The Covid-19 pandemic has create a global shockwave, across countries and industries and the ramifications are going to be many. Ratings agency ICRA recently undertook an extensive survey across key automotive component importers and exporters to understand the impact of disruptions in the global component supply chain because of Covid-19.
The Chinese Covid-19 epicenter of Hubei is an automotive component hub housing seven OEMs, 13 large auto ancillaries and over 10 electronic companies. The province-wide lockdowns and severe containment measures across China in January and February 20 led to supply chain disruptions globally, given China’s role as the fourth largest exporter of auto components. While China is limping back to a reduced state of normalcy, the global spread of Covid-19 to the USA and Europe has created new disruptions.
ICRA says its channel check has thrown up few important conclusions. The survey responses indicate that over 70 percent of the respondents have faced/or are likely to face supply chain disruptions because of Covid-19. Around 35 percent of the respondents said that there were no alternative sources of input material in the event of supply chain disruptions of this nature in China, largely for electronics. Among the respondents who said that there were alternative sources globally, 47 percent respondents said it would take a minimum of 3 months, with approvals from OEMs, and would require substantial re-tooling costs and validation time/costs.
While the demand slowdown from Covid-19 has softened commodity prices, 35 percent of the sample indicated that there were cost increases; the cost of electronic components has increased with supply disruption from China.
ICRA expects a significant scale down in exports over the next two quarters. Though most respondents felt that India stood to gain when global OEMs eventually re-source their requirements in a bid to geographically de-risk their supply chain, there were reservations that competition from other countries would make this difficult. Given the global slowdown, inventory build-up for export-oriented companies is expected in the coming months with a possible receivable stretch.
Pavethra Ponniah, vice-president and sector head, ICRA said, “Globally, the Covid-19 related supply shock will have a severe and immediate term impact on the auto component industry. While the threat from China has started subsiding, after peaking in February, risks emanating from USA and Europe, which are bigger cogs in the global supply chain will impact the industry in Q1 FY2021 and beyond. On a positive note, China which reported its first Covid-19 patient on Dec 31, 2019, has resumed operations across the country, and also recently in the viral epicenter of Hubei, China. According to ICRA’s findings, factory operations were restored to about 60 percent, with some persistent absenteeism. Inter- and intra-province, along with port freight has however been identified as a roadblock for exports from China.”
“Covid-19, which has so far disrupted the global complex auto-component supply chains and immediate term automotive demand, could manifest into a demand shock lasting multiple quarters for the domestic industry. As for the replacement demand, while the same would witness some pick-up, post the lockout, as system inventories are replenished, export demand for components will witness a sharp correction in FY2021. Large scale OEM plant closures in USA and Europe, apart from a global slowdown, will impact demand from India,” concluded Ponniah.
Also read: Interview: Tata Technologies, CEO & MD, Warren Harris: ‘Covid-19 is a wake-up call for the industry to re-look at legacy practices such as single low-cost sourcing and diversify to a more globally distributed sourcing model.’
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