auto-industry-outlook-2012.pdf

7/30/2019 auto-industry-outlook-2012.pdf

1/5

H I K E

S A L E

S

I N T E

R E S T

Automobile & Auto components

Research CellVector Consulting Group

Industry Outlook


2/5

Vector Consulting Group www.vectorconsulting.in

As the 'new normal' restored after the short financial crisis of 2008, the Indian Automobile industry started registeringa healthy growth in sales. Till 2011, the industry registered strong growth fueled by high per capita income, and themarket opportunity from low level of vehicle penetration in India compared to the several developing economies .

However, From 2011 onwards, the key industry segments Passenger vehicles (PV) and Heavy commercialvehicles have felt the major setbacks. The downturn has been attributed to two major events :

The hike in interest rates affected the Heavy commercial vehicles and the passengervehicle segment as the customers in both the segments could not affordable auto-loans.

The petrol price hike affected the Entry-level passenger vehicles. With hike in fuelprices, the running cost of vehicle increased which dampened

the sales.

The OEMs had high inventory in the supply chain and

the dip in sales prompted OEMs to push the excessinventory towards the dealers. As per industryestimates* , the quantum of unsold cars with dealerssurpassed 3.85 lakh units by June 2012. This excessinventory was equal to 40 days of average inventory-double of the normal levels .The story of commercialvehicles dealer inventory turns was alarming as it willabout nine months to flush out the excess inventory .

The only way out of the above situation was to correct thevolume of production. In fact, the corrections have already

started taking place. A report in the Indian Express mentionedabout OEMs announcements of production cuts, plant closures and

'no production days' to control pipeline inventory pile-ups. The highinventory levels at dealers forced the truck makers to cut down their

production significantly. Another report by CNBC-TV18 highlighted thatthe market leader in passenger vehicle (PV) segment had brought down

its production of petrol vehicles by one third in June 2012, while othercompeting automakers in the same segment have cut down their

production by one fourth during the same period. A European carmakeroperating in India shut down its manufacturing plant for several days in July-

Aug, 2012.The direct effect of these cut backs by Automakers would lead to forced

shutdowns by component manufacturers for much longer periods, to correctexcess inventory lying in their warehouses.

Typically; most tier 1 vendors have one month of sales as inventory. When OEMsshutdown their plant for a few weeks every month, the same inventory at tier 1

component vendor balloons up to several months of sales.The coming months are likely to lead to long periods of shutdown for tier 1 and tier 2

suppliers. Most of them are likely to trim their capacity to survive in the tough times. Someof them are facing severe working capital issues as money is locked up in high inventory of raw

materials and finished goods.

Automobile & Auto componentsIndustry Outlook

(1)The passenger vehicle penetration measured as no of vehicles per 1000 people, is 20 in India, while it is 40 in China, and 400 -700in Europe.

(2)The hikes in fuel prices and interest rates do not affect the luxury passenger vehicle segment. I t is because this segment isrelatively less sensitive to price & the running cost. And since this segment represents only 2 % of the auto industry in total industry sales volumes, the health of this segment is not representative of the overall health of the auto industry supply chain.
http://www.vectorconsulting.in/http://www.vectorconsulting.in/


3/5


Now the Million Dollar question : Why is the industry going through such turmoil? Can everything be blamed on thedownturn?

The real issue can be unearthed by looking back at the events in the last 7-8 months. In spite of the clear indicationsthat the market was witnessing a slowdown, the OEMs did not adjust production schedules. In fact, they resorted toproducing higher than before to meet the ambitious sales and production targets that were set before the slow downbegan. These ambitious forecasts were also passed down to the Tier 1 suppliers, who in turn, ordered higher volume

of raw materials from tier 2suppliers.

The damage of shutdownsis going to be higher for theplayer who is fartherupstream in the supply

chain the tier 1 and tier 2suppliers. The worst hitsuppliers would be the oneswhose import content intheir components is veryhigh.

Under these circumstances, thecomponents manufacturers would

be forced to go in for lay-offs. Alternatively, the components manufacturers have two options:

Utilizing existing capacities by trying to increase sales in the aftermarket, which is relatively insulated from the

slowdown in the vehicle sales segment, and/or

Diversifying their portfolio by entering new automotive & non-automotive segments.

Most of the auto component companies are not organized to service the after market. They have been mainly orientedtowards servicing the OEMs based on a forecast. Serving the Aftermarket actually means helping distributers tospread the range and reach at the retail level. This calls for a sustained effort in channel management, a long -terminitiative. The same is true with the strategy of entry into non -auto segment this is also a long- term effort of newproduct development and vendor approvals. It is nearly impossible for most auto component companies to deal withthese opportunities in the immediate term to tide over the crisis.

So, we expect most of the component vendors to trim down capacities (by laying off skilled labor) as immediatereaction. When industry will revive, most of them will find it extremely difficult to ramp up capacity at short notice.The signal to ramp up again will come very late as the OEMs, hurt by the high inventory during the slowdown, will waitfor the pipeline inventory to flush out. The coupled effect of demand recovering and OEMs conservative reaction willlead to inventory levels dropping very fast. Add to this, the fact that component suppliers have cut down theircapacities. The combined effect of all the above is loss sales during peak time. (We believe that the Indian growth story is intact in the long run and hence it is a matter of time before demand starts picking up once again).

The above Bullwhip effect* will have long-term implications in capacity planning in the supply chain.While the OEMs will depend on tier 1 and tier 2 suppliers to meet their growth numbers, most of these suppliers willbe extremely wary of putting capacity without some kind of guarantee. One expects the conflict around accountabilityfor capacity enhancement between OEMs and component vendors.

On one side, we can blame the economy for what is happening, but we cannot ignore the fact that the industry isinflicting bigger wounds on itself by creating the Bullwhip effect.


About 3.85 lakh units of cars an excess inventory atautomobile dealers by the end of June 2012.

The average inventory at dealers goes up from normalinventory level of 20 days to 40-50 days.

The large commercial vehicles inventory is likely to takeabout 9 months to convert into final sales.

TheImpact on

AutoDealers

*Distortion of information about the demand for a product as it passes from one entity to the next across the supply chain.


4/5



Manufacturer Tier 1 Tier 2Customers

The Bull-Whip Effect

Auto industry is supposed to have implemented the principles of JIT (Just In Time). They are expected to moveinventory between various entities just in time of the real demand. The regular month-end skew of finished goods

dispatches and the Bullwhip effect during the dip in demand indicates that the industry has not implemented theprinciples of JIT they are actually not moving inventory just in time they are moving it based on forecasts muchahead of time.

The low inventory of components in the books of OEMs and the clean shop floors do not indicate the success of JITimplementation. In reality, most implementations of JIT have been limited to only movement of component inventorybetween the transporter warehouses and assembly plants of OEM, while the entire supply chain continues to operateon a forecast and push mode. OEMs share the tentative schedule with the auto component suppliers well in advance.and they expect the auto component suppliers to plan and stock the inventory at their end, but close to OEMs plants(and hence the transporters warehouse). The auto component suppliers plan their daily capacities as per the forecasts(or schedules).

The entire built up inventory remains with the auto component manufacturers and they send the same to OEM basedon JIS - "Just in Sequence" of the assembly line. OEMS do not keep more than one shift inventory. The variationbetween build up of component inventory (based on advanced schedules) and the actual pick up based on shiftsrequirement of OEMs leads to a skew of inventory profile at the transporters warehouse - excess of componentswhose forecasts was high and shortage of components where forecasts was low. The same problem exists betweenthe dealers and the OEMs; the finished goods pile up is based on a push as per forecasts. Moving inventory based onpredetermined forecasts of targets makes the auto supply chain highly inflexible as it delays its ability to correctquickly. The more the corrections are delayed, the more painful it is to recover from the mismatch between demandand supply for all parties in the supply chain.

It is high time that the auto industry realizes that they actually do not have a supply chain which operates on JIT. It isnot as lean as the industry outsiders are made to believe. It is t ime for the industry to build an agile supply chain rightfrom the manufacturing operations of the component vendor till the dispatches to the dealer. A real JIT can beimplemented only when the entire supply chain builds and moves inventory on the basis of real consumption signalsrather than forecasts. Only a consumption based movement and production methodology will enable to meet thechanging demand patterns much faster and prevent the bull whip effect

References

Automakers mull downsizing production Indiatoday, New Delhi June 26, 2012.

Waiting for sales, The Financial Express, August 3, 2012.

Auto Industry Ends 2011-12 on a positive note, New Delhi, April 10, 2012.

High interest rate, fuel prices slow down car sales , Indo Asian News Service, May 10,20 12

Dealers OEMs Tier 1 Tier 2Customers

The Bull-Whip Effect


5/5

[email protected]

VECTORCONSULTINGGROUP

Automobile &Auto Components

ConsumerGoods

Retail Engineering &Construction

EquipmentManufacturing

Vector Consulting Group was founded with themission of helping companies get market sharegrowth in their respective industries by developingunique supply chain capabilities, which provide acompetitive edge.VCG uses the platform of Theoryof Constraints solutions and thinking processes for developing these capabilities for its clients.

linkedin.com/groups/Vector-Consulting-Group-4381748

facebook.com/VectorConsultingIndia

linkedin.com/company/499153

twitter.com/VectorConsultin

VCG is the leader inTOC consulting in India.

Documents

auto-industry-outlook-2012.pdf