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Auto Component Manufacturing: Newer Opportunities

Indian auto component manufacturing is new success story. Buoyed both by domestic and international demand, the sector is poised to attain newer growth dimensions. An OEM Update exclusive report.
 
The Indian auto component sector has been on a roll. Sales of automotive vehicles have crossed the 10 million mark. Riding on this growth and the outsourcing wave sweeping the developed countries, the Indian auto component manufacturing industry had touched the $ 15 billion mark, growing at a CAGR of about 30 per cent between the year 2002-03 and 2006-07. Projections by the automotive components manufacturing industry indicated that, even if the market continued to grow at the rate of modest 13 per cent CAGR, the industry could touch $40 billion by 2015-16.
 
Exports of auto components had touched $2.9 billion growing at a CAGR of 40 per cent between 2002-03 and 2006-07. The target set is to reach $20 billion by 2015-16. Investments in the auto components manufacturing industry were growing at a CAGR of 22 per cent and the sector has attracted cumulative investments during the preceding six years.
 
Current Scenario
The World is yet to fully recover from recession. Led by the recession, vehicles sales have been dropping so have been sales of auto components.
 
Original Equipment Manufacturers have been resorting to periodic shutdowns of plants and working weeks are being cut down by half, expenditure plans have been shelved. However, there are indications that the global market is showing signs of revival.
 
Nonetheless, the Indian market story seems pretty much intact led by sound demand fundamentals. However, it would require to be seen that how things will pan out in the next 2-3 years.
 
Preferred Sourcing Base
India has already established and consolidated its position as a preferred global sourcing base for auto components and small cars. Several global auto majors and tier-1 component manufacturers have already made India their global research and development, manufacturing and exports base. With marquee names such as Ford , Suzuki, Hyundai, Diamler-Chrysler, General Motors, Volvo, Fiat ,Toyota, Volkswagen, Renault, Nissan, Honda, Delphi, Visteon, Timken, Bosch, Cummins, Tenneco and Deutz already in the clients list today it is more a question of who is not there rather than who is already there.
 
Almost 80 per cent of India’s exports today go to the developed, quality conscious markets such as the United States, Europe and Japan – 50 per cent of this is to the original equipment manufacturers and tier-1 suppliers.
 
Thanks to Maruti and Hyundai, India already has certain level of built in competence to develop quality components at low cost. This combined with product development skills and uniquely high concentration of small cars, has consolidated India’s positioning as a preferred hub for components and small cars.
 
Today, India is a global sourcing hub for cars and auto components and global sourcing from India expected to reach $20 billion by the year 2014. Even, the global recession could not take away India’s unique advantages such as proximity to key markets, cost savings, availability of raw materials locally, capability to meet stringent quality and technical standards and availability of skilled manpower.
 
Quality Standards
Thanks to the exposure to global standards, practices and association with global players; many component manufacturers in India today can match the ‘best in business’ in quality standards and technical capability. India has already won the Deming Quality Award (regarded as the Nobel Prize for Quality) nine times. For the organized sector today, QS/ISO/ OHSAS/TS certification is a norm rather than an exception. Companies also embraced global best practices such as six sigma, lean manufacturing and total quality management and invested substantially to enhance their capabilities.
 
Action Areas
However, quality upgrades (or the lack of it) continue to be an issue with the bulk of component manufacturers, especially those in the unorganized sector. While at one end of the spectrum India has quality systems certified manufacturing units which are single source of global supplier for leading Original Equipment Manufacturers, at the other end it has manufacturers whose quality infrastructure and systems are best rudimentary and way below global standards.
 
Indian companies still measure their rejection rates in percentages, while the World has moved to parts per million (PPM). Defect rates in India even among the better suppliers are in the range of 1000-2000 ppm as against the Japanese average of 100-200 ppm as per AT Kearney survey. So the companies can use this opportunity to leverage their experience and expertise in IT, to enhance their quality and design and engineering capabilities and help the smaller unorganized sector players clean up their act and move up the value spectrum.
 
Enhancing Capabilities
Indian component manufacturers are increasingly building their design and product development capabilities. Investments in R&D are increasing and today companies have in-house laboratories which can carry out analysis and simulation, engineering, animation, modeling, drafting and tooling design.
 
However, product development continues to be a weak link in the chain. Historically product design has been driven out by OEM’s, the component manufacturers have at best been secondary participants in the endeavour. The pace of technology transfer and assimilation, especially in the case of contemporary and high end models (multipoint fuel injection system, catalytic converters and automatic transmission have therefore been slow and confined to the tier-1 players.
 
Can the companies utilize this opportunity and try and develop some engineering capabilities, either on their own or through more inclusive joint ventures and technological collaborations with global OEM’s and tier-1 component manufacturers? Can they explore building depth into their product development superstructure, by daring to design and development capabilities to tier-2 and tier-3 players?
 
Bulk of India’s exports involves low and medium technology and labour intensive products (except in case of few large players (who have strong research and development in house). In the changed situation even without the benefit of China like mandate that stipulates local partnership and R&D , can the Indian auto component manufacturers make the MNC auto majors realize that the sharing their high end technologies with them is in their best interest? Can the industry use this opportunity to start making conscious and concerted efforts to move up to the value chain and nudge its way into high end of technology spectrum?
 
Selective Diversification
By design or by default, many companies continue to be dependent on specific vehicle/ product segments or a handful of big ticket customers. Maybe given the supply pressures and perpetually overbooked order books still a while ago , they cold not do anything about it.
 
So can they use this chance and try to get out of excessive dependency situations and balance out their risk exposure, through selective diversification across the customer products segments and geographies. Now that the industry is already in a strong footing with tier-1 players can it expand it’s reach to the tier-2 and tier-3 players (such as Cummins)?
 
Fake Components
Fake components are a thriving industry, growing at about 35 per cent a year. In addition to stealing almost about a third of the organized sector’s market share, it causes big damage to brand equity and margins.
 
Owing to weak law enforcement systems and a legal lacuna (manufacturing fake products is a civil and not a criminal offence); the industry has so far been able to do little to tackle this menace. Can the industry use the opportunity to put in place an air-tight intellectual property rights structure?
May a concerted public awareness campaign backed by strong IPR regime finally help the industry resolve the counterfeit products issue?
 
Competition
China continues to be the main competitor in the global auto components outsourcing market. Backed by budgetary allocations from their government and huge subsidies on exports, the so called Chinese state owned enterprises continue to be a threat to India’s aspirations in the global arena. India’s share of the global auto components trade in 2007 stood at a low of 0.4 per cent, as against 1.2 per cent in the case of China.
 
Owing to fluctuating raw materials prices, power costs and higher taxation and infrastructure costs, costs in India are still higher by 15-20 per cent, when compared to countries like China and Thailand. There is also a threat from countries like Argentina, Brazil, Turkey and Mexico. The industry, the manufacturing associations and the government should together thrash out a tactical plan to compete against these countries, in terms of quality, delivery and pricing.

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