Parts supply still the weakest link in India's production chain

Shortage of components due to the Ukraine war and Covid-induced curbs in China are impacting production of automobiles and electronic products in the June quarter, and the tight situation will continue for the entire year, said executives of leading companies.

These executives said input costs were at lifetime highs and the consumer should brace for price hikes. According to industry estimates, automobile and electronics companies could not manufacture about 5-10% of their planned output in April, and the impact will be bigger in May-June.

BSH Home Appliances Group's global CEO Carla Kriwet told ET during her recent visit to the country that her company's India operations were facing a supply-side challenge, not a demand slowdown,

"Costs of logistics, steel and semiconductors are skyrocketing. The supply situation is not going to improve this year," she said, dashing hopes of an easing of supplies from June-July.

Carmakers are already reporting an impact on production and sales. India's largest car manufacturer, Maruti Suzuki India said despatches fell 10% in April. Hyundai Motor's domestic sales too declined by a similar level.

Commodity Prices
"The shortage of electronic components had a minor impact on the production of vehicles, mainly domestic models," Maruti Suzuki said in a statement.

A senior Tata Motors executive said while the company had expected the component supply situation to improve, it had taken a turn for the worse in the June quarter, and the uncertainty was now expected to prolong.



Shailesh Chandra, president of passenger vehicles business unit at Tata Motors, told ET that the input cost inflation has become a major challenge. "Apart from usual commodities like steel and precious metal, additional impact of premium being paid for securing semi-conductor supplies would be about 1% of our revenues."

China is battling its biggest ever Covid outbreak with Shanghai under lockdown since April and curbs rising in Beijing. This has impacted factory output due to shutdowns and increased congestion in the ports. The issue has worsened due to China's zero-Covid policy.

At the same time, prices of several commodities including crude and metal are at an all-time high due to the war and a recent World Bank report has said prices will be at historically high levels through the end of 2024. The report said energy prices are expected to rise more than 50% in 2022 before easing in 2023 and 2024, while metals are projected to increase almost 20% in 2022 before moderating.

Air-conditioner and refrigerator makers say supplies in May will be lower than demand, which has already hit an all-time high due to the heatwave and Covid-induced pent-up demand. The companies are also raising prices by 3-5% with immediate effect to factor in the higher input cost.

Godrej Appliances business head Kamal Nandi said the shortage will become more acute in May. "The situation in China is bad...cargo vessels are stuck and whatever we have ordered is not reaching. Production challenges will become a concern going forward from the end of May," he said.

Last Friday, Apple CEO Tim Cook said in an analyst call that supply challenges were "significantly lower" in March quarter than December quarter, but have became worse in the June quarter. The makers of iPhone and Mac computers have estimated the impact of "supply constraints" to be around $4-8 billion globally.

LG Electronics and Samsung too flagged similar concerns in their earnings release last week. Samsung said smartphone demand is forecast to slightly decline in June quarter, while uncertainties over prolonged Covid-19 and component shortage are likely to persist in July-December.

Counterpoint research director Tarun Pathak said the smartphone component supply shortage continued in April, and was accompanied by logistics issues which were not there earlier.

Gaurav Vangaal, associate director, S&P Global, said the supply chain constraints in May were likely to be more than April due to the current geopolitical scenario and Covid scare in China. However, some select players were likely to receive better supplies due to diversion of chips from Russia to other markets including India.