Less than two years back, the mood in the $18-billion Indian automobile component industry was buoyant. Every component maker worth his nuts and bolts had double digit growth rate on his future graph. But by the end of 2008, the outlook turned bleak to say the least.
The Automobile Component Manufacturers’ Association (ACMA) is now knocking at the government’s doors seeking a 2-3 years “bridge policy” to help survive the global financial crisis.
If the industry voices can be ignored for misplaced or unwarranted panic, the numbers cannot be misread. The first half numbers tell the story loud and clear. Between April and September 2008, operating profit margin (on net sales) of the 70-odd listed component makers in India was down to 11.11 per cent from 12.27 per cent in the first half of 2007-08. Net profit margin fell steeper to 3.96 per cent in the first half of this year from 5.26 per cent in the corresponding period of 2007-08.
The big numbers repeat this story. While sales during the first half of this fiscal grew by 24 per cent, the aggregated net profit of these 70-odd listed players fell by 6.64 per cent.
“We did see this slowdown coming when the sub-prime crisis in the US came to light. But we definitely underestimated its impact on us,” confessed Arvind Dham, managing director of Amtek Auto.
When the global financial crisis took shape in the US, exporters from India believed that their hope was in Europe. “We felt the EU was insulated. But in September, the EU too got affected. We did not know the gravity (of the situation),” said Dham.
Sanjay Labroo, managing director and CEO of automotive glass maker AIS, believes the mass lay-offs in the auto component sector are inevitable if the current slowdown continues. “The credit squeeze in the market has affected the commercial vehicle makers most,” he said adding there were reports of about 60-70 per cent contraction in production of commercial vehicles.
In a note to the media last week, ACMA president J S Chopra summarised the industry woes succinctly: “In the domestic market, the crippling liquidity crunch has slowed down vehicle demand, especially in the commercial vehicle category. Payments from OEMs (vehicle manufacturers) to vendors are getting delayed, loans for capacity expansion are difficult to secure and even disbursement of loans already approved by the banks is being deferred.”
Domestic sales of vehicles in the first seven months of this fiscal grew by just 5.64 per cent against the double digit growth in the last few years. Heavy commercial vehicle sales are down by 10 per cent with leading truck makers like Ashok Leyland announcing cut in production till December this year.
Chopra added: “On the export front, global outsourcing from large traditional markets like USA has taken a stiff beating and has seen a reduction of up to 30-40 per cent in many cases. The overall exports growth of the auto component industry has slumped to a meagre 6 per cent in the April 2008- September 2008 period, compared with a 25 per cent CAGR over the last five years.
On the other hand, imports of auto components continue to rise unabated at a high growth rate of almost 50 per cent, with total imports growing to $5.3 billion during 2007-08. Consequently, India today is a net importer of auto components.”
A leading tyre maker pointed out that while his business was equally dependent on the fortunes of the vehicle makers, he at least had the replacement market to bank upon during difficult times. “The component makers had a good run for the last 5-7 years, but now they are having difficulty in adjusting to a cyclical dip. While they were relishing the cake, we learned to live on bread,” he said. While nearly 70 per cent of the tyre makers’ revenue comes from the replacement market, it is less than 10 per cent for component makers.
Some of the leading component makers are giving a positive spin to the troubled times now. They see the current slowdown as an opportunity to improve efficiency. The Rs 2,500 crore Anand Group, which has one of the most diversified production portfolios in this component business, has taken several measures to cut costs and improve efficiency.
To begin with, all “business class” travel has been stopped. “This is from top to bottom, and for both domestic and foreign travel,” said Deepak Chopra, President and CFO of Anand Group.
Apart from these, there are plans to prune the bottom 5-10 per cent of workers, who do not live up to the productivity expectations. Pruning of shifts from three to two in select plants is also on the anvil. “We are even looking at deferring capex in new plants that will not affect our customers,” said Chopra.
While the growth target for this Delhi-based group was 24-25 per cent for 2008, it has now been brought down to 15 per cent on account of the current slowdown. “We see some silver lining in the replacement market. When new vehicles sales come down, people tend to run their cars and trucks for longer by replacing parts. There is a 15-20 per cent growth in this segment,” said Chopra.
In the next six to eight months, some believe that exports will pick up. “US and Europe might be in trouble now, but severe cost pressure will force them to source more parts from low-cost economies like India,” said an industry analyst.
In the last four to five years, exports have acted as a cushion for any cyclical change in the domestic demand. During this period, the industry consistently exported a fifth of whatever it produced, with US and Europe being the largest markets.
While expectations for exports to improve may create room for hope, the domestic demand-dependent auto component industry will have to buckle up for a tough 12 months ahead.
