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Section A: Auto Component Industry

The auto component industry is one of the fastest-growing industries in India. This industry has come a long way from being a supplier of components to the domestic market to turning into an auto component hub in Asia. The industry players are the most sought-after in the global automobile supply chain. India’s cost-competitiveness in terms of labour and raw material, and its established manufacturing base attract global OEMs for outsourcing components from India.

Industry Structure

The total turnover of the Indian auto component industry grew at a CAGR of 20% during FY04-FY09 and reached Rs 763 bn in FY09; this growth was aided by the rise in standard of living and income levels, and the decrease in tariff on imports, apart from the rising demand from the automobile industry. The turnover of the auto component industry grew rapidly in the past 6 years. However, the percentage change in growth fell from 38.7% in FY06 to 6.0% in FY09. Sales decreased in April 2009 as consumers stayed away from making new purchases and from dealerships in the midst of the rising economic uncertainty.

The Indian auto component industry is extensive and highly-fragmented. According to the Department of Heavy Industries, there are more than 400 large firms in the organised segment of the industry who cater largely to the OEMs and there are another 10,000 firms in the unorganised segment of the industry that operate in a tier-format — the firms in this segment operate in low-technology products and cater to tier I and tier II suppliers apart from the replacement market.

The auto component industry can be grouped under the following seven broad categories:

• Engine parts
• Drive transmission and steering parts
• Equipment
• Electrical parts
• Suspension and braking parts
• Body and chassis
• Others

Investments in the Indian auto component industry

Investments in this sector have been growing at 15-20% in the past few years, but they grew by 11% in FY09. The industry attracted investments worth Rs 320 bn during FY09, which grew at a CAGR of 17.15% during FY04-FY09. Much of these investments were made by the domestic companies by expanding their manufacturing capacities. India is a hub for outsourcing auto components for major global players. There has been a rapid increase in the demand for components by global players due to India’s cost advantages arising from availability of inexpensive labour and raw materials, and an established manufacturing base. The Indian government also has taken many initiatives to attract FDI; for instance, it has lowered the restrictions on imports of auto components and has approved 100% equity investment from foreign companies.

The auto component imports have been always higher than the value of exports. The large-scale import by the Indian auto component industry signifies the high demand in the domestic market. In the initial years, there was a marginal gap between the import and export values but during FY07 and FY09, the gap increased widely. The rising rupee and raw materials cost lowered the exports margins. In FY09, imports were almost 68% higher than exports. In FY09, exports rose by merely 19% over FY08, whereas imports rose by 34% in the same financial year. The government plans to adopt various measures like imposing anti-dumping duties to protect the domestic auto component industry from inexpensive imports. During FY04- FY09, the exports and imports of the auto component industry grew at a CAGR of 23.7% and 34.11%, respectively.

The key growth factors of the industry are as follows:

• Strong engineering skills, high quality, and relatively low cost
• Adaptation of modern technology
• Increased competitive pressures on global automakers that lead them to diversify to countries like India
• Opening up of the Indian economy, liberalisation of import-export policy, government initiatives such as setting up of NATRIP, reduction of peak rate duty, reduction of customs and excise duty on small cars
• Fast developing infrastructure
• Increased per capita income of Indians and easy financing options boost domestic demand for automobiles.

Some of the challenges that confront the Indian automotive industry are:

• Currency risk and increasing competition from other emerging countries (particularly China, Vietnam and Malaysia)
• Unprecedented increase in cost of raw materials
• Lack of good infrastructure and poor power supply
• Counterfeit components
• Low level of productivity aggravated by lack of labour reforms
• Slow delivery of reforms by the government
• Lack of a single window for quick clearances, multi-layered authority and the cost of democracy – lobbies, NGOs, legal framework, over-activism of the judiciary.

Future Outlook

The increasing number of auto exhibitions across the country gives an indication of the rising consumer interest. Automobile manufacturers from India are seeking joint ventures, collaborations, mergers and acquisitions worldwide to compete with all their might. Against the backdrop of such ambitious growth plans in the Indian automobile industry, the Indian auto component industry is estimated to garner a turnover of US$ 40 bn by 2016. In a nutshell, the thriving economy, strong domestic and global demand, adoption and acceptance of innovative technology will help the Indian auto component industry to make a mark globally.

Section B: Leather Industry

Introduction

The Indian leather industry plays an important role in the economy because of its potential for growth, exports and employment generation. The industry is the tenth-largest manufacturing sector in India and employs around 2.5 mn people, 30% of who are women. The leather sector’s strength lies in the fact that India accounts for around 21% of world cattle and buffalo population and 11% of global goat and sheep population.

According to the Council for Leather Exports (CLE) statistics, the annual turnover of the leather industry in FY09 was around US$ 7 bn, out of which US$ 3.6 bn came from exports. India is the second-largest producer of footwear and leather garments in the world. In FY08, the leather industry grew by 11.7% but in FY09, it fell by 7.0% owing to shrinkage in leather demand in foreign markets.

The sector can be broadly classified into primary, secondary and tertiary sectors, comprising many artisanal, cottage, tiny and small and medium enterprises. The primary sector constitutes almost 92% of the workforce and is engaged in hide/skin collection, tanning, besides making finished leather and finished products. The secondary and tertiary sectors constitute about 8% of the workforce, and are into manufacturing other value-added leather products such as footwear and footwear components, leather garments, bags, wallets, belts, gloves, accessories, saddlery and harness articles. The unorganised sector accounts for nearly 80% of leather footwear units.

Tamil Nadu and West Bengal together account for around 84% of the total leather garment and goods units in India while West Bengal and Uttar Pradesh house most footwear manufacturing units. Tamil Nadu has the highest number of manufacturing units in India and these units include footwear units, leather garments and leather goods units.

Leather exports

According to CLE statistics, India’s total leather and leather goods exports grew at a CAGR of 10.2% from US$ 2,216.45 mn in FY04 to US$ 3,598.64 mn in FY09. Since FY92, India has been involved in export of only finished leather because of export restriction on semi-finished leather. In the subsequent years, however, India evolved from a mere exporter of raw hides and skins to an exporter of value-added leather products.

The footwear segment, which comprises leather, non-leather and footwear components, constitutes the largest share of the leather export portfolio. Its share increased from 34.7% in FY04 to 42.6% in FY09. Export of leather footwear increased from US$ 553.04 mn in FY04 to US$ 1243.78 mn in FY09. During the same period, export of footwear components and nonleather footwear increased from US$ 161.27 mn to US$ 246.35 mn and from US$ 53.42 mn to US$ 43.53 mn, respectively. The shares of finished leather and leather garments in the export basket declined from 25.0% to 18.7% and from 13.6% to 11.8%, respectively, during FY04-FY09. However, the share of leather goods in the total leather exports remained constant at around 24% during this period.

Nearly 75% of India’s leather exports go to ten countries, and out of these countries, 5 belong to the EU region.

Government initiatives

The Indian government has created various schemes for the development of the Indian leather sector:

• Indian Leather Development Programme (ILDP): The ILDP has been introduced with the following objectives: developing the leather industry infrastructure; assisting the national agencies that are tackling the issues in the industry; promoting and enhancing productivity, value addition and employment; undertaking investment and trade development activities and building up an information base on the leather industry. Introduced in the Eleventh Five Year Plan period, the total investment for this project is Rs 9,126.7 mn.
• Integrated Development of Leather Sector (IDLS): ILDS is a sub-scheme of ILDP that has been allocated Rs 2,534.3 mn in the Eleventh Five Year Plan. This scheme is designed by the government to infuse capital in the industry. The scheme aims at technology upgradation, modernisation and capacity creation for accomplishing global competitiveness.
• Mission Mode Scheme: This scheme, which is also a sub-scheme of ILDP and aims to conduct various promotional activities in the foreign markets to promote the Indian leather industry, create awareness about India’s manufacturing capabilities and growth potential. This scheme is mainly aimed at attracting foreign entrepreneurs in India for making investments, and for entering joint ventures and technical collaborations.
• Benefits announced in the Union Budget 2009-10:
  1. Inclusion of new inputs for the manufacturer/ exporters of leather garments, footwear and other leather products under the 3% Duty Free Import Scheme (DFIS).
  2. 2% interest subvention scheme for certain labour-intensive sectors, including the leather sector, extended up to FY10.
  3. Additional benefits under Export Credit Guarantee Scheme have been extended till FY10.
  4. Exemption of service tax on foreign agents’ commission and transport of goods via road.

Challenges

The major hindrances that affect the growth of the Indian leather industry are:

• Environmental issues: The leather industry is considered to be a major pollutant, especially during the last stages of production in tanning. As the leather industry also releases its waste and chemicals in to water bodies it is known to badly affect groundwater. Due to its nature, importing countries have set global standards, besides banning usage of many chemicals.
• Unavailability of raw materials: The unavailability of raw materials is a serious problem for both the developed countries and the developing countries like India. Other components like fittings, adhesives and many more are also less accessible in preferred scale.
• Chinese competition: China dominates the global leather industry due to its low production costs.
• Lack of technology: In India leather is produced in the old fashioned way through tanning that takes a lot of time to process raw hide skin into leather. Further, the activities of designing, cutting and stitching are done manually, which affects the quality and unit value realisation of products. Evidently, the industry lacks in terms of level of modernisation and technology readiness.
• Inadequate investments: The leather industry needs to make high capital investments for proper production processes and infrastructure.
• Lack of skilled labour: The industry is affected by lack of skilled labour, and low level of labour productivity, as the employees are not exposed to any formal training.
• Underutilisation of capacity: Due to deficient raw materials, shortage of finance, labour problems and regular power failures there is underutilisation of capacity in the industry.

Future outlook

The government, recognising the colossal prospects of this sector, has adopted policies conducive for the growth of the leather industry. CLE expects the leather and leather goods exports to reach US$ 7 bn by 2013-14 and as a result generate additional employment opportunities for around one million people.