Mumbai/New Delhi: Large local auto parts makers are forming joint ventures to boost their technological know-how and expand product range as the largely fragmented sector is at full capacity and facing a capital crunch.
Bharat Forge Ltd , the world’s second biggest forgings maker, earlier this month entered into a joint venture with the Indian unit of gearing products manufacturer David Brown to build gearboxes.
Amtek Auto Ltd has signed joint ventures with firms in South Korea and Israel to boost product portfolio and the Samvardhana Motherson Group, which runs flagship Motherson Sumi Systems Ltd , is conducting eight due diligences across the globe for acquisitions and JVs.
“We acquire technology through product-driven joint ventures and then over a period of time we indigenise the technology,” said Santosh Singhi, chief financial officer, Amtek Auto.
“In technology, we feel we probably take the lead. It will be decided over a period of time, maybe three-five years, whether we buy out the JV partner or they buy our stake,” Singhi said.
India auto sales grew a record 30% in 2010/2011 to 1.98 million units.
US automakers such as General Motors and Ford Motor Co are also keen to increase sourcing from India. General Motors had in January said it plans to source $1 billion worth of auto parts from India over the next two years.
But the record auto sales in India has also taken the auto ancillary sector, roughly three-fourths of which comprise of small and medium enterprises (SMEs), by surprise and they may not find it as easy to boost capacity and technology.
“There is a huge shift happening in the auto industry because of the sheer number of sales and moving technology - suppliers are not being able to keep up,” said Darius Lam, senior market analyst, J.D. Power Asia Pacific.
The fast growing auto ancillary sector contributes some 2.3% to India’s gross domestic product (GDP) and is expected to clock sales of $30 billion in 2010/11.
The industry’s apex body the Automotive Component Manufacturers Association expects turnover to touch $110 billion by 2020.
“I think we came out of the recession much too fast for anybody’s imagination. That’s very good for us,” said Vinnie Mehta, executive director at ACMA.
“But again, you need to manage growth and we did not have enough capacities to meet the growing demand in the market,” he said.
Almost all auto ancillary makers have shown healthy growth in sales over the past few quarters, which have not necessarily translated into increased profitability.
“For component makers, top line growth is not really corresponding with the growth in profit margins. Because top line is growing you need more capital to add on to capacity but you are not making enough money,” said Preet Mohan Singh, executive director at Avendus Capital.
“I believe the funding problems of suppliers haven’t really gone away,” said Singh.
Need for Consolidation
Analysts say consolidation in the auto ancillary industry, so far rare, would pick up in the coming years, especially after the sector reaches a threshold in size and capacity.
“The Indian auto parts sector is very fragmented. There will be a lot of consolidation in the next two years so that the Indian auto part industry is more aligned with the international industry and global markets,” JD Power’s Lam said.
But high expectations from the promoters of takeover targets have thwarted many potential deals, experts say.
“I think there is a dichotomy, because the auto industry is growing so phenomenally, people have an expectation that a small company be valued as a huge one. So the comparison is rather unfortunate and they don’t realise that their expectations are so huge,” said Samvardhana Motherson chairman Vivek Chaand Sehgal.
In the interim, foreign firms are making the most of the opportunity and lapping up small or majority stakes in Indian auto parts players.
In April, German tyre maker Continental AG closed a deal to buy the tyre unit of India’s Modi Rubber Ltd .
And wheel rims maker Steel Strips Wheels has sold small stakes to South Korea’s GS Global Corp and Japan’s Sumitomo Metal and is currently in talks for a third round of stake dilution to a foreign investor.
“Stake buys are something that will keep happening because of two reasons. Infusion of capital for expansion which will also have reduced cost of funds. And the ability of the foreign player to play in an attractive market...,” said P.S. Easwaran, director at Deloitte India.
And moreover, as JD Power’s Lam says, “Fragmentation is hurting the industry —which needs to be bigger, more professional, more high tech too.”