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  •   RESEARCH IT!  >>  SECTOR INFO  >>  SEPTEMBER 04, 2007

     Auto Ancillaries [Key Points | Financial Year '07 | Prospects | Sector Do's and Dont's]
  • The fortunes of the auto ancillary sector are closely linked to those of the auto sector. Demand swings in any of the segments (cars, two-wheelers, commercial vehicles) have an impact on auto ancillary demand. Demand is derived from original equipment manufacturers (OEM) as well as the replacement market. Amongst the total production range, engine parts account for 31% of the total revenues of the industry.

  • ACMA, the Indian auto component industry body had an estimated 536 players registered with it in FY07. The industry has grown at a CAGR of 27% between 2001 and 2006 with total output in value terms touching US$ 15 bn in 2006. Exports have grown at a much higher rate of 38% CAGR between 2002 and 2006 with output touching US$ 2.9 bn.

  • Margins in the replacement market are higher than the OEM market. OEM requirements increase or decrease, depending upon general demand scenario and launch of vehicles. This market is very competitive and component manufacturers have to compromise on margins to bag bulk orders. Moreover, delivery schedules and quality standards have to be adhered to very strictly.

  • Indian auto ancillary sector has traditionally suffered from poor quality. While this still holds true for the unorganized sector, the organized sector has been resorting to increased automation to reduce the defect levels. Defect rates in domestic auto ancillaries (including the popular suppliers) are in the range of 1,000 parts per million (ppm) against a global average of 200 ppm.

  • One area where domestic units compare favourably with their international peers is in terms of costs. Lower labour costs gives Indian auto ancillary companies an absolute cost advantage. Just to put things in perspective, ACMA numbers suggest that wage cost accounts for 3% to 15% of revenues for Indian manufacturers as compared to 20% to 40% for US players. India's strength in exports lies in forgings, castings and plastics historically. But this is changing with more component manufactures investing in upgradation of technology in recent years.

     Key Points
    Supply

    Low for high technology products. Unorganized sector dominates the domestic component market due to excise benefits. Generally, excess supply persists.

    Demand

    Linked to automobile demand. Export demand is linked to the increasing acceptance towards outsourcing.

    Barriers to entry

    Capital, technology, OEM relationships, customer service, distribution network to meet replacement demand.

    Bargaining power of suppliers

    Low with OEMs. Relatively high in the replacement market

     
    Bargaining power of customers

    Companies operating in the export market face competition at a global level. At the domestic level, market structure is fragmented for a large number of ancillary products. Most companies adopt low cost and differentiation strategies. In some products (like batteries), only two or three companies control over 80% of the market.

    Competition

    Will intensify, as global players will enter the market leading to consolidation. Dereservation of SSI will result in access to capital and technology

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     Financial Year '07
  • With growth in passenger vehicles and commercial vehicles turning robust once again in FY07, auto component industry also witnessed growth as output increased by 25% in FY07 (provisional). Exports too continued with its strong performance and grew by an impressive 40%.

  • In light of increased competition in the global market and over supply situation, bigger auto majors faced significant pressure on margins. However, the imperative to invest in new product development increased. This resulted in select global majors increasing budget for outsourcing of components in order to save cost.

  • Capacity utilisation rates of the auto ancillary sector as a whole increased significantly in light of higher exports as well as growth in domestic demand in FY07. The demand for commercial vehicles increased by 33% in FY07. For instance, Bharat Forge had to ramp up capacity by 20% to meet demand as opposed to capacity utilisation of just 68% in FY06. The same was the case with Exide.

  • The year was also witness to increase in overseas acquisitions by domestic companies. Tractor giant M&M, in a bid to become a leader in forgings acquired a clutch of Europe based ancillary companies. Amtek Auto too continued with its overseas binge.

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     Prospects
  • There has been a conscious effort by manufacturers to improve productivity of the suppliers in the past few years. Though the number of active vendors has declined significantly for auto manufacturers, technology transfer and fresh fund infusions have resulted in improved productivity in the remaining ones. This is a big positive for the industry, as historically, the sector has been deprived of proper technical know-how and lack of funds. Relaxation of FDI norms for the small-scale sector could emerge as one of the key growth drivers in the long run. The Indian automotive components industry has lined up sizeable investment schedules for the next few years.

  • The automobile sector is cyclical and dependent on the growth of the economy and improvement in infrastructure. Factors like increased public spending, favorable interest rates and general improvement in per capita income points towards higher demand for automobiles in the future. Also, government's initiatives in the infrastructure sector such as the Golden Quadrilateral project and NHDP (National Highway Development Programme) is likely to give boost to four-wheeler sales especially CVs. Just to put things in perspective, we expect CV segment to grow by 8% to 9%, 2-wheeler demand to increase by around 12% to 15% and passenger car sales growth at 10% to 12% in FY08. This is a positive for auto ancillary manufacturers.

  • In the long term, the growth of this sector will depend partly on pace of indigenisation levels across all segments. The prospects look bright as most companies are increasing the indigenous components, in an effort to reduce their currency losses and remain competitive. Given the fact that many global players are launching models through the CKD route, there is a fair chance that domestic ancillary manufacturers will witness faster growth going forward. Also, the fact that auto manufacturers like Ford, Hyundai and Maruti are exporting cars, prospects look encouraging.

  • In the future however, auto ancillary companies in India will face tough times, because as competition increases, manufacturers will find it difficult to increase prices and will try to cut costs. This will put pressure on margins of auto ancillary manufacturers. In the near future, companies will need to have manufacturing lines that can be adapted for new models, have strong technology backing, an ability to export to developed markets, market dominance in specific products and a growth plan driven by volumes and product innovations. Companies will have to focus on quality and abide by delivery schedules if they want to survive. As manufacturers sourcing components are keen to get components from fewer sources in future, as compared to what is happening currently, this will lead to consolidation in the sector. Many players have to face extinction, bulk of them in the small-scale sector.

  • The growing number of Free and Preferential trade agreements being signed by India with countries like Thailand, Singapore and other ASEAN countries will hurt the cost competitiveness of Indian companies as Indian players play significantly higher duties than its Asian counterparts. Therefore, Indian companies might lose out on big orders if the duty structure is not rationalised.

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    Views Research Reports: Auto Ancillary Sector | All companies