Indian School of Business Vol.

Auto component industry

in India – Managing slowdown

Possibly seeing its worst slowdown in

decades, the Indian automotive industry
Gurukul has been badgered, bruised and
By CAS continues to suffer great losses. What
(In collaboration with CAC ) once was a phenomenal growth story
and an example for other manufacturing
SEP 2019 industries, if you discount 2008-09, now
looks like a distant memory.

Contents

1. Slowdown in the economy: Impact on the automotive

sector and key factors that are causing a downturn

2. Slowdown: What to do and what not?

3. Long term growth story of automotive sector

remains intact
 Indian School of Business Vol. 7

Slowdown in the Indian economy is impacting growth in

multiple consumer focused sectors like Real estate, FMCG
and Automotive

FMCG Auto Sector Real Estate

The fast-moving consumer
goods (FMCG) companies
have reported decline in
volume growth in the April-
June quarter. This has been
blamed on a sluggish rural
demand, which, in turn,
indicates less availability of
money in villages.
Automobile sector is facing its
worst crisis in 20 years. But
what signals a deeper
problem is the Society of
Indian Automobile
Manufacturers (SIAM) report
that 300 dealerships have
shut down in recent times.
The health of real estate is a
massive indicator of the state of
Indian economy. Reports are
that the volume of unsold
houses over the past one year
has increased in the top cities of
the countries unsold housing
units reached 1.3 Mn units in
March 2019

Automotive sector is going through a period of significant slowdown, led by

liquidity crunch, higher acquisition cost, and subdued consumer sentiments

• NBFC NPA increased from 5.3% to 6.6% between FY18 and FY19
NBFC Liquidity
• Bond issuance down to US 120 mn in May19 from US 230 mn in
Crunch Nov18

• 3 year & 5 year upfront insurance premium for 4W & 2W led to

Higher price rise of 1-2% & 4-8% respectively
acquisition • Increase in finance cost and raw material prices led to 6-7% rise in
price
cost • Transition from BS4 to BS6 could add another 5- 6% to price

Weaker • Outlook on increased spending down to 69% in May19 from 83%

year before
Consumer • Lending rates up from 8.4% in Apr 2018 to 8.7% in Apr 2019
Sentiments • Job confidence index down from 62% in Sept18 to 55% in Mar19
 Indian School of Business Vol. 7

Addressing the downturn requires a coordinated set of

actions in the near short term along with strategic moves in
the long term
Optimize parts complexity and modularize products : Leverage current slowdown and OEM
consolidation trend to reassess the design of key components to develop modular parts:
➢ Conduct product mapping exercise to identify major components that can be modified
➢ Develop modular solutions for priority components. Take help from stakeholders (e.g., OEMs)
Enhance quality, aim for zero defects and higher yields : Build quality into operations, management
and people systems:
➢ Operations: Quality based supplier selection; Standardization of shop floor tools due rapid
design changes; RFID based tracking
➢ Management: Measure both preventive and occurrence metrics
➢ People: Ensure quality standards are understood and rewarded
Optimize portfolio – look at the tail end : Rationalize portfolio to ensure maximum 10-15% revenue
from a single product. ‘Enabling Digital and Analytics’ and ‘Transformation mindset’ across the
organization are critical for success
Develop optimal inventory control & build transparency : Instead of depending on OEM forecasts,
develop internal models (leveraging analytics) to plan production and control inventory. Few
examples:
➢ Develop applications for tracking inventory movement between OEMs, Vendors and Tier 2
suppliers
➢ Use analytics based demand forecasting and Sales & Ops planning.
Re-look at organization structure to find efficiencies : Build a cross functional task force to conduct
value stream mapping (e.g. Span of control for supervisory manpower):
➢ Identify critical roles with disproportionate impact and invest in them
➢ Assessment of roles and job description to eliminate overlaps
➢ In case of overlaps reallocation of talent to departments with talent shortage, which will
improve utilization during slowdown
▪ Conduct benchmarking to identify right balance for talent allocation (e.g., ratio of white and blue
collar employees)

What not to do ?
1) Avoid dishonoring commitments to peers, suppliers and workforce
2) Don’t focus only on downturn, keep growth phase in mind; continue to invest in quality and
safety
3) Avoid under cutting competition with unsustainable practices (e.g., price), which will be tough
reverse once growth returns (avoid loss-loss situation)
4) Don’t reduce critical investment in business development and R&D as a cost-cutting measure
 Indian School of Business Vol. 7

Despite the current slowdown in the economy, the long term

growth story for Indian auto sector is intact

Recent measures taken by the government could help in

turning around the momentum and revive growth

Economic measures: Boost economic growth and revive jobs :

▪ Invest INR 100lakh Cr in infrastructure over the next 5 years to boost the economy by
~2x and generate jobs
▪ Scrapping surcharge on foreign portfolio investors (FPIs) and domestic market players
to revive sentiments and boost investment
▪ Launch of electronic marketplace for MSMEs – ‘Bharat Craft’ to expand reach. This
could generate INR 10lakh crore revenues and 5 Cr jobs

Financial measures: Revive PSBs and improve liquidity of NBFCs

▪ Infuse INR 70,000 Cr in PSU banks to enable release of INR 5lakh Cr liquidity
▪ One time 6 month partial guarantee of INR 1lakh Cr to purchase high rated assets of
NBFC; this could reduce potential NPAs
▪ Removed the requirement of maintaining Debenture Redemption Reserve to improve
liquidity in NBFCs

Industry measures: Stimulus to tackle slowdown in auto sector

▪ Lift ban on purchase of new vehicles to replace all old vehicles for its departments to
boost demand
▪ Additional depreciation of 15% on all vehicles acquired till 31st Mar20 to reduce high
inventory build up
▪ Evaluating investment in infra for auto component industry (to boost exports and
accelerate development of new components like EV batteries)

Source : McKinsey&Company