Chip crunch, commodity costs hit auto component companies in H1FY22: ACMA

Exports, aftermarket help keep momentum intact, says Automotive Component Manufacturers Association of India

India’s auto component industry does not expect a respite from the ongoing shortage of semiconductors and a persistent inflationary trend in commodity prices any time soon.

The two factors, which affected the industry’s turnover in the first half of the ongoing fiscal year, will continue to mount pressure on auto component firms even as demand, at least in the foreseeable future, is expected to remain strong, said Sunjay Kapur, the president, Automotive Component Manufacturers Association of India (ACMA). 

“The semiconductor issue is not resolved yet. It will take some time. This is the sense we are getting seeing the production schedules of automakers,” said Kapur. Automobiles account for just 7-10 per cent of the semiconductor industry. Given the number of chips that cars are looking to use, it could go up to 20 per cent, he said.

The apex body estimates a revenue loss of Rs 1,000 crore by the end of fiscal year 2021-22 (FY22) due to chip shortage, said Vinnie Mehta, the director general, ACMA. Last week, ICRA pegged a production loss of 500,000 units for passenger vehicle makers, translating into a financial loss of Rs 1,500-2,000 crore.

The turnover of the auto component industry advanced 65 per cent year-on-year to Rs 1.96 trillion ($26.6 billion) in the first half of the current fiscal year.  This came after a year that was marked by pandemic-induced lockdowns.

Besides the base effect, Kapur attributed the rise to increase in value-addition to meet regulatory compliance, fast recovery in external markets and traction in the domestic aftermarket.

"Despite resurgence of demand for vehicles, supply-side issues of availability of semiconductors, increasing input costs, rising logistics costs and availability of containers, among others, continue to hamper recovery in the automotive sector," said Kapur. Against this backdrop, the auto component industry displayed remarkable resilience, he added.

Amid a challenging environment accentuated by rising logistic costs, high raw material prices and chip shortage, growth in exports and aftermarket were the silver lining, said Kapur.

This, coupled with the auto industry’s increased focus on deep-localisation, and production-linked incentive schemes recently announced by the government on Advanced Chemistry Cell (ACC) Batteries and Auto & Auto Components will facilitate the creation of a state-of-the-art automotive value chain. They will also help develop India into an attractive alternative source of high-end auto components, Kapur said.

While exports surged 76 per cent to Rs 68.7 trillion ($9.3 billion) while imports rose 71 per cent to Rs 64.3 trillion ($8.7 billion) leading to a trade surplus of $600 million.

The aftermarket, estimated at Rs 38,895 crore, also witnessed a steady growth of 25 per cent. Component sales to original equipment makers (OEM) in the domestic market grew 76 per cent to Rs 1.53 trillion, he said.

Plagued by demand and supply issues in the two wheeler and passenger vehicle segments, automakers have not been able to tap the potential of the festival season. But ACMA is cautiously optimistic of the road ahead as there are indications that vehicle demand will improve in the coming months.

Semiconductor shortage chipped passenger vehicle sales (dispatch to dealers) by 19 per cent year-on-year in November. It dropped to 215,626 units during the month from 264,898 units in November 2020. Total two-wheeler sales declined sharply by 34 per cent year-on-year to 10,50,616 units amid weak demand.

"Auto component manufacturers have now, by and large, recovered and the investment cycle has also commenced," Kapur noted.

On the subject of the auto component industry preparing to be future-ready, 60 per cent of the respondents mentioned that they were already equipped to be part of the electric vehicles supply chain, while the rest would be ready in the next two-odd years, he said.