Auto industry expects smooth ride, but Omicron could be a speed breaker

India's automobile industry expects a continuation of healthy demand along with easing of semiconductor supply issues during the upcoming year.

However, speed breakers such as the third Covid wave triggered via the spread of Omicron variant in India as well as rising commodity prices might decelerate the industry's recovery.

"Auto industry is hopeful that the new variant of Omicron of Covid-19 will not play a major spoilsport. We are hopeful that once the semiconductor crisis eases out, the industry can continue to witness strong demand and do better in 2022," said Rajesh Menon, Director General, Society of Indian Automobile Manufacturers (SIAM).

"The industry is hopeful that the favourable policies of the government for instance the PLI schemes for the auto and auto component sector, advanced chemistry cell, extension of FAME-II scheme till 2024 and the announcement of a PLI scheme of Rs 76,000 crore for semiconductor manufacturing will provide the much-needed fillip to the industry."

Lately, rising commodity costs have driven up automobile prices.

Similarly, the semiconductor shortage has extended the waiting period along with escalated prices.

At present, semiconductors play a critical part in the production of internal combustion engines. They are an integral part of all kinds of sensors and controls in any vehicle.

"We see the year 2022 as a neutral year as the rise of Omicron has once again created fear globally," said Federation of Automobile Dealers Associations (FADA) President Vinkesh Gulati.

"This may further impact the supply in passenger vehicles if chip making countries go under a lockdown or prioritise chip making for electronics used for 'work from home'.

Besides, Gulati said the two-wheeler market which continues to face demand headwinds may further go into slump if the third wave becomes a reality.

"We anticipate that H2 of CY 2022 may see supply as well as demand slowly coming back to normalcy. As mentioned earlier, Auto Industry may fully recover only by 2023 and come back to its pre-covid levels if covid becomes a history."

Currently, the industry fears the advent of a third Covid-19 wave triggered via the Omicron variant.

"Overall the automotive industry is expected to fare better than in FY21 as we will probably see continuous production throughout the year without any breaks provided Omicron is not very severe and there are no localised lockdowns," said Hemal Thakkar, Director, Crisil Research.

"Also, semiconductor shortages are easing out as compared to earlier, but will still continue to persist throughout 2022."

Further, Thakkar said the momentum on the EV side would be "better" with players wanting to invest in battery cells and vehicles on account of the PLI released by the Centre which will facilitate ecosystem growth and demand-side incentives under 'FAME II' and state policies.

On the semiconductor crisis, Shamsher Dewan, Vice President & Group Head, ICRA said: "Normalcy in the supply chain is likely to be achieved only over the next 12-18 months as new capacities come on stream."

"Leading global players across the value chain have given a guidance of production shortfalls continuing for a major part of 2022; supplies are only expected to revert to normal levels by the first quarter of CY2023."

Besides, Dewan said that OEMs will continue to invest in new product development, with significant investments towards new technologies, such as electric vehicles (EVs).

"Within the various automotive segments, the 2W segment is expected to be at the forefront of India's automobile electrification drive, with the EV policy environment turned conducive for the segment."

"Significant financial incentives are being offered for e2Ws under the centre's FAME-II scheme and select state EV policies; the same has materially altered the total cost of ownership (TCO) in favour of EVs and has led to a surge in demand for the segment over the past few months."

According to Tanu Sharma, Director Ratings at Brickwork Ratings, passenger vehicles revenue growth estimates of BWR may be revised downwards to 15 per cent for 2022 in the backdrop of more severe semiconductor chip shortages impacting deliveries and muted festive season sales.

"The commercial vehicle segment should however grow at 20 per cent YoY in 2022 led by the revival of construction, agriculture and eCommerce activities, coupled with a low base. Due to rising commodity prices, and rising fuel prices, vehicle price hikes will be inevitable and pose a challenge of the high cost of ownership to buyers in the medium term," Sharma said.

"Vehicle price hikes may not fully cover the rising inflationary costs and could hurt the profitability of auto companies. Downside risks from the Omicron variant of Covid, viz. deferral in the resumption of travel, and the consequent impact on macroeconomic growth and a further delay in resolving semiconductor chips shortages remain pertinent."

In addition, Sridhar V., Partner, Grant Thornton Bharat LLP said: "The auto sector looks at 2022 with optimism despite several challenges faced by it in the form of chip shortage, Omicron, a price increase of input materials."

"The kickstart of the PLI scheme by the government with clear directional indicators supported by measures under FAME, introduction of scrappage policy, uptick in demand, positive sentiments and overall economic growth indicators should strengthen the optimism. Chip shortage is expected to ease out in the near term to keep pace with the demand expectations. 2022 is expected to be a year of awakening for the industry."

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