Logistical hurdles dampening the revival of India’s automobile sector

The Indian automobile sector which was trying to cope with the slowdown even before the pandemic was caught in a fix with the outbreak of COVID. The sector which is yet to make a recovery is facing more hurdles due to the shortage of shipping containers and rising freight costs.

Rajesh Menon, Director General of Society of Indian Automobile Manufacturers (SIAM) threw some light on the hurdles of container shortage and increasing freight rate. He said that this situation can lead to disruption of supply-chains of Indian auto companies over the next three-four months and may even lead to loss of production.

Companies like Mahindra & Mahindra Ltd. and Tata Motors Ltd. have raised a red flag about the supply chain issues arising from chip shortages. Automobiles have become increasingly dependent on chips – many of them made in Europe – for everything from computer management of engines for better fuel economy to driver-assistance features such as emergency braking. The shortage of vessels and the second wave of COVID in different parts of the world have further dampened the recovery.

India during the pandemic adopted to the make in India campaign which gave a push to exports of the country while imports stayed subdued, creating a huge shortage of vessels at ports. Furthermore, another reason accounting to the same is the rise in global trade and demand from industries.

Pramod Kumar Srivastava, president of the national association of container and freight stations said, “The shortage is as high as 30% for containers, and the increase in demand for shipment comes at a time when the number of vessels on a particular route had been withdrawn by 40% due to Covid-19.”

He added that the turnaround time of containers has gone up substantially. “There’s no space to keep the containers.”

A steady growth in freight rates has been observed in India since July which is making it impossible for the automakers to sustain normal operations. In light of the same automakers like M&M, Maruti Suzuki India Ltd. and the commercial vehicle unit of Tata Motors have announced they will hike prices in January 2021, without specifying the quantum, to offset rising input costs.

Struggling through the same, Hero MotoCorp Ltd. have also announced an increase in price of their products by up to Rs 1,500. Other automakers like Volkswagen India increased the rate for its Polo and Vento cars by 2.5%, while MG Motor announced a hike of 3% in its product prices depending on the model. For Nissan, the hike would be up to 5% across all models.

The demand for steel from various sectors have also increased recently and has outpaced supplies from domestic steelmakers, Menon from SIAM said. A shortage of iron ore for steel mills has only added to the pain.

“This has led to delays in vehicle production as some vehicle manufacturers are unable to meet the market requirements due to shortages and consequent increase in steel prices, over last few months,” Menon said.

As per reports, Input costs, which accounts for 70% of the total cost of vehicles, have gone up dramatically.

Shashank Srivastava, executive director in charge of marketing and sales at Maruti Suzuki said, “While for steel, plastics, the prices have gone up by 30%, for precious metals such as rhodium, the increase is much higher.”

“We have to make a fine balance between financial prudence and demand recovery,” he said, adding in certain segments the price hike will be significant. The fleeting recovery had prompted brokerages to revise their forecast for the industry. ICICI Securities revised the decline for two-wheeler and passenger vehicle categories from its earlier forecast of over 20% to about 15% for both the segment.

But that’s under threat. On the impact of price rise on demand, Srivastava said there’s a little bit of uncertainty, and they are apprehensive of the forward guidance.

“Till now we were highly confident of the market and there were good recovery signs, but now we’re again venturing into uncharted territories where we aren’t sure about the demand sustenance,” Gaurav Vangaal, associate director at IHS Markit said.

Source: Bloomberg Quint

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