Coronavirus: A drag or a boon?

Coronavirus, which started in Wuhan (China), has resulted in shutting down of factories, impacting the global auto industry due to short supply of Chinese components. Auto parts production in China is estimated at more than $40 billion, with almost $20 billion exported to other countries. Domino effects of component shortage could be felt around the world. For example, Hyundai and Kia have stopped several assembly lines in Korea and Nissan has suspended its auto production in Japan.

According to ICRA, prolonged coronavirus outbreak could have negative impact on the Indian auto industry, as China accounts for 27 per cent of India’s auto component imports, valued at $4.8 billion. Typically auto makers maintain a comfortable four-six weeks of inventory. However, if the situation in China persists for another few weeks, potential supply disruptions will become more likely, it added.

Auto manufacturers in India import products such as electronic components, EGR modules, fuel injection pumps, turbo charger, meter sets, LEDs, magnets, airbag components, steering system components and electric vehicle parts from China and other countries those are dependent on Chinese raw materials.

Procurement of commoditised products can be shifted with less pain. But, finding alternate suppliers for high value-add and customised components will be difficult, time-consuming and costly. This could prohibit auto companies to shift immediately to new suppliers. The coronavirus impact could also be felt on support industries like forging, who had already reduced their production rate due to the current slowdown.

At present, Indian companies are busy making the switch to BS VI emission norms from BS IV. While a few auto OEMs have warned about a possible impact in production due to non-availability of components from China, this loss is for production of soon-to-be-outdated BS IV models and not for the upcoming BS VI.

BS VI has helped vehicle makers to bring down their reliance on imports as they are employing a greater degree of locally manufactured parts in their BS VI-compliant vehicles; thus, making India much more self-sufficient than under BS IV. For instance, German giant Volkswagen and Skoda have started with 95 percent localisation which will further go up. Similarly, Tata Motors is also sourcing large amount of auto parts from within the country for its new generation vehicles. So are companies like Maruti Suzuki and Hyundai who are pushing for more localised content by proactively engaging with its vendors.

In budget 2020, the basic customs duty on catalytic converters and parts used to make catalytic converters such as ceramic parts and compounds have been raised by the government. This will further encourage automakers to source parts from within India.

Coronavirus impact has forced companies to rethink the design structure of their supply chain. So far no Indian automaker has raised a red flag over non-availability of components from China due to coronavirus, but they should be ready with a solid Plan B to mitigate the imminent challenge.