With orders coming to a screeching halt, ancillary manufacturers say they have been forced to lay off employees.

As auto industry slows down ancillary companies suffer in Chennai
news Business and industry Friday, September 20, 2019 - 12:47

50-year-old Balachander* who has been running a spare parts manufacturing company for TVS in Chennai, is set to completely shut shop in October. In the last month alone, he has had to lay off 20 employees who worked at his factory in Guindy and with no orders coming in, he sees no benefit in paying the last eight men still under his employment.

"We do sub-contract works for automobile manufacturers and the last three years has seen a steady decline in work culminating in a paralysing situation this month," he tells TNM. "I am giving the employees still here half a month's salary without even any work to do. Three years ago, I had 50 employees and a flourishing business," he laments.

In Guindy and Ekkaduthangal alone, there are close to 200 ancillary industries that depend on larger automobile manufacturers and most of them are struggling to stay afloat as demand is coming to a screeching halt.

According to the Automotive Component Manufacturers Association of India (ACMA),  the figure of job losses in this sector stand at around 10-15%. So far, those hired on contractual basis, who form a major portion of the workforce have had to bear the brunt, these reports indicate. In terms of absolute numbers, some 8 to 10 lakh workers might have lost their jobs, says ACMA.

Sources in ACMA estimate that there are over 50,000 ancillary manufacturers in the country.

"The first line of suppliers are called Tier 1 -like Wheels India And Lucas TVS. These people have suppliers who form Tier 2. And then Tier 2 have suppliers who form Tier 3. The most vulnerable in this chain are Tier 2 and Tier 3. They could be small and micro enterprises and the problems they face are very valid. They are under lot of stress because of liquidity crunch. They don't have credit rating that big companies have and the cost of capital for them is high," says an ACMA member to TNM.

Industry de-growth

With the economy seeing a massive slowdown and amid damp consumer sentiment, sales of automobiles in the country have been the lowest in over a decade. According to data from Society of Indian Auto Manufacturers (SIAM), the industry saw a de-growth of 12.25% in the April-August 2019 period in terms of production.

Automakers have scaled down production amid dampening sales. The sale of Passenger Vehicles declined by 23.54% in April-August 2019 over the same period last year. The overall commercial vehicles segment fell by 19% in the same period, compared to last year. Three-wheelers sales declined by 7.32%, while two-wheelers sales registered a de-growth of 14.85%.

All ancillary companies depend on these major automobile manufacturing companies for their business. With production coming to a halt here, ancillary companies, which are much smaller in size are the worst affected.

Ancillary manufacturers tell TNM that they are not given loans easily and neither do they benefit from government schemes like Mudra. "We are forced to take hand loans because banks don't give us money for capital easily," says Balachander.

Kumar*, who has been running a spare parts manufacturing unit in the city for 25 years now, says the current downturn is unprecedented.

"In 2008 we faced a dip in demand but it was nowhere close to the current debacle," he tells TNM. "There are no orders coming in from companies like TVS and Maruthi. But the bigger players - like Hyundai or TVS will manage because they have assets. It is only smaller players like us who will suffer. I have laid off all my employees because we couldn't pay them salaries," he says.

Balachander says that his unit would make a turnover of Rs.3-4 lakh every month and that has now reduced to nothing. ACMA, meanwhile, predicts that the worst is yet to come.

"Everyone is a victim of the downturn but the poor people always suffer the most as is the case in everything. Tier 2 and 3 are weakest links in our value chain. They don't have the right resources, access to capital or human resources. If the downturn continues, they will completely collapse," warns the member. 

ACMA and smaller manufacturers allege that the government's decision to levy GST is one of the primary causes for the downturn. However, they do acknowledge that the problem is larger.

"People will not think about buying vehicles when they are unsure if they can even keep their jobs long enough to pay EMIs," says Kumar. "The economy as a whole is suffering. And we are going down with it."