India’s automotive sector: semiconductor shortage, commodity problems continue to haunt OEMs

While earlier in 2022 the original equipment manufacturers for cars (OEMs) expected an improvement in the supply and demand scenario, the turn of events over the past five months means that now they will need to soften their expectations. Geopolitical conflicts, the revival of Covid-19 have dragged on semiconductor deficit and caused volatility in fuel prices, which damaged demand in the last quarter of the previous fiscal year.

OEMs have been raising prices over the past few months due to constant pressure on material costs.

Data show that while domestic sales increased 15.7% year on year, it fell 5% monthly due to multiple price increases and semiconductor shortages.

Exports also fell 5.7% year on year due to rising oil prices and declining supply when China is experiencing a resurgence of Covid cases.

Pune automaker Bharat Forge in its 4th quarter revenue update earlier this week said supply chain problems are still widespread and not limited to semiconductors. “In addition, local blockages / geopolitical situations in some regions negatively affect materials from international sources and generally cause high inflation“- said.

The rating company CareEdge said in a note that it expects consumer sentiment to weaken due to rising OEM prices and fuel inflation.

“RBI’s decision to raise the repo rate by 40 bp. will lead to more expensive car loans and thus further damage demand. In addition, concerns remain about restrictions on the global supply chain due to the blockade in China and the Russian-Ukrainian war, ”the statement said.

“The RBI’s order to increase the repo rate by 40 bp clearly took everyone by surprise. This move will slow down and further weaken the mood,” the Federation of Automobile Dealers Association said earlier this month.

Prospects for fiscal


Factors, including increased government infrastructure spending, the normal southwest monsoon, the launch of new products by OEMs and delayed demand, will sustain sector growth in the current fiscal year.

Studies show that this volume of fiscal, commercial (CV) and passenger (PV) vehicles could grow 18% and 12% respectively after rising 26% and 13% in the previous fiscal year, respectively.

However, it is expected that two-wheeled cars and tractors will again show insufficient performance due to the high base effect. Recovery and strong growth in the tractor segment depends on the prediction of a normal monsoon coming true.

“It is expected that the growth in demand for CVs, especially for medium and heavy commercial vehicles (MHCV), will be supported by demand for replacement due to improved utilization and profitability of fleet operators, as well as government infrastructure costs,” said Pushan Sharma, director. CRISIL Research.

Although the problems with semiconductors still persist, analysts expect that by the second half of fiscal year 23 they will ease.

“Restrictions on the supply of semiconductors and problems with the availability of containers are expected to affect sales and production in the near future, and we believe that this will be resolved in 23 2023,” – said in a statement.

Securities.

Analysts expect the three-wheeler and M & HCV segments to witness strong double-digit volume growth in the current fiscal year. “We believe the long-term fundamentals of the automotive sector remain intact,” Reliance Securities said.