will need to keep this going through 2022 when their mettle will be tested all over again especially if Omicron were to end up being more than a mild irritant.
Fancy corporate offices will be shut down and more employees will be urged to work from home. Companies will also have their hands full in hiring fresh talent for areas like electric while ensuring that their existing workforce is also able to reboot its skills going forward.
It will also be interesting to see how the electric scooter momentum gains traction especially with disruptors like Ola promising the moon. The coming months and years will separate the men from the boys . . . to that extent, 2022 will be the acid test for many.
This feature was first published in Autocar Professional's January 1, 2022 issue.