The domestic automotive industry is unlikely to stay insulated against the impact of the recent coronavirus (COVID-19) outbreak across China and neighbouring countries in South-East Asia. These nations play a critical role in the automotive supply chain, and domestic original equipment manufacturers (OEMs) source critical components and sub-components like fuel injection pumps, EGR modules, turbo chargers, from these markets, which directly or indirectly depend on China, stated an Icra note issued on Wednesday.
Shamsher Dewan, vice-president (corporate sector ratings), Icra, said, “China accounts for 27% of India’s auto component imports valued at $4.8 billion. So 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 customised components, while commoditised products could shift to alternative suppliers. But high investments and the gestation period involved in developing tooling remain the key prohibitive factors for an immediate shift to new suppliers,” he added.
The disruption in supply of certain critical components sourced from China will have differential impact. OEMs sourcing electronic components, EGR modules, fuel injection pumps, turbo chargers, meter sets, LEDs, magnets, and airbag, steering system and electric vehicle components will be affected the most. The impact will, however, be more profound on commercial vehicle (CV), passenger vehicle (PV) and the two-wheeler (2W) segments.
On the contrary, the tractor segment, with high localisation levels and limited dependence on imports, will see much lesser impact. Under normal circumstances, companies maintain a comfortable four-six weeks of inventory, given the stock-up done prior to the Chinese New Year. However, if the situation in China were to persist for another couple of weeks, potential supply disruptions will become more likely.
“Moreover, given that OEMs are currently in the period of transitioning to BS-VI production, disruption in the supply of critical components required for the same has the potential to impact smooth transition to new emission norms,” Dewan observed.
In terms of sectoral outlook on domestic automotive industry, Icra has a negative outlook on the CV segment due to surplus capacity in the system, existing financing constraints, weak macro-economic scenario and industrial output, which is likely to keep demand subdued. The outlook on PV segment, too, is negative and demand recovery is expected to be gradual. The demand in the initial months post BS-VI transition in April will be muted, and will subsequently recover on revival in consumer sentiment.
The tractors and the 2W segment have stable outlook on expectations of a good rabi crop yield, which will support rural demand sentiment. However, in the case of 2W, higher prices of BS-VI vehicles and muted urban demand remain dampeners in potential demand growth. As for the auto components segment, the outlook is negative due to contraction in broad-based OE sales, subdued aftermarket demand, and muted export demand in the light of global trade tensions, the Icra note pointed out.
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