How 30 Steel Co’s shut their doors because of Tata Motors

Some problems that home grown auto major Tata Motors is facing is its domestic sales have reported a 34% drop to roughly 33,000 units in July, from more than 50,000 units in the same month last year. Passenger vehicle sales dropped 31% and commercial vehicle sales were down 36% when compared with the same July month of last year. In addition, exports were also slashed by 32%. This poor performance was reflected in its latest quarterly results in which it reported its fourth loss in five consecutive quarters. Its loss nearly doubled to ₹ 3,680 crores for the June quarter. Its share price today stands at almost a decade low.

Not only Tata Motors, India is in the midst of one of the worst auto sector slowdowns ever. The severity of the market slowdown has led Tata Motors to announce a block closure or a partial shutdown for the fourth time since last month, of one of its biggest plants, located at Jamshedpur. This latest partial shutdown was put in place from Thursday to Saturday which was from 1^st to 4^th August, and besides, Sunday was also a holiday. Such closures are resorted to by companies to control costs (as operational and salary expenses are saved) and avoid inventory build up (because production is reduced, to keep it in line with the sluggish market demand).

It’s also worth mentioning that Ashok Leyland and Tata Motors had affected partial shutdowns of their factories in Patnagar, Uttarakhand as well, just last month, citing bleak market conditions and declining demand.

However, this time around, the shutdown at the Jamshedpur plant has a particularly adverse impact. The Jamshedpur factory is located in a place called Adityapur industrial area, which is one of the largest industrial belts in Asia. It houses 1,100 industrial units which include 11 large scale ones (Tata Motors being one of them). When a factory like that of Tata Motors closes its doors, even for a few days, it affects everyone in town. The 10,000 or so employees of Tata Motors would have to accept cuts in their salary; auto ancillary units (which depend on companies such as Tata Motors for orders) are operating one shift a day instead of three shifts during the last few weeks. In addition, vendors are facing a tough challenge as orders are down to mere trickle and payments are delayed.

In response, these auto ancillary units in the industrial area are taking elaborate measures to cut costs. They have reduced the use of generators in their premises, use of company vehicles are being restricted, non permanent workers have been retrenched and a no work half payment policy has been implemented for permanent workers, besides reducing their fringe benefits.

Another contagion effect as a result of this partial shutdown is that around 30 steel companies have downed their shutters and are on the verge of a complete shutdown. A combination of such closures, general economic conditions and recent exorbitant power tariff hikes implemented by the government, has hit the steel sector hard.

Electricity is an essential raw material for steel companies, and with the BJP led state government in Jharkhand hiking power tariff by 38% with effect from April this year, their production costs have spiralled out of control. Adding further to their pain is the fact that auto ancillary units in the Adiyapur industrial estate have been giving them much fewer orders because they themselves are under pressure from the likes of Tata Motors cutting production. See how the vicious cycle get’s created?

The government, on the other hand, has not done anything to help the auto sector. No new policy initiatives, no financial support, no reduction in GST rates (except for electronic vehicles which comprises a very minor segment). In fact, the new axle load norms implemented by the government last year led to massive dip in demand for new heavy trucks.