Indian Automotive Components Industry

Engine
& engine
parts

Drive,
Transmission
& Steering

Suspension
& Braking

Electrical

Equipment

Others

FY1999

FY2000

FY2001

FY2002

FY2003

Indian Automotive Components Industry

ICRA Sectoral Analysis - Jan 2005

DEVELOPMENT

India's automotive components industry manufactures almost the entire range of parts required by the domestic automotive industry for various types of vehicles. The total domestic production of automotive components in FY2004 was estimated at Rs. 306 billion (around USD 7 billion). In terms of value, the output registered a growth of 20% during FY2004 and the industry registered a compounded annual growth rate (CAGR) of 17% between FY1998 and FY2004. Most components required by the Indian automotive industry are manufactured locally. As a result, import dependence of the industry is low. The imports are usually restricted to items requiring special steels and components of precision engineering like gearboxes.

The Indian automotive components industry as it is today can be said to have evolved over four distinct phases. The development pattern has been influenced mainly by Government policies and the market dynamics of the Indian automotive industry. The size of the automotive components industry that was relatively flat for the three decades covering 1960-1990 witnessed a sharp increase from FY1995 onwards.

Exports of auto ancillaries (in rupees) from India expanded by 29% in FY2004. In dollar terms, exports of auto components touched $1 billion during FY2004. This marks a 32% growth over the FY2003. The target of $1 billion exports has been therefore achieved before 2005 - the cutoff date set by ACMA. Additionally, production of auto ancillaries jumped by 20% in FY2004.

(Rs. mn and %)

	Production	Y-O-Y change	Exports	Y-O-Y change
FY1998	120317		14935
FY1999	129967	8.0	15685	5.0
FY2000	163559	25.8	18330	16.9
FY2001	178569	9.2	27065	47.7
FY2002	216021	21.0	28019	3.5
FY2003	255354	18.2	34965	24.8
FY2004	306400	20.0	45000	28.7

Compiled by INGRES

KEY PRODUCTS

An automobile typically consists of over 20,000 components, with each performing a different function. The components industry manufactures products that may be classified under six broad product categories (Automotive Component Manufacturers Association of India/ ACMA classification) as depicted in the following table.

Table 2. ACMA Classification of Automotive Components

Product Group	Products	Share in total Production*
Enigne Parts	Pistons, Piston Rings, Engine Valves, Carburettors, Diesel-based Fuel Delivery Systems	23%
Electrical Parts	Starter Motros and Generators	7%
Drive Transmission & Steering Parts	Gears, Clutches, Axles	14%
Suspension & Breaking Parts	Brakes Leaf Springs, Shock Absorbers	11%
Equipment	Headlights, Dashboard Instruments	8%
Others	Sheet Metal Parts, Pressure Die Castings, Tyre Tube Valves and Cores	36%

* Segmental market shares of the organised sector in FY2003 in rupee terms
Compiled by INGRES

With a market size (in terms of total production) of Rs. 45.9 billion in FY2003, Engine Parts is the largest sub-segment of the Indian components industry.

SOURCES OF DEMAND

The market for automotive components can be segmented into three categories based largely on the identity of the buyer:

▪	Original Equipment Manufacturers (OEMs - the vehicle manufacturers)
▪	Replacement (vehicle owners who buy parts for maintenance and repair)
▪	Exports (primarily foreign vehicle manufacturers and International Tier I suppliers).

Demand from Original Equipment Manufacturers

The pattern of growth in the automotive segment is important for the performance of the automotive components segment. This is because the components content per vehicle differs significantly across vehicle categories. Demand for larger and higher-value automobiles implies higher demand for ancillary units. Thus, the demand multiple emanating from the automotive sector in terms of segmental growth could have a significant bearing on the performance of the automotive components industry.

The Indian automotive industry has been growing at a rapid pace since the 1980s but with a degree of imbalance across the various segments. Table 3 presents the growth witnessed in various automotive segments during the past two decades.

Table 3: CAGR in Automotive Volume Production (Segment-Wise)

(%)

	Passenger Cars & UVs	CVs	Two- Wheelers	Three- Wheelers	Tractors	Grand Total
1980-1985	23.2	8.2	21.9	13.2	3.1	18.9
1985-1990	11.1	7.5	10.8	14.2	10.5	10.7
1990-1995	12.6	10.3	6.4	10.3	5.5	7.3
1995-2000	10.1	-8.1	9.1	7.2	6.9	8.2
FY2001	-8.7	-9.7	-0.5	6.8	-3.5	-2.1
FY2002	4.0	6.9	14.7	4.7	-16.4	11.1
FY2003	7.7	24.9	18.6	27.5	-24.5	16.2
FY2004	36.7	35.1	10.8	23.1	14.3	15.1

Compiled by INGRES

Passenger cars experienced high growth rates in production during the 1980s, with Maruti clearly dominating the scene. In fact, Maruti was the only car manufacturer to significantly augment capacity during this period. Passenger cars apart, the various two-wheeler segments also witnessed high growth rates during the 1980s. The decision of the Government of India to liberalise the licensing regime in 1985 led to a rapid expansion of the two-wheelers segment especially motorcycles. The change in licensing procedures was followed by the entry of the four major Japanese manufacturers in collaboration or joint ventures with established Indian two-wheeler manufacturers. Domestic companies like Bajaj Auto and LML also rapidly expanded capacities during this period of 1980's. While the 1990s saw the two-wheeler segment broadly continue with the performance of the previous decade, the rate of growth was nevertheless lower.

The production of commercial vehicles, which witnessed significant growth during the first half of the 1990s, slowed down in the latter half of the same decade to post an 8.1% decline (in production). There was no new entry into these sectors, with all the increase in production coming from incremental capacity additions by the two dominant local manufacturers, Telco and Ashok Leyland Limited.

However, the real spurt in production was during the years FY2003-2004, when the overall growth was in excess of 15%, with growth in the passenger vehicle and commercial vehicle segment was in excess of 30%. Thus, the principal drivers of demand for the automotive components industry from the OEM segment (in number terms) have been passenger cars and commercial vehicles.

While OEMs are an assured source of demand for component manufactures, the OEMs also exert a great amount of pricing pressure on the component suppliers. It is the relatively large order size of the OEMs that gives them the bargaining strength.

Replacement Demand

The huge unorganised sector typically caters to the demands from replacement market. The unorganised sector in turn is a low-cost one with the fiscal liabilities (in terms of excise duties) being not accounted for by this sector. As a result, this sector is able to supply the replacement market with significantly lower-priced parts vis-a-vis those produced by the organised sector. The after-market is highly competitive for components with a high price elasticity of demand and a tolerance of lower quality standards. A major channel of marketing and distribution for this sector is the typical roadside mechanic.

Interestingly, this sector has recently shown the technical competence to even replicate some of the relatively sophisticated components. This suggests that the relatively large price differential between the genuine replacement parts offered by the OEM suppliers and those produced by the informal sector is not justifiable by the perceived quality differential alone.

The automotive component supplier also caters to the demands from the replacement market, apart from the original equipment one. Additionally, for automotive component suppliers, the prices in the replacement market are relatively higher than the prices in the original equipment market. This higher prices in the replacement market is because of the higher margins charged by the component suppliers, the impact of a longer supply chain and the tax structure. Typically, the replacement market provides higher margins but lower volumes vis-a-vis the OEM market.

Five factors primarily influence the aggregate annual demand for replacement parts:

▪	Size of the national vehicle population
▪	Average age of the national vehicle
▪	population Pollution norms and Government regulations
▪	Average number of kilometres driven per vehicle
▪	Road and other related conditions

Size of National Vehicle Population

Clearly, more the number of vehicles, higher the aggregate demand for replacement parts. With new vehicle registration currently increasing at a CAGR of more than 10%, the prospects of replacement demand for automotive components in India appear bright.

Age of National Vehicle Population

It is evident that higher the average age of the national vehicle population, greater the expenditure on replacement parts. This is particularly true for a country like India where the scrappage rates are relatively low. Also, a longer use of the vehicle would ensure higher replacement demand and a lower OEM demand.

Vehicle scrappage norms are not yet widely prevalent in India (except for the National Capital Region of Delhi). Thus, the life of vehicles in the country is high by international standards. The rapid growth in vehicles in the recent past has ensured a fast increase in the stock of vehicles on road and if this trend continues, it is likely to push up the replacement demand for automotive components.

Number of kilometres driven per vehicle

The level of economic activity has a clear implication for the demand for transport services in a country. Higher the level of economic activity, higher the demand for freight and passenger transport. In particular, the level of economic activity has a strong bearing on the demand for components from the commercial vehicles segment. Similarly, the performance of the agricultural sector has strong implications on the demand for automotive components, especially those required in tractors.

In terms of passenger travel, the trends indicate that people are driving their vehicles for longer distances every year. A variety of factors has contributed to this trend: wider suburban spreads in virtually all the major cities where the bulk of the vehicle population resides; greater demand for travel-based leisure activities; relatively poor progress in the expansion of public transportation systems in the urban and rural areas; and various other factors. The demand for replacement parts would increase as the wear associated with higher mileage of vehicles per year increases.

Road Infrastructure

The road infrastructure in India needs to be evaluated from the perspective of the inter-modal mix. Railways and roadways are the principal modes of transport in the country. In India, in FY1951, the railways, with an around 85% share of the total freight movement in the country, was the preferred mode of goods transportation (road transport then held a predominant share of the residual). However, since then, with the growth of the railways failing to keep pace with the traffic requirements of a growing economy, the inter-modal mix has changed in favour of roadways.

During the past 50 years, the railways to roadways ratio for freight movement has reversed, with currently railways accounting for around 30% of the total freight movement in the country. In the passenger traffic segment, the share of railways has declined from 68% in FY 1951 to 15% currently.

This change in inter-modal mix has meant that the number of vehicles plying on the roads has increased, leading to road congestion. It is estimated that about 2% of the road length in the country carries about 40% of the road traffic. This has led to deteriorating driving conditions like increased traffic congestion and low vehicular speed, besides higher pollution levels.

Driving Conditions

Besides congestion, the poor average quality of Indian roads is a significant factor adding to the wear and tear of vehicular parts. In India the poor condition of the roads have significantly influenced the demand for different parts. For instance, internationally, axles are not high replacement demand products. But in India, because of the poor quality of roads, axles have a high replacement demand. The situation is just the opposite for catalytic converters.

Internationally, catalytic converters are a high-replacement demand product (need to be replaced every 50,000 kms to comply with the emission standards). In India, however, the replacement demand for catalytic converters is low since only the OEMs have to fit them on to vehicles (which use the multi-point fuel injection, or MPFI, technology) in compliance with the Euro II emission norms.

With the vehicle population and usage in India increasing, and given the lower scrappage rates, the replacement demand for automotive components is likely to emerge as an important source of demand for automotive components. However, the replacement market is likely to face competition from the current threat of spurious markets.

Export Demand & Competitiveness

International automotive players with operations in India are increasingly sourcing components from Indian automotive component manufacturers. For instance, Hyundai and Fiat are sourcing parts locally for their Santro and Palio models in India, respectively. The demonstrated ability of Indian component makers to make supplies to global automotive manufacturers in the country has opened up the possibility of the component makers supplying the same OEMs in other countries as well.

Indian component manufacturers continue to enjoy competitive advantages primarily on the strength of the following factors:

▪	Low labour costs (low labour costs pulls down the total cost of production, typically in assembled parts such as clutches and lighting equipment). For instance, wage rates in India are currently 60% cheaper than that in developed markets. Dana Corp probably spends close to 39% of revenues on wages, as opposed to 6-7% by Indian forging company, Bharat Forge.
▪	Less stringent environmental regulations (environmental regulations have rendered the production of parts like castings cost prohibitive in developed countries). For instance, the metal casting process generates dust and it is estimated that foundries in Europe and USA on account of stringent environmental compliance spend roughly 5-6% of their sales on pollution control. Such costs are almost negligible in countries like India and other Asiatic nations.
▪	Low minimum economic scales and possession of established technology (as in castings and forgings).

Given these competitive advantages, India is therefore widely regarded as having an advantage in terms of low labour costs, strong engineering skills, and machining and processing capabilities.

Hence, labour intensive and assembly-oriented components are likely to be sourced from India. The exports of the automotive component manufacturers are targeted at the following groups of buyers:

▪	International vehicle majors such as Volkswagen, Volvo and so on. Exports are largely to their operations in developing countries since these manufacturers do not find it cost effective to source components from their own plants or from other local units. For instance, domestic component manufacturers such as Bharat Forge, Rico Auto, Sundaram Fasteners supply directly to global OEMs.
▪	Vendors who supply to component manufacturers like Delphi, Dana Corporation and Valeo. As an example, recognising the cost advantage involved, most global OEMs such as Ford, General Motors and Volvo, and Tier-I companies such as Navistar and Cummins have set up international purchase offices in India in the last 2-3 years, to source components and export them to their global plants.
▪	In the last couple of years, many global automobile manufacturers have identified India as a manufacturing base for some of their models, which are then exported to other countries. For instance, in the passenger car segment, Hyundai's Santro Xing and Suzuki's Alto are being exported. Two-wheeler manufacturers Yamaha Motors and Honda Scooters are also exporting some of their models. Similarly, Indian OEMs such as Bajaj Auto (World Bike 125 cc), TVS Motors and car companies such as Tata Motors (City Rover) and M&M (Scorpio) are also exporting fully built vehicles. As components form more than 50% of their cost of manufacture, the export of vehicles increases the demand for domestic auto components.
▪	The replacement market, which accounts for a large proportion of the exports of components from the Indian market. This is due to the fact that a significant portion of the Indian components is exported for the replacement markets for out-of-production models in these countries. As Tier-I vendors located in these countries meet the demand for current models, the production of components for out-of-production models are outsourced to countries like India. Additionally, Indian component manufacturers are also dependent on this market for the following reason:
▪	Unlike the OE market, the replacement market has low volumes and high margins. The OE market in turn, although has very large and assured volumes, the pricing is very stringent and strict quality controls are in place. As a result, Indian component manufacturers in the past and even now are exporting to the replacement market.

Further, the demand from automotive components in a number of countries could be promoted through the joint venture route.

Challenges faced by Indian component exporters

In comparison with the total size of the global auto component market of more than $1000 billion, Indian component exports are miniscule at $1 bn in FY2004. Although, the growth in the export of components is much higher than the growth in domestic markets, Indian exports have not been able to capture a larger market due to various hurdles faced by Indian component manufacturers.

For instance, the forging market offers a huge scope for untapped exports. Bharat Forge is now venturing into passenger car segment of the forging market (Ford Motors) in USA. Importantly, car components constitute 80% of the $1.5 bn total forging market in USA and Bharat Forge exports to USA is less than 2% ($28 mn).

Product liability clause

Most international OEMs also enforce a product-liability clause, which stipulates that suppliers will be charged punitive damages in case of a line stoppage or product recall caused by supply of defective components. As per industry reports - for instance if Ford or Delphi suffers a line stoppage due to a vendor problem, the punitive damage could be as high as USD 5000-15000 per minute. This factor significantly constrains Indian companies from dealing directly with large international OEMs.

Lead-time in winning international contracts is high

In the case of export contracts from international OEMs, the lead-time from the request for quotation till the time of commencement of actual supplies can be as high as 3-4 years.

However, once a contract is won, the entry barrier for other competing vendors is high. For instance, one of leading casting companies Rico Auto has been recognised as a Full Service Supplier (Tier - II status) by Ford and has now an agreement with Ford for a period of ten years to supply automotive castings.

Maintaining cost competitiveness and ensuring faster responses

Global OEMs require vendors to commit to a 5-10 % reduction in prices every year. Besides ensuring cost competitiveness, component vendors are required to scale up their production to meet increasing demand.

Table 4: Component-wise break-up of exports

(In %)

Compiled by INGRES

Table 5: India's export market

(In %)

	Europe	America	Asia	Africa	Others
FY1999	30	26	18	13	14
FY2000	28	24	24	10	14
FY2001	30	30	20	9	11
FY2002	28	30	20	11	11
FY2003	29	31	18	12	10

Compiled by INGRES

As far as destinations of auto component exports are concerned, auto components manufactured in India are mainly being exported to European markets and US, which have a high population of automobiles. Neighbouring countries in South Asia form the next export destination. Exports to these countries cater to the component requirements of Indian-made models, being exported to these countries. Indian components are not being exported to Japan, China and ASEAN countries in large numbers.