China’s Covid-19 lockdown is adversely affecting Tata’s supply chains, here’s how

Tata Motors' annual report for FY22 shows that the recent Chinese lockdowns have harmed its supply chains since suppliers are unable to deliver items, and the business may be forced to shut down production in some or all of its plants if it is unable to secure crucial parts from the nation. The domestic automaker is concerned that the ongoing global semiconductor scarcity may affect it "more pronouncedly" than its competitors, who may have better buying power with suppliers or a different variety of semiconductor-dependent features in their vehicles. 

"Recent lockdowns in parts of China as the government pursues a strategy of containing the spread of COVID-19 are adversely impacting our supply chains as our suppliers are unable to produce or deliver products to us," Tata Motors said in the report. Similarly, it said, "we are also witnessing a temporary decrease in demand. These lockdowns have also led to some dealerships in some regions of China to temporarily close, which may have an adverse impact upon our sales outlook in fiscal 2023".

In its elaboration of risk factors, Tata Motors further said, "If we are unable to ensure a supply of critical parts from China for production, we may be forced to stop production in some or all of our plants, which will have a significantly negative impact on our cash flow in the future".

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"We are witnessing certain supply chain disruptions as a result of China's lockdowns and dealership closures, possibly resulting in negative EBIT and negative free cash flows in the first quarter of fiscal 2023 for Jaguar Land Rover, while our domestic business is also likely to witness a negative impact on financial performance," it added.

On the ongoing shortage in the supply of semiconductors, Tata Motors said it has "impacted and continues to impact our production schedules and our ability to meet the demand for some of our vehicles".

Such shortages that affect the entire automotive industry, it said, "may impact us more pronouncedly than our competitors as they may have a greater level of buying power with suppliers or have a different range of features on their vehicles that are dependent on semiconductors, as well as impact our ability to divert the supplies on lower-end models, in which our competitors exclusively operate or for which our competitors are able to better manage supplies".

The company, however, said production schedules continue to be actively managed by the management in line with the availability of semiconductors and vehicle margin.

"Along with supply chain uncertainty caused by the COVID-19 pandemic and sudden factory shutdowns due to natural disasters at major semiconductor production sites worldwide, longer-term trends, such as a general rise in demand in the automotive sector competing with other rapidly growing industries for semiconductor manufacturing capacity and structural issues within the semiconductor supplier landscape have complicated our ability to secure sufficient supply," it added.

Stating that there can be no assurance that it will be able to source alternative supplies of semiconductors or that such alternative supplies of semiconductors will be readily available, Tata Motors said, "The shortage of semiconductors has and is likely to continue to impact us in the near future".

If the shortages continue for a prolonged time, Tata Motors said its "production levels may be affected, which would materially affect our business, financial condition and results of operations".

"In addition, the shortage of semiconductors could also have an adverse impact on the implementation of Jaguar Land Rover's Reimagine strategy to expand into EVs, which may contain a higher level of semiconductors than that used in conventional vehicles," the company added.

The shortage of semiconductors could also increase car prices, which could negatively affect customer demand in the future should other companies be able to increase supply in the future. Furthermore, the extended delivery times of new cars could cause an increase in cancellations by customers, it added.

Tata Motors further said, "While we expect semiconductor supply to continue to gradually improve throughout fiscal 2023, there is no assurance that this will be the case, and while the supply of semiconductors remains constrained, we may be more susceptible to supply-driven shocks in the future".

While the company continues to take measures to partially mitigate the impact of semiconductor supply shortages, including engaging in discussions with leading component suppliers and chip producers and prioritising the production of higher-margin vehicles, the company said, "there can be no assurance that such measures will provide significant mitigation".

Tata Motors also said the ongoing conflict between Russia and Ukraine could have an impact on its business and the results of operations.

"In Fiscal 2022, Jaguar Land Rover recorded 43 million pounds in relation to customer liabilities arising from sanctions imposed against Russia by countries, preventing the shipment of vehicles and certain parts to the market," the report said.

The company's British arm Jaguar Land Rover over the past three fiscal years, earned around 2.5 per cent of revenue on average each year from Russia and Ukraine. Still, it has suspended vehicle exports to Russia to comply with recent export restrictions.

As of the date, Tata Motors said, Jaguar Land Rover continues to import a restricted range of safety-related parts to Russia for the repair of vehicles in the market in compliance with relevant sanctions and export control measures in place.

While the impact of the conflict on production volume has been limited during fiscal 2022 as a result of active management of the parts supply chain, the company said. "...During April 2022, Russia suspended gas supplies to Poland and Bulgaria. Should this happen in the future, including in Slovakia, where we operate a manufacturing plant (for JLR), we may face further parts shortages or be unable to run production in our manufacturing facilities, which could have a material adverse impact on our business."

With inputs from PTI