• OUTLOOK ARENA
  • VIEWS ON NEWS
  • JANUARY 5, 2004

Auto ancillaries: Huge potential

While some Indian companies were winning plaudits for their work in the services field such as IT and BPO, companies from the manufacturing sector weren't exactly treading the same path. However, if the developments that have taken place recently in the auto ancillary industry are any indication, it won't be long before the auto ancillary industry in the country 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. In this article, let us try and find out why the auto ancillary industry has the potential to become the next big outsourcing story and what are the obstacles in the path.

Following are some of the reasons as to why we are bullish about the auto ancillary industry:

US auto industry, the biggest exports market for the Indian auto ancillary industry, is under increasing pressure to cut costs. The 'big 3' automakers have been steadily losing markets shares to their cost competitive Japanese counterparts and discounts and rebates on their models is causing enormous strain on their margins. While these companies posted an operating margin of 2% in 2002, their net margins had come down to a mere 1% in the same period.

Therefore, it is only natural that these companies have started looking at low cost destinations from where they could import cheaper components. This is where India's technically qualified low cost manpower acts as a key advantage. It is estimated that while Indian manufacturers spend 3%-15% of sales as labour cost, global companies spend anywhere between 20%-40% of sales on wages. Not only this, if one considers that India accounted for only 0.26% of US imports of around US$ 69 bn in 2002, it gives us an idea of the huge market that is out there waiting to be tapped.

Another factor that has led to the growth in exports from the auto ancillary industry is the changing perception about the 'Made in India' 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. Not only this, about half of the auto ancillary companies have QS 9000 certification, considered to be an important pre-requisite for supplying to the US based OEM's.

Another reason we are bullish on the industry's export prospects is the huge global market. The size of the market is estimated to be around US$ 1 trillion out of which about 75% is accounted for by the OEM's and the remaining 25% by the replacement markets. Therefore, in addition to the US, the auto ancillary manufacturers can also focus on the European and the growing Chinese automobile market for growth. 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 also 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 (that's 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 throw cold water on India's ambitions. 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.

But there is a light at the end of the tunnel for Indian auto ancillary 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 country's IT advantage, it can bridge this gap faster than its rivals.

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 (Research Analyst) bearing Registration No. INH000000537 (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, Canada or the European Union countries, 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 (Research Analyst) 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