The economic slowdown has given a severe blow to the Indian forging industry. The sector bore the brunt as more than 50,000 people lost their job due to declining demand on account of the ongoing financial turmoil. At present, the industry has a workforce of 1.5 lakh people. Most of the units are working at 20-30 percent of installed capacity. Several midsized companies have shut one or more units. The worst hits are the hundreds of small units that have quietly closed down, leaving their worker jobless. Ever since the demand from auto components went down drastically, the sector has been struggling to stay afloat. The sudden dip in steel prices has also hurt the forging sector. The FY 2009 was very bad for the forging industry. According to S.R. Somvanshi, Secretary, Association of Indian Forging Industry (AIFI), the capacity utilisation came down almost to 30-35 percent of the installed capacity, which is estimated to be 1.5 mt. the exporters have also come down substantially between seven to 10 per cent from the earlier about 23 per cent.

Problems galore              

The forging industry has been experiencing the heat of the global slowdown over the last four to five months. Profits have declined, first due to heavy inflation, and later, due to shrinking demand. In early 2008, it was the spiraling costs of steel which left the industry reeling. The sudden dip in steel prices has also hurt the forging sector. In addition, most of the existing clients are delaying their payments at least by 100 days, up from around 63 days earlier, said an industry source. The clients asked them to ensure the availability of steel till September of this year and the industrial units too purchased steel at a time when the prices were high. However, of late, the clients are bargaining for a reduction in prices, which has affected the industry. The industry has also been hit by a double whammy firstly, sales have fallen nearly 50 percent since August last year, and exports almost completely wiped out. Secondly, the industry is stuck with high cost steel stocks, which have to be sold for a lower price.

Government help sought          

The voice of the industry, the Association of Indian Forging Industry (AIFI), had recently launched a signature campaign pressing the need for Government intervention ensuring survival of the automotive dependent sector and to mobilize support for the workforce who have been directly affected by recurring issues and problems. According to AIFI, a substantial reduction in orders from OEMs and Tier I suppliers and a delay in payments by OEMs and Tier I and Tier II suppliers has resulted in an unbearable pressure on the financial situation of forging companies. apart form this the following changes in the environment have left the industry with massive losses which is not at all affordable in such tough times:

• Bankers are reluctant to restructure loans/ enhance working capital limits.
• There is difference in the rate of interest charged on overdue by different banks.
• There is a classification of loans as NPAs despite of RBI guidelines (extending period for payment of overdue from 90 to 120 days).
• The banks refuse to reclassify overdue portion after restructuring as standard and sub standard assets and still refer to them as NPAs (especially for SMEs).

The Association wants the government to announce a stimulus package to bail out the industry. Firstly, public sector banks must offer credits to the forging industry, which falls under Small and Medium Enterprises (SMEs) category, and secondly the government must increase its investment in infrastructure in such a manner that the demand for trucks increase, boosting the demand for auto components. The association has also said that the government needs to take the issues related to duties and taxes in case of forging units on priority grounds. The AIFI has demanded a ban on import of auto components, especially forgings. It has also asked the government as increase in export benefits, mainly DEPB benefits for forged components.

Deteriorating conditions           

There are around 700 Small and Medium scale forging units across the country and most of them are located in Pune, Chennai and Ludhiana. These units jointly employ about two lakh people at various levels and used to post revenues worth $470 million annually. However, the slowdown has forced heavy job cuts and permanent shutdown of five units. While the industry has already seen job losses of more than 50,000, conditions are deteriorating fast. Estimates suggest that exports of forgings might fall to $350 million this year (2009-10), from about $470 million reported during the just concluded financial year. Exports account for about 10-15 per cent of the output, while domestic sales account for the rest. According to the association, the industry has lost about Rs. 500 crore in revenue since September 2008, due to fall in auto demand, mainly in commercial vehicles. Indian commercial vehicles sales fell 16 per cent to 288,140 units between April and December 2008, against a growth of 3.6 per cent in the same period last year, according to the Society of Indian automobile manufacturers (SIAM), about 70 percent of industry’s revenue comes from the auto industry, if the auto industry is not improving, the industry expects more units to shut shop.

Auto companies shift focus           

Meanwhile, automakers have started importing cheaper parts from China and Korea, with the big three automakers GM, Ford and Chrysler struggling, exports have also taken a hit. The big three have been manufacturing 50 percent less vehicles than normal in the last five months, due to recession. An association member said that “with bankruptcy threat looming, we are demanding letter of credit from global automakers, which they are refusing to provide. While we are also not able to get insurance cover from the export Credit Guarantee Corporation of India, who are averse to new customers”. Most Indian auto component companies, who have idle capacity and are battling low margins following the slowdown, are shifting part of their production facilities toward making products for the more lucrative aerospace and defence sector. The trend is significant as Indian auto component industry was till last year the fastest growing among most sectors with the maximum number of deals via mergers and acquisition that catapulted Indian companies into the global league. The slowdown in the Rs. 50,000 crore auto component industries led many firms to cut production, as auto makers battled delayed purchase decision. According to various component industry grew by about three per cent in the just concluded fiscal year, in stark contrast to 2007-08, when the industry grew 22 per cent, with revenue of about %18 billion.                  

Published in MMR.