The struggle is real. The balancing act between lives and livelihood continues. It was unfortunate that the country had to be placed under enhanced community quarantine (ECQ) again in the first two weeks of April. Given the significant rise in the number of new COVID-19 cases, it was unavoidable.
Fortunately, we transitioned to modified ECQ (MECQ) in a short time. I was dreading a redux of the circumstances last year where ECQ was originally supposed to last only two weeks but rolled on for eight weeks.
The revival of the economy, however, is really complex. From a full stop, parts of the economy started to groan back to life in the second semester of last year. It has to be said that restarting the economic engines takes time to realize full – or even partial – productivity. It’s not like a light switch that you turn on and off or a super car that goes from zero to 100 kph in four seconds.
Slowly but surely, economic gains were being realized in the third and fourth quarters of 2020. In fact, auto industry sales climbed back to some 80 percent of pre-COVID levels of 2019. Service shops of dealers were seeing more customers, too. Even showrooms were experiencing more footfalls.
The ECQ in April and prevailing MECQ, therefore, was dreadful but not nearly as debilitating as last year. The creation of the NCR+ bubble was a significant difference as certain restrictions were flexibly enforced. Construction was one such example. Open-air dining was allowed. Public transportation also remained in service. It was a more informed and measured lockdown. Nonetheless, regaining momentum after grinding to an almost-halt in economic activity is a setback and it will take a couple of months to ramp up productivity.
In the auto industry, a critical driver of revival is reestablishing supply chains that were disrupted by quarantine. Economists are familiar with the tenet that supply creates its own demand. From a tactical standpoint, being able to introduce new models will make quite a difference in exciting auto buyers.
Beyond new models (which are heavily reliant on headquarter initiatives), local auto companies must be able to stimulate demand and provide buyers with a good enough reason to abandon their cautious outlook in favor of going the way of discretionary spending or, for businesses, capital expenditures. I believe that demand destruction is not prevalent; it is more about deferment of major expenditures, especially non-essential ones. The capacity – and need – to purchase is intact but just set aside.
To this end, dealers and car distributors are – and should – explore sales and service promotions that are compelling enough for customers to overcome their Covid-anxieties and loosen their purse strings. Stimulating demand is a necessary corollary to restoring supply.
Another key driver of revival is auto financing. Banks have understandably reduced their appetite for undertaking auto loans in light of increased default risks. High-end car buyers are being conservative and it will take time and a lot of incentives to draw them back into the market. They are cash buyers or corporate purchasers. The essential car buyers are normally in the lower end of the market where motor vehicles are needed for more basic reasons. In this segment, car financing is a crucial factor for revival. Recently, banks have slowly come back to the auto loan market. At the moment, maybe 60 to 70 percent of car sales are financed, up from 40-50 percent pre-COVID. There can be no recovery in auto sales without the return of auto financing.
Finally, I think the degree of mobility will be the final determinant of how quick and how strong the revival of the auto industry will be. Last year, severe limits were imposed in line with quarantine restrictions. This year, mobility has not been significantly impaired. Autos are purchased to provide mobility, not to be parked in garages. As long as mobility is restricted, there is no urgency to make that new car purchase or bring your car to the service shop.
It is good to note that mobility was preserved in large part despite the surge in COVID infections. Of course, appropriate protocols need to be strictly enforced. What is even more encouraging is that time spent in cars and travelling has been reduced due to a series of much-awaited opening of new highways and tollways. Reduced travel time helps reduce the risk of exposure to the COVID virus in enclosed cabins of autos. Promoting safety and health protocols need to be elevated in order that mobility can be further liberalized. To this end, dealers are offering a good number of disinfecting and cleaning services to assure drivers and passengers of a safe journey.
It is still a long road to revival but the auto industry will keep moving forward.