Auto parts makers in inventory trap

Auto parts makers are saddled with raw material stocks bought at higher prices and finished goods made with costlier inputs, a key reason why they or the auto makers are unable to take benefit of the falling commodity prices and reduce prices.

“There’s a stock build-up at old prices. People have bought material at old prices, plus there’s material in the pipeline,’’ said GS Chopra, president, Delphi-TVS, a manufacturer of fuel injection systems.

Typically, there’s a lead time of 4-5 months between sourcing raw material and selling the parts to auto makers. “The pain is severe as we need to place the orders 90-120 days in advance. Once you give the order, it’s difficult to change the supply schedule,’’ said Ashok Taneja, president, Shriram Pistons.

Some suppliers are coming forward to change the supply schedules, say parts makers. When commodity prices were rising in early 2008, many companies tried to secure their supplies and rates by entering into longer-term contracts. Some of these contracts run up to March, say parts makers.

“The depreciation of the rupee has negated the drop in commodity prices while the import duty on steel will be detrimental," Srivats Ram, CEO, Wheels India, told this reporter two weeks back. Besides, auto-parts makers say that prices of alloy steel has not dropped, unlike other grades of steel.

In fact, the landed cost of alloy steel has gone up by 13 per cent due to a higher exchange rate, said Vishnu Mathur, executive director, Auto Component Manufacturers Association (ACMA).

A Maruti official said last week that it will benefit from falling prices of aluminium and copper, but it’s unlikely to pass on the benefit as it will offset the 25-30 per cent increase in input prices the company has absorbed since April 2008.

Finished goods inventories have increased by 15 days over the 30-45-days inventory that part-markers carry across different models, types of components and warehouses. The original equipment makers (OEMs) expect just-in-time supplies. So parts makers need to have production units or warehouses close to OEMs.

The rising raw material and finished goods inventories, coupled with delays in payments from commercial vehicle-makers, have created a major crisis in the industry. “Suppliers to CV makers are stuck with a lot of inventories as they have cut production by 20-25 per cent,’’ said Ram of Wheel India.