New Delhi: Indian auto parts suppliers, struggling to meet a surge in demand due to capacity constraints, are ceding ground to aggressive Chinese suppliers. Some fear this may be permanent.
Auto component imports from China rose 322% to $114 million (about Rs500 crore) in February from a year before, according to Global Trade Information Services, which supplies trade data.
Graphic: Ahmed Raza Khan / Mint
The spurt in Chinese imports the past three months puts them on track to cross the $1 billion mark in India this calendar year.
India’s auto parts industry was estimated at Rs76,320 crore in 2008-09 by the Federation of Indian Chambers of Commerce and Industry, or FICCI.
“Once the Chinese come in all bets are off,” said Jayant Davar, president of the Automotive Component Manufacturers Association, or Acma. The association is lobbying with the government against Chinese imports, he said.
Globally, automakers are generally loath to source parts from outside their countries. They usually work on building relationships with component suppliers near their factories—relationships that are then carried forward when setting shop overseas.
To be sure, 12 years after India won its first Deming Award—a global award given by the Japanese Union of Scientists and Engineers—the quality of auto parts made in the country is still a worry. Recently, German automaker Volkswagen AG looked at at least 400 suppliers in India but could certify just 3-4 firms as its global suppliers, said a person familiar with the matter.
Auto companies say China wasn’t part of their plan originally, but they had no option following a spurt in sales.
Car sales rose 25% to 1.5 million units in the year ended 31 March. Truck and scooter sales were up 38% and 20%, respectively, resulting in what is termed as the ‘bullwhip effect’ by economists, in which increased orders lead to a large bump in shortages across the supply chain. Seeing suppliers unable to cope, several Indian companies went to China for what they thought would be a short-term fix.
Tata Motors Ltd, the country’s largest commercial vehicle maker, says it imports radial tyres from China even if these are more expensive due to a severe shortage of manufacturing capacity here. It also imports wheel rims and power steering for its trucks.
Large capacity addition takes time as companies have to put up with high borrowing costs. “We ramp up capacity only when we see stability and not during a cyclical boom,” says Nishant Arya, executive director of New Delhi-based JBM Group, a parts supplier.
Local parts makers fear auto companies may sign long-term contracts with Chinese firms, taking business away from Indian suppliers permanently.
Analysts, too, say Indian auto firms seem to be abandoning local suppliers and rushing to the cheapest source.
“It’s not only for the cost advantage but also for the quality that we are there (in China),” said Tata Motors spokesman Debasis Ray.
Smaller rival Ashok Leyland Ltd also sources parts from China and it is looking to build long-term relationships with suppliers there, managing director R. Seshasayee had said in a January interview. “We’re not sourcing only because it is cheaper,” he said.
Chinese components are 30-35% cheaper than made-in-India parts, according to an internal presentation by Beiqi Foton Motor Co., the world’s second-largest truck company.
The company plans to start selling in India next year and will source components from India. With the difference in price it’s unlikely an appreciating yuan will make imports unattractive. Freight costs from China are usually 10-12% of the cost of the component.
Free trade agreements, or FTAs, signed by India last year have also made it difficult for local component makers. A recent study by FICCI says imports have grown faster than domestic production since 2005-06. India’s balance of trade in components has also worsened from a $371 million deficit in 2004-05 to $2.76 billion in 2008-09.
In January, free trade agreements between India and South Korea and the Association of South East Asian Nations, or Asean, were operationalised. Acma expects an increase in imports from these countries as import duties move from 10% to zero.
“Free trade agreements inhibit entrepreneurs from building capacity,” says Davar.
Industry watchers agree. “Large capacity addition is happening in a piecemeal manner,” said V. G. Ramakrishnan, senior director, automotive practice, at Frost and Sullivan, a consultancy.
FICCI’s study also shows that imports from the European Union, with which India is negotiating a free trade agreement, have grown rapidly in anticipation of the deal being signed. They comprise over a third of total imports.