Nearly 18 months after the automobile industry made a spectacular U-turn, with surging demand that helped pump new life into several closed component factories, the ancillary industry is still unable to catch up.
Many component makers, mostly small-sized vendors scattered around auto hubs like Pune, Gurgaon and Chennai, are finding it difficult to scale up their production.
During 2010, when domestic sales of all vehicles rose by 31 per cent, component makers were unable to match supplies due to reasons from inadequate funding facilities to absence of uniform demand by vehicle makers.
Investment issues
At the start of the year, many vendors were sceptical about the steep growth projections made by vehicle makers. Due to this, further investments for enhancing capacity, which should have come onstream by now, were kept on the back burner.
Tier-II and Tier-III vendors, which are bulk suppliers to large vendors (classified as Tier-I suppliers), are presently running their capacities to full stretch. However, many such vendors lack confidence in making new investments.
“When the slowdown hit the market, manufacturers cut their output without informing us. Many of the large vendors were able to stay afloat but companies which have Rs 5-40 crore turnover suffered huge losses. Many thus defaulted on their payments to banks,” stated a Pune-based vendor, whose company clocked a turnover of Rs 80 crore last year.
Shinzo Nakanishi, managing director, Maruti Suzuki, has said in an interview to Business Standard: “I believe we will make 1.25 million units this year (March 2011), with another 250,000 units coming in later. But I have to say (that) all component manufacturers are stretched out currently, like we are stretched out.”
Estimates prepared by the apex component body, Automotive Component Manufacturers Association (ACMA), say an investment of $2.5-3 billion (Rs 11,300-13,600 crore) is expected to be made by vendors this year. The body agrees that many small companies are failing to generate enough funds.
Vinnie Mehta, executive director, ACMA, said: “Neither the vendors nor the vehicle makers envisaged such a growth. This led to a capacity crunch. To make matters worse, nobody could predict the sustenance of demand. Tier-II and III suppliers do not have better access to capital. Besides, cost (of loans) is also an issue.”
A gestation period of 12-18 months is required for a new capacity to be operational which adheres to all the quality requirements. While some small vendors developed an unhealthy credit record due to the downturn phase, others were unable to get skilled manpower or machinery in place for the next phase of expansion.
OEMs’ neglect
“Original equipment manufacturers (OEM) are always interested in maintaining their relationship with Tier-I suppliers. Very little or nothing is done for the Tier-II and III companies. Despite some good order books, we do not get finances for expansion,” stated an executive from Vanaz Engineers, which supplies to Tata Motors.
Large suppliers like Motherson Sumi Systems, which has 49 plants in India, were better prepared to manage the sudden spurt in demand. Said its Chief Operating Officer, Pankaj Mittal:To some extent we were lucky to have built new facilities even during recession. We normally operate at 80-85 per cent capacity. We are already building new facilities with a planned investment of Rs 300 crore this year. However, we did face sourcing problems when small players were facing hurdles.”
While bigger players are financially better off, the financial health of a small-sized component company depends on the frequency with which it gets its payments from OEMs.
“No OEM makes up-front payment for the components. In fact, the average number of days we had to wait earlier for our payments was 30 days, which is now expanded to 90 days and, in some cases, it is 180 days,” stated the Vanaz Engineers official.
Many such component vendors are facing a financial crunch and are failing to match production schedules of vehicle makers. Ford India, for instance, has put off its third shift plans due to shortage of components.
Michael Boneham, president and managing director, Ford India, told PTI, “The shortage of components is worrying us. It is very difficult to run a third shift at this moment, but we are keen at start it at our Maraimalai Nagar facility (in Chennai).
Tata Motors, Mahindra & Mahindra, Maruti Suzuki and General Motors, among others, have been inconsistent with their volume projection. New capacities of OEMs have to work in synchronisation with capacity addition planned by component makers.
While vendors of Tata Motors’ Nano were asked to ramp up production to match an output of 20,000-25,000 units a month, the company dropped production considerably at its Sanand plant (near Ahmedabad) last year.
Further with steel makers signalling an upward revision in prices, component makers are preparing for a further increase. So far this year, raw material prices have risen by over 30 per cent, say vehicle makers. Automakers have already expressed a word of caution.
P Balendran, vice president (corporate affairs), GM India, said, “The year so far has been beyond our expectation but we are expecting some sluggishness in demand growth in the next two months. Rising interest rate and raw material prices could dampen sentiments.”
Fresh investments for capacity additions are being done now, which will take another nine to 12 months to come on stream.
Sunil Todi, managing director, Akar Tools, said, “We are investing Rs 70 crore towards expansion and this activity was started three months ago. Raised produciton will come into effect in the coming months.”
