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The division of production processes and outsourcing among global automobile manufacturers has led to a major reorganisation of the supply base within the automobile and auto component industry. This new business model being followed by global companies holds tremendous potential for the growth of small and medium enterprises (SMEs) in India.

Defining SMEs
A well-debated issue, the definition of small and medium enterprises in India was very recently ratified. The Micro, Small and Medium Enterprises Bill, 2006, which is likely to take effect from October 2006, define the segment on the basis of investments in plant and machinery. Small enterprises are those with an investment of not more than Rs 50 mn in plant and machinery, and medium enterprises with an investment of over Rs 50 mn but less than Rs 100 mn in plant and machinery. This definition has finally put the segment within a legal framework.

The traditional small scale industries have been in focus since Independence. The medium enterprises are recent entrants, and part of government’s policy focus lately. The small scale segment is a manifestation of India’s socio-economic development model and has met with the country’s long-term expectations in terms of contribution to GDP, industrial base, employment and exports. This segment forms a major part of India’s industrial base.

Recognising the importance of SMEs in the industrial development of the country, the Government has initiated a range of programmes in diverse areas, viz. financing, technology, innovation, market information, technical training and developmental assistance. These initiatives are important in facilitating the growth of the SMEs. But it will be the internal dynamics of industries, and the path India’s industrial development takes, that will give a thrust to the emergence of SMEs. The auto component industry is one such sector that would give a major boost to SMEs.

SMEs in Auto Components
Auto component SMEs are one of the fastest growing within the SME category of industries. These units are key contributors to the total production of auto components and also have a significant share in the exports of the industry.

As part of a highly fragmented industry, these companies mostly are part of the unorganised sector. They operate in a tier framework, and most of the companies in the SME segment are in the Tier II or below. Few of the suppliers to OEMs are medium scale enterprises.

The SMEs are riding a boom phase, driven by demand from global auto manufacturers. The industry is undergoing a major restructuring and many existing companies are expected to move up in the value chain to a higher tier. Nevertheless, sustenance and survival still remains an issue of concern for these companies as they will have to absorb global best practices in this competitive environment.

Cost competitiveness, customer orientation, lead time, are some key factors the auto component SMEs will have to imbibe to survive in the new global set-up. At the same time, these companies face the limitations of being SMEs, like

• Low capital base
• Limited generation of surplus funds for re-investment due to tight working capital cycle
• Lack of awareness of business opportunities
• Inadequate exposure to international environment
• Limited geographical diversity of markets
• Obsolete Technology
• Poor infrastructure facilities

Despite these limitations, the SMEs have managed to significantly contribute towards development of India’s industrial base. The key risks that the auto component SMEs faces include:

• Fluctuations in the cost of production; especially raw materials like steel, aluminium, polymers
• Poor negotiation powers due to fragmented nature of industry; which in turn limits their pricing power
• Dependence on traders and agents to access overseas markets which threatens their competitiveness
• Product substitutes due to fast-changing technology

Addressing these challenges and risks will be crucial to promoting SMEs in the auto component industry. The government has initiated cluster-based development – geographical concentration of enterprises having similar lines of business – which gives rise to external economies and favours emergence of specialised technical, administrative and financial services. This form of networking of small firms is a means of achieving economies of scale. Extending this intitiative further, the government is encouraging banks to adopt a cluster-based lending approach to ease availability of funds to SMEs.