X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Auto ancillaries: In the driverís seat - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Mar 1, 2004

    Auto ancillaries: In the driverís seat

    While some Indian companies were winning plaudits for their work in the services field such as IT (information technology) and BPO (business process outsourcing), companies from the manufacturing sector werenít exactly treading the same path. However, if the developments that have taken place recently in the auto ancillary industry are any indication, it will not be long before the domestic auto ancillary industry does a repeat act. And this newfound optimism in the industry is not without reason.

    For one, the industry exports have grown at a CAGR of 19% in the last five years. Secondly, many among the best global auto makers have started either outsourcing from the Indian auto ancillary companies or have set up their own manufacturing bases in the country. So, what is it thatís making some of the best names in the global auto industry make a beeline for Indian shores and driving this new wave of auto components outsourcing. Letís try to find out:

    The worldís biggest car market, the US is not exactly in the best of health. Although this is not a new phenomenon, this time around itís not the sales that are worrying the US car manufacturers (the industry has seen four years of record vehicle sales and in 2003, the industry is likely to have closed the year with sales in excess of 16 m cars). Still, the industry is struggling to make ends meet. The reason is the overcapacity that is prevalent in the US markets. Even as thousands of cars are piling up unsold, the Japanese are flooding the US markets building up efficient new plants.

    US car and light truck market share%
    1996 2003*
    US big 3 72.5% 63.9%
    Japan 17.9% 22.6%
    *forecast
    Source: Economist

    This unprecedented glut is forcing carmakers to slash prices and consequently, putting enormous amount of strain on margins. This however, is not likely to continue forever and the US automakers will have to fight their Japanese counterparts on the cost front. Therefore, one viable alternative for these companies is to outsource components from cost competitive destinations like India.

    This is where the low cost advantage of the Indian auto components manufacturers comes into play. It is being estimated that while Indian companies spend 3%-15% of sales on labour cost, global companies spend 20%-40% and therefore it is only natural that the US automakers find it cheaper to import components from India rather than manufacture it in house or source it from US based suppliers.

    Another factor that has led to the growth in exports from the auto ancillary industry is the changing perception about the ĎMade in Indiaí products. While the Indian manufacturing industry is not exactly known for its cutting edge technology and stringent quality standards, things are beginning to change. The fact that as many as six companies boast of the coveted Deming awards (four auto ancillary companies and two auto companies) is a testimony of the fact that the Indian auto ancillary industry is capable of manufacturing products that are at par with the best in the world in terms of quality. It would be pertinent to add that not a single Chinese company has as yet won the Deming quality award. Not only this, about half of the auto ancillary companies in India have QS 9000 certification, considered to be an important pre-requisite for supplying to the US based OEMís. The point we are trying to impress on is not that we have got these awards. The fact is that Indian companies are not afraid of competition in the global markets. There has been a sea change in the mindset, per se. This may seem a very broader argument, but it is not.

    The growth of the domestic auto industry has also helped increase the quality awareness among Indian components manufacturers. The entry of global players such as Ford, GM, Toyota and Honda into the Indian market has allowed the Indian manufacturers to work with these players on global production, quality and delivery systems. It has also helped the global players to see for themselves the evolution of many auto components manufacturers and they are therefore now entrusting them with more work.

    Another reason we are bullish on the industryís export prospects is the huge global market. The size of the export market is estimated to be around US$ 1 trillion out of which about 75% is accounted for by the OEMís and the remaining 25% by the replacement market. Therefore, in addition to the US, the auto ancillary manufacturers can also focus on the European and the growing Chinese automobile market. Already, a couple of companies have made some strategic acquisitions in the European markets (Bharat Forge acquired a German forging company and Sundram Fasteners acquired precision forging business of Dana Spicer Europe). This would help these companies to reduce their dependence on the US markets and open up windows of opportunity in the European markets. In fact, Sundram Fasteners is also setting up a plant in China to cater to the Chinese domestic market, which is also growing at a very fast pace.

    Therefore, on account of a host of favorable factors given above, according to industry estimates, the exports from the Indian auto components industry should total roughly around US$ 50 bn by 2015 (thatís a 39% CAGR from current levels).

    However, there are a couple of caveats. While the Indian IT industry got a headstart over its rivals, the same cannot be said about the auto components industry as countries like China and Thailand might put a spanner in domestic industryís wheels. While China has huge economies of scale and lower labour cost than India in some areas, Thailand is believed to have excess capacity (legacy of East Asian crisis) and depreciated assets. Therefore, these countries are capable of beating India at its own game, that of low cost.

    US component imports (US$ m)
    1998 1999 2000 2001 2002
    India 99 117 150 141 177
    China 863 1,041 1,368 1,483 1,884
    Thailand 309 374 362 380 516

    As can be seen from the above table, while Chinaís exports to the US have grown by a CAGR of 27% over the last four years, that of Thailand and India have grown by 14% and 16% respectively. However, in 2002, both Chinaís (27%) and Thailandís (36%) exports have grown at a faster rate than Indiaís (26%). Therefore, if this trend is to continue, we might not be able to catch up with the two Asian giants as far as components exports to the US is concerned.

    Another key factor to consider is that the auto ancillary manufacturers largely belong to the small-scale sector. These smaller players have been deprived of both capital and technology and if the sector as a whole has to become competitive, the small-scale sector deregulation has to accelerate. Otherwise, it will only be Tier I players who will benefit from the growth opportunity.

    But there is a light at the end of the tunnel for the domestic manufacturers. It is being observed that over the last few years, automakers have been increasingly passing on greater responsibilities to their suppliers and they no longer want mere manufacturers but suppliers who can provide them with complete set of services like research, development and design, testing etc. and this is where India can score over its Asian rivals, as thanks to the countryís IT advantage, it can bridge the gap faster than its rivals.

    As is evident from the figure above, thanks to the countryís vibrant educational system and large pool of talented engineers, the country ranks ahead of even developed countries like USA in terms of design and machining capabilities and availability of qualified engineers. Therefore, once the global auto industry comes out of the current quagmire, costs will not only be the only competing factor and component makers will have to cope up with the pace of auto makers in terms of designing capabilities and this is where India will have to wrest the initiative away from its major rivals like China and Thailand. Therefore, investments in setting up design centers is the need of the hour and the countryís IT expertise will have a big role to play in this.

    Following is the list of some of the key companies that we feel would be the major beneficiaries of the current auto components outsourcing wave.

    Exports from some key companies
    (Rs m) Exports (% of sales)
    Company FY02 FY03 %change FY02 FY03
    Bharat Forge 1,104 2,714 146% 26% 44%
    MICO 1,928 2,490 29% 13% 16%
    Motherson Sumi 479 1,062 122% 16% 25%
    Sundram Fasteners 817 961 18% 21% 21%
    Exide 357 434 22% 5% 5%

    If the growth in exports from the above mentioned companies is any indication, the task of achieving US $ 50 bn worth of exports by 2015 seems to be well within our reach.

     

     

    Equitymaster requests your view! Post a comment on "Auto ancillaries: In the driverís seat". Click here!

      
     

    More Views on News

    Atul Auto: Demonetization Impacts Volumes and Profitability (Quarterly Results Update - Detailed)

    Mar 1, 2017

    Atul Auto has reported a 11.2% YoY decline in the topline while the bottomline has declined by 23% YoY.

    Bharat Forge Ltd: Subdued Performance, Recovery on Cards? (Quarterly Results Update - Detailed)

    Nov 22, 2016

    Bharat Forge has announced its financial results for the second quarter of the financial year 2016-17 (2QFY17). During the quarter, revenues declined by 20.1% YoY and net profits declined by 26.3%.

    Exide Industries: Good show amid the broad based recovery! (Quarterly Results Update - Detailed)

    Oct 28, 2016

    Good show amid the broad based recovery

    Endurance Technologies Ltd (IPO)

    Oct 4, 2016

    Equitymaster analyses Initial Public Offering (IPO) of Endurance Technologies Limited

    GNA Axles Limited (IPO)

    Sep 14, 2016

    Should you subscribe to GNA Axle IPO?

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    COMPARE COMPANY

    MARKET STATS