By Manav Kapur
Executive Director, Steelbird International
The Indian auto components industry is the worst affected by the latest downturn in the automotive sector. Many of India’s emerging auto hubs like Chennai in the Indian state of Tamil Nadu, projected as the ‘Detroit of India’, seem to be facing a grave demand crisis. Most of the auto components industries in these hubs are running below capacity amid weak domestic demand.
India’s auto-components sector contributes nearly 2.3% to the country’s Gross Domestic Product (GDP) and employs more than 1.5 million people. The 18.3% growth in the financial year 2017-18 has helped the sector to reach US$ 51.2 billion market value and brought US$ 13.5 billion to the country from exports.
Following this growth trajectory, the Automotive Component Manufacturers Association of India (ACMA), has forecasted a US$ 100 billion turnover for the sector by 2020. But, with the recent slowdown in the automobile industry, the auto-component industry is going through a jittery phase. And, as many as 1,000,000 employees are sitting on the verge of retrenchment.
It is not only a tough time for various stakeholders in the industry but a litmus test for the government to strike a balance between new environmental regulations and economic policies that may ensure a win-win scenario for environment as well as economy. Many industry players believe that the major factors responsible for the slowdown in the auto sector are low liquidity in the market and underperformance of the banking sector, especially the public sector banks and NBFC.
But, liquidity is a major factor for this bumpy ride. Issues like 28% GST, mandatory insurance cover for at least three years on purchasing a new car and five years on purchasing a two-wheeler, high interest rate on the car loan, new axle load norms that yield 20% higher capacity, and a proposed change in emission standard from BS-IV to BS-VI are also vitiating the current industrial scenario. Besides, the government’s lack of clarity on EV transition is further aggravating the demand for automobiles in the market.
Being the ancillary sector of automotive industry, auto-components are gravely bearing the brunt of the downtrend, and a majority of players are affected by it. Many industrial cities of Tamil Nadu, including Chennai, which is known as Detroit of India, are experiencing an alarming falloff and most of the auto components units there are running below capacity amidst weak domestic demand. The situation is equally disturbing in other states too.
Maharashtra, which is the second-biggest hub of auto components and spare parts in India, is also witnessing a palpable crisis with up to 30% decline in demand.
However, all the leading players in the industry believe that this slowdown is very much transitional in nature, and if the sale of automobiles increases in the festival season, the industry will recover by the first quarter of the coming year. On the other hand, auto component manufacturers who are shifting their focus from the domestic market to international market are least affected with the current market slump.
However, right decisions at the right time can increase the immunity of a company even in these unfavourable conditions. Still, there are many things in the market that can protect a company against heavy losses. The prices of raw material like rubber and plastic have come down sharply in the market, and smart businesses are taking them as a great opportunity to reduce their production cost.
The price of RSS-4 sheet rubber has dropped by 7% in the Indian market and around 12% in the international market in the last quarter. A similar trend is also seen in the plastic market, that further help the auto component companies in controlling their costs as well as prices.
Badly needs government support
In the hour of desperate need, it seems the auto component sector can look for some innovative solutions to dispel the current crisis. But, without government support and reassurance of liquidity in the market, the sector cannot touch the US$ 100 billion mark by the end of 2020.
To weather the storm, the government should make three important decisions. First of all, the insurance cover should be reduced to one year for both two-wheelers and four-wheelers. Secondly, adequate measures should be taken to improve liquidity in the market, and car financing should be cheaper. And lastly, the government should clear its stand on EV transition through clear and unequivocal policies.