COVID-19 Effect: Auto component manufacturers set to defer their planned capex of $4 billion till 2022

On the continuous spread of the COVID-19, the auto component manufacturing companies are set to defer their planned capex of around $4 billion till 2022. This decision has been taken to preserve cash and cope with supply chain disruptions, as per the announcement made by a top official of the Automotive Component Manufacturers Association of India (ACMA).

As the domestic auto industry is likely to witness a decline in double digits this year, the auto component companies are revising their strategies for the near term, adhering to the old mantra of ‘Cash in King’, said the official.

“Going forward, the majority of the tier-I component makers will focus more on consolidating capacities rather than expanding at least for the short-term in order to preserve cash. Overall, I think about $4 billion of capital expenditure is at risk from the auto component makers for the next two years,” Deepak Jain, President of ACMA said in a virtual roundtable organised by ETAuto.

The association pointed out that the $57 billion industry was suffering due to a prolonged slowdown with capacity utilisation shrinking to 60 percent last year. This crisis has further aggravated post coronavirus outbreak.

Deepak Jain, President of ACMA, explained that when the domestic auto component sector was growing at the rate of 10-15 per cent, the auto component manufacturers spent close to $2 billion annually on land, network expansion, and branching out into new business. But now in this present critical situation, survival and cash conservation are their top priorities rather than going for capex expansion. Nonetheless, some investments are expected to be seen on the forefront, added Jain.

Echoing similar opinion, Jagdeep Singh Rangar, chairman, MSME, ACMA, said that small business players, who have been severely impacted by the lockdown, have decided to adopt the strategy of financial prudence for the next two years.

“The MSME sector is already cash-strapped and therefore investment on capex is a big no for them for at least two years. Survival is our key requirement as of now and companies will postpone cost in the foreseeable future,” Rangar added.

NK Minda, chairman of leading tier 1 supplier of Automotive Components, Uno Minda Group, said although the plants have resumed their operations, yet the revenue generation looks bleak due to the severe dearth of demand from the end-consumers.

"We have come down to 2-5 percent of the sales budget from what we have originally planned for the current fiscal year," he highlighted.