Five reasons why 2013 will be tough for auto parts makers

Indian auto component makers face a tough year ahead, as demand slowdown could put pressure on profitability and balance sheet, global rating agency Fitch said in its report. Fitch however says that auto parts makers are better positioned to handle the current slowdown compared to the one in 2008. Also, it expects a pick-up in demand towards the second half of the calendar to ease the pressures on the overall auto sector.

Five reasons why Fitch thinks auto component makers would struggle to maintain profitability in the year ahead:

* Demand for auto suppliers would remain moderate, reflecting pressures likely to be faced by automobile companies both in India and globally during 2013. Companies focused on the commercial vehicle (CV) market are likely to be more severely impacted. Suppliers focused on increasing their share of business in a single vehicle rather than on growing volumes could benefit.

* A weak rupee could only benefit slightly as global automotive sales would remain weak near term. Further weakness in rupee could impact auto suppliers' profitability as cost of imported components increase.

* International trade agreements, aimed at reducing trade barriers, could intensify competition in global as well as domestic auto sectors. The EU-Korea free trade agreement (FTA), effective from July 2011, could hurt the Indian auto suppliers' exports to Europe which are already under pressure.

* Many domestic automotive suppliers are focused on developing new products both for existing and new customers to keep up the growth momentum amid intense competition. While beneficial in the long term, these innovations, though entail major investments for suppliers in the medium term.

* Liquidity stress faced by automobile firms could result in longer payable period and higher working capital needs for auto component makers.