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What ails auto components industry?

M. Ramesh

CHENNAI, Sept. 18

ASK anyone in the auto components industry how the business is going, you can safely bet on getting to hear a sob story. Business is bad, margins are under pressure, vehicle manufacturers want price cuts all the time - mumble, grumble, moan, groan.

Then you would hear about what the Government ought not to have done - allowing so many car manufacturers to operate in the country, when globally, a wave of M&A is sweeping through the automotive industry. And, that the Government is not investing en ough in infrastructure, which is why the economy is behaving like a sleeping buffalo.

There must have been some slowdown in offtake of auto components, for even some large companies have announced 5-day working week in their plants. But the published numbers tell a different tale.

If you look at the vehicle manufacture industry, passenger car sales have gone up to 1,90,441 vehicles in April-July 2000, from 1,84,062 vehicles in the same period last year. Utility vehicles sales have gone up from 33,769 to 37,434. Two-wheelers hav e gone up from 11.19 lakhs to 12.29 lakhs. Three-wheelers have increased from 62,195 to 64,031.

Only commercial vehicles (CVs) and tractors are not doing well, and here again, the CV sales have dropped by only around 10 per cent. So, what is the problem?

Industry spokespersons say that there are two reasons why this seemingly good going does not augur well for the component industry.

First, though passenger car sales are going up, Maruti's sales have fallen.

Many component suppliers have hitched themselves up with Maruti, and hence, if Maruti goes down, they go down too. Second, many component companies are dependent on the fortunes of the commercial vehicle segment.

Therefore, although on an overall basis, vehicle manufacturers appear to be doing well, because of Maruti and CV sales being down, the component industry is not doing well. The other cars selling higher volumes are not a big help since their indigenis ation levels are much lower, the argument goes.

But there is a counter to the ``Maruti slowdown'' argument. Some industry observers point out that due to the confusion about uniform sales tax floor rates, many bought cars before the uniform rates was to take effect in April. In March 2000, Maruti sold 41,766 cars, 6,293 cars more than in March 1999.

Total industry volume grew to 73,090 cars in March 2000, as against 49,410 cars in March 1999 and 40,690 cars in March 1998. How far this perk up in sales is due to the sales-tax effect is a moot question, but March 2000 does appear to have pulled dow n the sales of the next few months.

Hence, what is seen as a slowdown in sales in June and July, is really an adjustment taking place in the market. And, August sales have picked up for Maruti. The company sold 3,416 cars more than in the previous month, of which only 823 were the less indigenised Baleno and Wagon-R, the other 2,584 being the models with high local content.

The Maruti slowdown factor, therefore, does not appear to be a real cause for concern.

What about the CV industry? Nobody seems to know why trucks are not selling enough. After all, there is a growth in the economy. Agriculture is doing well. The manufacturing sector has grown by 5.7 per cent in April-August. Coming upon a growth of 6. 7 per cent in the same period the previous year, this only points to considerable production of goods, which would have to be moved.

It appears to be only a matter of time before CV sales start picking up, a view with which Mr R. Seshasayee, Managing Director, Ashok Leyland, concurs.

``This is a cycle that I have seen many times in my career,'' says Mr Suresh Krishna, Chairman of Sundram Fasteners Ltd. He points out that any slowdown in the trucks segment, has a ``magnifying effect''.

In other words, a slowdown in sales of CVs portray a picture as though things are worse than they are. ``Things should improve after October-November,'' he told Business Line.

Mr S. Adhimoolam, Managing Director, Ucal Fuel Systems Ltd, says that this is only ``a corrective phase'' in the industry. What ``corrective phase'' means is, the industry can no longer expect to have it easy and the margins will always be under pressu re as most vehicle manufacturers today are demanding price cuts from vendors. This again is a consequence of the vehicle manufacturers themselves being under pressure, thanks to intense competition in the industry.

TVS-Suzuki is a case in example. The company's turnover for April-August 2000 rose 17 per cent over the same period previous year. However, ``consequent to new product launches and higher sales promotion expenses'', there is no growth in profits duri ng April-June 2000, according to Mr Venu Srinivasan, Chairman of the company.

It is this ``pressure'' that gives a recession-like feeling, says Mr Adhimoolam. While a slowing of demand is obviously there, it is apparent that it is only a cyclical, and therefore, there is no cause for alarm. Some analysts feel that the second qu arter results may not be good, but there would be a pick-up in the third quarter.

Says Mr A. Sivasailam, Chairman of the Amalgamations group: ``There has been some slowdown in the first quarter of this year; but the general consensus is that this is only transient in nature and is not likely to continue.''

Another factor that has made the industry look as though it is very troubled is the incidence of interest costs. Almost invariably, industry players have invested in capacity expansions in the last two years in anticipation of a sales growth. But the act ual sales growth, again due to the factors discussed, has been less than expected. The investments in capacity expansion have resulted in increases in interest charges, which have eaten into the profits.

This, however, has not deterred companies from making further expansions. To give a few examples, Sundaram-Clayton proposes to spend as much as Rs 33 crores in the current year on expansion of various units. M M Forgings has said it would invest Rs 14 cr ores in expansion. India Nippon is spending Rs 3 crores. Ucal Fuel has just completed a Rs 22-crore project near Gurgaon.

A significant advantage that the domestic auto component industry enjoys is the huge after-market.

This is what a `briefing paper' of the Economist Intelligence Unit has to say about the replacement market for spares: ``In a country where the average life of a passenger car is still more than 20 years, the replacement market is enormous, accountin g for 60 per cent of the total components demand. There are currently an estimated 29 million vehicles (7 million with four wheels or more and 22 million 2/3 wheeled vehicles), growing at a rate of 7-8 per cent per year, and there are more than 20,00 0 spare parts dealers in the country.''

So, what is wrong with the auto components industry?

It appears to be only a matter of time before CV sales start picking up -- Mr R. Seshasayee, Managing Director, Ashok Leyland.

TVS-Suzuki's turnover for April-August 2000 rose 17 per cent over the same period previous year. However, ``consequent to new product launches and higher sales promotion expenses'', there is no growth in profits during April-June 2000, according to M r Venu Srinivasan, Chairman.