Opportunities in the

Indian automotive aftermarket

Prepared for Auto Serve 2010, a conference on improving the
productivity in the automotive aftermarket organised by the
Confederation of Indian Industry

Chennai, November 19th, 2010

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This report is furnished to the recipient for information purposes only. Each recipient should conduct their own
investigation and analysis of any such information contained in this report. No recipient is entitled to rely on
the work of McKinsey & Company, Inc. contained in this report for any purpose. McKinsey & Company, Inc.
makes no representations or warranties regarding the accuracy or completeness of such information and
expressly disclaims any and all liabilities based on such information or on omissions therefrom. The recipient
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Executive Summary

The automotive aftermarket for parts in India is a large and growing market that
spans manufacturers, distributors, retailers, service providers and garages.
Currently worth INR 19,000 crore to INR 24,000 crore1, the market has been
growing at 11 per cent, and is estimated to reach INR 39,000 crore to INR 44,000
crore by 2015. This growth will primarily be fuelled by the increasing number of
vehicles on the road, as well as the aggressive expansion of independent and
foreign players. While current margins for the industry remain attractive, players
across the value chain may see margins reducing to the lower levels observed in
developed economies. Therefore, to sustain profitability, it is imperative that
players evaluate additional ways of capturing value, including expanding service
networks, developing branded generic parts, forward integrating and building
scale. Looking ahead, revenue pools remain large across the value chain, hence if
players are able to pursue appropriate strategies, significant profits can be made in
this sector.

THE INDIAN MARKET IS LARGE AND HAS SCOPE FOR FURTHER

GROWTH
The Indian automotive aftermarket has been growing at a steady pace and is
expected to expand rapidly over the next five years. The total size of this sector is
currently estimated at USD 5 billion to USD 6 billion, while the global market is
worth USD 490 billion to USD 540 billion.

Growing market offers significant potential

The Indian market is valued at INR 19,000 crore to INR 24,000 crore, of which
roughly 30 per cent comprises spurious parts. Commercial vehicles (CV), which
include multi-axle vehicles, light commercial vehicles (LCVs), buses and trailers
account for roughly 22 per cent of this market (INR 4,500 crore to INR 5,500
crore), with Maharashtra, Tamil Nadu, Gujarat and Kerala accounting for over 40
per cent. The car market is estimated at INR 6,000 crore to INR 7,000 crore (34

1 Excludes services, which is estimated to be in the range of an additional Rs. 8,000 – Rs. 12,000 crore

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per cent of the market) with Maharashtra, Andhra Pradesh, Delhi and Tamil Nadu
cumulatively accounting for about 40 per cent of the share (Exhibit 1).
The two-wheeler market is the largest at INR 10,000 crore to INR 11,000 crore, or
44 per cent of the market, and Tamil Nadu, Maharashtra, Gujarat and Uttar
Pradesh constitute close to 45 per cent of the market. This market is also expected
to grow the fastest, given the strong growth in new sales (more than 15 per cent
per year) and the large volume of two-wheelers entering the vintage for
aftermarket parts (2 to 12 years).

EXHIBIT 1

The Indian market, estimated at Rs. 19,000 - Rs. 24,000 crore, is CV

dominated by the two-wheeler segment Cars

2-wheeler
187

944
163

705 161
1,103
992 1,638

299
257 Total market: INR 19,000-24,000 cr
876
1,987 346 698 CV market INR 4,500-5,500 cr
346

2,645 510
Cars market INR 6,000-7,000 cr

1,854 2-wheeler
INR 10,000-11,000 cr
market
154
1,660

2,585
1,264

Note: Above figures include spurious parts; PARC vehicle used from 1998 to 2008 to account for 3 to 13 year old vehicles;
McKinsey & Company |
Spend per annum on CV – RS. 20,000; PC – Rs. 10,000; Two-wheeler – Rs. 2,500

Globally, the automotive aftermarket is worth approximately USD 490 billion to

USD 540 billion (Exhibit 2). The largest markets are the US (USD 160 billion to
USD 170 billion) and Europe (USD 110 billion to USD 120 billion); China’s
market size is estimated at USD 65 billion to USD 70 billion, with other Asian and
Latin American markets being around USD 60 billion, and Africa and the Middle
East accounting for another USD 12 billion to USD 15 billion. Unlike the Indian
market, CVs account for roughly 60 per cent of the overall market in developed

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countries. The global off-road equipment market, which includes construction
equipment such as cranes and rollers, as well as tractors, is roughly USD 11 billion
to USD 15 billion.

EXHIBIT 2

The global aftermarket across CV, passenger cars and off-road is estimated
at USD 490-510 billion
USD billion, 2008
Total
………
CV PC Off-
road

UK: 23 - 28
15 10 1
US: 160 - 170 EU: 110 - 120
110 50 5 65 45 4
China: 65 - 70

32 35 2
India: 5 - 6
MEA: 12 - 15
1 4 .5 Rest of Asia:
13 1 50 - 60
LatAM: 60 - 70 50 2.5
60 1.5

Total market:
USD 490-540 billion

Note: CV and passenger car breakup not available for Africa/ME, South East Asia and S. America; India and China PC includes 2 Wheelers
SOURCE: Datamonitor; AAIA Factbook; DAT; ZDK; IFA Nürtingen; AAI Factbook; US Dept. of Energy;
McKinsey & Company |
McKinsey team; The Freedonia Group; McKinsey team analysis

Current market structure is fragmented

The value chain in India remains highly fragmented and there is a significant level
of intermediation required for parts to reach end customers. The production of
parts is split between original equipment manufacturers (OEM), original
equipment suppliers (OES) and generic manufacturers. While OEM’s may rely on
their own distribution networks, with parts being sold through directly-owned or
franchised dealers, the independent channel has grown in significance in recent
times. Original equipment suppliers have the advantage of being able to both
directly supply OEMs, as well as go through independent distributors (Exhibit 3).

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EXHIBIT 3

The current value chain in India indicates that significant intermediation is

required for parts to reach end-customers
Parts Parts
Retail ASSP Customers
producers distributors

OEM sales Owned and

OEM OEM units and franchised
branded part dealers dealers
Mainly Business
OEM
or OES
branded
Multi-brand
dealers
Retailers:
OESs/
largely Fleet
Tier 1
un-organized

Independent
part dealers
Small
Generic garages/ Private
manu- Mainly gas
facturer Generic OES Stations
branded
or generic

SOURCE: ACMA report; team analysis McKinsey & Company |

After making adjustments for the spurious parts market, the manufacturing
revenue pool of around INR 10,500 crore is roughly shared by OEMs (39 per
cent), OESs (34 per cent) and generic manufacturers (27 per cent). Distributors,
who typically enjoy margins of around 15 per cent, have a profit pool of around
INR 2,500 crore. Original equipment manufacturer’s sales units and distributors
enjoy a slightly higher share of the market at 55 per cent compared to independent
distributors at 45 per cent. Service providers, who interact directly with end
customers, have a profit pool of around INR 3,000 crore. Despite notable recent
growth, multi-brand dealers still constitute a small part (4 per cent) of a market
that is dominated by OEM-franchised dealers (50 per cent) and small unorganised
garages (46 per cent; Exhibit 4).

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EXHIBIT 4

The market is expected to grow at a rapid 11% per annum

Value add
Market growth (Incremental revenue) Share of players
INR crore Role INR crore Percent; INR crore
Multi-brand
120
Service 4
2006 ~11,000 3,000 Franchise
providers Garages 46 50 dealers
1,380 1,500

Independent
2010 ~16,000 11% p.a. Parts distributors
45 OEM
2,500 1,125 55 dealers
distributors
1,375

OES Generic
2015E ~30,000 4,095 39 27 2,835
Parts
10,500
producers
34 OEM
India's aftersales auto part 3,570

market is growing strongly at

more than 11% (p.a.) reaching
more than INR 30,000 cr in 2015
1 Excluding all spurious parts; only incremental revenues indicated

SOURCE: ACMA report, team analysis McKinsey & Company |

PLAYERS MUST UNDERTAKE SPECIFIC INITIATIVES TO ENSURE

MARGINS REMAIN AT CURRENT LEVELS
The growing automotive aftermarket presents a large opportunity for players
across the value chain. However, with the market demand for parts and services
set to double over the next 5 years, being able to satisfy this demand is a
significant challenge. Companies across the value chain will have to double their
capacity, as well as enhance their capabilities to produce parts for and service a
wider variety and complexity of vehicles. This will require significant additional
investments in capital.
In the absence of a concerted effort by market leaders to build the required scale
and capability, the fragmentation in the industry is bound to increase, especially
among market intermediaries like distributors, retailers, and independent service
providers. Across the value chain, current margins in India are considerably higher
than those typically observed in the developed economies of the US and Europe
(Exhibit 5). As the market matures in India, there is a threat that margins could
show a downward trend. Players will therefore need to proactively pursue certain
initiatives to enable them to capture further value.

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EXHIBIT 5

Margins may fall to reflect levels seen in developed economies

Performance

Margins in Gross margins (Percent)

developed 16-18 14-18 15-20
economies are 12-15
10-12
lower because
▪ Fragmented
distribution
and retail OES OEM Aftermarket Auto parts Service
industry aftermarket aftermarket distributors retailers providers
▪ Bargaining business business (incl OEM
power in the dealers)
hands of
large OES
10 - 12 8 - 10 10 - 15
and third- 8 -10 6-8
party
manufac-
turers
OES OEM Aftermarket Auto parts Service
▪ Players try to aftermarket aftermarket distributors retailers providers
bypass
business business (incl OEM
elements in
the value-
dealers)
chain
Margins show a downward trend in mature markets – players
therefore may need to evaluate additional ways of capturing value

SOURCE: Team analysis McKinsey & Company |

1. OEMs and OES’s must step up efforts to control parts distribution: The
aftermarket parts business is highly profitable for OEMs and it is imperative for
them to place adequate importance on expanding this business. Given that the
aftermarket contributes a modest 24 per cent in revenues to OEMs, but a
sizeable 55 per cent to profits, this is a lucrative sector to play in. With
independent players actively expanding, there is a need for OEMs to consider
various initiatives to attain a tighter control of parts distribution. Some OEMs
have already made attempts to progress along some of these initiatives:
■ Aggressively expand OEM service networks
■ Structure exclusivity contracts on manufacturing and distribution with
suppliers and distributors
■ Lock-in customers for a longer tenure through increasing warranty periods on
vehicles
■ Counter the threat of branded generic parts by launching second brands that
are cheaper and potentially useable across all makes

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■ Create awareness through promotions on the use of original spare parts, and
tie up with insurance providers, to ensure higher off-take of original spares.
2. Independent garages and multi-brand dealers must capitalise on India’s
ageing car-parc: Market interviews and analysis indicate that owners of older
vehicles often migrate to independent service networks for cheaper and faster
service. The lower cost of servicing at independent garages is influenced by
primarily three factors – the ability to source generic parts at a lower cost than
OE spares, the ability to reach scale in smaller locations through servicing
multiple brand vehicles, and the lower overhead cost structure compared to
OEMs. Given that the auto market in India has been growing rapidly for the last
few years, both generic manufacturers and independent garages and service
providers must position themselves to capitalise on this trend. With OEMs more
focussed on vehicles in their warranty period, offering higher levels of service
for older cars will be necessary for independent players to attract customers.
This means they must build a reputation for reliability by focusing on
standardisation and quality, while adequately preparing for increasing
complexity in vehicles (Exhibit 6).

EXHIBIT 6

ESTIMATES
Independent garages and multi-brand dealers must
Percentage of
capitalize on the growing vintage of India’s car-parc total in column

Relative market sizes for aftermarket spares

2012, INR crores Owners of older cars
migrate to independent
Car vintage
service networks for
Years
Service cheaper and faster service
provider <2 <2-4 4-6 >6
▪ As the car-vintage
880 1,100 matures in India,
385 715
OEM service independent garages
centers must
75 70 65 50 – Build trust: there is
low confidence is
660 quality and reliability
Independent
100 200 – Bring in
service 25
chains standardisation to
<5 10 15 30 prevent migration to
OEM service providers
440
Local 100 200 270 – Prepare for increasing
complexity in vehicles
garages
20 20 20 20 with adequate training

Assumptions
▪ Car owners are expected to move away from OEM service centers for lower price and faster service
▪ Car market expected to grow at 20% from 2010-12
▪ Retail margins (15%) and spurious parts (20%) eliminated from market potential
▪ Local garages expected to hold on to their current share of market

SOURCE: Market interviews; team analysis McKinsey & Company |

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3. OEMs and distributors should develop branded generics to capture the
cost advantage in this rapidly growing independent market: The Indian
market for branded generics is already worth INR 3,000 crore to INR 4,000
crore and is set to grow significantly in the next 5 years. Analysis shows that
generic brands tend to have much higher margins and are extremely popular
among consumers looking for fully functional, yet cheaper alternatives to OE
spares, especially in the non-critical product ranges. Globally, distributors such
as Trost and Engine Tech have reaped the rewards of building a reliable brand
of generics, while more recently, OEMs such as Toyota and Ford have also
introduced lower-price second brands to capture some this market (Exhibit 7).

EXHIBIT 7

OEMs and distributors should develop branded generics to capture cost

advantages in the rapidly growing independent market
Independent brands have higher margins Globally players are already taking such actions

Example category "Brake pads" Distributors

▪ Reliable European brand, able to
Supplier A Supplier B Supplier C command high margins
(OES brand) (OES brand) (generic)
Engine ▪ Pan-US distributor that globally
Workshop Tech sources and rebrands under own
140 140 70 name
invoice price

Product-
▪ Popular for focussed non-critical
specific 25 30 25 product offerings
margin
OEM’s
Volume
Discount
5 10 5 ▪ Reduced price, lower quality
branded spare parts launched
Distributor under name Toyota Optifit
110 100 40
net price
▪ Second brand ‘Ford Motorcraft’
Relative margin 21% 29% 43%
designed to fit all car makes
Percent
▪ Renault introduced cheaper brand
Absolute margin 30 40 30 named Motrio
EUR/unit

Indian market for branded generics likely to be Rs. 3,000-4,000 crore

SOURCE: Market interviews; team analysis McKinsey & Company |

4. OES’s, independent players and distributors should consider partnerships

and options for forward integration: Since many key skills and capabilities
required for success overlap along the value chain, forward integration offers
players the potential to create additional value. Globally, OES’s such as Hella

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 (direct distribution through Hella Logistics Center) and Bosch (Bosch Car
Service, 1a Autoservice) have successfully acted as parts distributors and even
service providers. In India too, Bosch has successfully built an extensive
distribution network. Independent parts distributors must also actively look for
opportunities to act as service providers and retailers. Such a move will allow
distributors to increase their bargaining power since they can provide suppliers
with a ready market for their parts. Most American distributors already have
retail arms, while many European distributors such as Stahlgruber and Europart
partner with retail outlets such as Meisterhaft and AC Autocheck. In India, TVS
distribution has already made efforts to forward integrate through PartSmart and
MyTVS. Forward integration may be crucial going forward as it enables market
leaders to tap into additional revenue sources, as well as build significant entry
barriers for new competition.
5. Independent distributors should consider building scale, expanding
globally and sourcing from low-cost countries: While global trends and the
complex nature of the Indian market indicate independent distributors are going
to remain valuable components of the value chain , it is imperative that they
build scale in order to counter the threat of exclusivity from OEMs, OESs and
the risk of displacement by logistics providers. Furthermore, distributors will
need to build scale by building large own-brand portfolios, sourcing from other
low-cost countries, and looking for opportunities to expand internationally.
Globally, distributors have been trying to achieve relevant scale, with the top 10
distributors both in the US and Europe having a minimum of around USD 200
million in revenues. The recent spurt in merger and acquisitions (M&A)
activities among distributors in these geographies are also markers to their
attempts to gain significance through scale.

SIGNIFICANT PROFITS CAN BE MADE IF PLAYERS ALONG THE VALUE

CHAIN ADOPT THE APPROPRIATE STRATEGIES
Several favourable trends will positively impact the Indian automotive aftermarket
in the years ahead. However, all players remain susceptible to certain risks and so
will need to focus on implementing key imperatives in order to enjoy high margins
and growing profits.
While increasing customer affluence and an already well-established network give
OEMs a sound starting position, they must continue to create barriers to entry for
independent players by expanding networks, demanding exclusivity and increasing
warranty periods. Similarly, despite the unique position of OESs that enables them
to ride off the success of both OEMs and independent distributors, it is vital they

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seize opportunities to forward integrate along the value chain. The growing
number of parts suitable for manufacturing by generic players and the increasing
vehicle parc (especially in rural India) puts generic manufacturers and independent
garages in a very attractive position. However, the focus must increasingly shift
towards quality and reliability as customer expectations grow. Independent
distributors, a vital element in the value chain, also face threats from OESs and
must therefore look to build scale through forward integration, creation of generic
brands and global sourcing.

□ □ □

The Indian automotive aftermarket is at an inflection point – vehicle parc is

increasing, parts are getting more complex, customers are more price sensitive,
and global suppliers are expanding their sourcing and distribution presence in
India. Scaling up capacity to service the growing demand will be a challenge for
Indian companies across the value chain, especially with margins likely to come
under pressure. Overall, the industry revenue pools will significantly increase, and
players who adapt their business models to the changing scenario, are likely to
emerge as winners.

Umang Dua Ramesh Mangaleswaran

Consultant, McKinsey & Company Director, McKinsey & Company

Ananth Narayanan Srivatsan Sridhar

Partner, McKinsey & Company Engagement Manager,
McKinsey & Company

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