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January 2009
IMRB International
INVESTMENT POTENTIAL IN AUTO COMPONENT INDUSTRY IN INDIA 1
Preface
Thai-Indian business relations have improved considerably over the past decade.
Thailand and India are close to concluding a Free Trade Agreement (FTA) covering trade
in goods by 2010. The Free Trade Agreement between Thailand and India is expected to
improve trade relations between the two countries further. The FTA covering trade in
goods would lead to long term mutual benefits in trade and investment and the
partnership would be expanded further to cover technology know-how and expertise.
India's primary imports from Thailand are machinery, electronic appliances, textiles,
plastic material, transport equipment, vegetable oil and latex. The major items of imports
under FTA are polycarbonate, cathode-ray tubes, color-TVs, air conditioners and
Aluminum products. Thailand’s main imports from India are jewelry, gemstones, steel,
pharmaceuticals and ferrous metal ores.
India's trade with Thailand could touch USD 7 billion by 2010-11 propelled by a
doubling in transaction under Free Trade Agreement (FTA). The EHS was implemented
on September 1, 2004, under which tariffs on 82 items were to be phased out by
September 1, 2006 by both the sides.
The trade between Thailand and India is estimated to be US $ 7 billion by 2010-11 from
US $ 2.2 billion in 2005-06.
The total trade of 82 items under Early Harvest Scheme (EHS) of the FTA was increased
by over 140 percent to about US $ 358.63 million in 2005-06 from US $ 149 million in
2003-04. The share of these 82 items in India-Thailand trade increased from 10.34
percent in 2003-04 to 15.68 percent in 2005-06.
Thailand’s export to India of the identified 82 EHS items was increased from US $ 84.64
million to US $ 275 million during the period from 2003 – 04 to 2005 – 06. During the
same time, India’s export to Thailand of these items increased from US $ 64.28 million to
US $ 83.03 million during the same period.
With significant potential for growth of business between the two countries, the Ministry
of Commerce, Thailand and Royal Thai Embassy would like to understand the
investment potential across the following identified product categories:-
1. Home Utility and Furnishing: This would broadly include three product
categories:-
a. Essential auto parts (low volume high value items e.g. gear box,
clutch plates etc and high volume low value items like break pads etc).
These parts would be for 2-wheelers (e.g. moulding etc) and 4-
wheelers – both cars and commercial vehicles.
In order to understand the trade potential across the above categories, the Ministry of
Commerce, Thailand and Royal Thai Embassy has commissioned Business and Industrial
Research Division (BIRD) of IMRB International to avail its research based consultancy
services
7 GOVERNMENT INITIATIVES........................................................................................ 48
7.1 Foreign Direct Investment ..................................................................................................... 48
7.2 Auto Policy ............................................................................................................................ 48
7.3 Automotive Mission Plan 2016 ............................................................................................. 50
14 REFERENCES .................................................................................................................... 79
The components in the Indian automotive component market are classified into Engine
parts, Drive transmission and steering parts, Body and chassis parts, Suspension and
braking parts, Electrical parts and Equipment and other parts.
The macro environment of the Indian auto component industry can be assessed by
understanding the social / consumer shifts, understanding its political and legal
environment, technological environment and economic shifts. This 9-forces analysis for
Indian auto component industry is done in the exhibit below:
Technological shifts
Political / Legal Environment
- Fast becoming global hub for R&D: GM, Daimler
- FDI growing due to competitive advantage; witnessed
Entry Barriers Chrysler, Bosch, Suzuki, Johnson Controls etc. have set
CAGR of 21.7% during 2002 – 07. The FDI was USD 7.2
- OEMs’ “inclusive growth” ensuring long term up development centres in India.
Billion in 2007 – 08
relationship especially for high value-adding items - Casting and forging processes in India 25 to 30 % lower
- Investment Commission of India facilitating FDI in all
- Foreign suppliers supplying to global auto majors with than western counterparts.
forms
local knowledge and expertise may have easy access - 5 Indian auto component companies received coveted
- No repatriation issues after paying taxes
Deming Prize, largest number outside Japan.
Economic shifts
Social / Consumer shifts Threat of Substitutes - Concentration of disposable income in top 6 – 8 cities
- Auto component industry – incubator to entrepreneurship - Less threat to substitute for organized players - Rising spending patterns on “pampering” therapies
initiatives especially for less value adding components working with OEMs and emphasizing on R&D - International economic environment augurs cautious
- OEMs developing and launching “India centric” vehicles for future needs approach
after understanding Indian consumers’ demands - Unorganized units stand chances for greater
threat
14,000 12,000
12,000
10,000 8,700
6,730 7,200
8,000
5,430 5,400
6,000 3,894 3,965 4,470 3,750
4,400
3,615
3,278 3,008 3,249 3,100
4,000 2,300 2,645 2,469 2,873
1,274 1,692
456 625 578 760
2,000 330 350
-
*
7
7
00
8
-9
-9
-9
-0
-0
-0
-0
-0
-0
-0
-0
0
96
97
98
00
01
02
03
04
05
06
-2
07
19
19
19
20
20
20
20
20
20
20
99
20
19
The Indian auto industry and auto component industry in 2006 – 07 was US$ 34 billion
and US$ 15 billion. As per Government of India’s automotive mission plan 2016, the
Indian auto industry and auto component industry in 2015-16 is estimated to be US$ 105
billion and US$ 40 billion respectively. It signifies that auto component industry would
The auto component industry is facing transient challenges due to the changing global
situation where 2 out of the top-3 U.S. are on the verge of filing bankruptcy. Since Indian
automotive component industry is exporting to these auto majors, the reduction in the
pace of growth is expected this year. This reduction is coupled with reduced growth rate
of domestic vehicles sales in 2008-09. These rough times, however, are short timed in the
light of Government’s automotive mission plan 2016 whereby it aims to achieve the turn
over of US$ 145 billion by 2016. The growth factors i.e. lesser penetration of vehicles,
growing income levels portends health growth for Indian auto and auto component
industry in the long term.
The OEM (Original Equipment Manufacturer) market is also known as the organized
market segment in the Indian auto component industry. All the Tier-1 suppliers/ vendor
to OEMs have their respective distribution channels in the aftermarket (or replacement
market) segment.
The inventory in the value chain of Indian automotive industry varies according to the
size of auto component suppliers. The large strategic Tier-1 suppliers who are better
connected with OEMs through ERP (Enterprise Resource Planning) system are able to
manage inventories better. On the other size, the small and medium sized Indian auto
component players not leveraging technology end up piling inventories due to “bull whip
effect”.
The Indian automotive component replacement market have various channels selling
genuine and spurious parts that makes it one of the most dynamic market segment (out of
the three market segments i.e. replacement demand, OEM demand and export market).
According to the study conducted by IMRB International for SIAM in 2006-07, the
counterfeit components constitute about 35% - 51% of private vehicle components
replacement market. Lately, OEMs have started showing increasing interest in the
replacement auto component.
The automatic approval for foreign equity investment upto 100 per cent of manufacture
of automobiles and component is permitted for the auto and auto component industry.
The import of technology /technological up gradation on the royalty payment of 5%
without any duration limit and lump sum payment of USD 2 million is also allowed
under automatic route in this sector. The norms for Foreign Investment and import of
technology have also been progressively liberalized over the years for manufacture of
vehicles including passenger cars in order to make this sector globally competitive. With
the gradual liberalization of the automobile sector since 1991, the number of
manufacturing facilities in India has grown progressively.
Low High
electronic parts
Legend
According to industry estimates, the size of the global auto component industry in
the year 2008 was approximately US$1.4 trillion and is likely to grow to about
US$1.9 trillion by 2015. Out of this total auto component demand by 2015, about
40% (i.e. US$ 750 billion) is likely to be sourced from low cost countries (LCCs)
such as China, ASEAN countries and India. The trends that are shaping the global
automotive industry are shown in the exhibit below:-
Pressure to lower
Level of profitability prices continues
too low
Global Trends –
Automotive Industry
Continued
Emerging markets are consolidation
fastest growing markets
Shared platforms & modules
increasingly important
The United States is far ahead of other countries when it comes to vehicle population per
1,000 vehicle driving age. It is home to the largest passenger vehicle market of any
country In 2007, there were about 250 million vehicles in the United States.
The exhibit below shows the penetration of LCVs across the major countries and the
emerging economies like Brazil, China and India.
Exhibit 3: GDP / Capita vs. Vehicle Density: India vis-à-vis major markets
The exhibit below shows per capita income and the number of inhabitants per vehicle in
the year 2002 and expected ratio and per capita income in the year 2014. After comparing
the potential for future auto and auto component markets, it can be deduced that the
emerging economies like China and India would be at growth stage whereas the
developed economies like US and Japan are the saturated stage, expected to remain
stagnant or grow at less rate in the medium to long term.
Exhibit 4: Vehicle density vs GDP / per capita – Current and Estimated in 2014
Source: EIU, Goldman Sachs and A.T. Kearney analysis
The above analysis clearly indicates the importance of U.S. automotive market for the
global auto component industries, especially from the emerging economies and ASEAN
countries. The exhibit below shows US Auto Component imports from the leading
exporters:-
The exhibit below shows top automotive component players and their sales figures
globally in 2004 and 2005. Robert Bosch Corporation (entered in India in collaboration
with MICO as MICO Bosch but now has standalone existence) and Delphi Automotive
Systems are the globally ranked number one and two respectively according to their sales
figures.
The ACMA-McKinsey Vision 2015 document forecasts the potential for the Indian auto
component industry to be US$ 40-45 billion by 2015. Investments and exports in this
segment are witnessing continuous growth. Global automobile manufactures see India as
a manufacturing hub for auto components and are rapidly ramping up the value of
components they source from India due to:
In India, there are four major clusters as far as auto and auto components are concerned.
The Chennai cluster has around 25 – 30% organized auto component manufacturers. The
exhibit below maps major auto and auto component clusters in India:-
text
text
Pune cluster
Chennai cluster
text
Bengaluru cluster
The Indian Auto component industry has transitioned from a supplier for the global
aftermarket to becoming a full-scale global Tier 1 supplier. The transition has been
brought upon by increased competition from foreign players that have helped Indian auto
component industry becoming auto component manufacturer and export of complex auto
spare parts. The exports from Indian auto components manufacturers to U.S. top 3
automotive majors have been in excess of US $ 900 Million last year. The exhibit below
shows the transition of Indian auto component industry.
th
n Pa
iti o
ns
Tra
Hand Tools
Metal bonded &
Low
Across the auto component industry, material cost is almost the half of the total cost build
up of the total expenditure. The exhibit below shows the percentage break up of total cost
in the auto component industry.
Out of the 5 sub-segments i.e. equipment parts, braking parts, steering parts, electrical
parts and engine parts, the percentage contribution of raw material out of the total cost at
75% is highest in the braking parts sub-segment. The exhibit below provides the cost
break up for the auto component by segments in the Indian auto component market:-
The auto component industry can be classified into the 3 channels; as far as auto
component market is concerned. The classification of auto component market, as per the
market spread, is shown in the exhibit below:
The OEM (Domestic and Export demand) contributes to 70% of the turnover, rest 30% of
the auto component demand is generated through aftermarket or replacement demand.
30%
70%
2nd
Tier 2nd
2nd Tier
2nd Tier
2nd Tier
Tier
1st
1st Tier
Tier
Tier
0.5 2nd
OEM Tier 2nd
2nd
Tier Tier
2nd
Tier
3rd 3rd
2nd
Tier Tier Tier 2nd
3rd 3rd Tier
Tier Tier
1st 2nd
Tier Tier
Tier-3 supplier to Tier-2 as well as
2nd
Tier-1 supplier to OEM Tier 2nd
Tier
The components in the Indian automotive component market are classified in the
following sub-segments:-
Engine parts
- Requires high precision and high quality adherence
- These fall into three broad categories: Core engine parts, fuel delivery
system and others.
- Major parts include Pistons, piston rings, engine valves, fuel pumps etc
Electrical parts
- New technology in cars and electric start two-wheelers are leading to the
growth of this segment
- Major parts include carburettors, starter motors, generators, bimetal bearings,
distributors, air conditioning unit etc
The exhibit below shows the major players in the Indian market who have manufacturing
units in India:-
The exhibit below shows the major players operating in the key sub-segments in the
product segments of the auto components:-
“Top 50 auto component companies in India would have around 1000 auto
component units across clusters. The vendors supplying to OEMs can be considered
as organized segment players. These (organized players) would be around 5,000 –
6,000. The total players including unorganized segment would be around 15,000.”
- Sr. Vice President, One of the leading Tier-1 component suppliers
Since components used in Commercial Vehicles and Tractors call for the properties of
high strength and load requirement, it was, therefore, observed that the operation of these
parts manufacturers are following in nature:
b) A large organized player supplying to the traditional 2& 3 wheeler and passenger
vehicles component markets has established a separate SBU (Strategic Business
Unit) for servicing the need of Commercial Vehicles and Tractors segment
Name of Foreign
Name of Indian Company Item of Manufacture
Collaborators
Amtek Auto Ltd., Gurgaon Bendo Kogyo, Japan Fly wheel ring gears
Jay Bharat Maruti Ltd., Gurgaon Allied Signal, USA Seat belts and Air bags
Subros Ltd., New Delhi Allied Signal, USA Catalytic converters
Exhaust Systems,
Mark Exhaust Systems Ltd., Gurgaon Sankei Giken, In.Co., Japan
Catalytic Converters
Saint Gobain Vitgrage, Laminated Safety Glass
Atul Glass Industries Ltd., New Delhi France
Alcan Deutschland GmbH, Pistons & Piston Rings
Menon Pistons Ltd., Kholapur Germany
Rockwell International Corp., Axle systems
Automotive Axles Ltd., Mysore USA
Blue Chip Products Inc., Water pumps
Autolec Industries, Madras USA
Spicer India Ltd., New Delhi Dana Corp., USA Engine bearings
Ball joints & Suspension
Sona Steering Systems Ltd., New Delhi Somic Ishikawa, Japan
joints
Asbestos free brake
Sona Steering Systems Ltd., New Delhi Fedoro, UK
linings
Sona Steering Systems Ltd., New Delhi Matsuda Industries, Japan Cold forging
Haryana Sheet Glass Ltd., Haryana Pilkington Plc., UK Laminated sheet glass
Johnson Controls Inc., USA Seating systems
Sommer Allibert, France Interiors and Plastics
Yazaki, Japan Wiring harness
Transmission of steering
Tata Industries Ltd., Bombay ZF, Germany
systems
NIFCO, Japan Plastic Fasteners
Brake systems, Electrical
ITT, USA
& wiper systems
Exhibit 17: Indian Auto Component-Foreign Collaborations (2006)
Source: Database search
Technological shifts
Political / Legal Environment
- Fast becoming global hub for R&D: GM, Daimler
- FDI growing due to competitive advantage; witnessed
Entry Barriers Chrysler, Bosch, Suzuki, Johnson Controls etc. have set
CAGR of 21.7% during 2002 – 07. The FDI was USD 7.2
- OEMs’ “inclusive growth” ensuring long term up development centres in India.
Billion in 2007 – 08
relationship especially for high value-adding items - Casting and forging processes in India 25 to 30 % lower
- Investment Commission of India facilitating FDI in all
- Foreign suppliers supplying to global auto majors with than western counterparts.
forms
local knowledge and expertise may have easy access - 5 Indian auto component companies received coveted
- No repatriation issues after paying taxes
Deming Prize, largest number outside Japan.
Economic shifts
Social / Consumer shifts Threat of Substitutes - Concentration of disposable income in top 6 – 8 cities
- Auto component industry – incubator to entrepreneurship - Less threat to substitute for organized players - Rising spending patterns on “pampering” therapies
initiatives especially for less value adding components working with OEMs and emphasizing on R&D - International economic environment augurs cautious
- OEMs developing and launching “India centric” vehicles for future needs approach
after understanding Indian consumers’ demands - Unorganized units stand chances for greater
threat
In the exhibit above, while looking at competitors, there are 450 – 500 medium to large
players with around 6000 – 7000 units in addition to around 10,000 units in the
unorganized segment. This distribution highlight that auto component industry is
dominated by unorganized players. It provides opportunity for organized Thai investors
to provide the products identified as their core competence in the later part of the report.
Analyzing other aspects like entry barriers, threat of substitute and supplier and consumer
power also helps in understanding the Indian auto component market and devising the
entry strategy and positioning plank for the products supplied by the entrepreneurs from
Thailand to Indian auto component market.
The classical tool to assess the industry environment is through SWOT analysis. The
exhibit below identifies Strengths, Weaknesses, Opportunities and Threats (SWOT
analysis) in the Indian Auto Component Industry:-
With the growing sales of automobiles, new global OEMs are entering in the Indian
automotive industry which in turn provides the auto component industry the opportunity
to register robust growth over next 5 – 8 years. The component industry has not more
than 50 players with turnover of more than US$ 500 million per annum. Around 70 –
80% of the total numbers of players, at the bottom of the pyramid, have revenues of less
than US$ 1 million per annum. The growing automobile demand and the increasing
awareness to purchase genuine spare parts in the aftermarket poses attractive market
opportunities for the two and four wheeler auto component manufacturers.
5.2.1 Production (in Number) and Growth rates of all vehicle categories
including two wheelers
The exhibit below indicates that in 2006-2007, out of the total automobiles market size of
around 1,10,65,000 vehicles, 94,42,000 or around 85% of the vehicles were two
wheelers. On an average, the overall annual growth rate of vehicles in the last 5 years has
been in excess of 15%.
14,000 12,000
12,000
10,000 8,700
6,730 7,200
8,000
5,430 5,400
6,000 3,894 3,965 4,470 3,750
4,400
3,615
3,278 3,008 3,249 3,100
4,000 2,300 2,645 2,469 2,873
1,274 1,692
456 625 578 760
2,000 330 350
*
7
7
00
8
-9
-9
-9
-0
-0
-0
-0
-0
-0
-0
-0
0
96
97
98
00
01
02
03
04
05
06
-2
07
19
19
19
20
20
20
20
20
20
20
99
20
19
As per the exhibit above the consolidated production of the two, three and four wheeler
auto component industry is growing at CAGR of 25 – 27% from the past 4 – 5 years. The
production is catering to both the domestic demand, coming from OEM and replacement
demand, and the growing rate of exports.
The investment in the auto component industry has also been doubled to USD 7.2 Billion
in the last three years. This highlights the growth momentum in the Indian auto
component industry.
The two wheeler automotive component market like the four wheeler automotive
component market can be classified into the same sub-segments categories. Out of the
consolidated automotive component market, the engine parts have the major share among
the other auto components. It accounts for 31% of the total auto component market (in
value terms). The equipments, electrical and other parts account for 10%, 12% and 7%
respectively of the total auto component market size (in value terms). The break up of the
auto component industry (in value terms including 2 and 4 wheeler components) is
shown in the pie chart below:
31%
19%
7% 12%
9%
10% 12%
Engine parts Drive transmission & steering parts
Body & chassis Suspension & braking parts
Equipment Electrical parts
Others
Exhibit 23: Percentage breakup of sub-segments in the Indian auto component industry
Source: ACMA (Automotive Component Manufacturers Association of India)
Within imports of auto components, Engine and Suspension / Braking have relatively
higher proportion in imports whereas Transmission and Equipments have lesser
proportion.
The table below highlights the items that are either high in import proportion (in value
terms) or are growing at rapid rate i.e. 50% or more. India imported US$ 20 million auto
components from China in 2004 – 05 whereas the imports from ASEAN countries were
close to US$ 73 million during the same time. The estimated imports (based on the
growth trends) from China and ASEAN countries in 2008 – 09 would be around US$ 120
– 150 million and US$ 350 – 400 million respectively.
The U.S. and European markets account for 28% each of the total exports from the Indian
auto component companies. The exhibit below shows the break up of the total auto
component export markets across the major auto importing markets.
27%
28%
4% 2% 11%
The exhibit below shows the gross margin and net margin at the distribution and retailer
level:-
The OEM market is also known as the organized market segment in the Indian auto
component industry. All the Tier-1 automotive component vendors have their respective
distribution channels in the aftermarket segment. Typically, an OEM works with around
100 – 200 Tier-1 suppliers and around 500 Tier-3 / Tier-2 suppliers (to Tier-2 / Tier 1
suppliers), depending upon the diversity of product line offerings.
Scheduling
Schedule Schedule
Sequencing
Customer
“We have categorized the components in various buckets. For high value items, we
follow JIT approach; we carry 1 day inventory for these items. For other categories
we may carry 3 - 4 day inventory. For smaller and less value components we may
have one week of inventory”
- Strategic Sourcing Official from one of leading Vehicle manufacturer
The research team of IMRB International tried to understand the vendor selection process
of LCV and Commercial Vehicle manufacturers. The OEM vendor selection process was
found to be almost similar in all the OEMs visited during the course of this study. In
general, OEMs select vendors in the following steps:-
Step 1: First, the vendor contacts OEM’s sourcing or purchase department. Due to high
number of parts, the sourcing department is categorized into 4 – 5 vendor management
groups. After submitting the credential documents and filling the vendor application
The party should be financially and technically sound. It should have prior experience as
supplier to other vehicle manufacturers. For some parts, specific commercial vehicle
technical expertise as vendor is required whereas for other components the vendor is
qualified if the party is supplying to LCVs.
Step 2: After initial qualification, a team of people from various departments (i.e.
Engineering, Sourcing etc) is formed that checks for quality aspects, the vendor’s
manufacturing set-up and technological capabilities etc. OEMs evaluate them whether
they would be able to meet OEM’s expectations with the economies of scales and quality
levels.
Step 3: After the party qualifies, OEMs involve in the commercial discussion about the
cost, inventory and other nitty-gritty. OEMs have long term association with vendors.
The process of vendor selection takes few weeks to few months.
WIP
RM FG
Tier Tier 1 OEM
Tier22 OEM
Inventory Inventory Inventory
Inventory
Inventory
Exhibit 28: Inventory in the supply chain of small auto component industries
“The time is not ripe (for the auto component players like us). We have sudden
export order cancellation from 2 out of top-3 US majors. We have inventory
accumulation of around 50% of our annual turnover at various levels. It will take
some time for us to come out of this situation.”
- General Manager of one of mid sized Automotive Component Manufacturer
Tier
Tier22 Tier
Tier11 OEM
OEM
Inventory Delivery
Manufacturing Delivery Manufacturing Assembly
The exhibit below shows the break up of the replacement market among various
categories of vehicles. 2/3 wheelers and cars replacement parts constitutes 66% of the
overall replacement market. In India, as far as major component suppliers are concerned,
most of the auto component players for 2/3 wheelers and cars are common..
Cars
33%
Due to the squeezing margin for the OEM auto component segment, the replacement
market has relatively better margins for OES and additional stream of income for OEMs.
The replacement market has become increasingly competitive with the focus on OEMs,
imports and reducing price difference between OEM/OES products and spurious auto
components. The exhibit below details out the critical factors that have recently
transformed the aftermarket demand:
Increasing imports on
Increasing focus of OEMs on account of FTAs
aftermarket
Indian Replacement
Parts Market
- The already have established channel in the form of their vehicle dealers
- The margins in the aftermarket equipments are significantly higher than the OEM
demand
- The OEMs can source the component from suppliers at wafer-thin margins in bulk
quantities
- By supplying genuine parts, OEMs are building on the brand image of their products
At a broader level, the channel structure for the replacement market can be classified into
3 categories: the OES / OEM channel, the spurious component channel and the import
channel where products are sold by importers.
According to the study conducted by IMRB International for SIAM in 2006-07, the
counterfeit components constitute about 35% - 51% of private vehicle components
replacement market. The exhibit below shows the product flow across different channels.
In the replacement market, it is estimated that spurious product market is bigger than the
market catered by genuine parts.
OES
(Original Equipment
Supplier)
Stockists / Big
Warehouse – Dealers
typically one at Dealers – small dealers
OEM factory and the generally in smaller cities
CUSTOMER/END USER
(Original Equipment others at zonal level
Manufacturer) Franchise e.g.
Leyparts, Maruti
Service Masters etc
Unbranded Warehouse –
(including spurious) generally only at
component market factory level
Stockists / Big
Dealers
Importers esp. for
accessories – generally Dealers – small dealers
having warehouse at generally in smaller cities
import cities
Imports
OES / OEMs –
further utilize their
spare parts channel
“All the auto companies (out of a total of 25 to 30 companies) within our group,
have separate distribution channels. We (our company) have OEM supplies, for
aftermarket we supply to 1200 dealers directly, these dealers in turn send it to smaller
shops. We have 1 warehouse in addition to warehouse at this (manufacturing)
facility.”
- General Manager, Marketing of one of the leading Tier-1 component suppliers
The Indian automotive industry with a turnover of US$ 34 billion and the auto parts
industry with a turnover of US$15 billion offer excellent scope for FDI. The investment
figure for the past 5 years is shown in the exhibit 20 under chapter 5.2 of this report.
The automatic approval for foreign equity investment upto 100 per cent of manufacture
of automobiles and component is permitted. The import of components is freely allowed.
The import of technology/technological up gradation on the royalty payment of 5%
without any duration limit and lump sum payment of USD 2 million is also allowed
under automatic route in this sector.
The norms for Foreign Investment and import of technology have also been progressively
liberalized over the years for manufacture of vehicles including passenger cars in order to
make this sector globally competitive. With the gradual liberalization of the automobile
sector since 1991, the number of manufacturing facilities in India has grown
progressively. At present there are 15 manufacturers of passenger cars & multi utility
vehicles, 9 manufacturers of commercial vehicles, 16 of 2/3 wheelers and 14 of tractors
besides 5 manufacturers of engines.
The industry provides direct and indirect employment to 13.1 million people. The
contribution of the automotive industry to GDP has risen from 2.77% in 1992-93 to 5%
in 2006-07. The industry is also making a contribution of 17% to the kitty of indirect
taxes of the Government. In order to provide special attention to the auto industry, the
Government of India has drafted the Auto Policy whose vision and objectives are
mentioned below:
Objectives
This policy aims to promote integrated, phased, enduring and self-sustained growth of the
Indian automotive industry. The objectives are to:-
(i) Exalt the sector as a lever of industrial growth and employment and to achieve a high
degree of value addition in the country;
(ii) Promote a globally competitive automotive industry and emerge as a global source
for auto components;
(iii) Establish an international hub for manufacturing small, affordable passenger cars and
a key center for manufacturing Tractors and Two-wheelers in the world;
(iv) Ensure a balanced transition to open trade at a minimal risk to the Indian economy
and local industry;
(v) Conduce incessant modernization of the industry and facilitate indigenous design,
research and development;
The full auto policy of Government of India is attached in the annexure of this report.
The Ministry of Commerce, with the help of SIAM (Society of Indian Automobile
Manufacturers) and ACMA (Automotive Component Manufacturers Association of
India) has devised automotive mission plan 2016 to emerge as the destination of choice in
the world for design and manufacture of automobiles and auto components with output
reaching a level of US$ 145 billion accounting for more than 10% of the GDP and
providing additional employment to 25 million people by 2016.
The Automotive Industry offers huge growth potential in terms of sales volume
(including exports) and also immense employment opportunities. The likely future
volumes of different vehicle categories were estimated on the basis of projections made
by iMaCS, NCAER and AT Kearney. The value of projected domestic output was
computed based on historical average vehicle prices. The export potential was estimated
on the basis of current trends and possible opportunities in major export destinations. The
demand for after-market auto components and export output was also included in
computing growth potential of the industry.
The complete document of Automotive Mission Plan 2006 – 2016 describing the mission
for development of Indian Automotive Industry can be downloaded from the following
URL: http://www.siamindia.com/upload/AMP.pdf .
The demand for auto components is mainly driven by the demand for automobiles,
although auto components do find usage in non-automotive industries as well. This
section covers the growth drivers, issues / challenges, Indian auto industry amid the
changing global scenario (transient challenges) and the critical success factors for the
automotive industry.
The auto component industry has cascading effect on the auto component industry as
70% of the automotive component supplies in value terms go to OEMs (domestic and
exports. The exhibit below represents the growth drivers propelling the growth of the
replacement demand. Due to these factors, there has been an increasing interest from
OES and OEMs to concentrate on auto component aftermarket.
Growth
Drivers
As is the case with many other young, aspirant and rapidly growing industries, Indian
auto component industry is also engulfed with certain challenges. These challenges can
be dissected into two categories – internal factors i.e. the challenges faced at
organizations’ level and external factors where the other entities, issues outside the
organization / industry influence the growth of the industry. The exhibit below highlights
the issues and challenges Indian auto component industry is facing today:-
In addition to the above challenges the auto component industry is facing, there are
certain transient challenges due to the changing global situation where 2 out of the top-3
U.S. auto major are on the verge of bankruptcy. The business scenario in case of Japanese
and Korean automotive majors is also echoing similar sentiments due to global meltdown
imposed by the sub-prime mortgage crisis in U.S. and the European economies. The
exhibit below shows the transient challenges in view of changing global business
situation.
Rising Customer
Integration with Global Expectations
(Developed) markets
Exhibit 36: Indian auto component industry in view of changing global situation
The factors critical to the success of auto component industry in India have been
delineated in the exhibit below. Some of these factors are commonly important to the
supply chain and automotive component industry across the economies because of the
nature of the industry. However, some factors are based on observing the businesses in
the Indian automotive industry.
c
ma dom s of
an g spe
in mie g
et esti
St me al e
in
ag lo ct
ro n
Sc Eco hiev
e b iv
pe
ng t w
r
ale no
Ac
rk
ith
0 1 2 3 4 5 0 1 2 3 4 5
As per the exhibit above, quality, brand and price are three key criteria for both
individual customers and customers owning a fleet of vehicles, either for personal or
commercial use. However, price is a less important factor for crucial components like
engine and transmission parts. The same finding can be extended to high value, low
volume IC (Integrated Circuit) based components as well.
When it comes to the sources of purchase for the organized replacement market, majority
of the individual customers rely on OEM and branded parts. As per the exhibit below,
almost more than one-third of the individual customers purchase OEM parts i.e. the parts
available from OEM distribution channel. Around half of the customers, except for
Recognizing the importance of OEMs in the component market, their criteria for vendor
selection and purchase process has been covered separately in “OEM’s Vendor Selection
Process” section of this report.
4. Skill-intensive parts
“Thai auto component industry can supply tyres to Indian OEMs at cost effective
price.”
- Sourcing Manager, one of leading passenger car manufacturers
The exhibit below shows that the domestic market for high grade plastic, electronics /
Integrated Circuit auto parts would be best suited for the imports from Thailand. The
other attractive sub-segments would be rubber based intensive parts and skill intensive
parts.
Low High
The share of auto accessories in the aftermarket demand is significantly less. The major
auto accessories that are sold are audio-video equipments, alloy wheels and car perfumes.
However, this segment is slated to become attractive as the size grows in 3 – 5 years’
time frame. Another important sub-segment for Thai imports would be rubber intensive
parts e.g. tyres, brakes etc.
The indicative list of major Indian auto component manufacturers across various sub-
segments is shown in the table below:-
There have been many success stories in the Indian auto component industry (as
mentioned in the section 3.8). The equity participation or technical tie up with foreign
collaborator depends upon the business plan and the attractiveness of various auto
component product categories.
“3 types of business models exist in the (Indian) auto component industry: 1) Fully
domestic or multinational 2) JV i.e. equal equity participation between Indian and
foreign players 3) Indian company getting into technical tie up with foreign
counterpart.”
- General Manager, Marketing of one of the leading Tier-1 component suppliers
Based on the demand potential for the auto components from Thailand, it is suggested
that Thai investors should initially export these products for OEMs and aftermarket in
India. Later on, when the product volumes would increase, we suggest that it should set
up the assembly base in one of the auto clusters, to be selected based on initial
experience.
Over the last few years, we have seen the equity participation and technical tie up in
equal proportion from the foreign players in the auto component industry. However, due
to robust demand for the automotive component industry over the next 5 – 7 years, there
has been an increase in the business model involving the equity participation with the
domestic players. In general, the equity participation of 49% by the foreign player is
prevalent in the Indian automotive component industry. The Global automotive
11.1 Entry Strategy for Thai Investors in the Indian Auto Component
Business
The exhibit below pictorially highlights the attractive areas in the Indian auto component
market and the timeframe for entering through these sub-segments in the Indian markets.
electronic parts
Legend
Thai auto component manufacturers have attained high quality levels in the plastics,
silicon intensive and electronics parts by working with Japanese automobile
manufacturers. Also, since they are supplying auto components to Japanese automobile
manufacturers who have very high demand in comparison to Indian automobile
manufacturers, Thai auto component players have huge production capacities and thereby
lesser cost of manufacturing.
The other category of auto components would that would be attractive for Indian markets
would be rubber intensive parts and accessories. The rubber intensive parts would be
attractive for Thai investors due to cost effective availability of latex in Thailand.
Automobile tyres forms significant cost component among the automobile components.
Thailand can supply good quality tyres at better prices than the Indian counterparts.
As far as high labour intensive parts are concerned, India has the cost as well as skill
advantage. We, therefore, suggest Thai investors not to enter into these sub-segments in
the Indian automotive component industry.
1. Form vendor
relationship with Indian
OEMs 1. Set up assembly unit in Focus on replacement
2. Export parts from India market for core
Thailand / other 2. Assembly unit to be set components once the
countries up at one of the auto products is established
3. Set up warehouse at clusters, nearer to among OEMs
port of entry for OEMs · To be targeted after
efficient distribution 3. Consolidate business establishing
management with old OEMs and credibility among
4. Target replacement target new OEMs and OEMs
market for auto Tier – 1 suppliers · Acceptance by OEMs
accessories like alloy 4. User raw material initially provide
wheels, music systems, procured from India or necessary push to
car perfumes, decorative from Thailand / other these components in
stickers etc countries replacement market
After examining the existing distribution channel for imports for the automotive
components market, it is suggested that Thai investors either should have a warehousing
arrangement at the port of entry. The port would most likely be either Mumbai or
Chennai. Goods are then supplied to OEMs and the replacement market from the
warehouse. Consequently, the following distribution channel is recommended.
Dealers – small
t
ke e n
Stockists / Big Dealers
M ce m
dealers generally in End Customer
t
(Usually at state level)
smaller cities
pla
ar
Re
Warehouse
Imports arrangement at port of
entry
OE ket
Ma
M
r
OES / OEMs – further
utilize their spare parts
channel
Servicing replacement market calls for engaging stockists or big dealers at the zonal level
followed by the deployment of stockists at the state level. These stockists would supply
the auto components to dealers who in turn sell to end consumers.
*****
1. POLICY OBJECTIVES
This policy aims to promote integrated, phased, enduring and self-sustained growth of the
Indian automotive industry. The objectives are to:-
(i) Exalt the sector as a lever of industrial growth and employment and to achieve a high
degree of value addition in the country;
(ii) Promote a globally competitive automotive industry and emerge as a global source
for auto components;
(iii) Establish an international hub for manufacturing small, affordable passenger cars and
a key center for manufacturing Tractors and Two-wheelers in the world;
(iv) Ensure a balanced transition to open trade at a minimal risk to the Indian economy
and local industry;
(v) Conduce incessant modernization of the industry and facilitate indigenous design,
research and development;
2. BACKGROUND
2.1 Automotive industry has universal5ly emerged as an important driver in the economy.
Although the automotive industry in India is nearly six decades old, until 1982, only three
manufacturers - M/s. Hindustan Motors, M/s. Premier Automobiles and M/s. Standard
3. EXTANT POLICY
3.1 Before the removal of QRs with effect from 01-04-2001, the policy placed import of
capital goods and automotive components under open general licence, but restricted
import of cars and automotive vehicles in Completely Built Unit (CBU) form or in
Completely Knocked Down (CKD) or in Semi Knocked Down (SKD) condition. Car
manufacturing units were issued licences to import components in CKD or SKD form
only on executing a Memorandum of Understanding (MOU) with the Director General
Foreign Trade (DGFT). 11 companies signed MOUs with DGFT under which they
agreed to:
iii. Indigenise components upto a minimum of 50% in the third and 70% in
the fifth year or earlier from the date of clearance of the first lot of
imports. Thereafter the MOU and import licensing will abate;
4.1 The industry encompasses commercial vehicles, multi-utility vehicles, passenger cars,
two wheelers, three wheelers, tractors and auto components. There are in place 15
manufacturers of cars and multi utility vehicles, 9 of commercial vehicles, 14 of
Two/Three Wheelers and 10 of Tractors besides 5 of engines. With an investment of
Rs.50,000 crores, the turnover was Rs. 59,500 crores in Automotive Sector during 1999-
2000. It employs 4,50,000 people directly and 100,00,000 people indirectly and is now
inhabited by global majors in keen contention.
4.2 India manufactures about 38,00,000 2-wheelers, 5,70,000 passenger cars, 1,25,000
Multi Utility Vehicles, 1,70,000 Commercial Vehicles and 2,60,000 tractors annually.
India ranks second in the production of two wheelers and fifth in commercial vehicles.
4.3 India’s automotive component industry manufactures the entire range of parts
required by the domestic automobile industry and currently employs about 250,000
persons. Auto component manufacturers supply to two kinds of buyers – original
equipment manufacturers (OEM) and the replacement market. The replacement market is
characterised by the presence of several small-scale suppliers who score over the
organised players in terms of excise duty exemptions and lower overheads. The demand
from the OEM market, on the other hand, is dependent on the demand for new vehicles.
4.4 The auto sector (excluding Tractors) attained a steep cumulative annual growth of
22% between 1992 and 1997. The Tractors achieved a cumulative annual growth of 16%.
Component production grew by 28%. There has been a slowdown in the automobile
sector in the past two years. However, the component industry maintained a low but
positive growth rate mainly due to its export performance. Over the years, the component
industry has maintained a 10% - 12% share of exports in the total production.
4.5 Roads occupy an eminent position in transportation as they, as per the present
estimate, carry nearly 65% of freight and 87% of passenger traffic. Although, India has
3.3 million kilometers of road network, which is the second largest in the world, the
Indian highways are getting overpopulated. Traffic management and road sense also need
attention.
5.1 The extant policy has drawn many overseas companies into India but needs to be
more investor friendly, address emerging problems and be WTO compatible. World over,
the majors have consolidated to elevate technology, enlarge product range, access new
markets, cut costs and in-graft versatility. They have resorted to common platforms,
modular assemblies and systems integration by component suppliers and E-Commerce.
5.2 The automotive industry is in the midst of a major structural transformation in today's
globalised scenario. "System Supply" of integrated components and sub-systems is
becoming the order of the day, with individual small components being supplied to the
system integrators instead of the vehicle manufacturers. In this process, most of the SSI
units manufacturing smaller individual components are on their way to become tier 2 and
tier 3 suppliers, while the larger companies including most MNCs are being transformed
into tier 1 companies, which purchase from tier 2 & 3, and sell to the auto manufacturers.
5.3 Indian auto sector needs to grow collaterally and in harmony with world industry.
India has the potential to be a global automotive power. However, concerted efforts will
be required to take auto manufacturing to a self-sustaining level where they shall have
volumes, generate requisite technology and meet evolving emission requirements.
5.4 Volume is important for any manufacturing enterprise. However, it is more important
for automobile sector, both for the manufacture of vehicles as well as auto components.
Lack of volume will not only inhibit efficient manufacture but also R&D and
introduction of new models. The investment and fiscal policies should create an
environment for volume production and indigenous capability for innovation for small
cars and auto components.
5.5 Auto components manufacturers have been slowly gaining global recognition and
maintaining a certain level of exports despite the recent downturn. It should be possible
to achieve an export target of US $ 1 billion by 2005 and US $ 2.7 billion by 2010. This
would require three pronged marketing strategy: exports through OEMs for their global
sourcing requirements, export to tier I manufacturers as a part of their international
supply chain and direct exports to aftermarket. The main challenges are lower volume –
6.1 Initiatives relating to investment, tariffs, duties and imposts will be the instruments to
achieve the Policy objectives. These path government’s economic reform and are in
harmony with the commitments made to WTO.
6.2 Increased resource allocation to the highways sector to ensure collateral upgradation
and development of road infrastructure in step with the increase in the population of
vehicles.
6.3 An appropriate regulatory framework for smooth movement of traffic, safety and
environmental aspects.
8. IMPORT TARIFF
8.2 The Government will review the automotive tariff structure periodically to encourage
demand, promote the growth of the industry and prevent India from becoming a dumping
ground for international rejects.
8.3 In respect of items with bound rates viz. Buses, Trucks, Tractors, CBUs and Auto
components, Government will give adequate accommodation to indigenous industry to
attain global standards.
8.5 The conditions for import of new Completely Built Units (CBUs), will be as per
Public Notice issued by the Director General Foreign Trade (DGFT) having regard to
environment and safety regulations.
8.6 Used vehicles imported into the country would have to meet CMVR, environmental
requirements as per Public Notice issued by DGFT laying down specific standards and
other criteria for such imports.
8.7 Appropriate measures including anti dumping duties will be put in place to check
dumping and unfair trade practices.
9. EXCISE DUTY
9.1.2 Domestic demand mainly devolves around small cars not exceeding
3.80 meters in length. Small cars occupy less of road space and save on
fuel. These capture more than 85% of the market. India can build export
capability and become an Asian hub for export of small cars. The growth
of this segment needs to be spurred.
9.3.3 The Government will promote the use of multi-axle vehicles for
carriage of goods as they cause reduced environmental pollution and lesser
wear and tear on road surface in comparison to the existing 2-axle trucks.
10.1 Traffic on roads is growing at a rate of 7 to 10% per annum while the vehicle
population growth for the past few years is of the order of 12% per annum. Poor road
infrastructure and traffic congestion can be a bottleneck in the growth of vehicle industry.
A balanced and coordinated approach will be undertaken for proper maintenance, up
gradation and development of roads by encouraging private sector participation besides
10.2 For the convenience of traveling public the Government shall also promote multi-
modal transportation and the implementation of mass rapid transport systems.
11.1 The Government shall promote Research & Development in automotive industry by
strengthening the efforts of industry in this direction by providing suitable fiscal and
financial incentives.
11.2 The current policy allows Weighted Tax Deduction under I.T. Act, 1961 for
sponsored research and in-house R&D expenditure. This will be improved further for
research and development activities of vehicle and component manufacturers from the
current level of 125%.
11.3 In addition, Vehicle manufacturers will also be considered for a rebate on the
applicable excise duty for every 1% of the gross turnover of the company expended
during the year on Research and Development carried either in-house under a distinct
dedicated entity, faculty or division within the company assessed as competent and
qualified for the purpose or in any other R&D institution in the country. This would
include R & D leading to adoption of low emission technologies and energy saving
devices.
11.5 Allocations to automotive “cess fund” created for R&D of automotive industry shall
be increased and the scope of activities covered under it enlarged.
12.1 With the growth of vehicles, smooth traffic movement has come under severe strain.
The problem has been aggravated because of inadequate provision of parking facilities
generally. Starting with metropolitan and important towns, the Government will pursue
with State Governments and Local bodies amendments to bye laws for upward revision
of the parking norms for new residential buildings, construction of common parking for
existing residential areas besides parking upgradation in all commercial areas. Multi-
storied parking shall also be encouraged.
13.1 The automotive and oil industry have to heave together to constantly fulfill
environment imperatives. The Government will continue to promote the use of low
emission fuel auto technology.
13.2 The Government after considering the recommendations of the Expert Committee
on Auto Fuel Policy headed by Dr. R.A. Mashelkar, have approved a road map for
implementation for the auto fuel quality consistent with the required levels of vehicular
emissions norms and environmental quality. The Government will formulate a
comprehensive auto fuel policy covering the other related aspects and ensure availability
of appropriate auto fuel/fuel mixes at minimum social costs across the country. Suitable
institutional mechanism will be put in place for certification, monitoring and enforcement
of different technologies/fuel mixes. Appropriate fiscal measures will be devised to
achieve milestones in the roadmap for implementation of auto fuel policy.
13.3 In the short run, the Government will encourage the use of short chain hydrocarbons
along with other auto fuels of the quality necessary to meet the vehicular emissions
norms.
13.4 There is prime need to support the development and introduction of vehicles
propelled by energy sources other than hydrocarbons by promoting appropriate
automotive technology. Hybrid vehicles and vehicles operating with batteries and fuel
13.5 Internationally, the practice is to levy higher road tax on older vehicles in order to
discourage their use. In India, the road tax on vehicles varies in nature and quantum
among the states. Lifetime road tax is also in vogue. The endeavour will be to move to
the international model.
13.6 In order to facilitate faster up-gradation of environmental quality, the Govt. will
consider having a terminal life policy for commercial vehicles along with incentives for
replacement for such vehicles.
14. SAFETY
14.1 Government will duly amend the Central Motor Vehicles Rules, Bureau of Indian
Standards (BIS) and other relevant provisions and introduce safety regulations that
conform to global standards.
14.2 Testing and certification facilities need to be revised and strengthened in accordance
with safety standards of global order. Government, in partnership with industry, will tend
to this requirement.
15.1 Government recognises the need for harmonisation of standards in a global economy
and will work towards it.
The expert interviews were conducted with the following organizations. More than one
interview per organization was conducted to gauge the holistic view of information
collectibles.
Automobile Companies
ISI Emerging Markets Datatbase: Compilation of news articles, news snippets and
various secondary data reports.