Coronavirus impact | Shutdown may wipe out smaller auto-parts companies

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While the Centre’s call for a nationwide lockdown is punching a hole of Rs 1,200 crore per day in the coffers of the auto component industry, smaller establishments are staring at a wipeout situation with every passing day.

Suppliers of raw materials such as plastic or metal from Tier 3 companies are worst hit due to the shutdown. This is a highly-fragmented segment involving several small players who are engaged in assembly parts. Many of such establishments that typically employ 10-15 people have been facing the brunt of the slowdown since the past three quarters.

“All suppliers are not necessarily strong. From a cash-flow point of view, there are some suppliers who are in pretty bad shape and they are bound to disappear. Our biggest worry right now is the financial health of these small entities because if they disappear then vehicle production will get impacted which means business loss for us too,” said a western Maharashtra-based Tier 1 supplier whose clients include Tata Motors, Honda and Maruti Suzuki.

Tier 1 suppliers are those which supply directly to vehicle makers while Tier 2 players supply to Tier 1. Tier 3 are the last in the chain and supply to Tier 2.

Production came to a stand-still almost a month ago when the Center directed a shutdown of every factory and office in a desperate attempt to arrest the spread of the deadly coronavirus. This led to a cascading delay in payments to suppliers across the tiers.

“We have had bad times earlier too but with zero production there is nowhere to hide. Employees understand the severity of the situation and therefore have accepted a delay in their salaries. There needs an urgent government intervention,” said a Tier 3 supplier on the condition of anonymity.

More than five million people are employed in the auto-parts industry as per the Auto Component Manufacturers Association (ACMA). In 2018-19, the turnover of the industry stood at $57 billion with $15 billion in exports. ACMA has asked for relaxation of borrowing norms and statutory payments for meeting working capital needs.

Deepak Jain, President - ACMA said, “Nil revenues in the auto component industry in the lockdown period has deepened the state of crisis in the industry and several enterprises are staring at insolvency. We urge the government to urgently infuse financial stimulus, based on our recommendations, to ensure that the industry has safe and sustainable operations post the lockdown.”

While there have been news of unusual delay in payments to the auto-parts manufacturing companies some vehicle makers like Hero MotoCorp and Volvo Eicher have started to release payments.

“Volvo Eicher has been very proactive in their communication but their payments have been delayed. Payments are still coming in from Maruti Suzuki and Ford after some delays. The OEMs are aware that any problems to us will mean problems to them”, said another supplier based in the north of India.

Carmakers also agree that there is an urgent need to look after the smaller parts manufacturing players to avoid a disruption within the larger ecosystem.

Rajeev Chaba, the president and managing director of MG Motor India, said, “It is really harsh on them and even on big players like us who are scrambling for cash management and managing the cost structure with an appropriate revised revenue stream. In the next few months, I think it is going to be extremely tough on the Tier 2 and Tier 3 suppliers. We have a big team called the community support program team which is working with the dealers and suppliers. We have made all the outstanding payments to the suppliers.”