Component shortage puts the brakes on auto firms

Bajaj Auto has seen motorcycle production more than double since the lows of December 2008 on the back of surging sales. That’s the good news.

The bad news is that the company has reported an output constraint at its plants because some component vendors were unable to keep pace with the faster production cycle.

The reason is simple: the surge in demand even after the festive season has caught many auto-component suppliers by surprise and they have had little time to expand capacity to match it.

“We are stretching our capacities to the limits but are still unable to satisfy demand. The momentum in sales growth, which picked up in September-October, has gone much beyond our estimates,” says Aditya Bhartia, managing director, Advik Group, whose group company Advik Hi-Tech supplies Bajaj Auto.

Mahindra & Mahindra (M&M) is facing the same problem. Pawan Goenka, president (automotive sector), says the company lost 5 per cent of its production in December because suppliers were unable to match demand. “We don’t expect the problem to be solved before April,” he adds.

Maruti Suzuki, the country’s biggest passenger car producer, recorded its highest monthly sales in December of more than 100,000 units compared to average monthly sales of 65,000 to 70,000 units. Maruti now says production has been impacted by a shortage of components.

It’s the same story everywhere. Auto component makers are grappling with the surge in demand from companies with all vehicle makers reporting higher sales. Passenger vehicle sales jumped 48.5 per cent during the October-December, 2009 period, two-wheelers 35 per cent and commercial vehicles 98 per cent.

With the sales surge showing no signs of abating in January, auto component makers are beginning to take steps to solve the supply mismatch. Motherson Sumi System (MSSL), Delhi-based supplier of wiring harnesses and the flagship company of the Rs 4,000 crore Samvardhana Motherson Group, has already started expanding capacity.

Says Pankaj Mittal, chief operating officer, MSSL, “As and when our capacity reached 80 per cent we decided to open a new facility. We invest Rs 300 crore to Rs 350 crore every year as capital expenditure and that will continue.”

Large-sized companies like Motherson and Bharat Forge have taken the lead, but their smaller counterparts are not far behind. Advik, for example, is now gearing up to invest Rs 50 crore in raising capacity 50 per cent, the investment being more than half its targeted turnover for the current year.

Pune-based Precision Camshaft, a camshaft manufacturer that supplies to Tata Motors and M&M, is pumping Rs 55 crore in a capacity ramp-up. Yatin Shah, managing director, Precision Camshaft, says, “We had created adequate stock for the festive period, but demand kept going up, so we are raising capacity 40 per cent.”

This flurry of expansion and investment is in sharp contrast to the situation before October 2009 when most component makers suffered badly because of the demand slump and irregular payment schedules by vehicle manufacturers. Result: most of them were forced to close factories. Now, with banks taking a more benign view on lending and order-books bulging, they're stepping on the gas again.

That they have the space to do so is evident from the strong show that the auto ancillary industry put up in the third quarter ended December 2009. Sales jumped 32 per cent and net profit surged more than 10 times over the same quarter of the previous year. Although this performance can be attributed to the "low base effect" — meaning sales and profits grew slowly in the previous quarter — margins improved significantly to 9.46 per cent against 3.34 per cent in the same period.

However, quarterly data suggest that auto ancillaries may not maintain profits in the fourth quarter owing to rising input costs — from 58.7 per cent of net sales in the quarter ended September 2009 to 64.17 per cent in the quarter ended December 2009.