Report auto component_market

MARKET ATTRACTIVENESS OF AUTO
COMPONENT BUSINESS IN INDIA

Prepared For:

Prepared By: ,
January 2009
IMRB International
INVESTMENT POTENTIAL IN AUTO COMPONENT INDUSTRY IN INDIA 1

Preface
Thai-Indian business relations have improved considerably over the past decade.
Thailand and India are close to concluding a Free Trade Agreement (FTA) covering trade
in goods by 2010. The Free Trade Agreement between Thailand and India is expected to
improve trade relations between the two countries further. The FTA covering trade in
goods would lead to long term mutual benefits in trade and investment and the
partnership would be expanded further to cover technology know-how and expertise.

India's primary imports from Thailand are machinery, electronic appliances, textiles,
plastic material, transport equipment, vegetable oil and latex. The major items of imports
under FTA are polycarbonate, cathode-ray tubes, color-TVs, air conditioners and
Aluminum products. Thailand’s main imports from India are jewelry, gemstones, steel,
pharmaceuticals and ferrous metal ores.

India's trade with Thailand could touch USD 7 billion by 2010-11 propelled by a
doubling in transaction under Free Trade Agreement (FTA). The EHS was implemented
on September 1, 2004, under which tariffs on 82 items were to be phased out by
September 1, 2006 by both the sides.

The trade between Thailand and India is estimated to be US $ 7 billion by 2010-11 from
US $ 2.2 billion in 2005-06.

The total trade of 82 items under Early Harvest Scheme (EHS) of the FTA was increased
by over 140 percent to about US $ 358.63 million in 2005-06 from US $ 149 million in
2003-04. The share of these 82 items in India-Thailand trade increased from 10.34
percent in 2003-04 to 15.68 percent in 2005-06.

Thailand’s export to India of the identified 82 EHS items was increased from US $ 84.64
million to US $ 275 million during the period from 2003 – 04 to 2005 – 06. During the
same time, India’s export to Thailand of these items increased from US $ 64.28 million to
US $ 83.03 million during the same period.

MARKET ATTRACTIVENESS OF INDIAN AUTO COMPONENT INDUSTRY 2

In 2007, Thailand’s export for these 82 items was US $ 406.31 million. Due the FTA
between two countries, Thailand is able to manage the trade surplus of US $ 598 in 2007
in bilateral trade between Thailand and India.

With significant potential for growth of business between the two countries, the Ministry
of Commerce, Thailand and Royal Thai Embassy would like to understand the
investment potential across the following identified product categories:-

1. Home Utility and Furnishing: This would broadly include three product
categories:-

a. Furniture – Largely focusing on house hold furniture e.g. Sofa-set,
Dining table, Corner / corner table etc. Also covering office furniture
e.g. office chairs, cubicles, tables etc and open-air furniture i.e. the
furniture used in the garden, near pools etc.

b. Interior Decoration items – This would include: Show pieces,
Wooden handicraft, photo frames, artificial flowers.

c. Utensils – Household (kitchen), HoReCa (Hotel Restaurant Catering)
Segment, Institutional / Office.

d. Plastic Products - Food containers, plastic storage boxes etc e.g.
Cello, Tupperware, Milton, Nyasa etc.

2. Construction Material: This would include Bathroom Fittings,
Tiles/Floorings (including wooden), Roof Tiles (used in the costal areas),
Metal (Al, Tin etc) / Gypsum boards used for partition.

3. Hospitality Services: This would be understood with the objective of tie-up
with existing hotels – spas, specialty restaurant (e.g. Thai cuisine restaurant),
health wellness services etc. The client would be interested in management
control and running the property. The stand alone spas e.g. Kaya clinic is also
covered in the purview of the study.


4. Auto parts and accessories: It would cover both types of auto parts:-

a. Essential auto parts (low volume high value items e.g. gear box,
clutch plates etc and high volume low value items like break pads etc).
These parts would be for 2-wheelers (e.g. moulding etc) and 4-
wheelers – both cars and commercial vehicles.

b. Accessories / decorative items e.g. music systems, alloy wheels etc

In order to understand the trade potential across the above categories, the Ministry of
Commerce, Thailand and Royal Thai Embassy has commissioned Business and Industrial
Research Division (BIRD) of IMRB International to avail its research based consultancy
services


Table of Contents
1 EXECUTIVE SUMMARY ................................................................................................... 7
1.1 Automotive Component OEM and Replacement Markets .................................................... 10
1.2 Foreign Direct Investment and Government Policy .............................................................. 11
1.3 Attractiveness of Auto Component Sub-segments and Entry Strategy ................................. 11

2 GLOBAL AUTO COMPONENT INDUSTRY ................................................................ 13
2.1 Global Trends in the Automotive Industry............................................................................ 13
2.2 Major Auto and Auto Component Markets ........................................................................... 14
2.3 Major Auto Component Companies...................................................................................... 17

3 INDIAN AUTO COMPONENT INDUSTRY ................................................................... 18
3.1 Major Auto Component hubs in India ................................................................................... 19
3.2 Transition of Indian Auto Component Industry .................................................................... 20
3.3 Auto Component Industry Cost Buildup ............................................................................... 21
3.4 Classification of Auto Component Market ........................................................................... 22
3.5 Tier Structure of Auto Component Market ........................................................................... 23
3.6 Classification of Auto Components ...................................................................................... 24
3.7 Major Automobile Players .................................................................................................... 25
3.8 Major Automobile Component Players (Two, Three and Four Wheeler players) ................ 26
3.9 Foreign Collaboration in the Auto Component Industry....................................................... 27

4 INDUSTRY AND MARKET ANALYSIS ........................................................................ 29
4.1 Macro and Micro Environment Analysis: Indian Auto Component Market ......................... 30
4.2 SWOT Analysis: Indian Auto Component Market ............................................................... 31

5 MARKET SIZE AND GROWTH FORECASTS............................................................. 33
5.1 Global auto component market size and growth estimates ................................................... 33
5.2 Indian auto component market size and growth estimates .................................................... 34
5.2.1 Production (in Number) and Growth rates of all vehicle categories
including two wheelers .............................................................................................. 34
5.2.2 Consolidated Production, Export and Investment in value terms ............... 35
5.2.3 Value wise break up of sub-segments – two and four wheelers ................. 36
5.2.4 Import estimates and trends (for 2 and 4 wheelers) .................................... 36
5.2.5 Auto Component Export Destinations ........................................................ 38
5.2.6 Trends in growth and margins – Two and Four wheelers .......................... 39

6 AUTO COMPONENT OEM AND REPLACEMENT MARKET ................................. 40
6.1 OEM Market in the Indian auto component industry............................................................ 40
6.2 OEM Component Sourcing ................................................................................................... 40
6.3 OEM Vendor Selection Process ............................................................................................ 41
6.4 Inventory in Supply Chain of OEM suppliers ....................................................................... 42
6.4.1 Small and Medium OEM vendors .............................................................. 42
6.4.2 Large OEM vendors / strategic Tier-1 suppliers......................................... 43


6.5 Break up of replacement parts market by type of vehicle ..................................................... 44
6.6 Automotive component replacement market: impact of structural changes ......................... 44
6.7 OEMs’ focus on replacement market .................................................................................... 45
6.8 Channel structure for auto component market ...................................................................... 46

7 GOVERNMENT INITIATIVES........................................................................................ 48
7.1 Foreign Direct Investment ..................................................................................................... 48
7.2 Auto Policy ............................................................................................................................ 48
7.3 Automotive Mission Plan 2016 ............................................................................................. 50

8 GROWTH DRIVERS AND CHALLENGES ................................................................... 51
8.1 Growth Drivers for Replacement Demand ............................................................................ 52
8.2 Issues and Challenges – Indian Auto Component Industry .................................................. 53
8.3 Indian Auto Component Industry amid changing global scenario ........................................ 54
8.4 Critical Success Factors......................................................................................................... 55

9 CONSUMER PREFERENCES FOR AUTO COMPONENTS ...................................... 56

10 ATTRACTIVENESS OF AUTO COMPONENT SEGMENTS FOR THAI
INVESTORS ............................................................................................................................... 58
10.1 Attractive segments within auto component market for Thai investors ................................ 58
10.2 Business Models for Collaboration ....................................................................................... 61

11 CONCLUSIONS AND RECOMMENDATIONS ............................................................ 63
11.1 Entry Strategy for Thai Investors in the Indian Auto Component Business ......................... 63
11.2 Recommended Distribution Channel for Thai investors ....................................................... 65

12 ANNEXURE: AUTO POLICY .......................................................................................... 67

13 LIST OF EXHIBITS ........................................................................................................... 77

14 REFERENCES .................................................................................................................... 79


1 EXECUTIVE SUMMARY
The Indian automobile ancillary sector is transforming itself from a low-volume, highly
fragmented one into a competitive industry and backed by competitive strengths,
technology and evolving value chain. The Indian Auto component industry has
transitioned from a supplier for the global aftermarket to becoming a full-scale global
Tier 1 supplier.

The components in the Indian automotive component market are classified into Engine
parts, Drive transmission and steering parts, Body and chassis parts, Suspension and
braking parts, Electrical parts and Equipment and other parts.

The macro environment of the Indian auto component industry can be assessed by
understanding the social / consumer shifts, understanding its political and legal
environment, technological environment and economic shifts. This 9-forces analysis for
Indian auto component industry is done in the exhibit below:


Market Analysis – Indian Auto Component Market

Technological shifts
Political / Legal Environment
- Fast becoming global hub for R&D: GM, Daimler
- FDI growing due to competitive advantage; witnessed
Entry Barriers Chrysler, Bosch, Suzuki, Johnson Controls etc. have set
CAGR of 21.7% during 2002 – 07. The FDI was USD 7.2
- OEMs’ “inclusive growth” ensuring long term up development centres in India.
Billion in 2007 – 08
relationship especially for high value-adding items - Casting and forging processes in India 25 to 30 % lower
- Investment Commission of India facilitating FDI in all
- Foreign suppliers supplying to global auto majors with than western counterparts.
forms
local knowledge and expertise may have easy access - 5 Indian auto component companies received coveted
- No repatriation issues after paying taxes
Deming Prize, largest number outside Japan.

Supplier Power Industry Competitors Consumer Power
- 450 – 500 mid to large players with
- Tier structure supporting vendor - Auto OEMs have average 2 suppliers
around 6000 – 7000 units in addition to
relationship to ensure competitiveness
around 10,000 units in unorganized
- Most Tier – 3 suppliers are small units - New auto clusters being developed
segment.
largely from unorganized segment with OEMs and major ancillaries
- Technical tie ups and R&D ensuring at
-
least 2 major players across segments

Economic shifts
Social / Consumer shifts Threat of Substitutes - Concentration of disposable income in top 6 – 8 cities
- Auto component industry – incubator to entrepreneurship - Less threat to substitute for organized players - Rising spending patterns on “pampering” therapies
initiatives especially for less value adding components working with OEMs and emphasizing on R&D - International economic environment augurs cautious
- OEMs developing and launching “India centric” vehicles for future needs approach
after understanding Indian consumers’ demands - Unorganized units stand chances for greater
threat

Exhibit: 18-Force Market Analysis of Indian auto component market


According to Automotive Component Manufacturers’ Association (ACMA), the
production of automotive component in India was US$ 18 billion. It is growing at CAGR
of 27% since 2002-03. The exhibit below shows that Indian auto component industry is
growing more than 25% since 2003 – 04. The exports in 2007 – 08 were US $ 3.6 billion,
out of these close to US $ 1 billion auto components were exported to top-3 US
automotive majors i.e. GM, Ford and Chrysler.

Indian Automotive Component Market

Auto Component Production
20,000 18,000
18,000
15,000
16,000
(In USD Million)

14,000 12,000
12,000
10,000 8,700
6,730 7,200
8,000
5,430 5,400
6,000 3,894 3,965 4,470 3,750
4,400
3,615
3,278 3,008 3,249 3,100
4,000 2,300 2,645 2,469 2,873
1,274 1,692
456 625 578 760
2,000 330 350

-
*
7

8

9

1

2

3

4

5

6

7
00

8
-9

-9

-9

-0

-0

-0

-0

-0

-0

-0

-0
0
96

97

98

00

01

02

03

04

05

06
-2

07
19

19

19

20

20

20

20

20

20

20
99

20
19

Production Exports Investment
Exhibit 22: Market size and growth trends – Indian auto component market
Source: ACMA (Automotive Component Manufacturers Association)
* Estimated figures

The Indian auto industry and auto component industry in 2006 – 07 was US$ 34 billion
and US$ 15 billion. As per Government of India’s automotive mission plan 2016, the
Indian auto industry and auto component industry in 2015-16 is estimated to be US$ 105
billion and US$ 40 billion respectively. It signifies that auto component industry would


grow more than two times in the next seven years. This high growth augurs the business
potential in the Indian automotive component industry in the long term.

The auto component industry is facing transient challenges due to the changing global
situation where 2 out of the top-3 U.S. are on the verge of filing bankruptcy. Since Indian
automotive component industry is exporting to these auto majors, the reduction in the
pace of growth is expected this year. This reduction is coupled with reduced growth rate
of domestic vehicles sales in 2008-09. These rough times, however, are short timed in the
light of Government’s automotive mission plan 2016 whereby it aims to achieve the turn
over of US$ 145 billion by 2016. The growth factors i.e. lesser penetration of vehicles,
growing income levels portends health growth for Indian auto and auto component
industry in the long term.

1.1 Automotive Component OEM and Replacement Markets

The OEM (Original Equipment Manufacturer) market is also known as the organized
market segment in the Indian auto component industry. All the Tier-1 suppliers/ vendor
to OEMs have their respective distribution channels in the aftermarket (or replacement
market) segment.

The inventory in the value chain of Indian automotive industry varies according to the
size of auto component suppliers. The large strategic Tier-1 suppliers who are better
connected with OEMs through ERP (Enterprise Resource Planning) system are able to
manage inventories better. On the other size, the small and medium sized Indian auto
component players not leveraging technology end up piling inventories due to “bull whip
effect”.

The Indian automotive component replacement market have various channels selling
genuine and spurious parts that makes it one of the most dynamic market segment (out of
the three market segments i.e. replacement demand, OEM demand and export market).
According to the study conducted by IMRB International for SIAM in 2006-07, the
counterfeit components constitute about 35% - 51% of private vehicle components
replacement market. Lately, OEMs have started showing increasing interest in the
replacement auto component.


1.2 Foreign Direct Investment and Government Policy

The automatic approval for foreign equity investment upto 100 per cent of manufacture
of automobiles and component is permitted for the auto and auto component industry.
The import of technology /technological up gradation on the royalty payment of 5%
without any duration limit and lump sum payment of USD 2 million is also allowed
under automatic route in this sector. The norms for Foreign Investment and import of
technology have also been progressively liberalized over the years for manufacture of
vehicles including passenger cars in order to make this sector globally competitive. With
the gradual liberalization of the automobile sector since 1991, the number of
manufacturing facilities in India has grown progressively.

1.3 Attractiveness of Auto Component Sub-segments and Entry
Strategy
The exhibit below shows that the domestic market for high grade plastic, electronics /
Integrated Circuit auto parts would be best suited for the auto component imports from
Thailand. The other attractive sub-segments would be rubber based intensive parts and
skill intensive parts.

Attractiveness Matrix for Thai Investors

Low High

Relative Degree of Technical Expertise
Ability in cost effective supply

High - Rubber Intensive parts High grade plastic, IC
e.g. tyres, Accessories based electronic parts /
- Skill intensive parts assemblies

Low High grade plastic, IC Parts for evolving
based electronic parts / technology aggregates
assemblies

Exhibit 40: Attractiveness matrix for Thai investors


For business collaboration, we suggest that Thai investors should initially export these
products for OEMs and aftermarket in India. Later on, when the product volumes would
increase, we suggest that it should set up the assembly base in one of the auto clusters, to
be selected based on initial experience. The exhibit below pictorially represents the
attractive areas and the timeframe for entering across various auto component market
sub-segments in India.

Entry strategy for Thai Investors
Degree of Attractiveness

Low Medium High

Plastic, silicon intensive
Auto Component Sub-segments

electronic parts

Rubber intensive parts
and accessories
Parts for evolving
technology aggregates

Skill intensive parts
covering engine parts

Labour intensive parts –
casting, forging etc

Legend

Immediate entry as OEM & aftermarket supplier

Enter in these sub-segments after 1 – 2 years of
immediate entry
Do not enter

Exhibit 42: Entry strategy for Thai investors


2 GLOBAL AUTO COMPONENT INDUSTRY
2.1 Global Trends in the Automotive Industry

The world’s automotive manufacturing sector consists primarily of about 20 very
large multinational corporations. The automotive supply sector, however, comprises of
thousands of firms ranging in size from a few employees to more than 100,000.

According to industry estimates, the size of the global auto component industry in
the year 2008 was approximately US$1.4 trillion and is likely to grow to about
US$1.9 trillion by 2015. Out of this total auto component demand by 2015, about
40% (i.e. US$ 750 billion) is likely to be sourced from low cost countries (LCCs)
such as China, ASEAN countries and India. The trends that are shaping the global
automotive industry are shown in the exhibit below:-

Global Trends in the Automotive Industry

Strategic “Tier-1" acting
closely with OEMs for designs

Pressure to lower
Level of profitability prices continues
too low

Global Trends –
Automotive Industry

Continued
Emerging markets are consolidation
fastest growing markets
Shared platforms & modules
increasingly important

Exhibit 1: Global trends in the automotive industry


2.2 Major Auto and Auto Component Markets

The United States is far ahead of other countries when it comes to vehicle population per
1,000 vehicle driving age. It is home to the largest passenger vehicle market of any
country In 2007, there were about 250 million vehicles in the United States.

The exhibit below shows the penetration of LCVs across the major countries and the
emerging economies like Brazil, China and India.

Cars for 1,000 inhabitants in different countries

Exhibit 2: Penetration of LCVs in different countries
Source: Secondary Search


The exhibit below maps vehicle penetration and nominal GDP per capita. In the long run,
the emerging economies like India hold immense potential as far as global automobile
industry future is concerned.

GDP / Capita vs. Vehicle Density: India vis-à-vis Major Markets

Exhibit 3: GDP / Capita vs. Vehicle Density: India vis-à-vis major markets

The exhibit below shows per capita income and the number of inhabitants per vehicle in
the year 2002 and expected ratio and per capita income in the year 2014. After comparing
the potential for future auto and auto component markets, it can be deduced that the
emerging economies like China and India would be at growth stage whereas the
developed economies like US and Japan are the saturated stage, expected to remain
stagnant or grow at less rate in the medium to long term.


Vehicle Density vs GDP/per capita

Exhibit 4: Vehicle density vs GDP / per capita – Current and Estimated in 2014
Source: EIU, Goldman Sachs and A.T. Kearney analysis

The above analysis clearly indicates the importance of U.S. automotive market for the
global auto component industries, especially from the emerging economies and ASEAN
countries. The exhibit below shows US Auto Component imports from the leading
exporters:-

Year Mexico Brazil China Thailand India
2001 18,469 820 1,470 380 141
2002 20,433 1,137 1,885 516 177
2003 21,477 1,319 2,363 498 191
2004 23,672 1,550 3,246 540 296
2005 25,445 1,847 4,328 535 426
Exhibit 5: Major US Auto Component Imports (In US$m): 2001-05
Source: US Census Bureau’s Foreign Trade Statistics 2001-2005


2.3 Major Auto Component Companies

The exhibit below shows top automotive component players and their sales figures
globally in 2004 and 2005. Robert Bosch Corporation (entered in India in collaboration
with MICO as MICO Bosch but now has standalone existence) and Delphi Automotive
Systems are the globally ranked number one and two respectively according to their sales
figures.

Company Sales in 2004 Sales in 2005 Change%
(USD Bn) (USD Bn)
Robert Bosch Corporation 35.4 30.7 -13.28
Delphi Automotive Systems 28.6 26.9 -5.94
Denso Corporation 23.2 25 7.76
Magna International 20.6 22.8 10.68
Johnson Controls Inc. 17.7 19.2 8.47
Lear Corporation 16.9 17.1 1.18
Visteon Automotive Systems 18.7 16.9 -9.63
TRW International 12 12.6 5.00
Eaton Corporation 9.8 11.1 13.27
Exhibit 6: Top Ten Auto Component Manufacturers-2004 & 2005
Source: Various Auto reports, Database search


3 INDIAN AUTO COMPONENT INDUSTRY
The Indian automobile ancillary sector is transforming itself from a low-volume, highly
fragmented one into 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 and the unorganized segments. While the forte
of the organized sector is the high valued added precision engineering products, the
presence of a large unorganized sector is characteristic especially of the lower value-
added segments of the industry.

The ACMA-McKinsey Vision 2015 document forecasts the potential for the Indian auto
component industry to be US$ 40-45 billion by 2015. Investments and exports in this
segment are witnessing continuous growth. Global automobile manufactures see India as
a manufacturing hub for auto components and are rapidly ramping up the value of
components they source from India due to:

• The cost competitiveness in terms of labor and raw material

• Its established manufacturing base

• Fine quality of components manufactured in India (used as original components for
vehicles made by General Motors, Mercedes, IVECO and Daewoo among others).


3.1 Major Auto Component hubs in India

In India, there are four major clusters as far as auto and auto components are concerned.
The Chennai cluster has around 25 – 30% organized auto component manufacturers. The
exhibit below maps major auto and auto component clusters in India:-

Major Auto and Auto Component Cluster

Delhi NCR and
Pantnagar cluster

text

text

Pune cluster

Chennai cluster
text

Bengaluru cluster

Exhibit 7: Major auto and auto component clusters in India
Source: Secondary search


3.2 Transition of Indian Auto Component Industry

The Indian Auto component industry has transitioned from a supplier for the global
aftermarket to becoming a full-scale global Tier 1 supplier. The transition has been
brought upon by increased competition from foreign players that have helped Indian auto
component industry becoming auto component manufacturer and export of complex auto
spare parts. The exports from Indian auto components manufacturers to U.S. top 3
automotive majors have been in excess of US $ 900 Million last year. The exhibit below
shows the transition of Indian auto component industry.

Transition of Indian Auto Component Industry

Rotating Auto Heavy Forgings
Electricals Wheel Rims
Tyres & Tubes
High
Product Complexity

Small Castings & Plastic Components
Forgings
Medium

th
Pa
iti on
ns
Tra
Hand Tools
Metal bonded &
Low

Moulded Rubber Parts

Aftermarket Tier 2-n supplier Tier 1 supplier
Customer complexity

Exhibit 8: Transition of Indian auto component industry


3.3 Auto Component Industry Cost Buildup

Across the auto component industry, material cost is almost the half of the total cost build
up of the total expenditure. The exhibit below shows the percentage break up of total cost
in the auto component industry.

Auto component industry cost item %
Material Costs 50.9%
Power & Fuel 4.4%
Employee Costs 5.9%
Other Mfg Expenses 4.1%
Selling expenses 2.1%
Interest & Finance Costs 1.5%
Depreciation 3.3%
Tax 2.3%
OPBDIT Margins 16.9%
NPM Margins 8.6%
TOTAL 100%
Exhibit 9: Auto component industry Cost Structure FY06
Source: Primary interviews and database search

Out of the 5 sub-segments i.e. equipment parts, braking parts, steering parts, electrical
parts and engine parts, the percentage contribution of raw material out of the total cost at
75% is highest in the braking parts sub-segment. The exhibit below provides the cost
break up for the auto component by segments in the Indian auto component market:-

Equipment Braking Steering Electrical Engine
Parts-% Parts-% Parts-% Parts-% Parts-%
Raw Material Cost 60% 74% 71% 68% 51%
Power and Fuel Cost 5% 5% 6% 4% 4%
Employee Cost 15% 7% 10% 10% 21%
Consumable Stores 1% 3% 4% 2% 6%
Selling Cost 5% 3% 3% 1% 5%
Others 14% 8% 6% 15% 13%
Exhibit 10: Segment-wise cost structure in the auto-component Sector FY06
Source: Primary interviews and database search


3.4 Classification of Auto Component Market

The auto component industry can be classified into the 3 channels; as far as auto
component market is concerned. The classification of auto component market, as per the
market spread, is shown in the exhibit below:

Classification of Auto Component Market

Auto Component Market

OEM demand After market demand Exports demand

Auto Components Auto Accessories

Exhibit 11: Classification of auto component market

The OEM (Domestic and Export demand) contributes to 70% of the turnover, rest 30% of
the auto component demand is generated through aftermarket or replacement demand.

Break up of OEM and Replacement Demand

30%

70%

OEM Demand (Including Domestic & Exports)
Replacement Demand

Exhibit 12: Break up of OEM and replacement demand
Source: ACMA


3.5 Tier Structure of Auto Component Market

The auto industry globally is structured based on vendor-supplier relationship with 3 to 5
nodes in the value chain ending at OEM (Original Equipment Manufacturer), that are also
the automotive major. In general, the OEMs in India typically have 100 to 500 Tier-1
equipment suppliers. These vendors are further classified as per the auto component sub-
segments that has been explained in the next section of this report. The tier structure in
the automotive industry is shown in the exhibit below:-

Tier Structure in the Auto Component Industry

2nd
Tier 2nd
2nd Tier
2nd Tier
2nd Tier
Tier
1st
1st Tier
Tier
Tier
0.5 2nd
OEM Tier 2nd
2nd
Tier Tier
2nd
Tier
3rd 3rd
2nd
Tier Tier Tier 2nd
3rd 3rd Tier
Tier Tier

1st 2nd
Tier Tier
Tier-3 supplier to Tier-2 as well as
2nd
Tier-1 supplier to OEM Tier 2nd
Tier

Exhibit 13: Tier structure in the auto component industry


3.6 Classification of Auto Components

The components in the Indian automotive component market are classified in the
following sub-segments:-

Segments within Auto Component Industry

Engine parts
- Requires high precision and high quality adherence
- These fall into three broad categories: Core engine parts, fuel delivery
system and others.
- Major parts include Pistons, piston rings, engine valves, fuel pumps etc

Drive transmission & steering parts
- Major sub-segments in this category include gears (tones), wheels/wheel
rims, steering gears and systems
- Major parts include starter motors, generators and spark plugs, gears, steering
gears and systems, wheel, clutch etc
- Technology intensive, top ten players account for about 80% of the total
segment size
- Size of replacement market for this segment is likely to increase esp. for
wheels

Body and chassis
- The chassis is the skeleton upon which all other components are positioned
Auto Component
- The parts under this segment include underbody, closure, body side, doors,
Industry
plastic-molded parts and exhaust systems etc

Suspension & braking parts
- Major sub-segments in this category are shock absorbers, leaf springs and
brake shoe assembly segments
- Gabriel India Ltd and Munjal Showa Ltd are the majors in
the shock absorber segment

Electrical parts
- New technology in cars and electric start two-wheelers are leading to the
growth of this segment
- Major parts include carburettors, starter motors, generators, bimetal bearings,
distributors, air conditioning unit etc

Equipment & Others
- Major equipment parts include headlights, dashboard instruments,
wiper motors and electric horns etc. Other components include sheet metal
components and plastic moulded parts

Exhibit 14: Segments within auto component industry


3.7 Major Automobile Players
The significant growth in the Indian automobile market as a result of growing income and
purchase power has provided opportunities to all the global automobile players to set up
their base in India in the last one decade. The setting up of new plants has provided
cluster development of automobile and automotive component market in India.

The exhibit below shows the major players in the Indian market who have manufacturing
units in India:-

Passenger Cars Commercial Vehicles Two-Wheelers Three-Wheelers
Maruti Suzuki Ashok Leyland Hero Honda Bajaj Auto
Hyundai Tata Motors Bajaj Auto Piaggio
Tata Motors Eicher Motors TVS Motors Mahindra & Mahindra
Honda Swaraj Mazda Royal Enfield Motors TVS Motors
Mahindra & Mahindra Volvo Kinetic Motors Tata Motors
Toyota MAN-Force Suzuki Motors Force Motors
Fiat Yamaha Motors
Hindustan Motors Honda
General Motors LML India
Ford
Volkswagen
Renault
Mercedes Benz
Skoda
BMW
Volvo
Exhibit 15: Auto Component Sub Segments and Major Players in Indian Markets


3.8 Major Automobile Component Players (Two, Three and Four
Wheeler players)
There is not any distinction between the two wheeler and four wheeler automobile
component players in the Indian automobile component industry. The major organized
players who are catering to two wheeler OEMs are also catering to four wheeler OEMs.
However, for some niche commercial vehicle components, due to specialized load
bearing and design requirements, some automobile component players are the vendors
only to commercial vehicles.

The exhibit below shows the major players operating in the key sub-segments in the
product segments of the auto components:-

Product Segment Key Sub-Segments Major Players
Gears & Drive 1. Rico Auto Inds
Clutches 2. Automotive Axles
Transmission and Steering Axles 3. Wheels India Ltd.
Others Sona Koyo Steer.
GKN Driveline (India)
Starter Motors, Generator, Denso
Distributor, Spark Plugs, Motherson Sumi
Ignition Coil, Flywheel MICO
Electrical Parts
Magnet, Voltage Regulator, Minda Industries
Electrical Ignition India Nippon
Lucas TVS
Escorts
India Pistons
Goetze (India)
Pistons
India Pistons
Piston Rings
Rane Engine Valves
Engine Parts Engine Valves
Shriram Pistons & Rings
Carburettors
Spaco Carburettors
Fuel Delivery System
Ucal Fuel
Lucas TVS
MICO Germany
Lumax, Autolite, Phoenix
Headlight
Lamps
Premiere Instruments &
Equipment Dashboard
Controls
Jay Bharat Maruti, Omax
Sheet Metal
Auto, JBM tools
Brake System Automotive Axles
Suspension and Braking
Brake Linings Brakes India


Shock Absorbers Kalyani Brakes
Allied Nippon
Rane Brake Lining
Sundaram Brake
Gabriel India
Munjal Showa
Fan Belts Rico Auto
Others
Sheet Metal Rico Auto
Exhibit 16: Auto Component Sub Segments and Major Players in Indian Markets
Source: Database search

“Top 50 auto component companies in India would have around 1000 auto
component units across clusters. The vendors supplying to OEMs can be considered
as organized segment players. These (organized players) would be around 5,000 –
6,000. The total players including unorganized segment would be around 15,000.”
- Sr. Vice President, One of the leading Tier-1 component suppliers

Since components used in Commercial Vehicles and Tractors call for the properties of
high strength and load requirement, it was, therefore, observed that the operation of these
parts manufacturers are following in nature:

a) The manufacturer is a niche player exclusively catering to the need of
Commercial Vehicle or Tractor replacement market segment OR

b) A large organized player supplying to the traditional 2& 3 wheeler and passenger
vehicles component markets has established a separate SBU (Strategic Business
Unit) for servicing the need of Commercial Vehicles and Tractors segment

3.9 Foreign Collaboration in the Auto Component Industry
The Indian automotive industry is characterized by a strong competition between
increasingly quality conscious manufacturers. The large, highly skilled but low cost
manufacturing base makes partnering linkages with overseas players attractive. These
strengths coupled with India’s well established strengths in IT/software combined
together to make India an emerging player in this sector. However, the industry needs to
continue to increase its quality standards and develop new products to compete globally.
Many domestic manufacturers have successfully entered into strategic alliances/


collaborations while others are actively chalking out their plans. Many of the world’s
leading Tier-1 suppliers have set up manufacturing facilities in India including Bosch,
Delphi, Visteon and Denso etc. Additionally, there is a well-developed domestic
component and ancillary industry with some suppliers already meeting global technical
and quality standards at the Tier-1 level. Some of India’s leading OES (Original
Equipment Suppliers) include TACO, Bharat Forge, Sundaram Clayton, and Sundaram
Brake Linings that have proven quality track record. However, many other suppliers lack
such competence and are looking to upgrade their process/technologies to remain
competitive. The exhibit below shows a part of Indian auto companies that have
collaborated with the foreign partners in the Indian market:-

Name of Foreign
Name of Indian Company Item of Manufacture
Collaborators
Amtek Auto Ltd., Gurgaon Bendo Kogyo, Japan Fly wheel ring gears
Jay Bharat Maruti Ltd., Gurgaon Allied Signal, USA Seat belts and Air bags
Subros Ltd., New Delhi Allied Signal, USA Catalytic converters
Exhaust Systems,
Mark Exhaust Systems Ltd., Gurgaon Sankei Giken, In.Co., Japan
Catalytic Converters
Saint Gobain Vitgrage, Laminated Safety Glass
Atul Glass Industries Ltd., New Delhi France
Alcan Deutschland GmbH, Pistons & Piston Rings
Menon Pistons Ltd., Kholapur Germany
Rockwell International Corp., Axle systems
Automotive Axles Ltd., Mysore USA
Blue Chip Products Inc., Water pumps
Autolec Industries, Madras USA
Spicer India Ltd., New Delhi Dana Corp., USA Engine bearings
Ball joints & Suspension
Sona Steering Systems Ltd., New Delhi Somic Ishikawa, Japan
joints
Asbestos free brake
Sona Steering Systems Ltd., New Delhi Fedoro, UK
linings
Sona Steering Systems Ltd., New Delhi Matsuda Industries, Japan Cold forging
Haryana Sheet Glass Ltd., Haryana Pilkington Plc., UK Laminated sheet glass
Johnson Controls Inc., USA Seating systems
Sommer Allibert, France Interiors and Plastics
Yazaki, Japan Wiring harness
Transmission of steering
Tata Industries Ltd., Bombay ZF, Germany
systems
NIFCO, Japan Plastic Fasteners
Brake systems, Electrical
ITT, USA
& wiper systems
Exhibit 17: Indian Auto Component-Foreign Collaborations (2006)


4 INDUSTRY AND MARKET ANALYSIS
The macro environment of the Indian auto component industry can be assessed by
understanding the social / consumer shifts, understanding its political and legal
environment, technological environment and economic shifts. The micro environment of
the industry can be assessed under the Porter’s 5 forces framework by understanding the
entry barriers, threats and supplier / buyer power. Merging the two assessment
frameworks provides an indication of macros (at a broader level) and micro (at an
industry level) factors influencing the entry of new players in the market. This 9-forces
analysis on a framework (comprising macro and micro factors) for Indian auto
component industry is done in the exhibit below:-


4.1 Macro and Micro Environment Analysis: Indian Auto Component Market

Market Analysis – Indian Auto Component Market

Technological shifts
Political / Legal Environment
- Fast becoming global hub for R&D: GM, Daimler
- FDI growing due to competitive advantage; witnessed
Entry Barriers Chrysler, Bosch, Suzuki, Johnson Controls etc. have set
CAGR of 21.7% during 2002 – 07. The FDI was USD 7.2
- OEMs’ “inclusive growth” ensuring long term up development centres in India.
Billion in 2007 – 08
relationship especially for high value-adding items - Casting and forging processes in India 25 to 30 % lower
- Investment Commission of India facilitating FDI in all
- Foreign suppliers supplying to global auto majors with than western counterparts.
forms
local knowledge and expertise may have easy access - 5 Indian auto component companies received coveted
- No repatriation issues after paying taxes
Deming Prize, largest number outside Japan.

Supplier Power Industry Competitors Consumer Power
- 450 – 500 mid to large players with
- Tier structure supporting vendor - Auto OEMs have average 2 suppliers
around 6000 – 7000 units in addition to
relationship to ensure competitiveness
around 10,000 units in unorganized
- Most Tier – 3 suppliers are small units - New auto clusters being developed
segment.
largely from unorganized segment with OEMs and major ancillaries
- Technical tie ups and R&D ensuring at
-
least 2 major players across segments

Economic shifts
Social / Consumer shifts Threat of Substitutes - Concentration of disposable income in top 6 – 8 cities
- Auto component industry – incubator to entrepreneurship - Less threat to substitute for organized players - Rising spending patterns on “pampering” therapies
initiatives especially for less value adding components working with OEMs and emphasizing on R&D - International economic environment augurs cautious
- OEMs developing and launching “India centric” vehicles for future needs approach
after understanding Indian consumers’ demands - Unorganized units stand chances for greater
threat

Exhibit 18: 9-Force Market Analysis of Indian auto component market


The macro and micro environment can be analyzed by looking at Porter’s five forces for
micro environment analysis and PEST analysis for analyzing macro environment of the
auto component industry.

In the exhibit above, while looking at competitors, there are 450 – 500 medium to large
players with around 6000 – 7000 units in addition to around 10,000 units in the
unorganized segment. This distribution highlight that auto component industry is
dominated by unorganized players. It provides opportunity for organized Thai investors
to provide the products identified as their core competence in the later part of the report.
Analyzing other aspects like entry barriers, threat of substitute and supplier and consumer
power also helps in understanding the Indian auto component market and devising the
entry strategy and positioning plank for the products supplied by the entrepreneurs from
Thailand to Indian auto component market.

4.2 SWOT Analysis: Indian Auto Component Market

The classical tool to assess the industry environment is through SWOT analysis. The
exhibit below identifies Strengths, Weaknesses, Opportunities and Threats (SWOT
analysis) in the Indian Auto Component Industry:-


SWOT Analysis – Auto Component Industry

Strength KEY FEATURES Weakness
▪ Is globally cost competitive ▪ Annual production turnover of ▪ Industry has low level of research
▪ Adheres to strict quality Rs. 210 billion (US $4.5 billion): and development capability
small by global standards
controls
▪ Around 5,000 players in the
▪ Industry is exposed to cyclical
▪ Has access to latest unorganised sector and 400 in the downturns in the automotive
technology organised sector. industry
▪ Provides support to critical ▪ Share of unorganised sector at ▪ Most component companies are
infrastructure and metal 23%: caters primarily to dependent on global majors for
replacement market
industries technology
▪ Share of organised sector at
77%: caters primarily to Original
Equipment Manufacturers, exports
and replacement market
▪ All prominent companies have
technological tie-ups with global
majors
▪ Manufactures products that may
be classified into six categories:
Engine Parts; Electrical Parts;
Opportunities Drive, Transmission & Steering Threats
▪ May serve as sourcing hub for
Parts; Suspension & Braking Parts; ▪ The presence of a large
Equipment; and Others
global automobile majors counterfeit components market
▪ The fortunes of the industry are
▪ Significant export largely driven by the automotive poses a significant threat
opportunities may be realised industry ▪ Pressure on prices from
through diversification of ▪ Posted a decline in margins and OEMs continues
export basket
returns in last five years till ▪ Imports pose price based
FY2002: working capital cycle
▪ Implementation of Value- competition in the replacement
increased during the same period
Added-Tax (VAT) in FY2004 market
will negate the cascading ▪ Further marginalization of
impact of prices smaller players likely
Exhibit 19: SWOT Analysis – Indian auto component industry

With the growing sales of automobiles, new global OEMs are entering in the Indian
automotive industry which in turn provides the auto component industry the opportunity
to register robust growth over next 5 – 8 years. The component industry has not more
than 50 players with turnover of more than US$ 500 million per annum. Around 70 –
80% of the total numbers of players, at the bottom of the pyramid, have revenues of less
than US$ 1 million per annum. The growing automobile demand and the increasing
awareness to purchase genuine spare parts in the aftermarket poses attractive market
opportunities for the two and four wheeler auto component manufacturers.


5 MARKET SIZE AND GROWTH FORECASTS

5.1 Global auto component market size and growth estimates

Global Automotive Component Market (US$ billions)

Exhibit 20: Growth trends of global automotive component market

As shown in the exhibit above, the global automotive components consumption is
expected to grow from US$ 1.2 trillion in 2003 to US$ 1.65 trillion in 2015 (exhibit
below). As per one of the reports, of this US$ 1.65 trillion, LCC (Low Cost Country)
players can theoretically address roughly 42 per cent or US$ 700 billion. They cannot
address US$ 425 billion or 26 per cent of the market that will primarily be manufactured
by OEMs in their home countries. Another US$ 525 billion or 32 per cent of the global
market will be ruled out because of practical difficulties in off-shoring or because it will
yield negligible savings.


5.2 Indian auto component market size and growth estimates

According to Automotive Component Manufacturers’ Association (ACMA), the
production of automotive component in India was US$ 18 billion. It is growing at CAGR
of 27% since 2002-03. The investment in the Indian auto component industry is also
gaining momentum with almost all major global automotive component manufacturers
are setting up their plants in India.

5.2.1 Production (in Number) and Growth rates of all vehicle categories
including two wheelers
The exhibit below indicates that in 2006-2007, out of the total automobiles market size of
around 1,10,65,000 vehicles, 94,42,000 or around 85% of the vehicles were two
wheelers. On an average, the overall annual growth rate of vehicles in the last 5 years has
been in excess of 15%.

Category 2002-03 2003-04 2004-05 2005-06 2006-07
Passenger Car 609 843 1018 1113 1323
Utility Vehicle 114 146 192 197 222
Commercial Vehicle 204 275 354 391 520
Two-Wheeler 5076 5623 6530 7609 9442
Three-Wheeler 277 356 374 434 556
Grand Total 6280 7244 8468 9744 11065
Growth Rate 18.13% 15.34% 16.90% 15.06% 13.55%
All Number in '000 units while Growth Rate is in percentage
Source: Ministry of Heavy Industries, Government of India

Exhibit 21: Production and growth rates of all vehicle categories
Source: ACMA
Above table also points out that the two-wheelers and passenger cars have been the most
significant product categories (combined share -97%) and growing steadily over the past
few years. The two wheeler replacement auto component market also holds significant
importance due to the sheer volumes. Therefore, the 2-wheeler automotive component
market cannot be ignored while gauging the attractiveness of automotive component
market of India. The synergies between the two-wheeler & four wheeler component
market also enable two-wheeler component manufacturers to service the four wheeler
segment easily.


5.2.2 Consolidated Production, Export and Investment in value terms
As per the exhibit below, the exports in 2007 – 08 were US $ 3.6 billion, out of these
close to US $ 1 billion auto components were exported to top-3 US automotive majors
i.e. GM, Ford and Chrysler.

Indian Automotive Component Market

Auto Component Production
20,000 18,000
18,000
15,000
16,000
(In USD Million)

14,000 12,000
12,000
10,000 8,700
6,730 7,200
8,000
5,430 5,400
6,000 3,894 3,965 4,470 3,750
4,400
3,615
3,278 3,008 3,249 3,100
4,000 2,300 2,645 2,469 2,873
1,274 1,692
456 625 578 760
2,000 330 350

-

*
7

8

9

1

2

3

4

5

6

7
00

8
-9

-9

-9

-0

-0

-0

-0

-0

-0

-0

-0
0
96

97

98

00

01

02

03

04

05

06
-2

07
19

19

19

20

20

20

20

20

20

20
99

20
19

Production Exports Investment
Exhibit 22: Market size and growth trends – Indian auto component market
Source: ACMA (Automotive Component Manufacturers’ Association)

As per the exhibit above the consolidated production of the two, three and four wheeler
auto component industry is growing at CAGR of 25 – 27% from the past 4 – 5 years. The
production is catering to both the domestic demand, coming from OEM and replacement
demand, and the growing rate of exports.

The investment in the auto component industry has also been doubled to USD 7.2 Billion
in the last three years. This highlights the growth momentum in the Indian auto
component industry.


5.2.3 Value wise break up of sub-segments – two and four wheelers

The two wheeler automotive component market like the four wheeler automotive
component market can be classified into the same sub-segments categories. Out of the
consolidated automotive component market, the engine parts have the major share among
the other auto components. It accounts for 31% of the total auto component market (in
value terms). The equipments, electrical and other parts account for 10%, 12% and 7%
respectively of the total auto component market size (in value terms). The break up of the
auto component industry (in value terms including 2 and 4 wheeler components) is
shown in the pie chart below:

Beakup of Various Segments in Indian Auto Component Industry
(In Value terms)

31%
19%

7% 12%
9%
10% 12%
Engine parts Drive transmission & steering parts
Body & chassis Suspension & braking parts
Equipment Electrical parts
Others
Exhibit 23: Percentage breakup of sub-segments in the Indian auto component industry
Source: ACMA (Automotive Component Manufacturers Association of India)

5.2.4 Import estimates and trends (for 2 and 4 wheelers)
The imports for the auto components are ranging 2-4% for the total replacement market
(which is 30% of total auto component demand in India). In the OEM demand, import of
auto-components is negligible (less than 1%), as it can be identified from the comment
below:-


“All OEMs have their vendors located in India. However, some OEMs like us
(Ashok Leyland) have set up their offices in China from where we are importing
some components that are cost effective. These components would be less than 1% of
the total auto component requirements
- Strategic Sourcing Official from one of leading Vehicle manufacturer

Within imports of auto components, Engine and Suspension / Braking have relatively
higher proportion in imports whereas Transmission and Equipments have lesser
proportion.

The table below highlights the items that are either high in import proportion (in value
terms) or are growing at rapid rate i.e. 50% or more. India imported US$ 20 million auto
components from China in 2004 – 05 whereas the imports from ASEAN countries were
close to US$ 73 million during the same time. The estimated imports (based on the
growth trends) from China and ASEAN countries in 2008 – 09 would be around US$ 120
– 150 million and US$ 350 – 400 million respectively.

Auto component import
Total Import – 2004-05 (US $ Million) Growth Rate (2001-05)
(OEM + Replacement)
Imports Imports Share of Imports Imports from
All All
Components detail from from China & from China ASEAN
Imports Imports
China ASEAN ASEAN
Parts and accessory of motor
543.38 3.98 61.16 12% 28% 28% 58%
vehicles
Engine parts 203.19 8.99 3.09 6% 15% 113% 24%
Electrical parts and accessories 29.80 0.68 0.1 3% 26% 63% -50%
Bumpers and parts 23.09 0.23 1.59 8% 69% 74% 288%
Injection pumps, oil pumps,
22.67 0.73 0.01 3% 39% 111% -29%
water pumps
Drive axles with differential 18.63 0.01 0.87 5% 50% -
Lighting equipment 17.46 1.8 2.01 22% 24% 14% 107%
Other Brakes/Servo brakes 17.20 0.9 0.23 7% 46% 63% -17%
Starter motors 11.16 0.3 1.44 16% 33% 166% 5%
Clutches 9.17 0.2 0.74 10% 25% 26% 147%
Wheels 7.86 0.75 0.29 13% 80% 127% 14%
Steering wheels and columns 7.06 0.01 0.45 7% 45% 21% 208%
Rear view mirror 4.23 0.74 0.6 32% 37% 104% 97%
Laminated safety glass 1.84 0.63 0.29 50% 87% 281% 313%
Total 916.7 20.0 72.9 30% 55% 49%
Exhibit 24: Auto component imports (OEM + Replacement market)
Source: ACMA (Automotive Component Manufacturers Association, DGFT (Directorate General of Foreign Trade)


The highlighted components above are the promising auto component products for both
two wheelers and four wheelers auto components that have are either high on value or the
rate of growth of import is significantly higher. These items could be looked as the
potential export items by Thai investors to export to India. The consumable items markets
like injection pumps, oil pumps, bumper and parts and wheels are growing at faster rate
in the replacement market due to increase vehicle population.
We expect the share of imported parts (especially from China and ASEAN countries
including Thailand) to grow in the future because of the two major reasons:-
 FTA’s that India has sign with a number of countries including Thailand would
result in increase in imported parts
 Launch of similar products in India and China / ASEAN.

5.2.5 Auto Component Export Destinations

The U.S. and European markets account for 28% each of the total exports from the Indian
auto component companies. The exhibit below shows the break up of the total auto
component export markets across the major auto importing markets.

Auto Component Export Destinations
(In Value terms)
28%

27%
28%

4% 2% 11%

U.S. Europe Asia Africa Australia Others

Exhibit 25: Indian auto component export destinations
Source: ACMA


5.2.6 Trends in growth and margins – Two and Four wheelers
As mentioned in the section 5.2.2 above, the automobile market is growing at CAGR of
25 – 27%. Notwithstanding the temporary global economic meltdown, it is expected that
the domestic demand for automobiles would grow unabatedly over the next 3 – 5 years.

The exhibit below shows the gross margin and net margin at the distribution and retailer
level:-

Gross Margins Net Margins

Distribution Ranges between 12 – 15% Ranges between 4 – 6% based
Margin based on type of part and on type of part and type of
type of manufacturer manufacturer

Retail Ranges between 14 – 18% Ranges between 6 – 8% based
Margin based on type of part and on type of part and type of
type of manufacturer manufacturer

Exhibit 26: Distributor and Retailer Margin

The average distribution margin per players (made by distributors / wholesalers) is
dependent on the number of layers in the channel. The margins and incentives play a key
role in pushing the product at the retail end. The margins are relatively higher for
electrical parts and brake & suspension parts.


6 AUTO COMPONENT OEM AND REPLACEMENT
MARKET
This section highlights OEM supply chain and inventory management aspects for small
and large auto component supplier. In the replacement market segment, changes in the
replacement market including the increasing focus of OEM on aftermarket in the recent
years and the channel structure have been highlighted in this chapter.

6.1 OEM Market in the Indian auto component industry

The OEM market is also known as the organized market segment in the Indian auto
component industry. All the Tier-1 automotive component vendors have their respective
distribution channels in the aftermarket segment. Typically, an OEM works with around
100 – 200 Tier-1 suppliers and around 500 Tier-3 / Tier-2 suppliers (to Tier-2 / Tier 1
suppliers), depending upon the diversity of product line offerings.

6.2 OEM Component Sourcing
The automotive manufacturing industry in India is on par with the globally competitive
markets. All the plants are typically connected with ERP systems with their strategic
vendors and distribution channels that enable them to control raw material, WIP (Work In
Process) and finished products (vehicles) inventory. The exhibit below shows typical
order-to-delivery process supply chain in the automotive industry.


Typical Order-to-Delivery Process in the Auto Industry Supply Chain

Purchasing Programming Marketing

Order Bank National
Plan Plan Sales Co.

Scheduling

Schedule Schedule

Sequencing

Tier 2 Tier 1 Inbound Body, paint, Outbound Inv.
Dealer
Supplier Supplier Logistics assemble Logistics

Customer

Exhibit 27: Order-to-delivery process in auto industry supply chain

“We have categorized the components in various buckets. For high value items, we
follow JIT approach; we carry 1 day inventory for these items. For other categories
we may carry 3 - 4 day inventory. For smaller and less value components we may
have one week of inventory”
- Strategic Sourcing Official from one of leading Vehicle manufacturer

6.3 OEM Vendor Selection Process

The research team of IMRB International tried to understand the vendor selection process
of LCV and Commercial Vehicle manufacturers. The OEM vendor selection process was
found to be almost similar in all the OEMs visited during the course of this study. In
general, OEMs select vendors in the following steps:-

Step 1: First, the vendor contacts OEM’s sourcing or purchase department. Due to high
number of parts, the sourcing department is categorized into 4 – 5 vendor management
groups. After submitting the credential documents and filling the vendor application


form, it is submitted with respective departments within the sourcing department of
OEM.

The party should be financially and technically sound. It should have prior experience as
supplier to other vehicle manufacturers. For some parts, specific commercial vehicle
technical expertise as vendor is required whereas for other components the vendor is
qualified if the party is supplying to LCVs.

Step 2: After initial qualification, a team of people from various departments (i.e.
Engineering, Sourcing etc) is formed that checks for quality aspects, the vendor’s
manufacturing set-up and technological capabilities etc. OEMs evaluate them whether
they would be able to meet OEM’s expectations with the economies of scales and quality
levels.

Step 3: After the party qualifies, OEMs involve in the commercial discussion about the
cost, inventory and other nitty-gritty. OEMs have long term association with vendors.
The process of vendor selection takes few weeks to few months.

6.4 Inventory in Supply Chain of OEM suppliers

6.4.1 Small and Medium OEM vendors
The small to medium auto component industry that are not leveraging the information
flow are the most vulnerable to the market volatility because of the “bullwhip effect”
leading to piling up of inventory all levels i.e. RM (Raw Material), WIP (Work In
Process) and FG (Finished Goods). The OEMs are well connected to their strategic
vendors either because of their physical proximity to the vendors or because of prompt
information exchange through ERP (Enterprise Resource Planning) software. It enables
these vendors to change the supplies as per the changing Master Production Scheduling at
OEMs’ end. The percolation of technology in India hasn’t seeped beyond Tier-1
suppliers, resulting in excess inventory at various levels. The exhibit below pictorially
represents the inventory buildup in a typical supply chain of Indian auto component
industries.


Inventory in the Supply Chain of Small Indian Auto Component Industries

WIP
RM FG
Tier 2 Tier 1 OEM
Tier 2 OEM
Inventory Inventory Inventory
Inventory
Inventory

SMALL AUTO COMPANIES – LONG LEAD TIMES & SHIPMENT DELAYS

Exhibit 28: Inventory in the supply chain of small auto component industries

“The time is not ripe (for the auto component players like us). We have sudden
export order cancellation from 2 out of top-3 US majors. We have inventory
accumulation of around 50% of our annual turnover at various levels. It will take
some time for us to come out of this situation.”
- General Manager of one of mid sized Automotive Component Manufacturer

6.4.2 Large OEM vendors / strategic Tier-1 suppliers
Though the supply chain of automotive industry in India is lagging behind in term of
technology adoption when compared with developed economies, the OEM and Tier-1
supplier relationship maintains some level of information flow that enables them to keep
a tab on the inventory levels. The exhibit below pictorially represents the ideal supply
chain situation that exists in the handful value chains in the Indian automotive industry.

Inventory in the Supply Chain of Evolved Indian Auto Component Industries

planning SRM planning SRM planning

Tier 2
Tier 2 Tier 1
Tier 1 OEM
OEM
Inventory Delivery
Manufacturing Delivery Manufacturing Assembly

TOP 50 AUTO COMPONENT COMPANIES REPLACE INVENTORY WITH
INFORMATION, HAVE ROBUST DELIVERY CAPABILITIES - LEAD TIMES ARE
VERY SHORT

Exhibit 29: Inventory in the evolved value chain of automotive industries


6.5 Break up of replacement parts market by type of vehicle

The exhibit below shows the break up of the replacement market among various
categories of vehicles. 2/3 wheelers and cars replacement parts constitutes 66% of the
overall replacement market. In India, as far as major component suppliers are concerned,
most of the auto component players for 2/3 wheelers and cars are common..

Break up by type of vehicle (Year 2006-07)
Tractors
9%
2/3 Wheelers
Commercial
33%
Vehicles
25%

Cars
33%

Exhibit 30: Break up of replacement auto component market by type of vehicle

6.6 Automotive component replacement market: impact of structural
changes
Though replacement market caters to 30% of the total (domestic and exports) auto
component market, several channels selling genuine and spurious parts make it the most
dynamic market segment out of the other two markets i.e. OEM demand and export
market.

Due to the squeezing margin for the OEM auto component segment, the replacement
market has relatively better margins for OES and additional stream of income for OEMs.
The replacement market has become increasingly competitive with the focus on OEMs,
imports and reducing price difference between OEM/OES products and spurious auto
components. The exhibit below details out the critical factors that have recently
transformed the aftermarket demand:


Structural Changes impacting auto component replacement demand

Advances on technology &
reliability of parts
- Leading to demand
reduction for spare parts
- Increase in OES / branded
parts demand

Increasing imports on
Increasing focus of OEMs on account of FTAs
aftermarket

Indian Replacement
Parts Market

Growth of organized Impact of Value Added Tax
private service centers (VAT)
- Effective reduction in tax
Regulatory changes inducing burden after process stabilizes
shift towards OES (Original
Equipment Suppliers)
- ARAI, ELV norms,
Emission & safety norms
Exhibit 31: Structural changes impacting auto component replacement market

6.7 OEMs’ focus on replacement market
Lately, OEMs have started showing increasing interest in the replacement auto
component market because of the following reasons:-

- The already have established channel in the form of their vehicle dealers

- The margins in the aftermarket equipments are significantly higher than the OEM
demand

- The OEMs can source the component from suppliers at wafer-thin margins in bulk
quantities

- By supplying genuine parts, OEMs are building on the brand image of their products


The marketing and supply initiatives taken by OEMs in the after market component
business is shown in the exhibit below:-

OEMs’ initiatives in the after market (replacement) business

Exhibit 32: OEM initiatives to grab replacement market share

6.8 Channel structure for auto component market

At a broader level, the channel structure for the replacement market can be classified into
3 categories: the OES / OEM channel, the spurious component channel and the import
channel where products are sold by importers.

According to the study conducted by IMRB International for SIAM in 2006-07, the
counterfeit components constitute about 35% - 51% of private vehicle components
replacement market. The exhibit below shows the product flow across different channels.
In the replacement market, it is estimated that spurious product market is bigger than the
market catered by genuine parts.


Prevailing Distribution Channels in the Auto Components Aftermarket

OES
(Original Equipment
Supplier)
Stockists / Big
Warehouse – Dealers
typically one at Dealers – small dealers
OEM factory and the generally in smaller cities

CUSTOMER/END USER
(Original Equipment others at zonal level
Manufacturer) Franchise e.g.
Leyparts, Maruti
Service Masters etc

Unbranded Warehouse –
(including spurious) generally only at
component market factory level

Stockists / Big
Dealers
Importers esp. for
accessories – generally Dealers – small dealers
having warehouse at generally in smaller cities
import cities
Imports

OES / OEMs –
further utilize their
spare parts channel

Exhibit 33: Channel structure in the auto component aftermarket

“All the auto companies (out of a total of 25 to 30 companies) within our group,
have separate distribution channels. We (our company) have OEM supplies, for
aftermarket we supply to 1200 dealers directly, these dealers in turn send it to smaller
shops. We have 1 warehouse in addition to warehouse at this (manufacturing)
facility.”
- General Manager, Marketing of one of the leading Tier-1 component suppliers


7 GOVERNMENT INITIATIVES
7.1 Foreign Direct Investment

The Indian automotive industry with a turnover of US$ 34 billion and the auto parts
industry with a turnover of US$15 billion offer excellent scope for FDI. The investment
figure for the past 5 years is shown in the exhibit 20 under chapter 5.2 of this report.

The automatic approval for foreign equity investment upto 100 per cent of manufacture
of automobiles and component is permitted. The import of components is freely allowed.
The import of technology/technological up gradation on the royalty payment of 5%
without any duration limit and lump sum payment of USD 2 million is also allowed
under automatic route in this sector.

The norms for Foreign Investment and import of technology have also been progressively
liberalized over the years for manufacture of vehicles including passenger cars in order to
make this sector globally competitive. With the gradual liberalization of the automobile
sector since 1991, the number of manufacturing facilities in India has grown
progressively. At present there are 15 manufacturers of passenger cars & multi utility
vehicles, 9 manufacturers of commercial vehicles, 16 of 2/3 wheelers and 14 of tractors
besides 5 manufacturers of engines.

7.2 Auto Policy

The industry provides direct and indirect employment to 13.1 million people. The
contribution of the automotive industry to GDP has risen from 2.77% in 1992-93 to 5%
in 2006-07. The industry is also making a contribution of 17% to the kitty of indirect
taxes of the Government. In order to provide special attention to the auto industry, the
Government of India has drafted the Auto Policy whose vision and objectives are
mentioned below:


Vision

To establish a globally competitive Automotive Industry in India and to double its
contribution to the economy by 2010.

Objectives

This policy aims to promote integrated, phased, enduring and self-sustained growth of the
Indian automotive industry. The objectives are to:-

(i) Exalt the sector as a lever of industrial growth and employment and to achieve a high
degree of value addition in the country;

(ii) Promote a globally competitive automotive industry and emerge as a global source
for auto components;

(iii) Establish an international hub for manufacturing small, affordable passenger cars and
a key center for manufacturing Tractors and Two-wheelers in the world;

(iv) Ensure a balanced transition to open trade at a minimal risk to the Indian economy
and local industry;

(v) Conduce incessant modernization of the industry and facilitate indigenous design,
research and development;

(vi) Steer India's software industry into automotive technology;

(vii) Assist development of vehicles propelled by alternate energy sources;

(viii) Development of domestic safety and environmental standards at par with
international standards.

The full auto policy of Government of India is attached in the annexure of this report.


7.3 Automotive Mission Plan 2016

The Ministry of Commerce, with the help of SIAM (Society of Indian Automobile
Manufacturers) and ACMA (Automotive Component Manufacturers Association of
India) has devised automotive mission plan 2016 to emerge as the destination of choice in
the world for design and manufacture 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.

The Automotive Industry offers huge growth potential in terms of sales volume
(including exports) and also immense employment opportunities. The likely future
volumes of different vehicle categories were estimated on the basis of projections made
by iMaCS, NCAER and AT Kearney. The value of projected domestic output was
computed based on historical average vehicle prices. The export potential was estimated
on the basis of current trends and possible opportunities in major export destinations. The
demand for after-market auto components and export output was also included in
computing growth potential of the industry.

According to AMP, Government will encourage collaboration of Industry with research
and academic institutions like CSIR, IIT, and machine tool industry for the development
of appropriate technology and creation of IPR to meet more stringent regulations as well
as to develop relevant machine tools and equipment that improve manufacturing
processes and quality of the vehicles and components produced by the industry. The
interface with the Core Group on Automotive Research (CAR) would be strengthened.

The complete document of Automotive Mission Plan 2006 – 2016 describing the mission
for development of Indian Automotive Industry can be downloaded from the following
URL: http://www.siamindia.com/upload/AMP.pdf .


8 GROWTH DRIVERS AND CHALLENGES
Over the last 5 years, the Indian automotive component industry is thriving with the
CAGR of 27%. Though the current global situation would have some coupling effect on
the exports and domestic consumption in the coming year, the growth story over 5 – 7
years period i.e. till 2015 is quite positive.

The demand for auto components is mainly driven by the demand for automobiles,
although auto components do find usage in non-automotive industries as well. This
section covers the growth drivers, issues / challenges, Indian auto industry amid the
changing global scenario (transient challenges) and the critical success factors for the
automotive industry.


8.1 Growth Drivers for Replacement Demand

The auto component industry has cascading effect on the auto component industry as
70% of the automotive component supplies in value terms go to OEMs (domestic and
exports. The exhibit below represents the growth drivers propelling the growth of the
replacement demand. Due to these factors, there has been an increasing interest from
OES and OEMs to concentrate on auto component aftermarket.

Growth Drivers for Replacement Demand

Vehicle Population Size
Proportional to aggregate
demand for replacement
parts Average age of the
Driving Conditions Vehicle Population
Poor driving conditions Vehicle scrap norms not
coupled with poor road widely prevalent, leading
infrastructure adds to to longer vehicle usage.
demand for certain parts Higher vehicles’ average
e.g. axle, tyres etc age leads to greater
demand

Growth
Drivers

Distance (in Kms)
Road Infrastructure covered per Vehicle
Impacts life of auto parts, Services not just confined
replacement demand is to super-riches.
influenced by condition Affordability factor
of road infrastructure instrument in increasing
demand

Exhibit 34: Growth drivers for auto component replacement demand


8.2 Issues and Challenges – Indian Auto Component Industry

As is the case with many other young, aspirant and rapidly growing industries, Indian
auto component industry is also engulfed with certain challenges. These challenges can
be dissected into two categories – internal factors i.e. the challenges faced at
organizations’ level and external factors where the other entities, issues outside the
organization / industry influence the growth of the industry. The exhibit below highlights
the issues and challenges Indian auto component industry is facing today:-

Indian Auto Component Industry –
Issues and Challenges

Internal factors External factors
– At Organizations’ level – Other than organizations’ level

Poor logistics & power
Sustaining quality levels
infrastructure

Shipment delays causing cascading Tightening environmental & safety
impact on aggregate planning of regulations leading to high capital
supplier organizations investments

Under-investment in ERP (Enterprise Increasing cost of raw material and
Resource Planning) infrastructure labour wages
leading to inefficient stock planning
and high inventory levels Increasing competition and high lead
time for international contracts (from
OEMs)
Rising attrition rate
Managing M&A / JV /
Collaborations

Exhibit 35: Indian auto component industry – Issues & Challenges


8.3 Indian Auto Component Industry amid changing global scenario

In addition to the above challenges the auto component industry is facing, there are
certain transient challenges due to the changing global situation where 2 out of the top-3
U.S. auto major are on the verge of bankruptcy. The business scenario in case of Japanese
and Korean automotive majors is also echoing similar sentiments due to global meltdown
imposed by the sub-prime mortgage crisis in U.S. and the European economies. The
exhibit below shows the transient challenges in view of changing global business
situation.

Indian Auto Component Industry
in view of changing Global situation

Troubled times for top-3 US
auto major

Volatile input prices and
Reduced growth rate of reduced profit margins
· Top 3 US auto majors are either
domestic vehicle Sales
canceling or delaying orders from
leading Indian auto majors,
leading to bad shape of their · Increase in the volatility of ferrous
· Sudden dip in the vehicle
demand in the last quarter has financial books and non-ferrous metals
· GM among the front runners in · Usage of newer input components
reduced the growth estimate
for FY 2008 – 09 filing bankruptcy, Ford and due to technological up gradation
Chrysler also in bad shape leading · Reduced profit margin due to cut-
to less business from exports throat competition

Increasingly stringent emission
Insufficient skill-sets and and safety regulations
shortage of qualified
labour
Auto Component · High environment concerns
· Increase in technological capability to
· Increase in employee wages in Industry reduce emissions due to increased
the last decade has increased R&D
the operating costs · Higher cost in ensuring better safety
· With the entry of new players and adherence to safety protocol
in last 5 – 7 years, shortage of leading to higher input cost
employees with specific skill
sets

Rising Customer
Integration with Global Expectations
(Developed) markets

· Customer expects more product
· Integration leading to lowering features
product life cycles · Expectation of high quality and
· Reduced time-to-market for new reliable product offerings
products
· Threat of new competition

Exhibit 36: Indian auto component industry in view of changing global situation


8.4 Critical Success Factors

The factors critical to the success of auto component industry in India have been
delineated in the exhibit below. Some of these factors are commonly important to the
supply chain and automotive component industry across the economies because of the
nature of the industry. However, some factors are based on observing the businesses in
the Indian automotive industry.

Critical Success Factors for Auto Component Industry
m

c
ma dom s of
an g spe

in mie g

et esti
St

in
ag lo ct
a l
a l
ro en

Sc Eco hiev
o n
on nt
em ba ive
pe
e
er

g wi

ale no
Ac
s
s
ba i
ba i

rk
l e
c
c

th
h
h
e

Forge right alliance Invest in technology
with well defined exit Critical with long term
perspective
strategy Success
Factors
l
na co- Ma
tio su nag
ra e & n
e c pp in
i
Op llen ion y ly g t
ch he
e t g
xc rea nolo r
e c h
ai n
e
c nsf Building
te ra
t credible
relationship
with key
customers

Exhibit 37: Critical success factors for auto component industry


9 CONSUMER PREFERENCES FOR AUTO
COMPONENTS
The understanding of consumer preference for the replacement market provides an
insight on the factors consumers consider important while purchasing the auto
components, be it for 2/ /3 wheelers, cars or commercial vehicles.

Key Purchase Criteria (Replacement Market)

Individual Customer Fleet Customer

Quality 4.5 Quality 4.4

Price 3.2 Price 3.4

Availability 2.4 Availability 2

Brand 3.1 Brand 3.4

Reliability 2.8 Reliability 2.7

0 1 2 3 4 5 0 1 2 3 4 5

1 = Least Important 5 = Most Important
Exhibit 38: Critical success factors for auto component industry
Source: ACMA

As per the exhibit above, quality, brand and price are three key criteria for both
individual customers and customers owning a fleet of vehicles, either for personal or
commercial use. However, price is a less important factor for crucial components like
engine and transmission parts. The same finding can be extended to high value, low
volume IC (Integrated Circuit) based components as well.

When it comes to the sources of purchase for the organized replacement market, majority
of the individual customers rely on OEM and branded parts. As per the exhibit below,
almost more than one-third of the individual customers purchase OEM parts i.e. the parts
available from OEM distribution channel. Around half of the customers, except for


transmission parts, purchase branded components, available from dealers or auto
component shops.

Source of Purchase (Replacement Parts)

Engine Parts 42% 47% 11%
Electrical Parts 33% 51% 16%
Transmission Parts 38% 41% 21%
Suspension / Braking Parts 34% 51% 15%
Equipment Parts 35% 52% 13%

0% 20% 40% 60% 80% 100%

OEM Branded Others

Exhibit 39: Source of purchase for replacement parts by individual customers
Source: ACMA

Recognizing the importance of OEMs in the component market, their criteria for vendor
selection and purchase process has been covered separately in “OEM’s Vendor Selection
Process” section of this report.


10 ATTRACTIVENESS OF AUTO COMPONENT
SEGMENTS FOR THAI INVESTORS
This chapter takes the cues from the insights highlighted in previous chapters and
classifies the sub-segments in the automotive component industry in the attractiveness
matrix based on the opportunity for the Thai investors. It takes into account the import
trends for auto components - in total value terms, imports from China and ASEAN
countries, the subjective opinion of various stakeholders met through the automotive
value chain and maps the auto component sub-segments in the attractiveness matrix for
Thai investors.

10.1 Attractive segments within auto component market for Thai
investors
The attractiveness of domestic auto component market can be gauged by segmenting it
based on the type of raw materials, manufacturing/design process involved and the
technical expertise required to produce these auto parts. On the basis of these 3 factors,
the auto component market can be segmented into the following five broad categories:-

1. Plastic, silicon intensive / electronics, integrated circuits parts

2. Rubber intensive parts

3. High labour intensive parts e.g. casting and forging parts

4. Skill-intensive parts

5. Parts for evolving technology aggregates

“Thai auto component industry can supply tyres to Indian OEMs at cost effective
price.”
- Sourcing Manager, one of leading passenger car manufacturers


The sub-segments are classified on two axes on the attractiveness matrix. These axes are:
- relative degree of technical expertise and ability in cost effective supply of automotive
components. By relative degree of technical expertise, we imply the technical expertise of
Thai automotive component industry for a particular sub-segment over the technical
competence of Indian auto component industries.

The exhibit below shows that the domestic market for high grade plastic, electronics /
Integrated Circuit auto parts would be best suited for the imports from Thailand. The
other attractive sub-segments would be rubber based intensive parts and skill intensive
parts.

Attractiveness Matrix for Thai Investors

Low High

Relative Degree of Technical Expertise

- Rubber Intensive parts
Ability in cost effective supply

High High grade plastic, IC
e.g. tyres, Accessories,
based electronic parts /
assemblies

Low Labour Intensive parts Parts for evolving
requiring forging and technology aggregates
casting

Exhibit 40: Attractiveness matrix for Thai investors


“Imports from Thailand would have an edge in the IC-based electronics components.
Once you have designed the (electronic) component, they (Thai investors) are good at
replicating it in the cost effective manner.”
- CEO of one of India’s leading auto component manufacturers

The share of auto accessories in the aftermarket demand is significantly less. The major
auto accessories that are sold are audio-video equipments, alloy wheels and car perfumes.
However, this segment is slated to become attractive as the size grows in 3 – 5 years’
time frame. Another important sub-segment for Thai imports would be rubber intensive
parts e.g. tyres, brakes etc.

The indicative list of major Indian auto component manufacturers across various sub-
segments is shown in the table below:-

Sub-segments Auto Component Manufacturers
Tata Autocomp Systems Ltd, Pune
Plastics, Silicon intensive and Denso India
electronics parts Motherson Sumi, Delhi NCR
Macro Precision Components, Bangaluru

Appollo Tyres, Delhi NCR
Rubber intensive parts and Ceat Tyres, Mumbai
accessories MRF Tyres, Chennai
Sundaram Clayton Ltd, Chennai

Lucas TVS, Chennai
Clutch Auto
Parts for evolving technology Munjal Showa, Delhi NCR
aggregates Sona Koyo, Delhi NCR
Rane TRW Steering Systems Limited
Amtek Auto

Delphi TVS, Chennai
Bosch India, Bangaluru
Skill intensive engine parts
Ucal Fuel Systems Ltd
Precision Sintered Products, Gujarat


Bharat Forge, Pune
Automotive axles, Mysore
Labour intensive - casting, forging
parts Unitech Texmech Pvt. Ltd., Pune
Progressive Gears Industries (P) Ltd,
Delhi

Exhibit 41: Sub-segment wise list of Indian auto component manufacturers

10.2 Business Models for Collaboration

There have been many success stories in the Indian auto component industry (as
mentioned in the section 3.8). The equity participation or technical tie up with foreign
collaborator depends upon the business plan and the attractiveness of various auto
component product categories.

“3 types of business models exist in the (Indian) auto component industry: 1) Fully
domestic or multinational 2) JV i.e. equal equity participation between Indian and
foreign players 3) Indian company getting into technical tie up with foreign
counterpart.”
- General Manager, Marketing of one of the leading Tier-1 component suppliers

Based on the demand potential for the auto components from Thailand, it is suggested
that Thai investors should initially export these products for OEMs and aftermarket in
India. Later on, when the product volumes would increase, we suggest that it should set
up the assembly base in one of the auto clusters, to be selected based on initial
experience.

Over the last few years, we have seen the equity participation and technical tie up in
equal proportion from the foreign players in the auto component industry. However, due
to robust demand for the automotive component industry over the next 5 – 7 years, there
has been an increase in the business model involving the equity participation with the
domestic players. In general, the equity participation of 49% by the foreign player is
prevalent in the Indian automotive component industry. The Global automotive


component majors from Japan, US, Germany and France have formed a joined venture
based on equity participation with their Indian counterparts in the last 2 – 3 years.

It is suggested that Thai automotive component manufacturers should also set up
manufacturing or assembly plant in India by forming equity partnership with their Indian
counterparts.


11 CONCLUSIONS AND RECOMMENDATIONS
The domestic automotive component market holds promising potential for the domestic
industries and for the players from China and ASEAN countries. However, for the
imports from Thailand, the success would largely depend upon the attractiveness of
product segments. The attractiveness for sub-segments can be assessed by looking at
relative degree of technical expertise and ability in cost effective supply of automotive
components.

11.1 Entry Strategy for Thai Investors in the Indian Auto Component
Business

The exhibit below pictorially highlights the attractive areas in the Indian auto component
market and the timeframe for entering through these sub-segments in the Indian markets.

Entry strategy for Thai Investors
Degree of Attractiveness

Low Medium High

Plastic, silicon intensive
Auto Component Sub-segments

electronic parts

Rubber intensive parts
and accessories
Parts for evolving
technology aggregates


Labour intensive parts –
casting, forging etc

Legend

Immediate entry as OEM & aftermarket supplier

Enter in these sub-segments after 1 – 2 years of
immediate entry
Do not enter

Exhibit 42: Attractiveness of auto component sub-segments for Thai investors


We suggest that Thai auto component manufacturers in the plastics, silicon intensive and
electronic parts would export their auto component products in India initially. Thai
investors would have technical edge over India auto component companies for silicon
intensive and electronics parts. Moreover, Thai investors can provide these parts cost
effectively because of the economies of scale of production.

Thai auto component manufacturers have attained high quality levels in the plastics,
silicon intensive and electronics parts by working with Japanese automobile
manufacturers. Also, since they are supplying auto components to Japanese automobile
manufacturers who have very high demand in comparison to Indian automobile
manufacturers, Thai auto component players have huge production capacities and thereby
lesser cost of manufacturing.

The other category of auto components would that would be attractive for Indian markets
would be rubber intensive parts and accessories. The rubber intensive parts would be
attractive for Thai investors due to cost effective availability of latex in Thailand.
Automobile tyres forms significant cost component among the automobile components.
Thailand can supply good quality tyres at better prices than the Indian counterparts.

As far as high labour intensive parts are concerned, India has the cost as well as skill
advantage. We, therefore, suggest Thai investors not to enter into these sub-segments in
the Indian automotive component industry.


The phase wise entry strategy for attractive auto component segments has been explained
pictorially in the exhibit below:-

Phase I – Supply from Phase II – Bring Phase III – Target
plants located in manufacturing servicing
Thailand or other closer to replacement
countries marketplace market

1. Form vendor
relationship with Indian
OEMs 1. Set up assembly unit in Focus on replacement
2. Export parts from India market for core
Thailand / other 2. Assembly unit to be set components once the
countries up at one of the auto products is established
3. Set up warehouse at clusters, nearer to among OEMs
port of entry for OEMs · To be targeted after
efficient distribution 3. Consolidate business establishing
management with old OEMs and credibility among
4. Target replacement target new OEMs and OEMs
market for auto Tier – 1 suppliers · Acceptance by OEMs
accessories like alloy 4. User raw material initially provide
wheels, music systems, procured from India or necessary push to
car perfumes, decorative from Thailand / other these components in
stickers etc countries replacement market

Exhibit 43: Entry strategy for Thai investors

11.2 Recommended Distribution Channel for Thai investors

After examining the existing distribution channel for imports for the automotive
components market, it is suggested that Thai investors either should have a warehousing
arrangement at the port of entry. The port would most likely be either Mumbai or
Chennai. Goods are then supplied to OEMs and the replacement market from the
warehouse. Consequently, the following distribution channel is recommended.


Recommended Distribution Channel for Thai Investors

Dealers – small

t
ke e n
Stockists / Big Dealers

M ce m
dealers generally in End Customer

t
(Usually at state level)
smaller cities

pla
ar
Re
Warehouse
Imports arrangement at port of
entry

OE ket
Ma
M
r
OES / OEMs – further
utilize their spare parts
channel

Exhibit 44: Sub-segment wise list of Indian auto component manufacturers

Servicing replacement market calls for engaging stockists or big dealers at the zonal level
followed by the deployment of stockists at the state level. These stockists would supply
the auto components to dealers who in turn sell to end consumers.

*****


12 ANNEXURE: AUTO POLICY
Vision: To establish a globally competitive automotive industry in India and to double
its contribution to the economy by 2010

1. POLICY OBJECTIVES

This policy aims to promote integrated, phased, enduring and self-sustained growth of the
Indian automotive industry. The objectives are to:-

(i) Exalt the sector as a lever of industrial growth and employment and to achieve a high
degree of value addition in the country;

(ii) Promote a globally competitive automotive industry and emerge as a global source
for auto components;

(iii) Establish an international hub for manufacturing small, affordable passenger cars and
a key center for manufacturing Tractors and Two-wheelers in the world;

(iv) Ensure a balanced transition to open trade at a minimal risk to the Indian economy
and local industry;

(v) Conduce incessant modernization of the industry and facilitate indigenous design,
research and development;

(vi) Steer India's software industry into automotive technology;

(vii) Assist development of vehicles propelled by alternate energy sources;

(viii) Development of domestic safety and environmental standards at par with
international standards.

2. BACKGROUND

2.1 Automotive industry has universal5ly emerged as an important driver in the economy.
Although the automotive industry in India is nearly six decades old, until 1982, only three
manufacturers - M/s. Hindustan Motors, M/s. Premier Automobiles and M/s. Standard


Motors tenanted the motor car sector. Owing to low volumes, it perpetuated obsolete
technologies and was out of sync with the world industry. In 1982, Maruti Udyog Ltd.
(MUL) came up as a government initiative in collaboration with Suzuki of Japan to
establish volume production of contemporary models. After the lifting of licensing in
1993, 17 new ventures have come up of which 16 are for manufacture of cars. This
industry currently accounts for nearly 4% of the GNP and 17% 0f the indirect tax
revenue.

3. EXTANT POLICY

3.1 Before the removal of QRs with effect from 01-04-2001, the policy placed import of
capital goods and automotive components under open general licence, but restricted
import of cars and automotive vehicles in Completely Built Unit (CBU) form or in
Completely Knocked Down (CKD) or in Semi Knocked Down (SKD) condition. Car
manufacturing units were issued licences to import components in CKD or SKD form
only on executing a Memorandum of Understanding (MOU) with the Director General
Foreign Trade (DGFT). 11 companies signed MOUs with DGFT under which they
agreed to:

i. Establish actual production of cars and not merely assemble vehicles;

ii. Bring in a minimum foreign equity of US $ 50 Million if a joint venture
involved majority foreign equity ownership;

iii. Indigenise components upto a minimum of 50% in the third and 70% in
the fifth year or earlier from the date of clearance of the first lot of
imports. Thereafter the MOU and import licensing will abate;

iv. Neutralise foreign exchange outgo on imports (CIF) by export of cars,
auto components etc. (FOB). This obligation was to commence from the
third year of start of production and to be fulfilled during the currency of
the MOU. From the fourth year imports were to be regulated in relation to
the exports made in the previous year.


4. CURRENT STATUS OF INDIAN AUTOMOTIVE INDUSTRY

4.1 The industry encompasses commercial vehicles, multi-utility vehicles, passenger cars,
two wheelers, three wheelers, tractors and auto components. There are in place 15
manufacturers of cars and multi utility vehicles, 9 of commercial vehicles, 14 of
Two/Three Wheelers and 10 of Tractors besides 5 of engines. With an investment of
Rs.50,000 crores, the turnover was Rs. 59,500 crores in Automotive Sector during 1999-
2000. It employs 4,50,000 people directly and 100,00,000 people indirectly and is now
inhabited by global majors in keen contention.

4.2 India manufactures about 38,00,000 2-wheelers, 5,70,000 passenger cars, 1,25,000
Multi Utility Vehicles, 1,70,000 Commercial Vehicles and 2,60,000 tractors annually.
India ranks second in the production of two wheelers and fifth in commercial vehicles.

4.3 India’s automotive component industry manufactures the entire range of parts
required by the domestic automobile industry and currently employs about 250,000
persons. Auto component manufacturers supply to two kinds of buyers – original
equipment manufacturers (OEM) and the replacement market. The replacement market is
characterised by the presence of several small-scale suppliers who score over the
organised players in terms of excise duty exemptions and lower overheads. The demand
from the OEM market, on the other hand, is dependent on the demand for new vehicles.

4.4 The auto sector (excluding Tractors) attained a steep cumulative annual growth of
22% between 1992 and 1997. The Tractors achieved a cumulative annual growth of 16%.
Component production grew by 28%. There has been a slowdown in the automobile
sector in the past two years. However, the component industry maintained a low but
positive growth rate mainly due to its export performance. Over the years, the component
industry has maintained a 10% - 12% share of exports in the total production.

4.5 Roads occupy an eminent position in transportation as they, as per the present
estimate, carry nearly 65% of freight and 87% of passenger traffic. Although, India has
3.3 million kilometers of road network, which is the second largest in the world, the
Indian highways are getting overpopulated. Traffic management and road sense also need
attention.


5. NEED FOR A COMPREHENSIVE AUTOMOTIVE POLICY

5.1 The extant policy has drawn many overseas companies into India but needs to be
more investor friendly, address emerging problems and be WTO compatible. World over,
the majors have consolidated to elevate technology, enlarge product range, access new
markets, cut costs and in-graft versatility. They have resorted to common platforms,
modular assemblies and systems integration by component suppliers and E-Commerce.

5.2 The automotive industry is in the midst of a major structural transformation in today's
globalised scenario. "System Supply" of integrated components and sub-systems is
becoming the order of the day, with individual small components being supplied to the
system integrators instead of the vehicle manufacturers. In this process, most of the SSI
units manufacturing smaller individual components are on their way to become tier 2 and
tier 3 suppliers, while the larger companies including most MNCs are being transformed
into tier 1 companies, which purchase from tier 2 & 3, and sell to the auto manufacturers.

5.3 Indian auto sector needs to grow collaterally and in harmony with world industry.
India has the potential to be a global automotive power. However, concerted efforts will
be required to take auto manufacturing to a self-sustaining level where they shall have
volumes, generate requisite technology and meet evolving emission requirements.

5.4 Volume is important for any manufacturing enterprise. However, it is more important
for automobile sector, both for the manufacture of vehicles as well as auto components.
Lack of volume will not only inhibit efficient manufacture but also R&D and
introduction of new models. The investment and fiscal policies should create an
environment for volume production and indigenous capability for innovation for small
cars and auto components.

5.5 Auto components manufacturers have been slowly gaining global recognition and
maintaining a certain level of exports despite the recent downturn. It should be possible
to achieve an export target of US $ 1 billion by 2005 and US $ 2.7 billion by 2010. This
would require three pronged marketing strategy: exports through OEMs for their global
sourcing requirements, export to tier I manufacturers as a part of their international
supply chain and direct exports to aftermarket. The main challenges are lower volume –


low scale, fragmentation, inadequate R&D/technology support, lower productivity levels,
limited resources for international marketing and establishment of an efficient supply
chain.

6. MEASURES TO REALIZE THE POLICY OBJECTIVES

6.1 Initiatives relating to investment, tariffs, duties and imposts will be the instruments to
achieve the Policy objectives. These path government’s economic reform and are in
harmony with the commitments made to WTO.

6.2 Increased resource allocation to the highways sector to ensure collateral upgradation
and development of road infrastructure in step with the increase in the population of
vehicles.

6.3 An appropriate regulatory framework for smooth movement of traffic, safety and
environmental aspects.

7. FOREIGN DIRECT INVESTMENT

7.1 Automatic approval for foreign equity investment up to 100% of manufacture of
automobiles and component is permitted.

8. IMPORT TARIFF

8.1 The incidence of import tariff will be fixed in a manner so as to facilitate
development of manufacturing capabilities as opposed to mere assembly without giving
undue protection; ensure balanced transition to open trade; promote increased
competition in the market and enlarge purchase options to the Indian customer.

8.2 The Government will review the automotive tariff structure periodically to encourage
demand, promote the growth of the industry and prevent India from becoming a dumping
ground for international rejects.

8.3 In respect of items with bound rates viz. Buses, Trucks, Tractors, CBUs and Auto
components, Government will give adequate accommodation to indigenous industry to
attain global standards.


8.4 In consonance with Auto Policy objectives, in respect of unbound items i.e., Motor
Cars, MUVs, Motorcycles, Mopeds, Scooters and Auto Rickshaws, the import tariff shall
be so designed as to give maximum fillip to manufacturing in the country without
extending undue protection to domestic industry.

8.5 The conditions for import of new Completely Built Units (CBUs), will be as per
Public Notice issued by the Director General Foreign Trade (DGFT) having regard to
environment and safety regulations.

8.6 Used vehicles imported into the country would have to meet CMVR, environmental
requirements as per Public Notice issued by DGFT laying down specific standards and
other criteria for such imports.

8.7 Appropriate measures including anti dumping duties will be put in place to check
dumping and unfair trade practices.

9. EXCISE DUTY

9.1 Motor Cars

9.1.1 The ownership of cars in India is just 6 per thousand of population as
against 500 in the developed economies. The contribution of the auto
sector to the GDP and employment is likewise low. Expansion of local
demand holds great potential and is vital to install scale volumes of
production.

9.1.2 Domestic demand mainly devolves around small cars not exceeding
3.80 meters in length. Small cars occupy less of road space and save on
fuel. These capture more than 85% of the market. India can build export
capability and become an Asian hub for export of small cars. The growth
of this segment needs to be spurred.


9.2 Multi Utility Vehicles

9.2.1 MUVs are an important mode of economical mass transport in rural
India due to poor road infrastructure and lack of good State transport
system. They are the first vehicle purchased by a number of farmers,
traders, small businessmen in rural and semi-urban markets. The
Government will endeavour to provide fiscal incentives to this sector.

9.3 Commercial Vehicles

9.3.1 Presently excise duty on commercial vehicles sold by a manufacturer
whether as a chassis or with a complete body is 16%. However, no duty is
levied on the body that is built by an independent body builder on chassis
bought from a manufacturer. This dispensation inveigles production of the
complete trucks and buses by the chassis manufacturer and is detrimental
to safety standards. The duty imposed on the construction of bodies by an
independent body builder, small or organised sector shall be equal to that
of bodies built by a chassis manufacturer.

9.3.2 The Government will encourage fabrication of bus body on bus
chassis designed for better passenger comfort instead of truck chassis as is
the current practice.

9.3.3 The Government will promote the use of multi-axle vehicles for
carriage of goods as they cause reduced environmental pollution and lesser
wear and tear on road surface in comparison to the existing 2-axle trucks.

10. IMPROVING ROAD INFRASTRUCTURE

10.1 Traffic on roads is growing at a rate of 7 to 10% per annum while the vehicle
population growth for the past few years is of the order of 12% per annum. Poor road
infrastructure and traffic congestion can be a bottleneck in the growth of vehicle industry.
A balanced and coordinated approach will be undertaken for proper maintenance, up
gradation and development of roads by encouraging private sector participation besides


public investment and incorporating latest technologies and management practices to take
care of increase in vehicular traffic.

10.2 For the convenience of traveling public the Government shall also promote multi-
modal transportation and the implementation of mass rapid transport systems.

11. INCENTIVE FOR RESEARCH AND DEVELOPMENT

11.1 The Government shall promote Research & Development in automotive industry by
strengthening the efforts of industry in this direction by providing suitable fiscal and
financial incentives.

11.2 The current policy allows Weighted Tax Deduction under I.T. Act, 1961 for
sponsored research and in-house R&D expenditure. This will be improved further for
research and development activities of vehicle and component manufacturers from the
current level of 125%.

11.3 In addition, Vehicle manufacturers will also be considered for a rebate on the
applicable excise duty for every 1% of the gross turnover of the company expended
during the year on Research and Development carried either in-house under a distinct
dedicated entity, faculty or division within the company assessed as competent and
qualified for the purpose or in any other R&D institution in the country. This would
include R & D leading to adoption of low emission technologies and energy saving
devices.

11.4 Government will encourage setting up of independent auto design firms by
providing them tax breaks, concession duty on plant/equipment imports and granting
automatic approval.

11.5 Allocations to automotive “cess fund” created for R&D of automotive industry shall
be increased and the scope of activities covered under it enlarged.


12. BUILDING BYE LAWS FOR RESIDENTIAL, COMMERCIAL AND OTHER
USES

12.1 With the growth of vehicles, smooth traffic movement has come under severe strain.
The problem has been aggravated because of inadequate provision of parking facilities
generally. Starting with metropolitan and important towns, the Government will pursue
with State Governments and Local bodies amendments to bye laws for upward revision
of the parking norms for new residential buildings, construction of common parking for
existing residential areas besides parking upgradation in all commercial areas. Multi-
storied parking shall also be encouraged.

13. ENVIRONMENTAL ASPECTS

13.1 The automotive and oil industry have to heave together to constantly fulfill
environment imperatives. The Government will continue to promote the use of low
emission fuel auto technology.

13.2 The Government after considering the recommendations of the Expert Committee
on Auto Fuel Policy headed by Dr. R.A. Mashelkar, have approved a road map for
implementation for the auto fuel quality consistent with the required levels of vehicular
emissions norms and environmental quality. The Government will formulate a
comprehensive auto fuel policy covering the other related aspects and ensure availability
of appropriate auto fuel/fuel mixes at minimum social costs across the country. Suitable
institutional mechanism will be put in place for certification, monitoring and enforcement
of different technologies/fuel mixes. Appropriate fiscal measures will be devised to
achieve milestones in the roadmap for implementation of auto fuel policy.

13.3 In the short run, the Government will encourage the use of short chain hydrocarbons
along with other auto fuels of the quality necessary to meet the vehicular emissions
norms.

13.4 There is prime need to support the development and introduction of vehicles
propelled by energy sources other than hydrocarbons by promoting appropriate
automotive technology. Hybrid vehicles and vehicles operating with batteries and fuel


cells are alternatives to the conventional automobile, which in their early beginnings, lie
entreasured. As an impetus for the development of such vehicles, an appropriate long-
term fiscal structure shall be put in place to facilitate their acceptance vis-à-vis vehicles
based on conventional fuels.

13.5 Internationally, the practice is to levy higher road tax on older vehicles in order to
discourage their use. In India, the road tax on vehicles varies in nature and quantum
among the states. Lifetime road tax is also in vogue. The endeavour will be to move to
the international model.

13.6 In order to facilitate faster up-gradation of environmental quality, the Govt. will
consider having a terminal life policy for commercial vehicles along with incentives for
replacement for such vehicles.

14. SAFETY

14.1 Government will duly amend the Central Motor Vehicles Rules, Bureau of Indian
Standards (BIS) and other relevant provisions and introduce safety regulations that
conform to global standards.

14.2 Testing and certification facilities need to be revised and strengthened in accordance
with safety standards of global order. Government, in partnership with industry, will tend
to this requirement.

15. HARMONISATION OF STANDARDS:

15.1 Government recognises the need for harmonisation of standards in a global economy
and will work towards it.


13 LIST OF EXHIBITS
Page No.

Exhibit 1: Global trends in the automotive industry ......................................................... 13
Exhibit 2: Penetration of LCVs in different countries ...................................................... 14
Exhibit 3: GDP / Capita vs. Vehicle Density: India vis-à-vis major markets.................. 15
Exhibit 4: Vehicle density vs GDP / per capita – Current and Estimated in 2014 ........... 16
Exhibit 5: Major US Auto Component Imports (In US$m): 2001-05 .............................. 16
Exhibit 6: Top Ten Auto Component Manufacturers-2004 & 2005................................. 17
Exhibit 7: Major auto and auto component clusters in India ............................................ 19
Exhibit 8: Transition of Indian auto component industry ................................................. 20
Exhibit 9: Auto component industry Cost Structure FY06 ............................................... 21
Exhibit 10: Segment-wise cost structure in the auto-component Sector FY06 ................ 21
Exhibit 11: Classification of auto component market....................................................... 22
Exhibit 12: Break up of OEM and replacement demand .................................................. 22
Exhibit 13: Tier structure in the auto component industry ............................................... 23
Exhibit 14: Segments within auto component industry .................................................... 24
Exhibit 15: Auto Component Sub Segments and Major Players in Indian Markets ........ 25
Exhibit 16: Auto Component Sub Segments and Major Players in Indian Markets ........ 27
Exhibit 17: Indian Auto Component-Foreign Collaborations (2006) ............................... 28
Exhibit 18: 9-Force Market Analysis of Indian auto component market ......................... 30
Exhibit 19: SWOT Analysis – Indian auto component industry ...................................... 32
Exhibit 20: Growth trends of global automotive component market ............................... 33
Exhibit 21: Production and growth rates of all vehicle categories ................................... 34
Exhibit 22: Market size and growth trends – Indian auto component market .................. 35
Exhibit 23: Percentage breakup of sub-segments in the Indian auto component industry 36
Exhibit 24: Auto component imports (OEM + Replacement market) .............................. 37
Exhibit 25: Indian auto component export destinations ................................................... 38
Exhibit 26: Distributor and Retailer Margin ..................................................................... 39
Exhibit 27: Order-to-delivery process in auto industry supply chain ............................... 41
Exhibit 28: Inventory in the supply chain of small auto component industries............... 43
Exhibit 29: Inventory in the evolved value chain of automotive industries ..................... 43
Exhibit 30: Break up of replacement auto component market by type of vehicle ............ 44
Exhibit 31: Structural changes impacting auto component replacement market .............. 45
Exhibit 32: OEM initiatives to grab replacement market share ........................................ 46
Exhibit 33: Channel structure in the auto component aftermarket ................................... 47
Exhibit 34: Growth drivers for auto component replacement demand ............................. 52
Exhibit 35: Indian auto component industry – Issues & Challenges ................................ 53
Exhibit 36: Indian auto component industry in view of changing global situation .......... 54
Exhibit 37: Critical success factors for auto component industry .................................... 55
Exhibit 38: Critical success factors for auto component industry .................................... 56
Exhibit 39: Source of purchase for replacement parts by individual customers............... 57
Exhibit 40: Attractiveness matrix for Thai investors ........................................................ 59
Exhibit 41: Sub-segment wise list of Indian auto component manufacturers .................. 61
Exhibit 42: Attractiveness of auto component sub-segments for Thai investors.............. 63


Page No.

Exhibit 43: Entry strategy for Thai investors .................................................................... 65
Exhibit 44: Sub-segment wise list of Indian auto component manufacturers .................. 66


14 REFERENCES

Primary Research – Expert Interviews

The expert interviews were conducted with the following organizations. More than one
interview per organization was conducted to gauge the holistic view of information
collectibles.

Government Departments and Industry Associations

Automobile Component Manufacturers Association (ACMA), Delhi

Society of India Automobile Manufacturers (SIAM), Delhi

Department of Heavy Industries, Delhi

Automobile Companies

Ashok Leyland, Chennai

Hyundai Motors, Chennai

Automobile Component Manufacturers

TVS Lucas, Chennai (and Delhi NCR)

Brakes India Limied, Chennai

Sundaram Fastners, Chennai,

Bosch India, Bangalore

Delhi TVS, Delhi NCR and Chennai

Krishna Quinette Seats Pvt. Ltd, Delhi NCR


Secondary Research Sources / Databases

ISI Emerging Markets Datatbase: Compilation of news articles, news snippets and
various secondary data reports.

ACMA (Automobile Component Manufacturers Association) Database and Annual
report: It details about latest market size and growth figures.

Internet Search for validation of various data points.


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