BackAuto components: growth through innovation and competitiveness
Govt's 'Make in India' push could be vital in creating platform for attracting substantial investments needed to help the sector achieve its potential
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The vibrant automotive industry in India produced over 25 million vehicles (two-wheelers, three-wheelers and four-wheelers) in 2015, of which nearly three million were exported. The bedrock for this large-scale production has been the automotive components suppliers that now represent over 5% of the manufacturing gross domestic product (GDP) of India and employ over one million people.
Notwithstanding the recent slowdown in the key automotive market segments in India, the auto components sector has the unique opportunity to sustain its growth trajectory by rapidly growing its export footprint while scaling its capacity to serve the domestic market that will return to its growing ways. However, achieving this will require the automotive components makers to further raise their competitiveness and drive vigorous innovation in products and processes.
Strong performance, significant growth potential
Over the last decade, the automotive components industry has scaled three times to $40 billion in 2015 while exports have grown even faster to $11 billion. This has been driven by strong growth in the domestic market and increasing globalisation (including exports) of several Indian suppliers. However, there is room for growth—Indian exports still form only 1% of global automotive components exports.
Indeed, the industry has the potential to grow five-fold from $40 billion in 2015 to $180-200 billion in size by 2026, and could reach 10% of India’s manufacturing GDP. To achieve this potential, the automotive components industry will need to attract $80-100 billion worth of investments and ensure skill development of the existing talent pool. By 2026, the Indian auto components industry could mature into being the ‘frugal innovator’ for the world, propel the ‘Make in India’ movement by being known for ‘quality in India’, and witness many global MNC (multinational corporation) component suppliers ‘manufacturing in India for the world’.
Raising competitiveness and driving innovation
India’s manufacturing sector is still not operating at its potential. Across two key measures of the share of manufacturing in GDP (India at 13%, China at 33%) and share of exports in manufacturing (India at 23%, China at 40%), there is significant room for growth. The automotive components sector could become one of the torch-bearers of the ‘Make in India’ campaign by raising its competitiveness and driving vigorous innovation.
One of the key measures that signals competitiveness of a company or a sector is the economic profit it is able to generate. Economic profit is a measure of the surplus a company has generated after repaying its cost of capital, and captures well the dual aspects of a company’s strength in the market and that of its operations. Across 2007–2014, among the top 100 automotive components suppliers in India, only one-third of the companies generated economic profit. In fact, the automotive components sector lies in the ‘mid zone’ of economic profit generation when compared to other sectors of the Indian manufacturing sector in general.
Indian automotive components players need to generate substantially greater economic profit to match peers from China, Germany, US and South Korea. These countries with high economic profit generation signal their higher competitiveness that enabled them to attract over two-thirds of global investments in the last five years.
Raising competitiveness will need growth in scale of the automotive suppliers across the tiers in India, and pursuing the next wave of cost excellence. A relentless focus on improving quality capability of tier-2 and tier-3 suppliers will need to be facilitated by the tier-1 and vehicle makers themselves. Embracing advances in digital manufacturing to transform productivity and quality will also offer gains.
Driving innovation will involve suppliers collaborating with the vehicle makers to design and develop new components and systems at uniquely lower price points, in turn enabling vehicle makers to enrich vehicles with greater functionality.
Weathering headwinds and riding tailwinds
The global automotive components industry is rapidly adapting and reshaping itself. Electrification is likely to intensify, driven by stricter emission controls, better performing vehicles, and government incentive programmes for electrical powertrains. Connectivity experience being demanded by customers is leading to a new competitive battlefield. Autonomous vehicles will further raise the electronics and software content in automotive parts. Finally, advanced technologies and materials are going to drive in a revolution in quality, part costs and light-weighting.
One key headwind the Indian automotive components players will have to weather is increasing penetration of electronics in automotive parts. It might happen that the share of imports of these electronics-heavy components could grow rapidly, similar to how India has become over-dependent on imports for electronic devices. To counter this, the components players need to invest in building capabilities as well as partnering for components and systems design for emission, safety and driver assistance technologies. Developing these electronics components and introducing them in the aftermarket vehicles may be a good way to learn and gain scale.
On the other hand, as the Indian vehicle makers globalise their industrial footprint, the component suppliers could benefit by co-locating their plant capacity, people skills and technology to support global expansion of these original equipment makers.
Enabling trade policy and ease of doing business
India could explore strategic trade agreements with export markets where India-like vehicles are in demand (for example, Nigeria, South Africa, Mexico, Colombia, Iran and Russia) towards growing the exports of Indian vehicles and automotive components manufacturers.
The ease of doing business is critical to attract investments into the manufacturing sector. Based on the World Bank’s 10 themes for the ease of doing business, India ranked among the top 40 nations in the world in terms of investor protection and availability of credit. However, it needs to substantially improve on the ease of starting a business, dealing with construction permits and enforcing contracts. The push by the government under the ‘Make in India’ movement could be vital in creating the platform for attracting substantial investments needed to help the automotive components sector achieve its potential.
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