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While the government announced several measures aimed at MSMEs as part of its stimulus package, auto industry suppliers feel that the measures have not done much to boost demand or address major concerns such as the inability of these smaller companies to pay salaries. (Photo: Mint)
While the government announced several measures aimed at MSMEs as part of its stimulus package, auto industry suppliers feel that the measures have not done much to boost demand or address major concerns such as the inability of these smaller companies to pay salaries. (Photo: Mint)

Facing demand freeze, small auto component suppliers fear closure

  • Mounting liabilities for these firms mainly include wages, inventory costs, unutilized production capacities, interest on loans and other fixed overheads
  • The troubles faced by small suppliers might lead to a wave of consolidation in the auto supply chain, feel industry experts

MUMBAI: Several micro and small auto component suppliers, categorized as tier 2 or 3 or even smaller in the supply chain, fear shutdowns as liabilities continue to mount and factories operate at minimal capacities.

Mounting liabilities for these firms mainly include wages, inventory costs, unutilized production capacities, interest on loans and other fixed overheads, several industry executives told Mint.

"As the working capital dries up, many MSMEs may shutdown in the coming months. Many small tool rooms, which function like the MSMEs and are critical link in the value chain, are also struggling for survival," said Nomura Research’s Ashim Sharma.

While the government announced several measures aimed at MSMEs as part of its stimulus package, auto industry suppliers feel that the measures have not done much to boost demand or address major concerns such as the inability of these 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 the small companies even pay back those liabilities if there is no business," asked Jagdeep Rangar, chairman, MSMEs at the Automotive Component Manufacturers Association (Acma).

Accumulating wages is the single biggest expense for small companies where the government could have helped via making direct transfers, Rangar said.

According to Rangar, up to 30% of overall MSMEs, including auto ancillary units, may shut shop.

An average small company with annual turnover of 20 crore would employ about 50-100 people, he said pointing at the expected jobs that will be lost if these MSMEs close down due to financial stress and absence of demand.

For MSMEs in the auto supply chain, the covid-19 pandemic and the lockdown could not have come at a worse time. Small suppliers were already bearing the brunt of falling auto demand in the country before covid-19 hit the country.

Sanjay Sabharwal, managing director of Jamshedpur-based Metaldyne Industries Ltd, supplier of metal parts to the auto industry, said 33% MSMEs in the auto component space may shutdown as a direct result of 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 said referring to the MSMEs capacity to invest in scaling up operations and new manufacturing technologies.

Last week, the finance minister had announced revision of MSME definition thereby setting higher limits on investments and turnover of the enterprises. That included replacing the earlier investment limit of up to 10 lakh for micro service enterprises and 25 lakhs for micro manufacturing companies with 1 crore for both the categories. The government has also added additional parameter of turnover of upto 5 crore for a company to be classified as the micro enterprise.

Further, 3 lakh crore worth of collateral free automatic loans for businesses including MSMEs were also announced.

Sabharwal said the industry would have appreciated a 100- or 200-day plan to revive the economy. He added that GST cut on vehicles for a temporary period and introducing vehicle scrappage policy could boost demand and offer immediate relief to the auto industry.

The troubles faced by these small suppliers might lead to a wave of consolidation in the auto supply chain, feel industry experts.

“Survival would be difficult for many (small) companies unless major measures to help revive demand are taken," said Sunjay Kapur, chairman, Sona Comstar, a tier 1 supplier, which engages with 450-500 MSMEs as its vendors at group level.

Kapur said a lot of consolidation may be seen across the auto supply chain in the coming quarters.

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