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Home Articles Slipping auto sales exerts pressure on Indian suppliers and automotive enterprises

Slipping auto sales exerts pressure on Indian suppliers and automotive enterprises

Automotive component
suppliers are finding the going tough with sales of automobiles declining

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Last updated: March 20, 2024
by and Alex Morrell is a senior correspondent at Business Insider covering Wall Street at large.

 

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For four successive months,
the auto industry in India is on a decline. Sales have declined for seventh
month in a row despite automakers trying their best to keep buyers interested.
New launches and high discounts notwithstanding, sales are continuing to fall.
To be precise, the Indian auto industry produced 1,737,548 vehicles in May 2013
as against 1,811,515 in May 2012, a decline of 4.08 per cent over the same
month last year. The overall domestic sales during April-May 2013 declined by
0.64 per cent over the same period last year. The overall sales in passenger
vehicles declined by 8.56 per cent during April-May 2013 over the same period
last year. Within the passenger vehicles, passenger cars and vans dropped by
11.33 per cent and 10.88 per cent respectively, while utility vehicles grew
marginally by 4.08 per cent during April-May 2013 compared to the same period
last year. Commercial vehicles sales also slipped. Overall commercial vehicles
segment registered de-growth of 5.20 per cent in April-May 2013 as compared to
the same period last year. The going’s getting rough for the Indian auto
industry. And a multitude of factors are said to be leading up to this dismal
performance. The resultant effect is the mounting pressure on Indian auto
component suppliers, and medium and small scale automotive enterprises.

Export markets of Europe are
continuing to slide and that isn’t helping matters either. Auto suppliers and
automotive SMEs, which support tier suppliers have seen their exports climb
down on the back of shrinking demand. A report by IRCA, an associate of Moody’s
Investors Service, mentions that weak demand is of prime concern for auto
suppliers and auto SMEs over rising costs. According to an industry source, the
slowing demand is spread across the board. Pointing at the sales figures
released by Maruti Suzuki and Tata Motors for the financial year 2012-13, the
source added that the across the board weakness in demand witnessed during the
last two quarters has tended to neutralize any structural advantage enjoyed by
automotive tier suppliers and automotive SMEs. For SMEs the challenges have
been rising during the FY12-13, and the near crash in passenger vehicle sales
in March 2013. The IRCA report on Indian Auto Components Industry also
highlights the trend where starting from Q2 2012-13, auto parts exports to USA
have declined significantly, particularly related to parts meant for CV
applications due to sharp contraction in demand (partly due to inventory
correction due to build-up during H1CY2012). The report states further that
component suppliers to the domestic replacement market have also been
experiencing moderation in growth, but this segment, as expected, has been
relatively more resilient if not fully immune.

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While an industry observer
claims that average revenue growth of tier suppliers in India has been
declining on a year-to-year basis from the first quarter of 2011-12, it is
select few suppliers who have been able to perform better than the industry
average. This is attributed to their ability to innovate, aggressively market
themselves, and manage costs. Factors that have resulted in market share gains,
favourable change in model mix, and rise in content per vehicle. The other ways
of growth some tier suppliers resorted to, were through acquisitions and
amalgamations. While there has been no significant change in character of
market forces like higher interest rates, volatile currency movements and
inflation, the biggest trepidation for auto parts manufacturers currently comes
from tepid automobile demand, dreaded to remain weak even in the near term.

The news of some automakers
choosing to revise production targets on the back of rising inventories, and
falling footfalls at dealerships, decline in revenues, starting first quarter
of 2011-12 have already significantly hurt the profitability as well as margins
of automotive suppliers. For automotive SMEs, the challenges are manifold, the
need to sustain at one end, and to ensure the availability of finance on
feasible terms at the other. If the auto suppliers and SMEs have taken a bad
hit in terms of profits and margins, it is the Q2 and Q3 of FY12-13. The dismal
performance during the last month of FY12-13 hasn’t helped either. Operating
earnings growth of auto component manufacturers are already claimed to be the
weakest in Q4 2012-13 given the high base of the corresponding previous
quarter, continued anaemic demand conditions and unyielding pressures stemming
from various other cost overheads mentioned above.

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The scale of operations and
limited operational and financial flexibility, mentioned above, is adding to
the challenge for sustaining. Some respite for those automotive suppliers, it
is said, is had from the fact that the demand in aftermarket is picking up as
more and more vehicle owners are choosing to postpone the purchase of a new
vehicle. Aftermarket auto components suppliers catering to export markets are
also expected to have a good going as demand for aftermarket auto parts in
Europe and US seems to be sustaining, if not rising.  

Tier suppliers and automotive
SMEs with exposure to aftermarket (apart from OEs) are expected to fare better
in the short term at least. Even those ancillary manufacturers who are into
manufacture of aftermarket parts like batteries, tyres, etc., that are consumed
as vehicle owners prefer to spend on maintaining their vehicles than go for new
ones. Higher interest rates, depreciating rupee that is causing upward price
pressure, and rising costs are affecting plans of aftermarket suppliers as
well. Reasoning that the slowdown in auto sales is due to near saturation
levels attained in many big cities of India, automotive manufacturers have been
shifting their attention to the rural markets for some time. This has provided
some respite, but not to an extent expected.

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Industry analysts in no
certain terms are of the opinion that recovery in the near term is unlikely to
come by. An indication is had from the fact that the Reserve Bank of India, on
June 17th, 2013, kept key interest rates unchanged, warning of upward risks to
inflation posed by a falling rupee and increases in food prices. Challenges
therefore, are certain to keep mounting at least for the short term. Recovery
of European markets, which many Indian auto suppliers cater

to, is not expected to happen
in a hurry.

The Indian auto market seems
to be shrinking further. Sales of automobiles are clearly linked to broad-based
issues like higher interest rates, fuel prices and inflation. Apart from
shrinking profit margins, the challenge many Indian automotive suppliers and
enterprises are facing is to keep afloat – to retain their resources, and keep
their machines rolling. 

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