vanshika industry overview - automobile - draft

8/11/2019 VANSHIKA Industry Overview - Automobile - Draft

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Draft for discussion purposes only

IndustryOverview - Automobile

Financial Year 2012-13

Draft for Discussion Purposes



Table of Contents Draft for discussion purposes only

Table of Contents

1. Indian Industry 1

1.1. Objective 1

1.2. Introduction 1

1.3. Background 1

1.4. Current Scenario 2

1.5. Major Players 2

1.6. Industry Trends 3

1.7. Financial Performance 3

1.7.1. Domestic Sales 3

1.7.2. Export 3

1.8. Government initiatives 3

1.9. Automotive Mission Plan (2006-2016) 4

1.10. Growth Drivers 4

1.11. Way Ahead 5

1.12. Sectoral Outlook 2013 5

1.12.1. Domestic automobile sales likely to witness moderate growth 5

1.12.2. Export performance to remain moderate 5

1.13. Segmental Commentary 6

1.13.1. Commercial Vehicles 6

1.13.2. Passenger Vehicles 6

1.13.3. Two Wheelers 6

1.14. Strategic Insight 6

1.14.1. Commercial vehicles 6

1.14.2. Passenger vehicles 7

1.14.3. Two wheelers 7

1.15. Summary 7




Industry Overview - Automobile - Transfer pricing analysis and reportPrice Waterhouse & Co. 1

1. Indian Industry

1.1. Objective

The Indian Regulations1 prescribe that the comparability of an international transaction with anuncontrolled transaction shall be judged with reference to the conditions prevailing in the markets in which the respective parties to the transactions operate. Hence, for the purposes of transfer pricinganalysis an overview of the industry is essential.

1.2. Introduction 2

The Indian automotive industry has emerged as a 'sunrise sector' in the Indian economy. India isemerging as one of the world's fastest growing passenger car markets and second largest two wheelermanufacturer. It is also home for the largest motor cycle manufacturer and fifth largest commercial vehicle manufacturer. India is emerging as an export hub for sports utility vehicles (SUVs). The globalautomobile majors are looking to leverage India's cost-competitive manufacturing practices and areassessing opportunities to export SUVs to Europe, South Africa and Southeast Asia. India can emergeas a supply hub to feed the world demand for SUVs. India also has the largest base to export compactcars to Europe. Moreover, hybrid and electronic vehicles are new developments on the automobilecanvas and India is one of the key markets for them. Global and Indian manufacturers are focussingtheir efforts to develop innovative products, technologies and supply chains. The automotive plants ofglobal automakers in India rank among the top across the world in terms of their productivity andquality. Top auto multinational companies (MNCs) like Hyundai, Toyota and Suzuki rank their Indianproduction facilities right on top of their global pecking order.

1.3. Background

The Indian automobile industry, the seventh largest in the world, has demonstrated a growth over thelast ten years, during which industry volumes have increased by 3.2 times, from a level of 4.7 millionnumbers to 14.9 million numbers, according to Vishnu Mathur, Director General, Society of Indian Automobile Manufacturers (SIAM). The Indian Automobile Industry embarked on a new journeysince 1991 with delicensing of the sector and subsequent opening up for 100 per cent FDI throughautomatic route. Almost all the global majors have set up their facilities in India taking the next levelof production of vehicles from 2 million in 1991 to 110+ million in 2011.3

The industry, by virtue of its deep connects with several key segments of the economy, occupies aprominent place in the country’s growth canvas. It exhibits a strong multiplier effect and has theability to be the key driver of economic growth. A robust transportation system plays a key role in acountry's rapid economic and industrial development, and the well-developed Indian automotiveindustry justifies this catalytic role by producing a wide variety of vehicles, which include passengercars, light, medium and heavy commercial vehicles, multi-utility vehicles such as jeeps, scooters,motorcycles, mopeds, three wheelers, tractors etc. Some defining characteristics are:4

Largest three wheeler market in the world

2nd largest two wheeler market in the world

7th largest passenger car market in Asia & 10th Largest in the world

4th largest tractor market in the world

5th largest commercial vehicle market in the world

1 Section 92D read with Rule 10B(2)(d)2 http://www.ibef.org/industry/india-automobiles.aspx3 http://ciiautoserve.in/autoserve/indus.php4

http://www.studymode.com/essays/Automobiles-Industry-In-India-842312.html





5th largest bus & truck market in the world5

1.4. Current Scenario6

As the year 2012 comes to an end, the Indian automobiles industry witnessed a moderation in

demand in 2012, after the double-digit growth in sales recorded in the preceding three years. Weakmacroeconomic sentiment coupled with subdued consumer confidence pulled down sales, particularly

in the latter half of the year. Domestic automobile sales grew by 6.6% in 2012 (Jan-Nov), as compared

to growth of 14-31% during 2009-2011.In view of the current macro environment, both domestically and globally, we are cautiouslyoptimistic about the Indian automobile industry’s prospects in the near term. As a result, a chievinghigh growth rates is likely to be a major concern for the industry in 2013.

1.5. Major Players7

5 http://ciiautoserve.in/autoserve/indus.php6 http://www.indiainfoline.com/Markets/News/Automobile-Sector-Outlook-2013-Dun-and-Bradstreet/55725704657

A Brief Report on Auto And Auto Ancilaries, CCI, March 2013.





1.6. Industry Trends8

Passenger Car volumes were down 6.7% YoY but Utility Vehicles were up 52% in 2012-13

Weakness continues in Commercial Vehicle segment; down 2.0% YoY in 2012-13

Domestic Two-Wheeler volumes up 2.9% in 2012-13

Three-Wheeler (passenger) segment benefits from fresh permits, registered 8.5% YoY growth

1.7. Financial Performance9

Automobile companies across segments continue to face tremendous pressure on profit margins dueto elevated inflation levels. Added to this are the heightened marketing costs incurred and heavydiscounts offered by vehicle manufacturers to attract consumers to the showrooms. This partiallyexplains the price hikes initiated by the vehicle OEMs to protect margins, despite the weak demandenvironment. Going ahead, amidst rising market competition, new product launches, as also productrefreshes planned, OEMs are expected to increase spend on marketing & promotional activities. Although commodity prices are not expected to witness steep hikes, overall cost and competitivepressures would keep the profit margins under pressure.

1.7.1. Domestic Sales

1.7.2.

Export

1.8. Government initiatives 10

Government has taken several policy initiatives and pro-active measures to enhance the effectivenessand drive growth in Automotive Sector. Major steps have been taken to make India a global

8 Indian Automobile Industry, ICRA, April 16, 20139 A Brief Report on Auto And Auto Ancilaries, CCI, March 2013.10






automotive hub under the 'Automotive Mission Plan'for the period of 2006-2016. The Mission Planaims to make India emerge as the destination of choice in the world for design and manufacture ofautomobiles and auto components, with output reaching a level of US$145 billion. Some of the otherkey initiatives include:

Formation of National Automotive Board (NAB) to look into the issue of recall of vehicles;hence improving manufacturing standards

Reduction of excise duty on small cars

Launch of the National Mission for Hybrid & Electric Vehicles under Budget FY12, to makehybrid vehicle kits cheaper by reducing the excise duty rebate to 5% from 10%

State Government promoting industrial space especially in the automobile sector Open toPublic Private Partnerships (PPP)

Establishing special auto parks and virtual SEZ's for auto components industry by providingan interest subsidy on loans and investment in new plants and equipments

Export benefits to intermediate suppliers of auto components against the Duty FreeReplenishment Certificate (DFRC)

Automatic approval for 100% Foreign Equity Investment in auto components manufacturing

Manufacturing and importing in this sector exempt from licensing and approvals

1.9.

Automotive Mission Plan (2006-2016) 11

The Automotive Mission Plan is a major step taken to make India a global automotive hub. TheMission Plan aims to make India emerge as the destination of choice in the world for design andmanufacture of automobiles and auto components, with output reaching a level of US$ 145 billion(accounting for more than 10% of the GDP) and providing additional employment to 25 million people by 2016. It envisages increase in production of automotive industry from the current level of Rs.169000 crore to reach Rs. 600000 crore by 2016. The Mission seeks to oversee the development of theautomotive industry, that is, the present scenario of the sector, its broad role in the growth of nationaleconomy, its linkages with other key facets of the economy as well as its future growth prospects. Thisis involved in improving the automobiles in the Indian domestic market, providing world classfacilities of automotive testing and certification as well as ensuring a healthy competition among themanufacturers at a level playing field.

1.10. Growth Drivers

Rising industrial and agricultural output

Rising per capita income

Favourable demographic distribution with rising working population and middle classUrbanisation

Increasing disposable incomes in rural agri-sector

Availability of a variety of vehicle models meeting diverse needs and preferences

Greater affordability of vehicles

Easy finance schemes

Favourable government policies Robust production 12

Huge Demand for Vehicle Servicing, Repairs and Maintenance

Non Vehicle Manufacturers are getting into Automotive Service Business

Branded service networks being set up both by vehicle manufacturers and other players

Expansion of Service Networks by Vehicle Manufacturer

Increased Customer Awareness on Vehicle Maintenance.

Emergence of One-stop-shop for vehicle owners to meet their needs like servicing, spares,accessories, insurance, warranty, etc, under one roof 13

11 http://business.gov.in/Industry_services/automobile_industry.php12

http://www.indiainbusiness.nic.in/industry-infrastructure/industrial-sectors/automobile.htm





1.11. Way Ahead 14

The rapid improvement in infrastructure, huge domestic market, increasing purchasing power,established financial market and stable corporate governance framework have made the country a

favorable destination for investment by global majors in the auto industry, as per Automotive MissionPlan (AMP) (2006-16). Additionally, the introduction of alternative fuels like hydrogen and bio fuelsneeds to be promoted to ensure sustainability of the industry over the long term. The vision of AMP2006- 2016 aims India to emerge as the destination of choice in the world for design and manufactureof automobiles and auto components with output reaching a level of US$145 billion accounting formore than 10 per cent of the GDP and providing additional employment to 25 million people by 2016.In addition, the US-based car major, Ford aims to make India its export hub and plans to sell itsproducts in more than 50 countries over a period of time. The company has committed a totalinvestment of US$2 billion in India so far (November 2012). The luxury car market of India is set forgrowth over the medium and long term. The market is about 30,000 cars a year and is rising steadily.

1.12. Sectoral Outlook 2013 15

1.12.1.

Domestic automobile sales likely to witness moderategrowth

The Indian automobiles industry witnessed a moderation in demand in 2012, after the double-digitgrowth in sales recorded in the preceding three years. Weak macroeconomic sentiment coupled withsubdued consumer confidence pulled down sales, particularly in the latter half of the year. Domesticautomobile sales grew by 6.6% in 2012 (Jan-Nov), as compared to growth of 14-31% during 2009-2011. In view of the current macro environment, both domestically and globally, we are cautiouslyoptimistic about the Indian automobile industry’s prospects in the near term. As a result, achievinghigh growth rates is likely to be a major concern for the industry in 2013. While the long termfundamentals of the Indian economy remain robust, the sluggish global environment has impacted

sentiments in the domestic market in the short term. But we expect this to be only a temporaryphenomenon, and prospects for 2013 look better than this year. Growth in sales would be driven bythe expected improvement in macro conditions on the domestic front, moderation in interest ratesand revival in consumer confidence, mainly after the initial two quarters. Consequently, the deferredpurchases witnessed in H2 2012 are expected to get converted into sales next year. The auto industryis likely to gain considerably from the various initiatives on infrastructure development, rural focusand the improved road infrastructure.

1.12.2. Export performance to remain moderate

In 2012 (up to Nov), all the segments, barring three-wheelers recorded higher exports. Growth inexports of two-wheelers, which account for over 65% of automobile exports, slumped to 1% in 2012

(up to Nov), from 31% in 2011. Vehicle exports have been on a downhill drive since mid-2012. Thesituation is not likely to witness a sudden turnaround, particularly with the uncertainty looming in theglobal economy. Moreover, with Sri Lanka recently announcing steep increase in import tariffs andexcise duties, it is likely to have an adverse impact on India’s automobile exports, as Sri Lanka is oneof the important export destinations for the industry. Nevertheless, vehicle manufacturers’ continuedthrust on exploring newer export markets will open growth opportunities for the industry.

13 http://ciiautoserve.in/autoserve/indus.php14 http://www.ibef.org/industry/india-automobiles.aspx15

http://www.indiainfoline.com/Markets/News/Automobile-Sector-Outlook-2013-Dun-and-Bradstreet/5572570465





1.13. Segmental Commentary 16

1.13.1. Commercial Vehicles

The year 2012 saw a moderation in growth in domestic sales of commercial vehicles (6.5% up to Nov),

after strong performance in the preceding years. This growth was driven by the light vehicle segment(19.4%), even as sales of medium and heavy vehicles (M&HCV) declined (-10%). Subdued macro-economic environment, sluggish industrial demand and increase in diesel price led to fall in sales ofM&HCVs. Growth in overall domestic sales of commercial vehicles is expected to be driven by the light vehicle segment in the year ahead as well. The export environment for commercial vehicles is expectedto remain challenging, with demand expected to remain subdued in the key overseas destinations.Nevertheless, CV manufacturers would increase thrust on exploring opportunities in non-traditionalmarkets (Africa, Middle East, Thailand, Afghanistan, Latin America, Russia, etc).

1.13.2. Passenger Vehicles

2012 was a challenging year for the passenger vehicle industry, as rising fuel prices and high interest

rates led to significant increase in ownership costs, deterring customers from making vehiclepurchases. In the year ahead, increased marketing efforts by companies and launch of newmodels/variants would be directed at pulling customers into the showroom. However, the demandmomentum is expected to gain momentum after the initial couple of quarters. Meanwhile, with thedifferential between petrol and diesel prices continuing to remain large, the coming year wouldcontinue to witness strong demand for diesel fuelled vehicles.

1.13.3.

Two Wheelers

Rising petrol prices kept growth momentum in the motorcycle segment under pressure in 2012, withdomestic sales growing by a meager 2% (up to Nov) compared to growth of 27.1% in 2010 and 14.7%in 2011. There have been early signs of an improvement in demand as the festive period towards the

end of the year saw pick up in sales. We expect demand for two wheelers to improve next year,supported by moderation in inflation levels and revival in consumer sentiment. However, the industryis unlikely to record the high growth rates as seen prior to 2012.

1.14. Strategic Insight 17

Some of the key strategies that vehicle manufacturers are likely to adopt in 2013 are listed below:

1.14.1. Commercial vehicles

Launch new models

Increased customer focus by expanding sales and service network

Focus on product innovation to create new market segments

Develop new products for the international markets

Expand footprint to newer export markets

Continue thrust on cost control & productivity improvement measures

Greater thrust on and expansion of less cyclical businesses.

16 http://www.indiainfoline.com/Markets/News/Automobile-Sector-Outlook-2013-Dun-and-Bradstreet/557257046517






1.14.2. Passenger vehicles

Launch new vehicle models, especially more diesel models

Increase focus on tier II and tier III markets, even for high-end models

Expand sales and service network for enhanced customer satisfaction

Increase focus on expanding pre-owned vehicle business Continue thrust on cost control & productivity improvement measures

Leverage social media to establish closer bonds with customers.

1.14.3. Two wheelers

Increase focus on small towns and rural markets (e.g. expansion of distribution/service

network)

Increase focus on emerging markets such as Brazil, Africa, Argentina, Indonesia, etc to

push exports.

1.15.

Summary

Given the large population and growing middle class, India has the potential to develop into asignificant market for automobile manufacturers. With a large, English speaking, relatively low- costlabour pool, India could eventually serve as a major regional export hub throughout Asia, Africa, andEurope. However, there are a number of factors that must be overcome in order for India, along withautomobile manufacturers, to fully realize the potential in the Indian market. In particular, logisticaltransportation infrastructure capabilities will need to be improved to meet domestic and export needs.Based simply on the amount of investments by GM and Ford alone, it is clear that foreign vehiclemanufacturers view India as a crucial player in the future of the automotive industry as a regionalexport hub, and as a supplier of automobiles and automotive parts globally.





2. Industry Overview 18

2.1. Objective

The Indian Regulations19 prescribe that the comparability of an international transaction with anuncontrolled transaction shall be judged with reference to the conditions prevailing in the markets in which the respective parties to the transactions operate. Hence, for the purposes of transfer pricinganalysis an overview of the industry is essential.

The following section contains an analysis designed to provide an overview of the auto componentindustry under which OMR Bagla operates.

2.2. Background

India has emerged as one of the world's most competitive tyre markets due to vast availability of rawmaterial (natural rubber) and ultramodern production facilities. The radial tyre market is expected toreach Rs 393 billion (US$ 7.33 billion) by FY 2015 growing at a CAGR of more than 21 per cent duringFY 2011-FY 2015.

The automotive plants of global automakers in India rank among the top across the world in terms oftheir productivity and quality. Top auto multinational companies (MNCs) like Hyundai, Toyota andSuzuki rank their Indian production facilities right on top of their global pecking order.

The Indian automobile and auto components industry can be expected to surpass China's growth path by 2021, according to a research report by Espirito Santo Securities.20

The Indian auto component industry is ancillary to the automobile industry. Major automobile

markets such as North America, Europe and Japan have been witnessing significant slowdown inautomobile sales growth since last one decade. While on the other hand India and China has grownrapidly, consequently leading the surge in the auto component industry in these regions. Gauging thegrowth prospects in these two regions almost all the major automobile OEMs as well as autocomponent manufacturers has ventured in these markets.21

The Indian auto component sector is transforming itself from a low-volume, highly fragmented oneinto a competitive industry, and backed by competitive strengths, technology and transition up the value chain. Broadly the Indian automotive component industry can be divided into the organized andthe unorganized segments. While the forte of the organized sector is the high valued added precisionengineering products, the presence of a large unorganized sector is characteristic especially of the

lower value-added segments of the industry.

The Indian auto component industry is expected to reach a turnover worth US$ 113 billion by 2020-21from US$ 43.4 billion in 2011-12, according to an Automotive Component Manufactures Association

18 The contents of this chapter are based entirely on information obtained from various internet based resources. PW & Co.has not carried out any independent research about accuracy and validity of such statements, facts and figures which areprovided in this chapter.

19 Section 92D read with Rule 10B(2)(d)20 http://www.ibef.org/industry/autocomponents-india.aspx21 http://www.bharatbook.com/market-research-reports/tyre-tire-market-research-report/indian-auto-component-

industry-for-indian-customers.html





(ACMA) report. The exports from the industry are expected to grow at a compound annual growthrate (CAGR) of 17 per cent during 2012-21, the ACMA report highlighted.22

Indian auto component industry is about Rs 1,600 billion (US$ 30.77 billion) and derives its growthimpetus from the growth in automobile industry. Industry body Society of Indian AutomobileManufacturers (SIAM) expects overall automobile sales to grow by 10-12 per cent in 2012-13 on the

back of supportive Government policies, launch of new models and intensifying enthusiasm for carsamong Indian consumers. Therefore, it could be expected that increase in demand for automobiles would eventually drive growth for auto parts sector.

As per industry estimates, Indian auto component industry derives 60 per cent of its turnover fromsales to domestic original equipment manufacturers (OEMs), 25 per cent from sales to the domesticreplacement market and around 15 per cent from exports.23

Figure 1: Product segments of the Auto Components Industry 24

2.3. Characteristics of the industry

2.3.1. Industry size

The Indian auto component industry is one of India’s sunrise industries with tremendous growthprospects. From a low- key supplier providing components to the domestic market alone, the industryhas emerged as one of the key auto components centres in Asia and today seen as a significant playerin the automotive supply chain. India is now a supplier of a range of high-value and criticalautomobile components to global auto makers.

India is also emerging as a sourcing hub for engine components, with original equipmentmanufacturers (OEMs) increasingly setting up engine manufacturing units in the country.

22 http://www.ibef.org/industry/autocomponents-india.aspx23 http://www.ibef.org/PrintThisArticle.aspx?artid=31497&pgno=1&totalpage=124

http://www.ibef.org/download/Auto_Components50112.pdf





According to industry statistics derived by Automotive Component Manufacturers Association ofIndia (ACMA), Engine parts form the largest segment (31 per cent) of auto part industry followed bydrive transmission and steering parts (19 per cent). Suspension & braking parts and Body & Chassisaccount for 12 per cent each in the entire product range, followed by equipment accounting for 10 percent of the same.

Further, estimates made by ACMA reveal that auto component exports would robustly grow at acompounded annual growth rate (CAGR) of 18.8 per cent over 2011-21, garnering about US$ 29 billion. European and North American markets account for 36 and 23 per cent of the entire industryexports, respectively, while 28 per cent of the exports are made to Asian countries.25

The amount of cumulative foreign direct investment (FDI) inflow into the automobile industry during April 2000 to January 2013 was worth US$ 8,061 million, accounting to 4 per cent of the total FDIinflows (in terms of US$), as per data published by Department of Industrial Policy and Promotion(DIPP), Ministry of Commerce.

The tyre production in India is anticipated to reach 191 million units by the end of FY 2016, accordingto a RNCOS research report titled, 'Indian Tyre Industry Forecast to 2015'. The manufacturers are

expected to invest huge amount into the industry over the next few years, with a major proportion ofthis investment directed towards the radial tyre capacity expansion.

In addition, with a significant increase in the number of CNG vehicles, the CNG vehicle market is witnessing a strong growth pattern. According to a RNCOS report titled, "India CNG Vehicle Market Analysis", the CNG kit market is expected to reach around INR 30 Billion in FY 2014, growing at aCAGR of around 22 per cent during FY 2011-2014. 26

2.3.2. Industry Growth Drivers 27

Figure 2: Growth Drivers

25 http://www.ibef.org/PrintThisArticle.aspx?artid=31497&pgno=1&totalpage=126 http://www.ibef.org/industry/autocomponents-india.aspx27

www.ibef.org/download/Auto-Components-261112.pdf





2.3.3. Competitive Landscape 28

The Indian auto components industry is facing formidable pricing challenge from China andSouth East Asian countries as they compete not only in the international markets but also on thedomestic turf. At present, the cost competitiveness of Indian players is constrained on account ofinfrastructure inefficiencies; higher cost of power; upward pressure on wages and inflexible labourlaws.

Free Trade Agreements (FTAs) entered into by India with many countries have catalysed the import ofauto components into India as many components have become more cost effective to import followingreduction of import duty.

The Indian auto component industry faces competition from the Chinese market. China’s automobilecomponent industry presents higher growth rate, superior infrastructure and more stable profitmargin.

2.3.4. Regulatory Environment

The government has taken many initiatives to promote foreign direct investment (FDI) in theindustry.

The Ministry of Heavy Industries and Public Enterprises has envisaged the Automotive Mission Plan(AMP) 2006-2016 to promote growth in the sector. It targets to:

Increase turnover to US$ 122 billion–US$ 159 billion by 2016 from US$ 34 billion in 2006

Increase export revenue to US$ 35 billion by 2016

Provide employment to additional 25 million people by 2016

The Indian Government is in the process of forming a National Automotive Board (NAB) which would become a formal set-up to look into the issue of recall of vehicles and hence improve manufacturingstandards. The prospective body, to oversee technical and safety aspects of vehicles, will haverepresentatives from all the nodal ministries and automotive bodies such as the Automotive Research Association of India (ARAI).

The Government of Tamil Nadu has also announced that it will sign several memoranda ofunderstanding (MoU) with various automobile and auto part makers and will soon release industry-specific policies. The reforms would give a boost to the state's position as a strategic autodestination.29

Favourable policy measures aiding growth:30

Automotive Mission Plan 2006–16

Setting up of a technology modernisation fund focusing on small and medium enterprises

Establishment of automotive training institutes and auto design centres, special auto parks andauto component virtual SEZs

NATRiPs

28 http://www.icra.in/Files/ticker/Auto_Ancillary_Ind_Note-Dec10.pdf29 http://www.ibef.org/industry/autocomponents.aspx30






Set up at a total cost of USD 388.5 million to enable the industry to adopt and implement globalperformance standards

Focus on providing low-cost manufacturing and product development solutions

Dept. of Heavy Industries & Public Enterprises

Created a USD 200 million fund to modernise the auto components industry by providing aninterest subsidy on loans and investment in new plants and equipment

Provided export benefits to intermediate suppliers of auto components against the Duty FreeReplenishment Certificate (DFRC)

Union Budget 2012–13

Prescribed a concessional excise duty of 6 per cent for manufacturers of batteries supplying tomakers of electrically operated vehicles

Five year extension of 200 per cent weighted deduction of R&D expenditure under the IncomeTax Act

Introduced weighted deduction of 150 per cent for expenditure on skills development

2.4. Key Trends 31

The auto component industry is expected to be influenced by following trends:

a) India is poised to become a global components sourcing hub-

Major global OEMs are planning to make India a component sourcing hub for their globaloperations.

Several global tier-I suppliers have also announced their plans to increase procurementfrom their Indian subsidiaries.

India is also emerging as a sourcing hub for engine components, with OEMs increasinglysetting up engine manufacturing units in the country.

b) Product-development capabilities have improved-

Increased investments in research and development operations and laboratories, which are

being set up to conduct activities such as analysis and simulation and engineeringanimations.

The growth of global OEM sourcing from India and the increased indigenisation of globalOEMs is making the country a preferred manufacturing base.

c) Inorganic route to expand-

Domestic players are acquiring global companies to gain access to the latest technology,expand client base and diversify revenue streams.

31






Players such as Amtek Auto and Bharat Forge have adopted a dual-shore manufacturingmodel.

2.5. Key Challenges 32

The Indian auto industry is changing rapidly. During the last decade, many international automanufacturers, either by themselves or in partnership with Indian companies, have startedmanufacturing in India. The ancillary industries have also grown in tandem. The quality of productionin small and medium-scale industries has improved to such an extent that they started exportingproducts to international manufacturers. The development in the auto industry has given confidenceto everyone related to the industry and specifically to the government which resulted inannouncement of Auto Policy 2006-2016 by the Ministry of Heavy industries. To realise futuregrowth, it is important to overcome various challenges the industry is facing currently.

Some of the challenges faced by the industry are listed below:

Rising oil prices: International price of crude oil has crossed US$120 per barrel and is rising atan alarming rate. The rise in oil prices will impact the growth of the automotive industry.

Human Resources: The industry is facing severe shortage of skilled technical as well asmanagerial manpower.

Import of components: import of ancillary from other countries has put pressure on domesticmanufacturers.

Technological issues: The industry does not have access to the latest technology.

Depleting Margins: Rise in price of commodity items like steel, non-ferrous, precious metals,rubber and petroleum products has put pressure on the profit margins. Commodity prices thatmake up to 60 per cent of the cost of the product have moved up by 45-60 per cent in the last year.

2.6. Opportunities 33

The Indian auto component industry has huge opportunities ahead in terms of domestic and exportmarkets which hold huge potential -

The domestic market is expected to account for 80 per cent of total sales by 2020 with a totalmarket size of USD 80 billion

Exports will account for as much as 20 per cent of the market by 2020.

Market potential balanced across product types –

The domestic and export markets are at par in terms of product type. For instance, Engine &Exhaust components, along with Body & Structural parts, account for about 50 per cent of thepotential in both domestic and export markets

Other major product types include Transmission & Steering components and Electronics &Electrical parts

Opportunities in engineering products:

32 http://www.autofocusasia.com/management/indian_automotive_industry.htm33






Engine & Engine Parts

New technological changes in this segment include introduction of turbochargers and commonrail systems

The trend of outsourcing may gain traction in this segment in the short to medium term

Transmission & Steering Parts

Share of the replacement market in sub-segments such as clutches is likely to grow due to risingtraffic density

The entry of global players is expected to intensify competition in sub-segments such as gearsand clutches

Suspension & Braking 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 export market

The entry of global players is likely to intensify competition in sub-segments such as shockabsorbers

Equipment

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

Electrical

Manufacturers are expected to benefit from the growing demand for electric start mechanismsin the two-wheeler segment

Others

Leading players in the sheet metal parts sub-segment are in the process of expanding theircustomer base. This sub-segment is expected to grow 10–11 per cent during 2010–15

2.7. Way Forward

The global automotive industry is witnessing tremendous and unprecedented changes. This industryis slowly and gradually shifting towards Asian countries, mainly because of saturation of automobile

industry in the western world. The principal driving markets for Asian automotive industry are China,India and ASEAN nations. Entrance of new manufacturers into the small car market and newlaunches of low cost vehicles namely scooters, motorcycles, mopeds and bicycles have led to themassive growth of domestic automotive industry, which provides an opportunity for the autocomponent players to grow revenues with multiple OEM customers.

Technological shifts in the Indian automobile industry have been the key drivers of growth andinnovation in the country’s auto components industry. The number of global players moving to Indiahas been increasing as a result of government of India permitting 100 per cent foreign equityinvestments. The country is also witnessing increased investment in R&D operations and theestablishment of laboratories to conduct activities such as analysis and simulation as well asengineering animations. Robust demand for automobiles is a catalyst for auto component market.





Revival of global demand will keep the outsourcing story intact. Recent fall in metal prices, whichconstitute major part of their raw material cost, will lead to expansion in margins and thus betterearnings. Thus the auto component industry is expected to grow at healthy rate in the future.

An analysis released by TechNavio predicts that auto component market in India would grow at aCAGR of 11.7 per cent over 2011-15. Apart from surge in demand for automobiles, rise in auto

financing activities would spur the growth of the sector.

Also, on the back of improving markets in the US and Europe, industry experts forecast a very positiveoutlook for automotive exports in 2012.34

The vision of Automotive Mission Plan (AMP - 2006-16) aims India to emerge as the destination ofchoice in the world for design and manufacture of automobiles and auto components with outputreaching a level of US$ 145 billion accounting for more than 10 per cent of the gross domestic product(GDP) and to provide additional employment to 25 million people by 2016.

The rapid improvement in infrastructure, huge domestic market, increasing purchasing power,established financial market and stable corporate governance framework have made the country a

favourable destination for investment by global majors in the auto industry, as per AMP 2006-16. ThePlan aims at doubling the contribution of automotive sector to the GDP with special emphasis onexport of small cars, MUVs, two & three wheelers and auto components.35

2.8. Summary

The objective of undertaking a review of the industry is to describe and gauge the economic/ businessconditions and trends affecting companies in India in the specified industry. This review provides adeeper understanding of the industry in which the company operates. An understanding of the sameallows us to evaluate the company’s functions performed, assets employed and risks assumed inrelation to similar entities within the industry.

The Indian automobile ancillary sector is transforming itself from a low-volume, highly fragmentedone into a competitive industry, and backed by competitive strengths, technology and transition upthe value chain. Broadly the Indian automotive component industry can be divided into the organizedand the unorganized segments. While the forte of the organized sector is the high valued addedprecision engineering products, the presence of a large unorganized sector is characteristic especiallyof the lower value-added segments of the industry. Investments and exports in this segment are witnessing continuous growth.

The global auto industry's search for lower cost and more international outsourcing will also lead to asharp growth in component output and exports in the coming years. Factors such as superiorengineering skills, modest domestic market growth, the sophistication of its IT industry andincreasing free trade agreements in addition to low cost, are expected to boost India's auto component

sector growth over other countries in the environment of off-shoring to low-cost countries.

34 http://www.ibef.org/industry/autocomponents.aspx35

http://www.ibef.org/industry/autocomponents-india.aspx

vanshika industry overview - automobile - draft

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