Indian Auto Ancillary - Feb 07

Source: http://www.rediff.com/

Dtd: 22^nd Feb 07

Indian Auto Ancillary

Key Positives

Huge potential: Global auto components market is worth over US$ 1 trillion and, considering India's market size, which is just 0.8% of the total market size, there exists tremendous growth opportunity for the domestic auto players to exploit. Having said that, the benefits will vary for Indian companies. We believe that players that have demonstrated their technical competence and have developed necessary scale are likely to benefit from global outsourcing opportunities. To give an example, around 75% of the total exports were to original equipment manufacturers (OEM) or TIER-1 players in 2006 as compared to around 35% in early 1990s.

More than cost arbitrage: Due to cost related pressures on global auto players and Tier-1 suppliers, a lot of them have started outsourcing components from low cost countries like India, China and some of the Latin American and ASEAN countries. However, the technical capabilities of the Indian players have given them the edge in high precision and critical activities. The industry, which exported components worth over US$ 1.8 bn in 2005, is projected to grow at an impressive CAGR of 34% between 2005 and 2014. It is expected that the total exports will touch US$ 25 bn by 2014.

Learning from the MNCs: The entry of global players such as Ford, GM, Toyota and Honda into the Indian market has allowed the Indian manufacturers to work with these players on global production, quality and delivery systems. It has also helped the global players to see for themselves the evolution of many auto components manufacturers and they are therefore now entrusting them (Indian companies) with more work.

IT advantage: Thanks to the country's IT advantage, the industry is capable of becoming a full-fledged service provider (research, design, development, testing) to global OEMs and thus score over other low cost countries like China. This, combined with low cost quality manpower strengthens our stand in the global arena.

Key Negatives

Lacking economies of scale: Despite being around 60 years old, the domestic auto ancillary industry is even behind countries like South Korea, Brazil and Mexico in terms of production and sales, thus depriving it the benefit of economies of scale. This makes it difficult for companies to invest extensively in R&D and development, a key competitive tool in the global market. Apart from this, the industry is highly fragmented, which also restricts the Indian players to develop scale (except for few players). Currently there are around 500 players (organised sector), which when compared to the total turnover of the industry indicates the fragmented nature of the same.

Competitive threats: Though Indian players have demonstrated their technical competencies, countries like China can spring in surprises in the long run considering the fact that with global auto players increasing their presence in China, the next logical step would be to rise up the value chain (high end auto ancillaries).

Increasing FTA: The growing number of FTAs (Free Trade Agreements) that are being signed by India with ASEAN countries is likely to hurt the domestic players as they pay a relatively higher excise duty of around 25% as compared to 1%-10% being paid by their ASEAN counterparts.