India’s automotive supply chain could be disrupted if coronavirus outbreaks persists longer: ICRA

February 19, 2020

·         China accounts for 27% of India’s auto component imports valued at US$ 4.8 bn

·         The impact is estimated to be higher for high value-add and customized components, while commoditized products could shift to alternative suppliers

The domestic automotive industry is likely to be negatively impacted due to the recent outbreak of coronavirus (COVID-19) across China and neighbouring countries in South-East Asia. As per an ICRA note, these countries play a critical role in the automotive supply chain and domestic OEMs source critical components and sub-components including fuel injection pumps, EGR modules, electronic components, turbo chargers etc. from these markets, which in turn directly or indirectly depend on China.

Says Mr. Shamsher Dewan, Vice President - Corporate Sector Ratings, ICRA Limited, “Since China accounts for 27% of India’s auto component imports valued at US$ 4.8 bn, 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 customized components, while commoditized products could shift to alternative suppliers. But high investments and gestation period involved in developing tooling remains the key prohibitive factor for an immediate shift to new suppliers.”

The disruption in supply of certain critical components sourced from China will have differential impact. OEMs sourcing components like electronic components, EGR modules, Fuel injection pumps, Turbo charger, Meter sets, LEDs, Magnets, Airbag components, Steering system components and Electric vehicle components will be affected most – in particular the impact will be more profound on commercial vehicle (CV), passenger vehicle (PV) and the two-wheeler (2W) segments. While tractor segment which has high localisation levels with limited dependence on imports will have much lesser impact. Typically, companies maintain a comfortable 4-6 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 supply of critical components required for the same has the potential to impact smooth transition to new emission norms,” adds Mr. Dewan.

In terms of sectoral outlook on domestic automotive Industry, ICRA has a negative outlook on the CV segment due to surplus capacity in 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 initial months post BS-VI transition in April 2020 will be muted, and subsequently recover thereafter on revival in consumer sentiment. The tractors and the 2W segment have stable outlook on expectations of a good rabi crop which will support rural demand sentiment. However, in 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 light of global trade tensions which continue to impact the segment.