India's automobile industry is likely to be negatively impacted and supply chain disrupted if the Coronavirus (COVID-19) outbreak in China and South-East Asia persisted longer, according to ratings agency ICRA.
These countries play a critical role in automotive supply chain and domestic OEMs source critical components and sub-components including fuel injection pumps, EGR modules, electronic components, turbo chargers from these markets which in turn directly or indirectly depend on China.
China accounts for 27 per cent of India's auto component imports valued at USD 4.8 billion and, the impact is estimated to be higher for high value-add and customised components, while commoditised products could shift to alternative suppliers, ICRA said in a statement.
Commenting on the development, ICRA Ltd Vice-President - Corporate Sector Ratings Shamsher Dewan said India's automotive supply chain could get disrupted if the manufacturing activities in China continue to remain impacted owing to coronavirus outbreak.
"The impact is estimated to be higher for high value-add and customised components, while commoditised products could shift to alternative suppliers. But high investments and gestation period involved in developing tooling remains the key prohibitive factor for an immediate shift to new suppliers," he added.
Dewan further said,"Moreover, given that OEMs are currently in the period of transitioning to BS-VI production, disruption in supply of critical components required for the same has the potential to impact smooth transition to new emission norms."
ICRA said disruption in supply of certain critical components sourced from China will have differential impact.
OEMs sourcing components such as electronic components, fuel injection pumps, turbo charger, meter sets, LEDs, magnets, airbag components, steering system components and electric vehicle components will be affected the most.
In particular, the impact will be more profound on commercial vehicle (CV), passenger vehicle (PV) and the two-wheeler (2W) segments, it added.
While tractor segment which has high localisation levels with limited dependence on imports will have much lesser impact.
"Typically, companies maintain a comfortable 4-6 weeks of inventory, given the stock-up done prior to the Chinese New Year. However, if the situation in China were to persist for another couple of weeks, potential supply disruptions will become more likely," the ratings agency added.
In terms of sectoral outlook on domestic automotive industry, ICRA said it has a negative outlook on the CV segment due to surplus capacity in system, existing financing constraints, weak macro-economic scenario and industrial output which is likely to keep demand subdued.
For the PV segment too the outlook is negative and demand recovery is expected to be gradual.
"The initial months post BS-VI transition in April 2020 will be muted and subsequently recover thereafter on revival in consumer sentiment," it said.
The tractors and the two-wheeler segment have stable outlook on expectations of a good rabi crop which will support rural demand sentiment.
"However, in case of two-wheeler higher prices of BS-VI vehicles and muted urban demand remain dampeners in potential demand growth," it said.
As for the auto components segment, the outlook is negative due to contraction in broad-based OE sales, subdued after market demand and muted export demand in light of global trade tensions which continue to impact the segment, ICAR added.
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