It has been a case of surmounting one hurdle after another for the micro, small and medium enterprises (MSMEs), the backbone of Tamil Nadu’s strong manufacturing base in engineering and automobile sectors, throughout 2020. As the year draws to a close, the segment is facing fresh trouble over surging raw material prices.
If the general economic sluggishness marred the sector at the beginning of the year, the Covid-19 pandemic and the subsequent lockdowns brought the operations to a near standstill in the March-May period along with the exodus of guest workers. “Most MSME units were in despair in March when they had to shut due to Covid lockdown. While the Centre’s financial package, which permitted a 20% increase in the existing borrowing limit of the units from banks, the money that came in was used to manage running costs of sustaining operations of the companies rather than helping to invest in new products,” said M Balachandran, president, Ambattur Industrial Estate Manufacturers’ Association (AIEMA).
A sizable number of AIEMA units, which cater to the leading automobile original equipment manufacturers (OEMs) around Chennai, saw some light at the end of the tunnel as the auto industry showed signs of revival during the June to September period. The requirement of metals, especially steel sheets, suddenly shot up in tune with the increasing orders from automobile OEMs. But the phased lifting of lockdown led to problems with the supply of raw materials. Subsequently, issues related to restrictions on imports from China post pandemic, besides the Centre’s thrust on selfrefliance (Atmanirbhar) meant business had run into trouble again.
“As several countries looked at alternative supply sources for metals other from China, Indian metal producers saw a better margin in Europe and focused more on exports to Europe. The Indian end users and manufacturers were forced to import raw material from South Korea and Taiwan. These were again held up at ports to verify that they did not originate from China. This resulted in supply shortage leading to a 30%- 40% increase in prices of raw materials such as steel, aluminium and copper,” recalled Balachandran. “Raw material accounts for 60%-70% of the cost of our end components. If one adds the operational costs of labour and power among others, we were working with low margins, ranging from 5%-10%, even in normal times. The surging raw material prices have not only wiped out those margins, but is also pushing the units into the red,” he said.
While local raw material suppliers have been informing about price increase, from time to time, it is not easy for the MSMEs units to pass on this additional burden onto OEMs, who source components on pre-agreed prices. Given their limited financial capabilities, the MSMEs are also unable to indulge in stocking in bulk or hedging.
The problem is not restricted to the MSMEs linked to the automobile industry, it is across sectors. The sharp surge in steel prices in recent months has hit the ancillary units supplying to BHEL, Trichy. Orders are availed, based on the prevailing price of steel at the time of signing the contract, by these units that are part of the fabrication and engineering hub for producing components for thermal power plants. “If proper measures are not taken immediately to contain the surging steel price, we can expect more MSMEs to turn sick and head towards permanent closure, resulting in job losses,” Rajappa Rajkumar, BHEL Small Scale Industries Association said.
The ripples are being felt in the industrial hub of Coimbatore too. “Price of raw materials like copper, pump stamping and metal casting has increased by 15%-25% in the past two months.
This has happened at a time, when we were attempting to increase our production post Covid lockdown. Instead, the production has dropped by 45%,” said K Maniraj, president, Kovai Power Driven Pumps and Spares Manufacturers Association (KOPMA).
According to him, the units have not increased the price of the end products due to the fear of losing customers. “Instead of 10% profit on products supplied, we are now forced to shell out from our pockets. Unable to bear the losses, many have started to shut down their business. The Centre should form a price monitoring committee and investigate the reasons for the sudden spike in prices,” Maniraj said.
MSMEs are now knocking at the door of the state government and the Centre. They are urging the governments to intervene and steady the market forces through better imports and preferred supplies to MSMEs through SAIL among others.
The Federation of Coimbatore Industrial Associations, representing the interests of 19 small and micro industrial associations in Coimbatore, has written to the Prime Minister Narendra Modi.
“The situation is bleak and distressing, as the little bit of margin allowed to the small and micro sector is wiped out and the forecasts predict further price increase. The small industries are neither financially strong nor wise enough to indulge in “hedging or futures trading” to escape from price volatility. It is the bounden duty of the government to check the price rise and ensure uniform price of basic and essential raw materials,” the letter of the association read. For the present, they are clinging on to their hopes that 2021 could turn out to be better.
(With inputs from Deepak Karthik, Nivedha Selvam and Padmini Sivarajah)
Views expressed above are the author’s own.
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