The industry lends modest support to industries such as copper, steel, aluminium. In effect, the fortunes of auto ancillaries industry are inextricably linked to the performance of its dominant customer—the automotive industry. The latter, in turn, provides stimulus through its backward and forward linkages with various other industries and services such as oil, insurance, financing, and roads.

Size 

·         The auto component industry investment outlay is around US $ 4,400 million during the FY 2005-06. 

·         India has a small, 0.4% share of the global Auto Components Industry. 

·         The auto ancillary (or auto components) industry (including the unorganised sector) had an estimated output of around US $ 10,000 million during FY2005-06.

·        While auto component exports grew by 40 percent in 2004-05 to a level of US$ 1.4 billion, it registered a growth rate of 46% in 2005-06 and crossed US$ 2 billion mark. A high growth of over 40% is expected to materialise in 2006-07 as well. Total export was of the order of Rs. 6237 crore during the year 2004-05 and Rs. 9127 crore during the year 2005-06.

·         The Indian auto components industry employs around 0.5 million people. The auto ancillary (or auto components) industry (including the unorganised sector) had an estimated output of around US$ 9-10 bn in 2006 accounting for around 1.3% of India’s Gross Domestic Product (GDP). 

·         The size of industry is relatively low by global standards, and there are close to 500 players in the organised sector and over another 10,000 firms exist in the unorganised sector that operates in a tier-format. A large number of these unorganised units are located in the northern states of Delhi and Haryana.

Structural Characterstics

·         The Indian auto ancillaries industry is a combination of different product segments, with each segment having a different market structure and being highly competitive. The industry has the resources to manufacture the entire range of auto products required for vehicle manufacturing, approximately 20,000 components.

·         The Industry has many structural characterstics which work to its advantage:

·         Well developed, globally competitive Auto Ancillary Industry

·         Competitive advantage arising out of low-cost advantage mainly on account of the availability of low-wage

·         High-skilled manpower; and high quality & productivity through the adoption of quality/production concepts such as TQM, TPM and Six Sigma

·         Established automobile testing and R&D centres and opportunity to set up R&D and Engineering centre

·         Among the lowest-cost producers of steel in the world

·         Global hub for manufacture of small cars

·         Potential for investment of over $13 billion in the next 5 years in the automobile sector

·         Almost all the prominent players in the Indian auto ancillaries industry in the organised sector have links with at least one international player.

·         Though the industry is fragmented, fragmentation is fast decreasing with concepts such as tierisation & vendor rationalization coming in vogue under pressure from OEM to cut costs.

·         Around 4% of the companies operating in the auto component segment cater to 80% of the demand emanating from OEMs. Within the unorganised segment, apart from supplying in the aftermarket, a number of players are also involved in job work and contract manufacturing.

·         The composition of exports in terms of the proportion of OEM and aftermarket has 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 three years. From an import of US$ 250 mn in FY03, they have gone up to US$750 mn in FY06.

·         Most of these manufacturers use primitive technologies and buy second-hand machinery, sometimes at near-scrap value. These units usually buy sub-standard raw materials, which, in turn, lower their costs of production.

·         To lower freight charges and facilitate faster delivery, auto components manufacturers are located largely around their OEM customers. The Northern region has the maximum number of auto components manufacturers with the share at 41% followed by te Western region, with 32%.

Policy

·         The National Auto Policy aims to establish a globally competitive automotive industry in India and to double its contribution to the economy by 2010. With the projected sustained growth in the vehicle industry, the domestic demand for components is estimated to touch US $ 20 billion by 2015.

·         The sectoral FDI policy permits 100% FDI through the automatic route.

·         The implementation of the Value-Added-Tax is also a likely positive for the automotive industry (and subsequently the auto ancillary industry) as this will eliminate the cascading impact of prices.

·         The Annual Supplement (2006) to Foreign Trade Policy (2004-09) announced by Government in April 2006 of India introduced various measures to promote exports of auto components. To promote India as a hub of auto components, import of new vehicles by auto component manufacturers for R&D purposes have been allowed without homologation (i.e. testing for fitness on Indian roads required for import of new models of cars) so as to give the sector easier access to latest technologies.

 Innovation is the capital

As per the Global Competitiveness Report for the year 2005-06, India’s rank in competitiveness is still low, though on an inter-temporal comparision it has improved to 43. Growth in competitiveness is determined by the innovative ability of an organization. This innovation arises from institutional initiatives and the R & D productivity of the firms, shaped by policies and nature of local institutions. In the automobile industry, this requires the combined efforts of researchers, technologists, production engineers, business leaders and above all political systems. The major problems of growth associated with automobile industry are atmospheric pollution, and safety of the vehicle and passengers

 Outlook

·         Auto market expected to double in the next 7 years. Vehicle production expected to increase from 8.6 million vehicles in 2004-05 to 15 million by 2010-11.

·         Auto ancillary sector to continue grow on a fast track due to its low-cost advantage and their new found high quality & productivity with syncronised production systems with tierised channels.

·         The two major segments—Commercial Vehicles and Passenger Vehicles—are expected to report high production growth.

·         Major factors in the Indian auto ancillary industry growth will be sustenance of demand in the domestic market in the short term due to growth in GDP and IIP, and easy availability of bank credit. 

·         The buoyancy in manufacturing and services sector activities and the positive business confidence and expectations will be the likely drivers of the auto components sector growth. 

·         India is emerging as a preferred destination as a low cost-outsourcing base due to abundance of cheap skilled labour. 

·         Over the medium term, there may be a few Tier-I vendors servicing the OEMs, and Tier II and Tier-III suppliers in turn will service Tier-I vendors.

·         Recent past experience of Indian auto component manufacturers in working with global OEMs and Tier I suppliers makes them a trustworthy choice for their efficiency and quality. It would also help them in expanding to hitherto unexplored markets.

·         For effective tapping of the export markets, the general trend at present is for the large auto component manufacturers to establish manufacturing points near to the markets. 

·         The industry is therefore into setting up bases in other emerging economies, who are potential competitors, for instance, Sundaram Fasteners’ greenfield facility in Zhejiang and Bharat Forge’s 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.

·         However, Indian companies would need to operate at different scales and invest upfront in design, development and capacity, as well as require much higher levels of working capital for catering to the export market.

·         Hardening prices of key inputs such as steel could be significant risk factors impacting the margins in this industry. Such a risk can be minimised through value engineering, process improvements and better sourcing.

·         Volatility in crude oil prices and changes in interest rates continue to be the other key risk factors.

·         With technology changing at a fast pace, access to technology through collaborations or joint ventures with foreign players is likely to be a key success factor for this industry.

References: www.dnb.co.in; http://www.investmentcommission.in/ ACMA, Economic Survey

Annual Report 2006-07 Ministry of Heavy Industries and Public Enterprises, Government of India Department of Heavy Industry