Faced with the double whammy of a slowing economy and increasing input costs, automobile component firms are in a de-risk mode. Most companies are cutting investments or delaying expansion plans, with some even mulling diversification into non-auto segments.
Srivats Ram, chairman, Wheels India, part of the $4-billion TVS Group, said, “We had investments flowing in the past two years. But looking at the slow growth of demand this financial year, we have minimised the investment. We would like to delay it further by six-eight months or even a year because even the export market is down.”
According to the Automotive Component Manufacturers Association (Acma), the component industry is expected to grow at just 8-10 per cent as against 15.7 per cent last financial year.
Surinder Kanwar, president of Acma and chairman and managing director of Bharat Gears, said: “Ambiguity in the fuel price regime, high cost of capital, high interest rates, and slowing of investment in infrastructure are adversely impacting the growth of the automotive industry.”
New investment into the industry fell to $1.6-1.9 billion (Rs 7,750-9,200 crore) last year from $2-2.05 billion (Rs 9,700-9,936 crore) in the previous year. With the prevailing gloomy environment, investment this year is expected to fall further.
In the last financial year, the component industry had recorded a turnover of Rs 210,400 crore ($43.4 billion), a growth of nearly 16 per cent over the previous year’s Rs 181,900 crore ($39.9 billion).
Tube Investments of India (TII), part of the $4.4-billion Murugappa Group, has cut its investment plan in Punjab, attributing this to the slow down. It was planning to set up a new facility to manufacture tubes with an investment of Rs 200-250 crore.
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L Ramkumar, managing director of TII, said: “Our first quarter results reflected the volatility and turbulence in the economy. Besides, pricing of railway wagon channels, increasing competition and our inability to pass on the input cost (mainly power and raw material) are also impacting our profits.”
While the car market was burdened with labour unrest and widening gap between petrol and diesel prices, the commercial vehicles market saw growth in the heavy and light segments with no growth in the medium segment.
Barring a few companies such as Honda (two-wheeler) and Toyota, several car, utility vehicle, commercial vehicle and two-wheeler firms have also cut production to bring their dealer inventories down over the past many weeks. This has led to heavy discounting on certain models, especially those driven on petrol. The recent mining ban has had a cascading effect on the off take of tippers and related heavy trucks. This, in turn, has led to a drop in their production, impacting auto component demand. The jump in petrol prices has pinched two-wheeler buyers, too.
Although diversification was always on the anvil for these parts suppliers, the pace has quickened in the past few months.
In July, TII acquired Coimbatore-based Shanthi Gears for Rs 464 crore. Shanthi Gears has a diversified portfolio and supplies to non-auto sectors, including infrastructure, steel, cement and power. The company manufactures gears, gear boxes, geared motors and gear assemblies. “The component industry also needs to actively consider diversifying into adjacent markets including defence, aerospace, railways, farm implements, etc. to sustain the growth momentum”, added Kanwar.
Another major auto components maker, Rane Group, is diversifying into aerospace and defence, while reducing its automotive capital expenditure for the current year.
L Ganesh, chairman, Rane Group, declared planning to invest about Rs 230 crore during this fiscal, but not even 50 per cent of this would be invested now. The company will wait till October to decide its future course of action.
Impact on SMEs
The current slowdown has had a severe impact on small and medium enterprises (SMEs).
For instance, enterprises in one of the country’s oldest industrial estate, Guindy, have started shutting doors and moving out from the business.
K Gopalakrishnan, former president of Industrial Estate Manufacturers Association in Guindy, said tier-II, III and IV were the worst hit. While the order flow has dropped drastically, payment for the work completed is getting delayed. Besides, input costs, including raw materials, power and labour, are also going up.
He narrated that while the tier-I players would issue work orders to tier-II players and subsequently the rough machining, forging and similar works would be assigned to tier-III and IV units.
But with orders, only a few are getting the job in the last two segments.
For instance, if a subcontractor had earlier assigned job works to four or five units for rough machining, now they give it to two units.
On the payment side, customers used to clear payments in 60-90 days, but now it is now taking about 140 days, whereas suppliers for SMEs want instant cash or maximum one month credit they offer.
The estate is the large base for Tier-III units, which are estimated to contribute around Rs 150-200 crore, while the remaining around Rs 120 crore are from tier-IV units.
Overall, the units in Guindy is coming down. In the last four-five years, the number of units in the industrial estate has come down from 700-800 units to 300-400 units now, he said.
China M&As to access markets better than India
According to a McKinsey analysis, in 2007-2009 the number of merger and acquisition (M&A) deals concluded by Indian auto components companies were 22 and average deal size was $53 million, while China reported only three deals worth $85 million.
Between 2010 and 2012, the number of deals concluded by Indian firms were eight compared to 13 by their Chinese counterparts. The average deal size was only $16 million for Indian companies, while it was $99 million for Chinese ones.
“Indian industry needs to make a transition to position itself on models of long-term success product innovation, scale and cost excellence are the three models for long-term success for the industry,” according to Mckinsey
An expectation mismatch exists between original equipment manufacturers (OEMs) and suppliers on the approach to develop product development capabilities. To take advantage of affordable R&D and develop India as an integrated hub, OEMs and suppliers need to increase collaboration for mutual benefit, said Ernst & Young.
Mckinsey added that when it comes to R&D spend, India spends less than China. While Indian companies spends only 0.4 per cent of the total revenue, Chinese companies spend 1.8 per cent of the total revenue. Export driven growth will based on strong R&D. For instance, South Korea which had three per cent of the total global auto component industry, managed to increase to 4.4 per cent.
With inputs from Gireesh Babu