in India The Indian automotive components industry - Teknikföretagen

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in India The Indian automotive components industry - Teknikföretagen

The Indian automotivecomponents industry


ForewordIndia has been one of the world’s fastest growing economies during the last fewyears. However, India has still not recovered from the effects of the former inwardorientedpolicies it followed until the 1990s. Economic reforms started taking placein the beginning of the 1990s when India started opening up gradually. The questionis whether India can implement the required policy changes effectively and developa conducive business climate for industry to grow, and thus be able to sustainthe strong rate of growth it has achieved over the past few years.During this time there has been increasing confidence in the manufacturing sector inIndia and its long term potential as a manufacturing hub. Importance of the engineeringindustry is supreme in this regard and it also plays a crucial role in the economicgrowth of the country. To understand the driving forces of India better, it is essentialto develop an understanding of prevailing fundamentals in the engineering industry.In this report we provide an overview of the engineering industry in India withrelevant facts regarding the structure and size, growth rates, main challenges, trendsin international trade, research and development initiatives, as well as an indicationof future outlook of the main segments in the engineering industry. It is a series ofseven different reports that includes an overview of the engineering industry, theautomotive industry, the machinery and equipment industry, the electrical machineryindustry, the automotive components industry, the electronic equipment industryand the fabricated metal products industry.This series of seven different reports has been commissioned by Teknikföretagen,the Association of Swedish Engineering Industries, to provide a detailed overviewof 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 Swedishengineering companies and give the reader increased knowledge of the presentindustrial development in India.The reports have been authored by Mr. Rahul Sanyal. He is an economist from NewDelhi in India, and has been appointed by Teknikföretagen to prepare these seven reports.Stockholm, September 2008Anders RuneChief Economist


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


Growth in the automotive industry, especially sincethe year 2000 has had a favorable impact on the automotivecomponents manufacturing industry in India.This industry has been one of the fastest growingsegments of the automotive industry overall. India isemerging as one of the key manufacturing hubs forcomponents in Asia and is also expected to play a significantrole at a global level.4


The Indian automotivecomponents industryOverview of the automotive components industry in IndiaThe Indian automotive components manufacturing industry is in the midst of atransition from being a low quality and low-technology industry heavily dependenton the domestic industry, to being a global industry. With cost pressures takingtheir toll on suppliers in Europe, North America and Japan, automotive componentsmanufacturing 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 industryAutomotive components manufacturing in India is dominated by about 500 majorcompanies that account for more than 85 per cent of total production and 10 000companies in the unorganized sector accounting for the rest. Based on technologyand quality, the automotive components industry is classified into three tiers, whereTier 1 consists of complete systems suppliers, followed by the lower tiers, Tiers 2and 3, that supply sub-systems and single parts.The industry contains many Small and Medium Enterprises (SMEs). The PlanningCommission of India plans to consolidate these SMEs into the supply chain byadopting the tier structure. Further, based on end user classification, the market forautomotive components can be classified into Original Equipment Manufacturers(OEMs), exports and the after sales (replacement) market. 11) Reference has been made to Ministry of External Affairs (11th April 2008) and Ministry of Heavy Industries andPublic Enterprises (2008)5


Indian automotive components manufacturing industry has maturedThe industry has developed the credential to manufacture the entire range ofcomponents required to manufacture vehicles which is clear from the high levelsof indigenization that the industry has achieved. For instance, Tata Motors, one ofIndia’s largest vehicle manufacturers is producing its new model Tata Nano, using97 per cent local content. 2Currently, more than 60 per cent of automotive components exports cater to USAand Europe, that constitute the high Accepted Quality Level (AQL) markets. 3In the 1990s more than 80 per cent of the exports were made to the internationalafter-market. However in 2005, more than 70 per cent of the exports were madeto global Original Equipment Manufacturers (OEMs) and Tier 1 companies andonly 30 per cent of exports were made to after-market. Thus it can be inferred thatthe automotive components manufacturing industry has reached a high degree ofmaturity in terms of quality and technology over the past few years. 4In fact, according to the Investment Commission of India, 11 Indian manufacturersincluding Sundaram Fasteners and Mahindra & Mahindra have received the covetedDeming Prize. No other country except for Japan has won the Deming Prize thesemany times. 5Large manufacturers of automotive componentsThere 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 Showapart of Hero group, Amtek Auto, Bharat Forge, Lucas-TVS and Minda India Limited(MIL) among others. Major global players in the industry include Delphi, Visteonwhich is part of Ford Motors, Bosch Limited which is part of the Bosch groupand Motherson Sumi Systems which is part of the Sumi Motherson Group.2 ) Reference has been made to Indiacar Private Limited (2nd September 2008)3) Ministry of Heavy Industries and Public Enterprises (2006c) has been referred4) Ministry of Heavy Industries and Public Enterprises (2006b) has been referred5 ) The Deming Prize is one of the most prestigious awards given for advancement in quality. Originally, it was madefor rewarding Japanese manufacturers but now this prize is also awarded to companies from other countries6


Companies such as Ford, General Motors, Mercedes Benz, Fiat, Volkswagen, Hyundaiand Toyota among others are making India their hub for procurement of componentsand there are several joint ventures taking place in the industry.Shown below is a table of the largest OEMs and suppliers in India. Indian OEMsand suppliers as well as foreign OEMs and suppliers have been mentioned.LARGE MANUFACTURERS OF AUTOMOTIVE COMPONENTSBoth OEMs and suppliers have been mentioned. It must be noted that the list is not exhaustive.Foreign OEMs Foreign suppliers Indian OEMs Indian suppliersGeneral Motors Bosch Tata Motors Bharat ForgeBMW Valeo Maruti Suzuki Sundaram FastenersMercedes Benz Eaton Mahindra & Mahindra Shriram PistonsVolvo Arvin Meritor Bajaj Auto Rico AutoVolkswagen Motherson Sumi TVS Motors Sona Koyo SteeringFiat Continental Hero Honda Rane GroupCummins Delphi Ashok Leyland Lucas-TVSFord Visteon Hindustan Motors TACOToyota Denso Atul Auto Amtek AutoNissan TRW _ Munjal ShowaSource: Industry research and analysisEvolution of the automotive components industryIn the pre-1985 era, the automotive components industry was protected by hightariffs and the market was primarily supplying to the domestic manufacturers.In the 1980s, the Government of India (GOI) introduced the Phased ManufacturingPlan (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, Europeanand American companies.7


After the end of the PMP in 1991, the GOI introduced the Memorandum of Understanding(MoU) route to enable localization of components. After success fullocalization, an increasing number of vehicle manufacturers (domestic and foreign)started outsourcing components rather than producing them inhouse and this ledto growth of the automotive components manufacturing industry. 6Contribution to output and exports to the economyIn the 1990s the rate of growth of the automotive industry was slow, and hence therate of growth of the automotive components industry was also slow. In the year1998–1999, the total value of production was Rs. 126.83 billion registering a growthof only 6 per cent. Value of exports in the same year was only 11 per cent of productioni.e. Rs. 14 billion but registered a reasonable growth of 13 per cent. Growth inexports though was taking place over a relatively small base. 7Why global manufacturers found India attractive and started setting up shop• Process engineering skills – processes can be redesigned so that manufacturingprocesses can be made more labour intensive and less capital intensive, therebyenabling manufacturers to reduce costs by using cheaper labour• Product engineering skills – Indian manufacturers have developed the credibilityto use smart product design to enable manufacturers to be more efficient. One Indiansupplier for instance, took just six months to design a steering system for anautomaker that was trying to develop the same product in other LCCs for morethan four years• Capital engineering skills – with regard to capital engineering, India’s advancedtooling and machining industry makes it possible to produce capital locally andefficiently 8An increasing number of multinationals started realizing these factors at the end ofthe 20th century and started sourcing components from India. Toyota was one ofthe first to see India as a source for components in 2001. The company made joint6) 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)8


ventures with local suppliers. It started localizing content for its Corolla and Qualismodels. 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 inits other models in foreign markets. There are similar successes that have led to thetremendous growth of this industry and helped it develop. 9Contribution of the automotive components industry to the economyThe turnover of the automotive components industry in the year 2006–2007, wasUSD 15 billion registering a growth rate of 21 per cent, with exports of USD 2.9billion during the same year, registering a growth rate of 15 per cent. In 2005–2006,exports grew by 28 per cent to USD 1.8 billion but that figure is very low against theworld trade of USD 185 billion in automotive components. Thus exports do notform a large proportion of output in the automotive components industry.However, components exports are becoming an important growth driver for growthof the automotive industry overall and is expected to assume greater responsibilityin future. At the same time, India is also a major importer of automotive componentswith more imports than exports. In the year 2006–2007, India imported USD3.3 billion worth of automotive components. 10STEADY GROWTH IN TURNOVER and international tradeAll values are in Rs. Billion and figures are in numberIndicators 2003–2004 2004–2005 2005–2006 2006–2007Turnover 306.40 385.00 534.00 645.00Exports 57.95 76.15 108.63 126.43Imports 64.99 85.60 109.22 146.44Direct employment 2 500.00 2 500.00 2 700.00 2 850.00Source: Ministry of Heavy Industries and Public Enterprises9) 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 HeavyIndustries and Public Enterprises (2006a). Ministry of Heavy Industries and Public Enterprises (2006b) has alsobeen referred9


Growth of the automotive components industryThe global automotive majors are aligning their manufacturing bases in the Asia-Pacific region, mainly in India, China and Thailand. This is because the constantpressure on OEMs and Tier 1 manufacturers to reduce costs is compelling them tooutsource more from LCCs. This changing scenario has become the big opportunityfor the automotive components manufacturers in India to expand significantlyand make global footprints. The top global automotive companies have big plansto source components from India. Many of these companies have opened InternationalPurchase Offices in India, mainly in the city of Mumbai in Western India.Some of these companies include BMW, General Motors, Ford, Mercedes Benz andVolkswagen.Not only are these companies focusing on business in India, but they are alsosearching for tie-ups to source automotive components for their manufacturingoperations around the world. For example, Volkswagen has just tied up with MindaIndustries Limited (MIL) for it to supply headlights and rear combination lamps.In addition, Volkswagen also plans to source more electrical and mechanical equipmentfrom Indian suppliers for its operations in other parts of the world. Outsourcingof engineering design and business processes is also taking place and India isincreasingly becoming a preferred destination for this as well. 11Strategy being followed by OEMs and Tier 1 companies to set up in IndiaIt has been observed by the Automotive Components Manufacturers Association(ACMA), the nodal agency in India for the automotive components industry, thatsuccessful OEMs and Tier 1 companies have been following a five step strategy tomanufacture components. 12 The steps can be briefly enumerated as follows:• The companies start small and build up gradually. The types of components inwhich India possesses comparative advantages are focused on• Companies work closely with suppliers and build capabilities in manufacturingprocesses, quality systems and logistics etc11) 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)10


They sign long term contracts with SMEs to gain confidence in making largeinvestments• 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 andproduct level technology• Achieve the main objective i.e. to use advanced technology at lower cost to manufacturehigh quality automotive componentsDriver of growth in the automotive components industryThe Indian automotive components industry is attaining a global stature, graduatingfrom being suppliers for the replacement market to becoming suppliers for Tier1 vendors and OEM suppliers worldwide. The stimulus for growth of the industryhas been generated by an increase in domestic demand, entry of foreign vehiclemanufacturers and outsourcing by global majors. Industry sources say that it canbe up to 30 per cent cheaper to produce in India. The low cost of labor, combinedwith the availability of a large number of technology oriented workforce and strongcredentials gained by the country in Information Technology (IT), electronic equipmentand electrical machinery have helped to build an environment conducive forgrowth of the automotive components manufacturing industry. 13The following factors are drivers of growth in the automotive components industry:• India has a long history of manufacturing vehicles and has developed strongcredentials in engineering• Low cost of employment and a high proportion of first time right designs. Indianengineers 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 multinationalcompanies outsourcing automotive design jobs to India. Global majors likeToyota have setup design centres in India and are outsourcing design tasks.• India produces the second largest number of engineers worldwide at 400 000 ayear. This combined with the fact that Indians are good in English is a bigadvantage, making India an attractive pool of talent13) Reference has been made to The Economic Times (10th September 2007)11


ADVANTAGES FOR GLOBAL LEADERS IN MANUFACTURING COMPONENTSThe figure describes the unique characteristics of the Indian industry, the combination of which is attractingincreasing foreign investments.• 400 000 engineeringgraduates each year• India accounts for 26per cent of the worldsESO & BPO talent‣High levels of existingcapabilities• Analysis and simulation• Engineering animations• Modelling, drafting andtooling design etcLargest pool of Englishspeaking engineersLow cost high qualitydesignsExperience in designswith increasing levelsof indigenization• An entry level engineer costsas less as USD 8 000 peryear• 89–92 per cent “first timeright” designs i.e, higherthan wourld average‣Low cost of workersand high proportionof “first time right”designs• High levels of indigeni zationby foreign OEMs & improvingskill sets• World renowned IT skills withstrong automotive domainknowledgeSource: Indian Brand Equity Foundation 14Growth of the industry is taking place in clustersThe automotive components manufacturing industry has traditionally been in NewDelhi in North India, Chennai in South India and Pune in West India. Now, thereare 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 inSouth India and Jamshedpur and Kolkata in East India. With Tata Motors manufacturingthe revolutionary Tata Nano in West Bengal (East India), many componentsmanufacturers are setting up in the state. Uttarakhand, a state in North India is alsoexpected 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 ofnumber of manufacturers. This is because the largest passenger cars and two-wheelersby 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)12


CLUSTERS IN THE AUTOMOTIVE Components INDUSTRYThe map depicts four clusters, one each in North, South, East and West India• Delphi• Minda• Sono Koyo Steering• Denso• Shriram PistonsDelhi-Gurgaon-Manesar• Bharat Forge• SKF bearings• Tata Johnson• EnduranceHalolPune-NasikAurangabadJamshedpurKolkata• Amtek India• International Auto Forgings• JMTChennai Bangalore Hosur• Sundaram Fasteners• Visteon• Rane TRW• Lucas TVS• BoschSource: Industry research and analysisFast growth due to increasing outsourcing from IndiaWith strong growth rates in the automotive industry there will also be a significantincrease in employment opportunities. Due to several backward and forwardlinkages, substantial amount of direct and indirect employment will be generatedin feeder industries. Specialists in the area of Research and Development (R&D),technology, product development, logistics and operations would also be requiredfor the industry to be able to achieve and sustain the growth. The automotive componentsindustry is expected to achieve a turnover of USD 70 billion by 2016, that isfive times the size of the industry in 2005–2006. This scale of growth is expected tolead to additional direct employment of 750 000 along with indirect employment toover 1.8 million people between 2006 and 2016. 1515) Reference has been made to Ministry of Heavy Industries and Public Enterprises (2006b)13


Size and structure of the automotivecomponents industryThe automotive components manufacturing industry is highly fragmented with 500major companies that contribute 85 per cent of total output and 10 000 companiesin the unorganized sector that contribute the rest. An increasing amount of consolidationof the small and unorganized units is needed to be able to increase overallproductivity and enable higher growth of the industry.Division of the industry into tiers based on technology and qualityBased on technology and quality, the automotive components industry is classifiedinto three tiers, where Tier 1 consists of complete systems suppliers, followed byTiers 2 and 3 that supply sub-systems and single parts. Tier 1 suppliers mostly consistof multinational companies, Tier 2 suppliers consist of large and medium sizedindustrial units and Tier 3 suppliers consist of small and unorganized units. A largenumber of unorganized units also produce counterfeit parts. These counterfeit productsare sold in large volumes across the country under the brand names of Tier 1companies and OEMs, and pose a problem for the legitimate companies. 16End user classification of the automotive components industryBased 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 AutomotiveMission Plan 2006–2016 (AMP) published by Ministry of Heavy Industriesand 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 14per cent. These figures are exclusive of tyres and batteries. 17Sources of demand for automotive components by segmentsThe two and three wheeler segments are the largest sources of demand for automotivecomponents followed by the passenger cars segment. Together with the passengercars segment the two and three-wheeler segments account for approximatelytwo-thirds of the automotive components market in India. 1816) Reference has been made to Ministry of Heavy Industries and Public Enterprises (2008) and Ministry of ExternalAffairs (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)14


SEGMENTWISE DEMAND FOR AUTOMOTIVE COMPONENTSThe table shown below is representative and may not be completely accurateTwo and three-wheelers 34 %Passenger cars 33 %Commercial vehicles 24 %Tractors 9 %Source: Indian Brand Equity FoundationProducts manufactured and their respective sharesin total productionThe 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 productionis relatively evenly divided among the remaining product segments.Productwise shares in total components productionThe table below is representative of shares of the products in the year 2006–2007. Share for each of theproducts is given in percentage. 19Product descriptionShareEngine parts 31Drive, transmission and steering 19Body and chassis 12Suspension and braking parts 12Equipments 10Electrical parts 9Others 7Source: Automotive Components Manufacturers Association (2007)Engine partsThe largest segment of the automotive components industry is engine parts. In theyear 2005–2006, the segment is estimated to have contributed approximately 31 percent in value i.e. USD 3.76 billion. This segment can be divided further into threesub-segments. They are the following:19) Reference has been made to Automotive Components Manufacturers Association (2007)15


• Core engine parts like pistons and piston rings• Fuel delivery systems• Other componentsSome of the major manufacturers of pistons are Escorts India Pistons Ltd, andFederal Mogul Goetze. Petrol based fuel injection systems are manufactured byUcal Fuel Systems, Spaco Carburettors, and Escorts Auto Components whereasDiesel based fuel injection systems are manufactured by Bosch Limited, Delphi andTata Cummins among others. Bharat Forge is a major company that manufacturescrankshafts while Kirloskar Oil Engines Ltd and Gabriel India Ltd manufacturebearings. Purolator India Ltd manufactures filters/ elements/ inserts.Drive, transmission and steering partsThis 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 percent in value i.e. approximately USD 2.3 billion in the year 2005–2006.A brief description of the sub-segments of the drive, transmission and steeringparts 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 sourcecomplete assemblies, but a large number of them source individual components likehousings, shafts and differentials from vendors. Automotive Axles, GKN Drivelineand Axles India are some of the largest companies in the segment. With regard towheels and wheel rims manufacturing, Wheels India Ltd is the most prominentplayer in India.Gears and steering systems – some of the biggest companies in the gears segmentare 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 PowerSteering Ltd. However these companies mainly manufacture steering systems forcars. With regard to commercial vehicles ZF Steering Gear India Ltd is the mainmanufacturer.16


Clutches – Luk Clutches is the major player in the clutch manufacturing segment.Rane Brake Lining and Rico Auto are also prominent players. Other players includeAmalgamations Repco that has collaboration with Valeo of France and Ceekay Dakinthat has collaboration with Exedy Corporation.Suspension and braking partsThe suspension and braking parts segment is estimated to have contributed 12per cent in value i.e. approximately USD 1.45 billion in 2005–2006. This segmentconsists of shock absorbers, leaf springs and brake shoe assembly segments. GabrielIndia Ltd and Munjal Showa are the major companies in the shock absorbersub-segment. Jai Parabolic Springs and Jamna Auto Industries are the two majormanufacturers of leaf springs/ coil springs. Players like Brakes India Limited, andAutomotive Axles Ltd dominate the brake shoe assembly segment.Electrical partsThis segment is among the smaller segments in the industry. As of 2005–2006, it isestimated 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 companiesin this segment include Bosch Limited, Denso, Motherson Sumi, MIL and IndiaNippon. The main products in this segment include starter motors, generators,spark plugs and distributors. Starter motors and generators are two sub-segmentsthat 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 robustrate as the newly manufactured automobiles in India contain a higher proportionof electrical parts. For instance, two-wheelers now come fitted with an electricalstarting system as compared to the kick start systems. Electric two-wheelers productionhas started only recently and is expected to boom. Electrical components inpassenger cars and commercial vehicles have also been increasing due to increasingautomation in the vehicles. Such innovations in technology are expected to increasethe demand for electrical parts in the automotive components industry.EquipmentThe equipment segment is also among the smaller segments in the industry interms of value. As of 2005–2006, this segment is estimated to have contributed10 per cent in value i.e. approximately USD 1.2 billion. Major companies in this17


segment are Pricol, Lumax Industries and Siemens VDO among others. The majorproducts manufactured in this segment include headlights, dashboard instruments,wiper motors and electric horns.Sub-segments like headlights may experience a significant expansion to meet thedemands of the foreign car manufacturers and they also have a strong potential forexports. The tie-up between MIL and Volkswagen is an example. MIL has tied upwith Volkswagen to supply headlights and rear combination lamps for Volkswagen´sfacilities in other parts of the world.OthersAll other components are classified in the others segment. Sheet metal components,fan belts and plastic parts are three of the major sub-segments. International majorslike Delphi are present in the rear view entertainment sub-segment and the shareand size of this sub-segment is likely to increase significantly. This is because thiskind of entertainment is still rare and is offered by few manufacturing companies asthe price is high and demand is low. However with increasing incomes and demandfor automobiles, the demand for such components is also expected to rise. In someof the other sub-segments like the iron castings segment, Autocast Limited andBrakes India Limited are dominant. The wiring harness and parts sub-segment isdominated by Motherson Sumi Systems Limited. 20Snapshot of the Indian Tyre IndustryIndia is one of the few countries that have attained self-sufficiency in manufacturingof tyres except for some special kinds of tyres like aircraft tyres and snow tyres. Atotal of 65 million tyres were produced in the year 2005–2006 of which 62 millionwere used in India. The tyre industry is expected to grow at the rate of 7 per centper year till 2012. The turnover of the tyre industry was Rs. 135 billion out of whichtyres worth Rs. 23 billion were exported in the year 2005–2006. 2120) Reference has been made to Cygnus Business Consulting & Research (2007)21) Reference has been made to Ministry of Heavy Industries and Public Enterprises (2006b)18


International trade scenarioExportsAs global OEMs and Tier 1 companies have identified India as a leading countryfor sourcing their automotive components for their global production, the exportscenario in the industry is quite optimistic. Between 2003–2004 and 2006–2007 theautomotive components industry has more than doubled its exports. In the year2006–2007 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 mostof the western countries is demonstrative of the fact that automotive componentsbeing manufactured in India are of high quality. 22DESTINATION OF Components EXPORTS ARE MAINLY EUROPE AND NORTH AMERICAThe table below is representative of destinations of exports as of 2006–2007.North America 26.9 %Asia 12.4 %Africa 10.8 %Europe 38.7 %Middle East 7.1 %South America 2.8 %Oceania 1.2 %Others 0.1 %Source: Automotive Components Manufacturers Association (2007)USA is the biggest market for international trade and is the world’s largest importerof automotive components. Countries like Brazil and Mexico have reaped rich benefitsof being in close proximity to USA. However, India, China and Thailand havealso been trading with USA, and more trade with USA in future will be a big driverfor growth in the automotive industry.22) Reference has been made to Ministry of Heavy Industries and Public Enterprises (2006b) and Ministry of HeavyIndustries and Public Enterprises (2008)19


ImportsDespite growing production and exports, India continues to be a major importer ofautomotive components with total imports being higher than total exports. Importswere to the tune of Rs 146.44 billion which were 3.1 per cent higher than the shareof exports in total turnover in the year 2006–2007. 23It is considered that with growing international trade, the automotive componentsindustry is getting increasingly integrated with the global industry. Increasing integrationwith global trade of automotive components is expected to be the drivingforce in the automotive components industry.TREND OF PRODUCTION AND INTERNATIONAL TRADE IN THE INDUSTRYAll values are in Rs. Billion and shares are in percentage.Category 2003–2004 2004–2005 2005–2006 2006–2007Turnover 306.40 385.00 534.00 645.00Exports 57.95 76.15 108.63 126.43Imports 64.99 85.60 109.22 146.44Share of export in turnover 18.9 19.7 20.3 19.6Share of import in turnover 21.2 22.2 20.4 22.7Source: Ministry of Heavy Industries and Public EnterprisesChallenges in the automotive components industryThe key to success of the automotive components manufacturing industry is lowcost production in order to remain competitive. Keeping this in mind, the mainchallenges will be to ensure flow of new innovations in technology, steady demand,infrastructure development, increase in exports, human resource development andincrease in environment and safety standards.Realization of economies of scale and cost managementGreater variety in vehicles being manufactured will enable automotive componentsmanufacturing companies to expand and grow while realizing economies of scale.More and more consolidation is required as the industry is highly fragmented withmany manufacturing companies being family run enterprises.23) Reference has been made to Ministry of Heavy Industries and Public Enterprises (2008)20


According to an econometric analysis commissioned by Indian Council for Researchon International Economic Relations (ICRIER), it was found that a majorconstraint for smaller automotive components manufacturers to increase the scaleof 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 percent of the total cost of manufacturers. On the other hand labour costs are quite lowat only 6.5 per cent of total cost. Since, labour costs are the easiest cost componentsto minimize, global manufacturers can use this facet to their advantage by manufacturingin India. 24Increasing demand for automotive componentsThere is a direct correlation between growth in the automotive industry and growthof the automotive components industry. Standalone exports to OEMs and Tier 1vendors will not be sufficient to drive strong growth. Growth is going to be supportedby demand generated by segments within the automotive industry. For instance,it is expected that the passenger cars and utility vehicles segment which was approximately1 million in terms of production in 2003–2004, would increase to 3 millionunits by 2015 thereby helping increase the market size of the automotive componentsmanufacturing industry by generating large scale demand for automotivecomponents. 25Development of infrastructure and competencies in technologyOne of the major bottlenecks for automotive components manufacturers to competeat the global level is the lack of appropriate technology and infrastructure.Shortage of power leads to lesser productivity, poor infrastructure for testing, certificationand homologation, and an inadequate automobile retail trade and serviceinfra s tructure inhibits growth.Hence, competitiveness in manufacturing is the main focus point. It is well knownthat stagnation in manufacturing as a proportion of GDP has an adverse impact onemployment. Since the share of the manufacturing sector in GDP has been relativelystagnant ranging between 15 and 17 per cent over the past two decades, there is aneed to stimulate the manufacturing sector. With increasing growth, the automotivecomponents industry, will not only play a major role in increasing the contribu-24) 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)21


tion of the manufacturing sector to GDP by increase in output, but it will also helpgenerate more employment in the industry and sustain high growth.Development of capabilities through training and developmentIndia produces a large number of engineers second only to China in the wholeworld. India will also supply the largest amount of manpower in the world between2005 and 2010. However, human resources need to be trained to keep up with globalbest practices. Management capabilities need to be developed simultaneously tobe able to reap the benefits of a growing and skill intensive working population. 26Research and developmentR&D expenditure as a share of turnover is low in the automotive components industryranging between 0 and 1.5 per cent. In fact many of the smaller companies andsome of the bigger companies do not even have R&D facilities. Since fiscal incentiveshave not worked effectively to improve R&D infrastructure, certain other policyinterventions are being planned in this regard. 27However, proficiency in understanding technical drawings, understanding of differentglobal standards, appropriate automation, and use of Information Technology(IT) for design and development, are some of the growing capabilities of theautomotive components manufacturers. Hence, India is expected to develop intoa big R&D base for global majors, given its capabilities in the IT sector, comprehensivedomain knowledge of the industry and shifting of design centres of globalcompanies to India. 28The Government of India is taking initiatives to strengthen infrastructure for conductingR&D in the country. Setting up of National Automotive Testing and R&DInfrastructure Project (NATRIP) is one of the largest and crucial initiatives takenin the automotive industry to create a state of the art testing, validation and R&Dinfrastructure in the country. 2926) 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 Ministryof Heavy Industries and Public Enterprises (2008)22


In 2003, the Indian automotive industry in collaboration with the academia setupthe Core group on Automotive Research and Development (CAR). The mandateof this group is to identify new technologies and develop world class automotivesystems in India for domestic use and for exports. Embedded control systems,Telematics, Hydrogen and Alternate Energy Technologies, Low Cost Safety etc arethe sought after topics currently.Future outlookThe automotive components manufacturing industry is showing tremendous potentialto grow and attain global proportions within ten years. The vast investmentsbeing made by foreign and domestic companies show promise of emergence ofIndia as an automotive components manufacturing hub. Despite stiff competitionfrom China and Thailand, India is well positioned to leverage the opportunity toproduce high quality components where it can offer end to end services from designto manufacturing.The entry of global majors in this industry will bring stricter regulations with it andhelp organize the market further, by removing the obsolete small time manufacturersor merging the small manufacturing units. Consolidation of the industry therefore,is gaining momentum which will also help to solve the problem of counterfeitproducts manufacturers.It is expected that the world production of automotive components will be USD1.7 trillion by the year 2015. Out of that about USD 700 billion worth of componentswill be outsourced to LCC countries. If India targets to get 10 per cent of thatit would mean exports of 70 USD billion. Further, it is also expected that the sizeof the after-market sector will also be USD 5 billion. If India is able to achieve theestimations made by Ministry of Heavy Industries and Public Enterprises, India’sshare in world components trade could increase from approximately 0.9 per cent in2005–2006 to more than 2.5 per cent by 2015.Due to the growth in the automotive industry overall, growth in engineering servicesindustry is also expected to develop and achieve a turnover of more than USD2 billion. Finally, the size of the automotive components manufacturing industry isexpected to reach USD 40–45 billion by the year 2016. 3030) Reference has been made to Ministry of Heavy Industries and Public Enterprises (2006b)23


However, prospects of the industry are not expected to brighten substantially unlessthere is a strong and continuing upward trend in the automotive industry bothglobally and domestically. The long term prospects depend on how effectively thedomestic industry is able to cope with the demands of the international automotiveindustry. Further, technology will play a key role for automotive components manufacturersto be able to meet international quality and environmental standardsand thus remain competitive in the global arena.24


ReferencesAhya, C, A Xie, S Roach, M Sheth and D Yam (2006), India and China: New Tigers of Asia Part II,Morgan StanleyAutomotive Components Manufacturing Association (2007), Engine of Growth Driving the IndianManufacturing Sector, Automotive Components Manufacturing Association, New DelhiAutomotive Component Manufacturers Association and McKinsey (2006), Vision 2015: For the IndianAutomotive Components Industry, Automotive Component Manufacturers Association and McKinseyChauhan C P (28th May 2008), “Volkswagen to source auto parts from Minda”, The Economic TimesCygnus Business Consulting & Research (2007), Industry Insight: Indian auto components,Cygnus Business Consulting & ResearchIndiacar Private Limited (2nd September 2008), Indiacar Private LimitedIndian Brand Equity Foundation (October 2007), Auto Components, Indian Brand Equity FoundationLuthra S, R Mangaleswaran and A Padhi (2008), When To Make India A Manufacturing Base,McKinsey & CompanyMinistry of Heavy Industries and Public Enterprises (2008), Annual Report 2007–2008,Department of Heavy Industry, New DelhiMinistry of Heavy Industries and Public Enterprises (2006a), Annual Report 2005 -2006,Department of Heavy Industry, New DelhiMinistry of Heavy Industries and Public Enterprises (2006b), Automotive Mission Plan: A Mission forDevelopment of Indian Automotive Industry, Department of Heavy Industry, New DelhiMinistry of Heavy Industries and Public Enterprises (2006c), Report of Working Group On AutomotiveIndustry, Department of Heavy Industry, New DelhiMinistry of Heavy Industries and Public Enterprises (2000), Annual Report 1999 -2000,Department of Heavy Industry, New DelhiMinistry of External Affairs (11th April 2008), ITP Division, New Delhi25


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 DelhiNational Automotive Testing and R&D Infrastructure Project (June 2007), Driving India into theFuture Volume II, NATRIP, New DelhiThe Economic Times (10th September 2007), “Global auto component companies look for JVpartners”, Mumbai26


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