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Auto part makers cautious on investment

Top component makers had invested heavily in capacity expansions in early 2008, but the global recession and tight availability of finance saw a demand slump in automobile sales.
 
Auto component manufacturers are careful about making huge investments for capacity expansions. This comes in the wake of growing uncertainty over Euro IV emission norms and a possible hike in excise duty on cars. Senior industry executives say this stance by component makers is mainly due to fears that they could be stuck with large liabilities as the government hasn’t yet upgraded refineries to supply eco-friendly fuel.
Top component makers had invested heavily in capacity expansions in early 2008, but the global recession and tight availability of finance saw a demand slump in automobile sales. As a result, auto parts makers have resorted to layoffs and production cuts. “When there is a downswing in demand, we are not insulated enough and we are left to handle the risk. So now all of us are overly cautious,” said Ashok Taneja, Managing Director, Sriram Pistons, which supplies to major car makers such as Maruti Suzuki and Tata Motors.
The Indian automobile industry, one of the few local industries affected by the liquidity crisis, has seen a steady recovery with sales in the past six months, growing by 15-20 per cent, prompting an increase in demand for part makers.
Car majors recently approached the government to extend the April 2010 deadline for emission norms by a couple of months, fearing that any mismatch of fuel can have an adverse effect on engines. While car companies are readying to get their vehicles compliant to stringent emission norms, the government has not yet upgraded refineries to meet stringent norms. The petroleum ministry has so far just set up a committee to ensure that 11 metros would adopt Bharat Stage IV emission norms and the remaining cities would upgrade to BS III by April 2010.
Component manufacturers are also worried that the recent upsurge in demand may not be sustainable. “A hike in excise would lead to a price hike in cars, and that might hit demand,” said Nishant Arya, an Executive Director with JBM Group, a leading company in the automotive and fabrication sectors.
“Most auto manufacturers also fear that parts suppliers may not gear up in time,” said Rakesh Batra, national leader (automotive practice) Ernst & Young. They admit that most makers have been facing parts shortage following a sudden spurt in year-end demand.  The sales growth has been across all segments of the auto industry. While car sales are growing at 15-20 per cent over the past few months, commercial vehicles too have seen a revival of the same quantum. Car companies, along with dealers and financiers, have stepped up discounts to clear off the year-end inventory with many manufacturers planning plant maintenance shutdowns to avoid piling of 2009 inventory. Traditionally, the festival season ends by November. This year has seen an extended festival season from September, which has stepped up footfalls, inquiries and sales, said manufacturers. Car sales, which saw a minuscule growth of 0.3 per cent in India in the financial year ended March 2009, is expected to cross 1.5 million units in the current fiscal year. Meanwhile, component makers, during the recent global recession, kept up the R&D spends in newer automotive technology like improving fuel efficiency and reducing emissions. To gear up to the April 2010 Euro IV emission norms, auto component makers have put up additional balancing and quality control equipment to produce new products. 

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