Indian Auto Sector’s Nascent Rebound Is Again At Risk

Indian auto sector's nascent recovery on easing chip constraints has now run into a fresh hurdle.

Russia's invasion of Ukraine and the resurgence of Covid-19 in China could disrupt supplies again, derailing the momentum when the sector had started witnessing signs of a sustainable rebound from the pandemic. That has prompted companies to stock up inventory.

The industry has been moving from “just in time” sourcing to inventory buildup, Sunjay Kapur, chairman of Sona Comstar and president of Automotive Component Manufacturers Association, said over the phone. “…we don't know when there will be next disruption. Nobody expected China to go into lockdown, and if you have supplies coming from China, then it will be impacted.”

The latest disruption increases risk of a fourth straight year of contraction in sales for the nation's automakers. The first two waves of the pandemic, which triggered a semiconductor shortage, caused volumes to shrink in FY20, FY21 and FY22.

“In the current situation, it is very difficult to predict the future,” Kenichi Ayukawa, president at the Society of Indian Automobile Manufacturers, told reporters last week. “There is uncertainty due to Russia-Ukraine crisis, besides Covid-19 cases are again rising in India and globally.”

China is a key sourcing hub for many commodities and components for the Indian automobile industry, Vinnie Mehta, director general, Automotive Component Manufacturers Association, said over the phone. If the lockdown persists in China, it could add to supply-chain woes, he said.

"Already, the industry is grappling with commodity prices that have gone off the roof because of the geopolitical crisis to the semiconductor shortage,” Mehta said. “The China lockdown will add another element of uncertainty and cost."

SIAM said that commodity prices are putting pressure on the industry. Aluminum is up 136.7% and nickel has surged 219.6%, while precious metals such as rhodium was up 124.9% in March compared with April 2020.

The ongoing Russia-Ukraine crisis could drive prices of steel and aluminum even higher, according to ICRA Ltd. And, further surge in crude prices will have a bearing on costs for auto ancillaries, it said in a note.

“Freight rates have increased by 4-5 times in the last one year, and is likely to remain at elevated levels in the near term." Supply chain uncertainties and inflation have prompted inventory stocking, it said.

Market leader Maruti Suzuki India Ltd. has reduced its schedule from 1.6 lakh to 1.4 lakh units, one industry executive privy to the development told BloombergQuint, choosing to remain anonymous as details are not public. He is yet to see a revision in schedule by other automakers. Automakers would have started feeling the supply impact again, he said, citing reliance on China.

According to Gaurav Vangaal, associate director at S&P Global Mobility, the industry will not be able to sustain if both chip crunch and China lockdowns carry on like this. “We could be entering a quarter of poor production because of supply constraints.”