How Supply Chain Issues Killed Mahindra & Mahindra’s Festive Buzz
This Diwali, while dealers of automakers Maruti Suzuki India Ltd. and Hyundai Motor India Pvt. Ltd. were stocked with 40-45 days of inventory, Mahindra and Mahindra Ltd. dealers were sitting on just 14 days worth of potential sales. This was not due to some just-in-time supply strategy or anticipation of weak demand by the Mumbai-based utility vehicle major. M&M has been struggling with myriad supply chain issues that have slowed production and deprived the company of sales sparkle during the festive season. A precious loss in a year when earnings have already been decimated.
In March, India imposed among the most severe of lockdowns to stall the spread of Covid-19. For three months, March-end to early-June, the entire economy ground to a halt. When restrictions were eased, businesses were desperate to get back to work to make up for lost time and income. As pent-up consumer demand boosted sales, several manufacturers rushed to fill shelves and stores. Their hopes brightened by the oncoming festivals of Dussehra and Diwali—a time of peak sales for many.
But at Mahindra factories, the lines moved slowly.
Over August, September, October—the months in which India’s auto industry saw the first signs of a post-lockdown recovery—larger players such as Maruti Suzuki and Hyundai dispatched more units than they had over the previous year. But at M&M dispatches were almost flat.
October was particularly bad. Just before Diwali arrived and demand picked up, factory-gate shipments for Maruti and Hyundai rose by 15% and 12%. At M&M, it was 1%.
A dealer that retails Mahindra’s SUVs in Bihar and Uttar Pradesh, among key markets for the company, said he had only 15 days of inventory around festive season. It was an opportunity lost, he said on the condition of anonymity due to business concerns.
Two dealers based out of Delhi-NCR, also speaking anonymously, complained about unavailability of vehicles. No customer will wait for three-four months to get their car delivered, one of them said. Had stock been available sales would have been higher by 35%, both the dealers said.
Now, many dealers tell BloombergQuint they are left with few or no vehicles to sell.
M&M has over the months acknowledged the problem but offered no diagnosis of what went wrong. “We do have an issue where supply is much less than our current levels of demand and on all our key brands,” Rajesh Jejurikar, executive director (automotive and farm equipment sector) at Mahindra & Mahindra, told reporters in November when announcing the company’s second-quarter earnings.
He didn’t say much more except that the firm was aware it was missing out on demand and was not happy with the situation.
What Went Wrong At M&M?
Despite several requests, M&M did not share much detail with BloombergQuint. This account of the production troubles has been put together based on inputs from suppliers and industry experts, almost all of whom preferred to speak anonymously due to business considerations.
The problem seems to have started in February when the Covid-19’s impact on China became severe. At that time Pawan Kumar Goenka, managing director at M&M, had told Bloomberg in an interview that a component shortage caused by the coronavirus may adversely hit production of certain vehicles and potentially delay the shift to a new emissions standard. More so when the XUV-500 maker was lagging peers in the transition to BS-VI, a higher emission standard applicable April 1, 2020, onwards.
But with the coronavirus impact becoming more apparent, M&M was hopeful of a time extension, claimed an auto parts supplier. It was among the last to graduate to BS-VI, according to the supplier, and hence among the worst hit when a nationwide lockdown was imposed in March and all industrial activity came to a standstill.
For several months ahead of the April deadline, auto companies had been trying to run down inventories of BS-IV-compliant vehicles to avoid getting stuck with unsaleable stock. India has skipped one level and moved straight to BS-VI in an effort to curb pollution. The biggest impact of this change in standard was on diesel automobiles, the mainstay of M&M whose bestselling cars are utility vehicles and off-roaders.
In the November earnings conference call, Pawan Goenka, managing director at M&M, acknowledged that the firm’s transition to BS-VI was underway when the lockdown was announced, and it had had no time to build inventories both at its plants and dealerships. “This had never happened in our lifetime, and one of the reasons we had this supply issue is because we had zero inventories both at the dealership and at our factories,” Goenka said to reporters.
Also, the new standard prompted other manufacturers, such as Maruti, to phase out diesel models. Auto component companies also cut back on relevant diesel parts, said one supplier, leaving M&M short and severely limiting the company’s ability to ramp up production when the lockdown was eventually lifted in June.
Then came the Covid-related problems.
Maharashtra, where most of M&M’s manufacturing facilities are located, has been among the states worst hit by the pandemic. Local lockdowns, containments, restrictions on the movement of people and goods made matters worse for the automaker. Or as Goenka put it, his company faced “little more challenges than other” automakers to build its supply chain.
“We also had one or two suppliers having some challenge either coming from lockdown, migrant issues, or local Covid situation,” Goenka said in the conference call.
Adding to this was the disruption in supplies of auto parts from China. Dealers, suppliers and experts BloombergQuint spoke to insist M&M’s China dependence contributed in no little measure to supply chain problems. The coronavirus outbreak was first reported in China’s Hubei Province, an auto hub. Even when economic activity in China resumed, trade lines were jammed with shipments running extraordinary delays. And before that could be fixed that was a sharp rise in auto sales in China adding further pressure on suppliers in that country.
In an emailed response to BloombergQuint’s queries, M&M said only 3% of total direct content material for auto and farm equipment sector is imported and China import is one-third of that. “Hence we are not impacted by China supplies.”
But it did not reveal how many of its suppliers had a material China dependency. In the media call, Jejurikar said there might be import dependence of some tier 2-3 suppliers.
A fourth of the imports by India’s $50-billion auto component industry come from China, according to data provided by industry body ACMA. The issue is severe for M&M because of its reliance on China for parts, contends one supplier.
Puneet Gupta, associate director at research agency IHS Markit, estimates M&M has a direct and indirect 12% import dependency on China for parts.
According to him the impact of China on M&M cannot be ignored as in the BS-VI transition most number of parts changed for diesel vehicles. “The cost involved, and the time required for the transition to BS-VI was more in diesel. Most of the Indian automakers were a lot more dependent on China for parts for the same,” he said.
By the time China supplies resumed, India, in a full-blown border conflict with its neighbour, was pushing its companies to cut the China chord.
Gupta raised one more concern regarding M&M’s supply disruption. It failed to anticipate the jump in demand. “The schedules given by M&M were low to part makers as M&M models were not expected to be in demand,” Gupta said adding that the firm lacked in planning.
More-than-expected demand is a good problem to have but not if it means taking several months to deliver the vehicle to customers, as is now turning out to be the case for Mahindra’s recently launched offroader — Thar. Bookings have surged past 20,000 but the delivery delay has consumers complaining directly to the company chairman.
M&M told BloombergQuint the supply constraint is now down to very limited parts and that too is largely behind them.
In the conference call, Jejurikar had said the company is running at 80-85% capacity utilisation. “We have stabilised our supplies at a much better level. In the one and a half month, we would be able to improve the stock levels and will be able to leverage the demand much better in January-March.”