Several micro and small auto parts suppliers, categorised as tier 2 or 3, or even smaller in the supply chain, fear shutdowns as liabilities, including wages, inventory costs, unutilized production capacities, interest on loans and other fixed overheads, continue to rise, industry executives said.
“As the working capital dries up, many MSMEs may shutdown. Many small tool rooms, which function like MSMEs and are a critical link in the value chain, are also struggling for survival," said Ashim Sharma, partner at Nomura Research Institute.
While the government announced several measures for MSMEs as part of its stimulus package, auto industry suppliers said the steps have not done much to revive demand or address major concerns, such as the inability of smaller companies to pay salaries.
“The government has done nothing, there is no stimulus to revive demand. Offering more loans is like telling stressed assets to add more debt to their books. How will small companies pay back those liabilities if there is no business," said Jagdeep Rangar, chairman, MSMEs, Automotive Component Manufacturers Association of India.
Wages is the single-biggest expense for small companies where the government could have helped through direct transfers, Rangar said, adding that as much as 30% of MSMEs (including auto ancillary units) may be forced to close.
An average small company with annual turnover of ₹20 crore will employ 50-100 people, he said, hinting at the large number of jobs that will be lost if these MSMEs shut operations.
For small suppliers, the covid-19 pandemic and the lockdown could not have come at a worse time. Small suppliers were already bearing the brunt of falling domestic auto sales even before the crisis hit.
Sanjay Sabharwal, managing director of Jamshedpur-based Metaldyne Industries Ltd, a supplier of metal parts for automobiles, said 33% MSMEs in the auto component space may shutdown following the two years of recession. “MSMEs should be nurtured, but the government’s new classification falls short of expectations. It is not practical, especially when these stressed companies have to compete globally." Sabharwal was referring to MSMEs capacity to invest in scaling up operations and adopting new manufacturing technologies.
Sabharwal said the industry would have welcomed a 100- or 200-day plan to revive the economy. He said a temporary GST cut on vehicles and vehicle scrappage policy could boost demand and offer immediate relief.
The troubles faced by small suppliers may lead to a wave of consolidation in the auto supply chain, said experts.