Auto&Ancillaries SPJain Vocal Lanes

8/6/2019 Auto&Ancillaries SPJain Vocal Lanes

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AUTOMOBILE AND ANCILLARIES IN INDIA

TEAM : VOCALLANES

Members :Ankit Singhai ([email protected]),Jayadev Behera ([email protected])

,Pallav Kumar ([email protected])

SP Jain Mumbai , PGP-10-12


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Contents

1. Current Scenario Page No.Domestic Industry3

Robust Growth in Passenger car segment3

Two Wheeler Segment-Consolidating 4

Slow down in commercial Vehicle Segment.. 4

2. Passenger car segmentDrivers for growth in small car segment. 5

India : Export hub for small car segment 6

3. Auto-component IndustryKey Drivers for Growth.. 8

Equipment and Electronics Industry.. 10

4. Lateral Industries and other opportunities.. 125. Conclusion. 13

Reference. 14


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1. Current scenario : GlobalThe era of global automotive industry being dominated by suppliers and OEMs in Europe and

US is coming to an end. Customers worldwide are forcing OEMs to provide more features at a

low cost. This trend that saw the down fall of big US companies like Ford and GM and rise of

low cost, fuel efficient and high durable products from the Japanese firms Toyota and Honda.

The US auto manufacturers known for churning out fuel-guzzlers had weakened significantly

even before the global melt down, being hit hard by a significant increase in fuel prices

following the 2003-08 energy crisis. However, the global auto industry would like to forget the

period of 24 months from 2008-2009.The decline in demand that began in middle of 2008

persisted through much of 2009. The recovery that was seen in certain sectors and certain

markets came only after considerable intervention from the government in respective countries.

This era was also marked with China becoming the number one vehicle market with sales of 11.6

million vehicles surpassing US which had10.4 million sales in 2009( source OICA). Toyotas

brief reign at the top of the global order was ended by the Volkswagen Group, which assumed

the top spot during the year 09-10, both in terms of market capitalization and global group sales.

This period has not been good to auto component industry as well, corporations such as Delphi

and Visteon have been broken up ending a period of industry consolidation and focus on system

integration.

Domestic Industry:

Robust growth in passenger car segment

Against this back drop the Indian auto industry posted a completely different story. The

passenger car segment which constitutes 80%(by sales) of the Indian auto industry recorded a

growth of 13 percent (S

IAM and OICA).The small car segment A1 and A2 segment showedmaximum potential for growth, led by series of new launches by MSIL (Maruti Suzuki India

Limited), Hyundai and GM .The launch of Tata Nano will further expand this market by creating

a bench of new entry level customers. The financial year 09-10 closed with sales in excess of 1.7

million units. This segment is expected to grow at a CAGR of around 11% from 2009-10 to

2012-13.


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Two Wheeler Businesses

The two wheeler industry recorded a growth of 17 % in the financial year 09-10 with sales in

excess of 8.6 million , out of which motor cycles accounted for almost 80%.The two wheeler

business has also acquired the characteristics of a matured market, driven by momentum of new

product launches clubbed with competitive marketing and financing. Premium motorcycles

consolidated their importance both in terms of brand image and market share. Scooter sales have

started to pick up again after almost a decade, largely becoming popular as stylish, chic and

practical urban commuter vehicles.

Slow Down in Commercial Vehicles

Commercial vehicles showed a decline in 09-10 of almost 10 percent as compared to 08-09. The

MCV and HCV (Medium and Heavy commercial vehicle) however showed a decline of almost

25 %. The underperformance could be attributed to the tight commercial credit, depressed freight

rates caused by fleet under-utilization and some of the relatively lower economic activity linked

to industrial production. Even government stimuli (excise duty cuts in stages from 14% to 8%)

could not improve sales. Although some of the larger commercial vehicle manufacturers of the

country got benefited from the governments urban investment policy JNNURM (Jawaharlal

Nehru National Urban Renewal Mission). LCV segment scripted a different story(growth of 20%

in 09-10) backed by the evolution of freight transport towards a hub and spoke structure has

created strong demand for light commercial vehicles that are typically engaged in last mile

distribution or urban small lot logistics. Vehicles like Tata Ace and Tata Magic have led this

segment forward in a big way.


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Source SIAM

2. Passenger Car: Most Promising Segment Small is Big

Looking at the trends in all segments, passenger car segment because of its size and growth rate

in recent years offers maximum promise. In passenger car segment small cars (A1 and A2)

constitute 72% of the sales. Following points could be attributed for it:

- Rising Middle Class: The big middle class with increasing amount of disposable incomeis a huge consuming class. This class is expected to swell to 600 million by 2012. Around

20 cities in India have been identified to account for 10 percent of countrys population

but account for 31 percent of the disposable income of India.(source NACER)

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Passenger cars Commercial Vehicle Three wheelers Two Wheelers


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- Easy Availability of Finance: 65 % of the car sales in India are through finance options,as many as 35 banks offer auto finance with SBI leading them.

- Low Penetration of Cars and Value Growth: Even today in India car penetration is aslow as 10 per thousand, it is 12 in Sri Lanka and 550 plus in developed economies.

Further, India today is the second largest market for two wheelers with annual sales

around 7 million. With increasing disposable income, a natural upgrade for a two wheeler

owner is a car (preferably small car, because of cost factor). Today 50 percent of the

buyers are first time buyers.

- Demographic Advantage: India has one of the youngest populations with 65 percentbelow 35 years. The average age for buying cars has come down to 29 years. The rising

DINKS (double income no kids) generation in urban cities is ready to experiment.

- Rural Market: Mobile service providers have shown through their deep inroads intorural markets that Rural Market has a lot to offer. Rural consumers are no longer different

from their urban counterparts they watch the same TV serials, buy the same mobile

phones and buy the same cars. Maruti Suzuki started its rural initiative few years back

and its rural penetration has risen from 3 % in 2007 to 16 % in 2009.

- Fuel Economy: Indian consumers have always been cost sensitive and running cost plusmaintenance cost of a car has always been a major concern for them, small cars will

always have their advantage because of their better mileage. In future too, with rapid

urbanization, small cars will be preferred over big gas guzzlers.

India: Export Hub for Small Cars Hyundai and Maruti Suzuki leading the way

With the factors cited above small car market has been heating up with all Global majors(firms

like GM, Nissan, Volkswagen and Ford) eyeing big on India and are setting up and expanding

manufacturing units in India..The major benefits stems from reduced excise duty at 8% now, add

to this many governments in Europe have offered incentives to customers who are ready to scrap

their older big vehicles and replace them with newer more fuel efficient cars.

For the FY 09-10 passenger car exports from India increased by more than 30 percent and were

around 4.5 lakh units as mentioned in the figure below.


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Source: SIAM Website.The fact worth noting is that export of small cars increased by more than 38% for the FY-09-

10.The rise in export of passenger vehicles has prompted many manufacturers to look as India as

a destination for both as market and as production hub, because of which they all are queuing. In

the subsequent section we will illustrate how the vendor base in India is supporting this. Apart

from cheap labor the other fact which is favoring India in export to Europe is its proximity to

Europe as compared to current manufacturing hubs Brazil and Thailand.

0

200000

400000

600000

800000

1000000

1200000

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Passenger car Commercial Vehicle Three Wheelers Two Wheelers


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3.Auto component Industry:

Roughly speaking materials and auto-components account for 70% of the vehicle cost , labor

around 15 % and miscellaneous expenses account rest 15 % of the cost. Looking at this break up

it is understandable that any OEM would like to reduce the cost of its auto-component. India

offers a destination for low cost auto components and because of which this industry in India has

been growing at a fast pace along with the auto passenger car segment.

The size of the Auto-component industry has been estimated at US$ 19 billion in 2008-09 and

has been growing at a CAGR of about 23 percent since last 5 years. The industry is expected to

grow to US $ 40 billion by the end of 2016.

Key Drivers for growth

- Low Cost and Competitive Quality standards : Cost of entry level engineers is verylow as compared to the rest of the world(average cost is $8000 per year ).Labor cost is

really cheap ,add to there have been 89-92 percent first time right designs by Indian

companies which is much above industry average worldwide. For example

manufacturing cost of castings and forgings in India is 25-30% cheaper as compared to

Western countries

- Suppliers reaching Global Standards: Indian vendors which mainly supply to MSILhave become capable of meeting the JIS (Japanese Industry Standards) and also DIN

(Deutsches institute for NormungGerman Standards), thus have become globally

competitive.

- ASEAN free trade agreement is going to give a surge in exports.- Automotive Mission Plan: Indian government in its Auto Mission plan release in 2007

has rated the auto sector as priority sector for growth in this manufacturing sector and hasannounced incentives for investment in this sector. Deregulation and policy initiatives

such as lower excise duty have been realized and VAT has been implemented.

- Development of Second Source: With expansion of auto sector, OEMs are lookingforward to develop second source and end monopoly of the existing vendor. For example


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in components like Wiper Motor , ECU , Alternator , Starter Motor DENSO has a big

monopoly in being a supplier to OEMs like Maruti Suzuki, Hyundai and Tata

- Large scope for Localization: OEMs in India are looking for localizing manycomponents from Indian vendors to avoid freight costs. Critical components in

electronics and electrical components , gears ( drive train ) and some components of the

engine are also bought as KD units especially from Japan , Korea and Taiwan.(Industry

source)

- India becoming R&D Hub: Successful design and development of Tata Nano hasproved the capability of Indian Engineers not only in OEMs but also in auto component

Manufacturers. Previous the companies like Suzuki and Hyundai used to deal with Indian

vendors directly for design and development of Auto-components, but now the Indian

subsidiaries of these companies have been gaining more role in R&D. Maruti Suzuki is

investing in big way in R&D in India, GM has also setting a R&D in Bangalore. With

this increasing activity in design and development in India more technical support in

forms of design and development in India would be required from vendors (in particular

components which are proprietary items) .

- Industry Infrastructure : Govt of India has approved 3 SEZs formally, 5 in principleand one has been notified so far as per the SEZ act of 2005.Ports are being developed

specifically to cater to the needs of export market, Mundra port in Gujarat serves

specifically the purpose of Maruti Suzukis export requirements to the Europe. As a part

of NATRiP (National Automotive Testing and R&D Infrastructure Project), centre for

testing facility as per industry standards are being set up in Pune, Chennai, Manesar and

Silchar.

- Investment: As per report by ACMA, auto component production worth US$ 20-25billion is expected to be outsourced to India. Also according to investment commission

Indias share in global auto component sourcing market is expected to grow from 1

percent in 2008-09 to 3-4 percent in 2015.As per the report released by government of

India in 2007 (Automotive Mission Policy) output on investment in this sector as

mentioned in the range of 1.1-2.4


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Equipment and Electronics Industry: Bright Prospects

The pie chart ( source: report on Indian auto-component industry by IBEF) below gives a

breakup of the various auto components in the auto component industry. As seen equipment

and electronics industry (Electrical) accounts for about 19% of the total value, although the

figure may seem pretty low but it is going to offer maximum growth in near future because of the

reasons explained below.


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The main factor behind the rapid increase in the proportion of electronic components is its role

in: 1) improving drivability, 2) enhancing safety features, 3) lowering environmental burden, and

4) realizing greater operational reliability.

With the growth of on-board electronics in the automobile sector, from two-wheelers to tractors

and heavy commercial vehicles, semi-conductor industry experts believe that in the immediate

future, electronics will be the differentiator. Components that enjoy an economy of scale, reduce

cost, and are general in nature, not having high freight costs, are expected to be the first choice of

being outsourced from LCCs( Low cost countries like India and China ) All the aforementioned

criteria are satisfied by electronic components such as LEDs, switches, lights, and air

conditioners for vehicles.

- The proportion of electronic components used in motor vehicles has been increasingsteeply in recent years. Electronic components currently comprise some 20-30% of total

costs for all car categories, and this figure is expected to reach 40% or so by 2015. If

present trends continue, by 2015 electronic component costs will comprise the majority

of material and components costs. In India the major players in this industry are DENSO,

Bosch, and Visteon etc.- A recent report of the Indian auto component industry suggested LCCs presently has the

potential to account for 20 % of the overall auto component export in electronic

components. With the existing price pressure and global competition, OEMs, at present,

are looking toward the LCCs as an answer to these issues.

- Currently countries such as China and Thailand have a huge comparative advantage overothers with regard to electronic components, however with lot of R&D activity for

passenger car expected in India there is going to be a spurge of demand for electronicsitems in India.

- New Indian firms may not be expected to compete the well established componentmanufacturers but huge opportunities in near future do exist as in Tier 2 and Tier 3

vendors to these firms.


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4.Lateral Industries and Other Opportunities:

Automobile Industry has a lot of related industries which offer great opportunity in India for

growth, some of them can be outlined as follows:

- Tool and Die making Industry : Currently all Global manufacturers get their tool anddies for both sheet metal components manufactured from companies in like Topia,

Nishiyama,Ccom,JSKorea and Toba Koken, which are mainly Japan and Korea based. In

future OEMs would definitely like to manufacture these in India to reduce the overall

cost and lead time. MSIL which leads the passenger car segment outsources 80%(by

value) of the tool and die from countries like Japan, Taiwan and China.

- Testing and Validation Labs: When a lot of development activity gets kicked off inR&D centre in India, testing and validation will be needed by component manufacturers

to validate their components. It will be mainly the Tier 1 and Tier 2 industries which

would be requiring these labs as they would not be able to access the labs of OEMs and it

always not possible to set up all the Labs. This is a highly unorganized sector and the

current Major Player is SGS Labs.

- Alternate Fuel Market: Stringent carbon dioxide (CO2) emission norms, governmentregulations, and ecological standards are the key drivers for the growth of LPG/CNG

vehicles in the country. Cost savings of an average of 50 per cent compared to

petrol/diesel vehicles will further drive growth in the global LPG/CNG vehicles market.

Currently majority of the parts of the CNG/LPG systems like regulator, valves etc are

imported from Italy (Vendor: Landirenjo) and other Europeans countries. Developing

these parts locally is a big opportunity. However, a major challenge for the market is

insufficient CNG and LPG service stations infrastructure and a poor refueling station

network. There are over 400,000 CNG/LPG vehicles in India (source Automotive

Business Review) , with GAILs plan of setting up distribution network across 230 cities ,

this number is going to increase.


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- Used Car Market: The used car segment is witnessing growth owing to factors likeincreasing numbers of OEMs entering pre-owned automobile industry, favorable

demographics, the changing lifestyle of Indians and user choice

Nearly 85 per cent of the used car market is unorganized. We now have

OEMs like Maruti Suzuki, Mahindra, Honda etc in India entering the used car market.. India

may witness the opening of nearly 270 outlets by 2012. A business opportunity exists as a

organized player dealing with multi brand used cars. However, the main challenges that the

used car market in India faces are the boom of cheaper new cars, the restricted choice and the

extra costs that pre-owned auto buyers bear in addition to the annoyance of checking various

documents.

5. Conclusion

Although the script above shows a bright future for the Auto and ancillaries industry in

India there are challenges in form of infrastructure, rising input cost of raw material and

demanding customer expectations. However there are huge opportunities as a component

supplier (tier 1, 2), Tool and die maker, technology component suppliers (electronics and

alternate fuel systems) which are lucrative for business investment.


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References

1. The Hindu :Survey of Indian Industries 2009-2010 (Articles by Executive Vice Chairman, Hinduja Automotive Ltd, Executive officer Maruti Suzuki india, MD and

CEO Hyundai Motor India)

2. SIAM www.siamindia.com3. OICA www.oica.net4. ACMA www.acmainfo.com5. Automotive Mission Plan 2006-2016

ww.dhi.nic.in/draft_automotive_mission_plan.pdf6. www.ibef.org7. Industry Source

Dines Singh Sahrawat Senior manager Body Electricals MSIL

Ridhima Monga Assistant manager Body Design MSIL

Jatin Mehta Assistant manager Supply Chain MSIL

Amol Chavan Mahindra and Mahindra, Executive officer

Planning, Automotive division

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