China power shortage may aggravate supply-chain challenges for India Inc

According to report, manufacturing units in China have been asked to either shut operations or to operate only on limited days. (PC: AP)

India Inc’s supply-chain woes don’t seem to be ending. Automotive, appliance, consumer durables and FMCG companies have been grappling with shortages of key components and raw material for more than a year after disruptions caused by the onset of Covid-19 and the blocking of the Suez Canal.

Now, a power shortage in China, the world’s manufacturing hub, is hurting supplies of key parts and sub-assembly units for auto, consumer durables and appliance makers in India, while even pharmaceutical, solar panel and pesticide makers could face a supply crunch, experts said.

“We are yet to see any major impact in India but we need to remain watchful of the situation in pharmaceuticals and pesticide industry as several intermediary products used for production are imported from China,” said Hetal Gandhi, director at Crisil Research.

China has been facing an acute power shortage since summer and several of its provinces have witnessed sudden blackouts of late. A rise in demand, weather conditions and measures to cut the use of fossil fuels have contributed to the power shortage in China.

According to reports, manufacturing units have been asked to close or operate only on limited days. The development will have implications on the world economy and on India given its heavy import dependency from the country.

Appliance makers

Although appliance and consumer durables companies said they are yet to feel the impact of the development in the neighbouring country, they anticipate facing issues in the supply of semiconductors, motors, aluminium controllers and electronic circuits in a few months.

“We have sourced products for about 90 days and while the production in October and November will not be impacted, we are anticipating a crunch from December onwards, which would impact the production of ACs ahead of the summer season,” Vikas Gupta, managing director – operations, at PG Electroplast, told Moneycontrol. The company is a contract manufacturer for consumer durables and electronic companies in India.

According to Gupta, the company’s vendors in China are operating two-three days a week, which has impacted production severely.

“They are not even allowed to operate on diesel generator sets,” he added.

While companies are trying to find alternative vendors in Thailand and Vietnam, this would take time.

About 80-85 percent of the parts used to manufacture televisions are sourced from China, while for air-conditioners about 65-70 percent of the components are China-made, as per industry estimates. About 40-45 percent of units used to make a washing machine are imported from China.

A halt in the production of these components will severely hit the manufacture of consumer products in India. This will be in addition to the semiconductor shortage.

Companies have indicated that despite the government’s production-linked incentive scheme to encourage domestic manufacturing and phase out imports, it would take at least a year for such units to attain scale in India.

Short of semiconductors

Auto companies, too, will face a supply crunch of sub-assembly units, which are imported from China. Vikram Mohan, MD of Pricol, an automotive components and precision-engineered products manufacturer, said the power crisis in China will affect India’s vehicle and auto component makers that are heavily dependent on China for various inputs.

Experts said the power crunch will aggravate the shortage of semiconductors in India, a constant headache for auto companies for more than a year now.
The semiconductor shortage has created supply issues ahead of the festive season. Vehicles with dealers and at warehouses of car companies are lower than expected. However, some auto companies are still managing production levels. Volkswagen, Skoda, MG Motor and Tata Motors are ramping up production this month and next.

“Retail numbers for the last four months have been higher than wholesale numbers, leading to a reduction in network stock. We have 24-25 days of stock, which should otherwise be 45 days of stock,” said Tarun Garg, director (sales, marketing and service) at Hyundai Motor India.

Maruti Suzuki, the country’s biggest car seller, has forecast a 40 percent cut in production to 100,000-110,000 units in October from 165,000-170,000 units.

Other companies have learned to deal with the new normal. They include Tata Motors, which will launch the Punch compact SUV on October 20.

“The semiconductor shortage is hitting everybody and it seems that this will remain with us for some time. But the fact that we have unveiled the Punch, we are fairly comfortable in ramping up production,” said Vivek Srivatsa, head – marketing, passenger cars, at Tata Motors.

Garg of Hyundai Motor India said, “Because we have launched so many products in the last two years, there is demand for all our products and this gives us the flexibility in shuffling production and giving priority to those models and variants that have good demand.”

A booster for textiles, steel?

Not all sectors will be adversely affected by the power shortage in China. Economists and industry stakeholders said a production halt in China could help India emerge as the new textile hub.

“The textile industries in Jiangsu, Zhejiang and Guangdong are affected due to power shortage, which are major hubs for the product. Another textile hub Xinjiang is affected due to labour issues and this has impacted the textile exports from the country,” said OP Gulia, CEO (India), SVP Global Ventures, a cotton yarn manufacturer.

China, according to experts, contributed about 39 percent to the world’s textile exports, with the US and Europe as its major markets before the pandemic. However, its share has now narrowed to 31 percent and analysts indicate it could drop below 30 percent due to stalled production.

“Demand for textiles has picked up drastically as we emerge from the second wave, and given the supply crunch in China, India can benefit,” said Gulia. “We are expecting a 28-30 percent increase in textile export revenue due to the development in China.”

Gandhi of Crisil said sectors including steel and textiles will benefit from the power shortage in China.