Auto parts makers in India have been hit hard by automobile companies cutting production to trim inventory amid weak demand.
The vendors are being forced to follow the path of the original equipment manufacturers (OEMs) by either temporarily shutting plants or adjusting output by reducing the number of daily shifts in their factories.
Automakers such as Maruti Suzuki Ltd, Tata Motors Ltd, Mahindra & Mahindra Ltd (M&M), Ashok Leyland Ltd and Honda Motorcycle & Scooter India Ltd have temporarily closed plants in the past few months. Initial reports for July suggest that the passenger car sales have slipped by over 29% making it the worst month in the past 2 decades.
Mint reached out to more than a dozen auto parts makers and learnt that while production cuts are resulting in mounting fixed costs and loss of jobs for contractual shop floor workers, smaller businesses are beginning to default on loans.
On 20 July, Bosch Ltd, one of the largest auto parts makers in India, said it has suspended operations at its Gangaikondan plant in Tamil Nadu for five days starting 23 July to ‘avoid unnecessary buildup of inventory’. Later, it suspended operations at its Naganathapura unit in Karnataka for two days (27 and 29 July) followed by single-day shutdowns at Jaipur (27 July) and Bidadi (29 July).
Bosch is not alone. Other key tier one vendors such as Exide Industries, Continental Automotive Components (India), ZF, Brose India Automotive Systems, Schaeffler India, Brembo Brakes India, Kalyani Maxion Wheels, Varroc Group, Eaton, IAC India have adjusted their respective production schedules to align their inventory as per the revised forecasts by the car companies.
A spokesperson at Exide said capacity is usually diverted to the aftermarket segment during low demand from automakers. “So, in the short run, this works to our advantage because aftermarket offers us better margin. However, if the demand slump continues for a very long time, then there is cause for concern," he stated.
Kalyani Maxion Wheels shut its truck wheel manufacturing plant for five days while the car wheel facility was closed for three days, one person at the company said. Meanwhile, Brose, a German supplier of window regulators and door modules for cars, trimmed its daily production schedule from three shifts to a single shift.
“Facilities are being shut on weekends; few shifts are being suspended impacting a large proportion of contractual workers, which comprise about 50% of all manpower employed by the auto industry. Few smaller enterprises are even beginning to default on loans raised from the financial institutions due to this economic slowdown," said a senior industry official, who declined to be named.
Jignesh Raval, MD, Sintercom India Ltd, maker of sintered parts for engines and transmissions, said, “The offtake continues to be low from our customers. This has forced us to cut our production to two shifts to control our inventory. If we don’t see further improvements, we will have to consider a block closure for a week in August."
The current 15-20% cut in vehicle production has led to a crisis-like situation in the auto ancillary industry and if the trend continues, an estimated one million people could be laid off, Ram Venkataramani, president, Automotive Component Manufacturers Association of India (ACMA) said recently.
Prashanth Doreswamy, market head, Continental India, a powertrain and chassis parts supplier, said various factors have contributed to the downturn. “We are closely monitoring our production and process costs. We are continuing to optimize them. Hiring is being looked at carefully," he said.
However, he said the company, which invested in two greenfield plants recently, is keeping its expansion plans on track.
Suresh K.V., head of ZF Region India, said his company is also impacted by the overall weak automobile demand. “We are carefully monitoring the situation such as inventory levels on a daily basis and balance our labour capacities between the different production lines," he said.
Vinodkumar Ramachandran, partner and head, Automotive and Industrial Manufacturing, KPMG in India sees vendors increasing their focus on agility and optimization of resources on weekly basis to manage costs. “They are focused on lowering their breakeven levels by converting fixed cost to variable cost and deploying technologies and automation to lower their enabling function costs," he added.