Ifthe current scenario persists, the industry anticipates further production andjob cuts as some OE’s (Original Equipment) have already announced furthercurtailment of production for November viz. October 2019.
The IndianAutomobile Manufacturers have reported a rise of 5-7 per cent sales in therecent months gone by. The uptick comes after a double-digit drop in sales eachmonth from April to September driven by higher than previous discounts offeredby the OE’s (Original Equipment) to enable liquidation of inventory. Thus, theoverall auto- components and forging industry have not seen an improvement intheir order books.
The apex body of theforging industry in India, the Association of Indian Forging Industry (AIFI)expressed concern over the lack of demand with respectto fresh orders from the automotive sector. With the ripple down effect ofslumping automobile sales, the forging industry is facing the heat with a sharpdecline in demand which has resulted in substantial production cuts.
The Indian ForgingIndustry primarily caters to the $57-billion Indian Automotive Industry, which accountsfor 60-70 per cent of the forging production. With the auto sector witnessingthe worst ever slowdown, the forging industry has witnessed a correspondingaverage slowdown to the tune of 25-30 per cent.
Says S Muralishankar,President, AIFI, “The production and demand at the manufacturing level haven’tseen any upward movement because of which the forging and auto-component sectorcontinue to reel under the auto slowdown. Currently, there is a huge inventorybuild-up due to poor demand and to curb this, many forging units have beenmaking proportionate cuts in terms of working hours and production. If this scenariostretches further, we anticipate more production loss and job cuts.”
The industry isadditionally grappling with various other concerns which could have furthernegative impact besides the fall in demand for forged parts. Some of the majorthreats looming over the forging industry due to the auto sector slowdown arepart obsolescence on account of the looming changeover to BS-VI norms fromBS-IV with effect from 1st April 2020, drop in the value ofcurrently non-moving inventory due to downward commodity price corrections,difficulty in meeting repayment requirements of loans, and interest liabilitiesdue to the reduction in capacity utilisation.
The auto slowdown figures
The industryproduced a total 21.76 lakh vehicles including Passenger Vehicles, CommercialVehicles, Three Wheelers, Two Wheelers and Quadricycle in Oct 2019 as against 24.93lakhs in Oct 2018, registering a de-growth of -12.72 per cent over the sameperiod last year.
The AutomotiveSector has been hit by several factors like increase in acquisition costs ofvehicles due to legislative changes, the impact of which is compounded by thehigh GST rates, farm distress and liquidity constraints, besides unemploymentand underemployment putting pressure on the household disposable income, newBS-VI emission norms, uncertainties regarding regulations and governmentpolicy, fluctuating fuel prices and the delay in scrappage policy are some ofthe key reasons for the slowdown.
Apart from this, theindustry is also dealing with many other challenges that seem to hamper theoverall growth in the long run. Issues like the rising steel prices and demand-supplygap, high electricity tariff rates in Maharashtra region, rising fuel prices, government’sthrust on electric vehicles, and technology up-gradation and modernization.
Strict lending norms: Banks have setup a few measures that reflect their cautious approach to new vehicle loans.Firstly, Banks have limited the funding from the usual practice of financingon-road costs to a vehicle's ex-showroom rate. This has increased the cost ofownership for new car buyers.
MSMEs in trouble: The sector’sfinancial health went from bad to worse. Issues with payments and lack ofdemand, combined with market issues, threaten MSMEs’ survival in the country.
Ina recent development, the RBI instructed state-owned banks not to declarestressed assets of MSMEs as non-performing assets (NPAs) until March 31, 2020,as the current norms stipulate that if over 90 days, any default should belisted as NPA. But, industry feels declaring NPA after 91 days is not practicalas most customers don’t pay to MSMEs on time, causing immense liquidity issuesand few smaller associations have highlighted this factor, requesting the RBI to give anextension up to 180 days.
“We believe that the government needs to take aholistic approach to revive the reeling auto sector and give a necessary push. Theindustry is hoping for a few immediate steps to be taken by the government,such as a cut in GST rates, reducing the overall cost of ownership, andtime-bound implementation of scrapping policy amongst others. The revival willplay a critical role in strengthening the Forging Industry and shall providecollaborative platforms to address the challenges faced by the industry,” says Muralishankar.
With an annualoutput of about 30 Lakh MT, the Indian forging industry has about close to 400forging units, of which 83 percent can broadly be categorized as Tiny and SmallEnterprises. While 9.0 per cent are Medium-sized, the remaining are Large Scaleset-ups.
While SMEscontribute 30 per cent of forging production, the Medium- and Large-scale unitscontribute 70 per cent. With a total production worth `45,000-`50,000-crore, the forging industryprovides direct employment to more than 300,000 people in the country alongwith an additional 60,000 contract labourers.
“The industry is hoping for a few immediate steps to be taken by thegovernment, such as a cut in GST rates, reducing the overall cost of ownership,and time-bound implementation of scrapping policy amongst others.”