The Indian automotive components industry

Foreword
India has been one of the worlds fastest growing economies during the last few years. However, India has still not recovered from the effects of the former inwardoriented policies it followed until the 1990s. Economic reforms started taking place in the beginning of the 1990s when India started opening up gradually. The question is whether India can implement the required policy changes effectively and develop a conducive business climate for industry to grow, and thus be able to sustain the strong rate of growth it has achieved over the past few years. During this time there has been increasing confidence in the manufacturing sector in India and its long term potential as a manufacturing hub. Importance of the engineering industry is supreme in this regard and it also plays a crucial role in the economic growth of the country. To understand the driving forces of India better, it is essential to develop an understanding of prevailing fundamentals in the engineering industry. In this report we provide an overview of the engineering industry in India with relevant facts regarding the structure and size, growth rates, main challenges, trends in international trade, research and development initiatives, as well as an indication of future outlook of the main segments in the engineering industry. It is a series of seven different reports that includes an overview of the engineering industry, the automotive industry, the machinery and equipment industry, the electrical machinery industry, the automotive components industry, the electronic equipment industry and the fabricated metal products industry. This series of seven different reports has been commissioned by Teknikfretagen, the Association of Swedish Engineering Industries, to provide a detailed overview of the Indian engineering industry covering various aspects of the main segments. It is hoped that the reports will help identify areas of business interest for Swedish engineering companies and give the reader increased knowledge of the present industrial development in India. The reports have been authored by Mr. Rahul Sanyal. He is an economist from New Delhi in India, and has been appointed by Teknikfretagen to prepare these seven reports. Stockholm, September 2008 Anders Rune Chief Economist

Table of contents

Overview of the automotive components industry in India.............................................. 5 A snapshot of the Indian automotive components industry................................................ 5 Large manufacturers of automotive components ................................................................ 6 Evolution of the automotive components industry.............................................................. 7 Contribution of the automotive components industry to the economy............................. 9 Growth of the automotive components industry. ............................................................... 10 Fast growth due to increasing outsourcing from India....................................................... 13 Size and structure of the automotive components industry. .......................................... 14 Division of the industry into tiers based on technology and quality................................. 14 End user classification of the automotive components industry....................................... 14 Sources of demand for automotive components by segments........................................... 14 Products manufactured and their respective shares in total production........................... 15 International trade scenario................................................................................................ 19 Exports................................................................................................................................... 19 Imports.................................................................................................................................. 20 Challenges in the automotive components industry. ....................................................... 20 Realization of economies of scale and cost management................................................... 20 Increasing demand for automotive components. ................................................................ 21 Development of infrastructure and competencies in technology...................................... 21 Development of capabilities through training and development. ...................................... 22 Research and development. ................................................................................................ 22 Future outlook....................................................................................................................... 23 References............................................................................................................................. 25

Growth in the automotive industry, especially since the year 2000 has had a favorable impact on the automotive components manufacturing industry in India. This industry has been one of the fastest growing segments of the automotive industry overall. India is emerging as one of the key manufacturing hubs for components in Asia and is also expected to play a significant role at a global level.

The Indian automotive components industry

Overview of the automotive components industry in India
The Indian automotive components manufacturing industry is in the midst of a transition from being a low quality and low-technology industry heavily dependent on the domestic industry, to being a global industry. With cost pressures taking their toll on suppliers in Europe, North America and Japan, automotive components manufacturing is increasingly being outsourced to Low Cost Countries (LCCs), India is in a good position to capitalize on this opportunity.

A snapshot of the Indian automotive components industry

Automotive components manufacturing in India is dominated by about 500 major companies that account for more than 85 per cent of total production and 10 000 companies in the unorganized sector accounting for the rest. Based on technology and quality, the automotive components industry is classified into three tiers, where Tier 1 consists of complete systems suppliers, followed by the lower tiers, Tiers 2 and 3, that supply sub-systems and single parts. The industry contains many Small and Medium Enterprises (SMEs). The Planning Commission of India plans to consolidate these SMEs into the supply chain by adopting the tier structure. Further, based on end user classification, the market for automotive components can be classified into Original Equipment Manufacturers (OEMs), exports and the after sales (replacement) market.1

1) Reference has been made to Ministry of External Affairs (11th April 2008) and Ministry of Heavy Industries and Public Enterprises (2008)

Indian automotive components manufacturing industry has matured The industry has developed the credential to manufacture the entire range of components required to manufacture vehicles which is clear from the high levels of indigenization that the industry has achieved. For instance, Tata Motors, one of Indias largest vehicle manufacturers is producing its new model Tata Nano, using 97 per cent local content.2 Currently, more than 60 per cent of automotive components exports cater to USA and Europe, that constitute the high Accepted Quality Level (AQL) markets.3 In the 1990s more than 80 per cent of the exports were made to the international after-market. However in 2005, more than 70 per cent of the exports were made to global Original Equipment Manufacturers (OEMs) and Tier 1 companies and only 30 per cent of exports were made to after-market. Thus it can be inferred that the automotive components manufacturing industry has reached a high degree of maturity in terms of quality and technology over the past few years.4 In fact, according to the Investment Commission of India, 11 Indian manufacturers including Sundaram Fasteners and Mahindra & Mahindra have received the coveted Deming Prize. No other country except for Japan has won the Deming Prize these many times.5

Large manufacturers of automotive components

There are a large number of domestic manufacturers of automotive components. Some of the major Indian manufacturers of automotive components are TACO, part of the Tata Group, Sundaram Clayton part of the TVS group, Munjal Showa part of Hero group, Amtek Auto, Bharat Forge, Lucas-TVS and Minda India Limited (MIL) among others. Major global players in the industry include Delphi, Visteon which is part of Ford Motors, Bosch Limited which is part of the Bosch group and Motherson Sumi Systems which is part of the Sumi Motherson Group.

2) 3) 4) 5)

Reference has been made to Indiacar Private Limited (2nd September 2008) Ministry of Heavy Industries and Public Enterprises (2006c) has been referred Ministry of Heavy Industries and Public Enterprises (2006b) has been referred The Deming Prize is one of the most prestigious awards given for advancement in quality. Originally, it was made for rewarding Japanese manufacturers but now this prize is also awarded to companies from other countries

Companies such as Ford, General Motors, Mercedes Benz, Fiat, Volkswagen, Hyundai and Toyota among others are making India their hub for procurement of components and there are several joint ventures taking place in the industry. Shown below is a table of the largest OEMs and suppliers in India. Indian OEMs and suppliers as well as foreign OEMs and suppliers have been mentioned.
LARGE MANUFACTURERS OF AUTOMOTIVE COMPONENTS Both OEMs and suppliers have been mentioned. It must be noted that the list is not exhaustive. Foreign OEMs General Motors BMW Mercedes Benz Volvo Volkswagen Fiat Cummins Ford Toyota Nissan Foreign suppliers Bosch Valeo Eaton Arvin Meritor Motherson Sumi Continental Delphi Visteon Denso TRW Indian OEMs Tata Motors Maruti Suzuki Mahindra & Mahindra Bajaj Auto TVS Motors Hero Honda Ashok Leyland Hindustan Motors Atul Auto _ Indian suppliers Bharat Forge Sundaram Fasteners Shriram Pistons Rico Auto Sona Koyo Steering Rane Group Lucas-TVS TACO Amtek Auto Munjal Showa

Source: Industry research and analysis

Evolution of the automotive components industry

In the pre-1985 era, the automotive components industry was protected by high tariffs and the market was primarily supplying to the domestic manufacturers. In the 1980s, the Government of India (GOI) introduced the Phased Manufacturing Plan (PMP) and laid the foundation for development of the automotive industry. After the entry of the Japanese manufacturers and growth of two wheeler manufacturing, a number of Indian companies formed joint ventures with Japanese, European and American companies.

After the end of the PMP in 1991, the GOI introduced the Memorandum of Understanding (MoU) route to enable localization of components. After success ful localization, an increasing number of vehicle manufacturers (domestic and foreign) started outsourcing components rather than producing them inhouse and this led to growth of the automotive components manufacturing industry.6 Contribution to output and exports to the economy In the 1990s the rate of growth of the automotive industry was slow, and hence the rate of growth of the automotive components industry was also slow. In the year 19981999, the total value of production was Rs. 126.83 billion registering a growth of only 6 per cent. Value of exports in the same year was only 11 per cent of production i.e. Rs. 14 billion but registered a reasonable growth of 13 per cent. Growth in exports though was taking place over a relatively small base.7 Why global manufacturers found India attractive and started setting up shop Process engineering skills processes can be redesigned so that manufacturing processes can be made more labour intensive and less capital intensive, thereby enabling manufacturers to reduce costs by using cheaper labour Product engineering skills Indian manufacturers have developed the credibility to use smart product design to enable manufacturers to be more efficient. One Indian supplier for instance, took just six months to design a steering system for an automaker that was trying to develop the same product in other LCCs for more than four years Capital engineering skills with regard to capital engineering, Indias advanced tooling and machining industry makes it possible to produce capital locally and efficiently 8 An increasing number of multinationals started realizing these factors at the end of the 20th century and started sourcing components from India. Toyota was one of the first to see India as a source for components in 2001. The company made joint

6) Reference has been made to Ministry of Heavy Industries and Public Enterprises (2008) 7) Information has been obtained from Ministry of Heavy Industries and Public Enterprises (2000) 8) Reference has been made to Automotive Components Manufacturers Association and McKinsey (2006)

ventures with local suppliers. It started localizing content for its Corolla and Qualis models. Now the local content in the models is 55 and 74 per cent respectively. Gradually, Toyota has turned India into a regional hub for its components used in its other models in foreign markets. There are similar successes that have led to the tremendous growth of this industry and helped it develop.9

Contribution of the automotive components industry to the economy

The turnover of the automotive components industry in the year 20062007, was USD 15 billion registering a growth rate of 21 per cent, with exports of USD 2.9 billion during the same year, registering a growth rate of 15 per cent. In 20052006, exports grew by 28 per cent to USD 1.8 billion but that figure is very low against the world trade of USD 185 billion in automotive components. Thus exports do not form a large proportion of output in the automotive components industry. However, components exports are becoming an important growth driver for growth of the automotive industry overall and is expected to assume greater responsibility in future. At the same time, India is also a major importer of automotive components with more imports than exports. In the year 20062007, India imported USD 3.3 billion worth of automotive components.10

STEADY GROWTH IN TURNOVER and international trade All values are in Rs. Billion and figures are in number Indicators Turnover Exports Imports Direct employment 20032004 306.40 57.95 64.99 2 500.00 20042005 385.00 76.15 85.60 2 500.00 20052006 534.00 108.63 109.22 2 700.00 20062007 645.00 126.43 146.44 2 850.00

Source: Ministry of Heavy Industries and Public Enterprises

9) This information has been obtained from a report prepared by McKinsey & Company. See Luthra et. al. (2006) 10) Reference has been made to Ministry of Heavy Industries and Public Enterprises (2008) and Ministry of Heavy Industries and Public Enterprises (2006a). Ministry of Heavy Industries and Public Enterprises (2006b) has also been referred

Growth of the automotive components industry

The global automotive majors are aligning their manufacturing bases in the AsiaPacific region, mainly in India, China and Thailand. This is because the constant pressure on OEMs and Tier 1 manufacturers to reduce costs is compelling them to outsource more from LCCs. This changing scenario has become the big opportunity for the automotive components manufacturers in India to expand significantly and make global footprints. The top global automotive companies have big plans to source components from India. Many of these companies have opened International Purchase Offices in India, mainly in the city of Mumbai in Western India. Some of these companies include BMW, General Motors, Ford, Mercedes Benz and Volkswagen. Not only are these companies focusing on business in India, but they are also searching for tie-ups to source automotive components for their manufacturing operations around the world. For example, Volkswagen has just tied up with Minda Industries Limited (MIL) for it to supply headlights and rear combination lamps. In addition, Volkswagen also plans to source more electrical and mechanical equipment from Indian suppliers for its operations in other parts of the world. Outsourcing of engineering design and business processes is also taking place and India is increasingly becoming a preferred destination for this as well.11 Strategy being followed by OEMs and Tier 1 companies to set up in India It has been observed by the Automotive Components Manufacturers Association (ACMA), the nodal agency in India for the automotive components industry, that successful OEMs and Tier 1 companies have been following a five step strategy to manufacture components.12 The steps can be briefly enumerated as follows: The companies start small and build up gradually. The types of components in which India possesses comparative advantages are focused on Companies work closely with suppliers and build capabilities in manufacturing processes, quality systems and logistics etc

11) This information has been obtained from an article published in the Economic Times. See Chauhan C P (28th May 2008) 12) Reference has been made to Automotive Components Manufacturers Association and McKinsey (2006) and Automotive Components Manufacturers Association (2007)

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 They sign long term contracts with SMEs to gain confidence in making large investments Facilitate partnerships between Indian and European suppliers at the Tier 2 & 3 levels to be able to attain an optimum combination of both process level and product level technology Achieve the main objective i.e. to use advanced technology at lower cost to manufacture high quality automotive components Driver of growth in the automotive components industry The Indian automotive components industry is attaining a global stature, graduating from being suppliers for the replacement market to becoming suppliers for Tier 1 vendors and OEM suppliers worldwide. The stimulus for growth of the industry has been generated by an increase in domestic demand, entry of foreign vehicle manufacturers and outsourcing by global majors. Industry sources say that it can be up to 30 per cent cheaper to produce in India. The low cost of labor, combined with the availability of a large number of technology oriented workforce and strong credentials gained by the country in Information Technology (IT), electronic equipment and electrical machinery have helped to build an environment conducive for growth of the automotive components manufacturing industry.13 The following factors are drivers of growth in the automotive components industry: India has a long history of manufacturing vehicles and has developed strong credentials in engineering Low cost of employment and a high proportion of first time right designs. Indian engineers and workers possesses inherent advantages due to their strong process, product & capital engineering skills and strong domain knowledge of the industry India is emerging as a global design hub with an increasing number of multinational companies outsourcing automotive design jobs to India. Global majors like Toyota have setup design centres in India and are outsourcing design tasks. India produces the second largest number of engineers worldwide at 400 000 a year. This combined with the fact that Indians are good in English is a big advantage, making India an attractive pool of talent
13) Reference has been made to The Economic Times (10th September 2007)

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ADVANTAGES FOR GLOBAL LEADERS IN MANUFACTURING COMPONENTS The figure describes the unique characteristics of the Indian industry, the combination of which is attracting increasing foreign investments. 400 000 engineering graduates each year India accounts for 26 per cent of the worlds ESO & BPO talent Analysis and simulation High levels of existing capabilities

Modelling, drafting and

tooling design etc

Engineering animations

Largest pool of English speaking engineers

Low cost high quality designs

Experience in designs with increasing levels of indigenization

An entry level engineer costs as less as USD 8 000 per year 8992 per cent first time right designs i.e, higher than wourld average

Low cost of workers and high proportion of first time right designs

High levels of indigeni zation by foreign OEMs & improving skill sets World renowned IT skills with strong automotive domain knowledge

Source: Indian Brand Equity Foundation14

Growth of the industry is taking place in clusters The automotive components manufacturing industry has traditionally been in New Delhi in North India, Chennai in South India and Pune in West India. Now, there are four main clusters that are located in Gurgaon and Manesar in North India, Pune, Nasik, Halol and Aurangabad in West India, Chennai, Bangalore and Hosur in South India and Jamshedpur and Kolkata in East India. With Tata Motors manufacturing the revolutionary Tata Nano in West Bengal (East India), many components manufacturers are setting up in the state. Uttarakhand, a state in North India is also expected to develop into a hub due to its friendly investment policies. However, the clusters in the North and South of India are the largest in terms of number of manufacturers. This is because the largest passenger cars and two-wheelers by volume are produced in these parts of India.

14) Reference has been made to Automotive Components Manufacturers Association and McKinsey (2006) and Automotive Components Manufacturers Association (2007)

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CLUSTERS IN THE AUTOMOTIVE Components INDUSTRY The map depicts four clusters, one each in North, South, East and West India Delphi Minda Sono Koyo Steering Denso Shriram Pistons

Delhi-Gurgaon-Manesar

Jamshedpur Halol Pune-Nasik Aurangabad Kolkata

Amtek India International Auto Forgings JMT

Bharat Forge SKF bearings Tata Johnson Endurance

Chennai Bangalore Hosur

Sundaram Fasteners Visteon Rane TRW Lucas TVS Bosch
Source: Industry research and analysis

Fast growth due to increasing outsourcing from India

With strong growth rates in the automotive industry there will also be a significant increase in employment opportunities. Due to several backward and forward linkages, substantial amount of direct and indirect employment will be generated in feeder industries. Specialists in the area of Research and Development (R&D), technology, product development, logistics and operations would also be required for the industry to be able to achieve and sustain the growth. The automotive components industry is expected to achieve a turnover of USD 70 billion by 2016, that is five times the size of the industry in 20052006. This scale of growth is expected to lead to additional direct employment of 750 000 along with indirect employment to over 1.8 million people between 2006 and 2016.15

15) Reference has been made to Ministry of Heavy Industries and Public Enterprises (2006b)

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Size and structure of the automotive components industry

The automotive components manufacturing industry is highly fragmented with 500 major companies that contribute 85 per cent of total output and 10 000 companies in the unorganized sector that contribute the rest. An increasing amount of consolidation of the small and unorganized units is needed to be able to increase overall productivity and enable higher growth of the industry.

Division of the industry into tiers based on technology and quality

Based on technology and quality, the automotive components industry is classified into three tiers, where Tier 1 consists of complete systems suppliers, followed by Tiers 2 and 3 that supply sub-systems and single parts. Tier 1 suppliers mostly consist of multinational companies, Tier 2 suppliers consist of large and medium sized industrial units and Tier 3 suppliers consist of small and unorganized units. A large number of unorganized units also produce counterfeit parts. These counterfeit products are sold in large volumes across the country under the brand names of Tier 1 companies and OEMs, and pose a problem for the legitimate companies.16

End user classification of the automotive components industry

Based on end user classification, the markets for automotive components are OEMs, exports and the after-sales market i.e. the replacement parts market. As per the Automotive Mission Plan 20062016 (AMP) published by Ministry of Heavy Industries and Public Enterprises, demand from OEMs accounted for 67 per cent of sales, the after-market accounted for 19 per cent of sales, while exports accounted for 14 per cent. These figures are exclusive of tyres and batteries.17

Sources of demand for automotive components by segments

The two and three wheeler segments are the largest sources of demand for automotive components followed by the passenger cars segment. Together with the passenger cars segment the two and three-wheeler segments account for approximately two-thirds of the automotive components market in India.18

16) Reference has been made to Ministry of Heavy Industries and Public Enterprises (2008) and Ministry of External Affairs (11th April 2008) 17) Reference has been made to Ministry of Heavy Industries and Public Enterprises (2006b) 18) This information has been obtained from Indian Brand Equity Foundation (October 2007)

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SEGMENTWISE DEMAND FOR AUTOMOTIVE COMPONENTS The table shown below is representative and may not be completely accurate Two and three-wheelers Passenger cars Commercial vehicles Tractors
Source: Indian Brand Equity Foundation

34 % 33 % 24 % 9%

Products manufactured and their respective shares in total production

The Indian automotive components industry produces the entire range of components. Engine parts constitute the single largest share of components in total production, followed by drive, transmission and steering parts. The remaining production is relatively evenly divided among the remaining product segments.
Productwise shares in total components production The table below is representative of shares of the products in the year 20062007. Share for each of the products is given in percentage.19 Product description Engine parts Drive, transmission and steering Body and chassis Suspension and braking parts Equipments Electrical parts Others
Source: Automotive Components Manufacturers Association (2007)

Share 31 19 12 12 10 9 7

Engine parts The largest segment of the automotive components industry is engine parts. In the year 20052006, the segment is estimated to have contributed approximately 31 per cent in value i.e. USD 3.76 billion. This segment can be divided further into three sub-segments. They are the following:
19) Reference has been made to Automotive Components Manufacturers Association (2007)

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 Core engine parts like pistons and piston rings Fuel delivery systems Other components Some of the major manufacturers of pistons are Escorts India Pistons Ltd, and Federal Mogul Goetze. Petrol based fuel injection systems are manufactured by Ucal Fuel Systems, Spaco Carburettors, and Escorts Auto Components whereas Diesel based fuel injection systems are manufactured by Bosch Limited, Delphi and Tata Cummins among others. Bharat Forge is a major company that manufactures crankshafts while Kirloskar Oil Engines Ltd and Gabriel India Ltd manufacture bearings. Purolator India Ltd manufactures filters/ elements/ inserts. Drive, transmission and steering parts This is the second largest segment within the Indian automotive components industry. The major sub-segments in this segment are gears, wheels and wheel rims, steering gears and systems. This segment is estimated to have contributed 19 per cent in value i.e. approximately USD 2.3 billion in the year 20052006. A brief description of the sub-segments of the drive, transmission and steering parts segment has been given below. Axles Due to bad roads in India, the replacement market for axles is very high, contributing significantly to the growth of this sub-segment. Few OEMs source complete assemblies, but a large number of them source individual components like housings, shafts and differentials from vendors. Automotive Axles, GKN Driveline and Axles India are some of the largest companies in the segment. With regard to wheels and wheel rims manufacturing, Wheels India Ltd is the most prominent player in India. Gears and steering systems some of the biggest companies in the gears segment are Bharat Gears Ltd, Gajra Gears, JMT Auto, and ZF Steering Gear India Ltd. The steering systems segment is dominated by Sona Koyo Steering and Rane Power Steering Ltd. However these companies mainly manufacture steering systems for cars. With regard to commercial vehicles ZF Steering Gear India Ltd is the main manufacturer.

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Clutches Luk Clutches is the major player in the clutch manufacturing segment. Rane Brake Lining and Rico Auto are also prominent players. Other players include Amalgamations Repco that has collaboration with Valeo of France and Ceekay Dakin that has collaboration with Exedy Corporation. Suspension and braking parts The suspension and braking parts segment is estimated to have contributed 12 per cent in value i.e. approximately USD 1.45 billion in 20052006. This segment consists of shock absorbers, leaf springs and brake shoe assembly segments. Gabriel India Ltd and Munjal Showa are the major companies in the shock absorber sub-segment. Jai Parabolic Springs and Jamna Auto Industries are the two major manufacturers of leaf springs/ coil springs. Players like Brakes India Limited, and Automotive Axles Ltd dominate the brake shoe assembly segment. Electrical parts This segment is among the smaller segments in the industry. As of 20052006, it is estimated to have contributed 9 per cent in value i.e. approximately USD 1.09 billion. Lucas TVS is the largest player in terms of market share. The major companies in this segment include Bosch Limited, Denso, Motherson Sumi, MIL and India Nippon. The main products in this segment include starter motors, generators, spark plugs and distributors. Starter motors and generators are two sub-segments that account for a major portion of this segment in terms of value. This segment of the automotive components industry is expected to grow at a robust rate as the newly manufactured automobiles in India contain a higher proportion of electrical parts. For instance, two-wheelers now come fitted with an electrical starting system as compared to the kick start systems. Electric two-wheelers production has started only recently and is expected to boom. Electrical components in passenger cars and commercial vehicles have also been increasing due to increasing automation in the vehicles. Such innovations in technology are expected to increase the demand for electrical parts in the automotive components industry. Equipment The equipment segment is also among the smaller segments in the industry in terms of value. As of 20052006, this segment is estimated to have contributed 10 per cent in value i.e. approximately USD 1.2 billion. Major companies in this

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segment are Pricol, Lumax Industries and Siemens VDO among others. The major products manufactured in this segment include headlights, dashboard instruments, wiper motors and electric horns. Sub-segments like headlights may experience a significant expansion to meet the demands of the foreign car manufacturers and they also have a strong potential for exports. The tie-up between MIL and Volkswagen is an example. MIL has tied up with Volkswagen to supply headlights and rear combination lamps for Volkswagens facilities in other parts of the world. Others All other components are classified in the others segment. Sheet metal components, fan belts and plastic parts are three of the major sub-segments. International majors like Delphi are present in the rear view entertainment sub-segment and the share and size of this sub-segment is likely to increase significantly. This is because this kind of entertainment is still rare and is offered by few manufacturing companies as the price is high and demand is low. However with increasing incomes and demand for automobiles, the demand for such components is also expected to rise. In some of the other sub-segments like the iron castings segment, Autocast Limited and Brakes India Limited are dominant. The wiring harness and parts sub-segment is dominated by Motherson Sumi Systems Limited.20 Snapshot of the Indian Tyre Industry India is one of the few countries that have attained self-sufficiency in manufacturing of tyres except for some special kinds of tyres like aircraft tyres and snow tyres. A total of 65 million tyres were produced in the year 20052006 of which 62 million were used in India. The tyre industry is expected to grow at the rate of 7 per cent per year till 2012. The turnover of the tyre industry was Rs. 135 billion out of which tyres worth Rs. 23 billion were exported in the year 20052006.21

20) Reference has been made to Cygnus Business Consulting & Research (2007) 21) Reference has been made to Ministry of Heavy Industries and Public Enterprises (2006b)

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International trade scenario

Exports
As global OEMs and Tier 1 companies have identified India as a leading country for sourcing their automotive components for their global production, the export scenario in the industry is quite optimistic. Between 20032004 and 20062007 the automotive components industry has more than doubled its exports. In the year 20062007 alone, the industry achieved a growth rate in exports of 15 per cent. Not only is the growth of exports impressive, the fact that exports are made to most of the western countries is demonstrative of the fact that automotive components being manufactured in India are of high quality.22
DESTINATION OF Components EXPORTS ARE MAINLY EUROPE AND NORTH AMERICA The table below is representative of destinations of exports as of 20062007. North America Asia Africa Europe Middle East South America Oceania Others
Source: Automotive Components Manufacturers Association (2007)

26.9 % 12.4 % 10.8 % 38.7 % 7.1 % 2.8 % 1.2 % 0.1 %

USA is the biggest market for international trade and is the worlds largest importer of automotive components. Countries like Brazil and Mexico have reaped rich benefits of being in close proximity to USA. However, India, China and Thailand have also been trading with USA, and more trade with USA in future will be a big driver for growth in the automotive industry.

22) Reference has been made to Ministry of Heavy Industries and Public Enterprises (2006b) and Ministry of Heavy Industries and Public Enterprises (2008)

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Imports
Despite growing production and exports, India continues to be a major importer of automotive components with total imports being higher than total exports. Imports were to the tune of Rs 146.44 billion which were 3.1 per cent higher than the share of exports in total turnover in the year 20062007.23 It is considered that with growing international trade, the automotive components industry is getting increasingly integrated with the global industry. Increasing inte gration with global trade of automotive components is expected to be the driving force in the automotive components industry.

TREND OF PRODUCTION AND INTERNATIONAL TRADE IN THE INDUSTRY All values are in Rs. Billion and shares are in percentage. Category Turnover Exports Imports Share of export in turnover Share of import in turnover 20032004 306.40 57.95 64.99 18.9 21.2 20042005 385.00 76.15 85.60 19.7 22.2 20052006 534.00 108.63 109.22 20.3 20.4 20062007 645.00 126.43 146.44 19.6 22.7

Source: Ministry of Heavy Industries and Public Enterprises

Challenges in the automotive components industry

The key to success of the automotive components manufacturing industry is low cost production in order to remain competitive. Keeping this in mind, the main challenges will be to ensure flow of new innovations in technology, steady demand, infrastructure development, increase in exports, human resource development and increase in environment and safety standards.

Realization of economies of scale and cost management

Greater variety in vehicles being manufactured will enable automotive components manufacturing companies to expand and grow while realizing economies of scale. More and more consolidation is required as the industry is highly fragmented with many manufacturing companies being family run enterprises.
23) Reference has been made to Ministry of Heavy Industries and Public Enterprises (2008)

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According to an econometric analysis commissioned by Indian Council for Research on International Economic Relations (ICRIER), it was found that a major constraint for smaller automotive components manufacturers to increase the scale of production is the lack of availability of credit at reasonable rates of interest. According to the report, regarding costs, material costs make up more than 50 per cent of the total cost of manufacturers. On the other hand labour costs are quite low at only 6.5 per cent of total cost. Since, labour costs are the easiest cost components to minimize, global manufacturers can use this facet to their advantage by manufacturing in India.24

Increasing demand for automotive components

There is a direct correlation between growth in the automotive industry and growth of the automotive components industry. Standalone exports to OEMs and Tier 1 vendors will not be sufficient to drive strong growth. Growth is going to be supported by demand generated by segments within the automotive industry. For instance, it is expected that the passenger cars and utility vehicles segment which was approximately 1 million in terms of production in 20032004, would increase to 3 million units by 2015 thereby helping increase the market size of the automotive components manufacturing industry by generating large scale demand for automotive components.25

Development of infrastructure and competencies in technology

One of the major bottlenecks for automotive components manufacturers to compete at the global level is the lack of appropriate technology and infrastructure. Shortage of power leads to lesser productivity, poor infrastructure for testing, certification and homologation, and an inadequate automobile retail trade and service infra s tructure inhibits growth. Hence, competitiveness in manufacturing is the main focus point. It is well known that stagnation in manufacturing as a proportion of GDP has an adverse impact on employment. Since the share of the manufacturing sector in GDP has been relatively stagnant ranging between 15 and 17 per cent over the past two decades, there is a need to stimulate the manufacturing sector. With increasing growth, the automotive components industry, will not only play a major role in increasing the contribu24) This information has been obtained from a report prepared by ICRIER on the Indian automotive industry. See Narayanan and Vashisht (2008) 25) Reference has been made to Ministry of Heavy Industries and Public Enterprises (2006b)

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tion of the manufacturing sector to GDP by increase in output, but it will also help generate more employment in the industry and sustain high growth.

Development of capabilities through training and development

India produces a large number of engineers second only to China in the whole world. India will also supply the largest amount of manpower in the world between 2005 and 2010. However, human resources need to be trained to keep up with global best practices. Management capabilities need to be developed simultaneously to be able to reap the benefits of a growing and skill intensive working population.26

Research and development

R&D expenditure as a share of turnover is low in the automotive components industry ranging between 0 and 1.5 per cent. In fact many of the smaller companies and some of the bigger companies do not even have R&D facilities. Since fiscal incentives have not worked effectively to improve R&D infrastructure, certain other policy interventions are being planned in this regard.27 However, proficiency in understanding technical drawings, understanding of different global standards, appropriate automation, and use of Information Technology (IT) for design and development, are some of the growing capabilities of the automotive components manufacturers. Hence, India is expected to develop into a big R&D base for global majors, given its capabilities in the IT sector, comprehensive domain knowledge of the industry and shifting of design centres of global companies to India.28 The Government of India is taking initiatives to strengthen infrastructure for conducting R&D in the country. Setting up of National Automotive Testing and R&D Infrastructure Project (NATRIP) is one of the largest and crucial initiatives taken in the automotive industry to create a state of the art testing, validation and R&D infrastructure in the country.29

26) This information has been obtained from a report prepared by Morgan Stanley. See Ahya et. al (2006) 27) This information has been obtained from a report prepared by ICRIER on the Indian automotive industry. See Narayanan and Vashisht (2008) 28) Reference has been made to Ministry of Heavy Industries and Public Enterprises (2006b) 29) Reference has been made to National Automotive Testing and R&D Infrastructure Project (June 2007) and Ministry of Heavy Industries and Public Enterprises (2008)

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In 2003, the Indian automotive industry in collaboration with the academia setup the Core group on Automotive Research and Development (CAR). The mandate of this group is to identify new technologies and develop world class automotive systems in India for domestic use and for exports. Embedded control systems, Telematics, Hydrogen and Alternate Energy Technologies, Low Cost Safety etc are the sought after topics currently.

Future outlook
The automotive components manufacturing industry is showing tremendous potential to grow and attain global proportions within ten years. The vast investments being made by foreign and domestic companies show promise of emergence of India as an automotive components manufacturing hub. Despite stiff competition from China and Thailand, India is well positioned to leverage the opportunity to produce high quality components where it can offer end to end services from design to manufacturing. The entry of global majors in this industry will bring stricter regulations with it and help organize the market further, by removing the obsolete small time manufacturers or merging the small manufacturing units. Consolidation of the industry therefore, is gaining momentum which will also help to solve the problem of counterfeit products manufacturers. It is expected that the world production of automotive components will be USD 1.7 trillion by the year 2015. Out of that about USD 700 billion worth of components will be outsourced to LCC countries. If India targets to get 10 per cent of that it would mean exports of 70 USD billion. Further, it is also expected that the size of the after-market sector will also be USD 5 billion. If India is able to achieve the estimations made by Ministry of Heavy Industries and Public Enterprises, Indias share in world components trade could increase from approximately 0.9 per cent in 20052006 to more than 2.5 per cent by 2015. Due to the growth in the automotive industry overall, growth in engineering services industry is also expected to develop and achieve a turnover of more than USD 2 billion. Finally, the size of the automotive components manufacturing industry is expected to reach USD 4045 billion by the year 2016.30

30) Reference has been made to Ministry of Heavy Industries and Public Enterprises (2006b)

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However, prospects of the industry are not expected to brighten substantially unless there is a strong and continuing upward trend in the automotive industry both globally and domestically. The long term prospects depend on how effectively the domestic industry is able to cope with the demands of the international automotive industry. Further, technology will play a key role for automotive components manufacturers to be able to meet international quality and environmental standards and thus remain competitive in the global arena.

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References

Ahya, C, A Xie, S Roach, M Sheth and D Yam (2006), India and China: New Tigers of Asia Part II, Morgan Stanley Automotive Components Manufacturing Association (2007), Engine of Growth Driving the Indian Manufacturing Sector, Automotive Components Manufacturing Association, New Delhi Automotive Component Manufacturers Association and McKinsey (2006), Vision 2015: For the Indian Automotive Components Industry, Automotive Component Manufacturers Association and McKinsey Chauhan C P (28th May 2008), Volkswagen to source auto parts from Minda, The Economic Times Cygnus Business Consulting & Research (2007), Industry Insight: Indian auto components, Cygnus Business Consulting & Research Indiacar Private Limited (2nd September 2008), Indiacar Private Limited Indian Brand Equity Foundation (October 2007), Auto Components, Indian Brand Equity Foundation Luthra S, R Mangaleswaran and A Padhi (2008), When To Make India A Manufacturing Base, McKinsey & Company Ministry of Heavy Industries and Public Enterprises (2008), Annual Report 20072008, Department of Heavy Industry, New Delhi Ministry of Heavy Industries and Public Enterprises (2006a), Annual Report 2005 -2006, Department of Heavy Industry, New Delhi Ministry of Heavy Industries and Public Enterprises (2006b), Automotive Mission Plan: A Mission for Development of Indian Automotive Industry, Department of Heavy Industry, New Delhi Ministry of Heavy Industries and Public Enterprises (2006c), Report of Working Group On Automotive Industry, Department of Heavy Industry, New Delhi Ministry of Heavy Industries and Public Enterprises (2000), Annual Report 1999 -2000, Department of Heavy Industry, New Delhi Ministry of External Affairs (11th April 2008), ITP Division, New Delhi

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Narayanan, B, P Vashisht (2008), Determinants of Competitiveness of the Indian Auto industry, Indian Council for Research on International Economic Relations, Working Paper No 201, New Delhi National Automotive Testing and R&D Infrastructure Project (June 2007), Driving India into the Future Volume II, NATRIP, New Delhi The Economic Times (10th September 2007), Global auto component companies look for JV partners, Mumbai

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