drive to rule the world
By Kunal Kumar Kundu
MUMBAI - The past couple of years have marked the beginning of another growth
cycle of the auto component industry in India. After a roller-coaster ride
during the late 1990s and the first two years of the new century, the domestic
auto component industry is settling down to a more stable and sustained growth
While raw material prices have been rising, there has been a substantial volume
growth. However, while overall sales grew, the operating margins of the
industry were under severe pressure. Consequently, the industry continues to
lay strong emphasis on productivity improvement initiatives to sustain
profitability. However, the most significant and impacting development that has
taken place is in the area of global outsourcing.
Of late, a major transformation has taken place in the policies of global
original equipment manufacturers and Tier-I suppliers in respect of
Severe cost pressures faced globally is driving these companies to increasingly
look to low-cost countries like Brazil, members of the Association of Southeast
Asian Nations (ASEAN), India and China. The Asia region is expected to be a
major player in the auto component sector by 2006, with the total Asian
automotive market, including Japan, likely to be bigger than that of Western
India is expected to play a major role in this global paradigm shift. In fact,
a radical change that has manifested itself over the years has been a marked
change in the ambition of the auto component industry. Today, Indian industry
is not satisfied with just being a sub-contractor of low value-added components
for the world. More and more companies are moving up the value chain and
developing technology-intensive and software-embedded component systems for the
Indian auto component manufacturers have gone through a steep learning curve
and are all set to make an impact on the global scenario. The industry's
competitive edge stems from the availability of highly skilled manpower at
relatively low cost, its ability to adapt to low-volume production using
appropriate technology and automation, its capability in terms of just in time
(JIT) supply using active support from logistic providers and its track record
in adopting Japanese concepts and best practices like Total Productive
Maintenance/Total Quality Maintenance (TPM/TQM), Six Sigma and Toyota
Production Systems/Lean to improve productivity and quality.
According to the Auto Component Manufacturers' Association (ACMA), there are
now 384 companies with ISO 9000 certification, 223 with QS 9000 certification,
83 with TS 16949, 63 companies with ISO 14001 certification and nine companies
with OHSAS 18001. Five companies have also won the Deming Prize, and one has
won the Japan Quality Medal.
Boston Consulting Group holds that India's edge lies in its capability to turn
out low volume, high variety of parts in which the engineering content is high
- despite the fact that the size of its factories are much smaller than those
in the US, China and other emerging economies.
Not surprisingly, India captured the top position in A T Kearney's 2004
Offshore Location Attractiveness Index by a comfortable margin because of its
strong mix of low-cost and rich human resources. China secured second place for
its low-cost and vast labor pool, though it lags behind India in terms of
experience and other key factors such as information technology and management
education, language skills, concern about intellectual property and overall
In auto component outsourcing, India is right on top of the heap, with 24% of
the respondents (to an online survey of American automotive executives
conducted by AT Kearney, India) giving it the thumbs up. Bigger auto markets
like China and Mexico lagged behind at 15% and 13% while auto hubs like Brazil,
Thailand and the Philippines cornered just 10%, 2% and 3% of the votes. India
evidently enjoys top-of-the-mind-awareness (TOMA) in the US$9 billion North
American market, despite all the anti-outsourcing noise in the US.
More importantly, the biggest share of the auto outsource pie comes from the
engineering and technical services segment, which commanded 39% of the votes.
And why not? In a study conducted by
ACMA, labor costs account for 38.8% of sales of US-based companies, while the
same for Indian companies is less than 9%. The average wage costs in India are
around $6 per day, compared to up to $20 per hour in developed markets. All
this, without compromising on quality. The results are beginning to show.
During 2003-04, Indian auto component exports crossed the $1 billion mark to
touch $1.1 billion, a growth of 38.8% over the previous year. While this
landmark figure is still less than that of China or Brazil, the growth rate of
Indian exports is the highest. Between 1997-98 and 2003-04, Indian auto
component exports have seen a yearly growth of over 20%.
A part of this success story is attributable to the presence of
global majors in India, such as:
General Motors, USA - Global purchasing team (Halol)
Volvo, Sweden - Global purchasing team (Bangalore)
International Truck & Engine Co - Global purchasing
Cummins, USA - Global purchasing team (Pune)
Caterpillar, USA - Global purchasing staff (Delhi)
Toyota Motors - Global hub for transmissions, 168,000
transmissions per year
Daimler Chrysler sourcing components worth 70 million euro (US$86
Ford - full fledged component sourcing team
Fiat sourcing components
Even Indian players are aiming to move up the value chain. A spate of
acquisitions is a sure pointer to the sector's transition to the next phase.
Right from Bharat Forge's acquisition of CDP in Germany to Amtek Auto's
acquisition of GWK in the United Kingdom, and Sundaram Fasteners' acquisition
of Cramlington Precision Forge Ltd, Indian auto ancillary companies are trying
to enter the global market.
But despite achieving the landmark figure, Indian auto component exports of
$1.1 billion are a small drop in the $1 trillion global auto component market.
To increase market share, Indian companies have to overcome the following
Economies of scale. Despite being around for 60 years, the
domestic auto industry is even behind countries like South Korea, Brazil and
Mexico in terms of turnover, thus depriving it the benefit of economies of
scale. This makes it difficult for companies to invest extensively in research
and development, a key competitive tool in the global market.
For example, as per ACMA, only 16 Indian companies feature in the $50 million
to $500 million turnover bracket while as many as 237 companies have turnover
ranging between $1 million to $5 million only.
Competitive threats. Countries such as China and Thailand might
put a spanner in the domestic industry's wheels. While China enjoys huge
economies of scale and lower labor costs than India in some areas, Thailand is
believed to have excess capacity (a legacy of the East Asian crisis) and
depreciated assets. These countries are thus capable of beating India at its
own game, that of low costs.
Trade agreements. The growing number of FTAs (free trade
agreements) that are being signed by India is likely to hurt the domestic
players as they pay a relatively higher duty of around 25%, compared to 1%-10%
paid by their Asian counterparts.
Fortunately, however, the entire sector is upbeat. The small and medium
enterprise (SME) sector is enthusiastic on taking technology investment
initiatives to become self-reliant and globally competitive, according to a
Confederation of Indian Industry (CII) survey report on auto-component SMEs.
The survey reveals that Indian SMEs manufacturing auto-components are well
equipped to produce components as per international standards. Besides
supplying to domestic automobile manufacturers, these SMEs have now started
taking strategic positions in international markets - both at the original
equipment manufacturers and the replacement supply horizons.
A recent study by McKinsey mentioned that India's auto parts industry has the
potential to expand five-fold by 2015 to $33-40 billion, from $6.7 billion in
2003-04 by exploiting local cost advantages. According to their estimate,
global auto parts sales in 2015 will be $1.6 trillion, and Indian firms could
address 40% of that market valued at about $650-700 billion.
"The potential growth could create 2.5-3 million additional direct and indirect
jobs and provide significant employment opportunities for people in rural areas
and small towns," McKinsey noted.
Kunal Kumar Kundu is a senior economist with a leading bilateral Chamber
of Commerce in India. He has a Masters in Economics with specialization in
econometrics from the University of Calcutta.
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