Auto slowdown, uncertainity forces component industry to cut down capex

The auto components industry has postponed, or shelved its capital expenditure worth $1.5-2 bn for the near future after a slowdown in the market hit its capacity utilisation. Industry sources believe that the uncertainity around future demand is also holding the companies back from investment.

 
Component manufacturers, who invested in the past expecting a growth in sales, have found themselves fighting the downturn with lower utilisation of existing capacity and capital invested in new facilities, which have no takers. Moreover, there is confusion about whether customer demand will shift to electric vehicles in the future. This will impact capex allocation for traditional auto component manufacturing.

"Before the slowdown started, vehicle sales were probably at their peak and we were working on almost full capacity. Our capacity utilisation was almost 70-80 per cent and because at that point in time the scenario looked so upbeat, lot of component manufacturers invested in capacity expansion almost to the tune of 20-30 per cent more capacity. Unfortunately with the downturn, production has been cut and people are operating at suboptimal capacities in the range of 50-60 per cent", said Vinnie Mehta, director general, Automotive Component Manufacturers Association of India (ACMA).
"It is more like a double-whammy. While on one hand, the capacity utilisation, compared with earlier, has gone down, on the other hand, companies have made more investments. As a result companies are really stressed out. At this juncture, because of so much of surplus capacity, people have postponed any plans that they would have," he said. "Our estimate is that the capital expenditure postponed or shelved would be in the range of $1.5-2 billion," he added.

“Most players in the auto component sector are taking a relook at their capital expenditure plans; consequently, across segments, ICRA estimates a cut back ranging between 15-25 per cent by most players,” said Subrata Ray, senior group vice president & head — corporate sector ratings, ICRA. The impact and the ability to tide over the current slowdown will depend on the credit profile of individual entities heading into the downcycle, said the rating agency, which revised the sector outlook on auto components to negative, following a sharp and and broad-based contraction in OEM sales in the past several quarters.

Aftermarket demand for components, which accounts for 18 per cent of the industry turnover, has also slowed down with a decline in goods movement and the consequent weakness in freight activity. Further, tight liquidity across the aftermarket dealer channel has led to de-stocking, curtailing fresh demand from component manufacturers. Given that the global automotive outlook has turned negative with a decline in sales across geographies, partly due to heightened trade tensions and other geopolitical factors, export demand for Indian component manufacturers could be impacted in the coming quarters.

“Despite accommodative commodity prices, weakness in OEM demand will impact credit metrics for component manufacturers. This comes amidst rapid and mandatory technological advancements in vehicle safety and emissions, which has led to sizable capital expenditure by component manufacturers over the past few years,” said Ray.

An expert from the auto component industry said that while in the previous downturns in 2009 and 2014, the industry continued to make strategic investments as they knew what the future held; this time there is a doubt in the minds of the industry on the direction which the regulators and the consumers are going to take. 

"If the regulators tomorrow say that everything is going to be electric, what will the industry do? If the consumer says that they only want to buy electric vehicle, what would one do? It is a period of great uncertainities. During a downturn, one is able to figure out where to invest and what to do. But in this downturn, where to invest is a big question mark," said the official on condition of anonimity. This is despite the government's assurance that the internal combustion engine (ICE) vehicles and electric vehicles co-exist in future, which has been a positive message. 

Over the last several years, the auto supplier industry has benefited from the volume growth across segments, enjoying healthy cash flows stemming from scale benefits and higher value additions. Nevertheless, the impact and the ability to tide over the current slowdown will depend on the credit profile of individual entities heading into the downcycle, said ICRA.

Large tier 1 manufacturers, who have used their cashflows from the upcycle to develop a strong balance sheet and product capabilities are expected to be more resilient to the current downturn. On the other hand, entities with leveraged balance sheet are likely to face stress. Smaller players, especially Tier II/III players will feel the pressure more acutely as they lack pricing power and bear the brunt of stretched work capital cycle, it added.