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Economic and Political Weekly July 5, 20032784

EPW

AUTOMOTIVECOMPONENTS

New Rising Star

The Indian auto components industry appears set to moveinto top gear. After software and BPO, auto parts is beingmentioned as the site of the next big outsourcing wave likely

to bring in a clutch of investors looking for a low-cost, high-quality production base. A number of the worlds largestautomobile- and equipment-makers have already announcedplans to source parts from Indian companies or expand theirown production operations in the country, especially forexport. This trend is likely to gain further momentum as arecession-hit global automotive industry struggles to cutproduction costs. Export figures provide a strong indicationof the shape of things to come: Indian auto componentexports, worth $ 291 mn in 1996-97, had grown to $ 800 mnin 2002-03 and are estimated to cross $ 2 bn by 2005-06. Thenew-found optimism is reflected in the share prices of

several auto parts companies, with stocks scaling new highsin recent weeks. After two very difficult years, companiesin the sector witnessed a turnaround in 2002-03. Yet as it putsthe downturn of recent years behind it and looks to a revival,the auto parts industry faces several challenges in establishinga long-term presence in a competitive global market.

The current boom in the auto ancillary sector can be tracedback to economic liberalisation which brought in its wakea large number of global automobile-makers eager to gaina foothold in the burgeoning Indian market. The inflow offoreign direct investment in the sector as well as the influxof component suppliers made reform imperative for thedomestic components industry which had hitherto beenrequired only to supply parts for ageing models of vehicles,calling for little technological innovation. Faced withcompetition, several companies focused on developing theirtechnology base and improving quality. Today, apart fromlow production costs, the Indian parts manufacturing sectorhas also come to be recognised for its skilled labour forceand ability to meet the quality requirements of the inter-national market. Some companies have obtained internationalquality certification and awards for consistent high qualityof products. An impressive degree of indigenisation ofautomobile parts used in vehicles manufactured by foreignmajors for the domestic and export market has been achieved.

Of late, the sluggish automobile market in industrial countrieshas put pressure on parts manufacturers to cut costs, forcingthem to look at low-cost countries such as India and Chinaas supply bases. Several automobile majors, seeking tomanufacture for the international market, have also inrecent months decided to make India their global exportproduction base.

The growing acceptability of Indian components in overseasmarkets is reflected in the changing export trend. The pro-portion of aftermarket sales (parts used for maintenance ofa vehicle after it has been sold) in the export basket hasdeclined over the past five years. Today, OEM (original

equipment manufacturer) sales account for almost 40 percent of total component exports, and this share is expectedto rise to 70 per cent over the next three years, according tothe Automotive Component Manufacturers Association.Sales to OEMs results in higher margins, repeat orders andlinkages to the global supply chain network. In 20 years,exports are expected to touch $ 25 bn. Even so, Indias sharein the global auto ancillary market, worth $ 750 bn today,

will still be minuscule, indicating the potential for growth inthis area. In order to successfully tap this market, however,Indian companies will have to spruce up their image.Aggressive investment in new technologies and productdevelopment will be needed, along with cost control andscalability.

Many companies are already planning big increases inR and D spending, some in collaboration with their overseaspartners. Indian companies are also increasingly focusing ondesign and development. The present focus almost exclu-sively on the US and European markets will have to beexpanded to explore markets in Asia. Diversification ofcustomer base can help cope with pricing pressures. Indiancompanies will, of course, have to keep one step ahead ofcompetitors in China who enjoy advantages in costs andinfrastructure. They will also face significant challenges inhigh-end, cutting-edge technology development where theylack the muscle to make heavy investments to compete withthe international majors. In fact, in recent years, severalcomponents companies have found themselves squeezed outof the market due to technological shortcomings and havehad to sell out to MNCs. To gainfully leverage their technicalstrengths, therefore, the companies will have to concentrateon products where they can hold their own against the com-petition. Exports should also be developed as a long-term

strategy rather than simply as a diversion to tide over adomestic downturn.