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Bharat Forge: Investor meet extracts
Sep 6, 2005

At the 2nd Equitymaster ‘Investor Meet’ held on August 27, 2005 at Pune, Mr Maheshwari, Group CFO, Bharat Forge made a presentation giving an insight about the present global auto component industry, its future and how well is the group positioned to exploit the emerging trends. The extracts of the same are as follows:

What is the reason of the current outsourcing boom?
The trends in the global auto industry can be summarised as follows. Firstly, global OEM players are witnessing tremendous pressure on margins on account of rising manufacturing costs without the commensurate pricing power. To give an example, the cost of a car in 2002 was approximately 11,000 Euros. Apart from normal increase in the costs, there is an additional burden on account of innovation, electronic, safety and emissions. These costs are likely to result in an increase of Euro 3,000 by 2015, thereby resulting in the total cost of Euro 15,000. However it is expected that the final consumer can bear a cost burden of Euro 12,000 by 2015. Hence, there is tremendous pressure to reduce costs by atleast Euro 3,000 or 1/5th of the overall cost by 2015. This can be achieved by outsourcing mainly the traditional items like mechanical parts.

Secondly, there is a strategic shift in the business model of global OEM customers. Earlier, they had a vertically integrated manufacturing model. In simple language, the manufacturer of car would like to do everything right from manufacturing of parts to launching of new models. Now, because of the cost pressure and increasing competition, OEMs are concentrating on activities that are critical and related to the core business i.e. the conception, development, strategic assembly, brand management, marketing, finance of car and after-sales services. They do not want to do manufacturing of components except for few that are very critical and prefer to outsource. The main objective being reducing the product development time, improving brand loyalty and reducing costs.

Size of the global market: The size of the global component market is expected to grow from US$ 1,200 bn in 2003 to grow to US$ 1,650 bn by 2015. The important point is that between 2003 and 2015, there is going to be added US$ 450 bn worth of additional requirement for components. If one considers size by geography, Japan is a stable market and is not growing at all. Europe and the US are also not growing too much (1% YoY each). Rest of World, which includes India and China, is growing at 6% on an average, which is considered to be a very high.

As the developed nations are not witnessing growth, it is resulting into a significant outsourcing opportunity. Out of US$ 1,650 bn of total auto component market, there is US$ 425 bn that is primarily done by the OEMs in their home country, as it is very critical for them (relating to body and engine assembly). Outsourcing worth US$ 525 bn does not make sense because of no significant cost benefits involved. Rest of the industry worth US$ 700 bn is the domain of low cost countries (LCCs) including India. This opportunity is available to auto component manufacturers if they can get our act together, and benchmark against the best global companies.

How are Indian players placed?
The positioning of the Indian players was highlighted by defining the various types of opportunities that are available in the auto component industry.
  • Skill intensive parts requiring high process engineering - our competitiveness is very high because of a highly technical and relatively low cost manpower.

  • Technical aggregates – competitiveness is emerging; Indian players are getting into assembly operations and aggregation of technical competence.

  • Labor intensive parts – competitiveness is not so great. China takes the cake in this segment.

  • Relatively low technology plastic and silicon intensive parts – Indian players do not have much presence in this segment.

Thus, the competitiveness of Indian players lies in those parts that require high process engineering and high technical capabilities. We feel that going forward, our technical capabilities will be of significant advantage, as the nature of work that Indian players can perform will be relatively low in volumes and high in value, thereby improving the overall margins and return ratios.

How is Bharat Forge poised to take advantage of these trends?
  • Manufacturing in India, Germany and US

  • 2nd largest forgoing company worldwide

  • Diverse product and customer profile

  • Capacity constraints issues are being addressed by increasing capacity

  • Full services supply capability

  • Elaborate product profile across steel and aluminum

  • Global OEM customer base

  • Diversified geographical reach

What is our view?
We agree with the perspective of the company on the current global scenario and the available opportunities to the Indian auto component manufacturers. As far as Bharat forge is concerned, we believe that the company is best placed to capture the outsourcing story in future on account of its global scale, the growth strategy (both organic and inorganic), technical prowess and a strong list of global OEMs as its customers and the niche area in which the company is present. For further details on the growth drivers for the company refer to our research report.

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