Investments in the auto component sector are not likely to be scaled-down drastically in the current year. This is largely because motor parts makers do not (again) want to be caught without sufficient capacities, when the fortunes of the automobile companies pick up, Business Line 's enquiries reveal.
“Two years ago, we got caught – the auto sector grew 30 per cent and we couldn't match requirements,” recalls Mr Arvind Kapur, President, Automotive Components Manufacturers Association (ACMA).
“There may be a slight slowdown in investments this year, with the cost of borrowing being heavy. But largely, the industry will invest according to the demands of the auto sector,” Mr Kapur told
A few companies may “tweak” budgets cautiously but there will not be wholesale reduction as this may impact future supply, opines Mr Abdul Majeed, Auto Practice Leader, PwC. “Auto markets in Europe and North America are not solid; so Asian and domestic markets will play a big role going forward.”
Despite sluggish sentiments in the domestic auto sector, especially in passenger cars, OEMs such as Ford and Maruti have announced capacity enhancements. Component makers will follow closely as they do not want to be caught napping, says Mr Kumar Kandaswami, Leader - Manufacturing, Deloitte.
“The ticket size of OEM investments is large. Being a B2C model, OEMs cannot afford to cut down investments too much. The component sector being relatively smaller may hold back investments a bit; but there won't be large scaling down as there is the promise of orders with OEMs building capacity. Component companies will look to invest close to OEM capacity.”
MM Forgings and Wheels India plan to invest on capacity building for the future. Says Mr Vidyashankar Krishnan, MD of MM Forgings: “We are not scaling down investments. MM Forgings plans to invest Rs 65 crore this year on capacity building and debottlenecking at forging plants and capacity addition at wind mills.”
Wheels India will invest Rs 70 crore this year (up from Rs 49 crore last year). “This is in line with our initial investment plan. We will continue to invest in wheel capacity for passenger cars, as the market expands. In the current market environment, with high inflation and slow growth, we will look internally to control costs and improve productivity,” says Mr Srivats Ram, MD, Wheels India.
It certainly won't be an easy ride for component makers dependent on the passenger car market. For instance, passenger cars account for 40 per cent of Rane group's domestic sales. The group Chairman, Mr L. Ganesh, says it may end up spending only 60 per cent of the planned investment of Rs 280 crore this year. “We will slow down or even defer passenger car-related investments this year,” says Mr Ganesh.
Mr Kapur attributes this “modulation” to the demand situation. “But when the customer demands pick up, investments may be revised accordingly.”
Off-road sectors
Auto component makers who have diversified into off-road sectors may benefit, says Mr Kumar of Deloitte.
A significant part of Wheels India's investments this year will go towards expanding presence in the exports market. The company exports wheels for off-road construction equipment and agricultural applications to Japan, Korea, the US, Brazil and China. Wabco, manufacturer of air brakes, is also betting big on exports for the construction sector. Bulk of Wabco's Rs 60-crore capex in FY12 will go into its upcoming export plant in Chennai.
This is also the time for component makers to exploit inherent capacity by choosing the right product for the right factory (line balancing) to squeeze the last kilogram of capacity from the supply chain, advises Mr Kumar. (Wheels India is going through a “massive” relocation of lines in facilities which are under-utilised by moving them to another plant.)
The current investment scenario in the component industry is likely to continue for the next couple of years. “Nobody will jump into big investments. There won't be peaking of investments till 2014,” warns Mr Kumar.