Economics for Managers

Executive Summary of Economics for Managers

The coronavirus pandemic has impacted the economic activities across the globe. The lockdown as well as containment measures have a profound impact on the Indian economy and various sectors of it. In order to study the impact of the COVID-19 pandemic, the automobile industry has been selected. The aim of this paper is to examine how the automobile industry in India is affected by the crisis and what steps are taken by the government to stimulate growth in this industry. In addition to this, the market structure of the automobile industry is elucidated. The market forces of demand and supply are also taken into consideration in order to show the impact of changes in the automobile industry on price and quantity.

Table of Contents

Introduction.

Automobile Industry in India.

Background.

Oligopoly market structure.

Barriers to entry.

COVID-19 impact on Indian Economy automobile sector.

Market Share.

Market Mechanism..

Government Policy.

The Road ahead.

Conclusion.

References.

Introduction to Economics for Managers

COVID-19 has impacted all the countries across the globe, the health crisis has now been converted into an economic crisis. India is also adversely impacted by the virus. The restrictions and the containment measures have significantly impacted the economic activities in India. The automobile sector was adversely impacted by the lockdown measures as well as the economic contractions. The automobile industry has boosted economic growth in India over the years and this industry has been highly supported by the government of India (Miglani, 2019). Over the years, the demand for Indian vehicles has increased not only in the domestic market but in the international markets. Indian automobile producers are now emphasizing the usage of electrical vehicles and investing in research and development to ensure sustainable development (Miglani, 2019).

The recent pandemic has impacted this industry adversely. The pandemic has resulted in a decline in economic activities and a rise in unemployment, this has led to diminishing consumer confidence and purchasing power (Singh, 2020). Moreover, the containment measures have impacted the supply chain and have hampered the supply of automobiles. As a result, the market has contracted and is witnessing a sharp decline in growth (Dun & Bradstreet, 2020). The aim of this study is to analyze the impact of the COVID-19 pandemic on the automobile industry in India. The characteristics and features of the automobile industry in India are elucidated. Furthermore, the actions taken by the government to mitigate the effect on this industry are also being discussed in detail.

Automobile Industry of India

Background of Economics for Managers

In 2019, India attained the Fifth rank in the automobile sales and seventh position in terms of manufacturing commercial vehicles (Indian Brand Equity Foundation, 2020). India is witnessing expansion in the middle class as well as the demographic component shows a higher proportion of younger generation, this has resulted in higher demand for the two-wheeler segment(Indian Brand Equity Foundation, 2020). Government initiatives and higher Foreign Direct Investment in this filed have significantly transformed this industry.

Oligopoly Market Structure

The concentration of firms in an industry is significant factors that shape the conduct and administration of a firm in a particular industry. Moreover, the concentration specifies the position and control of the firm over the production of a good, market exchanges, or employment in that industry (Kumar & Choudhary, 2017). Oligopoly is the form of market structure in which there are few big firms and a large number of buyers of a commodity (Rosenberg, & O’Halloran, 2014). Each firm has a significant share of the market. There are few firms that dominate the market, therefore, each firm has market power. The price and output decisions of one firm significantly impact the price and output decisions of the rival firms in the market (Rosenberg, & O’Halloran, 2014). There are high barriers to entry, these barriers are large scale of investment and huge selling cost, patent right, government licensing, etc. Oligopoly firms try to avoid price wars and indulge in practices of marketing, advertising, and promoting their products, using innovation through research and development, and providing differentiated products in order to increase sales (Rosenberg, & O’Halloran, 2014).

According to a study by Kumar & Choudhary (2017), the Indian automobile sectors can be characterized as an oligopoly market structure as most of the goods are produced by only a few specific firms. There are three leaders in the markets, these are Maruti Udyog Ltd., Premier Automobiles Ltd. as well as Hindustan Motors. In the case of commercial vehicles, the leaders were Telco and Ashok Leyland, in jeep sectors the leader was Mahindra & Mahindra and Tata. The two-wheeler sector was the oligopolistic industry. However, over time with an increase in the global competition, the concentration has dipped but Maruti-Suzuki maintained the dominant position in the car sales in the year 2013-2014.

Barriers to Entry

The automobile manufacturing industry is the capital and resource-intensive industry by its very nature. The companies produce similar goods but not identical, the changes in the products can be made by the application of new technology, mainly using unique production techniques Bubna, Humbert, Wiseman & Manes, 2016). Thus, technology is preserved using patents. The automobile industry tries to restrict the entry of other firms by imposing barriers to entry. These barriers are in the form of patents. According to the study by Miglani (2019), the patents granted to Indian manufacturers are rising.

Name of the company

2001-2010

2010-2018

Tata Motors

10

57

M& M Limited

16

29

TVS Motor Company Limited

87

161

Maruti Suzuki Limited

 

10

Bajaj Auto Limited

13

14

Ashok Leyland

4

11

Sono Koyo Steering Systems Limited

4

2

Source: Miglani,2019

Moreover, other barriers to entry are brand identity and higher switching costs. The high-quality car brands have established their presence and people prefer not to switch from one brand to another (Bhatia, 2017).In addition to this, access to raw material, distribution channels as well as technology also acts as barriers. The government has set certain standards to fuel emissions, efficiency rating, and other associated regulations that will deter the entry of new firms in this industry ( Bhatia, 2017).

Covid-19 Impact on Indian Economy Automobile Sector

According to the Society of Indian Automobile Manufacturers (2020a ) report for the quarter, April-June quarter of 2019 and April-June quarter of 2020 the domestic sale of automobiles declined.

Table: Domestic sales of Automobiles.

 

Sales (April - June 2019)

Sales (April - June 2020)

Commercial vehicle

208,310

31,363

Three-wheeler

149,797

12,760

Passenger vehicle

712,684

153,734

Two-wheelers

5,013,067

1,293,113

Source: Society of Indian Automobile Manufacturers (2020a)

The coronavirus pandemic has impacted the automobile sector in many ways. During the lockdown, the automobile dealers couldn’t deliver the product (Singh, 2020). Moreover, this industry was heavily dependent on migrant workers. In the lockdown period, the migrant workers have shifted to their home towns, this further distorts the supply chain of the automobile. The goods couldn't be produced on tome and worse could not be delivered (Singh, 2020). Many people witnessed job losses in India and contractions of economic activities resulted in an increase in the number of loan defaulters. People are more likely to spend on necessities rather than on other goods. Also, the containment measures during the pandemic have put pressure on the mobility solution as well as the after-market services (Singh,2020).

According to the Dun & Bradstreet report, the automotive industry will be highly impacted by COVID 19 and will take a long time to recover. The study emphasizes that the economic crisis has reduced consumer confidence, resulted in lower disposable income as well as higher prices, overall, all these factors will cause reduced demand for cars. Moreover, the demand for commercial vehicles relies on Gross Material products (GMP), the GMP is expected to be lower during this year. The lockdown has impacted the logistics and delivery of finished goods as well as the raw material. This will further distort the supply of the goods. Consequently, the low supply and low demand for the industry is expected in the year 2020 (Dun & Bradstreet, 2020).

The Indian Automobile market has contracted and the market size has reduced to 2,15,50,494 units, which is a fall in growth of 18% in the financial year 2020 (Industrial Automation, 2020). The commercial vehicle market lessened to 7,17,688 units marking a degrowth of 29% while the three-wheeler market witnessed a reduction and reached 6,36,539 units with a loss in growth by 29%. In addition to this, the passenger vehicle saw a decline and reached 27,75,679 units, with reduced growth of 18% the two-wheeler decreased to 1,74,17,616 units and a decline in growth by 18% for the financial year 2020 (Industrial Automation, 2020)

Table: Reduction in sales for the Automobile sector

Commercial vehicle

7,17,688 units

Three-wheeler

6,36,539 units

Passenger vehicle

27,75,679 units

Two-wheelers

1,74,17,616 units

Source: Industrial Automation (2020)

Market Share

The market share of Maruti Suzuki increased by 3.5% while Mahindra witnessed a 6% decline in the market sage of the SUV/MUV category. In this category, the Hyundai Market share rose by 5% in the Financial year 2020 (Industrial Automation, 2020). In the commercial vehicle category, the market share of Mahindra rose by 3% while Tata Motors and Ashok Leyland compressed to 2%. Moreover, in the category of Two-wheelers, the market share f Honda surged by 2%. Hero is at the top position with 50% of the market share in motorcycle (Industrial Automation, 2020).

Market Mechanism

The economic slowdown has disrupted the demand and supply mechanism in the automobile industry. Both the demand as well as the supply of the automobile industry has seen an overall decline. The demand for automobiles has reduced drastically. Companies are trying hard to bear the negative consequences of the economic crisis, all those companies who could not sustain the brunt will leave the market. As a result, the supply will decrease. This is shown in the diagram given below :

Government PolicyOn the x-axis, the price is shown while on the y-axis, the quantity is shown. Initially, when the market is in equilibrium, at the point E where the demand curve as shown by the DD curve intersects the supply curve as denoted by the SS curve. Now, due to the COVID-19 pandemic, the demand contracted, as a result, the demand curve moved to DD'. Similarly, the supply also contracted, as a result, the supply curve has shifted to SS'. The new equilibrium is achieved at point E'. There has been a decrease in the price of the good as well as the quantity of the good. The price has reduced to P' while the quantity has declined to Q'.

The Indian government has been working to improve the demand for goods and services by using expansionary fiscal as well as monetary policies. The Indian government is using the fiscal stimulus to combat the negative effects of the pandemic and to boost economic activities. By the means of the fiscal stimulus package, the government has brought forward 2 sets of packages. The first part comprises the one-off cash transfers which amount to approximately 30 million for individuals who belong to the category of old and disabled as well as amount of approximately 200 million to the rural women, moreover, the government has decided to provide transfers in the form of in-kind to approximately 2/3 population along with it the health workers are entitled to medical insurance. The second set of the fiscal stimulus package will benefit the internal migrants and entails the expansion of benefits to rural workfare schemes (Organization for Economic Cooperation and Development 2020).

In order to stimulate liquidity in the market, the government has used expansionary monetary policy. The monetary policy includes the changes in the Liquidity Adjustment facility. The steps taken by the government include a decline in the repo rate by 40 bps and it has reached 4%, in addition to this, the reverse repo rate was lessened to 3.35 % as shown by the data released by the Reserve Bank of India (2020). Besides this, the Marginal standing facility rate as well as the bank rate were diminished and reached 4.25 % (Reserve Bank of India, 2020). The emphasis is highly on the micro, small and medium enterprises, the real estate and construction companies, non-banking financial institutions are provided easier availability to credit and money (Organization for Economic Cooperation and Development 2020).

However, the government is working to stimulate the entire economy, however, no specific measures were taken to revive the automobile industry. The overall improvement in the country will indirectly benefit the automobile sector as improvement in economic activities will increase the purchasing power of people. Consequently, people will start to buy the automobiles and the demand for the automobile will increase. Although, there have been no direct policies for the automobile sector has been announced by the government ( Society of Indian Automobile Manufacturers, 2020b)

The perfectly competitive industry is the industry which is categorized by having a huge number of buyers as well as sellers and the good produced is homogenous goods ( Mankiw, 2016). However, the automobile market is the oligopoly market, there are few large sellers in the market and the goods produced by each seller varies from the other seller. In simple terms, the vehicle produced by Maruti is different from the vehicles produced by TATA Motors. The demand curve for an individual firm operating in the perfectly competitive industry is perfectly elastic, however, this is not the case with the oligopoly market. Witness kinked shaped demand curve ( Mankiw, 2016).

The Road Ahead

The automobile industry is witnessing a recovery and the recovery is seen mainly in the two-wheeler segment. According to ICRA (2020), the Indian passenger vehicle segment will witness a recovery although it will be slow. Although, the past lockdown period is witnessing an increase in demand on a monthly basis, however, it will be difficult for India to achieve the demand volume that the economy was experiencing before it was impacted by the pandemic. It is anticipated that for the year financial year 2021, the demand for the automobile to reduce by 22% - 35%, provided the growth in Gross Domestic Product is in the range of 0% -% for the financial year 2021( Society of Indian Automobile Manufacturers, 2020b). However, stringent actions are required in this sector to boost the production of vehicles. A direct stimulus is required to be provided in this industry and actions that can be taken are reduction in the GST rates, incentive-based policies related to vehicle scrappage (Society of Indian Automobile Manufacturers, 2020b)

Conclusion on Economics for Managers

COVID-19 started as a health crisis has turned into an economic crisis. The falling levels of GDP and unemployment rates rising have been witnessed by countries across the globe. India was also adversely impacted by the pandemic. The contractions of economic activities have impacted all the sectors of the economy including the automobile sector. In India, the automobile industry has shown characteristics of an oligopoly market structure, there are a few firms that dominate the entire market moreover, the entry in this structure is difficult as it requires huge capital, and the entry is restricted through patents. These companies invest highly in research and development in order to attain more customers and tend to spend a huge amount of advertisement. The lockdown measures have reduced the demand for automobiles. The industry witnessed a sharp decline in sales as compared to last year. The sales as well as the production both were impacted by the crisis. As, a result, the demand and supply of automobiles declined. The result is there is a decrease in price as well as quantity of automobiles. The government of India has been working to boost the economic activities by using tools of monetary as well as fiscal policy, the government is trying to increase the liquidity in the market and simultaneously augment the purchasing power of people. Although, these measures are indirectly helping the automobile sector and slight recovery has been seen, however, no actions that are specific for this industry have been taken up as of now. Since the automobile industry contributes highly to the GDP, direct stimulus packages are anticipated in this industry. 

References for Economics for Managers

Bhatia, J. (2017). Porter's five forces industry analysis of the Indian passenger car industry. Pacific Business Review International Journal of Management .http://www.pbr.co.in/2016/jan13.aspx

Bubna, P., Humbert, M., Wiseman, M., and Manes, E. (2016). Barriers to entry in Automotive production and opportunities with emerging additive manufacturing techniques. SAE Technical Paper. https://doi.org/10.4271/2016-01-0329.

Dun & Bradstreet (2020). Impact of COVID-19 on sectors in India. Retrieved from https://nidm.gov.in/covid19/PDF/covid19/research/30.pdf

ICRA. (2020). Domestic volume growth trends in July 2020. Retrieved from https://www.icraresearch.in/research/ViewResearchReport/3177

Indian Brand Equity Foundation. (2020). Automobile Industry in India. Retrieved from https://www.ibef.org/industry/india-automobiles.aspx

Industrial Automotaion (2020). India’s Automotive report FY 2020 and forecast. Retrieved from https://www.industrialautomationindia.in/newsitm/9534/Indias-Automotive-Report-FY-2020-and-Forecast/news#:~:text=The%20Indian%20GDP%20forecast%20shows,FY%202020%20comes%20around%208%25.&text=Overall%20sales%20declined%20by%2045,2020%20compared%20to%20March%202019.

Kumar, N. & Choudhary, P. (2017). Concentration in the Indian Automobile Industry. Pacific Business Review International Journal of Management.http://www.pbr.co.in/2019/march9.aspx#

Mankiw, G. N. (2016). Principles of microeconomics. Cengage Learning (9th edition).

Miglani S. (2019). The growth of the Indian automobile industry: Analysis of the roles of government policy and other enabling factors. Springer, Singapore. https://doi.org/10.1007/978-981-13-8102-7_19

Organization for Economic Cooperation and Development (2020) India economic snapshot-June 2020.Retrieved from http://www.oecd.org/economy/india-economic-snapshot/

Reserve Bank of India (2020). Monetary policy statement, 2020-21: Resolution of the monetary policy committee (MPC) May 2020. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=49843

Rosenberg, S. & O’Halloran, P. (2014). Firm behavior in oligopolistic markets: evidence from a business simulation game. Journal of Business Case Studies, 10(3). https://clutejournals.com/index.php/JBCS/article/download/8714/8695/

Singh, R. (2020). Impact and implications of COVID-19 on the automotive industry. Retrieved from http://www.businessworld.in/article/Impact-And-Implications-Of-COVID-19-On-The-Automotive-Industry-/12-04-2020-188916/

Society of Indian Automobile Manufacturers (2020a). Auto Industry Decline by 75% During the 1st Quarter of 2020-21 Compared to Same Period Last Year Significant Improvement in June 2020 for Passenger Vehicle and Two Wheelers Compared to Previous Months. Retrieved from http://www.siam.in/pressrelease-details.aspx?mpgid=48&pgidtrail=50&pid=459]

Society of Indian Automobile Manufacturers. (2020b). Aatma Nirbhar Bharat package. Retrieved from http://www.siam.in/pressrelease-details.aspx?mpgid=48&pgidtrail=50&pid=458

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