India’s Auto Revival Runs Into Cargo Hurdle

The Indian automobile sector, yet to recover from a prolonged slowdown made worse by the pandemic, faces more hurdles — shortage in shipping containers and rising freight costs.

“This situation can lead to disruption of supply-chains of Indian auto companies over the next three-four months and may even lead to loss of production,” Rajesh Menon, director-general of the automakers’ body, Society of Indian Automobile Manufacturers, told BloombergQuint in an emailed response.

Automakers like Mahindra & Mahindra Ltd. and Tata Motors Ltd. have already cautioned about supply chain issues arising from chip shortages, with the former suggesting production could be hit in the fourth quarter itself. That threatens to delay after the lockdown caused a complete washout earlier in the year.

The shortage of vessels at ports that carry everything from car parts to medical equipment is because of the rise in global trade and demand from industries, leading to higher freight costs, according to Pramod Kumar Srivastava, president of the national association of container and freight stations. A big fall in imports and a sudden increase in exports has also added to the shortage, he said.

“The shortage is as high as 30% for containers, and the increase in demand for shipment comes at a time when the number of vessels on a particular route had been withdrawn by 40% due to Covid-19,” he said, adding that the turnaround time of containers has gone up substantially. “There’s no space to keep the containers.”

Menon of SIAM said freight rates, which rose since July, have reached levels where automakers are finding it almost impossible to sustain normal operations. And automakers, including M&M, Maruti Suzuki India Ltd. and the commercial vehicle unit of Tata Motors have announced they will hike prices in January 2021, without specifying the quantum, to offset rising input costs.

Others like Hero MotoCorp Ltd. said they would increase prices of their products by up to Rs 1,500. Volkswagen India said its Polo and Vento cars would cost 2.5% more, while MG Motor will hike its product prices by 3% depending on the model. For Nissan, the hike would be up to 5% across all models.

Demand for steel from various sectors have increased recently and has outpaced supplies from domestic steelmakers, Menon said. A shortage of iron ore for steel mills has only added to the pain.

“This has led to delays in vehicle production as some vehicle manufacturers are unable to meet the market requirements due to shortages and consequent increase in steel prices, over last few months,” Menon said.

Input costs, which accounts for 70% of the total cost of vehicles, have gone up dramatically, according to Shashank Srivastava, executive director in charge of marketing and sales at Maruti Suzuki. “While for steel, plastics, the prices have gone up by 30%, for precious metals such as rhodium, the increase is much higher,” he told BloombergQuint over the phone, adding that the company has no choice but to partially pass on the costs to the customers.

“We have to make a fine balance between financial prudence and demand recovery,” he said, adding in certain segments the price hike will be significant.

The fleeting recovery had prompted brokerages to revise their forecast for the industry. ICICI Securities revised the decline for two-wheeler and passenger vehicle categories from its earlier forecast of over 20% to about 15% for both the segments.

But that’s under threat. On the impact of price rise on demand, Srivastava said there’s a little bit of uncertainty, and they are apprehensive of the forward guidance.

“Till now we were highly confident of the market and there were good recovery signs, but now we’re again venturing into uncharted territories where we aren’t sure about the demand sustenance,” Gaurav Vangaal, associate director at IHS Markit, told BloombergQuint over the phone.