Economic slowdown

The auto component industry in Chennai on a downward spiral

Print edition : September 13, 2019

At a foundry in Coimbatore on August 19. The slowdown has hit auto component units in the city, which, together with Chennai, accounts for 35 per cent of the country’s component production capacity. Photo: M. PERIASAMY

The auto component industry in Chennai is facing an unprecedented slowdown and many major units have announced temporary lock-outs and voluntary retirement schemes.

On August 18, K. Pandiarajan, Tamil Nadu Minister for Tamil Official Language, Tamil Culture and Archaeology, posted an unusual tweet in response to a newspaper report that the automobile sector would shed about five lakh jobs in the next quarter: “Warning signal, especially for TN [Tamil Nadu] which has the highest concentration of Auto sector in India—Central govt to act fast announcing fiscal and other incentives to save the jobs!”

The tweet was unusual because Ministers in the Tamil Nadu Cabinet, or in the party that currently runs the State, the All India Anna Dravida Munnetra Kazhagam (AIADMK), have rarely said anything that is not complimentary to the Narendra Modi government at the Centre. His tweet immediately brought forth a flurry of responses from pained executives in the industry and owners of automobile ancillary firms in the State who have been feeling the pinch. One senior industry expert, K. Srinivasan, said, “SIAM [Society of Indian Automobile Manufacturers], the central auto body of India, has declared sales numbers. [In] Every segment we have lost volumes and these are the highest across segments. The job creation of direct to indirect is 1:10 in the auto segment. Serious cause of concern.”

Another person, who said he runs a component industry, SRS Auto Tech, responded: “I am running a small-scale industry. This month till date no orders no work. But my expenditure [is] same 35k [35,000] rent, 85k EMI, 35k salary. I don’t know how to tackle this situation. I am from Tamil Nadu.” An auto component manufacturer in Chennai confirmed that the slowdown was real. “I supply a small component of the axle. A company used to require about 10-12 lakh pieces of the component that I supply. Now it is down to less than half the number. My orders are down too, but I am one of the better-off people,” said the manufacturer who did not wish to be named.

Temporary lock-outs

Echoing the sentiment across the auto component industry—35 per cent of the industry’s capacity in India is located in just two cities in Tamil Nadu, Chennai and Coimbatore, according to the Tamil Nadu Industrial Development Corporation—Lucas TVS, a major auto electrical manufacturer, announced non-working days in August because of “business slowdown”. The notice, posted by the company on its notice board, went viral on social media platforms after Dravida Munnetra Kazhagam (DMK) president M.K. Stalin tweeted the photo and said that data from all sectors, including the automobile sector, indicated that the economy was in deep distress.

Another TVS Group firm, Sundaram-Clayton, which manufactures aluminium die-cast products for domestic and overseas markets, announced a two-day closure of its factory in August. Earlier, in July, Bosch Limited, a large automobile parts maker in India, announced it was shutting its Gangaikondan plant in Tamil Nadu for five days to check “unnecessary buildup of inventory”. News reports said that Bosch closed three other plants—in Naganathapura, Jaipur and Bidadi—for varying periods for the same reason.

“Because of production cuts by manufacturers, ancillary units are facing the heat,” said an automotive parts supplier. Layoffs are being resorted to every week. In the case of the battery industry, too, this is a reality today. “We sell about 60 to 65 per cent of our production to the OEM [original equipment manufacturer]. If that stops, how do we manage our factories? We have to sell this volume somewhere. Unfortunately, the export market, too, is not doing great,” said an executive who works with a leading battery brand.

In the retail trade in tyres and batteries, too, there is a problem because of the liquidity crunch. “This slowdown at the manufacturer level will not have an immediate impact on the retail trade, but we will face a problem down the line, maybe in a year or so,” said a retailer.

The auto and auto components industry’s impact on the Indian economy is significant as it contributes about 7 per cent to the country’s gross domestic product (GDP). The automotive industry is key to the domestic manufacturing sector; it contributes over 40 per cent of the sector’s turnover and impacts the fortunes of several related manufacturing industries such as iron and steel, aluminium, rubber, chemicals and moulds, according to the Confederation of Indian Industry (CII).

Tamil Nadu’s position as one of the top 10 automobile “hotspots” in the world is under serious threat because the slowdown in Coimbatore is as bad, if not worse, as that of Chennai. As many as 15,000 foundries do “job works” for the auto sector and almost all of them are in the micro and small-scale sector.

Two major problems

A representative of the Tamil Nadu Association of Cottage and Micro Enterprises said that the units faced two major problems: one, lack of job orders; and two, delays in payment from the companies they supply to. Given the current situation, job losses are an everyday affair and there does not seem to be any light at the end of the tunnel. “The situation is really bad on the ground…. It’s shocking because we are witnessing sales crashing month on month,” Vinnie Mehta, director general, Automotive Component Manufacturers Association, told a cable news TV channel. “This has not happened before. This is unprecedented.”

According to the Federation of Automobile Dealers Association (FADA), the apex body of automobile retailers across the country, as many as 65 per cent of the dealers who participated in an online survey in July rated the current sentiment of the industry as “bad”, up from 56 per cent in June. On the liquidity front, 56 per cent of the dealers rated the situation as “bad”, up from 46 per cent in June.

The problem is much more complex than it appears on the surface and multiple factors contributed to it,according to experts and industry association representatives. The slowdown in demand because of problems across sectors is the first shock for the sector. The second is the Central government’s push for electric vehicles (EVs). While auto component industry representatives do not flag this as a serious issue, it evoked strong reactions from automobile manufacturers.

“Things were already bleak when the government announced the EV push,” said an industry representative. At least two major companies in Chennai, including the marquee Ashok Leyland, have offered golden handshakes to employees.

Employee issues

Employees of Ashok Leyland, who were initially demanding a higher bonus, were outraged and demanded to know why the company wanted to send employees off when it had made record profits last year. Representatives of the company said that the slowdown was the reason. Another multinational company with a better-than-industry-standard work ethic found that only 20-odd of its 8,000 employees were willing to accept the voluntary retirement scheme. The slowdown in sales here is quite in-your-face—there is no space on the company’s premises to park the vehicles that the company is producing.

A few major automobile manufacturers have cancelled their annual get-together with their vendors and dealers. Dealerships across the country are under pressure, and over 200 have downed their shutters. One multinational had organised a get-together for its dealers and all that a company representative was willing to say was that “it was ugly”.

The CII’s director general, writing in The Asian Age on August 6, underlined the fact that the automobile industry had been struggling over the past few months and that its performance in the first quarter of the current financial year was discouraging and that demand growth in most of the segments was down. “Any further downslide in demand may lead to loss of jobs and an overall slowdown in the economy,” he added.

Asked why the component industry was facing such headwinds, Anand Srinivasan, economist and a spokesperson of the Indian National Congress, responded: “The main industry is dying and that’s why the component industry is also dying.”

It all began with the credit boom to encourage more people to buy cars. The credit standards were made the same as for buying motorbikes. Even luxury vehicles were sold with buy-back offers and long-term loans. “All these were funded mainly by non-banking financial companies (NBFCs) and just three major banks. The NBFCs were borrowing in the commercial paper market (where payback time is very short) and lending for long periods of time. This was going well for a long time because [Prime Minister] Manmohan Singh was running the engine properly,” said Srinivasan.

“Once the economy started stuttering, mutual funds stopped investing in these NBFCs. The second reason is that for about six years, there has been no increase in the minimum support price (MSP) for agricultural produce. This and demonetisation have seriously affected the rural economy. Rural consumption was finished off as a result. The situation will not improve unless the NBFCs and rural demand issues are fixed,” he said.

“This is not the first time that you see a downturn in the auto industry. This will not be the last time…. It will happen again in the future,” said R. Ganapathi, president, Southern India Chamber of Commerce and Industry. “But this time the situation appears to be different. There are far too many moving parts in orbit. Previously, we knew that the downturn was because of less cash in the system. The cause might have been a drought or a global headwind or whatever. This time, there is a global headwind emerging, possibly the threat of a looming recession. But I think it is reasonable to presume that the MSME [micro, small and medium enterprises] sector is still in a recovery mode and the agrarian crisis has put less money in the rural sector, affecting consumption.”

Multiple changes

Ganapathi flags “multiple changes” in the sector as another reason. “The compliance requirement of the Bharat Stage VI norms and the introduction of EVs have perhaps created some mindset challenges. The industry is trying hard to come to terms with the velocity of change around it,” he said. “At one level, I am excited about India moving into EVs and, hopefully, emerging as the go-to country for EVs, much like Japan was in the 1980s for auto and consumer electronics. But the concern, of course, is that the technology is still emerging and is yet to stabilise. The second thing is that, straight away, you lose out on the component side. In a traditional car, you will probably have 7,000-plus components, but the minute you make an EV, it comes to below 1,000. The impact on MSMEs need not be overstated,” he said.

There are two other unrelated but important components in the matrix that exacerbate the shock to the economy. One, a public sector bank chairman telling the national executive committee of a chamber of commerce in Mumbai in August that he had Rs. 1 lakh crore to lend but had no applications. Two, the total payment receivable to corporates and companies from the Central and State governments in India is Rs.10 lakh crore, across sectors and companies. “Why are you talking about a Rs.1 lakh crore stimulus? The industry across the board does not need a stimulus. Let every state-owned entity, starting from the National Thermal Power Corporation (NTPC) to State governments sit together and decide to release at least 50 per cent of what they owe vendors. That will be Rs. 5 lakh crore. Why blame industry? Please release what you owe to industry,” said a corporate honcho.

Why is the industry not excited about taking the loan from the public sector bank? “It means that people are not enthused about increasing capacity. Normally, you increase capacity when your consumption level goes to about 80 to 85 per cent and you anticipate demand and create additional capacity. Today, nobody believes that there is going to be a demand in the foreseeable future. Whether this is a mindset block or a reality, I don’t know,” said a seasoned industrialist.

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