Make in India: Sector Survey – Automobile components; Emerging as a global hub for sourcing auto parts

7 Months agoThis article is part of the ‘Sector Survey’ series that takes a closer look into each sector identified by the Government of India in the ‘Make in India’ initiative.

OVERVIEW

 

India is fast emerging as a global hub for sourcing auto parts. The country’s geographical proximity to key global automotive markets such as the Association of Southeast Asian Nations (ASEAN), Japan, Korea and Europe gives it a distinct advantage over its competitors in this sector. Other factors for its rapid growth include a floating end-user market, improved consumer sentiment and the return of adequate liquidity in the financial system.

The automobile components industry contributes towards 25.6% to the manufacturing GDP and 3.8% to the national GDP, proving indirect employment to 1.5 million people.1 It can be divided broadly into the following categories:

  • The organised sector which caters to the Original Equipment Manufacturers (OEMs) and consists of high-value precision instruments
  • The unorganised sector which caters mostly to the aftermarket category and comprises low-valued products2
 

PRESENT SITUATION

 

The auto component industry registered a turnover of USD 39 billion in the Financial Year (FY) 2015-2016 registering a growth rate of 8.8%.3 A cost-effective manufacturing base keeps costs lower by 10-25 % as compared to operations in Europe and Latin America. The hourly labour cost in India for manufacturing averages at 92 cents as opposed to USD 3.52 in China.

Country’s exports of auto components edged up by 3.5% to USD 10.8 billion in 2015-16.4 Exports have been estimated to account for as much as 26% of the market by the year 2021. Indian auto components are exported to more than 160 countries.5 Europe accounts for the largest share of Indian auto components exports at 38.1%, followed by North America at 21% and finally Asia at 25%.6 The components which are exported include parts of diesel engines, crank shift for engines, spark ignitions, gear boxes, hydraulic power steering systems, etc.7

The Department of Industrial Policy and Promotion (DIPP) reported that the cumulative foreign direct investment (FDI) inflows into the Indian automobile industry from April 2000 to March 2016 was USD 15.065 billion.

 

NEW INITIATIVES & VISION FOR THE FUTURE

 

The target for this sector is that it crosses the USD 100 billion mark with exports reaching USD 35-40 billion and USD 20-22 billion in revenue from overseas assets. Initiatives that are taken by the government to encourage the growth of this industry includes:

  • The Automotive Mission Plan 2016-26 (AMP 2026) is the collective vision of the government of India and the automotive industry on where the industry should be after 10 years. AMP 2026 seeks to define the trajectory for the automotive ecosystem in India including the regulations and policies that govern research, design, technology, testing, manufacturing, etc. of automotive vehicles, components and services. It envisages that the Indian automotive industry would grow 3.5-4 times in value from its current output and reach around USD 248.6 billion by 2026.8
  • Voluntary Vehicle Fleet Modernization programme (V-VMP) proposed by the Ministry of Road Transport and Highways that offers incentives worth 8-12% of the cost of a new vehicle for surrendering the old one. It would be able to generate steel scrap worth USD 1,728 million domestically every year with the set-up of organised shredding centres in addition to providing environmental and energy efficiency benefits.9

After the implementation of such initiatives by the government, several global tier-I suppliers have already announced plans to increase procurement of auto parts from their Indian subsidiaries. French tyre manufacturer Michelin announced plans to produce 16,000 tonnes of truck and bus tyres from its Indian facility this year, a 45% rise from last year. Auto components maker Bharat Forge Ltd (BFL), the flagship company of the USD 3 billion Kalyani Group, has formalised an agreement with Rolls-Royce Holdings Private Limited Company (Plc), which will supply BFL with critical and high integrity forged and machined components. Everstone Capital, a Singapore-based private equity (PE) firm, has purchased 51% in Indian auto components maker SJS Enterprises for an estimated USD 51.35 million.10

Given the policies and promotion along with the global demand, there is no doubt that the auto components sector of India is poised to grow at a rapid speed in the coming years.

Citations:
1 http://www.acma.in/president-acma.php
2 http://www.ibef.org/industry/autocomponents-india.aspx
3 http://www.siamindia.com/statistics.aspx?mpgid=8&pgidtrail=9
4 http://www.siamindia.com/statistics.aspx?mpgid=8&pgidtrail=9
5 http://www.acma.in/about-acma.php
6 http://www.ibef.org/industry/auto-components-presentation
7 http://www.acma.in/docmgr/ACMA_Presentation/ACMA_Presentation.pdf
8 http://www.siamindia.com/statistics.aspx?mpgid=8&pgidtrail=9
9 http://auto.economictimes.indiatimes.com/news/policy/vehicle-policy-to-generate-steel-scrap-worth-rs-11k-cr/annum/52605230
10 http://www.entrepreneurscouncil.in/auto-components.php