The Indian auto industry could see manufacturing constraints over the lack of components supply, due to the Coronavirus (COVID-19) outbreak in China. According to the ICRA, the neighbouring country is a major supplier of critical auto components and sub-components to OEMs in India. The note from ICRA comes on the heel of Hero MotoCorp's recent statement that the company will face a 10 per cent cut in production in February over the supply constraint of key components. The Coronavirus outbreak has severely affected manufacturing in China as most facilities have been shut, affecting OEMs globally.
Speaking on the issue, Shamsher Dewan, Vice President - Corporate Sector Ratings, ICRA Limited said, "Since China accounts for 27 per cent of India's auto component imports valued at US$ 4.8 billion, India's automotive supply chain could get disrupted if the manufacturing activities in China continue to remain impacted owing to coronavirus outbreak. The impact is estimated to be higher for high value-add and customized components, while commoditized products could shift to alternative suppliers. But high investments and gestation period involved in developing tooling remains the key prohibitive factor for an immediate shift to new suppliers."
At present, domestic manufacturers source fuel-injection pumps, EGR modules, electronic components, turbochargers, LEDs, airbag components, meter sets, steering wheel systems and a lot more from markets that directly or indirectly depend on China for the production of the part. In another sector to be gravely affected will be the electric vehicle space that sources several major components from the country. The supply constraint will have a dominant effect on commercial, passenger and two-wheeler segments, while ICRA says that the tractor segment will witness limited impact due to high localisation levels.
Typically, automakers maintain an inventory of four to six weeks. However, if the situation worsens, the supply disruption will continue and affect the production of BS6 vehicles across segments. The constraint comes at a time when the industry is nursing back to health after an alarming year of the slowdown. The transition to BS6 has been a long-awaited one with over Rs. 80,000 crore cumulatively invested by OEMs.
Adding further, Dewan said, "Moreover, given that OEMs are currently in the period of transitioning to BS6 production, disruption in supply of critical components required for the same has the potential to impact smooth transition to new emission norms."
The auto sector expects the industry to revive after a few lean months initially in the BS6 era, post April 2020. According to the ICRA, expectations of a good rabi crop is expected to support rural demand that will boost the tractor and two-wheeler segments. However, high prices for two-wheelers will be a dampener in urban areas. The auto segment is expected to grow, albeit slowly over the next year.
The coronavirus has so far killed over 2000 people globally, while infecting over 75,000 people. While the outbreak has affected largely in mainland China, there have been over 1000 cases reported outside the country.
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