Tata Motors fears China lockdown, temporary fall in demand to impact

The recent lockdowns in parts of China, as the government pursues a strategy of containing the spread of Covid-19, are adversely impacting its supply chains as suppliers are unable to produce or deliver products. These lockdowns have also led to temporarily closure of some dealerships in certain regions of China, which would also have an “adverse impact” on its sales outlook for FY23.

Tata Motors would be forced to stop production in some or all its plants if it is unable to ensure a supply of important parts from China, even as it faces semiconductor shortage. Further, the automotive major is also seeing a “temporary” fall in demand.

“If we are unable to ensure a supply of critical parts from China for production, we may be forced to stop production in some or all of our plants, which will have a significantly negative impact on our cash flow in the future. We are witnessing certain supply chain disruptions as a result of China’s lockdowns and dealership closures possibly resulting in negative EBIT and negative free cash flows in the first quarter of FY23 for Jaguar Land Rover, while our domestic business is also likely to witness a negative impact on financial performance,” Tata Motors said in its FY22 annual report.

The recent lockdowns in parts of China, as the government pursues a strategy of containing the spread of Covid-19, are adversely impacting its supply chains as suppliers are unable to produce or deliver products. These lockdowns have also led to temporarily closure of some dealerships in certain regions of China, which would also have an “adverse impact” on its sales outlook for FY23.

“Similarly, we are also witnessing a temporary decrease in demand,” it added.

There is also a “significant uncertainty” surrounding such business disruptions as continued cross-border restrictions could adversely affect its supply chains globally.

The company also said it is facing a shortage of semiconductors, which are crucial to its products. The shortage of semiconductors has impacted and continues to impact the company’s production schedules and its ability to meet the demand for some of its vehicles.

“We, like other automotive manufacturers, have experienced some supply chain disruption due to the Covid-19 pandemic, including the current global unavailability of semiconductors, which has impacted our production schedules and the ability to meet global demand for some of our vehicles. As a result, we adjusted production schedules for certain vehicles and in certain manufacturing plants,” it said.

“Such shortages, which affect the entire automotive industry, may impact us more pronouncedly than our competitors as they may have a greater level of buying power with suppliers or have a different range of features on their vehicles….”

The shortage of semiconductors could also increase car prices, which could negatively affect customer demand in the future should other companies be able to increase supply. Furthermore, the extended delivery times of new cars could cause an increase in cancellations by customers, it said.

“There can be no assurance that we will be able to source alternative supplies of semiconductors or that such alternative supplies of semiconductors will be readily available. The shortage of semiconductors has and is likely to continue to impact us in the near future,” it said, adding the extent and impact of changing “consumer preferences and behaviour is unknown and impossible to predict” at this time.

Although operations were restored at its production facilities, it fears manufacturing rates and timelines may be affected, while the decrease in consumer confidence or changing behaviours such as working from home arrangements could impact demand in the global transportation and automotive industries.

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