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| Auto component makers go slow on new investments |
| Ranju Sarkar / New Delhi Jan 15, 2010, 00:56 IST |
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 Despite the surge in automobile sales in recent months and new vehicle development programmes of car makers, auto component makers are wary of committing further investments in building new capacities. They have adopted a wait-and-watch attitude to see if the demand sustains. “Component makers are investing with caution and moving in a phased manner. They are not adding capacity in big strides, like a few years ago, but only incrementally,” said Ashok Taneja, president, Shriram Pistons.
Industry players are faced with one big question: Is the pullback in demand for vehicles, which has been aided by several factors, sustainable or not? Sales of passenger cars and two-wheelers have been growing at 15-18 per cent and commercial vehicles at a slower pace.
The recovery has been aided by excise duty cuts, lower interest rates, pay commission revisions and the scrappage scheme in Europe. In addition, public sectors banks were nudged into lending and raw material prices were modest. Many of these factors could change. Component makers fear the government may raise excise duties or that interest rates may go up. Also, pay panel arrears have been mostly paid except in a few states. Then liquidity may dry up. Already, raw material prices are on the rise. The scrappage scheme in Europe is due to end too. According to Taneja, a combination of these factors is what concerns industry players. He added people are asking themselves: “How much should I invest?”
Jayant Davar, president, Auto Component Manufacturers’ Association of India (Acma), said part makers are being once bitten, twice shy, as they had to pull back their investments when they were hit by the downturn. “Two-three months of recovery is not sufficient to invest more, as people are wary of how well the new launches would do. Rightly so, as margins and return ratios have been dropping sharply,” said Davar.
According to a study by credit-rating agency Icra, the industry’s net sales grew at a rate of 16.8 per cent to Rs 11,932.5 crore between 2004 and 2009. Overall profits (profit before tax, excluding other income) shrank 14.7 per cent. Net profit margins have fallen from around 6.3 per cent in 2004 to 1.8 per cent in the year ended March, 2009.
Many small and medium enterprises (SMEs), which were hit hard by the downturn, are wary of committing fresh investments and are seeking a reassurance from buyers.
“They are asking for risk-sharing (asking customers if they can chip in, say, Rs 35-50 lakh to buy a new machine). They are investing in phases, and not in big leaps. Earlier, the attitude was, let me expand; the business will come,” said an auto expert.
Banks have adopted a similar view and boards are asking companies if they have a plan B. But there are auto part makers who are expanding, Killol Kimani, MD, Samarth Engineering, a Jamshedpur-based SME that supplies sheet metal parts to Tata Motors, said: “We have come out of recession and see some robustness. People are taking calculated risks and expanding as nobody can guarantee (an offtake).”
Acma’s Davar feels people are shying away from new investments as the cost of funds is high and companies are borrowing at 13-14 per cent rates, against 6-7 per cent two years back. Davar’s Sandhar Technologies, with plants in seven countries, had to downsize the workforce by 50 per cent to fight recession. Though growth is back in markets like Spain, which is growing by 27 per cent, he’s not sure of making new investments.
Many companies, like Clutch Auto, have resolved this dilemma by shifting their focus to the after-sales market.
Clutch Auto has developed 77 new products for the after-sales market, which it hopes will contribute half its sales in a few years, from 25 per cent today.
“With the after-sales market, we can get the right price and a placement of our choice,” said Vijay Mehta, MD, Clutch Auto. It has also been sourcing heavily from China to reduce input costs.
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