Learn How the Indian Auto Supply Chain is Becoming More Agile

The Indian automotive industry is on the cusp of a transformational change. The industry is witnessing a perfect storm of disruptive trends that are set to redefine the very nature of mobility. Rising income levels, evolving consumer preferences and technological advancements are coming together to create a new breed of customers demanding different products and services. This is putting immense pressure on original equipment manufacturers (OEMs) to rethink their business models and find new ways to remain relevant in the market.

One way OEMs are responding to these challenges is by making their supply chains more agile. In a rapidly changing market, an agile supply chain gives OEMs the flexibility they need to adapt quickly to changing customer demands. It also makes them more responsive to disruptions and can help minimise the impact of unexpected events.

The Indian auto industry has traditionally relied on imported components, but that is starting to change. OEMs are now working with suppliers to develop local capabilities and build a more robust domestic supply chain. This is providing them with the agility they need to respond quickly to dynamic market conditions.

Overview of the Indian automobile industry in 2022

The Indian automobile industry is expected to grow significantly in the next few years. According to Invest India, a national investment promotion and facilitation agency, India’s annual production in the financial year (FY) 2022 was 22.9 million vehicles, and 4 million vehicles were produced from April to May 2022. Two-wheelers and passenger cars accounted for 76% and 17.4% of the market share, respectively. Passenger car sales are dominated by small and mid-sized cars. Overall, India exported 5.7 million vehicles in FY22. This growth is driven by several factors, including an increasing middle class, a growing economy and government initiatives such as the Make in India campaign.

In terms of production, India is currently the seventh-largest producer of automobiles in the world. India’s automotive industry is worth more than $222 billion, contributing 8% to the country’s total exports, accounting for 7.1% of India’s gross domestic product (GDP) and on track to becoming the third-largest in the world by 2030.

The electronic vehicle (EV) market is also expected to grow at a compound yearly growth rate (CAGR) of 49% between 2022-2030 and is expected to hit 10 million-unit annual sales by 2030. In addition, the EV industry is expected to create 50 million direct and indirect jobs by 2030.

Recent reports indicate that the prices of raw materials are beginning to soften after a sharp increase for over 20 months. This has come as a boon for the auto companies as they can now expect better margins in the upcoming quarters. With the prices of steel and aluminum going down, auto analysts predict that the margin trend will sustain for some time.

Tackling the existing challenges

While the demand in the automotive industry continues to be buoyant, with increasing orders for most auto companies, the global economic uncertainties and geopolitical crisis are heavily impacting them and their supply chains. The Russia-Ukraine conflict has had a major impact on the Indian automobile industry. Russia is the main supplier of metals like palladium for the semiconductor industry while Ukraine supplies neon and helium gases required for chipmaking. With this ongoing crisis, neon prices have surged to an all-time high, and the sanctions imposed on Russia have hindered the supply of palladium, impacting the manufacturing of vehicles in the Asia-Pacific region. This is extending the production, sales and delivery of vehicles.

Global economic changes are having a direct impact on the Indian auto supply chain, with increasing interest rates from the Reserve Bank of India (RBI) and rising inflation making it difficult for suppliers to maintain a consistent cash flow.

The demand for passenger vehicles is also outstripping the supply, leading to a longer waiting period for popular cars and variants. As of September 2022, cars such as the Mahindra XUV 700 have a waiting period of up to 16 months, owing to strong consumer demand and the ongoing shortage of semiconductor chips. These challenges are also impacting the production of most companies in the industry. There is congestion in the shipments and harbour, further delaying the delivery of products and vehicles. Due to these roadblocks, adopting new-age technology to become financially resilient has become the need of the hour for auto suppliers.

High demand and a shift to newer technologies such as EVs are leading to a sharp increase in working capital and CapEx requirements for OEM makers and their suppliers. This has strained COVID-impacted balance sheets further in the auto industry.

The changing preferences of customers are another challenge. Customers are now more aware of global trends and demanding better quality, fuel efficiency and vehicle safety. They are also more open to new technologies. All these factors have created a perfect storm for the Indian auto industry.

An agile approach to the Indian auto industry

The Indian auto industry is at a crossroads. While it is tackling unprecedented challenges, it is also adopting an agile approach to thrive and grow.

It is embracing new technologies. The industry is heavily investing in EVs and the infrastructure required to support them. Slowly, there has been a shift in thinking, as the traditional auto industry has been reluctant to embrace change.

The industry is also focusing on quality. Customers have now become more demanding, and they expect better quality products. Therefore, the industry is improving its manufacturing processes and investing in research and development to create better products. India accounts for 40% of the total $31 billion of global engineering and R&D spending. In addition, 8% of the country’s R&D expenditure is in the automotive industry. This highlights India’s vision of becoming a crucial automotive hub in the near future.

The industry is becoming more responsive to customer needs. It aims to adapt to the changing trends and preferences quickly. The traditional auto industry has often been slow to react to change, but this need for agility is pushing it to become more responsive. The industry is also creating a more favourable environment for investment. This includes creating a stable and predictable policy environment and improving the ease of doing business.

While the Indian auto industry is trying to find the right balance between tackling disruptions and becoming more agile, changes like a shift in thinking and investment in new technologies are positioning it well to take advantage of the opportunities ahead.

The need for a consistent flow of capital

The automotive supply chain will need enhanced working capital to adopt an agile approach and meet the challenges in the times to come. Companies will have to rely on alternative funding sources when loans from banks/other financial institutions are not available at competitive rates because of weaker financial standing or past history. In such a scenario, programs or solutions like early payment, dynamic discounting and dynamic supplier finance can play a crucial role in providing a consistent capital flow for the suppliers. This capital can then be utilised to invest in new technologies, meet evolving customer demands and increase the agility of the auto supply chain. Adopting fintech platforms like those offered by C2FO, a global leader in working capital solutions, can be a win-win situation. C2FO solutions lead to better and faster availability of working capital without having to utilise bank limits and providing financial documentation, which further increases the supply chain agility of the industry.

Innovative working capital solutions from C2FO have an easy and paperless process and can enable businesses to boost their cash flows without exhausting bank limits. The accelerated cash flow generated through the C2FO Early Payment Program will help speed up the cash conversion cycle and reduce the pending payments. The C2FO platform can also provide businesses with the flexibility needed to select invoices for early payment, determine the rates and get working capital when they need it the most.

Conclusion

The pandemic’s adverse effects, coupled with rising inflation and interest rates, will continue to plague the Indian automotive industry. The regulations and policy changes by the government of India (GoI) and changing customer preferences will require automotive companies to invest in developing new technologies and setting up better infrastructure, leading to higher CapEx outlay. Innovative fintech solutions can go a long way in enabling automotive companies and their supply chains to overcome these challenges, improve their competitiveness and build business agility for the future.

To learn more, please get in touch with a C2FO supplier relationship manager at +91 7035 7035 93 or drop an email at [email protected].