Coronavirus impact: Supply chain disruption to cost auto industry Rs 6,080 crore

The disruption in supply chain in India's automobile sector due to the coronavirus pandemic is likely to cost the industry Rs 6,080 crore ($800 million) over the last quarter of this financial year (2019-20) and first quarter of next fiscal (2020-21), research firm Care Ratings said on Monday. It also warned of huge job losses going forward, as 50 per cent of the workforce employed by the industry is contractual by nature.

India has a sizeable $57 billion automotive component industry but it still imports parts worth about $17.6 billion every year. Over a quarter of them at about $4.6 billion come from across the border in China. In the first six months of 2019-20 also, imports from China were worth $2 billion.

"China is currently operating at below average capacities and given the conditions, is expected to fully recover only by Q2 FY21, provided the spread of Covid-19 is curtailed. Therefore, the Indian component industry is expected to witness supply chain disruptions in the domestic market during Q4 FY20 and Q1 FY21 to the tune of around USD 8,000 million (assuming 40 per cent of FY19) while local sourcing is expected to increase going forward," Care Ratings said.

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The pandemic will put added pressure on an industry which is already battling an unprecedented slowdown in the domestic market, the firm said. In the first nine months of this fiscal, net sales of the automobile OEMs witnessed a 14 per cent year on year decline, while auto ancillary players (including tyres) witnessed a decline of 11.7 per cent. Profitability of the industry as a whole declined by 27 per cent (9M 2019-20) while overall volumes declined 13 per cent between April 2019 and February 2020.

"With the already existing slowdown during FY20, the industry is likely to suffer huge losses going forward. Also, the employment of the industry is at risk as the contractual workers accounts for about 50 per cent of the workforce in the industry," it said. "It is also to be noted here, that even if the pandemic is curtailed, the consumer sentiments are expected to be unfavourable and demand is expected to remain muted during H1 FY21 led by fluctuating and uncertain economic conditions."

The likelihood of the industry diversifying its imports to other countries besides China or even indigenise it also remains low due to the high investment requirement and long gestation period.

"India's maximum dependence on imports especially for the two wheeler and passenger vehicle industry component wise is in steering and braking systems, engine parts, alloy wheels and lighting systems. Also, most of the OEMs are dependent on Chinese supply chains for the BS IV as well as BS VI components such as fuel injection pumps. In the current scenario with the overall slowdown in the Indian economy shifting to other alternate countries (such as Germany, Japan, Korea) for supply may not be feasible in terms of both cost and time," it said. "Also, the gestation period and the huge investment requirement for the auto component industry remain restricting factors for such immediate shift. In case of sub segment tyres the local industry is expected to benefit as cheap Chinese imports(about 25-30 percent of total tyre imports) are expected to drop," it said.  

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