AUTO COMPONENTS Auto components industry is expected to grow steadily with growth in auto industry and initiatives taken by the government. This report gives a brief analysis of the role of SMEs in industry and assessment of the industry trends along with key success factors, opportunities, challenges, future outlook and much more for SMEs in India. AUTO COMPONENTS Who is driving it: SMEs? sookshm.co.in 0
Contents ABOUT THE AUTHOR... 2 EXECUTIVE SUMMARY... 3 INDUSTRY OVERVIEW... 4 PROFITABILITY... 5 AUTOMOBILE SUPPLY CHAIN... 5 GEOGRAPHICAL DISTRIBUTION... 5 EXPORTS... 6 GOVERNMENT INITIATIVES... 7 OPPORTUNITIES FOR SMEs... 8 CHALLENGES FOR SMEs... 9 WAY FORWARD... 10 sookshm.co.in 1
ABOUT THE AUTHOR Rohan Agarwal has 2 years of experience in project management in Realty sector. He has keen interest in Finance and Operations area and is currently pursuing MBA from International Management Institute (IMI) New Delhi. He is a graduate in Civil engineering from Delhi Technological University Kumar Rishi is a Post Graduate in Maekting from IMT Ghaziabad and a Mechanical Engineer from Thapar University, Patiala. He has experience in auto component industry and market research. Vyjayanta Kashyap is a Business Strategy and Management Consulting Professional with experience across industries and geographies. He has hands on experience in structuring Corporate Strategy for organization with wide range of verticals, formulating Global Business Expansion strategy and Go-to- Market strategy. He is an MBA from AIM, Philippines and is currently running Sookshm Management Consulting Firm catering to Indian SME's sookshm.co.in 2
EXECUTIVE SUMMARY Auto component industry in India surpassed the target set by AMP (Automotive Mission Plan) 2006-16 by registering a turnover of USD 39 billion in 2015-16 as per ACMA and Industry grew at CAGR of 4.95% from FY 08 to FY 16. This sector is marked by presence of large number of unorganized players and small number of organized players. Market is expected to grow to USD 200 billion by 2026. Its demand is driven by Domestic OEM sales, aftermarket and exports. For understanding the structure, Auto ancillary industry in India can be divided into 7 broad categories: Engine part, Drive transmission & steering, Body & Chassis, Suspension & Braking, Equipment, Electrical Parts and Others (sheet metal, fan belt, etc.). The Indian auto industry has evolved around three major clusters: Mumbai-Pune-Nashik-Aurangabad (West); Chennai-Bangalore-Hosur (South); and Delhi-Gurgaon-Faridabad (North). While majority of suppliers (90%) are having positive EBIT, only 36% (one-third) of automotive components companies are making economic profit (EP) which drops to 29% if we consider other sectors as well. Indicating the thin margins the auto component sector is operating on. Hence, need for efficiencies and cost reduction is crucial for SMEs. Sector needs to move towards high EP if it wants to attract global investments. As per Automobile Component Manufacturers Association (ACMA) estimates, exports of automobile component from India are estimated to reach USD 70 billion by FY 2026 from USD 10.8 billion in FY15-16. Exports of auto components in India increased at a CAGR of 11.31 per cent, during FY09-FY16, with the size increasing from USD 5.1 billion in FY09 to USD 10.8 billion in FY16 as per IBEF. Major export markets by volume share in FY 16 were Europe (36%), Asia (25%), North America (25%) and Africa (6%). US being top destination for exports, accounting for almost 24% of exports. Government has brought in various policies, Make in India initiative and provisions in Union budget 17 to help the sector in growing through Motor Vehicle Act, Automotive Mission Plan (AMP) 2026, implementing Faster Adoption & Manufacturing of Electric Hybrid Vehicles (FAME) till 2020, setting up NATRiP (National Automotive Testing and R&D Infrastructure Project) centers and 100 per cent FDI in the sector under automatic route. Also external factors such as implementation of BS-VI standards by April 2020, price gap between Petrol & Diesel PVs would expand, Global demand was impacted by macroeconomic slowdown and political volatility which has created uncertainty in the market. Opportunities are plenty for the manufacturers in untapped market like the Northeast region of India, High-value sports and luxury motorbikes which boast fat margins, Developing and manufacturing cost efficient powertrain as need for e-vehicles arises and Global active safety market also presents huge potential. But there are various challenges which Indian SMEs need to overcome such as entry of global players, high dependence of exports on US and European market, Share of Diesel Vehicles in the industry declined to 44% from 58%, Lack of proper infrastructure and shortage of skilled technical as well as managerial manpower. The way forward for the SMEs and industry as a whole can be to develop capabilities and take advantage of the new technology like 3D printing coming up. Also, manufacturing needs to keep pace with fast changing regulations and demand patterns such as BS VI norms, electric vehicles, focus on safety to sustain in market. Making supply chain smart is also as integral part for the success. sookshm.co.in 3
INDUSTRY OVERVIEW For the year 2015-16, auto component industry surpassed the target of USD 28 billion USD 32 billion set by AMP (Automotive Mission Plan) 2006-16 by registering a turnover of USD 39 billion. Revenues have risen from USD 26.5 billion in FY08 to USD 39 billion in FY16 at a CAGR of 4.95 per cent during FY08-16. The total market size is estimated to grow to USD 200 billion by 2026. There were about 10000 unorganized players vs. 700 organized players in the sector in FY 15. Although lesser in number, the organized sector comprises of 85 % of total industry turnover in FY15. For auto ancillary industry, demand can be broken down into Domestic OEM sales (54% of revenues), aftermarket/replacement (17% of revenues) and exports (29% of revenues) in FY 15. Auto ancillary/components industry in India can be divided into 7 broad categories as given in figure-1. And if we see the market production volumes as shown in figure-2 (category wise), then about 50% of market is occupied by engine parts and drive transmission and steering parts. Vehicle production in India is estimated to reach around 4.25 Crore units by FY 2021 from about 2.32 Crore units in FY16. Vehicles include passenger vehicles, commercial vehicle and 2&3 wheelers. Tractor sales in India are estimated to grow at CAGR of 8% to 9% in the next 5 years, increasing India's market potential for international brands. Figure-1: Structure of Auto component sector sookshm.co.in 4
AUTOMOTIVE SUPPLY CHAIN Supply chain is crucial to every industry and automobile components is not any exception. Primary goals of supply chain have changed with times, from reducing operating costs and overall inventory levels, to concerns of how to improve customer service and speed of product delivery to markets. A typical vehicle contains approximately 20,000 components with about 1000 sub-assemblies or modules. The supply chain includes multitude of Tier 1, 2 and Tier 3 suppliers or manufacturers with many assembly operations and several dealerships which can be seen in figure-3. Toyota s Production System cherishing lean thinking has long since been an industry benchmark. GEOGRAPHICAL DISTRIBUTION The Indian auto industry has evolved around three major clusters: Figure-2: Production volume category-wise PROFITABILITY Is Auto components sector lucrative for SMEs? Economic Profit (EP) is not merely accounting profit. EP is the difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. Opportunity costs are the alternative returns foregone by using the chosen inputs. Majority of suppliers (90%) are having positive EBIT but only 36% (one-third) of automotive components companies are making EP which drops to 29% if we consider other sectors as well for the period of 2011-14. Mumbai-Pune-Nashik- Aurangabad (West): Bajaj auto, Fiat, Force motor, John Deere, Mercedes Benz, Volkswagen, Skoda and TATA motors Chennai-Bangalore-Hosur (South): Ashok Leyland, BMW, Caterpillar, Ford, Hyundai, Renault, TVS, Nissan, and Royal Enfield Delhi-Gurgaon-Faridabad (North): Maruti Suzuki, Hero Moto Corp, Honda motorcycles, Honda Cars India, JCB, Yamaha, Suzuki motorcycles, ICML sookshm.co.in 5
Figure-3: Auto Components Supply chain EXPORTS As per ACMA estimates, exports of automobile component from India are estimated to reach USD 70 billion by FY 2026 from USD 10.8 billion in FY15-16. Top 10 countries for export can be seen in table-1. Table-1: EXPORT DESTINATIONS: TOP 10 IN % USA 23.59 THAILAND 3.18 GERMANY 6.96 UAE 3.15 TURKEY 6.22 FRANCE 2.99 UK 5.43 BRAZIL 2.62 ITALY 3.86 MEXICO 2.59 potential domestic sales as well as exports in 2020. See figure-4. Owing to reduced demand in the domestic OE (original equipment) segment as well as robust export growth, the share of exports increased from 24% in FY13 to 29% in FY15 primarily at the expense of domestic OE demand share. Indian automotive exports have high dependence on US and European market, which together accounts for about 60% of overall auto component exports from India. Exports of auto components in India improved from USD 5.1 billion in FY09 to USD 10.8 billion in FY16 at a CAGR of 11.31 per cent. Major export markets by volume share in FY 16 were Europe (36%), Asia (25%), North America (25%) and Africa (6%). Both domestic and export markets are almost similar in terms of potential share by different product types. For example, Engine & Exhaust components, along with Body & Structural parts, are expected to make up 50 per cent Figure-4: Export market (Est. FY 20) sookshm.co.in 6
GOVERNMENT INITIATIVES Automotive Mission Plan (AMP) 2026 outlines a target of fourfold growth in the automobile sector in India over the next ten years. It is estimated to generate an additional employment of 65 million. And contribute 12% of India s GDP by 2026. Action plan includes auto fuels and emission norms, safety regulations, Inspection and certification regime, End of life policy and trade policy. NATRiP (National Automotive Testing and R&D Infrastructure Project) centers have been set up to enable the industry to adopt & implement global performance standards. Focus on providing low-cost manufacturing and product development solutions. Funds worth USD 200 million to modernize the auto components industry by providing an interest subsidy on loans and investment in new plants and equipment. Export benefits also provided to intermediate suppliers of auto components against the Duty Free Replenishment Certificate (DFRC). Planning to implement Faster Adoption & Manufacturing of Electric Hybrid Vehicles (FAME) till 2020 which would cover all vehicle segments, all forms of hybrid and pure electric vehicles. India has set an aspiring target for 2030 to electrify 100% of vehicles on road. With an aim to achieve 6-7 million units in sales of hybrid and electric vehicles each year from 2020 onwards. 100 per cent FDI has been allowed under the automatic route. Opportunities and challenges created by FDI will be discussed in further sections. With the launch of Make in India initiative, the government is expected to vitalize a substantial investment in the auto component sector with initiatives like exemption from basic customs duty on lithium-ion automotive batteries that are used in the manufacture of hybrid and electric vehicles. Motor Vehicles (Amendment) Bill 2016 has been passed in 2017 and is planned for full implementation to boost the road transport sector, mainly in passenger segment. And government is required to frame national transportation policy for road transport under the amendment. sookshm.co.in 7
OPPORTUNITIES FOR SMEs Various government initiatives discussed earlier provides a gambit of opportunities for SMEs in India. 100 % FDI in the sector has enabled SMEs to partner with firms having required capabilities to meet the ever changing demands of customers. New technological changes in this segment include introduction of turbochargers. Turbocharger market is expected to grow at a CAGR of 14% during FY16-20. In India, turbochargers are present in over 90% diesel vehicles, however its penetration level in petrol vehicles is low. So, SMEs can tap the opportunity in components required in petrol segment. High-value sports and luxury automobiles boast fat margin, yet global market leaders such as Harley- Davidson, BMW and Ducati are not aggressively investing in the Indian market. This leaves an opening for domestic OEMs. For Ex- Mahindra & Mahindra has taken 51% stake in Peugeot Motorcycle. This creates an opportunity for suppliers of these OEMs to venture into higher margin luxury automobile segments. Global active safety market is expected to grow to USD 37 billion by 2020 at CAGR of 8% from USD 25 billion in 2015. Active safety includes Parking warning, parking camera and tyre warning pressure. This can be a good opportunity for Indian manufacturers like SGS India, etc. 928 MNC s have set up 1,165 R&D centers. India accounted for almost 40 per cent of the total globalized engineering and R&D centers around the world in 2015. Thus, SMEs can partner with the firms having such capabilities as supply partners Government has decided to catapult directly to norms complying with BS-VI standards by April 2020. As per estimates, auto and auto components industry in India need to invest USD 10 billion to manufacture BS VI compliant cars. Generally two engine fitments will be required for up-gradation of passenger cars to BS-VI norms: Diesel Particulate Filter (DPF) - For decrease in PM in diesel vehicles and Selective Catalytic Reduction (SCR) Module - For decrease in NOx emissions. This presents a big opportunity for SMEs involved in engine production, fuel injection systems and emission control/ exhaust systems to partner with firms possessing capabilities for complying with BS-VI norms and take advantage. sookshm.co.in 8
CHALLENGES FOR SMEs Global players entering the Indian market because of FDI allowed in the sector is expected to intensify competition in sub-segments such as gears and clutches. High dependence of Indian automotive exports on US and European market, which together accounts for over 60% of overall auto component exports from India. Recent political volatility in countries like US make Indian manufacturers highly vulnerable. They would need to have back up plan for it. Increasing imports from China are on the rise, posing threat to Indian SMEs. Lack of proper infrastructure, support and guidance hinders the SMEs in bringing down costs. SMEs need to focus more on systems & efficiency to become more cost competitive. Like many other industries in India, auto industry is also facing severe shortage of skilled technical as well as managerial manpower. This challenge becomes more daunting because of lack of adequate training infrastructure. There is also an urgent need to improve the quality of skilled and semiskilled manpower working in the auto industry. Standards for emission are getting incrementally stricter for diesel segment as compared to petrol vehicles in BS VI norms. Technology for former is expected to go through significant up-gradation both within the engine and the exhaust system. Thus, price gap between Petrol & Diesel Passenger Vehicles would expand further thereby affecting the demand for diesel Passenger Vehicles. Global demand was impacted by macro-economic slowdown, slowdown in M&HCV sector in US and uncertainties brought by emission scandals by large multinationals like Volkswagen. sookshm.co.in 9
WAY FORWARD With rising income levels in India, automotive market is expected to grow steadily translating into demand for ancillary segment. India is set to become global outsourcing hub with several foreign manufacturers such as Honda, Ford, etc. planning to invest in the market. Going forward SMEs will need to consider the following, if they want to grow and sustain in the market: As BSVI implementation will increase the cost for 4 wheelers, 3 wheelers and 2 wheelers, optimization & efficiency are needed for cost reduction by Indian manufacturers. Connected cars and infotainment are the future. With additional features like parking assistance, driver warning systems, weather and traffic reports, and music streaming, connected cars promise to make driving more safe, convenient and enjoyable. Thus, in long term view, SMEs might partner with firms to take advantage of the opportunity. OEM-supplier co-development and innovation can help greatly in reducing costs and increasing efficiency of supply chain. Effective application of lean techniques will help meet evolving business dynamics and make supply chain smart. Sustainability for achieving competitive differentiation through green supply chain practices will impact the functioning of Indian automotive supply chains. Significant advances have been made in 3-D printing (or AM, additive manufacturing) over the past decade. The freeform capabilities of 3D printing and drastic reduction in designto-final production time will allow manufacturers to produce complex, high-performance parts for end use. Tier 1 and tier 2 suppliers should look at exploiting capabilities along path to serve consumers at locations closer to end use and reduced inventory levels. sookshm.co.in 10
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