Indian Auto Ancilleries Industries Report
Overview
Described as the ‘sunrise industry of India’, the auto ancillary industry is highly fragmented with 500 organized and 5,000 unorganized players with over 60% of exports to Europe and USA. The market for auto components can be classified into Original Equipment (accounting for around 40% of demand), Replacement Market (accounting for around 50% of demand) and export market (accounting for the balance 10%).
Indian Auto Industry - Overview
The Indian auto industry is highly competitive with the presence of a number of global and Indian auto companies. India is the world’s second largest manufacturer of two wheelers and ninth largest car manufacturer. Automobile production has consistently shown an upward trend, growing at a CAGR of ~10% over 2002-2009. Automobile production including Passenger Vehicles, Commercial Vehicles, Three Wheelers and Two Wheelers stood at 11.2 million
units in 2008-09, almost double the figure of 6.3 million units in 2002- 03.
During October 2009, sales of Honda, Ford, Skoda, Hyundai and Maruti increased by 347%, 98%, 97%, 41% and 21% y-o-y, respectively. The momentum in sales of automobiles shows buoyancy in demand.
With improving road infrastructure, higher per capita income, favorable interest rates and launch of new models, the demand for automobiles and hence production is forecasted to be on the rise over the coming years Indian auto component industry is expected to grow to US$33-40 billion by 2015 based on buoyed growth in auto industry. In 2008-09 the turnover of the auto sector (automobiles and auto ancillaries) stood at INR2,190 billion with the ancillaries industry accounting for ~50% of the total turnover. India supplies a range of high-value and critical automobile components to global auto makers such as General Motors, Toyota, Ford and Volkswagen. Some of the leading manufacturers of auto components in India include Apollo Tyres, Bosch Ltd, Exide, CEAT, Bharat Forge, Motherson Sumi.
India compares favorably with other low cost countries in labour cost. Power cost constitutes only 3% of total cost structure, hence India’s high power cost compared to other low cost countries is not a significant disadvantage. Indian manufacturers lag their counterparts in terms of high fuel costs and higher taxes. However, with continuous growth in this sector and increased competition from foreign players, the government might structure the taxes more favorably for the benefit of component manufacturers. For example, the government lately announced an excise duty reduction of 4% across automobiles. High fuel cost is solely an economy driven factor and with global recession calming this might not be a significant cause for worry.
The demand for auto batteries is expected to grow at 7-8% per annum over the next couple of years driven by strong growth in replacement market. Presently, the Indian storage batteries market is estimated at INR90 billion. Of this, automotive batteries account for INR53 billion and industrial batteries for INR37 billion. The domestic organized sector accounts for 75% of the total batteries market with the unorganized sector taking the remaining share.
Several commercial vehicle manufacturers have identified India as manufacturing base for their export market which might lead to a higher demand for Indian batteries. This would help expand the market base for automotive batteries manifold.
The replacement cycle of a battery depends on application and usage pattern of the vehicles. Batteries typically last at an average of more than 3 years in a vehicle. The recovery in overall demand of vehicles would continue to fuel replacement demand for batteries ahead.
The Indian tyre sector outperformed the BSE Sensex during Q2 2010 over Q2 2009 and is expected to grow at a CAGR of 6-7% for the 2008-09 to 2013-14 period. The Indian tyre industry currently comprises of around 40 players in the organized and unorganized sectors. It is mainly dominated by the organized sector and consists of four major players including Apollo Tyres, MRF, JK Tyre and CEAT, which together account for 85% of the industry’s turnover. There are many other companies with a focus only on one or two categories of tyres, tubes and flaps primarily for the replacement market. Commercial vehicle tyres
account for ~70% of the industry’s turnover.
Raw material costs account for nearly 75% of total operating costs, particularly natural rubber which accounts for 40% of total raw material cost. Natural rubber prices are expected to remain higher during H2 2010 but players expect to report better numbers on overall growth in demand and ability to partially pass on raw material costs.
During April-July 2009, there was a surge in turnover in the replacement market driven by a growth of ~47% in truck & bus segment. The replacement market constitutes nearly 50- 51% of the tyre consumption followed by OEMs (43-44%) and the remaining exports. In the replacement market, truck and bus tyres posted a production growth of 11%, passengercar tyres 15%, LCVs tyres 10%, two-wheeler tyres 15% and farm tyres 20% during H1 2010 compared to H1 2009. Profitability is highest in the replacement market hence companies
vie to increase their share of this market.
Products
Since an auto assembly involves large number of parts, ACMA has classified sector companies on the basis of components that they supply to auto manufacturers. The pie chart describes the industry segmentation on the basis of range of products manufactured and their contribution to the overall industry revenues.
Recent Trends
The industry had been hit hard by the slowdown in domestic sales and exports. The imports in the recent past have increased manifold. A large number of auto ancillary companies witnessed sharp decline in profitability and are also facing severe problem of nonavailability of working capital. The Department of Heavy Industry has recommended an INR10 billion Automotive Development Fund to help in financing the modernization of the auto-ancillary industry
Presently, the production is on a recovery path buoyed by the pick up in sales of passenger cars and two wheelers. Alongside, the investment climate has improved since January this year. The revival process is expected to gain momentum in 2009-10. According to CMIE, ancillary production is expected to grow by 8.2% in 2009-10 aided by a 7% growth in the OEM segment and an 8.5% rise in exports & replacement market segment.
Global Scenario
The global auto ancillary industry is expected to reach US$1.9 trillion by 2015, of which around 40% (US$700 billion) is potentially expected to be sourced from low cost countries including India. With American automakers selling some of their brands and shift in the US consumer interest towards smaller and fuel-efficient cars, there are unique opportunities for the manufacturers in India and China to enter the North American automotive market Following the liquidity crisis starting September 2008, there was a rapid and sudden drop in orders in European market including incoming orders for future demand. The passenger car segment witnessed a reduction in demand. The drop in demand across sectors is expected to be more pronounced in CY2009 as the full effect will be evident.
Auto sales in Japan reversed a yearlong slide in August, rising 2.3% as government subsidies and tax cuts helped lift demand for Toyota’s new Prius and Honda’s Insight cars. The Japan Automobile Manufacturers’ Association expects domestic industry-wide sales to drop 8.5% to 4.3 million vehicles in the year ending March 2010.
Demand Drivers
-Infrastructure development (US$500 billion) in the next 5-6 years
-Low penetration rate of cars (8/1000) and access to capital
-Rising per capita income
-The middle class is expected to grow from 50 million to 550 million by 2025
-Continuously improving quality resulting in export of automobiles and auto ancillaries
-Low cost of skilled manpower and design capability
Investments – Foreign and Domestic
Continental Automotive Components (India) Private Limited, a wholly-owned subsidiary of Continental Corporation, is planning to invest over US$79.2 million in its Indian operations during the next two years ending December 2010
Canadian auto component major Magna International Inc is mulling options to set up an integrated manufacturing facility in or its nine business divisions
Shriram Pistons announced investing more than INR2.25 billion over two years in a new plant in Rajasthan and Rico Auto plans to spend about INR0.4 billion on
equipment this year to boost capacity in some segments
An auto park is coming up near Hyderabad with investments worth over US$409.3 million from around 34 automotive ancillary units. This is in addition to a US$245.6 million Greenfield project being set up by MLR Motors near the park
JK Tyres is investing US$53.8 million in a new facility in Mysore for off-the-road (OTR) tyres
Of the total 141 projects outstanding, 34 are expected to be commissioned by June 2010. Several luxury car makers are looking at making India a sourcing hub for components; BMW is likely to sign the first direct sourcing deal with local vendors by the end of this year. Skoda Auto India is looking at increasing localization for its small car Fabia to over 50% over the next two years. Mercedes Benz India expects growth in sourcing from India to continue at 10%.
Capex Plans
Auto component companies have lined up capex plans of nearly INR10 billion for FY09-2010: Minda Industries is setting up new plants in Vietnam, Pune, Bangalore and Manesar this year at an investment of INR2-2.5 billion
Sona Koyo has invested INR3 billion to set up new facilities under its recent joint
ventures with JTEK, FUJI, Americam Axel and Arjun Stampings this year. Plans to invest INR0.40 billion during the remaining period of the fiscal especially for upgrading its R&D Rico Auto has invested INR0.60 billion in this fiscal and plans to invest another INR0.40 billion in the remaining half on the new models
Recent Events
On September 03, 2009, Fiat announced sourcing of more than US$1 billion worth components for its global businesses in 2010 from India
On August 27, 2009, Motherson Sumi System bagged a contract worth INR40 billion from a group of German car makers to supply rear-view mirrors for six years. It has bagged the contract through its subsidiary Samvardhana Motherson Reflectec and the delivery is slated to begin from 2011
On August 24, 2009, Mando India announced that it has been selected by Mando Corporation to supply brake and suspension components for several of its global OEM customers including Volkswagen and Renault
On August 20, 2009, Bridgestone announced setting up a second facility near Pune at an investment of INR20.5 billion
On July 10, 2009, French tyre major, Michelin, gained clearance from the Foreign Investment Promotion Board for its US$2.26 billion FDI proposal to set up a manufac turing facility in Tamil Nadu
Future Outlook
As per an Automotive Component Manufacturers Association of India (ACMA) report, the industry is expected to touch US$40 billion by 2015-16. Investments were estimated at US$7.2 billion in 2007-08 and are likely to touch US$20.9 billion by 2015-16. It is estimated that exports of auto ancillaries would reach around US$20 billion-US$22 billion by 2015-16. The Investment Commission has set a target of attracting foreign investments worth US$5 billion for the next seven years to increase India's share in the global auto ancillaries market
from the existing 0.9% to 2.5% by 2015.
Key Concerns
The entry of SAIC (Shanghai Auto) into the Indian market might increase competition for several Indian players. The challenge could come in the light truck segment and even cheaper costs.
Trade agreements signed with countries like Thailand and China which already offer a number of incentives to their domestic players, are perceived to be a potential threat to India
Labour unrest has become an aggravating problem adversely affecting some companies including Rico Auto, Pricol, Sunbeam Auto. Problems of re-instating sacked workers, hiring of contract workers and non-payment of pay are some of the factors causing unrest between management and workers.
The industry is facing about 18-20% cost disadvantage in the form of increasing raw material costs, power costs, higher taxation and infrastructure costs when compared to China and Thailand
With the increasing input costs and automobile designs getting changed frequently, component manufacturers are required to constantly invest to upgrade themselves and to add value. This has been a drag, especially on small and medium manufacturers who have been found wanting in terms of servicing huge orders due to lack of scale. The auto components SMEs are facing stiff competition from companies in other developing countries like ASEAN countries
Companies covered in this report include
Amara Raja Batteries – Maintaining Momentum
Amtek Auto – Restructuring Measures In Process
Apollo Tyres – Robust Growth Trend
Bharat Forge – Value Creator
Bosch – Consistent Performer
CEAT – Capacity Expansion
Exide Industries – Healthy Bottom-Line
Federal-Mogul Goetze – Turnaround Story
Halonix – Gradual Rebounding
Motherson Sumi Systems – Declining Margins
Rico Auto – Operational Problems
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