Not Chip Shortage, India's Tata Motors Is Concerned About Another Issue

 

Some of the biggest names in the auto industry have already had to modify their car production targets due to the global chip shortage and many are making plans to cope with the situation as the semiconductor crisis threatens to worsen in the coming months. But according to a report, one of the top automotive manufacturing companies in India, Tata Motors is more concerned about something else than the chip issue.

The company, which is India’s third-largest carmaker, is more worried about the rising cost of raw materials. As reported by Bloomberg Quint, PB Balaji, who is the chief financial officer at Tata Motors Group, said: “It [raw material cost] is becoming very, very painful. Prices right now are moving so fast that we are not able to process it.”

According to Balaji, vehicle costs have increased by 14 per cent in the last year across all categories due to engine upgrades to meet lower emission standards (BS-VI or Bharat Stage VI), while another 6-7 per cent increase in price is due to higher steel costs.

Tata Motors has raised rates three times thus far but has yet to recoup the full cost increase. Balaji added that “we have taken 6 per cent price increase already. I think we are still losing at least 350-400 basis points of the margins because we are not able to pass-on hike in the price of steel”. According to him, the manufacturer will have to raise prices another 5 per cent to compensate for the increased steel price.

The company is unsure if the fragile recovery in demand will withstand the increased cost of fuel and automobiles. The chip shortfall is already affecting manufacturing in India and the Jaguar Land Rover, a Tata Motors business based in the United Kingdom. According to Balaji, 50 per cent of JLR volumes, or around 65,000 units, will be lost due to the chip shortage in the July-September quarter.

It was also said that the production in India is expected to be 3,000-6,000 units lower than the usual quarterly production of 45,000-50,000 units.

However, Balaji said: “Specific inventories [supply chain] in specific areas have been jacked up so that we have the right things with us and we are picking up whatever orders we are given. It is a meticulous planning process between us, tier 1 [suppliers] and the semiconductor industry.”

He claimed that Tata Motors was purchasing such inventories even during the lockdown imposed to curb the second Covid-19 wave in India. According to Balaji, this is now providing relief to the automaker.

As per the report, Balaji is optimistic about a robust comeback in the second half of the fiscal year and may delay more price increases till then. While hoping for stability in raw material prices, he said that “at this point, I am starting to worry and we need to be careful that we don’t overdo the pricing”.

Balaji also told the Bloomberg Quint that Tata Motors is working on every aspect to get operating leverage and find ways to generate revenue. He noted that “various works are happening to take the steel out in its entirety and then, of course, production mix is a very important lever.”

“Per vehicle I may not be able to make money but if it’s a better mix of products I can make money out of that,” Balaji said.

However, according to reports, to find a long-term solution to the chip scarcity, the Centre wants to establish a semiconductor sector in India. Union Commerce and Industry Minister Piyush Goyal said: “There is a worldwide shortage of semiconductors and the government is very much focused on bringing the semiconductor industry to India… the government is committed to supporting both these sectors."

Goyal's remark on the global chip issue comes just days after Tata Group announced that it is considering entering the semiconductor business. This decision by the automaker will not only allow it to capitalise on a massive opportunity but will also result in shorter wait times for Tata Motors vehicles in the long run.

Recently, Tata Sons Chairman N Chandrasekaran said: “At the Tata Group, we have already pivoted into a number of new businesses like electronics manufacturing, 5G network equipment as well as semiconductors, in all probability.”

Additionally, he said that “on rebalancing supply chains, India can benefit from global shifts. The Tata Group has already set up a business to seize the promise of high-tech manufacturing for electronics. A domestic electronics industry could unlock $1 trillion in GDP and create millions of jobs.”

While talking about the semiconductor sector in India, Goyal said that the government's 'Aatmanirbhar' will be pushed further through developing the chip industry and boosting the shipping industry. He also hopes that significant corporations would take an interest in the shipping business, which will provide the sector with the necessary push for the country's international trade.