Enhanced Working Capital Availability Can Help Ease the Indian Automobile Industry’s Woes

A growing supply chain imbalance, regulatory measures, and safety norms, along with a continuous rise in commodity prices and a liquidity crunch, may hinder the Indian auto industry’s growth trajectory.

With an overall gross domestic product (GDP) contribution of 7.1% and an impressive 49% manufacturing GDP contribution to its credit, the Indian automobile industry is pivotal to the national economy. Nationwide, it supports 37 million jobs, directly and indirectly. India manufactured 26 million vehicles in the Financial Year 2020 (FY2020). These included passenger vehicles, commercial vehicles, three-wheelers, two-wheelers and quadricycles. According to Invest India, 4.7 million vehicles were exported in 2020, significantly contributing to the country’s foreign exchange earnings. 

However, the past few years have not been conducive to the auto industry’s growth in general. Even before the pandemic hit the country, the industry faced supply chain disruptions, financial distress, and production shortages. The prime reason was a combination of macro factors such as new safety norms, the Goods and Services Tax (GST), and implementation of Bharat Stage VI (BS-VI) norms for emissions.

The onset of the pandemic further aggravated the problems faced by the industry. The Auto Components Manufacturing Association (ACMA) has pegged the losses suffered by the industry in FY20 and FY21 at 14.6% and 13.6%, respectively. While this deceleration in the industry’s output and sales affected several industry constituents, its impact on Tier 2 and Tier 3 supply chains was more prominent.  

C2FO has built a strong footprint in the auto industry over the years, working closely with leading original equipment manufacturers (OEMs) and Tier 1 supply chains. Given our in-depth understanding of this industry, we would like to analyze the impact of four key drivers in determining cash flow challenges and their effect on the industry supply chains.

Demand side

In the post-pandemic period, there has been a surge in demand in several industry segments, such as passenger vehicles. While it is welcome news, it has also brought a new set of challenges. The massive change in consumer preferences has made revisiting product and marketing strategies crucial. This has significantly enhanced the working capital requirements of OEMs as well as supply chains. Here are some of the shifts the industry is up against: 

• Consumers have started preferring electric vehicles (EVs) and hybrid vehicles over conventional ones because of government incentives, sustainability and cost advantages.
• Shared mobility has given way to personal mobility amid the pandemic due to prevalent safety and hygiene concerns. 
• Affordable vehicles are preferred over premium ones due to widespread salary cuts and job losses during the pandemic, leaving consumers with less disposable income.
• Consumers are transitioning from a physical to a digital (phygital) car purchase journey powered by an immersive augmented reality (AR) and virtual reality (VR) experience. 

To keep up with the evolving demands of the end customer, auto companies and their supply chain partners require consistent investments and dynamic approaches to meet unanticipated production imbalances. This dynamic approach to managing finances requires the auto industry to consider effective and dynamic financial technology solutions.

Supply side

Because automotive supply chains were disrupted globally due to the pandemic, the industry is expected to encounter supply-side challenges in the foreseeable future. Some of these include: 

• Since the beginning of the pandemic, the bull run in the price of commodities such as steel, copper, and aluminum has had a cascading effect on both the cost and availability of critical raw materials for the manufacture of auto components.
• The severe shortage of semiconductor chips has further worsened the situation for the auto industry.
• Other concerns such as the shortage of shipping containers, import restrictions, and localization further debilitate the supply process. 

To counter these challenges, OEMs have started stockpiling to improve their supply chain management. This disruptive inventory model coupled with supply chain hacks is driving a greater need for short-term cash and the availability of on-tap financing for the suppliers. Therefore, a new approach towards making working capital accessible is imperative to support frequent changes in the quantum and timing of financing for their business partners.

Technology shifts

The four megatrends disrupting the auto industry status quo today: 

• Connected
• Autonomous
• Electric 
• Shared mobility

Automobile giants are prioritizing innovation amid increasing environmental concerns, regulatory norms, and support measures at the institutional level. They are now focusing on reducing oil imports and strengthening energy security, curbing rising pollution, and adhering to international climate change commitments. 

Another impetus is reducing the cost differential of owning an electric vehicle compared to other options. Although the initial investment in EVs is high, their cost advantage over conventional vehicles, especially in terms of the fuel savings between electricity and petrol, diesel, or compressed natural gas (CNG), along with low maintenance, make them a strong choice for many consumers. 

New EV policy has been rolled out in many states across India to offer additional subsidies and promote the adoption of electric mobility. However, a critical factor driving the adoption of EVs is the support infrastructure such as charging or repairs that needs to be developed in tandem. 

The onus is on the OEMs and their supply chains to invest in building the right product, component, and infrastructure mix. Business models must strike a balance between managing existing business requirements and preparing for the industry’s future, which requires incremental capital both for working capital and capital expenditure requirements.

Regulatory and compliance norms

The Government of India (GOI) has rolled out multiple regulations concerning vehicle safety, emissions, and fuel efficiency. India has also achieved the remarkable feat of leaping from BS-IV to BS-VI in just three years. 

• India will adopt a stricter form of corporate fuel efficiency norms to reduce carbon emissions and improve passengers’ safety.
• Policies around vehicle scrappage and the green tax are also set to significantly boost new-vehicle demand.

While the measures are positive, they are also exerting cost pressures on the OEMs and auto component suppliers, which have to maintain the balance between fulfilling consumer expectations and keeping up with the compliance of the changing norms and standards. Therefore, it will warrant a continuous flow of investment into technology, infrastructure, and resources. 

Conclusion

While the auto industry is wary of the pandemic’s third wave, it also sees a sliver of hope given the myriad trends leading to the industry’s revival and long-term growth. With India also being considered for expansion and new capacities by multinational auto companies and the government’s INR 26,000 crore Production Linked Incentive (PLI) plan, a speedy recovery appears imminent. 

However, a lot will depend on the OEMs and associated suppliers’ preparedness to keep up with the uncertain yet promising future that lies ahead. Innovative working capital solutions can help a great deal to upscale their operational efficiency. Ability and agility to adapt will be critical factors for them to cash in on the opportunities and withstand the emerging challenges, foreseen or unforeseen.

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