Chip Shortage Threatens To Hurt Paintmakers During Festive Season
The paint industry is the latest to bear the brunt of the global shortage of semiconductors that has already hurt car to two-wheeler and electronic goods makers. And that comes just ahead of India's festive season.
The chip crunch has hit the supply of tinting machines, central to the distribution of the colourants. That has slammed the brakes on expansion of paintmakers, particularly newer firms.
The machines, costing up to Rs 2 lakh apiece, help dealers produce different shades at the outlets based on demand instead of holding stock-keeping units of multiple colours. The devices and their specifications are unique to each company.
Demand for personal computing devices—from tablets to smartphones and laptops—soared during the Covid-19 pandemic as people worked from home. That spurred a shortage of chips, stalling production at various industries, including automobiles. Latest estimates peg the hit to global automakers alone at $210 billion.
The chip shortage is hurting supply of tinting machines, AS Sundaresan, joint managing director and chief executive officer of JSW Paints Ltd., told BloombergQuint over the phone. “There would be some delay in supply of these paint tinting machines, but we don’t see a situation as of yet where it becomes unavailable."
Still, the situation couldn’t have come at a more inopportune time for the paint producers as the nation heads into the festive season. It's a period when Indians paint homes and buy gold to cars.
Indigo Paints Ltd. told analysts at a recent call that it needs to supply 200 tinting machines per month but can source only 150. The firm has installed such machines across India, specifically in tier 2 cities and beyond, where the company's penetration is relatively low.
Given its smaller base, the Pune-based company also has the highest rate of tinting machine addition over the past few years — 51.2% against 15-20% for its larger peers Asian Paints Ltd. and Berger Paints Ltd., according to Edelweiss Research.
JSW Paints has come up with a workaround. In larger cities, the company has set up “tinting spokes” or centres at its warehouses so that the retailers don’t have to invest in such machines or worry about maintenance, said Sundaresan. The company is deploying around 2,000 such machines every year, he said.
Asian Paints has a dominant distribution network of more than 70,000 dealers and tinting machine count of 58,000, data collated by Edelweiss Research shows.
According to Abneesh Roy, executive vice-president of research at Edelweiss Financial Services, the chip shortage will mostly impact newer firms with fewer tinting machines. This also means that companies like Asian Paints and Berger Paints with a high tinting machine penetration will see relatively less impact.
“Given that dealers have a limited shop floor space, setting up a tinting machine is in a way an act of drawing one’s territory. Companies employ various promotions and unique offers to push their tinting machine to dealers,” Roy said. The underlying supply constraints, he said, could impact paint companies’ expansion at new dealerships.
While prices of machines have not risen so far, a shortage could make them costlier, putting additional financial burden on dealers, according to Roy.
Paintmakers are also likely to forgo price hikes to support demand during the crucial festive season, that accounts for a major chunk of their annual sales. That comes after a lacklustre FY21, not just because of the pandemic's disruption but also hardening of input prices such as Brent crude, production cutbacks by raw material suppliers, force majeure in some geographies and an unprecedented surge in logistics costs.
Since April, companies have already increased prices by 8-10%—the highest in at least a decade—to protect margins. Prices of both decorative and industrial paints rose for five straight months till September.