Industry Overview - Automobile Sector in India 2012-13

Draft for discussion purposes only
Industry
Overview -
Automobile

Financial Year 2012-13

Draft for Discussion Purposes

Table of Contents Draft for discussion purposes only

Table of Contents
1. Indian Industry 1
1.1. Objective 1
1.2. Introduction 1
1.3. Background 1
1.4. Current Scenario 2
1.5. Major Players 2
1.6. Industry Trends 3
1.7. Financial Performance 3
1.7.1. Domestic Sales 3
1.7.2. Export 3
1.8. Government initiatives 3
1.9. Automotive Mission Plan (2006-2016) 4
1.10. Growth Drivers 4
1.11. Way Ahead 5
1.12. Sectoral Outlook 2013 5
1.12.1. Domestic automobile sales likely to witness moderate growth 5
1.12.2. Export performance to remain moderate 5
1.13. Segmental Commentary 6
1.13.1. Commercial Vehicles 6
1.13.2. Passenger Vehicles 6
1.13.3. Two Wheelers 6
1.14. Strategic Insight 6
1.14.1. Commercial vehicles 6
1.14.2. Passenger vehicles 7
1.14.3. Two wheelers 7
1.15. Summary 7


Industry Overview - Automobile - Transfer pricing analysis and report
Price Waterhouse & Co. 1

1. Indian Industry
1.1. Objective
The Indian Regulations
1
prescribe that the comparability of an international transaction with an
uncontrolled transaction shall be judged with reference to the conditions prevailing in the markets in
which the respective parties to the transactions operate. Hence, for the purposes of transfer pricing
analysis an overview of the industry is essential.
1.2. Introduction
2

The Indian automotive industry has emerged as a 'sunrise sector' in the Indian economy. India is
emerging as one of the world's fastest growing passenger car markets and second largest two wheeler
manufacturer. It is also home for the largest motor cycle manufacturer and fifth largest commercial
vehicle manufacturer. India is emerging as an export hub for sports utility vehicles (SUVs). The global
automobile majors are looking to leverage India's cost-competitive manufacturing practices and are
assessing opportunities to export SUVs to Europe, South Africa and Southeast Asia. India can emerge
as a supply hub to feed the world demand for SUVs. India also has the largest base to export compact
cars to Europe. Moreover, hybrid and electronic vehicles are new developments on the automobile
canvas and India is one of the key markets for them. Global and Indian manufacturers are focussing
their efforts to develop innovative products, technologies and supply chains. The automotive plants of
global automakers in India rank among the top across the world in terms of their productivity and
quality. Top auto multinational companies (MNCs) like Hyundai, Toyota and Suzuki rank their Indian
production facilities right on top of their global pecking order.
1.3. Background
The Indian automobile industry, the seventh largest in the world, has demonstrated a growth over the
last ten years, during which industry volumes have increased by 3.2 times, from a level of 4.7 million
numbers to 14.9 million numbers, according to Vishnu Mathur, Director General, Society of Indian
Automobile Manufacturers (SIAM). The Indian Automobile Industry embarked on a new journey
since 1991 with delicensing of the sector and subsequent opening up for 100 per cent FDI through
automatic route. Almost all the global majors have set up their facilities in India taking the next level
of production of vehicles from 2 million in 1991 to 110+ million in 2011.
3

The industry, by virtue of its deep connects with several key segments of the economy, occupies a
prominent place in the countrys growth canvas. It exhibits a strong multiplier effect and has the
ability to be the key driver of economic growth. A robust transportation system plays a key role in a
country's rapid economic and industrial development, and the well-developed Indian automotive
industry justifies this catalytic role by producing a wide variety of vehicles, which include passenger
cars, light, medium and heavy commercial vehicles, multi-utility vehicles such as jeeps, scooters,
motorcycles, mopeds, three wheelers, tractors etc. Some defining characteristics are:
4

Largest three wheeler market in the world
2nd largest two wheeler market in the world
7th largest passenger car market in Asia & 10th Largest in the world
4th largest tractor market in the world
5th largest commercial vehicle market in the world

1
Section 92D read with Rule 10B(2)(d)
2
http://www.ibef.org/industry/india-automobiles.aspx
3
http://ciiautoserve.in/autoserve/indus.php
4
http://www.studymode.com/essays/Automobiles-Industry-In-India-842312.html


5th largest bus & truck market in the world
5

1.4. Current Scenario
6

As the year 2012 comes to an end, the Indian automobiles industry witnessed a moderation in
demand in 2012, after the double-digit growth in sales recorded in the preceding three years. Weak
macroeconomic sentiment coupled with subdued consumer confidence pulled down sales, particularly
in the latter half of the year. Domestic automobile sales grew by 6.6% in 2012 (Jan-Nov), as compared
to growth of 14-31% during 2009-2011.
In view of the current macro environment, both domestically and globally, we are cautiously
optimistic about the Indian automobile industrys prospects in the near term. As a result, achieving
high growth rates is likely to be a major concern for the industry in 2013.
1.5. Major Players
7

5
6
http://www.indiainfoline.com/Markets/News/Automobile-Sector-Outlook-2013-Dun-and-Bradstreet/5572570465
7
A Brief Report on Auto And Auto Ancilaries, CCI, March 2013.


1.6. Industry Trends
8

Passenger Car volumes were down 6.7% YoY but Utility Vehicles were up 52% in 2012-13
Weakness continues in Commercial Vehicle segment; down 2.0% YoY in 2012-13
Domestic Two-Wheeler volumes up 2.9% in 2012-13
Three-Wheeler (passenger) segment benefits from fresh permits, registered 8.5% YoY growth

1.7. Financial Performance
9

Automobile companies across segments continue to face tremendous pressure on profit margins due
to elevated inflation levels. Added to this are the heightened marketing costs incurred and heavy
discounts offered by vehicle manufacturers to attract consumers to the showrooms. This partially
explains the price hikes initiated by the vehicle OEMs to protect margins, despite the weak demand
environment. Going ahead, amidst rising market competition, new product launches, as also product
refreshes planned, OEMs are expected to increase spend on marketing & promotional activities.
Although commodity prices are not expected to witness steep hikes, overall cost and competitive
pressures would keep the profit margins under pressure.

1.7.1. Domestic Sales

1.7.2. Export

1.8. Government initiatives
10

Government has taken several policy initiatives and pro-active measures to enhance the effectiveness
and drive growth in Automotive Sector. Major steps have been taken to make India a global

8
Indian Automobile Industry, ICRA, April 16, 2013
9
10


automotive hub under the 'Automotive Mission Plan'for the period of 2006-2016. The Mission Plan
aims to make India 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. Some of the other
key initiatives include:
Formation of National Automotive Board (NAB) to look into the issue of recall of vehicles;
hence improving manufacturing standards
Reduction of excise duty on small cars
Launch of the National Mission for Hybrid & Electric Vehicles under Budget FY12, to make
hybrid vehicle kits cheaper by reducing the excise duty rebate to 5% from 10%
State Government promoting industrial space especially in the automobile sector Open to
Public Private Partnerships (PPP)
Establishing special auto parks and virtual SEZ's for auto components industry by providing
an interest subsidy on loans and investment in new plants and equipments
Export benefits to intermediate suppliers of auto components against the Duty Free
Replenishment Certificate (DFRC)
Automatic approval for 100% Foreign Equity Investment in auto components manufacturing
Manufacturing and importing in this sector exempt from licensing and approvals
1.9. Automotive Mission Plan (2006-2016)
11

The Automotive Mission Plan is a major step taken to make India a global automotive hub. The
Mission Plan aims to make India 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. It envisages increase in production of automotive industry from the current level of Rs.
169000 crore to reach Rs. 600000 crore by 2016. The Mission seeks to oversee the development of the
automotive industry, that is, the present scenario of the sector, its broad role in the growth of national
economy, its linkages with other key facets of the economy as well as its future growth prospects. This
is involved in improving the automobiles in the Indian domestic market, providing world class
facilities of automotive testing and certification as well as ensuring a healthy competition among the
manufacturers at a level playing field.

1.10. Growth Drivers
Rising industrial and agricultural output
Rising per capita income
Favourable demographic distribution with rising working population and middle class
Urbanisation
Increasing disposable incomes in rural agri-sector
Availability of a variety of vehicle models meeting diverse needs and preferences
Greater affordability of vehicles
Easy finance schemes
Favourable government policies
Robust production
12

Huge Demand for Vehicle Servicing, Repairs and Maintenance
Non Vehicle Manufacturers are getting into Automotive Service Business
Branded service networks being set up both by vehicle manufacturers and other players
Expansion of Service Networks by Vehicle Manufacturer
Increased Customer Awareness on Vehicle Maintenance.
Emergence of One-stop-shop for vehicle owners to meet their needs like servicing, spares,
accessories, insurance, warranty, etc, under one roof
13

11
http://business.gov.in/Industry_services/automobile_industry.php
12
http://www.indiainbusiness.nic.in/industry-infrastructure/industrial-sectors/automobile.htm


1.11. Way Ahead
14

The rapid improvement in infrastructure, huge domestic market, increasing purchasing power,
established financial market and stable corporate governance framework have made the country a
favorable destination for investment by global majors in the auto industry, as per Automotive Mission
Plan (AMP) (2006-16). Additionally, the introduction of alternative fuels like hydrogen and bio fuels
needs to be promoted to ensure sustainability of the industry over the long term. The vision of AMP
2006- 2016 aims India 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 per cent of the GDP and providing additional employment to 25 million people by 2016.
In addition, the US-based car major, Ford aims to make India its export hub and plans to sell its
products in more than 50 countries over a period of time. The company has committed a total
investment of US$2 billion in India so far (November 2012). The luxury car market of India is set for
growth over the medium and long term. The market is about 30,000 cars a year and is rising steadily.
1.12. Sectoral Outlook 2013
15

1.12.1. Domestic automobile sales likely to witness moderate
growth
The Indian automobiles industry witnessed a moderation in demand in 2012, after the double-digit
growth in sales recorded in the preceding three years. Weak macroeconomic sentiment coupled with
subdued consumer confidence pulled down sales, particularly in the latter half of the year. Domestic
automobile sales grew by 6.6% in 2012 (Jan-Nov), as compared to growth of 14-31% during 2009-
2011. In view of the current macro environment, both domestically and globally, we are cautiously
optimistic about the Indian automobile industrys prospects in the near term. As a result, achieving
high growth rates is likely to be a major concern for the industry in 2013. While the long term
fundamentals of the Indian economy remain robust, the sluggish global environment has impacted
sentiments in the domestic market in the short term. But we expect this to be only a temporary
phenomenon, and prospects for 2013 look better than this year. Growth in sales would be driven by
the expected improvement in macro conditions on the domestic front, moderation in interest rates
and revival in consumer confidence, mainly after the initial two quarters. Consequently, the deferred
purchases witnessed in H2 2012 are expected to get converted into sales next year. The auto industry
is likely to gain considerably from the various initiatives on infrastructure development, rural focus
and the improved road infrastructure.
1.12.2. Export performance to remain moderate
In 2012 (up to Nov), all the segments, barring three-wheelers recorded higher exports. Growth in
exports of two-wheelers, which account for over 65% of automobile exports, slumped to 1% in 2012
(up to Nov), from 31% in 2011. Vehicle exports have been on a downhill drive since mid-2012. The
situation is not likely to witness a sudden turnaround, particularly with the uncertainty looming in the
global economy. Moreover, with Sri Lanka recently announcing steep increase in import tariffs and
excise duties, it is likely to have an adverse impact on Indias automobile exports, as Sri Lanka is one
of the important export destinations for the industry. Nevertheless, vehicle manufacturers continued
thrust on exploring newer export markets will open growth opportunities for the industry.

13
14
http://www.ibef.org/industry/india-automobiles.aspx
15


1.13. Segmental Commentary
16

1.13.1. Commercial Vehicles
The year 2012 saw a moderation in growth in domestic sales of commercial vehicles (6.5% up to Nov),
after strong performance in the preceding years. This growth was driven by the light vehicle segment
(19.4%), even as sales of medium and heavy vehicles (M&HCV) declined (-10%). Subdued macro-
economic environment, sluggish industrial demand and increase in diesel price led to fall in sales of
M&HCVs. Growth in overall domestic sales of commercial vehicles is expected to be driven by the light
vehicle segment in the year ahead as well. The export environment for commercial vehicles is expected
to remain challenging, with demand expected to remain subdued in the key overseas destinations.
Nevertheless, CV manufacturers would increase thrust on exploring opportunities in non-traditional
markets (Africa, Middle East, Thailand, Afghanistan, Latin America, Russia, etc).
1.13.2. Passenger Vehicles
2012 was a challenging year for the passenger vehicle industry, as rising fuel prices and high interest
rates led to significant increase in ownership costs, deterring customers from making vehicle
purchases. In the year ahead, increased marketing efforts by companies and launch of new
models/variants would be directed at pulling customers into the showroom. However, the demand
momentum is expected to gain momentum after the initial couple of quarters. Meanwhile, with the
differential between petrol and diesel prices continuing to remain large, the coming year would
continue to witness strong demand for diesel fuelled vehicles.
1.13.3. Two Wheelers
Rising petrol prices kept growth momentum in the motorcycle segment under pressure in 2012, with
domestic sales growing by a meager 2% (up to Nov) compared to growth of 27.1% in 2010 and 14.7%
in 2011. There have been early signs of an improvement in demand as the festive period towards the
end of the year saw pick up in sales. We expect demand for two wheelers to improve next year,
supported by moderation in inflation levels and revival in consumer sentiment. However, the industry
is unlikely to record the high growth rates as seen prior to 2012.
1.14. Strategic Insight
17

Some of the key strategies that vehicle manufacturers are likely to adopt in 2013 are listed below:

1.14.1. Commercial vehicles
Launch new models
Increased customer focus by expanding sales and service network
Focus on product innovation to create new market segments
Develop new products for the international markets
Expand footprint to newer export markets
Continue thrust on cost control & productivity improvement measures
Greater thrust on and expansion of less cyclical businesses.

16
17


1.14.2. Passenger vehicles
Launch new vehicle models, especially more diesel models
Increase focus on tier II and tier III markets, even for high-end models
Expand sales and service network for enhanced customer satisfaction
Increase focus on expanding pre-owned vehicle business
Continue thrust on cost control & productivity improvement measures
Leverage social media to establish closer bonds with customers.

1.14.3. Two wheelers
Increase focus on small towns and rural markets (e.g. expansion of distribution/service
network)
Increase focus on emerging markets such as Brazil, Africa, Argentina, Indonesia, etc to
push exports.

1.15. Summary
Given the large population and growing middle class, India has the potential to develop into a
significant market for automobile manufacturers. With a large, English speaking, relatively low- cost
labour pool, India could eventually serve as a major regional export hub throughout Asia, Africa, and
Europe. However, there are a number of factors that must be overcome in order for India, along with
automobile manufacturers, to fully realize the potential in the Indian market. In particular, logistical
transportation infrastructure capabilities will need to be improved to meet domestic and export needs.
Based simply on the amount of investments by GM and Ford alone, it is clear that foreign vehicle
manufacturers view India as a crucial player in the future of the automotive industry as a regional
export hub, and as a supplier of automobiles and automotive parts globally.



2. Industry Overview
18

2.1. Objective
The Indian Regulations
19
prescribe that the comparability of an international transaction with an
uncontrolled transaction shall be judged with reference to the conditions prevailing in the markets in
which the respective parties to the transactions operate. Hence, for the purposes of transfer pricing
analysis an overview of the industry is essential.
The following section contains an analysis designed to provide an overview of the auto component
industry under which OMR Bagla operates.
2.2. Background
India has emerged as one of the world's most competitive tyre markets due to vast availability of raw
material (natural rubber) and ultramodern production facilities. The radial tyre market is expected to
reach Rs 393 billion (US$ 7.33 billion) by FY 2015 growing at a CAGR of more than 21 per cent during
FY 2011-FY 2015.
The automotive plants of global automakers in India rank among the top across the world in terms of
their productivity and quality. Top auto multinational companies (MNCs) like Hyundai, Toyota and
Suzuki rank their Indian production facilities right on top of their global pecking order.
The Indian automobile and auto components industry can be expected to surpass China's growth path
by 2021, according to a research report by Espirito Santo Securities.
20

The Indian auto component industry is ancillary to the automobile industry. Major automobile
markets such as North America, Europe and Japan have been witnessing significant slowdown in
automobile sales growth since last one decade. While on the other hand India and China has grown
rapidly, consequently leading the surge in the auto component industry in these regions. Gauging the
growth prospects in these two regions almost all the major automobile OEMs as well as auto
component manufacturers has ventured in these markets.
21

The Indian auto component 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 Indian auto component industry is expected to reach a turnover worth US$ 113 billion by 2020-21
from US$ 43.4 billion in 2011-12, according to an Automotive Component Manufactures Association

18
The contents of this chapter are based entirely on information obtained from various internet based resources. PW & Co.
has not carried out any independent research about accuracy and validity of such statements, facts and figures which are
provided in this chapter.
19
Section 92D read with Rule 10B(2)(d)
20
http://www.ibef.org/industry/autocomponents-india.aspx
21
http://www.bharatbook.com/market-research-reports/tyre-tire-market-research-report/indian-auto-component-
industry-for-indian-customers.html


(ACMA) report. The exports from the industry are expected to grow at a compound annual growth
rate (CAGR) of 17 per cent during 2012-21, the ACMA report highlighted.
22

Indian auto component industry is about Rs 1,600 billion (US$ 30.77 billion) and derives its growth
impetus from the growth in automobile industry. Industry body Society of Indian Automobile
Manufacturers (SIAM) expects overall automobile sales to grow by 10-12 per cent in 2012-13 on the
back of supportive Government policies, launch of new models and intensifying enthusiasm for cars
among Indian consumers. Therefore, it could be expected that increase in demand for automobiles
would eventually drive growth for auto parts sector.
As per industry estimates, Indian auto component industry derives 60 per cent of its turnover from
sales to domestic original equipment manufacturers (OEMs), 25 per cent from sales to the domestic
replacement market and around 15 per cent from exports.
23

Figure 1: Product segments of the Auto Components Industry
24

2.3. Characteristics of the industry
2.3.1. Industry size
The Indian auto component industry is one of Indias sunrise industries with tremendous growth
prospects. From a low- key supplier providing components to the domestic market alone, the industry
has emerged as one of the key auto components centres in Asia and today seen as a significant player
in the automotive supply chain. India is now a supplier of a range of high-value and critical
automobile components to global auto makers.
India is also emerging as a sourcing hub for engine components, with original equipment
manufacturers (OEMs) increasingly setting up engine manufacturing units in the country.

22
23
http://www.ibef.org/PrintThisArticle.aspx?artid=31497&pgno=1&totalpage=1
24
http://www.ibef.org/download/Auto_Components50112.pdf


According to industry statistics derived by Automotive Component Manufacturers Association of
India (ACMA), Engine parts form the largest segment (31 per cent) of auto part industry followed by
drive transmission and steering parts (19 per cent). Suspension & braking parts and Body & Chassis
account for 12 per cent each in the entire product range, followed by equipment accounting for 10 per
cent of the same.
Further, estimates made by ACMA reveal that auto component exports would robustly grow at a
compounded annual growth rate (CAGR) of 18.8 per cent over 2011-21, garnering about US$ 29
billion. European and North American markets account for 36 and 23 per cent of the entire industry
exports, respectively, while 28 per cent of the exports are made to Asian countries.
25

The amount of cumulative foreign direct investment (FDI) inflow into the automobile industry during
April 2000 to January 2013 was worth US$ 8,061 million, accounting to 4 per cent of the total FDI
inflows (in terms of US$), as per data published by Department of Industrial Policy and Promotion
(DIPP), Ministry of Commerce.
The tyre production in India is anticipated to reach 191 million units by the end of FY 2016, according
to a RNCOS research report titled, 'Indian Tyre Industry Forecast to 2015'. The manufacturers are
expected to invest huge amount into the industry over the next few years, with a major proportion of
this investment directed towards the radial tyre capacity expansion.
In addition, with a significant increase in the number of CNG vehicles, the CNG vehicle market is
witnessing a strong growth pattern. According to a RNCOS report titled, "India CNG Vehicle Market
Analysis", the CNG kit market is expected to reach around INR 30 Billion in FY 2014, growing at a
CAGR of around 22 per cent during FY 2011-2014.
26

2.3.2. Industry Growth Drivers
27

Figure 2: Growth Drivers

25
http://www.ibef.org/PrintThisArticle.aspx?artid=31497&pgno=1&totalpage=1
26
27
www.ibef.org/download/Auto-Components-261112.pdf


2.3.3. Competitive Landscape
28

The Indian auto components industry is facing formidable pricing challenge from China and
South East Asian countries as they compete not only in the international markets but also on the
domestic turf. At present, the cost competitiveness of Indian players is constrained on account of
infrastructure inefficiencies; higher cost of power; upward pressure on wages and inflexible labour
laws.

Free Trade Agreements (FTAs) entered into by India with many countries have catalysed the import of
auto components into India as many components have become more cost effective to import following
reduction of import duty.

The Indian auto component industry faces competition from the Chinese market. Chinas automobile
component industry presents higher growth rate, superior infrastructure and more stable profit
margin.
2.3.4. Regulatory Environment
The government has taken many initiatives to promote foreign direct investment (FDI) in the
industry.
The Ministry of Heavy Industries and Public Enterprises has envisaged the Automotive Mission Plan
(AMP) 2006-2016 to promote growth in the sector. It targets to:
Increase turnover to US$ 122 billionUS$ 159 billion by 2016 from US$ 34 billion in 2006

Increase export revenue to US$ 35 billion by 2016

Provide employment to additional 25 million people by 2016
The Indian Government is in the process of forming a National Automotive Board (NAB) which would
become a formal set-up to look into the issue of recall of vehicles and hence improve manufacturing
standards. The prospective body, to oversee technical and safety aspects of vehicles, will have
representatives from all the nodal ministries and automotive bodies such as the Automotive Research
Association of India (ARAI).
The Government of Tamil Nadu has also announced that it will sign several memoranda of
understanding (MoU) with various automobile and auto part makers and will soon release industry-
specific policies. The reforms would give a boost to the state's position as a strategic auto
destination.
29

Favourable policy measures aiding growth:
30

Automotive Mission Plan 200616
Setting up of a technology modernisation fund focusing on small and medium enterprises

Establishment of automotive training institutes and auto design centres, special auto parks and
auto component virtual SEZs

NATRiPs

28
http://www.icra.in/Files/ticker/Auto_Ancillary_Ind_Note-Dec10.pdf
29
http://www.ibef.org/industry/autocomponents.aspx
30


Set up at a total cost of USD 388.5 million to enable the industry to adopt and implement global
performance standards

Focus on providing low-cost manufacturing and product development solutions
Dept. of Heavy Industries & Public Enterprises
Created a USD 200 million fund to modernise the auto components industry by providing an
interest subsidy on loans and investment in new plants and equipment

Provided export benefits to intermediate suppliers of auto components against the Duty Free
Replenishment Certificate (DFRC)
Union Budget 201213
Prescribed a concessional excise duty of 6 per cent for manufacturers of batteries supplying to
makers of electrically operated vehicles

Five year extension of 200 per cent weighted deduction of R&D expenditure under the Income
Tax Act

Introduced weighted deduction of 150 per cent for expenditure on skills development

2.4. Key Trends
31

The auto component industry is expected to be influenced by following trends:
a) India is poised to become a global components sourcing hub-
Major global OEMs are planning to make India a component sourcing hub for their global
operations.
Several global tier-I suppliers have also announced their plans to increase procurement
from their Indian subsidiaries.
India is also emerging as a sourcing hub for engine components, with OEMs increasingly
setting up engine manufacturing units in the country.
b) Product-development capabilities have improved-
Increased investments in research and development operations and laboratories, which are
being set up to conduct activities such as analysis and simulation and engineering
animations.
The growth of global OEM sourcing from India and the increased indigenisation of global
OEMs is making the country a preferred manufacturing base.
c) Inorganic route to expand-
Domestic players are acquiring global companies to gain access to the latest technology,
expand client base and diversify revenue streams.

31


Players such as Amtek Auto and Bharat Forge have adopted a dual-shore manufacturing
model.
2.5. Key Challenges
32

The Indian auto industry is changing rapidly. During the last decade, many international auto
manufacturers, either by themselves or in partnership with Indian companies, have started
manufacturing in India. The ancillary industries have also grown in tandem. The quality of production
in small and medium-scale industries has improved to such an extent that they started exporting
products to international manufacturers. The development in the auto industry has given confidence
to everyone related to the industry and specifically to the government which resulted in
announcement of Auto Policy 2006-2016 by the Ministry of Heavy industries. To realise future
growth, it is important to overcome various challenges the industry is facing currently.
Some of the challenges faced by the industry are listed below:
Rising oil prices: International price of crude oil has crossed US$120 per barrel and is rising at
an alarming rate. The rise in oil prices will impact the growth of the automotive industry.
Human Resources: The industry is facing severe shortage of skilled technical as well as
managerial manpower.
Import of components: import of ancillary from other countries has put pressure on domestic
manufacturers.
Technological issues: The industry does not have access to the latest technology.
Depleting Margins: Rise in price of commodity items like steel, non-ferrous, precious metals,
rubber and petroleum products has put pressure on the profit margins. Commodity prices that
make up to 60 per cent of the cost of the product have moved up by 45-60 per cent in the last year.
2.6. Opportunities
33

The Indian auto component industry has huge opportunities ahead in terms of domestic and export
markets which hold huge potential -
The domestic market is expected to account for 80 per cent of total sales by 2020 with a total
market size of USD 80 billion

Exports will account for as much as 20 per cent of the market by 2020.
Market potential balanced across product types
The domestic and export markets are at par in terms of product type. For instance, Engine &
Exhaust components, along with Body & Structural parts, account for about 50 per cent of the
potential in both domestic and export markets

Other major product types include Transmission & Steering components and Electronics &
Electrical parts
Opportunities in engineering products:

32
http://www.autofocusasia.com/management/indian_automotive_industry.htm
33


Engine & Engine Parts
New technological changes in this segment include introduction of turbochargers and common
rail systems

The trend of outsourcing may gain traction in this segment in the short to medium term
Transmission & Steering Parts
Share of the replacement market in sub-segments such as clutches is likely to grow due to rising
traffic density

The entry of global players is expected to intensify competition in sub-segments such as gears
and clutches
Suspension & Braking Parts
The segment is estimated to witness high replacement demand, with players maintaining a
diversified customer base in the replacement and OEM segments besides the export market

The entry of global players is likely to intensify competition in sub-segments such as shock
absorbers
Equipment
Companies operating in the replacement market are likely to focus on establishing a
distribution network, brand image, product portfolio and pricing policy
Electrical
Manufacturers are expected to benefit from the growing demand for electric start mechanisms
in the two-wheeler segment
Others
Leading players in the sheet metal parts sub-segment are in the process of expanding their
customer base. This sub-segment is expected to grow 1011 per cent during 201015
2.7. Way Forward
The global automotive industry is witnessing tremendous and unprecedented changes. This industry
is slowly and gradually shifting towards Asian countries, mainly because of saturation of automobile
industry in the western world. The principal driving markets for Asian automotive industry are China,
India and ASEAN nations. Entrance of new manufacturers into the small car market and new
launches of low cost vehicles namely scooters, motorcycles, mopeds and bicycles have led to the
massive growth of domestic automotive industry, which provides an opportunity for the auto
component players to grow revenues with multiple OEM customers.
Technological shifts in the Indian automobile industry have been the key drivers of growth and
innovation in the countrys auto components industry. The number of global players moving to India
has been increasing as a result of government of India permitting 100 per cent foreign equity
investments. The country is also witnessing increased investment in R&D operations and the
establishment of laboratories to conduct activities such as analysis and simulation as well as
engineering animations. Robust demand for automobiles is a catalyst for auto component market.


Revival of global demand will keep the outsourcing story intact. Recent fall in metal prices, which
constitute major part of their raw material cost, will lead to expansion in margins and thus better
earnings. Thus the auto component industry is expected to grow at healthy rate in the future.
An analysis released by TechNavio predicts that auto component market in India would grow at a
CAGR of 11.7 per cent over 2011-15. Apart from surge in demand for automobiles, rise in auto
financing activities would spur the growth of the sector.
Also, on the back of improving markets in the US and Europe, industry experts forecast a very positive
outlook for automotive exports in 2012.
34

The vision of Automotive Mission Plan (AMP - 2006-16) aims India 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 per cent of the gross domestic product
(GDP) and to provide additional employment to 25 million people by 2016.
The rapid improvement in infrastructure, huge domestic market, increasing purchasing power,
established financial market and stable corporate governance framework have made the country a
favourable destination for investment by global majors in the auto industry, as per AMP 2006-16. The
Plan aims at doubling the contribution of automotive sector to the GDP with special emphasis on
export of small cars, MUVs, two & three wheelers and auto components.
35

2.8. Summary
The objective of undertaking a review of the industry is to describe and gauge the economic/ business
conditions and trends affecting companies in India in the specified industry. This review provides a
deeper understanding of the industry in which the company operates. An understanding of the same
allows us to evaluate the companys functions performed, assets employed and risks assumed in
relation to similar entities within the 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. Investments and exports in this segment are
witnessing continuous growth.
The global auto industry's search for lower cost and more international outsourcing will also lead to a
sharp growth in component output and exports in the coming years. Factors such as superior
engineering skills, modest domestic market growth, the sophistication of its IT industry and
increasing free trade agreements in addition to low cost, are expected to boost India's auto component
sector growth over other countries in the environment of off-shoring to low-cost countries.

34
http://www.ibef.org/industry/autocomponents.aspx
35


Industry Overview - Automobile Sector in India 2012-13

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Industry Overview - Automobile Sector in India 2012-13

Uploaded by

Copyright:

Available Formats

Draft for discussion purposes only

You might also like