The Indian automotive industry is the sixth largest in the world having deep forward and backward linkages with several key segments of the economy. The industry has a strong positive multiplier effect which acts as a key driver of economic growth. As India is rapidly emerging as a global sourcing hub for auto makers across the globe, the Indian automotive industry is also fast transforming to meet the expectations and stringent norms of the customers. While the well-developed Indian auto industry produces a wide variety of vehicles; passenger cars, light, medium, heavy commercial vehicles, multi-utility vehicles, two wheelers, tractors and other off-road vehicles, the Indian auto component sector also manufactures a complete portfolio of products including engine parts, drive transmission and steering parts, body and chassis, suspension and braking parts, equipment and electrical parts, besides others.
The last fiscal has been one of the most challenging for the automotive industry in India; flagging vehicle sales, high capital costs, high interest rates, fluctuating exchange rate and slowing down of investment in manufacturing, have adversely impacted the growth of the auto component industry. Considering the turbulence in the environment, the component industry witnessed a marginal decline of 2 percent over the fiscal, clocking Rs. 2,11,765 crores (USD 35.13 billion) in turnover for the period April 2013 to March 2014, however the CAGR over the last six years recorded an impressive 14 percent.
While the traditional advantages of low cost and highly skilled engineering manpower backed by a robust domestic demand for vehicles have stood in good stead for the component industry so far; however going forward and to be globally competitive the sector needs to focus on research and development, design capabilities, product differentiation and improve quality to meet the evolving needs of customers who are looking for more value add.
It is indeed heartening that the new government recognises the potential and the need for revival of the automotive industry and has extended the excise duty concession till the end of the year further, allowing of 49% FDI in defence sector in the recent Union Budget will also open new vistas for the component makers who are keen to mitigate the risk of automotive industry cyclicality and diversify into adjacencies such as the defence sector. Moreover, with government's focus on infrastructure and skill development and enhanced funding for development of the MSME sector, has built hopes for an early revival of the industry.
Indian auto component manufacturers, over the years, have developed strong manufacturing capabilities that have helped them in keeping costs low and meet stringent quality norms. Indian auto components are exported to more than 160 countries and have been growing at 15 percent per annum over the past six years. Components exports stood at Rs 61,487 crores (USD 10.2 billion) in FY 2013-14, accounting for 29 percent of overall industry turnover. The key export items include engine parts, transmission parts, brake system & components, body parts, exhaust systems, turbochargers etc. However, as business complexities increase, the component makers will have to invest in technology, scale up operations and further improve quality, cost and delivery performance to remain globally competitive.
Today the 700 hundred plus ACMA membership boasts of 576 ISO-9001 certifications, 467 TS-16849 certifications, 208 ISO-14001 certifications and 105 OHSAS-18001 certifications. Second only to Japan, India's auto components industry also has the highest number of Deming Awards to its credit. In addition, the industry boasts of 15 Total Productive Maintenance (TPM) awards, three Japan Institute of Plant Maintenance (JIPM) awards, two Japan Quality medals and two Shingo Silver medallions.
Going forward, scaling up of operations will be a key challenge for smaller component manufacturers facing constraints in raising capital, attracting talent and accessing technology. Further, many Indian component manufacturers are competing in the lower value-added space and produce parts/components on either job work or build-to-print basis. Such manufacturers depend on either the OEMs or on their JV partners for technical/product design capabilities. In future, product design, testing and validation capabilities are expected to become even more important as OEMs rely more on their suppliers for product design.
Driven by the growth in vehicle production, the Indian auto component industry is expected to scale over by 100 USD billion by the year 2020. According to the recent study by Mckinsey, knowledge partner for ACMA, the Indian suppliers are well positioned with the global trends, working in their favour which can significantly accelerate their international presence in the next few years. The five macro global trends that support the component makers to diversify are - globalising of OEMs with suppliers following them; maturing of low-cost countries (LCC) as export hubs; platform consolidation and shift towards large global suppliers; increasing aspiration of emerging market suppliers to access new markets; and technologies and market diversification for margin resiliency. Based on market comparison, supplier and OEM surveys, Indian suppliers can nurture a three-pronged 2020 aspiration:
- Increase exports from the current USD 10 billion to USD 35 to 40 billion
- Increase revenues from overseas assets from the current USD 6 billion to USD 20 to 22 billion
- Increase count of Indian suppliers in global top 100 from the current lone figure to five by 2020
The auto component industry can be an engine of India's economic and manufacturing growth contributing 3.6 percent GDP by 2020, up from the current level of 2.2 percent. To achieve this potential the industry would require additional skilled manpower of over 1 million people and cumulative investment of over USD 35 billion.
In the coming decade the Indian automotive industry will need to revise its technology and introduce efficient green vehicles, on the back of rising fuel consumption and costs, and heightened awareness on environmental issues. The major trends that will define the automotive industry in the decade ahead are discussed below.
- Future technology: In view of the rising fuel prices and increasing expectations of Indian consumers for cost effective and fuel efficient vehicle, the Original Equipment Manufacturers (OEMs) would place greater thrust on two core areas - reducing vehicle weight and developing smaller engines but more efficient engines. Further, Government regulations on emissions will play a key role on the vehicular technology. Emerging global trends such as e-mobility will also impact on the Indian automotive industry.
- De-risking: To ensure long-term sustainability and growth and to reduce susceptibility of business to cyclical fluctuations, auto companies will look at deploying their core competencies in other industries such as defence, aerospace, oil & gas, railways and construction, among others.
- Cost Optimisation: Mounting pressures on margins would put cost optimisation high on the industry's agenda, which they would approach through local sourcing, local manufacturing and by having multi-plant operations. The globalisation objectives would lead to companies widening their presence, not just within the domestic boundaries, but also across the global markets. The success stories of Indian companies who embarked on the acquisition route early on would encourage more auto players to aggressively focus on expanding their global footprint.
- Collaboration: The changing role of component suppliers will necessitate more investments in R&D, product innovation and faster response time OEMs' new product launch plans.
There is a need for creating a more encouraging ecosystem, characterised by increased thrust on IT, R&D, creation of more value added products, incentives and policy support from the Government, testing and validation centres, and appropriate training infrastructure to spruce human resource base, with the objective of positioning the Indian industry prominently on the global automotive map.