Auto component slowdown looms ahead

While component makers are beginning to brace themselves because of a drop in car sales, high inflation and interest rates are also stalling expansion plans.

With the automobile industry in the country reeling under the effects of a sudden slowdown in demand, leading component makers are either re-considering their capital expenditure plans or deferring it by months.

The development comes in the backdrop of passenger car sales declining by 1.36 per cent to 909,283 units between April and September this year. Sales in the domestic market in the first six months of the fiscal have been far below expectations, forcing industry body Society of Indian Automobile Manufacturers (SIAM) to revise growth projections for the passenger cars segment to 2-4 per cent from the earlier 10-12 per cent.
Chairman of the country’s leading car air-conditioner maker Subros Ramesh Suri said that the company has delayed its capex plans owing to a slowdown in car sales. The company does not want to keep “idle capacity” and hence has deferred plans of making an investment originally scheduled to have been infused in March this year. Subros supplies to a wide range of original equipment manufacturers (OEMs) including Maruti Suzuki, Tata Motors and Mahindra & Mahindra.

Harish Sheth, managing director, Setco Automotive echoes Suri’s thoughts : “After experiencing a tremendous growth last year, we are seeing an unprecedented slowdown in the industry. This is the reason why the industry is so wary of increasing capacity,” he said. He added that his firm is also going slow in its expansion plans. The component industry had grown by a whopping 34.2 per cent to record a turnover of $ 39.9 billion in the last financial year.

High levels of inflation and rising interest rates have tightened availability of liquidity in the economy. This has proved to be an added dampener to capacity expansion projects in the component industry. “Some auto component manufacturers are deferring investments in capacity expansion programmes because of high cost of funding. But the real concern is to make credit available to tier-II and tier- III suppliers. If they do not invest in capacity, over the long-term this would choke the supply chain,” said ACMA President Arvind Kapur.

What is also adding to the industry’s woes is the four-month long labour crisis at Maruti Suzuki. The company, which accounts for over 40 per cent of sales in the domestic auto industry, has around 250 suppliers. As much as 80 per cent of these vendors had set up manufacturing units in the Gurgaon-Manesar belt to cater to the company. With production severely disrupted at MSIL, the suppliers are now staring at losses ranging from 15 to 20 per cent of their annual earnings. Estimates suggest vendors supplying to MSIL have suffered revenue losses to the tune of Rs 1400 crore since the start of the standoff in June this year.

K Gopalakrishnan, Industrial Advisor, Chennai District Small Scale Industries Association (CDISSIA) says that there are 400 units in the Guindy industrial estate in Chennai—one of the oldest in the country—and another 1200 small units located in and around the Estate which work on projects assigned by the bigger 400 units. Units in these estates produce components worth Rs 1,000 crore. These units take on mostly aluminum casting-related works for the OEMs and other press shop works.

Off-take dropped by 10-15 per cent mainly due to the strike in Maruti and slowdown in the industry, according to Gopalakrishnan who says that besides the drop in off-take, payment time has also increased drastically to 120 days. He notes that as per the MSME Act, bill payment should not be more than 45 days. "If the units go and complain to the regulators, then next time they will be black listed by the OEMs".

Sluggish demand in the domestic market, in the meantime, has forced the component industry to moderate its growth projections to 12-15 per cent in the current year. Vinnie Mehta, executive director, Automotive Component Manufacturers Association (ACMA), says, “The slowdown in passenger vehicle sales is definitely a cause of concern. Suppliers catering solely to the passenger car segment are facing problems. But we are not considering reviewing our growth projections at present. Demand for two-wheelers, commercial vehicles and tractors continue to be healthy but overall the growth rate has moderated.”

Venu Srinivasan, managing director, Sundaram Clayton, a leading automobile components manufacturer and holding company of country's third largest two-wheeler manufacturer by sales, TVS Motor says that “next 18 months are very uncertain due to global scenario. Rising interest costs and fuel prices will put pressure on companies’ bottom lines. All sections of the auto industry will slowdown, however two-wheelers will buck the trend and see robust growth”.

Although commodity prices are showing a downtrend , says Srinivasan, “employee costs have increased by 12-15 per cent. Given these factors we can’t predict when slow down will hit and we to have cautious view on capital and cost control.”

If the slowdown persists, industry observers feel, there could be a rationalisation of workforce employed particularly by vendors catering to the passenger vehicle segment. The auto component industry employs about one million workers in the country, 40 per cent of whom are hired on ‘contract basis’. “These workers are likely to take a hit if business takes a turn for the worse”, said an industry source on condition of anonymity.

However, Lumax Industries, JBM Group and Sona Koyo still continue to remain optimistic. Senior executive director of the country’s largest head lamp maker Lumax Industries Deepak Jain said that component companies have to invest and scale up capacity with a three to four year horizon in mind. “The long-term growth projection still remains intact hence a temporary slowdown should not deter anyone,” Jain said. Lumax has lined up an investment of Rs 150 crore to set up three green field manufacturing units. Jay Bharat Maruti (JBM) too is investing Rs 500 crore this fiscal on expanding capacity across its existing capacities and setting up new facilities in Chennai, Sanand and Pant Nagar.