The last three months were difficult for the auto component industry while there is hope for a partial recovery with two- and three-wheeler market and exports. For long, the Indian automotive market experienced slowdown headwinds which were followed by Covid 19. In this article, Pushkar Oak discusses auto component industry challenges and way ahead.

In 2018-19, the turnover of the Indian auto components sector was Rs 3,95,902 crore ($57 billion), its contribution to GDP 2.3 per cent, and to manufacturing GDP 25 per cent. The sector also exported components worth Rs 1,06,048 crore ($15.16 billion), primarily to North America and Europe. But its exports, as compared to global auto trade, are still less than 1.5 per cent. The Covid-19 crisis presents an opportunity for the Indian auto components sector to become the factory of the world Today, the auto components industry is under tremendous pressure reduced liquid capital, stalled payments, slow movement of raw material across the sates are some factors.

BS VI effect: Due to the BS VI deadline of April 2020, the automobile prices have increased by 10-15 per cent, according to the Federation of Automotive Dealers Association (FADA) observations. Given that the automotive market was already into a slowdown and the current situation has worsened the position.    As India shifted quickly top BS IV to BS VI and it was clear when BS IV was made mandatory that BS VI will soon be here. Component manufacturers in the industry had a very short time to supply their OEMs and aftermarket. They also missed out on R&D and innovation. The technology has improved, but all that has been built outside India. 

Movement of goods: Indian value chain and companies are slowly coming on track for exports and its operations but better coordination in the movement of goods will help grab better opportunities in the global market. Jagdish Kumar, Group President and CEO, Anand Automotive in a webinar held by CRISIL highlights, “The movement of goods in the nation is not yet that fast. To grab export opportunities and even the local opportunities, the movement of goods inter-state will play a vital role. State governments should intervene and find a solution over the same.”

Post-Covid 19 situation: Due to lesser business movement in the market, in the last 2-3 months, cash flows have dried in the tier-2 and tier-3 regions. These suppliers will be put to test. Assistance from the government is there but is not sufficient as there is no immediate help offered in the recently announced package. Companies will cut down on costs wherever possible. In this situation, all have explored digital mediums. Thus, work from home will be a new normal. All kinds of overhead costs will be cut; for example, air travel will come down and will be transformed into online meetings. This year every business will try and monitor its processes, business, workforce, supply chain, etc to cut unnecessary expenses and utilise it in the right manner. 

Shrikant Badve, MD, Badve Group of Industries, points out, “The buying mediums are expected to change from offline to online. However, customers will be looking for better quality, features and designs in the products. Cost-rich companies can build an edge over the others in this scenario and will try to benefit from the market.  

Opportunity in disguise There have been several speculations that China will lose its global position due to Covid 19. Interestingly, China is such an integrated part of the global value chain that it will be very hard to ignore. In this situation, India can attract all the expansion activities being planned by the global companies to India, as these companies will be on a hunt for the ASEAN region post-Covid 19. 

The Japanese government is assisting companies who are willing to shift their centres into Japan from China. India too, like Japan has announced some policy benefits to attract companies in India. 

Industry is experiencing a shift in the purchase approach. Finding a new supplier is also a big challenge. If large companies strengthen local suppliers to improve their capacities and develop new products, it will be a win-win situation for the auto component industry. Large companies who source supplies from foreign nations are working with their local suppliers to build and manufacture components efficiently. Assistance in terms of R&D, finance & design are being provided to such suppliers by large companies. Such activities in the industry increase competency. 

Amid these negative market sentiments, a positive approach has come from OEMs, Kumar states, “Some of our OEMs have helped us with faster payments, so we can also complete our payment cycles to our vendors, keeping the supply chain active.”

It is expected that the replacement demand from OEMs will go down across all categories accept 2-wheelers. The 2-wheeler market is expected to pick up by end of Q3 or by Q4. Further, the export markets for the replacement segment will also not be of prime importance as domestic businesses are under pressure. 

The electric vehicle (EV) market may perform well if the sales go up. Given that the EV market has also been hit. Component manufacturers depend on a very small share of the EV industry. “Looking at the adoption, the government was first to adopt EV buses for public transport. Such adoptions and handovers have completely stopped. The ones that are in the process of manufacturing will be delayed. This will have an impact on the industry and will also put pressure on the carbon footprint target. The positive side of the story is that the buses will come into play faster. Further, payments from the government to their suppliers have not stalled.” EV market boom may be delayed by a year or so which can only be tackled by some innovation in technology. 

One of the significant benefits that India may get due to the Covid 19 is that of technology. There will be collaborations with Chinese and other global players, opening more avenues to explore for the Indian industry. “Indian auto component industry has to invest to upgrade and to up its game. This will make the companies ready and equipped to achieve global competency. Such investments are inevitable,” informs Badve. 

The Covid 19 situation had some positive side to it that the companies across sectors are coming together and communicating for a better future. Deepak Jain, President, Automotive Component Manufacturers Association of India, “Collaboration is in the air, going forward. More concentration on the health of the workforce but companies are looking at the quality of people, and this is a massive opportunity of investing in people. Entities who focused on cash flows will emerge winners in this scenario. There will be a new way of approaching and acquiring new customers, and so this is an opportunity for the whole industry to become asset-light. People might get more into private ownership of vehicles, so this is the right time for the government to rethink certain taxations and get the scrappage policy to incentivise consumption—to get the customer confidence back. 

This is an opportunity for the auto components sector to become the factory of the world. Quality of components is a proven fact as 65 per cent of exports were to high-quality product markets such as North America and Europe, but we need to work with the government. A different approach towards export opportunities backed by government policy infrastructure. 

Lastly, it will also be crucial to see how the government ensures support to the MSMEs for absorbing this Covid 19 blow. However, component manufacturers will have to invest to upgrade, and bring digitalisation in their operations and manufacturing to build products of better quality, designs, and features.