Supply chain uncertainty saddles auto component firms with inventory

Impact on passenger car makers due to chip crisis and raw material shortage, and on two-wheeler, tractor and CV makers due to demand swings has trickle-down effect on autoparts makers

Amid supply chain disruption and skyrocketing commodity prices that have been worsened by the Russian invasion of Ukraine, automotive (auto) component makers are staring at a dilemma they haven’t faced in some years. Most have seen the inventory of raw materials and finished goods increase.

Here is why: passenger vehicle makers are no longer able to adhere to the production schedules, owing to the shortage of critical parts like semiconductors and raw materials.

On the other hand, two-wheeler, tractor, and commercial vehicle makers haven’t been able to give accurate projections on production volumes, owing to the frequent swings in demand.

Consequently, suppliers are left guesstimating the quantum they need to produce and are tied down with inventory of raw material and finished goods.  

“The production schedules are dynamic — they are changing every week,” said Jayant Davar, co-chairman and managing director, Sandhar Technologies.

Most auto companies follow the just-in-time model of supplies. However, the current situation warrants suppliers to keep stock due to price volatility and supply crunch. This, in turn, has taken the efficacy off the just-in-time model and been singing the margins of auto component firms, said suppliers.

The inventory of finished goods and raw materials at Sandhar has gone up nearly 20 per cent in value terms, compared to last year, said Davar. He attributes the frequent changes to automakers’ production schedules to shortages of parts, including chips, and delayed arrival of ships due to container deficiency.

“This is most pronounced for parts or materials that are imported. You have to keep the inventory ready, but frequent changes to schedules from original equipment manufacturers (OEMs) – twice or thrice in a month - make it tough,” he said.

Deepak Jain, chairman and managing director at Lumax Industries, echoed a similar sentiment. “We are facing longer lead times on import ordering and, of course, the downward revisions on monthly schedules of OEMs, largely due to chip shortages, put further strain on the working capital and inventory management.”  Automakers are struggling, too.

"Last year, we saw supply-side constraints due to semiconductor shortages which, coupled with good demand bounce-back, led to increased pending bookings," said Shashank Srivastava, senior executive director at Maruti Suzuki India.

“While the situation has been improving in the past few months, it is still not fully regularised. The volatility in this visibility has led to frequent changes to the production schedule as OEMs seek to optimise outputs,” he said.

Sunjay Kapur, president, Automotive Component Manufacturers Association, said the industry has been facing headwinds in the form of logistics and availability of chips like every other country. For this reason, one cannot follow the just-in-time model.

“So far, I haven’t seen any major impact on production because of chips or neon gas,” he said, adding that a strong demand across segments, barring two-wheelers, has helped the industry.

Shortage of chips and palladium — a critical precious metal used in the heat treatment of catalytic converters - and other raw materials may force automakers to cut production by a minimum 10 per cent next month, said an executive at another component maker.

Most auto companies follow the just-in-time model of supplies. The current situation has made them less efficient in terms of overall operations.

India Ratings and Research has revised its outlook for the auto ancillary sector to 'Neutral' for 2022-23 (FY23), from 'Improving'. It expects the sector revenue to grow 10-15 per cent year-on-year (YoY) in FY23 - lower than its estimated growth of 20-25 per cent YoY in 2021-22.Amid a supply chain disruption and skyrocketing commodity prices that have been worsened by the Russian invasion of Ukraine, auto component makers are faced with a dilemma they haven’t faced in some years. Most have seen inventory of raw materials and finished goods increase.

Here is why: passenger vehicle makers are no longer able to adhere to the production schedules owing to the shortage of critical parts like semiconductors and raw materials. On the other hand, two-wheeler, tractor and commercial vehicle makers haven’t been able to give accurate projections on production volumes owing to the frequent swings in demand.

Consequently, suppliers are left guesstimating the quantum they need to produce and tied down with inventory of raw material and finished goods.  “The production schedules are changing every week. Predictability is very erratic.” said Jayant Davar, co-chairman and managing director at Sandhar Technologies.

Most auto companies follow the just-in-time model of supplies. However, the current situation requires suppliers to keep stock due to the price volatility and  sort supplies. This in turn has taken the efficacy away of the just-in-time model and has been singing margins of auto component firms, said suppliers.

The inventory of finished goods and raw materials at Sandhar has gone up by almost 20 per cent in value terms as compared to last year, said Davar. He  attributes the frequent changes to automaker’s production schedules to shortages of various parts including chips and delayed arrival of ships due to container shortage.

“This is most severe for parts or materials that are imported. You have to keep the inventory ready but frequent changes to schedules from the OEMs – twice or thrice in a month, makes it tough,” he said.

Deepak Jain, chairman and managing director at Lumax Industries echoed similar sentiments. “We are facing longer lead times on import ordering and of course, the downward revisions on monthly schedules of the OEMs largely due to chip shortages, puts further strain on working capital and inventory management.”  

Automobile makers are struggling too. "Last year we saw supply side constraints due to semiconductor shortages which coupled with good demand bounce back led to increased pending bookings," said Shashank Srivastava, senior executive director at Maruti Suzuki India.

“While situation has been improving in the past few months but it is still not fully normalized. And the volatility in this visibility has led to frequent changes in production schedule as OEMs seek to optimise outputs,” he said.

Sunjay Kapur, president Auto component Manufacturers Association (Acma) said the industry has been facing headwinds in the form of semiconductor shortage, logistics, and availability of semiconductors like every other country. Hence one cannot follow the just-in-time model.

“So far, I haven’t seen any major impact on production because of chips or neon gas,” he said, adding that a strong demand across the segments, barring two wheelers, has helped the industry.

Shortage of chips and palladium—a critical precious metal used in the heat treatment of catalytic converters and a few other raw materials, may force automakers to cut production by a minimum of 10 per cent next month, said an official at another component maker. To be sure, most auto companies follow the just-in-time model of supplies. The current situation has made them less efficient in terms of the overall operations.

India Ratings and Research (Ind-Ra) has revised its outlook for the auto ancillary sector to neutral for FY23 from improving. It expects the sector revenue to grow 10-15 per cent y-oy- in FY23, lower than its estimated growth of 20-25 per cent YoY in FY22.