Coronavirus supply chain shock for auto component sector, says ICRA

Rating agency ICRA on Friday said the supply chain shock due to the coronavirus pandemic will have negative impact for Indian auto component industry.

The COVID-19 supply chain disruptions will manifest into a demand shock lasting multiple quarters for the domestic industry, ICRA said in a statement.

The rating agency, which undertook an extensive survey across key auto component importers and exporters to understand the impact of disruptions in the global auto component supply chain because of the pandemic, said it expects a significant scale down in exports over the next two quarters.

"Though most respondents felt that India stood to gain when global OEMs (original equipment manufacturers) 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," it said.

Given the global slowdown, inventory build-up for export-oriented companies is expected in the coming months with a possible receivable stretch, it added.

Commenting on the scenario, ICRA Vice-President and Sector Head Pavethra Ponniah said, "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 2020-21.

"Large-scale OEM plant closures in USA and Europe, apart from a global slowdown, will impact demand from India," Ponniah said.

ICRA said that according to its ICRA's channel check, responses indicate that over 70 per cent of the respondents have faced or are likely to face supply chain disruptions because of COVID-19. As many as 35 per cent of the respondents said there were no alternative sources of input material in the event of supply chain disruptions of this nature in China, largely for electronics.

Of the respondents who said that there were alternative sources globally, 47 per cent said it needed over 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 per cent of the sample indicated that there were cost increases; the cost of electronic components has increased with supply disruption from China.

Ponniah said, "While the threat from China has started subsiding, after peaking in February 2020, 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 December 31, 2019, has resumed operations across the country, and also recently in the viral epicenter of Hubei, which is an auto component hub housing seven OEMs, 13 large auto ancillaries and over 10 electronic companies.

"According to ICRA's findings, factory operations were restored to about 60 per cent, with some persistent absenteeism. Inter- and intra-province, along with port freight, has however been identified as a roadblock for exports from China," Ponniah added.

ICRA said province-wide lockdowns and severe containment measures across China in January and February 20 lead 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.