AUTO COMPONENTS The Indian auto component industry is one of the front runners for grabbing the global

auto component outsourcing market, estimated to be worth US$700 billion by 2015.

The Indian automobile components industry has come a long way since the countrys economic liberalisation which opened up the sector in the early 1990s. From a quiet supplier of low-value components to the domestic aftermarket, the industry has transformed itself into a global hub for sourcing a range of high-value and critical automobile components. The industry is the darling of many global auto makers such as GM, Toyota, Ford, Volkswagen, etc., who source auto components worth millions from India. In fact, the industry is one of the front runners for grabbing the auto components outsourcing market estimated to be worth US$700 billion by 2015. However, the journey is not smooth. The industry accounts for only 0.4% of the US$1.2 trillion global components industry as against competitors like China (1.2%) and Mexico (5.9%). It is up against challenges such as lack of good infrastructure, increasing input costs, etc. which could impede its growth.

Current scenario Rising costs of automobile manufacturing in the West coupled with benefits of sourcing from India such as low cost (which saves the automobile manufacturers about 25 to 30%) etc. have been instrumental in driving Western automobile manufacturers to source auto components from India. Apart from the growing demand from the global markets, the domestic automobile market boosted by the tremendous increase in domestic demand, is also contributing to the growth of the auto components industry. The demand led to increase in production capacity. According to the Automotive Component Manufacturers Association of India (ACMA), domestic components production increased by 15% from 2004-05 to US$10 billion in 2005-06. It recorded a compounded annual growth rate of 20% between 2000 and 2005 and is expected to grow to US$18.7 billion by 2009. Meanwhile, exports increased by 28% in 2005-06 to US$1.8 billion from the previous year with Europe and North America respectively accounting for 36% and 26% of the total auto components exports from India.

The Indian auto components industry is one of the fastest growing manufacturing sectors which is both forward and backward integrated with other engineering and manufacturing divisions in the country. The industry has about 500 organised players (registered with ACMA) which account for more than 85% of the countrys production and another 5000 in the unorganised sector.

Early days Though the Indian auto components industry has been in existence since the early 1940s, the protectionist policies of the Indian government prior to the nineties and low volumes of production due to limited demand from the vehicle manufacturers in India hampered innovation and growth in this sector. Nearly 80% of the auto components were supplied to the aftermarket and the remaining to Tier 1 OEMs. As a result, the Indian component manufacturers were left far behind their global counterparts until the middle of the late 20th century. The first boost came in 1982 when the Government of India established Maruti Udyog Limited (MUL) and collaborated with Suzuki Motors of Japan. The government insisted on having at least 75% local content in the next five years. However, the local suppliers were in no position to meet the quality standards and specifications of MUL. Hence MUL entered into joint ventures with a number of Indian component manufacturers and started working with them closely. Suzuki launched development programmes and assisted component suppliers in upgrading themselves and in transfer of technology. Suzuki also asked a number of Japanese OEM suppliers to license technology or enter into JVs with the Indian component manufacturers. This improved the standards of a majority of the components manufacturers who were located around the MUL plant in Gurgaon, Delhi.

However, a major impetus came after the liberalisation of the Indian economy in the early 1990s. The abolition of licensing in 1991 and automatic approval given up to 51% foreign investment in the industry saw a host of foreign automobile manufacturers such as Hyundai, Toyota, General Motors, Ford, and DaimlerChrysler etc. set up their manufacturing centres in India. The components manufacturers willy-nilly went on to improve themselves to meet the standards of the foreign automobile makers to continue as their suppliers.

In this pursuit, component manufacturers embraced global best practices/standards such as Lean Manufacturing, TQM, Six Sigma, etc. They invested substantially to improve their production capacities and capabilities. They began using IT for design, development and simulation and achieved flexibility in small batch productions. This in turn propelled modernisation and induced dynamism in the industry. Some of them imported or borrowed equipment and technology from foreign companies while others forged alliances. For example, in 1992 when GM was closing a plant in the UK, Sundram Fasteners bought the equipment and relocated it to its plant in Chennai.

A number of component manufacturers have upgraded themselves to meet the ISO standards ISO 9000 (456 players) and ISO 14001 (129 players). Gradually, they learned to meet the technical standards of all global automotive manufacturers. However, it should be noted that a number of component manufacturers who were not willing to upgrade themselves perished.

The availability of cheap labour, raw materials, technically skilled manpower in abundance attracted a number of foreign manufacturers to India. Foreign manufacturers such as Volkswagen and Renault, which had no manufacturing plants in India, too started sourcing components from India. Initially, foreign manufacturers had some apprehensions about the quality of components made there. However, the standards achieved by some of the manufacturers soon removed any doubts regarding the quality of the components. Global auto component makers such as Delphi (a spin-off of GM), Visteon (a spin-off of Ford) started their offices in India to source components for their global operations which saw a gradual increase in the number of components sourced from India. This improved the exports and by 2003 auto components exports crossed US$1 billion mark from just US$273 million during 1997-98.

During the same time (mid and late nineties), Indian manufacturers such as Tata Motors, Mahindra & Mahindra joined the race to catch the growing demand from the burgeoning Indian middle class and helped increase domestic car production rapidly; the car production increased 17-fold between 1982 and 2000. As a result, the component manufacturers shifted their focus from supplying to the aftermarket to the Tier1 suppliers and OEMs. By 2006, Tier 1 OEMs market accounted for around 75% while the aftermarkets share was reduced to 25%.

On the prowl By early 2000s, some of the component manufacturers, having established themselves firmly in the domestic market, began attempts to make a global footprint. Manufacturers such as Bharat Forge, Sundram Fasteners began scouting for foreign companies. Some of the reasons for focussing on acquiring foreign firms were red-tapism and poor infrastructure (roads and ports in India) which delayed the export process. As clients were strict on deadlines, component makers turned to foreign acquisitions not only to circumvent such bottlenecks but also to move closer to global automobile manufacturers. Bharat Forges acquisition of German company Carl Dan Peddinghaus (CDP) in 2003 brought it closer to the top European car manufacturers such as Volvo, BMW, Volkswagen, Audi etc. and made it the worlds second biggest forging company. Further, Indian companies felt that having manufacturing facilities on foreign soil would bring credibility and respect along with access to new technologies. (Table I gives details of some of the acquisitions made by Indian manufacturers since 2000).

Government support Apart from starting Maruti and liberalising the Indian economy, Indian government has played a valuable part in the growth of the industry. The government has allowed 100% foreign equity investments in this sector and also freed it from manufacturing and imports duties, and securing licenses and approvals. Further, there is no local content regulation in the industry. The Ministry of Commerce and Industry, through the engineering export promotion council, has been involved in promoting exports of auto parts. The government has also been taking effective measures to improve infrastructure.

The road ahead Today, India has the potential to manufacture a range of automotive components (about 20,000 in number) - from fasteners to engine parts (Figure 1). Apart from the foreign demand, the domestic car production is also growing with sales expected to be about 10 million by 2009. The exports are expected to touch US$5 billion by 2010 and looking at the current growth, it seems very much possible. The sector has attracted US$18 billion in investments between 2000 and 2006 which includes about US$530 million in FDI. India, which currently accounts for just above 1% of the global auto components sourcing market, is expected to garner up to 3-4% by 2015. Indian component manufacturers are now looking at ASEAN countries to invest and expand their operations while Japan is keen on investing in India.

Given the scenario, though it looks like the Indian component manufacturers would take the world by storm, the reality is there are certain issues that could hamper the pace of the industrys growth. The FTAs (Free Trade Agreements) and RTAs (Regional Trade Agreements) signed with China and ASEAN countries are arguably in their favour. Trade agreements signed with countries like Thailand and China which already offer a number of incentives to their domestic players, are perceived to be a huge threat to India. The agreements are seen as the reason behind India losing out to these countries in gaining green field investments and are expected to hamper future investments in India. It is feared that this could severely dent Indias competitive advantage very soon.

The government reduced the peak import duty from 15% during 2005 to 12.5% in 2006. This increased the Chinese imports by three times to Rs.100 crores in 2006 from 2005. While the peak import duty could have been retained until some more internal reforms took place, the government cut it down further by 2.5% in 2007. The industry is facing about 18-20% cost disadvantage in the form of increasing raw material costs, power costs, higher taxation, infrastructure costs, etc. when compared to China and Thailand. With the increasing input costs and automobile designs getting changed frequently, components manufacturers are required to constantly invest to upgrade themselves and to add value. This has been a drag, especially on small and medium manufacturers who, in some cases, have been found wanting in terms of servicing huge orders due to lack of scale.

Given the hardships involved during the journey towards grabbing up a sizeable chunk of global automobile sourcing market, it remains to be seen whether the components industry will gear-up itself in the wake of ensuing action-packed years.

Keywords: Indian Automotive Components Industry, Automobile components, auto components outsourcing, Automobile manufacturers, Automotive Component Manufacturers Association of India (ACMA), Original equipment manufacturers, foreign automobile makers, Components manufacturers