Fear of excess capacity stalking auto SMEs

Although the auto industry in India, including SME dominated auto components sector, has come back on the growth track, analysts and industry players fear that the sector will soon have to face the problem of excess capacity. As small, mid-sized as well as big firms in the sector continue to add capacity and undertake ambitious expansion plans, there is a growing concern that a demand-supply imbalance might occur in the short-term.

Pricing and margins to come under pressure

As SME auto parts manufacturers as well as big vehicle makers embark on new capacity expansion plans, more auto parts and vehicles are expected to come into the market in the near-term. Therefore, the presence of a wide variety of products will offer buyers greater choice. However, it will intensify competition for SME auto components makers and auto majors, as supply will be far higher than demand.

"Consumers will be spoilt for choice as several car launches are slated to take place in the days ahead, but increased competition across segments will compel manufacturers and auto parts suppliers to price products even more competitively, thereby bringing their margins under pressure," said Vijay Sarda, proprietor of a Ford dealership store in Nanded, Maharashtra.

Although competition will benefit consumers, analysts fear that it will lead to a rerun of price wars for auto parts manufacturers and auto majors.

"SME auto parts manufacturers will have to be cautious before undertaking big production plans as it might cause more trouble for them rather than bringing in good returns, if the market continues to face the situation of excess capacity," said Manu Vora, proprietor of Kunal Auto Services, a small-sized auto parts supplier in Mumbai.

Therefore, it is advised that small-scale auto components manufacturers and suppliers tread with caution and take only calculated risks.

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David Parks is a well known author and has written articles on Cleaning Products and Phone Cards, suppliers, Manufactures and many other subjects.