Auto Ancillaries Sector Analysis Report

 The fortunes of the auto ancillary sector are 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.
 Margins in the replacement market and exports are higher than the OEM market. The
OEM market is very competitive and component manufacturers have to compromise on
margins to bag bulk orders. Moreover, delivery schedules and quality standards have to
be adhered to very strictly.
 Auto ancillary face pricing pressure from OEMs. In order to negate that these players
have a challenge of continuous cost reductions through innovations to stay innovative.
 The Indian economy demonstrated its resilience by absorbing dramatic change brought
in by demonetisation and introduction of GST and has regained its status as the fastest
growing major economy during the current calendar CY18.
 RBI's efforts to keep inflation in check. All growth drivers of the economy viz. public
and private capital expenditure, domestic consumption, exports, and foreign direct
investments continue to gain in strength.
 The auto-components industry accounted for 2.3% of India's Gross Domestic Product
(GDP) in 2017- 18. During 2017-18, 1.5 million people directly and 1.5 million people
indirectly were employed in the auto-components industry.
 The country's growth sectors are well charted – transportation, infrastructure and energy
efficiency; each of these is undergoing massive change driven by automation,
connectivity and digital transformation. With stability and good governance at the
center, India is on a sustainable growth curve. Change is an opportunity to shape the
future.
 The Indian auto-components industry has experienced healthy growth over the last few
years. The auto-component industry of India has expanded by 18.3% to reach at a level
of US$ 51.2 billion in FY 2017-18.

Porter's five forces model on Auto Anciliiary Industry

Threat of new entrants: Weak

It is difficult for new brands to enter the automobile industry which is because of the large
investment required. Initially, a quite huge investment will be required to set up the
manufacturing facilities, distribution network and to hire skilled staff. Another major barrier
is the level of competition from the existing brands. Unless a new brand brings an innovative
and differentiated product to the market, chances to gain a market share are low. Some
governments have applied high import taxes to discourage foreign brands. So, there are several
factors that minimize the threat from the new players.

Bargaining power of suppliers: Weak

The bargaining power of suppliers in the automotive industry is weak for most of them are
small players. Only few of them are significant in size. The threat of forward integration is
minimum from the suppliers for the reasons discussed in the first category. These suppliers
have to play per the rules set by the brands. the brands hold immense clout because the raw
material is always available in plenty and switching from one supplier to another is not difficult
for them. In this way, the bargaining power of suppliers is considerably low.

Bargaining power of buyers: Moderately strong

A large p[art of the buyers are the small individual buyers that buy single vehicles. However,
there are corporations and government agencies that buy fleets of vehicles. Such buyers are in
a position to bargain for lower prices. Whether small or large buyers can easily switch to a
new brand. There are no big costs involved in switching to another brand or to a alternative
mode of transportation. the buyers are price sensitive mostly and would switch to another brand
that offers lower prices. However, none of the buyers whether big corporations or individual
small buyers poses a threat of backward integration., Still, based on the overall picture their
bargaining power is moderately strong.

Threat of substitutes: Weak

There are several substitutes and alternative modes of transportation including taxis, buses,
trains and planes. However, none of them can provide the kind of accessibility and convenience
that owning an automobile does. Your own car will serve you round the clock but if you missed
a train or bus you have to wait for another. However, in case of the alternative modes you do
not need to worry for maintenance. Still, owning a car is both a matter of convenience and
prestige for most. So, the threat of substitutes is weakened. Still, there is some threat from the
substitute products where daily commuters may find it cheaper and easier to take a train or bus.

Competitive Rivalry in the industry: Very strong

The number of recognized and influential brands is low and the exit barriers very high. Any
brand trying to exit would have to bear very large losses. The level of customer loyalty is high
and while the industry is large, it has matured. This intensifies the competition or market share.
However, different brands target different market segments but yet they overlap. Brands
compete on the basis of price, design, quality, technology, customer safety and several other
points. Overall, competition in the auto industry is a strong force rather very strong.

Investment purpose

 The Passenger Vehicle Industry domestic sales grew at 8% during the year, as compared
to 9% in the previous year. The rise in fuel prices, inflation and an increase in interest
rates dampened slightly, the enthusiasm generated by the slew of new model launches
by leading OEMs.
 After a slow 4% growth last year, the Commercial Vehicle Segment bounced back
strongly with a 20% growth in domestic sales.
 In the 3/4 Wheeler market, domestic sales grew at nearly 12% compared to 6% last year.
Two-Wheeler sales have seen a robust growth at 15% compared to a modest 7% growth
last year.
 Revenues have risen at a CAGR of 6.8% from US$ 26.4 billion in FY08 to US$ 51.2
billion in FY18.
 Domestic OEM supplies contribute 55.9% of the industry turnover followed by exports
(26.2%) and domestic aftermarket (17.8 %).
 Exports of automobile components from India in FY18 stood at US$ 13.5 billion. As
per Automobile Component Manufacturers Association (ACMA) forecasts, automobile
component exports from India are expected to reach US$ 80 billion by 2026. The Indian
auto component industry aims to achieve US$ 200 billion in revenues by 2026.

Prospects
 India is expected to become the 4th largest automobiles producer globally by 2020 after
China, US & Japan. The auto components industry is also expected to become the 3rd
largest in the world by 2025.
 With the launch of "Make in India" initiative, the government is expected to vitalise a
substantial investment in the auto component sector. Auto component sector is expected
to invest around US$ 4.5 billion for upgradation of products & keeping up with the new
industry regulations.
 India's projected production is around 8.7 million passenger vehicles per year by 2020
(with most of them being compact cars).
 Many MNC's like Ford, Hyundai, Toyota & GM are launching new vehicle models due
to their earlier success in the Indian market.
 The auto-components industry is expected to follow OEMs in adoption of electric
vehicle technologies. The global move towards electric vehicles will generate new
opportunities for automotive suppliers. The mass conversion to electric vehicles may
generate a US$ 300 billion domestic market for EV batteries in India by 2030.