Working Capital Challenges On The Horizon For The Automotive Industry

At the onset of the nationwide lockdown due to the Coronavirus in March, India’s automobile industry came to a standstill. Valued at around $57 billion, this segment petitioned the government for financial aid in the form of a moratorium on loan interest payments and working capital support.

As it is, several small and medium auto enterprises were already facing cash shortages since the implementation of GST. This was due to the steep tax rates of 28% levied on around 40% of automotive parts and components. The pandemic-led nationwide lockdown only further accelerated such problems for the industry.

What Can Cause The Working Capital Decline?

While the entire economic slump is to blame for the current working capital issues faced by the automobile industry in India, here is a look at some of the extenuating factors that specifically harm this particular industry –

• Tremendous Shortage In Component Parts

A majority of the auto components are sourced from China. Due to the pandemic, imports of such nature effectively dried out. These supply chain disruptions delayed production, thereby causing sales to suffer. Indirectly, such an issue created working capital shortages for companies. 

With no indication of when supply chains would be restored to normalcy, the automobile industry must prepare for continued disruptions in receiving auto parts.

• Limited Availability Of BS-VI Models In The Market

The working capital problem within the industry will accentuate because of the limited availability of vehicles with the upgraded BS-VI certification. Post 31 March 2020, car companies were restricted from selling cars with the older BS-IV emission standard, replacing them with upgraded BS-VI models. However, due to lockdown and limited supply of parts, these upgraded models may be in short supply in the future as well. This could increase further cash shortfalls ahead.

• Decreased Customer Footfalls

With the economy being the way it is at present, automobile sales are expected to plummet further. Customers simply do not have sufficient liquidity to invest in these expenses. Until the market begins to recover significantly, working capital challenges will likely continue.

Keep in mind that sales were predicted to dip in 2020 even before the Coronavirus pandemic began. This was due to the increased pricing for the BS-VI variant of cars and bikes. In conjunction with the on-going economic crisis, this price hike will also decrease sales numbers in the future. 

• Blocked BS-IV Inventory

The remaining BS-IV inventory for car dealerships can cause additional cash problems, especially for car dealerships. Additionally, the tightening eligibility criteria for availing business loans can also add to these working capital troubles for automobile businesses.

• Increased Reliability On Online Retailers

Online car and bike retailers in India have experienced high traffic and interest. Nevertheless, this transition to the online marketplace may increase the overall cash flow issues, instead of resolving them. Vehicular sales through such platforms will be low due to limited customer confidence in these retailers. 

So, if you are working in the automotive industry at present, you can expect a few years of intense struggle. Most companies will face financial shortages, which may take years to resolve. Still, businesses can employ a few measures to ensure long-term gains at this stage.

How Can Automobile Companies Respond To Working Capital Problems?

Recovery from this economic slump will differ from one company to another. Businesses, which are quick to respond, will likely recover sooner than others. The following three-step plan can enable automobile companies to regain some of their lost traction – 

• Adapt work ethics and employee routine by providing flexible working options. Prioritise their health. A healthy workforce will draw in more profits than an absent one.
• Business owners need to get involved with real-time supply chain management, ensuring the availability of all essential parts. In short, working capital issues can be addressed through the implementation of a contingency plan.
• Acquire financing when cash is in short supply. Fortunately, companies can rely on alternative sources of funding, when typical bank loans are unavailable. For example, with invoice discounting, your business can leverage unpaid invoices to acquire emergency funds.

A company’s management must begin continuity planning as soon as possible. 

This involves setting up response teams, with specialised and aligned leaders.

Bottom Line

At present, the Indian automotive industry is struggling like many other sectors. The working capital shortage is one of the main issues these businesses are facing today. Undertaking a few simple measures can prevent such companies from facing long-standing implications of the current slowdown.