Surplus capacities may affect the profit margins of SMEs

As SME auto parts manufacturers and large vehicle manufacturers mull over capacity additions, consumers undoubtedly will have one too many to pick and choose from, however this will step up competition and bring down the profit margins of auto component manufacturers.

According to industry analysts, though accelerating domestic demand is good news for the auto industry and the auto component sector, however analysts have sounded an alarm that soon the industry is going to face the problem in terms of surplus capacity. Driven by over ambitious plans, both small and big-sized companies are adding capacity; however, in the future there might be a demand-supply imbalance.

Profit margins will come under tremendous strain

With SME auto parts manufacturers and large vehicle manufacturers mull over capacity additions, definitely a slew of vehicles will be crowding the Indian marketplace and certainly consumers will be spoilt for choice, however this will lead to increased competition among SME auto component makers and auto majors, leading to decline in profit margins for auto component manufacturers.

According to a local car dealer “Consumers will have the benefit to zero down his choice from several cars available which are slated to be launched in the coming days, nonetheless, increased competition will force manufacturers and auto parts suppliers to price products more competitively, thereby bringing down their margins considerably.

Though competition will be advantageous for consumers, industries sources are apprehensive that it will lead to price wars between auto parts manufacturers and auto majors.

SME auto parts manufacturers are walking on a knife-edge if they plan to undertake massive expansion plans because by doing this they are inviting trouble for themselves rather than attracting good returns, in case the future presents an imbalance in demand and supply, informed an owner of a small auto parts supplier in Mumbai.

Hence, it would be better if auto components manufacturers and suppliers stride ahead with caution and undertake only planned risks.