A recent report from McKinsey & Company indicates that the US and European economies could take until 2023 to recover from the impact of the COVID-19 crisis. With an average global drop in GDP already estimated to be at an optimistic 4.7 percent, the less rich countries in Asia will take the brunt of the deficit.
The industries expected to absorb the full shock of the economic effect of the coronavirus pandemic are travel, hospitality, and tourism, automotive and transport, financials including lending and insurance.
THE CAR BUSINESS
MAJOR changes in the car industry after the coronavirus pandemic, have adversely affected both sides of the supply chain. The slowdown from the manufacturing side is already traumatic and has resulted in job losses.
The tug on the other side is the slowdown in demand—not just for a quarter but for 6 months to a full year. The expected reduction in demand will naturally be prompted by consumers reprioritizing their finances.
In the Philippines, unofficial estimates by insiders at both the Chamber of Automotive Manufacturers of the Philippines Inc. (CAMPI) and the Association of Vehicle Importers and Distributors (AVID) are looking at the optimistic 20 percent reduction in total sales volume and an extreme 42 percent negative.
Combined sales last year for the whole industry is over 416,000. A 20 percent drop is equivalent to 70,000 units decrease. That is a total of only over 346,000 units. While a 42 percent decrease means 124,000 units–practically one-quarter industry combined total sales.
If the assumed margin on one car is at an average of 38 percent of the suggested retail price, a P1.0 million car is P380,000. Multiply that to 124,000 units is P4 billion. That is the amount of money that may be potentially lost, if the sales trend is not corrected. (Note these are insider market estimate and computations, educated guesses based on discussions with the various collaborators to this article–editor)
FEAR THE WORST
Though the captains of the auto industry are confident of its recovery, the real question is when.
“When the automotive industry loses one-quarter sales, it does not mean recovery will come after three months, because there are factors, like the sales cycle and filling the sales funnel that have to be considered,” says a former automotive executive now working in the financing sector. He requested anonymity for this report.
He mentioned that in teleconferences and online meetings with car dealers, the idea of recovery for most is to simply get back those with interests to purchase into signing the sales contract. But that is not likely, as the fear and anxiety of the pandemic will outweigh the need for a new vehicle.
“There is on theory is that because there is no public transportation, people will buy more cars, that is being overly optimistic. There might not be enough cash around for most people to buy cars and thus they will focus instead on other forms of transportation. Like motorcycles, which are easier to procure,” our source said.
He sees the situation getting worse before it gets better. He explained that though methods using digital selling will be deployed, car purchasing is a highly personal affair and showroom visits still count as the best way to close a deal. Moreover, dealers will be forced to create better deals just to attract clients to move inventory or deal with imported units already in the pipeline.
The same goes true for importers, with cars either loaded on ships in the docks or on the way to delivery from Thailand, Korea, China or Japan. These vehicles on route have are “committed” and will be a big disruption in the supply chain if these purchase orders are postponed or even canceled.
It is very likely that new car sales will be shifted to the second hand or used car market because of the tight financial situation for buyers.
“A lot of car buyers have taken advantage of downpayment schemes of 20 percent and below. The low equity allows more buyers into the funnel, even if the payment schemes are higher on a monthly basis, say over 60 months, but for as little as P15,000 one can drive home a decent sized sedan. For P5,000 even smaller cars can be purchased,” our source explains.
But there lies the rub for the industry. Lower equity also means lower responsibility and lower risk for the buyer. This usually results in defaults in payments and eventually vehicle repossession.
Banks have reported high repossession rates on vehicles that have no “business potential.” Those that can be used to haul passengers such as vans or sedans for TNVS services can be considered ‘self-liquidating.’ Not surprisingly, repossession of small cars—purchased through really affordable deals end up to be in the yard faster.
The second-hand car business on the other hand depends on purchase price—as much as 35 percent off a relatively new car’s retail price and a 30 to 50 percent down payment might prove to be more appetizing to buyers needing a vehicle. Still this has to be proven once the market start to open and business begins.
A MUTED ECONOMY
This pandemic is globally traumatic, and has become the biggest threat to the worldwide economy in modern history. If the public health response in the Philippines, including social distancing and lockdown measures, is initially successful but fails to prevent a second wave, the country will experience a “muted” economic recovery.
This scenario is happening in countries that have not taken correct measures for lockdown, such Brazil or Italy, or have taken a long time to respond such as the US. The McKinsey report says that in a muted economy scenario, while the global economy would recover to pre-crisis levels by the third quarter of 2022, the US economy would need until the first quarter of 2023 and Europe until the third quarter of the same year.
THE LONG SUPPLY CHAIN
The automotive market in the Philippines, like anywhere else depends on a long supply chain. For local manufacturing it has hundreds of suppliers that feed it the large amount of materials needed to put together a car. From completely knocked down parts coming from countries like China, Korea and Japan. To stamped steel parts, plastics, electricals and electronics. A strong supply chain is both interdependent and robust. Suppliers depend on car production to employ labor and ensure seamless production on a daily basis. Car makers depend on suppliers for their parts.
The exact impact to each part of the supply chain would be clearly known in the weeks following the slow process back to normalization. Once the Philippines and our neighboring countries start to recover from the peak of virus attack and life starts to return to normal. But when is this going to happen for the country?
A PANDEMIC TRIGGERED PRICE WAR
Our automotive executive source said that to prime car buying, banks and dealers are expected to collaborate come out with common schemes to entice buyers. If even lower-priced acquisition plans are included in the agenda, he fears a price war will be counterproductive.
Since brands and dealerships battle for the attention of the buyer, “that can be done by offering packages and not playing with the price” our source warns adding that though price is the clincher, in this time of the anxiety about the coronavirus, maybe services such as regular car sanitizing and disinfection packaged with the purchase may be a key driver.
However, he said that if pricing was to be used, he strongly suggests that pricing versus customer ability and not simply selling the higher profit, more expensive models which may also result in repossession.
“The magic niche might be in the P400,000-P500,000 segment with 30 to 50 percent downpayment schemes. That is an affordable P80,000 at 30 percent down payment, without sacrificing equity and providing a better spread for amortization,” our source mentioned.
“Whether this is in the used car or brand new vehicle market is entirely up to the buyer. Since there are no SUVs in this segment, that can be left to those who car truly afford it,” our source emphasizes pointing out that this is now the right time for those in the end user side, the consumption side of the car-buying cycle to properly profile who their actual target market is and what do they really need. – With Gregory E. Bautista