Auto comp sector to grow at 8-9% CAGR

Suman Jagdev

The Indian auto components industry is expected to witness significant shifts given the evolving regulatory landscape and trends in the underlying automotive sector. The Indian auto component industry is expected to grow at about 8-9% CAGR over FY 2016-18 on the back of demand in the passenger vehicle and two-wheeler segments.

Original equipment manufacturers (OEMs) comprise about 65% of demand, of which passenger vehicles and two wheelers contribute about 80%. India is fast emerging as a global hub for auto R & D and the Government’s policies to drive local manufacturing is providing an impetus to the sector.

The automobile market is witnessing three broad mega trends globally, as well as in India. These are:

• ‘Green’ era-Growing concerns over environmental pollution and global warming is driving the market towards stricter norms and alternate fuel technologies
• Increased focus on safety – Safety norms are becoming stringent globally as well as India
• Growing electronic content – Emission norms and increasing focus on autonomous technologies is leading to higher electronic content

Safety norms will boost demand for safety equipment such as airbags, automatic brake systems (ABS), rear view sensors and speed warning systems. ABS for two-wheelers will also present a significant opportunity for component players. There is a significant market for safety equipment manufacturers as only about 50% of vehicles are sold with airbags and ABS currently, which are supplied by large organised players or are imported. Makers of airbags, ABS and speed warning systems are expected to benefit from this opportunity.

The truck body code to ensure standardisation of truck build would provide impetus to organised players of body building parts. Under the voluntary vehicle modernisation program, there would be increased replacement sales benefitting suppliers to the MHCV segment, specially BS IV compliant component manufacturers. The proliferation of advanced technologies is resulting in the entry of consumer electronics companies and larger integration between software and hardware providers to create a new segment of Tier 1 suppliers.

Based on presence in the component value chain, suppliers can be broadly categorised as consumable suppliers (tyres, pistons, batteries etc.), process specialists (chassis, forgings, fasteners etc.), sub-assemblers (engine valves, power train components, clutches etc.)  and system developers (fuel injection systems, steering systems etc.). From a growth and margin standpoint, system developers and consumables are attractive segments.

System developers are likely to witness revenue growth led by increasing electronic content per car & overall auto volume growth, with focus on high technology content and greater value addition. The consumables sector is expected to see high growth on the back of increase in volumes in the aftermarket/ replacement segment.

Component players in India are focusing on moving up the value chain by developing capabilities in manufacturing and technology. Tier 1 suppliers are gearing themselves to address the rapidly growing Indian OEM market, exports and the domestic aftermarket. India based global suppliers are leveraging their global network to emerge as preferred suppliers / integrators to OEMs.

Product development as a capability for component suppliers can be a key differentiator as companies look at rolling out new models customised for India. New product development is a key driver of market and financial performance. OEMs in India have started focusing on alternative fuel/ powertrain combinations to gain strategic advantage with stricter emission norms coming into place. There is a need for close partnership with component suppliers, right from the product design and development stage to bring in the requisite innovation.

We are observing a shift in sourcing philosophy from a ‘price based approach’ to a ‘knowledge based approach’ on the part of OEMs. While the price based approach is based on leveraging buying power and focuses on price-downs, the knowledge based approach is improvement oriented and emphasizes integrated relationships with suppliers to establish the supplier base as a source of competitive advantage.

These shifts bode well for suppliers since it provides a platform to take a holistic value chain view and develop distinct capabilities to create differentiation.

(The Author is Senior Director, Alvarez & Marsal)