Auto component makers see growth halving this year

Decline in vehicle demand the main culprit; firms look to exports to save the day.

The auto component industry expects growth to halve in the current financial year owing to a slowdown in demand for automobiles due to high interest rates and burgeoning fuel prices.

“The industry will grow at 6-8 per cent as compared with a forecast of 12-13 per cent,” said Sanjay Labroo, president, Auto Component Manufacturers Association.

The Reserve Bank of India has raised its repurchase rate, or repo rate, to nine per cent from 8.5 per cent, the third increase in two months, on July 29. The benchmark rate is now at a seven-year high. It also raised the cash reserve ratio to nine per cent form 8.75 per cent in order to tame inflation.

The move forced State Bank of India and ICICI Bank, two of the country’s biggest lenders, and other banks to raise lending rates. Besides, rising input costs also affected auto component manufacturers.

In fact, commercial vehicle makers like Tata Motors have already indicated a 20 per cent production cut in their schedules. So, it won’t be surprising if car makers follow suit as sales take a beating and inventories pile-up with dealers.

This could be a difficult year for auto as analysts expect car and commercial vehicle sales to remain muted this year. Sales of tractors, too, could lose momentum.

Manufacturers, which have already seen their margins shrink by 300-400 points last quarter, are already struggling as they have been absorbing a part of the rising input costs.

The part-makers had to partially absorb the increase in prices of key inputs, though it varied across components. For instance, if the price of an input went up by 100, they got compensated for 80 and had to absorb the rest.

“It’s a challenge. We have to absorb the cost increases when volumes are not growing. Unless the market grows, it will be difficult for us to recover our investments,’’ said Srivats Ram, joint managing director, Wheels India.

To cope with the slowdown, part makers like Setco Automotive are trying to push exports and renew their focus on the after-sales market. “The replacement market is 7-8 times bigger than the original equipment manufacturer (OEM) market,” said Setco CMD Harish Sheth. That could be a viable strategy.

In commercial vehicles, where transporters are deferring their decision to buy new vehicles, there’s an incremental demand for spares in the the after sales segment.

Pushing exports overnight may be difficult unless they have initiated the process months back; getting qualified as a supplier to an OEM can take a year or two. But part-makers, who made acquisitions abroad in last few years, are trying to push exports through overseas entities who are already suppliers to OEMs.

It’s not an entirely bleak scenario. “In a slowdown, the OEMs accelerate the outsourcing. International purchasing offices of global OEMs are very active. Last year, we exported parts worth $3.8 billion,” said Labroo, who’s also the managing director & chief executive officer of sheet-glass manufacturer Asahi India Glass.

With commodity prices cooling down, the industry hopes that the inflationary pressures will abate and their ride will be less bumpy.