Consumer Goods

The Liquidity Crunch

Maintaining liquidity is providing to be a major problem for the automotive industry but it can be tackled. The auto industry is severaly affected by the liquidity crisis. What started off with the commercial vehicle segment now afflicts almost all segments. On the one hand demand got affected due to rising interest rates, and on the other banks became overcautious lending to consumers. Overnight the banks started pruning their lending to companies they thought were risky, through control on overdrafts and loan limits.

With sales below expectations, the collections of gross contribution (sales - truly variable costs) are not adequate to pay for total periodic expenses like salaries, rent, etc. This cash crunch is further compounded by the compulsion to pay for the raw material currently lying in finished goods not selling immediately (lying in the automaker's own warehouse or at the dealers/ distributors). As a knee-jerk reaction, many companies are trottling back payments to their suppliers.

Payments more than two months overdue (on a credit period of two months), compounded by the reluctance of banks to lend more to small companies, have pushed some component suppliers to the brink of shutting down.

The severe working capital issues of suppliers are causing a boomerang effect back on the OEMs. The suppliers are finding it difficult to supply for current (immediate sales) of the OEMs. So we have OEMs stuck with huge finished goods inventory of some products which are not selling fast and not having components for items which can sell immediately, further hidering the flow of liquid money. A vicious cycle.

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