July 29, 2021

Alice-in-chains

Automotive forever

India’s luxury car buyers are being made to do something they aren’t used to

A global shortage of semiconductors has not only created supply constraints but long waiting periods for customers despite steady demand. Daimler, Volkswagen and BMW were forced to cut global production in June due to a shortage of spare parts and this may spill over to their India operations as well.

Luxury vehicle manufacturers have been witnessing a gradual increase in demand after a near shutdown in April and May following the explosive rise in covid-19 cases in India. Hence, the disruption in the supply chain could delay the recovery by a few quarters.

According to a Mercedes Benz India spokesperson, its global sales partners are seeing increasing demand across models, but supply shortage of semiconductor components had affected deliveries in the second quarter, especially June. “In India, we are witnessing a similar demand for our products across the portfolio, but we have a select impact and are mitigating. Saying that, we do not completely rule out disruptions resulting in some delays triggered by this shortage for our upcoming product introductions in the coming months,” he added.

The shortage of semiconductors also led to production delays for local mass-market manufacturers as the waiting periods for certain products had increased to more than four months in February and March. Hence, most automakers had to ramp up production from June.

In April, German automaker Daimler had reduced the working hours for a section of its employees and temporarily stopped production in a few facilities. Its competitor BMW also announced reduced output at its plants in the UK and Germany.

In May, Volkswagen chief executive officer Herbert Deiss said the company is in a “crisis mode” due to its inability to procure chipsets for its vehicles.

Tata Motors-owned Jaguar Land Rover has been the worst hit, and expects to report a negative operating margin and an operating cash outflow of £1 billion in the second quarter due to a 50% fall in wholesale dispatches.

“Unfortunately, our suppliers only gave us visibility in the last week of June. Our Q2 supplies could be constrained by as much as 50%. We still expect the situation to improve in the second half as certain specific capacity reduction has come back online. But we also expect for a period of 12 months up to 18 months for the situation to not fully normalize,” said Adrian Mardell, chief financial officer, JLR.

Despite the severe impact of the second covid wave in India, luxury vehicle manufacturers reported better sales in the first half of 2021 compared to the year-ago period with robust demand seen in the March quarter.

Mercedes Benz India, the country’s leading luxury vehicle manufacturer, announced sales of 4,857 units in the January-June period compared to just 2,948 units in the year-ago period. Swedish firm Volvo Cars also reported sales of 713 cars compared to just 469 in the corresponding period of last year.

Manufacturers were hoping for substantial sales growth on the back of a faster economic recovery.

Som Kapoor, partner, EY, said the impact on luxury automakers may be limited compared to mass-market manufacturers due to the limited volumes they sell in India.

“Most auto companies are suffering from a shortage of semiconductors and luxury carmakers are no different. This situation is likely to continue for some months as the suppliers are in the process of ramping up capacity. However, mass-market players will be more impacted because of their volumes,” Kapoor added.

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