The Hindu Business Line : Coimbatore auto components industry in distress

Coimbatore, Jan. 1 The wild swing in commodity prices and the meltdown faced by the automotive industry, both within and outside India, has created a crisis of confidence among the nearly 5,000-strong auto component SMEs in Coimbatore, which fear the worst blow may come in the first quarter of 2009 calendar year.

This segment, which accounts for an annual turnover of Rs 3,000-4,000 crore, had a dream run in the past few years due to the global auto industry boom and went for capacity expansion/additional units. But the swift and savage fall in the fortunes of the auto industry in the past few months has pushed the SMEs catering to automotive industry into a crisis that might leave deep scars before recovery is sighted.

Speaking to Business Line, Mr K. Elango, President, Coimbatore District Small Industries Association (Codissia), and an auto component manufacturer himself, said in the auto component industry in Coimbatore, nearly 5,000 to 10,000 workers have been laid off. But, he said, ‘the full pain’ will be felt between January and March when more people may face the axe.

Commodity swing

He said the sharp swing in commodity prices had delivered a crippling blow to the auto component industry and even the steep fall in the commodity prices was not of any help. If the easing of prices had been gradual, then the industry would have cleared the pending stock.

But the rapid fall in prices worked as a double whammy because it came when the component makers were saddled with stocks produced at high cost due to higher cost of commodities and the falling prices forced the industry to sell them at lower prices at a loss.

When the commodity prices were going up, the vehicle manufacturers delayed revising the prices upwards because they felt the industry had procured its raw materials at a lower cost. But when the prices fell, the industry wanted to slash the prices even if the component manufacturers had sourced raw materials at a higher cost. This instability was ‘terrible for the industry’ and most of the component producers have taken a huge hit, he added.

Capacity hit

Mr Elango said nearly 5,000 auto component makers in Coimbatore catered directly and indirectly to the automotive industry. The total turnover of these units was in the region of Rs 3,000-4,000 crore including domestic and export markets and tier I supplier (directly to the manufacturer) and tier II and III segments. The quantum of capacity hit suffered by the industry could be around 30 per cent to 50 per cent.

He said many companies went for capacity expansion and/or additional units including many top-end foundries. The hit was particularly severe among the suppliers to commercial vehicle segment and their production loss could be around 80 per cent. It was less among those catering to passenger car segment at about 50 per cent and at 25-30 per cent among the two-wheeler component makers.

After market segment

While there are suppliers to global manufacturers for their Indian operations, there are very few who supply for their manufacture outside India. But there are tier II and III suppliers who have taken a severe hit but the volume is not very high. However, those who cater to the after market segment internationally are also in a ‘bit of a dilemma’ because of the global situation due slow down, cash crunch etc.

He said the Coimbatore auto component manufacturers also contributed to the domestic after market segment and their turnover might be around Rs 500 crore. Apart from big companies like Pricol, LGB, Elgi Equipments and Roots, there were around 50-60 small players catering to after market sales whose total turnover could be around Rs 100-150 crore. As economic slowdown has hit truck operations, these smaller players also have suffered a blow.

Payment delays

Commenting on delayed payments by OEMs, Mr Elango said the MSME Act, which mandates that payment has to be made within 45 days or penal interest be paid on the outstanding amount and they should be booked in their balance sheets every quarter has come as a saviour.

But when the cash flow of larger component suppliers was affected due to delayed payments (Ashok Leyland was in the news recently on this score), the cash flow of SMEs also take a hit. The order and payment crunch, the bank loan payment due because of investment on expansion etc have dealt a ‘death blow’ to many who do not have the ‘inherent strength to survive’. He estimated that in 2007-8 and 08-09 FYs, the auto component makers would have invested around Rs 500 crore in Coimbatore.

Loans difficult to get

On what the Government and financial institutions could do to help out the sector, he said despite the RBI guidelines, the risk-averse banks were reluctant to lend to the SMEs, barring some companies that have strong relationship with banks. It was essential to reschedule the loans and it was imperative that banks slashed the interest rates if the SMEs are to survive. The Government should pump in money into infrastructure development to stimulate the automotive industry.

Mr Elango, however, saw tremendous growth opportunity for the component industry amidst global automotive industry meltdown and felt that business would shift from developed to developing countries because of closure of automobile industries.

If India gears itself up, it could tap such opportunities and a focussed approach was needed from the Government to do this. Cost cutting was crucial and manufacturers should stay competitive, should search for new markets and quality upgradation was essential if the industry is to survive the crisis, which he termed as ‘unprecedented’.

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