OEMs to slash production amid uncertainty

Auto manufacturers in India, trying to cope with supply chain disruptions and skyrocketing commodity prices could not have had it worse. They now have to brace themselves for the impact of recent hikes in fuel prices, which is likely to be the first of many,  and an impending increase in insurance premia, which are set to further stoke current inflationary trends. With limited scope to pass on the higher costs to the end customers, OEMs have no choice but to cut production amid high costs and supply disruptions, said analysts and industry experts.

Neither the legacy manufacturers nor EV makers are willing to go on the record about their production plans but the writing on the wall is clear. The Ukrainian crisis, now into its fifth week,  isn’t showing any signs of any rapprochement in sight which will only exacerbate key raw materials shortages and see their prices heading further north. An official with a component manufacturer that counts major automotive brands as its customers says, “We are estimating a 10-15 per cent drop in production schedules of our OEMs.”

Some leading brokerages, rating and consulting firms have now pared their growth forecast for the industry. Nomura Securities, for instance, has cut its growth forecast for the industry (including electric vehicles) its growth forecast. Companies in a highly-competitive environment, who cannot pass on hikes, have no choice but cut production. 

“In our estimates,  production for March and April 2022 will see a major dip with cuts across the board. Hence our estimate for FY22 is pegged at 3.1 million units. We have revised the forecast for fiscal 2023 at 3.4 to 3.6 million units from 4.2 to 4.4 million units earlier,” says Harshvardhan Sharma, Head Auto Retail Practice, Nomura.

Among ICE makers,  the luxury players including Mercedes Benz India, Audi India and Volvo India have announced plans to hike prices from 1 April 2022. Mass carmakers have yet to bite the bullet and are unlikely to do so in a hurry. Most have already taken multiple price increases during this fiscal and do not want to risk demand. Among commercial vehicle makers, Tata Motors has announced it would increase prices by about 2.5 percent across the range. 

“The Ukraine-Russia crisis will only worsen the impact on semiconductors,” says Hemal Thakkar, director, Crisil Research. The war-torn region is a major source of palladium, the basic raw material for semiconductors with Russia accounting for 40 percent of global production. In addition, close to 70 percent of global supply of neon gas, an important element in semiconductor production comes from Ukraine. “The semiconductors situation will continue to be on the boil," Thakkar reiterates.

With the availability of some semiconductor parts stretching beyond 52 weeks, the auto industry, on an average, is seeing a price increase of about 15-18 percent for semiconductor components. “We are seeing a significant rise in the metal prices,” says solar energy expert Venkat Rajaraman, founder and chief executive, Cygni Energy. 

Nickel prices have already risen to over $100,000 a tonne at the London Metal Exchange (LME). Lithium prices and the benchmark mineral index value have also gone up significantly in the recent months. This, coupled with the semiconductor shortage, says Rajaraman will only bump up costs for ICE and EV makers.

Limited leeway for price hikes
Aside from Ola Electric which plans to hike prices effective 1 April, other EV makers have chosen to defer the move. Spokespersons for Hero Electric, Ather Energy (it increased prices in January 2022) and Wardwizard said they do not have plans to raise prices for now.

Meanwhile, battery makers are already bleeding from the volatility in commodity prices. Over the last month, cobalt has gained 11.88 percent in a month, going up 55.86 percent year-on-year.  Russia is the second-largest exporter of cobalt. Overall costs for EV battery manufacturing have risen by 25-30 percent in the last month. With cell prices going up as much as 40 percent and India importing 90 percent of it from China, the battery manufacturers have no option but to pass on the cost inflation to customers.

Founder & CEO, Li-Ion battery maker Trontek, Samrath Kochar, said the lithium is rising at 2 percent each day on the metal exchange. “We have no option other than to hike prices such as the cost of batteries which will only jack up production costs of an EV,” said Kochar. The shortage of critical raw materials including nickel and lithium will impact the EVs and the energy storage business, he said.

Making the most of a crisis 
Co-founder at battery pack manufacturer and recycling startup, Lohum Cleantech, Justin Lemmon, says that while Covid and now the Ukraine crisis have caught people unawares, “diversification from the existing supply chain is slowly gathering momentum in the industry”. 

Uday Narang, chairman of Omega Seiki Mobility, speaks of the need to look inwards in the current circumstances. “With the situation making its impact felt across the supply chain, we are compelled to increase by 7 to 10 percent for all our product lines.”  From a long-term perspective, Omega Seiki is focusing on non-China-based suppliers like C4V, while Exicom and Sun Mobility are working on a full-scale backward integration to hedge themselves from prevailing global uncertainties.

Others too are preparing for the disruption and see it as an opportunity. Wardwizard Mobility which is based in Gujarat has already begun creating its own supply ecosystem. This would be not only to meet its own requirements but also for supplies of components and spares to the nascent EV industry.

“India has had enough of being at the mercy of global supply chains,” avers Nitin Gupte, Chairman and Managing Director, Wardwizard.  The company is targeting a 100 percent localization of EV supply chain in the next six months by indigenously manufacturing chargers, batteries, motors and chassis under one roof and offering supplies of “mission critical” parts to the entire EV ecosystem. According to Gupte, the arrangements with global suppliers are such that Wardwizard is shielded from such uncertainties. However, he admits that if prices don't cool off, it may well consider a price hike for its e-bikes and scooters in the next 30-45 days.

India sold 32,443 e-two-wheelers in February 2022, up 433 percent year-on-year. E-passenger vehicles also saw a 297-percent y-o-y jump (YoY) in the same month retailing a total of 2,352 units according to the Federation of Automobile Dealers Associations of India.

Logistics costs
It is not only the supply chain that would weigh in on the operational costs.  Those in the manufacturing business will also have to face the heat from higher logistics costs as transporters pass on the higher diesel costs. A proposed hike in the motor insurance premia from April will add to transporter’s costs and enhance  truck rentals.

“As an industry, we are still recovering from the Covid impact which led to low sales and subdued customer sentiments,” said Diageo Graffi, Chief Executive, Piaggio India Vehicles.  The proposed hike in the third-party motor insurance premia at a time like this will increase the acquisition cost denting the already reduced volumes, he added.

Vedanarayanan Seshadri, MD, Mahindra Insurance Brokers says, "The proposed increases are being made after a gap of two years. These would be based on data available with the insurance regulator on how third party claims cost has moved up over the past 3 years. At this stage, this is a draft proposal pending views from all industry segments. Moderate and consistent increases over a period of time will balance the interests of all".

India's logistics cost is among the world’s highest as against a global average of 15-18 per cent. It is only low-priced Russian crude that has acted as a counterbalance. However, rising input and fuel prices are likely to push up infrastructure costs and drive an inflationary spiral in the economy, says Nomura’s Harshvardhan.

“Multiple hikes will further push up the logistics cost and add to an all-time high inflation of 6.5 percent of GDP,” said Bal Malkit Singh, chairman (core committee) All India Motor Transport Congress (AIMTC).

Transporters have opposed government’s revision in third party insurance charges and are in the process of making representations to roll back the proposed hikes during the 30-day window period that started from 17th of March according to a government notification, post which third party insurance hikes will become a reality.