Indian auto firms hit by slowdown

The economic slowdown has started taking its toll on the Indian auto industry. With retail sales hit hard, big auto companies have started defaulting on payments to component suppliers. As a result, the $18-billion auto-parts industry is fearing huge production cuts and layoffs.
The poor sales in October have created a virtual panic, with most players slashing production to cope with the weak demand. Along with this, many component makers have decided to halt production temporarily, while many have decided to cut back output and even lay off contractual staff.
In October, sales were down 9% this year for cars, utility vehicles and multi-purpose vehicles. That's the sharpest drop this financial year and among the steepest monthly slide in the past 12 to 18 months. Industry experts say this will pull down cumulative growth for the fiscal to around 4%.
The passenger vehicle tally in October was down to 124,000 units compared to around 136,000 units last October and 140,000 units in September this year. Worse, the gloom isn't limited to cars alone. Truck sales, always the first telltale indicator of the health of the economy, have started sending out some panic signals.
Until just before Diwali, the inventory pile-up at the dealer end was a staggering 19,000 vehicles, with another 6,000 trucks stuck with private banks and financiers due to defaults by transporters, according to a study by the Indian Foundation of Transport Research and Training (IFTRT).
The financing bite is beginning to hurt now, as more defaults and fewer footfalls take the life out of auto sales. In !the first half of the current fiscal year, passenger-vehicle sales grew by a respectable 7.5%, mostly on account of robust growth in utility vehicles. With sales of market leader Maruti turning flat and now negative, the car industry is stuck in first gear. And trucks are on skid row.
Two-wheelers, which had bucked the slide so far, have also hit skid row. The country's largest two-wheeler maker !Hero Honda Motors Ltd (HHML) posted a 3.44% decline in total sales in October to 352,000 units against 365,000 units last year. Several vendors say that auto companies are now deferring payments by many days.
"On an average, we used to receive payments in a time span of 30 to 60 days. However, companies are now de!ferring this and some have even held back the payments by even 100 days or more, which is really hitting us hard," said a vendor, who declined to be named.
Auto companies blame the poor demand at the retail end for this. "They are telling us that the vehicles are not selling and most of them are becoming their inventories or inventories of dealers. So how do they pay us?" the vendor !asked.
J.S. Chopra, president of the Automotive Component Manufacturers Association (ACMA), who also is head of the component company Delphi-TVS, confirmed that vendors are under a huge financial stress. "The crippling liquidity crunch has slowed down vehicle demand, especially in commercial vehicles. Payments from auto companies are getting delayed, loans for capacity expansion are difficult to secure and even disbursement of loans already approved by banks are being deferred," he said.
While there are 575 component suppliers registered with ACMA, more than 1,000 companies from the unorganised sector are also catering to the auto industry, giving direct employment to about 250,000 people. A worrying trend is that the component industry's growth has come down from more than 20% between 2002 and 2007 to a poor 6% in the April-September 2008 period.
ACMA's executive director Vishnu Mathur said not only the domestic market, but exports are also in doldrums because of the downturn in US and European markets. Analysts, however, feel that exports may revive fast, as companies abroad would be looking at cost-cutting that could send business to low-cost markets such as India.
The uncertain outlook is forcing companies to go slow on new investment plans. The ACMA had earlier forecast that the annual investments would be as much as $ 1.5 billion, though Mr Mathur now cautions that this may not be so.
N.K. Minda of Minda Industries said his company is contemplating delaying fresh investment plans by at least six months. "The situation is tough and we !have reduced production days to four days from six," he said.
Jayant Davar, managing director of Sandhar Technologies that supplies a range of components to two-and four-wheel companies, said companies are only undertaking mandatory or unavoidable capital expenditure plans. "Companies are telling us not to stock inventory. Component makers are now actively looking at cutting costs. That includes laying off temporary workers," he said.And the situation seems to be getting worse for auto companies. After announcing a block closure at its Jamshedpur plant, Tata Motors is shutting commercial vehicle production at its Pune and Lucknow factories for six days this month. Component supplier sources point to production slowdowns in other companies, including the utility-vehicle major Mahindra and Mahindra (M&M).
Tata said it is shutting production to avoid inventory buildup. The Pune plant will be shut from next Friday to Nov 26, while output was halted at Lucknow from last Monday to today.
Unavailability of finance, coupled with high interest rates, is forcing customers to postpone purchases, the company said. "This will call for appropriate action from Tata Motors from time to time, to match production with demand and avoid unnecessary buildup of inventory in the company or with the company's dealers," the spokesperson said.
Vendor sources said Mahindra had slowed down production with expected weak sales forecast. The company shut down its plant for the first week of this month. Rajesh Jejurikar, chief of operations for Mahindra's automotive sector, said the !company was closely watching the market situation and will keep production in line with demand.