Auto component makers plunge into a well of uncertainty

A sextet of deterrents, namely — Covid-19, chips (semiconductor shortage), container shortage (dearth of shipping containers), commodity prices, conflict (the Russian invasion of Ukraine and the ensuing conflict), and the ongoing China lockdown — has pushed India’s auto ancillary and component manufacturing industry into the realm of uncertainty.

“Forecasting is one of the most difficult jobs right now in this industry. Within the supply chain, the biggest problem is that of commodity prices. It is still a challenging time with risk involved in the future,” Deepak Jain, chairman and MD, Lumax Industries Limited, tells Fortune India.

Jain’s scepticism has other takers as well. According to Neeraj Mahajan, group chief marketing officer, Spark Minda Group, companies in the industry had no choice but to be nimble and agile, in order to be quick enough to adapt to changing trends. “We need to keep a watchful eye on the trends around midterm export requirements in Europe to gauge any potential patterns of recovery. The ongoing shortfall of chips continues to be a significant issue for the automotive industry,” he explains.

However, amidst all the chaos and volatility, there also exists — albeit cautiously — a feeling of jittery optimism in some quarters of the industry.

“We’re not seeing any major disruptions in essential raw materials like neon gas used in semiconductor plants; palladium and nickel coming out of Russia, but given the fact that we’re amid a conflict, what will the situation be three weeks or a month from now, I can’t say,” Sunjay Kapur, president of the Automotive Component Manufacturers Association (ACMA) and the chairman of Sona Comstar, avers in a conversation with Fortune India.

Notwithstanding, what Kapur concedes is that the industry continues to remain in a difficult position. “We are facing headwinds when it comes to semiconductor chips, when it comes to raw materials. We also don’t know when these geopolitical escalations would cede,” he adds.

The Covid-19 pandemic, among other things, has left an indelible mark on every industry, and the manufacturing industry isn’t an exception. The pandemic completely upended the concept of capacity planning and inventory management for the auto component industry.

“Based on the guidelines that are coming in from OEMs, everybody is talking about demand. The concern is whether we’d be able to meet the demand. These concepts have taken a dynamic shift, post Covid-19, because of the high levels of volatility,” Jain explains.

Kapur concurs. “We went from a just-in-time (JIT) model to a just-in-case (JIC). We moved away from the JIT system of production because of the unprecedented disruptions that hit us. I don’t think anyone ever imagined a pandemic; anyone ever managed for three months with zero revenue.”

Companies had to keep a large inventory of raw materials to be able to cater to the demand and ever-changing production timelines. “With several processes digitised because of recent disruptions, we now have improved visibility on inventory management, but we must hold larger inventories, create buffer stocks and enter into long-term contracts,” Jain adds.

For Lumax, digitisation has helped in transparency and traceability across factories. “We know there is a base capacity, and with all the fine-tuning, we are seeing whether we can use excess capacity or inventories within the company to become more agile,” Jain says

However, keeping leviathan inventories comes at a price, quite literally. It takes a toll on the working capital of companies. “The semiconductor issue is another big concern for the industry. Some of the trends being witnessed include unconditional/non-negotiable price increases and NCNR (non-cancellable, non-reschedulable) orders on suppliers. In addition, lead times are extremely high currently ranging from 26 weeks to over 60 weeks,” Mahanjan explains.

Spark Minda has been able to curtail costs by adopting a slew of measures — including placing long-range orders with the suppliers, asking the engineering team to propose alternatives for certain semiconductors which are in short supply, exploring alternatives for sourcing, and buying online.

According to Mahajan, the Covid-19 pandemic, and everything that emerged after it, was an awakening for enterprises of Minda’s ilk, to be resilient and show perseverance in the face of adversity. “Emerging out of the challenges the last two years presented, everybody has accepted one thing — there will always be challenges and we must learn to adapt and work around them,” he adds.

Kapur also exhorts that as an industry, auto ancillary sector needs to work together to navigate these peculiar times. “One of the things that were most effective during the first-wave of the pandemic was the automotive industry coming together. We’re all very dependent on each other. We do have the support of the OEMs. All we can do is to work inwards,” he explains.

Because of the sharp increase in commodity prices for the past three to four quarters, auto ancillaries have not been able to pass through entirely, resulting in a decline in gross margins. “The gross margins of auto ancillaries will be lower on a YoY basis in FY 2022,” reads a monthly report from ICRA.

The auto component industry is also plagued by inflation in other costs, including freight rate, which has increased multifold. The recent geopolitical tensions have resulted in an increase in fuel costs as well. Supply chain uncertainties, inflation and need for inventory stocking have led to incremental inventory requirements.

However, despite the gloom, there still may be a ray of hope. “While cost pressures are likely to continue in H1 FY2023, ICRA expects YoY improvement of 100 bps in operating margins in FY2023, because of expectation of a relatively (better) H2 FY2023,” the report adds.

Export continues to remain a sweet spot. “Exports have remained a bright spot in the Indian auto component story, partly aided by the China+1 strategy. This is despite supply chain issues.”

In fact, analysts are of the view that the growth in FY2022 exports would have been even better if not for the semiconductor shortage. Kapur concurs. “We’re seeing a great opportunity in the export market, to cater to other markets.” “We aim to continue with our trend of beating industry numbers by 10-12%,” Mahajan of Minda avers.

Nevertheless, the industry is still wary of the ongoing Russian invasion of Ukraine. “While auto ancillaries have a healthy export order book for the next few months, the impact of geopolitical and supply-chain issues on actual offtake remains a monitorable.”