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India Inc rejigs supply chain models as Ukraine invasion, Chinese lockdowns disrupt working

India Inc rejigs supply chain models as Ukraine invasion, Chinese lockdowns disrupt working

India Inc is rewiring organisational risk models in the wake of inflationary pressures provoked by Russia’s invasion of Ukraine and sweeping lockdowns in China that have hit supply chains and transformed the business landscape, industry leaders said.

Companies have been forced to look to Indonesia, Thailand, Bangladesh and Vietnam as sourcing alternatives to China.

Building stronger supply chains has become crucial, said Sanjiv Mehta, president of the Federation of Indian Chambers of Commerce & Industry (Ficci).

“There is this huge disruption in the global supply chain that has impacted many businesses, especially automobiles,” said Mehta, who is also the chairman of Hindustan Unilever, the country’s biggest fast-moving consumer goods company.

P1G

Closely monitoring situation

“For FMCG (fast-moving consumer goods), disruption in the supply of a single chemical will impact manufacturing cycles. It has now become important for manufacturing to be closer to consumers, so also to cut on freight and travel costs to cut carbon footprint. Reconfiguring the supply chain from the lens of sustainability and resilience has become important.”

TV Narendran, president of the Confederation of Indian Industry (CII) and Tata Steel managing director, said the protracted military operations in Ukraine are a matter of concern.

“The evolving situation is being closely monitored by industry for its impact on input prices and overall growth path,” he said. “We hope that critical macroeconomic indicators such as fiscal deficit, inflation and current account deficit remain within reasonable limits. We are also monitoring the impact on key sectors. As per CII’s analysis, a US $10 per barrel increase in oil prices could have a total direct and indirect impact of around 30 basis points on overall inflation. It is hoped that based on the requirement, foreign exchange reserves can be used to cushion the economic disruptions.”

The Reserve Bank of India (RBI) raised its consumer inflation forecast for FY23 to 5.7% earlier this month from 4.5% estimated in February as it slashed the growth forecast for the year to 7.2% from 7.8% and signalled a hardening of monetary policy.

Several top corporate groups have selected new supply markets to reduce dependence on China for raw materials and offset the significant impact of commodity and input costs, which they say will erode operating margins. The Tata Group has identified robust supply chains as the company’s top strategy for 2022.

“A huge challenge is that companies will have a fairly disrupted supply chain system for imports and exports for the next two years. So, companies have to be agile and resilient,” a Tata Group executive said.

The chairman of a leading Mumbai-based conglomerate said every board is currently dealing with five Cs — Covid, chips, container, commodity and conflict, referring to the global squeeze on semiconductors and shipping capacity, apart from the pandemic, the surge in input costs and Ukraine.

“It’s up to companies as to how they pivot their business models to source more parts from within the country. Supply chain strength will be critical for protecting growth and margins,” he said.

According to a Gartner Risk and Audit Practice study, the conflict in Ukraine reinforces the imperative for most organisations to have in place more hardy supply chains. “As ERM (enterprise risk management) leaders reassess their organisational risk models, they must also ensure a high frequency of communication with the C-Suite as to the critical changes that require attention now.”

Trent CEO P Venkatesalu said the company is diversifying sources geographically and in terms of number of partners.

“There is a calibrated approach to price architecture and managing the inflationary pressures as a portfolio, platform to diffuse impacts,” he said. “Both within India and importantly component, inputs that go into conversion by our partners from multiple countries, diversifying from China to Indonesia, Bangladesh, Vietnam etc.”

Agility has become critical in terms of sourcing as has building a non-China supply base, said Pidilite CEO Bharat Puri.

“Concerns of global shortages and poor visibility into China have made it important to have a non-China supply base and keep the supply chain resilient,” he said. “We have identified Taiwan, Thailand, Vietnam and India for alternatives and ensure better raw material build-up. Geopolitics is now a big agenda to put heads together and rework risk models.”

Leading component makers say this is the first time in several years that they are tackling multiple issues from Covid to chips and container shortages, rising commodity prices and the Ukraine war. Apart from this, the low visibility in the domestic market poses its own challenge, said Lumax Industries managing director Deepak Jain. The Indian automotive industry is in a delicate state and supply chains are being rewired as these businesses need to stay relevant in a volatile scenario, he said.

The geopolitical situation and the lockdown in China are worrisome as they are happening in the backdrop of other trials such as the semiconductor shortage, rising costs, shortage of raw materials and high logistics costs.

“The current situation has added to our woes and could derail the recovery of our economy and industry,” said Sunjay Kapur, chairman of Sona Comstar and president of the Automotive Component Manufacturers Association (ACMA).

To be sure, the recently announced production-linked incentive (PLI) scheme will accelerate investment in areas such as advanced technological and electronic vehicle components in the domestic market. Auto component makers have already started processing more parts within the country, in addition to holding larger inventories, creating buffer stocks and entering into long-term contracts.

“The pandemic has taught us to be lean, control our internal costs well and respond fast to customers’ changing needs,” said Kapur.

Auto ancillaries have not been able to pass higher costs through entirely, resulting in a decline in gross margins. Freight rates have increased four-five times in the past year and are likely to remain elevated in the near term. Supply chain uncertainties, inflation and the need for stocking have led to incremental inventory requirements. While the semiconductor situation has been improving in the past one-two months, the Russia-Ukraine conflict could stress the globalised chip value chain, said an ICRA report.

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