How Digital Supply Chain Finance Can Boost India’s Auto Industry

Cross-border trade has been severely disrupted since the pandemic as a result of a sudden halt in global commerce and subsequent lockdowns. As the economies began to recover into the new normal and turned north, the ongoing geopolitical tensions between Russia and Ukraine exacerbated problems in many sectors. The automobile industry has been unmistakably impacted by global supply chain disruptions as well as the transitional phase from gasoline to electric vehicles (EVs).  

The Indian Automobile Sector

India is one of the world’s most important automobile hubs, and the country is on track to become the world’s third-largest vehicle manufacturer by 2026. The auto industry in India contributes 7.1% to GDP, with the government aiming to increase this to 12% in the near future.

Furthermore, it currently accounts for 49% of manufacturing GDP, with an annual turnover of INR 7.5 Lakh Cr and exports of INR 3.5 Lakh Cr. According to some estimates, over 14,000 companies manufacture automobiles, auto accessories, and auto components. While it appears to be one of India’s most important growth sectors, it has faced challenges in recent years. 

The Challenges And Hassles In Supply Chain For The Industry 

The Indian automobile industry is at a crossroads, facing multiple headwinds such as supply chain issues, regulatory changes, and increased inflationary pressures due to raw material price increases. The pandemic caused significant disruption, resulting in inventory buildups and detrimental restrictions on imported auto components. This created difficulties for the industry in importing critical automobile components. The semiconductor shortage caused by delayed shipments from China, cancellation, and damage to consignments has had a significant impact on the industry. 

The supply chain is highly integrated and plays an important role in business continuity. Disruption at one end of the chain causes problems for all players in the chain. For instance, the original equipment manufacturers (OEMs) that grapple with the piled-up inventory of unfinished products due to unavailability or delayed availability of some components from global suppliers face deep stress on their working capital and product distribution plans. Furthermore, the domestic suppliers of the components suffer as a result of extended credit cycles. 

Moreover, the supplier’s credit term is determined by its production capacity, inventory backlog, and purchase order quantity from the buyer. In the worst-case scenario, the availability of supply chain finance can protect some of these players.

Digital SCF Ecosystem

The current dynamism has compelled companies in the auto sector, ranging from large corporations to MSMEs, to seek quick supply chain finance (SCF) solutions. Companies, on the other hand, waste valuable time in the repetitive process of seeking finance at the best possible terms from individual lenders until they find one. This problem statement is addressed much more emphatically by digitalisation. 

The digital SCF ecosystem connects buyers (anchors), sellers (vendors), and lenders (financial institutions). It ensures that a business’s operating cycle runs smoothly by providing quick access to credit. 

New-age fintechs are investigating the creation of marketplaces where borrowers looking for working capital can find the best lenders at the best price. The digital onboarding process is a low-cost, time-efficient solution that provides immediate liquidity to OEMs, vendors, dealers, and distributor channels in tier 2 and 3 locations. The critical point to remember here is that supply chains are inherently non-homogeneous, and capital must be aligned at every risk/price point.

Financial institutions, on the other hand, can diversify their portfolio by lending to micro, small, and medium-sized enterprises (MSMEs). Fintechs can help them optimise their resources by providing AI-powered risk assessment tools such as real-time trend analysis reports, collection tracking, and co-lending opportunities. 

The Way Forward

As consumer sentiment improves and the EV segment changes, the automobile industry continues to face supply-driven shocks, negatively impacting cash flows. The lack of cost-effective credit for small and medium-sized enterprises (SMEs) is a significant barrier for automakers. A digital SCF ecosystem and a flexible regulatory framework can help the industry navigate the turbulent waters of unpredictability in global conditions and technological disruptions.  

While principal companies benefit from financially lubricated channels in general, vendors and dealers benefit from strategic sourcing, DPO (days payable outstanding) extension/de-risking and DSO (days sales outstanding) reduction, sourcing advantage, margin expansion, increased sales through greater channel coverage, and check out finance for B2B commerce.