US auto slowdown to hit IT cos here

THE slowdown in the US automobile industry is likely to impact the growth of select Indian IT companies. Some Indian companies such as Satyam Computer Services, TCS, Wipro and Infosys could be hit by delayed payments and a freeze in contracts as their major customers in the auto sector face threat of bankruptcy, according to analysts.

    The top three US automakers — General Motors (GM), Ford Motor and Chrysler — are seeking a bailout from the US government. And, even if they succeed in getting the bailout, their IT expenditure could drop more than $1.5 billion a year, said analysts. Future contracts could come with demands for price cuts, which the IT majors will be pressurised to agree to.
    "To cut costs, auto companies would shrink in size to trim their operations. Some of them will shut down a few plants. This means reduction in operational IT spends," Gartner VP advisory service manufacturing group Thilo Koslowski told ET. The companies are also likely to axe expenditure on new IT initiatives often referred as discretionary spends.
    Edelweiss Capital's IT analyst Viju George said: "In case of a bailout, the US auto companies would cut their discretionary spend to stay afloat. As of now, about a third of their IT spends are of discretionary nature. This portion could get impacted going ahead."
    Analysts say the magnitude of the impact would be known in next 2-3 months, once auto players have a relook at their IT budgets.
    Though the IT budgets of these auto companies are as small as 1-2% of their total revenue, in absolute terms, it is a sizeable amount given their huge toplines. GM ended 2007 with $181 billion in revenue. Ford and Chrysler reported sales of $172 billion and $58.6 billion, respectively. IT spends are likely to fall by at least half a per cent over the next years for each of these companies, said Mr Koslowski. This would mean the overall IT expenditure of the three US auto giants would fall by $1.5 billion.
    Among the top-five Indian IT exporters, Satyam is likely to take the biggest hit as it provides IT services to GM and Ford. "Satyam is likely to be affected the most as it earns 5-6% of its revenue from the automobile sector," said Mr George. According to him, impact on Wipro will be muted as its exposure to the auto sector is modest. GM is Wipro's clients too.
According to industry observers, exposure of TCS to the US auto sector is limited only to Chrysler and is likely to be less affected. "Infosys would get impacted as a good portion of incremental deals won by Infosys in the past 7-8 quarters are in manufacturing vertical," said Religare Capital markets IT analyst Anurag Purohit. A senior official of the IT giant said clients had frozen talks on the new contracts that are currently on the anvil. Officials of Infosys, TCS, Wipro and Satyam were not available to respond to ET queries on this.
    Gartner's Koslowski said US auto clients, who earlier used to ask for a 3-5% price cut every year, are bound to pressurise their IT vendors for more at lesser costs. "They (IT companies) will have to be more flexible while approaching the auto companies," he said.
    jessica.irani@timesgroup.com