Slowdown-hit OEMs’ production cuts impact India components industry, currently operating at 50% capacity

The continuing slowdown in the Indian economy is having a strong impact on the automobile and in turn the automotive component industry. For the first seven months of the fiscal year 2020 (April-October 2019), production is down 15.45% and sales down 16.43%. So it comes as no surprise that with vehicle manufacturers, who are having to contend with sharply slowing sales and also BS VI around the corner, have resorted to production cuts, which has impacted domestic automotive components suppliers, both in terms of sales as well as job losses.  

On December 6, apex body Automotive Component Manufacturers Association of India (ACMA), announced the findings of its ‘Industry Performance Review’ for the first-half of FY2019-20. The turnover of the automotive components industry that contributes 2.3% to India’s GDP, 25% to its manufacturing GDP and provides employment to over 5,000,000 people, stood at Rs179,662 crore (US$ 26.2 billion) for the period April 2019 to September 2019, registering a year-on-year decline of 10.1% (April-September 2018:Rs 199,849 crore / US$ 29.1 billion).

With negative sales over the past 12 months, sales to OEMs dropped further by 15.2% to Rs 150,743 crore compared to the H1 of FY2019 (Rs 177,755 crore). India Auto Inc has been witnessing a severe prolonged downturn owing to multiple factors including liquidity crunch, increased vehicle prices as well as a negative buyer sentiment. In the first six months of the ongoing fiscal, the sector saw vehicle sales across segments decline to 11,736,976 units over that in the same duration of the previous fiscal (H1 FY2019: 14,154,463 / -17.08%).

According to Deepak Jain, President, ACMA, “The automotive industry is facing a prolonged slowdown. Vehicle sales in all segments have continued to plummet for the last one year. Considering the auto components industry grows on the back of the vehicle industry, a current 15 to 20% cut in vehicle production has inter-alia adversely impacted the component industry’s performance and investments. Going forward, with transition to BSVI and implementation of safety norms, the value-addition from the components industry is expected to progressively increase.”

“Subdued vehicle demand, recent investments made for transition from BS IV to BS VI, liquidity crunch, lack of clarity on policy for electrification of vehicles, among others, have also had an adverse impact on the expansion plans of the component sector,” he added.

Loss of investment opportunity
With the new BS VI emission regulations hardly three months away from getting into implementation, the industry is laser-focused on meeting deadlines and ensuring qualitative upgrade to the cleaner emission standards. However, the parallel slowdown has taken a sizeable sum of investment away which could have come in the form of capex.

“Out of the Rs 90,000 crore sum cumulatively invested into BS VI by the Indian automotive industry, the components industry has invested close to Rs 35,000 crore. However, had we grown at a projected 10 percent rate over the US$ 57 billion (Rs 405,954 crore) turnover of FY2019, the industry would have had to make investments between US$ 1.5 to 2 billion (Rs 10,63 crore to Rs 14,244 crore) in opex and capex, which, sadly, is a lost opportunity owing to the ongoing slowdown,” said Jain. 

Exports offer some buffer
The industry’s performance, with regard to exports, fared better, recording a growth of 2.7% over last year and overall shipments cumulating worth Rs 51,397 crore (H1 FY2019: 50,034), with engine components, drive and transmission, suspension and braking parts, interior trims and electronic and electrical parts forming the largest composition and going to countries like the US, Germany, Thailand and the UK. Europe accounted for 32 percent of exports followed by North America and Asia, with 30 percent and 26 percent, respectively.

In terms of the aftermarket, again the industry posted reasonable growth in an otherwise slow environment. Aftermarket turnover in H1 FY2020 stood at Rs 35,096 crore (H1 FY2019: 33,746 / +4.0%).

“The logic that correlates this is that when people delay their buying of new vehicles, there essentially will be more repairs on existing vehicles, and thus, more demand for spare parts. More so, if we compare the aftermarket’s performance to the growth observed over the last few years, the segment had been growing at a double-digit rate which is not there this time around. Instead, there is a more conservative and stable growth. This is because of the liquidity crunch in the market holding traders back and also due to the fact that the aftermarket also includes accessories. So, people are not being seen making discretionary purchases, but only doing what needs to be done,” commented Jain. 

Sharing his concerns over the lowered capacity utilisation, Jain added, “The whole component industry is right now operating at 50 percent capacity, where everyone was running at 85-90 percent until the H1 of last year and growing in double-digits.” 

"The downturn in the automotive industry in India is result of certain structural and cyclical (due to the nature of the industry) reforms that have taken place over the past years, while also including some regulatory reforms specifically in the automotive sector – all coming together in a very short span of time and leading to an increase in prices of vehicles across all segments. At the same time, the financing institutions unfortunately went into trouble, causing a lack of fund for dealers, as well as two-wheeler and CV buyers," he added.

Not-so-good outlook for second-half FY2020
ffering his outlook of Hs (second-half FY2020) and the full fiscal, Jain said: “It's very hard to estimate but we hope that the full year would have a single-digit de-growth as it is now impossible to catch up and grow in this market condition. We are hopeful that Q4 would be slightly better and primarily, the H2 of FY2020 will have less de-growth compared to H1, leading us to arrive in single-digit territory.”
“There will be BS VI pre-buying as well as new BS VI launches. Also if you notice, the OEMs have course-corrected inventory during the festive season and now, inventories will be fed with fresh BS VI products. So, it doesn't really mean that there would be an offtake in the market in terms of demand as such but at the dealer end, inventory fill-up will take place and because of that, the component industry may do better. Concerns, however, will still remain on the Q1 of FY2021,” concluded Jain.