Facing severe pressure to improve their bottom lines, auto makers in the developed markets are looking at India for their sourcing requirements.
The auto components industry, currently estimated at US$ 8.7 billion, is one of the hottest and fastest growing manufacturing sectors in India. After China, India is touted to be one of the most sought after destinations for global auto components sourcing. McKinsey, in its study in 2004, predicted that sourcing of auto components from India could reach US$ 20-25 billion by 2015 from the current US$ 2.95 billion. A recent announcement by General Motors to triple components sourcing from India to US$ 1 billion in the next three years is just one example of this growing trend. Several global OEMs have been looking at India for establishing sourcing units and International Purchase Offices (IPOs) for components. Renault-Nissan, Volvo, Volkswagen, JCB and Caterpillar are some of the companies looking to ramp up their sourcing requirements from India.
With fast-changing customer preferences, global auto companies are under pressure to manufacture vehicles equipped with latest technologies and innovative features while minimising costs. Further, strict guidelines on passenger safety and emission norms are pushing auto companies to look for alternatives to reduce costs. One such option is to source components from low-cost countries like India and China, which are well-equipped to cater to the requirements of global manufacturers. Further, as these countries have huge potential to become future markets, having a presence there will bring them closer to the local markets.
Until the late 1990s global auto companies never cashed in on the opportunity to source components from low cost countries. However, rising competition from the Asian auto makers, rapidly shrinking time-to-market, rising costs of employee benefits and availability of high quality components at cheaper prices in Asian countries have made them turn their heads to Asia, especially China and India.
The Indian auto components industry has emerged from being a mere supplier of low volume components to the aftermarket to being recognised one of the major sourcing destinations by global auto majors.
Till the mid 1990s, Indian components manufacturers were serving to a low demand and low volume domestic market with most of the components supplied to the aftermarket and to a few OEMs and Tier 1s. The post-liberalisation era has seen many global auto majors GM, Ford, Hyundai, Toyota etc. enter the Indian market to set up their manufacturing units and thus serve the domestic market and also export components for their vehicles manufactured in the developed markets. Increasing competition from global majors and a steady growth in the domestic passenger car market showed the way forward for the components manufacturers. To meet the product specifications of global players, the Indian components manufacturers embraced advanced manufacturing technologies and improved capacities and thus moved up the value chain.
As the domestic auto components industry evolved, it witnessed a few
notable trends like
• Global Quality and Service Benchmarking – Indian manufacturers have been successful in their pursuit to meet global manufacturing and quality standards with many companies winning the coveted Deming prize in the last decade.
• Outsourcing – Most of the global Tier 1s and OEMs have their manufacturing centres in India and they source components from India for their global requirements
• Globalisation - Several top Indian companies have expanded their footprint to other parts of the globe through acquisitions in the US and Europe.
Also, the Indian auto components industry witnessed a shift in focus in the last decade—first, OEM to aftermarket ratio for components supplied has changed from 35:65 in the 1990s to a 75:25 in 2006. Second, a geographical market shift i.e. from supplying components to markets in developing countries to exporting them to developed markets. Indian components manufacturers can now manufacture a wide range of components viz. engine parts, drive and transmission parts, suspension and breaking parts, electrical parts, and body and chassis parts. Of these components, engine parts account for a major share with 31 percent.
Sourcing components from India helps in cost savings of up to 25 percent for global manufacturers. While cost advantage still remains the key, it is not the only criterion that is pulling the auto majors. Other factors like quality of components manufactured, value addition through latest design and engineering skills and economies of scale achieved by Indian components manufacturers have been driving India’s growth in the global components industry.
The auto components industry in India has grown at 20 percent during 2000-05 and it is expected to grow at 17 percent during 2006-14. Exports have grown at 25 per cent during 2000-05 and are expected to grow by a huge 34 percent during 2006-14.
Domestic and global components majors have been pouring in investments worth millions of dollars for capacity expansions in India. A look at the market dynamics suggests that domestic components majors are not far from their global counterparts in terms of investments for expansion. The major investments by top components manufacturers indicate their urge to cater to the rising demand from the OEMs.
A burgeoning passenger car market coupled with demand emanating from global OEMs and Tier 1s is offering a great potential for the Indian auto components market. The Auto Component Manufacturers Association (ACMA), the nodal agency for the Indian auto components industry, estimates that global sourcing of components from India will increase from US$ 2.95 billion in 2006-07 to US$ 5.9 billion in 2008-09 (Figure 1). Confirming this trend, Wilfried Aulbur, Managing Director and CEO, Daimler Chrysler says, “India is a big market for us and we will continue to source smart components for our global needs.”
Though there is an increasing demand for sourcing components from India, the road ahead is not going to be smooth for the domestic companies. With reduced product lifecycles, new vehicle designs, Indian companies will be required to manufacture a variety of components in a very short time.
For components manufacturers, the best way to remain competitive and improve growth prospects is to be innovative and increase their R&D budgets. The key to this lies in product specialisation and their ability to integrate operations across several related areas of specialisation. Domestic manufacturers need to increase their investments in companies in the US and Europe to go closer to global markets.
Components manufacturers have to collaborate and work closely with OEMs that will help them in coming up with innovative products that meet their requirements. Also, domestic components manufacturers need to educate their suppliers about service benchmarking and international quality standards.
The way forward for companies would be through scaling up the value chain, talent transformation for better use of manpower and close collaboration and building long-term value relationship with global players.
