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PREFACE | FOREWORD | EXECUTIVE SUMMARY | METHODOLOGY | INDUSTRY REPORT | SME INSIGHTS| COMPANY LISTING| SPONSORS
 

The Indian auto component industry has been navigating through a period of rapid changes with great élan. Driven by global competition and the recent shift in focus of global automobile manufacturers, business rules are changing and liberalisation has had sweeping ramifications for the industry. The global auto components industry is estimated at US$1.2 trillion. The Indian auto component sector has been growing at 20% per annum since 2000 and is projected to maintain the high-growth phase of 15-20% till 2015.

The Indian auto component industry is one of the few sectors in the economy that has a distinct global competitive advantage in terms of cost and quality. The value in sourcing auto components from India includes low labour cost, raw material availability, technically skilled manpower and quality assurance. An average cost reduction of nearly 25-30% has attracted several global automobile manufacturers to set base since 1991. India’s process-engineering skills, applied to re-designing of production processes, have enabled reduction in manufacturing costs of components. Today, India has become the outsourcing hub for several global automobile manufacturers.

Innovation and cost pruning hold the key to meeting the global challenge of rising demand from developed countries and competition from other emerging economies. Several large Indian auto component manufacturers are already gearing to this new reality and are in the process of substantially investing in capacity expansion, establishing partnerships in India and abroad, acquiring companies overseas and setting up greenfield ventures, R&D facilities and design capabilities.

Some leading manufacturers of auto components in India include Motor Industries Company of India, Bharat Forge, Sundaram Fasteners, Wheels India, Amtek Auto, Motherson Sumi, Rico Auto and Subros. The India’s Top 500 Companies, published by Dun & Bradstreet in 2006, listed 22 auto component manufacturers as top companies in India with a total turnover of US$ 3 bn. These companies are in the process of making a mark on the global arena, and some have already acquired assets abroad.

Industry Structure

The total turnover of the Indian auto component industry is estimated at US$9 bn in 2006. The industry has the resources to manufacture the entire range of auto products required for vehicle manufacturing, approximately 20,000 components. The entry of global manufacturers into India during the 1990s enabled induction of new technologies, new products, improved quality and better efficiencies in operations. This in turn effectively acted as a catalyst to the local development of the component industry.

The Indian auto component industry is extensive and highly fragmented. Estimates by the Department of Heavy Industries, Government of India, indicate there are over 400 large firms who are part of the organised sector and cater largely to the Original Equipment Manufacturers (OEMs). Another 10,000 firms exist in the unorganised sector that operates in a tier-format. The firms in this segment operate in low technology products and cater to Tier I and Tier II suppliers and also serve the replacement market

Around 4% of the companies operating in the auto component segment cater to 80% of the demand emanating from OEMs. Within the unorganised segment, apart from supplying in the aftermarket, a number of players are also involved in job work and contract manufacturing.

   

Source: ACMA
   

The range of products manufactured, with each broad product segment having a different market structure and technology, has negated any possible concentration of the market in a few hands. The market is so large and diverse that a large number of players can be absorbed to accommodate buyer needs. However, there are a select few large companies that have integrated their operations across the value chain. The key to competing in this industry is through specialisation by product-type, and integrating operations across the related area of specialisation.

An interesting insight provided by a study conducted by the National Council of Applied Economic Research revealed that the market segments for auto components included OEMs constituting 33%, local components having 25% with the balance 42% comprising of spurious market including re-conditioned parts. A large part of the spurious or grey market companies are in the unorganised sector.

The regional base of auto component manufacturers is mostly concentrated in the West, North and South of India.This regional concentration of auto component manufacturers has been dictated by the emergence of automobile manufacturers in these regions. The set up of Tata Motors, Bajaj, Mahindra & Mahindra and TVS in the 1950s and 1960s laid the foundation for auto component manufacturers in the West and South, whilst the entry of Maruti during the 1980s created the base in the North.

Industry Growth

Production of auto ancillaries was estimated at US$10 bn in 2005-06 and has been growing at a robust 20% per annum since 2000. Exports of auto components have been strong growing at 24% per annum since 2000. This growth in exports if sustained for another five years will see India’s auto components exports will touch US$ 5 bn by 2011 from the US$ 2 bn at present.

Till the 1990s, the auto component industry was solely dependent on the domestic automobile industry to drive the demand for ancillary products. This composition of the market however is undergoing radical changes with global outsourcing gaining momentum. In recent times, exports has emerged as a significant driver of growth, and the demand emanating from global OEMs and Tier I manufacturers has opened new opportunities for the auto component industry in India. At the same time, a bright outlook for the domestic automobile industry also offers significant growth potential, given the fast rising income levels with a rapidly growing middle and high income consumers.
 
Share of exports in total production has risen from 10% in 1997 to 18% in 2006. The composition of exports in terms of the proportion of OEM and aftermarket has also undergone a sweeping change since the past decade. The ratio of OEM to aftermarket has changed from 35:65 in the 1990s to 75:25 in 2006. While exports have been booming, there has been a sharp rise in imports of auto components as well, especially in the last three years. From an import of US$ 250 mn in FY03, they have gone up to US$750 mn in FY06. This is a healthy trend, indicative of rising domestic demand.

Investments

Since 2000, the auto component industry has recorded an investment level of Rs 18 bn and has attracted US$ 530 mn in terms of foreign direct investment. Investments in the sector have been growing at 14% per year. In 2005-06, investments touched US$ 4.4 bn, and are expected to grow significantly in future.

The Investment Commission has set a target of attracting foreign investment worth US$ 5 bn for the next five years to increase India’s share in the global auto components market from the present 0.4% to 3-4%. This is a sizeable target considering the meagre amount of FDI currently coming into the industry. The changing perception of global auto makers is however fast altering this scenario.

With less than 1% share in the global market, India has tremendous potential to emerge as a supply base. Several global giants like Ford and Toyota have already set up base in India to source auto components. Outsourcing is fast catching up with domestic OEMs as well, with most Indian OEMs today sourcing nearly 70-80% of their component requirements from vendors.

This changing business scenario is leading to an inevitable outcome of consolidation within the industry. The takeover of Kar Mobiles by Rane Engine and of Gero Auto by Uma Precision are few instances. However, such mergers and takeovers will be few and far in between in the auto component industry, unlike the churn out anticipated in other emerging industries – the principal factor being the vastness of the market and the range of products that need to be delivered.

Rather than domestic consolidation, the general trend at present is for the large auto component manufacturers to establish a global presence. Top auto component manufacturers have already set up base in the global markets, especially in Europe. Overall, there have already been 16 acquisitions, with six made in 2005. The industry is the third highest among the Indian industries after IT and Pharma, in acquiring overseas assets. These acquisitions have largely been in Europe and the USA. This trend has been possible as the auto ancillary industry in these countries have been collapsing, thus making it affordable to acquire these companies. Nevertheless, this will provide a base for Indian companies to access the European and American markets.

Indian auto component companies are also setting up bases in other emerging economies, who are potential competitors, for instance, Sundaram Fasteners’ greenfield facility in Zhejiang and Bharat Forge’s joint venture with the Chinese automotive major FAW Corporation. Another auto component manufacturer with plans to enter China is PMP Components, which intends to set up a sourcing base to establish itself as a low cost supplier.

These trends are indicative of the changing business environment in the country. Top auto component manufacturers are gearing to take big risks. Their cross-border vision has established them as global companies. Though the going-global phenomenon is limited to a handful of companies, the smaller companies are also indirectly gearing to this trend by entering into formal manufacturing contracts and specialisation.

Prospects

Looking forward, the industry displays tremendous potential in generating employment and boosting entrepreneurship in the country. The spate of new investment plans announced by global and domestic automobile manufacturers promises the emergence of India as a global hub for auto components.

The industry is transforming, and the boost in demand will see the emergence of several new players in the industry. The vast market for auto components, and the diverse products and technology involved ensures a place and role for many. At the same time, the entry of several global automobile manufacturers will bring in more regulation into the industry and see a pruning of the spurious market. Among the smaller players in the unorganised segment, this implies moving away from being standalone companies, to entering into either contract manufacturing or being ancillary units. The newly defined rules are specialisation, development and delivery that hold the key to success in the auto component industry.

Foreign Acquisitions by Indian Companies
Indian Company
Acquired
Country

Bharat Forge

Carl Dan Peddinghaus

Germany

CDP Aluminiumtechnik

Germany

Federal Forge

USA

Imatra Kilsta AB

Sweden

Scottish Stampings Ltd

Scotland

Motherson Sumi

WOCO Group

Germany

G&S Kunststofftechnik GmBH

Germany

Amtek Auto

GWK

UK

New Smith Jones Inc

USA

Zelter

Germany

Sundaram Fasteners

Bleisthal Produktions GmBH

Germany

Cramlington Forge

UK

CDP GmBH

Germany

EL Forge

Shakespeare Forgings

UK

TVS Autolec

RBI Autoparts SND BHD

Malaysia

Sona Koyo

Fuji Autotech

France

Source: Auto Component Manufacturers Association