Clipped from: https://economictimes.indiatimes.com/
With losses of Rs 1,000 crore a day during lockdown, the auto component sector is hammered by the pandemic
The auto industry pinned their hopes on 2020 for a revival after 2019 proved to be a forgettable one as sales plummeted to decades low. Little did they know that a pandemic waited in the wings.
India’s auto competent sector has an annual turnover of about $57 million and employs more than 50 lakh people. A sector that provides employments to scores has been in a spot of a bother since early 2019 when a sluggish economy hit sales of motor vehicles. Then came COVID-19 and the economic fallout has scorched the sector. To know more about the future of this sector, ET Digital spoke to Vinnie Mehta, Director General, Automotive Component Manufacturers Association of India (ACMA).
ET Digital (ET): Car sales dipped to two decades low in 2019, private vehicle sales were down to 13% and below the psychological three million mark. What was going wrong then?
Vinnie Mehta (VM): The industry is facing a downturn for almost 15 months now. Many things happened in the period gone by. The industry had to transition from BS IV to BS VI, a huge investment went in there. We had to be compliant with a lot of safety norms. The commercial vehicle front suffered because the government came out with a notification that allowed the axle carrying capacity to be increased by 25% so that sucked away 25% demand from that industry. There was an increase in the insurance costs, which impacted the two-wheeler and car industry.
Early last year, the monsoon was a little erratic, that smoothened out only to be followed by floods. That wrecked havoc in the rural economy, where a lot of two-wheelers and entry level cars sell.
There wasn’t one specific reason for collapse. The overall vehicle sales in 2019-20 came down by 18% compared to what they were in 2018-19. The component industry also had a tough time. In the component sector, 60% of our sales goes to the domestic OEMs, about 25% to export and another 15% to the domestic aftermarket. This had an adverse effect on the domestic component industry. Our estimate is that we might have lost around 13 to 15% for the year ending March 2020. This is not the best time for our industry.
ET: What is the current status of the auto component industry?
VM: We were hoping that post-March things will start looking up. If we were to go by the response in the Auto Expo it didn’t look that something was amiss and we were in a downturn. Everything looked growth oriented and vibrant. But, unfortunately, we had COVID waiting in the wings and by March the industry started to suffer because even though the pandemic did not break out in India in March, the supply chain was affected as some of us are dependent on Chinese imports. But with the pandemic and the lockdown, the sector suffered immensely. It is estimated that the vehicle industry was losing around Rs 2,300 crore a day and the component sector was losing Rs 1,000 crore a day. It has been well documented that the working capital dried up in the industry. The month of April was unprecedented – never in the history of auto industry did we record zero sales.
Half of May went into preparing to resume operations because India was divided in green, orange and red zones and there was a lack of the governance around this time too. Even though production began, capacity utilization was rather low. The capacity utilization stayed between 8-10% because there weren’t enough inventories in the system at that point. The vehicle sales were not picking up, dealer sales were not opening.
The month of June is looking relatively better; especially because of the abundant Rabi crop the rural markets have been vibrant. COVID is yet to impact the rural markets because of the lockdown that happened, so, the sale of tractors has been pretty good. We hope the two-wheeler sale will be good this month in the rural areas. The government has supported them well with MSP. So, there is something to cheer. We just hope that the coronavirus doesn’t spread in the rural areas like it spread in the metro cities.
For the other segments of the vehicle, things seem to be looking up, especially for the car manufacturers. The commercial vehicle industry is still in a spot and will take some more time to come up. Once the festive season comes, in the months of October and November we expect our capacities to go up by 70 to 80% of what was in the last year. In May it was around 10%. In June, I expect it to go up to 25%.
ET: Urban centres remain a spot of bother that is where the industry needs to get better, how do you see that panning out?
VM: The bigger towns and cities will be a challenge. From an economic perspective, they are more prosperous for car sales to happen. But also what we have observed in China is that adherence to social distancing helped the car and two-wheeler sales to go up. We hope the same happens in India as well.
ET: On one hand, we’re looking at salary and earnings of people coming down, but now people also feel the need to have a personal vehicle instead of taking the public transport and sharing a ride. Will that feeling propel the industry?
VM: For a country like India, where the public transport is not at its optimum, but there is a need for an individual to move, how does one do that? So, one needs to invest in a personal vehicle. There might be an increase in demand for entry level vehicles and two-wheelers.
ET: Starting May 13, the Finance Minister, Nirmala Sitharaman announced a slew of measures for various sectors. Do these measures have anything for the component sector?
VM: The auto component industry is very heavily dominated by small and medium enterprises. The government came very strongly to address the problem of liquidity. That is appreciated. The RBI also made some announcements and the government too came up with collateral free loans. The enhancing of the definition of small and medium industries is also highly appreciated as this will encompass 65% of the ACMA membership who are only in the organized sector and we did not represent the micro enterprises. 65% benefiting due to the change in the definitions is remarkable. Having the back-end ready, I hope the government focuses on demand creation, without which things won’t move.
ET: What would your wishlist be for your sector?
VM: Everything depends on creating a demand as the supply side issue is taken care of. The vehicle prices have gone up significantly because of the compliance when we transition from BS IV to BS VI. Also, due to the safety regulations the prices of vehicles have gone up by 10-15%. We also want the GST rate to be slashed from 28% to 18%. If you add the cess, then the rates can go as high as 50%. So, our plea has been to the government if they can consider it as a short-term measure to give a boost to the industry.
From a component industry perspective, our request has been that to keep a uniform rate of 18% on all the auto components. Today, about 60% of the auto components are at 28% and the rest are at 18%.
In the first package that the FM mentioned that there would be an incentive for the scrappage scheme. I think it’s time we implemented this because the scheme will address the problem of pollution and create a demand. Also specifically from a commercial vehicle industry perspective, the Government needs to do a lot of investments in highways and housing etc. That creates a lot of opportunity for the commercial vehicle industry.
Lastly, the government has been in the past, very aggressive on the regulatory front. Our estimate is that in the past year, almost 40 new regulations have come up. We are not saying that they shouldn’t be there, but if there could be a definite roadmap and these things are introduced in a phased manner, then we will be able to recover the investments we have done so far. Every new regulation enhances the cost of the vehicle so the idea is to stagger it so that the consumers also don’t bear the brunt of it.
ET: One problem the industry is facing is the shortage of labour. What’s the condition of the component sector?
VM: What happened was unfortunate. Till the time the capacity utilization is low, one doesn’t feel the pinch. In the auto component sector the migrant labour is around 70% and permanent workers are around 30%. This has become skewed in the last four years or so. Earlier the split was 50-50. Of late the proportion of temporary workers has gone up steeply. This becomes more pronounced when you go down the tiers of the industry. The challenge of the migrant workers is much pronounced in the smaller companies, where at times almost 95% of the work force is temporary. As the capacity utilization increases, the industry will suffer.
ET: Do you think there would be an uptick in demand this festive season and where do you see the future now?
VM: COVID-19 was an aberration. The vehicle population stands at 28 per thousand people so you still have a huge headroom there. Mobility, especially public transportation is still very challenging in the country and it is aspirational to have a vehicle. To be very honest, the broader economic fundamentals of the nation remain intact so hope that things will come back to normal once the COVID period gets over. So there’s no reason for us to believe that we will not be back on track.