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Home > Research It > Sector Info > Auto Ancillaries - DECEMBER 22, 2010

Auto Ancillaries Sector Analysis Report

2
[Key Points | Financial Year '11 | Prospects | Sector Do's and Dont's]

The fortunes of the auto ancillary sector are closely linked to those of the auto
sector. Demand swings in any of the segments (cars, two-wheelers, commercial vehicles) have an impact on auto ancillary demand. Demand is derived from original equipment manufacturers (OEM) as well as the replacement market. Out of the total revenues, engine parts account for 31% of the total revenues of the industry in FY10.

ACMA, the Indian auto component industry body had around 588 players
registered with it in FY10.

Margins in the replacement market are higher than the OEM market. The OEM
market is very competitive and component manufacturers have to compromise on margins to bag bulk orders. Moreover, delivery schedules and quality standards have to be adhered to very strictly.

Indian auto ancillary sector has traditionally suffered from poor quality. While

this still holds true for the unorganized sector, the organized sector has been resorting to increased automation to reduce the defect levels.

Lower labour costs give Indian auto ancillary companies an absolute cost

advantage. To put things in perspective, ACMA numbers suggest that wage cost accounts for 3% to 15% of revenues for Indian manufacturers as compared to 20% to 40% for US players. India's strength in exports lies in forgings, castings and plastics historically. But this is changing with more component manufactures investing in upgradation of technology in recent years.

Key Points
Supply Low for high technology products. Unorganized sector dominates the domestic component market due to excise benefits. Generally, excess supply persists. Linked to automobile demand. Export demand is linked to the increasing acceptance towards outsourcing. Capital, technology, OEM relationships, customer service, distribution network to meet replacement demand. Low with OEMs. Relatively high in the replacement market

Demand

Barriers to entry Bargaining power of

suppliers Bargaining power of customers Companies operating in the export market face competition at a global level. At the domestic level, market structure is fragmented for a large number of ancillary products. Most companies adopt low cost and differentiation strategies. In some products (like batteries), only two or three companies control over 80% of the market. Will intensify, as global players will enter the market leading to consolidation. Dereservation of SSI will result in access to capital and technology. TOP

Competition

Financial Year '11

After a strong FY10, the Indian automobile industry mirrored this strong
performance in FY11 too. Consequently, the passenger car and CV segment witnessed a growth of 30% and 27% respectively for the full year.

In light of this strong surge in growth, auto component industry managed to do

well during the year as Bharat Forge and Exide reported 59% YoY and 21% YoY growth in sales respectively. Despite subdued economic conditions in the developed world, some players were able to put up a strong show in exports as well. For instance, Bharat Forge saw its exports grow by a stupendous 73% YoY on account of new customer additions and product development. Capacity utilisation rates of the auto ancillary sector were also high in light of strong growth in the domestic market.

Just like the auto industry, the auto ancillary industry witnesses a rise in input
costs during the year. This was in sharp contrast to the scenario in FY10 whereby input costs had softened considerably. As a consequence, rising input costs exerted pressure on margins and those who were able to keep other cost heads under control were able to maintain margins if not expand them.

TOP

Prospects
There has been a conscious effort by manufacturers to improve productivity of
the suppliers in the past few years. Though the number of active vendors has declined significantly for auto manufacturers, technology transfer and fresh fund infusions have resulted in improved productivity in the remaining ones. Relaxation of FDI norms for the small-scale sector could emerge as one of the key growth drivers in the long run. The Indian automotive components industry has lined up sizeable investment schedules for the next few years.

The automobile sector is cyclical and dependent on the growth of the

economy and improvement in infrastructure. Factors like increased public spending, favorable interest rates and general improvement in per capita income point towards higher demand for automobiles in the future. Also, government's initiatives in the infrastructure sector such as the Golden Quadrilateral project and NHDP (National Highway Development Programme) are likely to give boost to four-wheeler sales especially CVs. Just to put things in perspective, we expect CV segment to grow by 7% to 8%, 2-wheeler demand to increase by around 12% to 15% and passenger car sales growth

at 10% to 12% over the medium to long term. This is a positive for auto ancillary manufacturers.

In the long term, the growth of this sector will depend partly on pace of

indigenization levels across all segments. The prospects look bright as most companies are increasing the indigenous components, in an effort to reduce their currency losses and remain competitive. Also, the fact that auto manufacturers like Ford, Hyundai and Maruti are exporting cars, make the prospects look encouraging.

Margins are likely to come under pressure in the long term because as

competition increases, manufacturers will find it difficult to increase prices and will try to cut costs. The burden will eventually fall on auto ancillary players. In the near future though, companies will need to have manufacturing lines that can be adapted for new models, have strong technology backing, an ability to export to developed markets, market dominance in specific products and a growth plan driven by volumes and product innovations. Companies will have to focus on quality and abide by delivery schedules if they want to survive. As manufacturers sourcing components are keen to get components from fewer sources in future, this will lead to consolidation in the sector.

The growing number of Free and Preferential trade agreements being signed

by India with countries like Thailand, Singapore and other ASEAN countries will hurt the cost competitiveness of Indian companies as Indian players play significantly higher duties than their Asian counterparts. Therefore, Indian companies might lose out on big orders if the duty structure is not rationalized. TOP

Related Links for Auto Ancillaries Sector: Quarterly Results N E W | Sector Quote | Sector Review 2009

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Mr. Vinnie Mehta Executive Director Automotive Component Manufacturers Association of India The Capital Court 6th Floor,Olof Palme Marg Munirka New Delhi 110 067 Phone (s) [Board] +91-11-26160315 FAX : +91-11-26160317
E-mail :acma@acma.in