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Can Opportunity Reveal their Genius?
Buoyant car sales offer an Unprecedented Opportunity for The Indian The Auto-Component industry to ramp up its Investments and Innovation. Can they meet The Demand?
Issue Date - 17/03/2011
From its small beginnings in the 1940s to the spectacular growth over the last couple of decades, the Indian auto component sector has come a long way. In fact, the industry is one of the front runners for grabbing the global auto components outsourcing market estimated to be worth $700 billion by 2015. As India’s consumption story for cars is expected to remain strong, component manufacturers are gearing up to meet the challenges and demands set by the automobile sector. “The automobile industry is growing at a pace of 30% vis-à-vis the economy growth of 8-9%, so there is bound to be a correction sooner or later. However, the last three years have been full of surprises and we hope the growth will continue,” says Anil Gadi, Executive Director, Shriram Pistons. Car sales for fiscal year ending March 31, 2011 are forecasted to grow by at least 25% from a year earlier, according to the Society of Indian Automobile Manufacturers (SIAM).

According to the Automotive Component Manufacturers’ Association (ACMA), an industry body, the total passenger car production in the country will jump four times to reach nine million cars by 2020. On the other hand, the Indian auto component industry is expected to also grow by over four-fold to $113 billion by 2020. “India would be among the top five vehicle producing countries in the world by 2020,” says Vinnie Mehta, Executive Director, ACMA. A recent ACMA report puts the turnover of the auto component industry at about $26 billion in 2010-11, up 18% from $22 billion in 2009-10. The report states that 40% of the auto component industry is dominated by body and structural products, 20% by engines and exhaust, and 10% each by suspension and braking parts, transmission and steering parts, electronics and electrical and interiors.

However, the road to growth is not without hiccups. The Indian auto-component industry is up against challenges such as lack of good infrastructure, increasing input costs, et al, which could slow down growth. ACMA estimates that an investment of $35 billion must be made over the next decade to help car makers realise their targets. But the parts industry invested a measly $1.7 billion in 2009-10, half of the required rate.

Doubts over the sector’s ability to cope with the unprecedented demand have a strong basis. The second half of 2010 was characterised by long waiting periods at car dealerships of popular models. For instance, Maruti Suzuki Swift had a waiting period of over three month while the recently launched Polo from German car maker Volkswagen had a waiting period of over six months. Industry veterans ascribe the reason for the delays to component shortages, which adversely impacted the production cycle. Take, for instance, the case of utility vehicle maker Mahindra, which suffered a 10% production loss in the first quarter of FY 2010-11, mainly due to shortage of components like tyres, fuel injections and castings. At the other end, players like Maruti and Volkswagen were forced to keep consumers waiting because of the inability of their vendors to supply components as per schedule. Similarly, Volvo Eicher Commercial Vehicles also took a 20% hit in the production numbers, as their component manufacturers were not able to match pace with the orders.

Counterfeit components, mostly from China, pose another big problem. According to ACMA, the auto-component replacement market in India is infested with Rs.87 billion worth of counterfeit parts. The components aftermarket constitutes around 25% of the total auto-component market, which is valued at Rs.247.5 billion ($5.5 billion), according to data available with ACMA.

According to Srivats Ram, President, ACMA, “Considering a 10% excise duty and other taxes at 15%, the net loss to the government exchequer on account of counterfeit auto components is to the tune of $496 million.” The most commonly found counterfeit parts are filters, bearings, steering arms, tie rods, brakes and brake linings, bumpers, alternators, wipers and lamps.

ACMA feels that in the case of safety critical parts, there should be a push for adequate homologation to ensure safety. The industry umbrella body is now planning to persuade the government to make counterfeiting of auto components a cognizable and non-bailable offense. “There needs to be a law that covers the entire spectrum of spurious auto components, especially those related to manufacturing, packaging as well as selling,” says Ram. So far legislation has slow to respond.

The industry is also beset by the rising cost of raw materials. A report by securities firm Anand Rathi says that the cost of raw material has risen by 40-50% over the past 12 months and has taken away India’s low-cost manufacturing advantage. It adds that the price difference for steel works out to 18% in favour of China and on an average, Chinese products are at least 13-15% cheaper than the products offered by Indian component makers. “Rise in costs is a big reason for the rise in imports from China. We expect the momentum to shift towards the domestic industry as soon as raw material prices are under control,” says Gadi of Shriram Pistons.

“Component makers have invested in capacity expansion well in time and are now ready to meet the demands from the OEMs,” says Karl Slym, MD, GM India. The time is just right for components makers to support the heady growth of the automobile industry. They are making investments, but with the current state of affairs, it doesn’t look like an easy road ahead by any yardstick.

Pawan Chabra           

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