China lockdowns, chip shortage, Ukraine war cloud FY23 growth: Tata Motors

Tata Motors expressed concerns that supply disruptions and dealership closures due to Covid-19 lockdowns in China could impact its financial performance in the ongoing fiscal. In its annual report for the financial year 2021-22, the Indian auto major also pointed out that risk factors stemming from the Russia-Ukraine war and semiconductor shortage could hinder supply chains and affect business.

The Jaguar Land Rover (JLR) owner says recent lockdowns in parts of China are adversely impacting its supply chains as suppliers are unable to produce or deliver products. A temporary decrease in demand has also been witnessed by the company. Tata Motors says these lockdowns have also caused dealerships in some regions of China to temporarily close, which may have an adverse impact upon its sales outlook in FY23.

“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,” the company states. “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 FY 2022-23 for Jaguar Land Rover while our domestic business is also likely to witness a negative impact on financial performance.”

On the impact of Covid-19, the company says that even as the pandemic subsides, uncertainties are likely to persist regarding the potential impact of any future variants and long-term sustainability of any economic recovery.

The company has also listed semiconductor shortage as a potential risk to growth in FY23. The pandemic-mandated restrictions had caused a persistent shortage of semiconductors, Tata Motors says. The rise in demand for white goods, especially consumer electronics, due to work from home arrangement and the migration to 5G, has now resulted in producers shifting semiconductor capacity to consumer durable goods from the automotive sector.

“As a result of supply chain issues, production was impacted, resulting in adverse working capital which increased our debt for automotive business in FY 2021-22. If we continue to face significant supply chain issues, our volumes may be impacted, affecting revenues from our operations, profitability, free cash flows and our debt reduction plans,” the auto manufacturer says.

“While we expect semiconductor supply to continue to gradually improve throughout FY 2022-23, 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,” it adds.

Regarding the Russian invasion of Ukraine, Tata Motors says the impact of the conflict on Jaguar Land Rover's production volume has been limited during fiscal 2022 as a result of active management of parts supply chain.

“However, we are currently unable to predict with certainty the duration and severity of the conflict between Russia and Ukraine and its ultimate impact on our business, financial condition, liquidity and results of operation, as these depend on rapidly evolving and uncertain developments and factors that are beyond our control,” it states.

Some parts of the automotive supply chain are sourced from Russia and Ukraine, including neon gas from Ukraine and palladium from Russia. “Should the conflict lead to shortages of these or any other commodities, we may face challenges within our supply chain in sourcing parts or face significant price increases in the future,” the company says.