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Indian auto ancillary industry in top gear
By Dr. Uday Lal Pai
Exclusively for InvestorIdeas.com
posted January 03, 2007
Automobile ancillary industry has emerged as one of the India's fastest growing manufacturing sectors and a globally competitive one thanks to the success in car market and the spiraling demand from the domestic auto companies.
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The performance of auto ancillary sector is closely linked to those of the auto sector. Demand swings in any of the segments (cars, two-wheelers, commercial vehicles) have an impact on auto ancillary demand. Demand is derived from original equipment manufacturers (OEM) as well as the replacement market. Replacement demand accounts for close to 57% of total demand, while OEMs account for 27%, with exports accounting for the balance 16%.
According to the Indian auto component industry body ACMA the auto components industry in India is dominated by around 500 key players, which contribute more than 85 percent of India's production.. The automobile sector is cyclical and dependent on the growth of the economy and improvement in infrastructure. Factors like increased public spending, favorable interest rates and general improvement in per capita income points towards higher demand for automobiles in the future.
The domestic auto component sector - an integral part of the manufacturing business - is on the fast track, clocking 34 per cent growth in the past three years. This has been propelled by strong domestic demand and an indigenization drive. India has joined the billionaire club on the export front, riding on the outsourcing wave.
Performance
The Indian automotive component industry has witnessed a CAGR of 20 per cent in the last five years (between 2000-2005), according to a McKinsey-ACMA report on the Status of the Indian Auto Industry. In 2005, the auto components industry was worth over US$ 10 billion, which is expected to nearly double every four years, to 18.7 billion in 2009, and reach US$ 40 billion by 2014.
According to estimates by the Automotive Component Manufacturers Association (ACMA), domestic production increased by 17 per cent in 2005-06 to $10 billion, while exports jumped by 30 per cent to $1.8 billion. "The industry has grown at a CAGR of 20% between 2000 and 2005 with total output in value terms touching US$ 10 billion in 2005. Exports have grown at a much higher rate of 34% CAGR during the same period with output touching US$ 1.8 billion," say data published by independent market observers too.
The reduction in excise duty on small cars effected in the 2006 Budget had created positive market sentiment towards auto-ancillary units, especially the ones having exposure to small cars producers. The reduction in peak customs duty levels and the reduction in import duty on ferrous and non-ferrous metals should also provide some relief to the auto ancillary producers.
The Indian auto industry produces an estimated 9.7 million vehicles, propelled by a surging domestic demand, which has pushed the growth rate of the auto industry to 20% in the last couple of years. The domestic industry is set to grow manifold over the next few years as estimates point out that the Indian auto components industry will invest about $1 billion towards ramping up capacities and acquiring newer technologies every year for the next 10 years.
Exports
With global sourcing of components on the rise, exports as a percentage of total output is also increasing. The figure has grown steadily to 18 per cent this year, up from about 14.68 per cent in 2003-2004 and 12.9 per cent in 2001-02.
The positive trend in exports is only likely to strengthen further with ACMA setting an export target of $20-25 billion by 2015.
The industry is poised to jump from exports of US$ 1.8 billion in 2004-05 to US$ 5.9 billion in 2008-09. According to the Automotive Component Manufacturers Association of India, more than a third (36 per cent) of Indian auto component exports head for Europe, with North America a close second at 26 per cent.
"Auto component exports from India are expected to touch US$ 25 billion by 2015," said Rakesh Shah, Chairman, Engineering Export Promotion Council (EEPC). Exports of auto components from India have clocked a record compounded annual growth rate of 33% in the last 3 years, owing to a huge increase in sourcing of auto components from India by several developed countries. Many Indian companies are also snapping up plants and operations overseas, to gain direct access to global OEMs and expanding their product range, besides benefiting from outsourcing synergies.
Outsourcing
One of the sectors that has been surging ahead in the India outsourcing story, is auto ancillary. Exports of components from India as a percentage of total sector revenue are expected to nearly double over the next five years.
India continues to be a low-cost outsourcing destination for global auto companies, with its strong engineering skills. Sourcing parts from India is 10-20 per cent cheaper for American auto makers and about 50 per cent cheaper for European auto makers, according to an analyst. Exports, which at present constitute 15-20 per cent of the industry size of about $10 billion in FY06, are likely to reach 50 per cent in another five years.
According to estimates, India can achieve a 3-4 per cent share of the potential auto components sourcing market by 2015 given the country's strength in manufacturing. The growth in India would be driven by the 9-10 per cent expected growth in medium & heavy commercial vehicles, 15 per cent growth in cars, 15-17 per cent growth in two-wheelers and about 20 per cent growth in light commercial vehicles.
Huge business potential
Exciting times lie ahead for the Indian automotive component industry. The industry is transforming, and the boost in demand will see the emergence of several new players in the industry. The vast market for auto components, and the diverse products and technology involved ensures a place and role for many.
According to Baba Kalyani, chairman, Bharat Forge Ltd, the auto-component business is huge and what players like us from the developing world are trying to do is to get a part of that business. And that part will never be more than 20 per cent. But that 20 per cent is big business. The auto-component business that is favorable for India totals to some $380 billion. "Even if you get 10 per cent of that, it is $38 billion! It is a hell of a lot more than what we are doing as a whole country," he stated.
There are lot of positive factors - India has emerged as an outsourcing hub for auto parts for international companies such as Ford, General Motors, Daimler Chrysler, Fiat, Volkswagon, and Toyota. India enjoys a cost advantage with regard to castings and forgings. The manufacturing costs in India are 25 to 30 percent lower than its western counterparts. India's competitive advantage does not come from costs alone, but from its full service supply capability.
Besides the burgeoning demand from global auto majors, there is also the domestic car industry, which is growing at a spanking rate of over 16 per cent, driven by a rising consumer base and affordable loans. Auto sales within India are expected to touch 10 million by 2009 and Indian auto majors have registered a growth of over 24 per cent in vehicle exports in September 2006 alone. The industry displays tremendous potential in generating employment and boosting entrepreneurship in the country. The spate of new investment plans announced by global and domestic automobile manufacturers promises the emergence of India as a global hub for auto components.
Major Players
Asahi India
Bharat Forge
Exide Industries
Mico
Sundaram Clayton
Sundaram Fasteners
Sona Koyo Steering
Jay Bharat Maruti
Bharat Seats
Amara Raja Batteries
Subros
Motherson Sumi
Amtek Auto
EL Forge
TVS Autolec
Disclaimer
Dr. Uday Lal Pai is an independent columnist for this web site.
Dr. Uday Lal Pai may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
Dr. Uday Lal Pai is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.
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