Business beyond Covid-19: Auto firms change biz plans to stay relevant

The pandemic crisis has prompted automobile firms, like their counterparts in other sectors, to revisit everything — from fixed cost and capital allocation to manpower deployment.

According to consulting firm Kearney’s estimates, there has been an impact of $1.5-2 billion per month across the automotive value chain.

Auto companies, which have a high fixed cost structure, have put in place long-term changes and are preparing for life beyond 2021.

R C Bhargava, chairman, Maruti Suzuki, said: “Covid-19 has shown us various ways of reducing costs. Those will come in handy.”

After no sales in April and two successive weak months, Maruti dispatched more than 100,000 vehicles to its dealers in July, almost touching the pre-Covid levels. Bhargava said getting back to the previous levels was not tough.

“Fiscal 2019 was the previous best. With that as the base, we have to grow further in double digits.”

To meet the target and tide over the crisis, Maruti has decided on where to trim its sails. “It can be done by reducing travel, entertainment, advertising, etc. The pandemic has shown that businesses can be run without incurring those costs,” said Bhargava.

Elsewhere too, it’s the same sentiment. Shekar Viswanathan, vice-chairman at Toyota Kirloskar Motor, said: “The only way to tide over the current problem is to lower the break-even point and reduce fixed costs.” The Japanese carmaker’s Indian arm, staring at a loss by the end of FY21 for the first time after 12 years of reporting profit, has announced leave without pay for its employees. TKM is revisiting everything from consolidating functions and postponing launches to foregoing capex and sweating the assets of the plant better.

The pandemic has made most companies re-think the utility of travelling, which is a big cost component. It has also made work from home (WFH) the new normal.

This will bring in changes in hiring policy, said Rahul Mishra, principal (automotive) at Kearney.

“As businesses realise their ability to operate remotely — without office, with more effective hours, and through greater use of technology — hiring will be reviewed,” said Mishra.

The past four months have made several roles redundant or irrelevant and they may be the first to be rationalised, he said.

“In order to ensure the industry is competitive, the same thought process and cost discipline have to be adopted across the value chain — be it the raw material supplier, vendor, dealer, or financier,” said Bhargava.

Auto component makers, too, are adapting themselves to the changes. “Our focus on return on capital employed will be sharper. In the good old days, one never paid much attention to free cash flows. That is set to change now,” said Vineet Sahni, group chief executive officer, Lumax Industries.

The company is targeting reducing its fixed cost by 15-17 per cent by end of the current financial year.