Apr 29, 2000|
Consolidation and globalisation to change the shape of things ...
During financial year 98 and 99 the domestic auto ancillary industry faced tough times as they reeled under the slowdown faced by the automobile sector. In financial year 99 the production of the auto ancillary segment was valued at Rs 126.8 bn, of this the organised sector accounted for 78 percent and the small scale sector for 22 percent. For financial year 2000, the automobile industry has shown a smart recovery and all segments besides scooters have witnessed buoyant growth. This growth has also trickled down to suppliers of auto components. Though financial year 2000 compiled figures are not available for the auto ancillary segment (source: ACMA), this industry has witnessed a growth in sales and production in financial year 2000 as can be seen from the corporate performance of the companies in this sector and the fact that automobile sales directly impact them.
Auto ancillaries demand springs from two categories, Original Equipment Manufacturers (OEM) and the replacement market. As per industry sources, these segments have seen a pick up in financial year 2000. OEM grew by 35-40 percent during this period and the replacement market grew by 11 percent. The main reasons for this pick up in demand from the OEM market is introduction of new models in the passenger car and two wheeler segments, higher competition resulting in upgradation and re-launches of existing models, a recovery in the economic scenario and lower interest rates. However margins in this segment are very competitive, with suppliers bargaining power being poor. The replacement market too will benefit from the pick up in the OEM market as consumers will need to replace parts of their existing vehicles. Replacement demand is also expected to pick up when vehicle imports are permitted and the overall vehicle population goes up.
Though the growth prospects are bright for auto ancillary makers currently there are other issues that this industry will be faced with in future. They need to leave their complacency behind and require to shape up to meet the challenges to be faced from consolidation and globalisation in this sector. The Indian auto ancillary industry is made up of many small companies and this sector does not have any large players. Domestic as well as international automobile manufacturers are keen to reduce the number of their suppliers and they prefer vendors who supply complete sub-assemblies rather than individual components. This is being done to have a lean manufacturing structure so as to reduce costs and provide efficacy to the production process. This will in future eliminate the number of auto component manufacturers as well as improve economies of scale and hence bring down costs for auto component companies. The trend is emerging towards development of large component companies to take charge of the key technologies. The entry of Tata Autocomp Systems (Taco) spells out consolidation as it aims to create a supplier base for Telco and also for other companies.
The consolidation will result in division in the sector into three segments. Tier-1 will be the large component manufacturers who will supply the entire sub-assemblies, while the tier-2 and tier-3 will be the medium and small component manufacturers supplying components to the large players.
The entry of a large number of international auto players is changing other aspects too. The technological expertise, cost management and quality of products supplied by international auto component players will result in a shake out in the domestic scenario. With the entry of international car companies into India over the last couple of years, some auto component giants have also set up shop here. Delphi and Visteon Automotive System have already set up shop. As these companies are adept in bringing out new products and processes very quickly they definitely pose a threat to the domestic players. Besides this they are also in a position to undercut on pricing as they have huge resource bases. To counter this many domestic automobile manufacturers have entered into tie-ups with international players most of which are technical in nature. The international companies also plan to use India as an export base, due to cheap labour available here.
As new technology is going to be the key to survive, the domestic players need to get their act together and increase their spends on research and development. Currently the auto component manufacturers in India are spending only around 1 percent of their turnover on research and development, with the entry of global players this may not work. This is also important if they want to increase exports from India and reduce the impact of domestic revenues on their bottomline.
The advantages of the domestic players are that their products are simple and not too complex as the Indian auto market does not require too much sophistication currently. Besides this they have the experience in the Indian market and recognise the need of their clients well. However post 2003, the situation is bound to change. When the WTO guidelines come into enforcement, import duties on auto ancillaries will decline. The domestic players will find it difficult to counter the competition from better quality imports. These lower duties could also result in international auto players sourcing their auto component needs from the global market.
More Views on News
Mar 1, 2017
Atul Auto has reported a 11.2% YoY decline in the topline while the bottomline has declined by 23% YoY.
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%.
Oct 28, 2016
Good show amid the broad based recovery
Oct 4, 2016
Equitymaster analyses Initial Public Offering (IPO) of Endurance Technologies Limited
Sep 14, 2016
Should you subscribe to GNA Axle IPO?
More Views on News
Aug 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
Aug 10, 2017
Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.
Aug 16, 2017
The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Aug 16, 2017
Ensure your financial Independence, and pledge to start the journey towards financial freedom today!
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: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407