Untitled Document

Dun & Bradstreet - Oriental Bank of Commerce SME Cluster Series 2014 : Chennai


Auto Components Overview

The Indian auto components industry is one of the fastest growing industries in the country. It has grown at a CAGR of
14.6% during the last five years ended 2012-13. The industry has a distinct global competitive advantage in terms of cost and
quality and this has aided in its transformation from a local supplier to a global auto parts supplier catering to some of the
big names in the global automobile industry. The cost advantage stems from the cost-competitiveness in raw material and
labour, while its established manufacturing base is a compelling attraction for global Original Equipment Manufacturers
(OEMs) to outsource components from India. The industry is transforming itself from a low-volume highly fragmented
industry into a competitive industry backed by competitive strengths, technology and transition up the value chain.

The annual turnover of Indian auto component industry was around ` 2,161 billion during FY13, almost twice the size in

Several factors have enabled this transformation of the Indian auto components industry. The government’s role has been in
the form of initiatives and incentives, additional subsidies and formation of various clusters as also economic liberalisation.
The gradual increase witnessed in the per capita income in India has led to leading aspirations and greater demand for
automobiles, which in turn has boosted the demand for auto components. In addition, the entry of various foreign players
in the Indian market led to companies adopting innovative marketing strategies to fend competition. The competitive
intensity led to the improvement in the end products.

Industry Structure

The Indian auto components industry can be broadly classified into the organised sector and the unorganised sector.
There is a clear demarcation with respect to products in these two sectors, the organised sector caters to high value-added
precision engineering products and accounts for around three fourth of the total production. The unorganised sector caters
to the lower value-added segments. The organised players cater to the original equipment (vehicle) manufacturers, while
the unorganised sector largely caters to the aftermarket. There are around 600 players in the organised sector accounting
for around 70% of the industry’s total revenues.

In the organised sector, some of the major auto component manufacturers include Bosch Ltd, Bharat Forge Ltd, Brakes
India Ltd, Bosch Chassis Systems India Ltd, Sona Koyo Steering Systems Ltd, Automotive Axles Ltd, Sundram Fasteners
Ltd, Wheels India Ltd, Jay Bharat Maruti Ltd, Motherson Sumi Systems Ltd, Subros Ltd, Pricol Ltd and Amtek Auto Ltd,
among others.

Industry Classification

The auto components industry in India can be classified based on different parameters, these include, product range and
size and location.

Product Range

The Indian auto components industry offers a comprehensive product range, consisting of approximately 20,000 components
required for vehicle manufacturing. The entire product range is grouped into seven categories. Engine parts and drive
transmission and steering parts are the two main product categories, contributing to 50% of the Indian auto component
industry in FY13.

Auto component Clusters

The auto components industry in India is largely present in the form of clusters, due to the presence of a large number of
small and unorganised units. The clusters have OEMs as hubs or centres of growth while the suppliers have formed their
bases around the OEMs.

The auto components industry in India has evolved around three major regions, Western Region (Mumbai – Pune – Nasik
– Aurangabad), Southern Region (Chennai – Bengaluru – Hosur) and Northern Region (Delhi – Gurgaon – Faridabad). In
the Eastern region, activity in the automotive sector is seen in Jamshedpur and Kolkata, but the development in this region
has been to a lesser extent than in the others.

Factors Influencing Demand for Auto Components

Being an ancillary industry, demand for auto components is greatly influenced by the demand for automobile industry.
Auto components cater to both the OEM segment as well as the aftermarket or replacement market and by their very
nature, factors that drive demand from both these segments vary.

Supply Dynamics

Raw materials constitute a major cost component in the auto components industry followed by labour charges. Indian
auto components manufacturers have been focusing on R&D, innovation, design, and engineering to meet global quality
standards and emerge as full-service providers to OEMs.

Exports Scenario

Low labour costs, availability of skilled labour and high quality consciousness among Indian vendors have supported the
growth of auto component exports from India.

Exports of auto components from India have nearly doubled during the last 5 years from US$ 5.1 billion in FY09 to US$
9.7 billion in FY13. Exports constitute 24.4% of the Indian auto components industry’s total turnover. Exports declined
during FY10 primarily due to slow recovery in the developed economies. However, they once again bounced back in FY11,
registering sharp growth of around 57%. Europe accounted for nearly 35% of India’s exports and continues to be one of the
major export destinations, followed by North America.

Auto Component Makers Face Falling Exports due to Global Slowdown

Indian auto component makers are facing the heat of a global auto slowdown thereby resulting in falling exports, which
is further aggravated by weak domestic demand. Europe, which accounts for one-third of India’s component exports, is
still reeling under the pressure of slow economic growth. As per the European Automobile Manufacturers’ Association,
new passenger car registrations fell by about 1.7% (y-o-y) during 2013, whereas demand for new commercial vehicles
however grew at a modest rate of 1.0% in the EU during 2013. The major markets that reported significant decline in new
registrations were Germany (-4.2%), France (-5.7%) and Italy (-7.1%). Additionally, imports of parts and accessories of
motor vehicles by the US from India declined at a rate of -18.4% during 2013. Thus, with more than half the Indian exports
catering to the US and Europe and 80% of export revenue accruing from supplies to OEMs, Indian component makers are
in a tight spot. Furthermore, the auto component manufacturers also face competition from high imports of auto parts from
Asian countries, which accounted for about 59% of US$ 13.1 billion imports in FY13.

Challenges Facing the Auto Components Industry

The growth prospects for the Indian auto components industry are bright. However, to continue to report healthy growth,
the industry has to overcome certain challenges facing them. The major challenges facing the industry that are acting as
bottlenecks in exploiting the full market potential include:

Technological capability and R&D competence not enough to match global standards

The Way Forward

The Indian auto components industry is well poised to achieve strong growth in the coming years owing to expanding
replacement market and rising domestic demand in the OEM market due to an expected turnaround in the domestic auto
sector from the second half of fiscal 2014. The export market for auto components is also likely to see strong traction once
the demand from Europe and the US picks up. Moreover, the sector could expect operating margins to improve due to
decline in raw material costs as commodity prices are expected to moderate.

According to the Auto Components Manufacturers Association (ACMA), the Indian auto components industry is likely to
grow to US$ 150 billion by 2020 with the domestic market share of ~US$ 85 billion. Given the healthy long-term demand
prospects in the domestic market and with India emerging as a favoured low-cost sourcing destination, auto component
manufacturers are likely to invest in increasing production capacities and technological capabilities. Further, companies
would continue to diversify their product portfolio to de-risk their businesses. This augurs well in accelerating the industry’s
growth and development, going ahead.