Automobile Components

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SUMMARY
  • The Automotive industry is a key driver of macro-economic growth and technological advancement in India.
  • The Automotive industry in India is leading in many segments- primarily in two-wheelers, cars and tractors.1
  • As of FY 2018, the US$ 51.2 bn Auto-Components industry in India is expected to grow to US$ 200 bn by 2026.2
  • The Compound Annual Growth Rate (CAGR) of the industry stood at 10% over a period of 2012-2018.3
  • The exports grew by 23.9 to each US$13.5 bn in 2018-19.4
  • With increasing vehicle parc in India, the aftermarket in 2017-18 raised by 9.8% to US$ 9.2 bn from US$ 8.4 bn in 2016-17.5
  • The Automobile component industry in India is projected to be the third largest in the world by 2025.
REASONS TO INVEST
  • A stable government framework with increased purchasing power, large domestic market and an ever-increasing development in infrastructure have made India a favourable destination for investment.6
  • India is emerging as a global hub for sourcing auto components. The key automotive markets like the ASEAN, Japan, Korea, Europe and huge domestic market are geographically closer to India.
  • India offers low cost by 10-25% relative to that offered by Europe and Latin America. Hence, India is cost competitive as compared to other manufacturing countries.
  • There are minimal restrictions on export-import which make it a favourable trade policy. Furthermore, specific incentives are available for export-oriented units and export processing zones.
  • India’s growing integration in Global Value Chains further offers impetus to the Automobile component industry.
  • Favourable government policy with 100% FDI allowed through automatic route.
  • Presence of enabling infrastructures like automotive training institutes and auto design centres, special auto parks and virtual SEZs for auto components.
  • India is the fastest growing major economy in the world with a GDP growth rate of above 7%.
  • An increasing working population and an expanding middle-class are likely to remain key demand drivers.
  • A large pool of skilled workforce and a strong educational system are the supporting factors for investment. Improvised R&D operations and laboratories that have been set up to conduct activities such as analysis, simulation and engineering animations are helping in additional investment prospects.
  • The growth of global Original Equipment Manufacturers (OEMs) sourcing from India and the increased indigenisation of global OEMs is turning the country into a preferred designing and manufacturing base.
STATISTICS
  • The Automobile component industry in India is set to become the 3rd largest in the world by 2025.
  • The turnover of the Automobile component industry in India has been US$ 51.2 bn in FY 2018and is expected to be US$ 100 bn by 2020. The predicted rise will be mainly due to the strong exports ranging between US$ 80-US$ 100 bn by 2026.8
  • Out of the total exports, the Auto components exports in India account for 4% and in 2017-18, exports stood at US$ 13.50 bn.9
  • Industry exports are projected to reach US$ 30 bn by 2020-21, further rising to US$ 80 bn by 2026. The exports grew by 23.9% to reach US$ 13.5 bn in 2017-18. Major export markets are Europe (34%), North America (28%) and Asia (25%).10
  • The domestic aftermarket for auto components stood at US$ 9.2 bn in 2017-18.11
  • The contribution of Automobile component industry in India’s GDP will account to as much as 5% to 7% by 2026.
  • The Automobile component in India contributes 2.3% to India’s GDP.12 About 1.5 mn people are directly and 1.5 mn are indirectly are employed in this industry.
  • Automotive Mission Plan (2016-26) projects to provide direct incremental employment to 3.2 mn by 2026. Realization of goals in the Automotive Mission Plan (2016-26) requires an additional investment of US$ 25-30 bn.
  • The Automobile component industry in India will be among the top three of the world in engineering, manufacturing and export of vehicles and components.
  • The Automobile component industry in India is composed of organized and unorganized sector. The organized sector refers to original equipment manufacturers (OEMs) and is engaged in the manufacture of high-value precision instruments. Whereas, the unorganized sectors comprise of low-valued products catering to after-market services.
  • Various sub-sectors of the Automobile component industry in India are engine parts, drive transmission & steering parts, body and chassis, suspension and braking parts, equipment, electrical parts and others such as fan belts, die-casting and sheet metal parts.
  • India is considered competitive in manufacturing of forgings, stampings, castings, machining, wiring harness and electronic fuel injectors.
FDI POLICY
  • 100% Foreign Direct Investment (FDI) is allowed under the automatic route in the Automobile component industry in India, subject to all the applicable regulations and laws.
  • The Foreign Direct Investment (FDI) inflows into the Automobile component industry in India during the period April 2000 – March 2019 is recorded at US$ 21.38 mn.13
SECTOR POLICY

Auto Policy 2002

  • The National Auto Policy had been formulated aiming at prescribing policy guidelines and enabling the framework to achieve the predicted growth objectives.14
  • The Department of Heavy Industries will conduct an independent assessment and mid-term review of the Auto Policy in 2022. 15
  • In the Automobile component industry in India, manufacturing and imports are exempted from licensing and approvals.

AUTOMOTIVE MISSION PLAN 2016-26

  • AMP 2016-26 seeks to outline the trajectory of the advancement of the Automobile component industry ecosystem in India.16 
  • The Automobile component industry in India foresees growth of US$ 260 bn- US$ 300 bn by the end of FY 2026.
  • India forecasts to be amongst the top 3 automotive industries in the world by 2026. There will be 65 mn direct & indirect jobs generated by 2026.
  • The GDP contribution of the Automobile component industry in India is projected to be 12% by 2026.

NATIONAL AUTOMOTIVE TESTING AND R&D INFRASTRUCTURE PROJECT (NATRIP)

  • National Automotive Testing and R&D Infrastructure Project (NATRiP), largest and most significant initiatives by Government of India, in the Automobile component industry in India.
  • The chief aim of the project is:
    • To generate core global competencies - state-of-art testing and R&D infrastructure.
    • To enable seamless integration by driving the automobile component industry in India into the global automotive excellence.17 
  • A total of US$ 573 mn investment has been done to adopt and implement global performance standards.
  • The key focus lies in providing low-cost manufacturing and product development solutions.

DEPARTMENT OF HEAVY INDUSTRIES & PUBLIC ENTERPRISES

  • The Department of Heavy Industries (DHI) has invested US$ 200 mn funds to modernise the Automobile component industry in India, by providing an interest subsidy on loans and investment in new plants and equipment.
  • DHI has also provided export benefits to intermediate suppliers of auto components against the Duty-Free Replenishment Certificate (DFRC).

NATIONAL ELECTRIC MOBILITY MISSION PLAN 2020 (NEMMP)

  • NEMMP aims to bring the transformational paradigm shift in the Automotive and Transportation industry by promoting hybrid and electrical mobility in India. It predicts a vehicle population of about 6-7 mn electric/hybrid vehicle in India by 2020.
  • There has been a cumulative outlay of US$ 2.15 bn for building such roadmap. It is a composite scheme involving demand-side incentives to facilitate the acquisition of hybrid/electric vehicles along with the provision of supply-side incentives.

FASTER ADOPTION & MANUFACTURING OF ELECTRIC HYBRID VEHICLES (FAME) SCHEME II

  • The scheme is proposed to be implemented from April 2019 to April 2022, for faster adoption of electric mobility and development of its manufacturing eco-system in the country.
  • Department of Heavy Industries will be the nodal agency and be responsible to review the scheme.18 
  • Total fund requirement for this scheme is US$ 1.44 bn over three years from 2019-20 to 2021-22.19
FINANCIAL SUPPORT

R&D INCENTIVES FOR INDUSTRY AND PRIVATE SPONSORED RESEARCH:

  • A weighted tax deduction is given under section 35 (2AA) of the Income Tax Act.20 
  • Weighted deduction of 200% is granted to assess for any sums paid to a national laboratory, university or institute of technology, or specified people with a specific direction and that the said sum is used for scientific research within a program approved by the prescribed authority.

MANUFACTURERS WITH AN IN-HOUSE R&D CENTRE:

  • Section 35 (2AB) of the Income Tax Act, 1961 provides weighted tax deduction of 150% of the expenditure incurred by a specified company, on scientific research in the in-house R&D centres as approved by the prescribed authority. This does not include expenditure on the cost of any land or building.
  • The weighted tax deductions of 150% are effective until 31 March 2020. Post that, the weighted tax deductions will be 100%.

STATE INCENTIVES:

  • Apart from the mentioned, each state in India offers additional incentives for industrial projects. Incentives are in areas like subsidized land cost, relaxation in stamp duty exemption on sale and lease of land, power tariff incentives, concessional rate of interest on loans, investment subsidies, tax incentives, backward areas subsidies and special incentive packages for mega projects. Few examples are:
  • Andhra Pradesh:
    • The Government of Andhra Pradesh is committed to providing land at concessional rates, along with 24 hours uninterrupted power supply.
    • Capital subsidy of 50% for common infrastructure in auto clusters and ASMC developers, up to a maximum of US$ 3.07 mn.
    • Financial assistance limited to 75% of the cost, subject to a maximum of US$ 38,461 for obtaining patent registration and 50% of all charges, subject to a maximum of US$7,692 paid for obtaining quality certification. This is applicable to only MSME units.
    • Under Marketing Incentives, 50% of the cost of participation with a maximum amount of US$ 7,692 to be reimbursed to a maximum of 10 MSME units per year for participating in international trade fairs.
  • Gujarat:
    • Auto component manufacturers can either avail general incentives under the Gujarat Industrial Policy 2015, or under the scheme for Mega/ Innovative Projects.
  • Jharkhand:
    • Jharkhand introduced Automobile and Auto Component Policy 2016 with an aim to make Jharkhand, a preferred destination for automobile and auto-component manufacturing units.
    • The policy encourages the establishment of Tier-I, Tier-II and Tier-III auto-component manufacturers in the state.
    • Provision of financial assistance of 50% for fixed capital investments in building and common infrastructure up to a maximum of US$ 3.07 mn.
    • 100 % electricity duty exemption shall be provided for 10 years from the date of production.

EXPORT INCENTIVES:

  • Export subsidy is available to exporters as a % of duty credit scrip under Merchandise Exports from India Scheme (MEIS).
  • Additionally, the MEIS Scheme has been extended to additional tariff lines and expanded to 65 countries as per the recommendations by ACMA.

AREAS BASED INCENTIVES:

  • Incentives for units in Special Economic Zones (SEZs) / National Investment & Manufacturing Zones (NIMZs) as specified in respective Acts or setting up projects in special areas like the North-east region, Jammu & Kashmir, Himachal Pradesh & Uttarakhand.

KEY POINTS IN THE UNION BUDGET 2018-19:

  • The increase in duty on selected items such as engine & transmission parts, brakes and parts thereof, gearboxes and parts thereof, airbags and so on, from 7.5-10% to 15% will provide a boost to domestic manufacturing. Since most of the component manufacturing units are SME’s. Thus, the reduction in the corporate tax rate to 25% for SMEs with a turnover of less than US$ 38.46 mn will benefit the Automobile component industry in India.
INVESTMENT OPPORTUNITIES

Engine & Engine Parts:

  • New technological changes like turbochargers and common rail systems.
  • Outsourcing to gain traction in the short to medium term.

Transmission & Steering Parts:

  • Replacement market share in sub-segments such as clutches is likely to grow due to rising traffic density.
  • The entry of global players is expected to intensify competition in sub-segments such as gears and clutches.

Suspension & Breaking Parts:

  • The segment is estimated to witness high replacement demand, with players maintaining a diversified customer base in the replacement and OEM segments besides the exports.
  • The entry of global players is likely to intensify competition in sub-segments such as shock absorbers.

Equipment:

  • Companies operating in the replacement market are likely to focus on establishing a distribution network, brand image, product portfolio and pricing policy.

Metal Parts:

  • Manufacturers are expected to benefit from the growing demand for sheet metal parts, body & chassis, fan belts, pressure die castings, hydraulic pneumatic instruments in the two-wheeler segment.
  • Leading players in the sheet metal parts sub-segment are in the process of expanding their customer base.

Hybrid & Electric Vehicles Components:

  • It is estimated that there will be a huge demand in India for low-cost hybrid and electric vehicles (xEVs) that are suitable short-distance urban commutes (averaging 50-100 km per trip) and rugged enough to perform reliably in the summer and in the monsoon season in India.
FOREIGN INVESTORS
  • ZF (Germany)
  • Aisin Seiki Company (Japan)
  • Bosch (Germany)
  • Continental Engines (USA)
  • Delphi (UK) Denso (Japan)
  • FAG (Germany)
  • Magneti Marelli (Italy)
  • TRW (USA)
  • Valeo (France)
  • WABCO (Germany)
  • David Brown/ Bharat Forge
  • Schaeffler
  • Honda
  • MG Motor21
SOURCES
  1. Press Information, http://pib.nic.in/newsite/PrintRelease.aspx?relid=186819 accessed on 11 May 2019
  2. McKinsey & Company, The auto component industry in India: Preparing for the future, https://www.mckinsey.com/~/media/McKinsey/Featured%20Insights/Asia%20Pacific/The%20auto%20component%20industry%20in%20India%20preparing%20for%20the%20future/ACMA%20Vertical_Onscreen_Final.ashx accessed on 11 May 2019
  3. Automotive Components Manufacturers Association of India, Industry Statistics, https://www.acma.in/auto-component.php accessed on 11 May 2019
  4. EY external source, Industry report of Emerging Markets Information Service (EMIS), Indian Auto Components Industry – Update, accessed on 11 May 2019
  5. Automotive Component Manufacturers Association of India, About ACMA, https://www.acma.in/about-us.php accessed on 11 May 2019 EY
  6. Industry report of Emerging Markets Information Service (EMIS), Indian Auto Components Industry – Update,  accessed on 11 May 2019
  7. Automotive Component Manufacturers Association (ACMA), Press Conference 2018- Indian Auto Component Industry grows by 18.3% in 2017-18, https://www.acma.in/press-release.php accessed on 11 May 2019
  8. EY Industry report of Emerging Markets Information Service (EMIS), Indian Auto Components Industry – Update,  accessed on 11 May 2019
  9. Automotive Components Manufacturers Association of India, Industry Statistics, https://www.acma.in/auto-component.php accessed on 11 May 2019
  10. Automotive Component Manufacturers Association (ACMA), Press Conference 2018- Indian Auto Component Industry grows by 18.3% in 2017-18, https://www.acma.in/press-release.php accessed on 11 May 2019
  11. Automotive Component Manufacturers Association (ACMA), Press Conference 2018- Indian Auto Component Industry grows by 18.3% in 2017-18, https://www.acma.in/press-release.php accessed on 11 May 2019
  12. Automotive Component Manufacturers Association (ACMA), Press Conference 2018- Indian Auto Component Industry grows by 18.3% in 2017-18, https://www.acma.in/press-release.php accessed on 11 May 2019
  13. Department for Promotion of Industry and Internal Trade, Fact Sheet on Foreign Direct Investment, https://dipp.gov.in/sites/default/files/FDI_Factsheet_27May2019.pdf accessed on 28 May 2019
  14. Department of Heavy Industries, National Auto Policy, https://dhi.nic.in/writereaddata/UploadFile/DHI-NAB-Auto%20Policy%20Draft%20Document_vDRAFT.pdf accessed on 11 May 2019
  15. Department of Heavy Industries, National Auto Policy, https://dhi.nic.in/writereaddata/UploadFile/DHI-NAB-Auto%20Policy%20Draft%20Document_vDRAFT.pdf accessed on 11 May 2019
  16. Society of Indian Automobile Manufacturers, Automotive Mission Plan 2016-26: A curtain raiser, http://www.siamindia.com/uploads/filemanager/47AUTOMOTIVEMISSIONPLAN.pdf accessed on 08 May 2019 
  17. National Automotive Testing and R&D Infrastructure Project, Homepage, https://www.natrip.in/ accessed on 08 May 2019
  18. Department of Heavy Industries, Notification of FAME India Scheme Phase-II, https://dhi.nic.in/writereaddata/UploadFile/publicationNotificationFAME%20II%208March2019.pdf accessed on 08 May 2019
  19. Press Information Bureau GoI- Cabinet, Cabinet approves Scheme for FAME India Phase II, http://pib.nic.in/newsite/PrintRelease.aspx?relid=189081 accessed on 08 May 2019
  20. Income Tax, https://www.incometaxindia.gov.in/Rules/Income-Tax%20Rules/103120000000007105.htm accessed on 08 May 2019
  21. Invest India, https://www.investindia.gov.in/sector/automobile accessed on 30 May 2019
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