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


Industry overview

Auto Components Industry

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 FY08.

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 3.1% (y-o-y) during Jan-Oct 2013, whereas demand for new commercial vehicles was down by 4.0% in the EU during Jan-Sep 2013. The major markets that reported significant decline in new registrations were Germany, France and Italy. Additionally, imports of parts and accessories of motor vehicles by the US from India declined at a rate of -21.5% (y-o-y) during Jan-Sep 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:

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.

Engineering Sector

India’s core industrial strategy over the years has been the development of engineering and capital goods sector. This sector forms the basis for the enhancement of the country’s domestic manufacturing capabilities and so forms a vital ingredient in driving the nation’s economy. The sector’s cascading effect is prominent on the growth of its user industries. Nearly 12% of India’s total manufacturing activity is contributed by the capital goods industry.

Engineering sector in India comprises of diverse set of products

India now has a strong base of engineering and capital goods sector. Capacity creation in core sectors such as power, infrastructure, mining, oil, general manufacturing sector, automotive, process, and consumer goods industries all drive demand for this sector. It propels the growth of its user industries through the manufacturing of a wide range of machineries and equipment in India.

The engineering sector can be broadly categorised into heavy and light engineering goods. The heavy engineering sector includes machineries such as power generating sets, earthmoving and mining equipment, power plant equipment, textile machinery, process plant machinery, packaging machinery equipment and automotive equipment. The light engineering sector consists of a diverse set of sub-sectors including items such as medical instruments, sophisticated process control equipment, castings, forgings, fasteners, bearings, steel pipes and tubes.

A majority of MSMEs operate in the light engineering sector, which comprise of low technology machines such as castings, forgings, fasteners, bearings, steel pipes and tubes. A few of the MSMEs are restricted to the assembly of imported components. Although MSMEs are known to dominate the low technology, light engineering segment, a few of them have also made a foray into the manufacturing of niche and high value-added products.

A number of products that constitute the light engineering segment serve as an input for high engineering and capital goods sector. Demand for high engineering and capital goods therefore influence the overall health of the light engineering sector. Some of the products manufactured under the light engineering sectors such as different types of fasteners (except high tensile and special purpose fasteners), conventional hand-operated sewing machines, bicycle parts and other components are reserved for the SSI sector.

Engineering goods sector is witnessing healthy growth

The engineering goods sector has been growing at a robust pace over the last few years. The sector’s growth is dependent on the growth of its user industries. For the engineering goods sector, the key user industries include power sector, textile, automotive, oil and gas, and iron and steel. Growth of the engineering goods sector is attributed to a healthy demand for these user industries.

The sector’s production has grown at a healthy CAGR of 13.4% during FY05 to FY11, amassing ` 1,068.2 billion in FY11. For the period FY12 to FY17, the growth is projected to be 17.3% for the engineering goods sector.

The market size of the engineering goods sector grew at a healthy pace of approximately 15% CAGR during FY05-FY11, to reach a level of ` 1,164.5 billion in FY11. The sector is expected to record 15.8% CAGR in terms of market size from FY12 to FY17. The market size of the sector is driven by multiple factors such as macro-economic situation, GDP growth, policy support, state of key infrastructure sectors, state of user industries, and project implementation.

The engineering goods sector is deriving its demand from capacity creation in sectors such as iron and steel, consumer durables, power, mining, automotive, and oil and gas. FDI reforms and de-licensing of the sector through government policies have ensured growth in the market size of the engineering goods sector. This sector is estimated to have employed 370,000 people at the end of FY11 and is projected to employ 500,000 at the end of FY17.

Engineering goods exhibited weakness in exports for FY13

India’s engineering goods exports have grown steadily over the last decade. For the period FY09 to FY13, the sector has shown a CAGR of 8.4% in exports. However, exports in FY13 stood at US$ 65.3 billion, as compared with US$ 67.8 billion in FY12, which is a decline of 3.8%. The sector’s exports remained subdued in the first quarter of FY14, wherein it showed a decline of 8.3% compared with the corresponding quarter of the previous year. India’s engineering goods exports and overall demand were affected on account of the prolonged global weakness and slowdown in the US, Euro area and China. India’s overall merchandise exports declined by 1.6% in the first quarter of FY14 because of its subdued performance.

Decline in exports of engineering goods also impacted its share in the overall exports for India. The sector’s share of the total of India’s exports has declined steadily from 23.1% in FY11 to 22.2% in FY12, and further to 21.8% in FY13. However, for Q1 in FY14, the share of exports for the sector increased to 22.8%, reflecting marginal recovery.

The major contributors to engineering goods exports in FY12 include transport equipment (31%), machinery and instruments (22%), and manufacture of metals (14%).

The Way Forward

Key policy initiatives, infrastructure development, and capacity additions in the chief sectors are expected to accelerate industrial and manufacturing growth and the outlook for the engineering goods sector in India looks promising. The various recent government policy initiatives such as 100% FDI in most sectors will help in inflow of funds and will be the catalyst for growth of this sector. Initiatives in infrastructure development and capacity additions in infrastructure sectors such as power, mining, and oil & gas will benefit the sector in the long run.

Going forward, MSMEs are likely to experience a shift in their business and operating landscape, as the government will integrate this sector, as part of its industrial policy. Many of the policy measures and initiatives will provide the necessary momentum to boost the growth of the MSME sector. The government’s focus on improving manufacturing infrastructure and the engineering sector will lead to a more conducive growth for MSMEs in India.