This pandemic will change the auto industry as we know it

2020 was supposed to be a landmark year for the Philippine auto industry.

In 2015 industry executives projected that by 2020 the Philippines will see 500,000 unit sales. The industry was actually building up to that level, averaging 425,000 units annually from 2016 to 2019; the high being in the (fear of) excise tax-driven 2017. That year alone, the country saw almost 474,000 units sold.

But fate had other plans.

We entered the year with Davao on shaky ground, literally. Then there was the Christmas storm that hit Leyte and Samar. And when the new year came, not two weeks had passed and Taal Volcano decided to clear its throat on the twelfth of January.

The proximity of the volcano to Santa Rosa in Laguna - our equivalent of Motor City - meant that production was affected, if not interrupted. There were even fears of an even larger eruption. It comes as no surprise that sales in January 2020 dropped; the final tally was an 11.8% dip compared to January 2019.

And just as the industry was getting back on track in February, we got hit by another problem: the coronavirus.

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The government imposed a community quarantine that began on Sunday, the 15th of March, for the NCR. The game plan was to quell the contagion, but the rather long list of exemptions made it practically ineffective, and we don't need scientific data for that; the following Monday (March 16), despite orders to reduce capacity, many buses and jeepneys were packed... "sabit" included.

And so that brought us to the enhanced community quarantine after just a mere 48 hours. The ECQ is a veritable lockdown that closed malls, stopped businesses, shut down public transportation, shuttered factories, and instructed people to stay home unless they're fetching essential supplies. But you knew that already unless you're from a different country.

The auto industry, however, was hit very hard. Automobile factories, dealerships, and servicing were all deemed as non-essential. That means they can't make cars, can't sell cars, and can't service cars. In other words: zero revenue. And when the ECQ comes to a close (hopefully) by May 15, it will have been two months since.

So what's next for the auto industry? How can the many brands, the hundreds of dealers, and the thousands of persons employed directly and indirectly by the industry recover?

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"Recovery will be a challenge, no doubt," said Vince Socco, Chairman of GT Capital Auto Dealership Holdings (GTCAD), the parent company of 5 Toyota dealerships. "CAMPI (Chamber of Automotive Manufacturers of the Philippines, Inc) mentioned a drop of 20% or more in the auto market; AVID (Association of Vehicle Importers and Distributors) referred to a 30-40% decline. That translates to a decrease of around 80,000 to 165,000 units."

In 2019, the auto industry sold just over 416,637 units. If we factor that in to take CAMPI's projection of a decline, we're looking at just over 330,000 new vehicles for 2020. If we took AVID's projection, annual sales could be anywhere between 250,000 to about 290,000. That's a huge drop in vehicle sales.

"By any measure, that is a lot of cars. But it cannot be helped. Consumer and economic priorities have shifted in a major way. Surely, the drop will be significant," continued Socco.

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If a senior executive of a major dealership network of the country's number one car brand in terms of volume has reason to be concerned, then what about dealers of other brands? For that, we spoke to Tey Sornet, a senior executive of the LICA Group. They manage many dealers for many brands such as Honda, Subaru, Foton, Chevrolet, Honda, and Hyundai.

"The effect of the ECQ on auto dealers is wide-ranging and will be felt in the months to come," said Tey Sornet, COO of the auto dealership giant LICA Group. "Auto dealers are high capital but low margin businesses and having no operations for 2 months means that we have mounting bills to pay that will force us to reduce cost including manpower to survive."

Sornet drives a specific point: auto dealers are high capital businesses. While the general public thinks that the majority of the profits with every car sold go to the dealer, that is hardly the case. The profit margin for volume brands at the dealer level isn't very high on a per-unit basis. Dealers generally won't release those figures but don't expect six digits on a per unit basis for volume brands.

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That's why dealer businesses like LICA expand their portfolio with many brands under one roof or within one lot like the LICA 'Autoplex' in Cainta. The strategy is to cast a wider net, so to speak. But if you can't cast a net at all, that's a problem. And manpower is realistically the first to get affected which will drive up the unemployment rate. One dealer executive (who did not wish to be quoted) shared some thoughts with us regarding the matter, particularly the relationship between the incoming economic situation, unemployment, and the banks.

"With the projected drop in consumer spending, how will auto [industry] continue to keep employees by maintaining workforce if banks continue to charge interests during the pandemic?" said the executive who wished to remain anonymous. "The government, through the BSP (Bangko Sentral ng Pilipinas) should support banks and cut interest rates to half like other countries are doing to fight unemployment."

The executive also cited that dealer groups and auto brands that are closely affiliated with banks will have the greatest advantage of moving forward from COVID-19. The reason is that dealers borrow money to make money, and so the vehicles they order to occupy warehouses and stockyards are, in fact, under a loan, and that's why dealers and dealer groups of all sizes are very concerned.

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One of those is Willy Tee Ten. He's the president of the Autohub Group which has a dealership portfolio that includes Ford, Nissan, Hyundai, and Mazda, as well as being the official distributorship of Lotus, MINI, and Rolls-Royce.

"We need to cut costs and reduce overhead expenses," said Autohub's Willy Tee Ten. "Right now we’re exhausting different possible ways to sell cars but we’re also making sure we follow all government protocols like staying home (work from home which is 20% only of our workforce) while on lockdown and once lifted we have to follow proper social distancing, sanitation of our dealerships, disinfecting our vehicles and the likes. Things will really change from now on."

That's the reason why - as our anonymous source points out - automotive brands and dealers under conglomerates like Yuchengco Group of Companies, Ayala Corporation, and GT Capital would have the edge given the affiliation with RCBC, BPI, and Metrobank, respectively. GT Capital's Vince Socco gave his thoughts on that 'unfair' advantage.

"I think it is not so much that we are affiliated with Metrobank. We do business at arms-length. Our recovery advantage, if you can call it that, is the strength of the Toyota brand, the quality of our products and services, and the popularity of Toyota among Filipinos," Vince Socco responded.

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The volume auto market will take a hit, but what about the luxury automobile category? Willy Tee Ten of Autohub had a different insight into the matter given that his group handles volume brands, premium automobiles, and even ultra-luxury motor cars.

"Initially, the demand will experience a huge drop. Clients will have this tendency to buy lower-end brands at the moment of crisis and when the economy recovers, they may slowly consider the more luxurious brands. But there’s also a possibility of people buying luxury brands at this time because we are sure to come up with better offers. Nothing is final until we go back and feel everything out," said the president of Autohub.

Automotive retail will take a big hit as well, but there are strategies to overcome it. The importer/distributor business should be able to bring in vehicles via the ports as soon as factories abroad restart their assembly lines; something that many companies are doing now. But what about our own manufacturing? How does Philippine manufacturing intend to pull itself together after a singular even that will echo for quite some time?

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Vince Socco weighed in on that, and he has a lot of experience in that regard. The Chairman of GTCAD is a longtime Toyota executive, having started out when Toyota began manufacturing operations in the Philippines in the late '80s and rose to become a very senior Toyota executive internationally.

"Toyota is, in a way, a homegrown brand. We support a whole ecosystem from suppliers, manufacturing, exports, sales, financing, parts, and services," said Socco. "The multiplier effect we have on the economy is significant. As such we have a very huge responsibility to be a leading partner of government and the Filipino people in getting our nation back on the track of economic development."

Restarting manufacturing will be a challenge. Social distancing, while possible in a large automobile factory, means a major change to the assembly line. That would translate to issues with regard to production pace. We expect the rate that cars will roll off the line to be slower, but there are also expectations that sales volume will drop because livelihoods have been adversely affected by the crisis. Still, local car factories need to resume production so that those that need vehicles will have them available, and that's what Mitsubishi Motors Philippines is planning to do.

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"Production-wise we had people in the plant to maintain the facility and everyone is looking forward to going back to work,” said Alvin Dalida, MMPC's First Vice President for Marketing and Sales. "However we have to comply with the new normal. It will be tough since we have to consider DOH and DOLE guidelines. We fall under Category 2 so we should be able to normally operate."

The Philippine market is vital to Mitsubishi's global performance as in terms of industry ranking; this is the country where the brand ranks highest. It's a testament to their longevity in the country, and they stayed during the dark martial law years. But this crisis is much more difficult.

The priority now for carmakers is to figure out what exactly the "new normal" is for manufacturing. Dalida, like the rest of the industry executives we spoke to regarding domestic manufacturing, is managing expectations for sales and production volume; both will undoubtedly be low. Actually, the shutdowns caused by the ECQ came at the worst time for the companies that tend to operate on a Fiscal Year system (April to March of the following year) as the accountants would have been finishing up their, uh, accounting when the lockdown was declared, preventing companies from moving forward with their final tally for FY 2019-20.

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"Because year-end includes financial closing. Unfortunately, our finance team can't close the books from home due to system limitations," continued Dalida. "We need to access office programs with IT support. That will be the priority after ECQ."

The reality faced by local automakers will be felt by all, including industry giant Toyota. Normally, Toyota has a commanding share in the Philippine market as the undisputed leader; for every 10 vehicles sold, 4 are Toyotas. But 40% of no sales is still no sales and Atty. Rommel Gutierrez, First Vice President for TMP's Corporate Affairs Group, is careful of projections.

"[TMP] sales projections for the whole 2020 will be scaled down," said Atty. Gutierrez. "The pandemic has a big impact on sales and sales target for the year will be revised accordingly."

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But it's not just sales. There are thousands - possibly tens of thousands - of people that depend on Toyota's position as the country's largest automaker by far to resume production. The people manning the supply chain attached to vehicle production is undoubtedly on the edge of their seats, but Atty. Gutierrez is cautious about the immediate state of manufacturing after the ECQ.

"Santa Rosa, Laguna, where our plant is located, is still under ECQ until May 15," said TMP's Atty. Gutierrez. "It is still not certain at this time whether this status will change after that. With certain protocols to be followed under GCQ or total lifting of the quarantine and revised sales projections, production will not reach 100% capacity."

The rest of the industry will undoubtedly be keeping an eye on how Toyota restarts. Some in the auto industry are taking a more positive outlook towards a post-crisis world. One of them is - surprisingly - deeply embedded in the luxury automobile sector: Francis Ang, the Chief Operating Officer of Auto Nation Group, the distributor of brands such as Mercedes-Benz, Jaguar, Land Rover, Chrysler, Jeep, Dodge, and even Harley Davidson.

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"We are expecting our sales to get hit this year by the COVID-19 pandemic like a lot of other industries, but the lifeblood of the automotive industry is a new product and we have a significant number of models to introduce this year," said the COO of ANG. "Apart from that, we are making sure that our dealerships are virus free and we are strengthening our digital presence."

Is Ang talking about virtual dealerships? Possibly. Some companies even tried doing virtual motor shows to somehow make up for canceled events. Volkswagen AG tried that out in lieu of the canceled Geneva Motor Show, and it looked pretty good. Could that be a tactic that is viable for local automakers and distributors, especially given that the Manila International Auto Show (MIAS) was postponed? It's also worth mentioning that the venue for the show - World Trade Center Manila - is being used as a COVID-19 quarantine site.

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Social distancing is more easily achieved by performing the majority of transactions online, but car buying is still very much traditionalist. Many customers still prefer reading newspapers rather than reading on their phones and to physically visit stores rather than ordering on Lazada or Shopee.

It's understandable: a car is a very major purchase. But Tey Sornet of LICA Group thinks that could all change in the coming months.

"We will enter a new normal where the customer leads will come from digital instead of traditional showroom walk-in and mall displays," said Sornet. "Auto dealers will change their strategy and dedicate more resources to keep up with the digital wave. Those traditionalists' will be left behind if they cannot switch to the new norm (digital/online selling)."

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Just how will this new normal affect sales volume? Atty. Gutierrez, apart from being a senior Toyota executive, is also the president of CAMPI, and he spoke of what the landscape could be like for the auto industry in the coming months.

"CAMPI’s initial projection for 2020 was a 10% increase from last year. With COVID-19, this projection will certainly be revised drastically downward," said CAMPI's president. "The coming months of 2020 will be focused on relief and recovery efforts. Adjustments to the new normal will definitely change our way of doing things. Outlook will not be as positive as initially forecast."

Many dealers are already bracing themselves for the reduction in revenue due to lower new car sales, but there is potential in another field: automotive servicing.

"The opportunity can come from the Service business where customers are expected to keep their vehicles for a longer time," adds LICA's Tey Sornet. "Currently many customers are requesting to have their vehicle repaired since they are bogged down and require Periodic Maintenance as well."

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2020 was supposed to be a landmark year for the auto industry, and it is... but just not in the way we thought it would be.

Make no mistake about it: the coronavirus pandemic is a cataclysmic event that showed us just how vulnerable we really are. This isn't a typhoon or a volcano or a flood or an earthquake wherein we would just wait it out and go on our merry way as before. We're very resilient that way. But the pandemic made it clear that policies, practices, and our very culture need to change to protect us in the future. That is the basis of the new normal.

The same goes for the auto industry, both foreign and domestic, as the effects will be far-reaching and long-lasting. But it should change us for the better, and hopefully, we'll all emerge from this more resilient than ever. Perhaps GT Capital's Vince Socco said it best:

"Recovery will come. We will get there by standing by the Filipino motorists, all the way."