AUTOCOMPONENTINDUSTRYREPORT OVERVIEWOFAUTOCOMPONENTINDUSTRY The Indian auto component industry has been navigating through a period of rapid changes with

th great lan. Driven by global competition and the recent shift in focus of global automobile manufacturers, business rules are changing and liberalisation has had sweepingramificationsfortheindustry.Theglobalautocomponentsindustryisestimated atUS$1.2trillion.TheIndianautocomponentsectorhasbeengrowingat20%perannum since2000andisprojectedtomaintainthehighgrowthphaseof1520%till2015. TheIndianautocomponentindustryisoneofthefewsectorsintheeconomythathasa distinct global competitiveadvantage in terms of cost and quality. The value in sourcing autocomponentsfromIndiaincludeslowlabourcost,rawmaterialavailability,technically skilledmanpowerandqualityassurance.Anaveragecostreductionofnearly2530%has attractedseveralglobalautomobilemanufacturerstosetbasesince1991.Indiasprocess engineering skills, applied to redesigning of production processes, have enabled reductioninmanufacturingcostsofcomponents.Today,Indiahasbecometheoutsourcing hubforseveralglobalautomobilemanufacturers. Innovationandcostpruningholdthekeytomeetingtheglobalchallengeofrisingdemand fromdevelopedcountriesandcompetitionfromotheremergingeconomies.Severallarge Indianautocomponentmanufacturersarealreadygearingtothisnewrealityandarein the process of substantially investing in capacity expansion, establishing partnerships in Indiaandabroad,acquiringcompaniesoverseasandsettingupgreenfieldventures,R&D facilitiesanddesigncapabilities. Some leading manufacturers of auto components in India include Motor Industries Company of India, Bharat Forge, Sundaram Fasteners, Wheels India, Amtek Auto, MothersonSumi,RicoAutoandSubros.TheIndiasTop500Companies,publishedbyDun &Bradstreetin2006,listed22autocomponentmanufacturersastopcompaniesinIndia withatotalturnoverofUS$3bn.Thesecompaniesareintheprocessofmakingamarkon theglobalarena,andsomehavealreadyacquiredassetsabroad. IndustryStructure ThetotalturnoveroftheIndianautocomponentindustryisestimatedatUS$9bnin2006. Theindustryhastheresourcestomanufacturetheentirerangeofautoproductsrequired for vehicle manufacturing, approximately 20,000 components. The entry of global manufacturers into India during the 1990s enabled induction of new technologies, new ByDun&BradstreetIndia

products, improved quality and better efficiencies in operations. This in turn effectively actedasacatalysttothelocaldevelopmentofthecomponentindustry. TheIndianautocomponentindustryisextensiveandhighlyfragmented.Estimatesbythe Department of Heavy Industries, Government of India, indicate there are over 400 large firms who are part of the organised sector and cater largely to the Original Equipment Manufacturers(OEMs).Another10,000firmsexistintheunorganisedsectorthatoperates inatierformat.Thefirmsinthissegmentoperateinlowtechnologyproductsandcaterto TierIandTierIIsuppliersandalsoservethereplacementmarket Around 4% of the companies operating in the auto component segment cater to 80% of thedemandemanatingfromOEMs.Withintheunorganisedsegment,apartfromsupplying in the aftermarket, a number of players are also involved in job work and contract manufacturing.

Source:ACMA

Therangeofproductsmanufactured,witheachbroadproductsegmenthavingadifferent marketstructureandtechnology,hasnegatedanypossibleconcentrationofthemarketin a few hands. The market is so large and diverse that a large number of players can be absorbedtoaccommodatebuyerneeds.However,thereareaselectfewlargecompanies thathaveintegratedtheiroperationsacrossthevaluechain.Thekeytocompetinginthis industryisthroughspecialisationbyproducttype,andintegratingoperationsacrossthe relatedareaofspecialisation. An interesting insight provided by a study conducted by the National Council of Applied Economic Research revealed that the market segments for auto components included OEMsconstituting33%,localcomponentshaving25%withthebalance42%comprising of spurious market including reconditioned parts. A large part of the spurious or grey marketcompaniesareintheunorganisedsector.

TheregionalbaseofautocomponentmanufacturersismostlyconcentratedintheWest, North and South of India.This regional concentration of auto component manufacturers hasbeendictatedbytheemergenceofautomobilemanufacturersintheseregions.Theset upofTataMotors,Bajaj,Mahindra&MahindraandTVSinthe1950sand1960slaidthe foundationforautocomponentmanufacturersintheWestandSouth,whilsttheentryof Marutiduringthe1980screatedthebaseintheNorth. IndustryGrowth Production of auto ancillaries was estimated at US$10 bn in 200506 and has been growing ata robust 20% perannum since 2000. Exports ofauto componentshave been strong growing at 24% per annum since 2000. This growth in exports if sustained for anotherfiveyearswillseeIndiasautocomponentsexportswilltouchUS$5bnby2011 fromtheUS$2bnatpresent. Till the 1990s, the auto component industry was solely dependent on the domestic automobile industry to drive the demand for ancillary products. This composition of the market however is undergoing radical changes with global outsourcing gaining momentum.Inrecenttimes,exportshasemergedasasignificantdriverofgrowth,andthe demand emanating from global OEMs and Tier I manufacturers has opened new opportunitiesfortheautocomponentindustryinIndia.Atthesametime,abrightoutlook forthedomesticautomobileindustryalsoofferssignificantgrowthpotential,giventhefast risingincomelevelswitharapidlygrowingmiddleandhighincomeconsumers. Share of exports in total production has risen from 10% in 1997 to 18% in 2006. The composition of exports in terms of the proportion of OEM and aftermarket has also undergoneasweepingchangesincethepastdecade.TheratioofOEMtoaftermarkethas changed from 35:65 in the 1990s to 75:25 in 2006. While exports have been booming, there has been a sharp rise in imports of auto components as well, especially in the last threeyears.FromanimportofUS$250mninFY03,theyhavegoneuptoUS$750mnin FY06.Thisisahealthytrend,indicativeofrisingdomesticdemand.

Investments Since2000,theautocomponentindustryhasrecordedaninvestmentlevelofRs18bnand hasattractedUS$530mnintermsofforeigndirectinvestment.Investmentsinthesector havebeengrowingat14%peryear.In200506,investmentstouchedUS$4.4bn,andare expectedtogrowsignificantlyinfuture. TheInvestmentCommissionhassetatargetofattractingforeigninvestmentworthUS$5 bnforthenextfiveyearstoincreaseIndiasshareintheglobalautocomponentsmarket fromthepresent0.4%to34%.Thisisasizeabletargetconsideringthemeagreamountof FDIcurrentlycomingintotheindustry.Thechangingperceptionofglobalautomakersis howeverfastalteringthisscenario. Withlessthan1%shareintheglobalmarket,Indiahastremendouspotentialtoemergeas asupplybase.SeveralglobalgiantslikeFordandToyotahavealreadysetupbaseinIndia tosourceautocomponents.OutsourcingisfastcatchingupwithdomesticOEMsaswell, with most Indian OEMs today sourcing nearly 7080% of their component requirements fromvendors. This changing business scenario is leading to an inevitable outcome of consolidation withintheindustry.ThetakeoverofKarMobilesbyRaneEngineandofGeroAutobyUma Precisionarefewinstances.However,suchmergersandtakeoverswillbefewandfarin between in the auto component industry, unlike the churn out anticipated in other emergingindustriestheprincipalfactorbeingthevastnessofthemarketandtherange ofproductsthatneedtobedelivered. Rather than domestic consolidation, the general trend at present is for the large auto component manufacturers to establish a global presence. Top auto component manufacturers have already set up base in the global markets, especially in Europe.

Overall, there have already been 16 acquisitions, with six made in 2005. The industry is thethirdhighestamongtheIndianindustriesafterITandPharma,inacquiringoverseas assets.TheseacquisitionshavelargelybeeninEuropeandtheUSA.Thistrendhasbeen possible as the auto ancillary industry in these countries have been collapsing, thus makingitaffordabletoacquirethesecompanies.Nevertheless,thiswillprovideabasefor IndiancompaniestoaccesstheEuropeanandAmericanmarkets. Indianautocomponentcompaniesarealsosettingupbasesinotheremergingeconomies, who are potential competitors, for instance, Sundaram Fasteners greenfield facility in Zhejiang and Bharat Forges joint venture with the Chinese automotive major FAW Corporation. Another auto component manufacturer with plans to enter China is PMP Components, which intends to set up a sourcing base to establish itself as a low cost supplier. Thesetrendsareindicativeofthechangingbusinessenvironmentinthecountry.Topauto component manufacturers are gearing to take big risks. Their crossborder vision has establishedthemasglobalcompanies.Thoughthegoingglobalphenomenonislimitedtoa handful of companies, the smaller companies are also indirectly gearing to this trend by enteringintoformalmanufacturingcontractsandspecialisation.

Prospects Looking forward, the industry displays tremendous potential in generating employment and boosting entrepreneurship in the country. The spate of new investment plans announcedbyglobalanddomesticautomobilemanufacturerspromisestheemergenceof Indiaasaglobalhubforautocomponents. Theindustryistransforming,andtheboostindemandwillseetheemergenceofseveral new players in the industry. The vast market for auto components, and the diverse productsandtechnologyinvolvedensuresaplaceandroleformany.Atthesametime,the entry of several global automobile manufacturers will bring in more regulation into the

industry and see a pruning of the spurious market. Among the smaller players in the unorganised segment, this implies moving away from being standalone companies, to entering into either contract manufacturing or being ancillary units. The newly defined rulesarespecialisation,developmentanddeliverythatholdthekeytosuccessintheauto componentindustry. ForeignAcquisitionsbyIndianCompanies IndianCompany BharatForge Acquired Carl Dan Peddinghaus CDP Aluminiumtechnik FederalForge ImatraKilstaAB Scottish StampingsLtd MothersonSumi WOCOGroup G&S Kunststofftechnik GmBH AmtekAuto GWK New Smith Jones Inc Zelter SundaramFasteners Bleisthal Produktions GmBH Cramlington Forge CDPGmBH Shakespeare Forgings Germany Country Germany Germany USA Sweden Scotland

Germany UK USA Germany Germany UK Germany UK

ELForge

TVSAutolec SonaKoyo

RBI Autoparts SNDBHD FujiAutotech

Malaysia France

SMESINTHEAUTOCOMPONENTINDUSTRY The division of production processes and outsourcing among global automobile manufacturershasledtoamajorreorganisationofthesupplybasewithintheautomobile 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)inIndia. DefiningSMEs A welldebated 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 takeeffectfromOctober2006,definethesegmentonthebasisofinvestmentsinplantand machinery.SmallenterprisesarethosewithaninvestmentofnotmorethanRs50mnin plant andmachinery,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 withinalegalframework. ThetraditionalsmallscaleindustrieshavebeeninfocussinceIndependence.Themedium enterprises are recent entrants, and part of governments policy focus lately. The small scale segment is a manifestation of Indias socioeconomic development model and has metwiththecountryslongtermexpectationsintermsofcontributiontoGDP,industrial base,employmentandexports.ThissegmentformsamajorpartofIndiasindustrialbase. 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.TheseinitiativesareimportantinfacilitatingthegrowthoftheSMEs.Butitwill betheinternaldynamicsofindustries,andthepathIndiasindustrialdevelopmenttakes, thatwillgiveathrusttotheemergenceofSMEs.Theautocomponentindustryisonesuch sectorthatwouldgiveamajorboosttoSMEs. SMEsinAutoComponents

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 andalsohaveasignificantshareintheexportsoftheindustry. As part of a highly fragmented industry, these companies mostly are part of the unorganisedsector.Theyoperateinatierframework,andmost ofthecompaniesinthe SMEsegmentareintheTierIIorbelow.FewofthesupplierstoOEMsaremediumscale 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 survivalstillremainsanissueofconcernforthesecompaniesastheywillhavetoabsorb globalbestpracticesinthiscompetitiveenvironment. Cost competitiveness, customer orientation, lead time, are some key factors the auto componentSMEswillhavetoimbibetosurviveinthenewglobalsetup.Atthesametime, thesecompaniesfacethelimitationsofbeingSMEs,like

Lowcapitalbase Limitedgenerationofsurplusfundsforreinvestmentduetotightworkingcapital cycle Lackofawarenessofbusinessopportunities Inadequateexposuretointernationalenvironment Limitedgeographicaldiversityofmarkets ObsoleteTechnology Poorinfrastructurefacilities

Despite these limitations, the SMEs have managed to significantly contribute towards developmentofIndiasindustrialbase.ThekeyrisksthattheautocomponentSMEsfaces include:

Fluctuations in the cost of production; especially raw materials like steel, aluminium,polymers Poornegotiationpowersduetofragmentednatureofindustry;whichinturnlimits theirpricingpower Dependenceontradersandagentstoaccessoverseasmarketswhichthreatenstheir competitiveness Productsubstitutesduetofastchangingtechnology

Addressing these challenges and risks will be crucial to promoting SMEs in the auto component industry. The government has initiated clusterbased development geographical concentration of enterprises having similar lines of business which gives risetoexternaleconomiesandfavoursemergenceofspecialisedtechnical,administrative

and financial services. This form of networking of small firms is a means of achieving economiesofscale.Extendingthisintitiativefurther,thegovernmentisencouragingbanks toadoptaclusterbasedlendingapproachtoeaseavailabilityoffundstoSMEs. Multinational automobile manufacturers like Magna International of Canada, Delphi and Ford of US and some European companies have announced plans to enter the Indian markets.Thisbodeswellfortheautocomponentindustryasitwouldenablethecollective development auto component SMEs. This will bring in better technology, skills, new productsandanassuredmarket.Strategictieupsandcontractmanufacturingisanother wayforwardforSMEsintheautocomponentindustry. Looking forward, it is the best of times for Indian auto component manufacturers. The outlookfortheindustryisbrightandisexpectedtocontinueonahighgrowthtrajectory for the next 10 years. Capitalising on this growth prospect will mean keeping pace with global developments and imbibing capabilities that will give an edge to Indian SMEs in survivingthisrapidlychangingcompetitiveenvironment. AutoComponentClustersinIndia State No. AndhraPradesh 1 Delhi 1 Gujarat 5 Haryana 3 Jharkhand 1 Karnataka 2 Maharashtra 5 MadhyaPradesh 1 Punjab 4 TamilNadu 1

FUTUREOUTLOOK Currenttrendsindicateasmoothrunfortheautocomponentindustry.Infact,since2000, this is one sector which has made a global mark and has been identified as a sunrise industry.Theindustryistransformingfrombeinghighlydomesticcentric,toaforceready tofaceglobalcompetition. Thefactorsthatwilldrivegrowthfortheautocomponentindustryare:

The growth expected in the domestic automobile industry will give a fillip to the auto component sector. The Indian automobile industry offers great potential considering the low penetration along with rising income levels and a rapidly growing middle class. These factors will see a boost in demand for vehicles,

especiallypassengercarsandtwowheelers.Thesetwosegmentsareestimatedto growatbetween1012%foratleastthenextfiveyears. TheentryofglobalOEMs,makingIndiaastheirmanufacturingbase,hasgivenabig boost to the industry. For instance, Skoda plans to source parts for its European operationsfromitsIndianbaseandraiseindigenisationlevelforIndianmodelsto 70%. This trend has also enabledIndian companies to gain a competitive edge in the global market. Further, themodel of clusterbased development prominent in thissectorwillprovideeconomiesofscale. Export of automobiles has also emerged as a key component of growth. Rising exportsofIndianmadevehicleslikeM&MsScorpiomodel,BajajAutosBikes,Tata Motors City Rover are indirectly increasing the demand for Indian auto components.Also,theexportofIndiamademodelsofglobalOEMslikeHyundais SantroXingandSuzukisAltohasgivenaboosttotheindustry. Deregulation and the Governments policy initiatives have facilitated growth and focus has now shifted towards attracting foreign direct investments. Also, the Governmentsinitiativetowardsroaddevelopmentwillgiveaboosttodemandfor vehiclesandindirectlyautocomponents. TheGovernmentsinitiativestowardsopeningupchannelsoffinance. Investmentscominginforresearchanddevelopmentwillkeeptheindustryabreast ofthelatesttechnology.

Entry of global OEMs has transformed the Indian automobile and auto components landscape.Indiaisbeingperceivedasamajormarketforcarsandtwowheelersbyglobal OEMs.Beforetheendof2006,atleast30newcarmodelsareexpectedtobelaunchedby foreignOEMs. These factors portend a robust auto ancillary industry in India and the overall expected good growth will provide several opportunities for the emergence of new enterprises. Extendingtheirreachtoglobalmarketsisthepredominantoutlookamongthetopauto componentmanufacturersinthecountry.Thevisiontocompetegloballycomesfromthe inherentstrengthstheIndianautocomponentindustrypossesses.Somefeaturesare: Cost reduction of 2530% in production in the domestic market compared to overseas Lowlabourcosts Designing,engineeringandtechnicalskills Establishedqualitysystems Availabilityofrawmaterials Adaptabilitytonewtechnology Investmentsinresearchanddevelopment,cominginfromglobalOEMs.Thisstands outpositivelyinfavourofIndia.KeyplayersarenotonlywillingtoinvestinR&D butalsoinmechanicalandengineeringoperations.Theseinvestmentsareexpected toincreaseinthenearfuture

ThoughIndiaridesontheseinherentstrengths,afewrisksexistthattheautocomponent manufacturersmayhavetoconfront.

Aglobalslowdowncanderailtheprospectsoftheindustry. Volatility in the prices of metals and other inputs could erode the industrys cost competitiveness.Further,globalOEMsexpectacommitmentof510%reductionin priceseveryyear. TierImanufacturerstakingupgreenfieldprojectsoverseas. Intense competition from counterparts in other emerging economies may add pressureonmarginsofmanufacturers.

The Indian auto component industry is poised for robust growth till 2010. There is a perceptiveexuberanceintheindustryandgrowthestimatesindicateaboomingindustry. Going by current trends in production and exports of auto components, indicate a doubling of the domestic auto component industry by 2010. The production of auto components could grow to US$22 bn by 2010. Similarly, Indias exports of auto componentscouldgrowtoUS$4.5bnascomparedtoUS$1.8bnin2005.Expectedgrowth inproductionandexportsofautocomponentsisshowninthegraphsbelow.

This growth outlook implies opportunities for the small and medium enterprises. The overalltrendisencouraging,butremainingcompetitiveinthischangingscenariowillbe the toughest challenge. The combination of low manufacturing costs along with quality systemswouldgiveanedgetocompaniesintermsofpricingandquality.Expansionand diversification will help break into new markets. It would be imperative for these companies, which are largely based on traditional management practices, to imbibe technologyinabigway.TheSMEscanexploittheseopportunitiesthroughjointventures, collaborationandtechnicaltieups.Knowledge,specialisation,innovationandnetworking willdeterminethesuccessoftheSMEsinthisgloballycompetitiveenvironment. Source:www.dnb.co.in