Thefast growing auto component sector contributes some 2.3 percent to India’s gross domestic product (GDP).
This figure has the potential to touch US$110 billion by 2020, with exports going up six-fold, predicts ACMA (Automotive Component Manufacturers Association of India).
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Growth Drivers
Lower labor costs give Indian auto component companies a huge cost advantage. The Automotive Components Manufacturers Association (ACMA) states that wage cost accounts for 3 per cent to 15 per cent of revenues for Indian manufacturers as compared to 20 per cent to 40 per cent for US players.
| Key Challenges |
| • Low capital base • Obsolete technology • Lack of exposure to the international environment • A fragmented domestic market • Most companies adopt low cost and differentiation strategies |
The industry exports have grown at a CAGR of 19 per cent in the last five years. Global auto makers are outsourcing from Indian auto component companies. Some are setting up their own manufacturing bases here.
Italy-based leader in brake discs for automotive vehicles, Brembo and German firm ZF Group have their production units in Chakan, Pune. Germany-based manufacturer of clamps, plastic tubing systems and connectors for auto and non-auto industry, Norma group recently set up their facilities at Talegaon. “There is a strong focus on localisation of parts with vendors to give the cost advantage to the customers,” Klaus Sicker, vice-president and head, off-road division, ZF India, was quoted as saying.
Trend: Joining Forces
Auto parts makers have formed joint ventures to boost technological know-how and expand product range:-
- US automakers such as General Motors and Ford Motor Co are also keen to increase sourcing from India. General Motors had in January said it plans to source US$ 1 billion worth of auto parts from India over the next
two years.
- Bharat Forge Ltd, the world’s second biggest forgings maker entered into a joint venture with an Indian unit of gearing products manufacturer David Brown to build gearboxes.
- Amtek Auto Ltd has signed joint ventures with firms in South Korea and Israel to boost product portfolio and the Samvardhana Motherson Group, which runs flagship Motherson Sumi Systems Ltd, is conducting eight due diligences across the globe for acquisitions and JVs.
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| Nuts & Bolts |
| • India auto sales grew a record 30 percent in 2010/2011 to 1.98 million units • The total passenger car production in the country will jump four times to reach 9 million cars by 2020, says an ACMA report • The auto component sector is expected to clock sales of US$30 billion in 2010/11. |
India in high gear
For several auto companies (OEMs or original equipment makers), India is part of their global supply chain and new product development processes. OEMs like Suzuki, Hyundai and Ford are developing small cars in India for global markets. Some of these are using India as an export hub for some global platforms. Indian OEMs like Bajaj, TVS, Tata Motors and M&M are also focussing on exports in a big way.
Historically, India’s strength in exports has been forgings, castings and plastics. But this is changing with more component manufactures investing in upgradation of technology in recent years. Automakers are increasingly passing on greater responsibilities to their suppliers. They no longer want mere manufacturers but suppliers who can provide them with a complete set of services like research, development, design, testing etc.
This is where India’s IT advantage can give it the edge over Asian rivals.
Cutting edge R&D and production for global markets will benefit the component sector as well. Japanese, German and US auto component companies became global players when their auto companies went global.
Increasing performance
Most auto ancillary companies have asked original equipment manufacturers to hike prices (8-10 per cent) so that the auto component companies can pass on the increase in wages and processing costs. As of now, predictions state that the auto component industry will outperform the auto sector.
| CRISIL Comments |
| CRISIL’s analysis of more than 150 automotive component manufacturers in the small and medium enterprise (SME) sector reveals a compound annual growth rate (CAGR) of 9.44 per cent in turnover between 2008-09 (refers to financial year, April 1 to March 31) and 2009-10. The analysis reveals that the SME manufacturers’ business risk profiles are supported by the extensive experience of the promoters in this sector and their established customer relationships. The strong business risk profile and healthy growth of the automobile industry have enabled these enterprises to maintain an operating margin of 8.02 per cent during 2009-10. However, these enterprises are exposed to risks relating to customer concentration in revenues, and volatility in raw material prices. Most SMEs in the sector benefit from the extensive experience of the promoters; the average experience of the promoters in the sample was 20 years. The average turnover of the enterprises in the sample was `248 million and a large portion of them continue to be proprietorships and partnerships (49 per cent). More than 75 per cent of these enterprises are concentrated in Maharashtra, Tamil Nadu, Punjab, and National Capital Region (NCR), and are situated close to major automobile manufacturing units. Thus, while they enjoy strong customer relationships, this proximity and dependence also result in high customer concentration. Not all enterprises have been able to mitigate the risk of customer concentration: CRISIL’s analysis reveals that only 40 per cent of them cater to the replacement market, while only 15 per cent diversified into direct exports (firms with more than 10 per cent of sales derived from exports). A notable finding of CRISIL’s analysis has been that SME players from South India reported a higher operating margin (9.80 per cent) than their counterparts in Western (7.32 per cent) and Northern (8.39 per cent) India during 2009-10, backed by greater flexibility to pass on raw material price increases to their customers owing to the long standing relationships and the locational advantage of being close to original equipment manufacturers. Ultimately, the higher operating margin also translated into 2 to 3 per cent higher profit after tax (PAT) margin for players from South India as compared to their competitors in other regions. However, CRISIL believes that most SMEs across regions will be unable to fully pass on raw material price increases to their customers in case of an economic slowdown. |
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