Vehicle Recalls: Risks Loom For Auto Parts Makers

With rise in vehicle recalls in India, auto component industry has a lot to worry as there may be impact on the profitability of the companies.

“Growing vehicle recalls may lead to further increase in warrant provisions in the medium to longer term and that could directly affect the profitability of auto ancillaries, rating agency Icra said in a report.

“In case of a large recall, there could be pressure on liquidity as well as credit profile of an ancillary who supplied those defective components,” it added.

Despite no formal recall policy in the country, over the last five years, the Indian automotive industry has witnessed a sharp increase in the number of vehicle recalls, both by global and Indian OEM (original equipment maker). While the financial implications of such vehicle recalls are far reaching on OEMs, suppliers also have a lot to worry about.

As product requirements from OEMs increase, quality expectations from the auto component manufacturer and the liability in the event of a defect are bound to increase. Vehicle makers will attempt to push down a significant portion of the directly attributable cost to the Tier I suppliers.

But, Tier 1 vendors who themselves are sourcing from several smaller companies, they may not be able to pass those costs down stream given the scale and financial strength of their fragmented supplier chain. Apart from stringent control on product design, extra safety equipment and quality check measures will have to be taken up by the Tier I supplier. Thus, warranty provision may increase further in the coming years that could directly affect profitability of auto ancillaries.

Globally, several countries have a mandatory vehicle recall code to safeguard the interest of the consumer, which entails heavy financial penalties and criminal charges against the OEMs.

Indian government has proposed ‘Recall of Vehicle’ policy in the Road Transport and Safety Bill, 2015, which is in consultation stage now.

Meanwhile, Icra has pointed out that softness in COMMODITY PRICES will continue to provide support to operating margins of auto parts markers over the next two quarters. Companies having strong aftermarket presence will benefit more.