There's a new shipping crisis in Southeast Asia. Auto firms have stocked up

This logistical bottleneck is of particular concern given that exports to major markets in the US, Europe, and Asia account for nearly 30% of the annual turnover of Indian auto component makers, the Automotive Components Manufacturers' Association (ACMA) said on Thursday.

In FY24, the Indian auto components industry clocked a revenue of $74.1 billion, marking a growth of 9.8% over the previous fiscal year. Notably, exports grew at a faster pace than imports, resulting in a trade surplus of $300 million, a significant improvement from the previous fiscal year’s deficit of $200 million, according to data from ACMA. 

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“Not only are freight costs increasing, but the time to deliver has also gone up substantially, almost twice to thrice the usual duration," Vinnie Mehta, director general of ACMA, said.

“Bottlenecks in the Red Sea are one issue; we are also facing bottlenecks in the Southeast Asia region," Shradha Suri Marwah, president of ACMA, explained further. "The Singapore port is very congested. Sri Lanka and China are also cluttered. Today, freight companies are asking for a congestion surcharge of up to $1,000-$1,500 per container, and we are also having to hold more inventory." 

The imports scenario

However, the industry seems to be doing better on the imports front, which is important for the domestic market.

Unlike the semiconductor shortages and shipping issues seen during covid-19, which caused severe shortages of parts and vehicles in India, suppliers and original equipment manufacturers (OEMs) have learned to anticipate and mitigate such disruptions. Marwah emphasized that the industry has taken a proactive approach to the crisis this time.

“Till September end, we don't see an issue. We have built up inventory for 45-60 days, so we are well catered to for the festive season. I can't say what will happen if this crisis continues, then everyone will be impacted. The target for everyone is to cover Diwali, and that seems to be covered," Marwah said.

“If this logistics issue continues, then the inventory building might actually do us good. The supply chain is now more vigilant, and the forecasting is better," she added.

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Marwah told Mint that the impact of heightened shipping costs will be passed on to customers and covered by forward contracts with OEMs in most cases. However, margins could be temporarily impacted due to the increased costs and extended delivery times.

Export and import dynamics

In FY24, India’s auto component exports grew 5%, reaching $21.2 billion, while imports increased by 3%, amounting to $20.9 billion. The industry's positive trade balance of $300 million was primarily driven by strong demand for engine components and drive transmission and steering parts, which together accounted for more than half the exports. 

The US and Europe remained key export destinations, with North America accounting for $6.79 billion and Europe $6.89 billion of the total exports, according to data compiled by ACMA.

Conversely, China continued to be a major source of imports, accounting for 29% of the total imports, followed by Germany, South Korea, and Japan. Imports were dominated by drive transmission and steering parts, engine components, and electricals and electronics.

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The sector's growth is fuelled by growth in domestic vehicle sales, despite a lacklustre first quarter, a strong aftermarket, and increasing exports. 

In FY24, the aftermarket grew 10%, driven by increased vehicle usage for personal and commercial purposes, and the rising formalization of the repair and maintenance market. “The upcoming festive season is expected to lead to a much better second half of the year," Marwah said.