Deepak Jain, president, Automotive Component Manufacturers Association of India (Acma), said auto parts makers have invested a combined about ₹30,000 crore over the past three years in transitioning to the stringent Bharat Stage-VI (BS-VI) emission norms. The new norms will come into force from 1 April.
“The investment slowdown in the auto component industry alone would be about $1 billion, and that’s the capex only," Jain said in an interview.
“We were in an up-cycle when the auto manufacturers and ancillary units committed investments, which included a lot of brownfield investments. The (auto) ancillary industry is sitting on (idle) capacity and now (going forward), fresh capital expenditure will take time to happen," he said.
Jain said, however, that the entry of automakers such as MG Motor, Great Wall Motors, Kia Motors presents an opportunity as they increasingly look to localize parts.
In December 2019, Acma reported a 10% year-on-year (y-o-y) drop in the auto component industry’s revenues to ₹1.79 trillion in the six months ended 30 September. However, the industry body said total exports for the period grew 2.7% y-o-y to ₹51,397 crore. The industry body represents over 800 auto parts makers.
The auto parts makers are taking steps to efficiently manage their costs as they brace for the current slowdown in automobile sales to continue at least in the first two quarters of the next fiscal year following vehicle price increases by automakers under the BS-VI regime.
With production schedules trimmed, the ancillary units have adjusted manufacturing by reducing daily shifts or observing no production days. They now plan to take aggressive cost control measures such as strategic sourcing, cash conservation, capacity and capability management, lowering fixed costs including logistics and energy consumption, freezing hiring activities and improving cash flows via tightening working capital among others, said senior executives at auto parts companies.
“When the market is growing, big expenses accounting for 80% of the total costs remain under the focus. However, during a downturn such as this, the management at any ancillary unit would look at the remaining 20% of the expenses too," said Abhishek Jain, chief executive and managing director of PPAP Automotive Ltd. PPAP is a supplier of injection moulded parts to carmakers such as Maruti Suzuki India Pvt. Ltd, Tata Motors Ltd and Mahindra and Mahindra Ltd.
Jain said auto ancillary units moved to the cash conservation mode a few months ago when the industry concluded that the downturn is the steepest in two decades. “We have tried to bring down the break-even points across projects and lowered out fixed costs. Secondly, we have worked on the management of receivables and payables and have delayed non-critical capital expenditure," Jain added.
Bangalore-based Continental Automotive India Pvt. Ltd has also been cautiously managing costs.
“We have been closely monitoring our production and process costs, and are continuing to optimize them along with overlooking various methods to improve productivity," said Prashanth Doreswamy, managing director, Continental Automotive India and country head of Continental Group India.
However, not a single company has shut shop in the ongoing downturn, according to Acma.
“Joint ventures and technology transfers are the way to go," said Sunjay Kapur, chairman of Sona Comstar and vice-president of Acma, underlining how the tier two and three suppliers who are largely micro, small and medium enterprises (MSMEs) would cope with the pressure to make new capital investments and develop new capabilities.
Notably, MSMEs make up over 70% of the auto component industry, which Acma claims contributes 2.3% to India’s GDP and 25% to its manufacturing GDP.