Mumbai: Capacity constraints will continue to be a hindrance for commercial vehicle (CV) manufacturers as tier-II suppliers hold back from making additional investments to ramp up production capacity, citing uncertainty in long-term demand and business cycle risks inherent to the segment.
Tier-II suppliers manufacture components such as castings, bearings and forgings, which are used by tier-I vendors, who are direct suppliers of parts to original equipment manufacturers (OEMs) such as Tata Motors Ltd and Mahindra and Mahindra Ltd.
Component manufacturers are shying away from making long-term investments because the market scenario post the implementation of Bharat Stage VI (BS VI) emission norms in April 2020 is uncertain, according to a senior executive at a Mumbai-based bearings manufacturer.
“As vehicle prices are set to rise post BS VI, the management is not keen on making long-term investments as the demand scenario is not clear," the executive said on condition of anonymity. The government’s “lopsided" electrification drive and the prospect of high levels of unutilized capacity in case of an economic lull are depressing sentiments, the executive added.
The company usually plans its investments depending on the projected returns for the next four-five years.
As CV sales picked up pace during the second half of fiscal 2018, the sudden upswing in demand left component manufacturers across the board in a tizzy, as they could not immediately ramp up capacities to required levels, said OEMs.
According to data provided by industry body Society of Indian Automobile Manufacturers, CV sales grew 19.94% to 856,453 units in FY18 over that of the previous year, on the back of the government’s increased focus on infrastructure and the rural economy, a low base and a broader recovery in economic growth.
In comparison, CV sales in FY17 grew at a marginal 4.16% to 714,232 units, as per a cyclical pattern inherently seen in the segment. Before FY18, CV sales last crossed 800,000 units in FY12.
To be sure, tier-I component vendors are optimistic about sustained momentum for the next one-and-a-half years and want a larger share of the pie even as they hold back from making long-term investments.
A Pune-based supplier of driveshafts and axles for utility vehicles and light CVs saw a “20-30% increase in customer demand, which is higher than the usual 5-10%" in the first quarter of the fiscal, said a business development executive at the company.
“Because we expect this demand to continue till the third quarter of FY20, we have to seek out other (tier-II) sources because our present suppliers are not willing to add capacities. This is a real challenge", the executive said, adding that the firm had made higher-than-normal investments in the past two fiscals but is considering its future course.
During the first few months of the calendar year, executives at Tata Motors and Mahindra said that bottlenecks in the supply chain limited higher production and constrained market share movement.
Girish Wagh, president of the commercial vehicles unit at Tata Motors, expects the supply chain to remove bottlenecks by the end of the fiscal, he said in late April.