Auto suppliers hit by rising sanitation and labour costs
2 min read 23 Jun 2020, 10:51 PM ISTAny spike in manpower costs will worsen the companies’ already-stretched balance sheetsAutomakers are looking to increase production to 70-80% of pre-covid levels in near future
PremiumAuto parts makers are worried about a sharp increase in labour costs due to the exodus of skilled workers from cities as they strive to ramp up output in line with the ambitious projections of top automakers.
Labour is the second-biggest expense for an auto parts company after raw materials. Any increase in labour cost coupled with sanitization-related expenses to prevent coronavirus infections at factories will worsen the already-stretched balance sheets of these companies, most of whom are small and medium enterprises.
“Manpower cost in certain parts of Maharashtra has gone up by almost 30-35% in cases of high-skilled labourers. Due to the sanitization and social distancing norms, output has suffered since assembly lines, which were operated by 6-7 workers, are now being operated by just 3-4 people," said Sanjeev Vashdev, founder and managing director, Flash Electronics Ltd, which makes two-wheeler electronic parts.
“Also, the Maharashtra government has raised electricity charges by 7-8%, which will further increase costs. Recent schemes announced for creating jobs in rural areas will further impede movement of migrant labourers back to cities," he said.
Parts suppliers employ almost 70% of their workforce on a contractual basis. The hiring is made as per the demand outlook and production forecast of automakers.
A top executive at one of Maruti’s tier-1 vendors said the labour shortage is forcing companies to pay the existing workforce at least 15-20% more.
“The demand in the market in the last two months has been almost zero and most vendors had no income. Sanitization efforts and social distancing norms are increasing cost and because of that the number of people working in the factory had to be reduced," the executive said, requesting anonymity
Domestic automobile sales across categories are likely to drop 25-35% this fiscal, according to Society of India Automobile Manufacturers (Siam).
Given the bleak demand outlook and rising costs, auto parts firms may find it difficult to match production in line with the forecast of top Original Equipment Manufacturers (OEMs).
Companies such as Maruti Suzuki India Ltd, Hero MotoCorp Ltd and Bajaj Auto Ltd plan to raise output to almost 70-80% of pre-covid levels in the coming months.
“Labour migration will impact vendors because they use far more contractual labour than us. It could impact our production," Maruti chairman R. C. Bhargava said at a recent conference call post 4Q quarterly earnings.
“Every government department is making their own rules with respect to covid-19. Getting manpower back at work at our plants in Chakan (near Pune) as we ramp up operations is turning out to be a challenge," said Aditya Bhartia, managing director, Advik Hi-Tech Pvt Ltd. A supplier of parts to two-wheeler makers such as Bajaj Auto and Honda Motorcycle & Scooter India, Advik Hi-Tech has restored production at about 70% capacity utilization levels.
