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Out in the Cold

The disruption due to coronavirus in China has put Indian industry in a jam
twitter-logoBusinessToday.In | Print Edition: March 8, 2020
Out in the Cold

Phrases, at times, sum up global power transitions. In the nineteenth century, Austrian politician Klemens von Metternich said, "When Paris sneezes, Europe catches a cold." Paris gave way to "America" in the twentieth century, reflecting the shift in global trade. Now, it is a lot more about the East. When China sneezes, the world catches a cold. But what about India? Considering the economic disruption its northern neighbour is facing because of the breakout of coronavirus that has claimed hundreds of lives and led to shutdown of some important economic centres.

Sample this: China is India's second-largest trading partner with overall trade of $64.9 billion between April 2019 and December 2019. The country also accounts for a bulk of India's trade deficit (around 32 per cent). In fiscal 2019, India imported automobile components worth $4.6 billion from China, which was more than a quarter of component imports into the country. About 65 per cent of inputs in medicines under the National List of Essential Medicines (NLEM) come from China. In case of paracetamol, nearly 80 per cent of the material that goes into making active pharmaceutical ingredients, or APIs, come from the Middle Kingdom. APIs, or bulk drugs, are raw materials to manufacture medicines.


Auto

  • India imported automobile components worth $2 billion from China in the first six months of the current fiscal
  • In FY19, imports were worth $4.6 billion, more than a quarter of the overall component imports into the country
  • Transition to BS VI emission norms in April may be affected if components are not available

Apart from this, up to 80 per cent components of a mobile phone assembled in India come from Chinese firms. The country also supplies 80 per cent of solar cells and modules used in India and 85 per cent toys sold in India. The saving grace for now is that in preparation for the Chinese New Year, most Indian manufacturers had stocked up for a few months. Hence, most have inventories for a few weeks, at least until the end of February. If Chinese factories don't reopen in a couple of weeks, Indian assemblers would be in for a jolt. Lunar New Year holidays, called the Chinese New Year holidays, have been extended. The holidays, between January 24 and 30, were first extended till February 9-10 as the Chinese government wanted to contain the spread of the disease. They may now be extended till February 17 and beyond depending on the province.

Pharma

  • India imports $3 billion worth of APIs from China in a year
  • 65% of inputs in medicines under the National List of Essential Medicines come from China
  • The country is a major global supplier of antibiotics such as penicillin G, its derivatives, cephalosporins, its derivatives, and tetracyclines, apart from Vitamin C and D.
  • 80% of the material for paracetamol API and nearly 90% for first line of anti-diabetic metformin API come from China Mobile Phones, Solar,

Experts say these developments could hurt India's economy, which is not out of the woods yet. Private sector lender Yes Bank said in a recent note: "We expect expansion in manufacturing and services to continue, but at a slower pace. We see sequential recovery in domestic demand on account of positive monsoon, improved rabi sowing, recent shift in terms of trade in favour of the farm sector and higher budgetary allocation for the rural sector in FY21. Further, thawing of US-China trade relations should encourage exports and gradual progress in monetary transmission should start spurring consumption and investment demand. However, the outbreak of 2019-nCoV (coronavirus) could have a mild temporary adverse spillover."


Toys, Diamonds

  • Up to 80% components in mobile phones assembled in India are imported from China
  • 80% of solar cells and modules used in India come from China
  • 85% of the toy market by value is accounted for by Chinese imports; no new consignments from China in last one month
  • 37% diamonds exported from Surat go to Hong Kong, where two international diamond expos have been postponed

The coronavirus, which can cause a range of respiratory illnesses, started in Wuhan in Hubei province of China but quickly spread across 18 regions of the country. The number of those infected across China has risen to over 60,000 while 1,300 people have died thus far. The virus has spread to 25 countries. Restrictions on travel and subsequent factory closures have disrupted global supply chains. According to Dun & Bradstreet (D&B), the impacted provinces in China account for over 90 per cent of all active businesses in the country. "At least 51,000 companies around the world have one or more direct or Tier-1 suppliers in the impacted region, and at least five million companies around the world have one or more Tier-II suppliers in the impacted region," notes D&B.

BT spoke to representatives of industries dependent on China to assess the potential impact on them.

Automobiles: The automobile industry in India contributes as much as 49 per cent to the country's manufacturing GDP. Although India has its own auto component industry, it is still not completely insulated from China. In fact, import of components from China has been on the rise. In FY19, India imported auto components worth $4.6 billion from China. In the first six months of the current fiscal, imports from China were worth $2 billion. "There is not a single country in the world that produces everything. It's the same with the automotive industry. We are weak as far as electronics are concerned. Depending on the product, there's always a piece of China. So, coronavirus might have an impact," says Guenter Butschek, Managing Director and CEO of Tata Motors. "We expect people to get back to work at the beginning of the next week. So, we need another reference check to see what has been produced, what has been shipped, what is available for shipment, and then to do the math to see where we are against our production plan. This is currently an operational concern and we will discover it as our regular contacts get back at work," he adds. Jaguar Land Rover (JLR), the subsidiary of Tata Motors, has extended a plant shutdown in China and asked its 3,000 employees to work from home. The plant of the joint venture firm, Chery Jaguar Land Rover, is located in Changshu, about 800 km from the epicentre of the outbreak in Wuhan.

India's largest two-wheeler maker Hero MotoCorp has said the outbreak in China is likely to impact its planned production for February by 10 per cent as supply of some components has been affected. Another company that has admitted it would be hit is MG Motor, owned by SAIC, China's biggest automobile company. MG entered the Indian market last year and sells the Hector mid-size SUV. Last month, it launched its maiden electric SUV, ZS EV. "We expect significant disruption in the supply chain from European and Chinese/Asian suppliers," says Gaurav Gupta, Chief Commercial Officer, MG Motor India. "Our sales will get impacted in February as our inventory levels have been minimum because of the bookings backlog. We are working to ensure that the impact on the consumer and our operations is minimised," he adds.

We expect significant disruption in supply chain from European and Chinese/Asian suppliers. Our sales will get impacted in February as our inventory is minimum, says Gaurav Gupta, Chief Commercial Officer, MG Motor India

The transition from BS IV to BS VI emission norms in April this year is complicating things. Mahindra and Mahindra (M&M), for example, says there are still some vehicles in the last lot of BS IV production that may get impacted if parts do not come in time from China. A delay in production of these vehicles will put the company in a tight spot with dealers as no BS IV vehicle can be registered after March 31. "I don't see any risk in the transition from BS IV to BS VI except for the impact of the coronavirus. We have one or two parts that are procured from China for our BS IV vehicles. These are now in the quarantine process," says Pawan Goenka, Managing Director, M&M. "I am hoping that supply will open up in the next week to 10 days and there won't be any impact. But if it goes beyond that, we will have a challenge of 3,000-3,500 BS IV vehicles for which other parts are already in our inventory," he says.

Pharma: Indian drug manufacturers are heavily dependent on China for sourcing their drug ingredients or APIs. This is largely for penicillin G, tetracycline and vitamins such as vitamin C and D. All these are based on drug ingredients made using the fermentation process, an area where China has achieved dominance. There is dependence on other areas, too. Officials from the Pharmaceutical Export Promotion Council of India say that for medicines under NLEM, import dependence on China is to the tune of 65 per cent of inputs. For imports outside NLEM, it is up to 90 per cent. In case of paracetamol, nearly 80 per cent of the material that goes into making the API is imported from China, says Krishna Prasad Chigurupati, Chairman and Managing Director of Granules India. Overall, API imports from China are in the range of $2.5-3 billion or about Rs 17,000 crore, as per estimates from the Pharmaceuticals Export Promotion Council of India. For now, the fallout of the coronavirus scare has been on prices of APIs; prices of paracetamol have increased by 30-35 per cent. Chigurupati says prices will settle down as most of the inputs do not come from Wuhan.

In case of paracetamol, nearly 80 per cent of the material that goes into making the API is imported from China, says Krishna Prasad Chigurupati, CMD, Granules India

The Indian government has approached most Indian pharmaceutical associations and companies for data on inventory and shortages. These companies talk of an ability to last another five to six weeks. Meanwhile, the scare is making India's pharmaceutical industry seek enabling policy environment to make India self-reliant in at leastsome key areas. Satyanarayana Chava, Founder and CEO of Laurus Labs, a supplier of APIs from India, says, "India needs a long-term strategy to strengthen supplies of key raw materials for the pharma industry. We need to become self-reliant and create global capacities in India."

Mobile phones, solar products: Chinese mobile phone makers dominate the Indian smartphone landscape - four out of top five vendors are currently Chinese. These are Xiaomi, Vivo, Realme and OPPO. Xiaomi recently reported its highest ever smartphone shipments (12.6 million units) in the third quarter, a rise of 8.5 per cent over the year-ago period.

While many of these companies assemble smartphones in India, the components come from China. Xiaomi India says its current operations aren't affected as it had planned ahead for the Chinese New Year. "Business might get affected only if China shuts down for additional two-three weeks but then all the other industries will also be affected. At present, it's a wait and watch situation for all players dependent on China for supply or support," it says. "China accounts for almost 85 per cent of mobile phone components imported into India. If the lockdown continues in China, it will spell serious trouble for smartphone brands in India in the first half of 2020, and potentially even beyond," says Prabhu Ram, an analyst with CyberMedia Research. One model of Asus India is getting ready for a shortage. "While we had steady availability for long, due to disruption in supply caused by the prevailing situation in Asia, ROG Phone II will face a temporary shortage. Rest assured, we are working hard to ensure that your favourite gaming smartphone will be back in stock soon," says the company

China accounts for almost 85 per cent of mobile phone components. If the lockdown continues, it will spell serious trouble for smartphone brands, says Prabhu Ram, Analyst, CyberMedia Research

India's solar industry appears to be more worried. Indian companies buy 80 per cent of their solar cells and modules from China "Supply disruption, delays in production, delays in quality checks and transport of components due to the outbreak are already visible in China," says Gyanesh Chaudhary, Managing Director, Vikram Solar. The company makes solar equipment. He adds that project developers in India, already dealing with challenges such as safeguard duty and GST, are expected to face more difficulty. "As power purchase agreements signed by developers specify strict commissioning deadlines, failure to meet them will result in fines and encashment of bank guarantees. Considering the scenario, government support should be extended to the affected industries. A prolonged slowdown in China will cause raw material shortage and affect many domestic manufacturers as well," he says. The value of solar cells/photovoltaic cells imported from China jumped to $3.41 billion in 2017/18 from $596.73 million in 2013/14.

Diamonds and toys: The sparkle in Surat, the world's largest hub for polishing diamonds, may wane. If the coronavirus outbreak isn't contained soon, the city is likely to lose business worth between Rs 8,000 crore and Rs 10,000 crore over the next two months. "Polished diamonds are transported from Surat to Mumbai and polished diamonds worth around Rs 50,000 crore are exported every year to Hong Kong, where the international trading community comes for purchases. Hong Kong has been shut for over a month and that is likely to impact us in the coming two months," says Chirag Mehta, Director of Leela Diamonds, a diamond selling company. Following the outbreak of the disease, more than 3,000 representatives and traders from Indian diamond companies have returned to India, he adds.

According to the Gems and Jewellery Export Promotion Council (GJEPC), Hong Kong accounts for 37 per cent of the total exports from Surat. Sources say two international diamond expos in Hong Kong have been postponed. The Hong Kong International Diamond, Gem & Pearl Show, which was due to take place from March 2-6, and the Hong Kong International Jewellery Show, scheduled for March 4-8, will now be held between May 18-21.

Holi is around the corner and the sparkle from India's toy industry could wither as well. India's toy industry, worth around Rs 4,000 crore, imports 85 per cent of goods by value from China. Most toys imported into India are manufactured in Guangdong, a coastal province in south China. Indian importers typically do not stock for more than a month, and to make matters worse, no new consignments have arrived from China in the last one month.

Normally, Indian toy traders start ordering Chinese Holi colours and sprinklers soon after the Chinese New year as consignments don't take more than 14-30 days to reach. In Mumbai alone, 20-25 Chinese toy importers bring in about five lakh pieces of water guns attached with small water tanks. This year, the traders have no stocks for this toy. "We are assessing the situation and are hopeful of ordering the consignments," says Abdullah Sharif, Vice- President of United Toys Association of Mumbai.

Industry captains agree that the next fortnight is critical. They have some sleepless nights ahead.

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