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The Indian auto component industry has been navigating through a period of rapid changes with great
élan. Driven by global competition and the recent shift in focus of global automobile manufacturers,
business rules are changing and liberalisation has had sweeping ramifications for the industry. The global
auto components industry is estimated at US$1.2 trillion. The Indian auto component sector has been
growing at 20% per annum since 2000 and is projected to maintain the high-growth phase of 15-20% till
2015.

The Indian auto component industry is one of the few sectors in the economy that has a distinct global
competitive advantage in terms of cost and quality. The value in sourcing auto components from India
includes low labour cost, raw material availability, technically skilled manpower and quality assurance. An
average cost reduction of nearly 25-30% has attracted several global automobile manufacturers to set base
since 1991. India’s process-engineering skills, applied to re-designing of production processes, have
enabled reduction in manufacturing costs of components. Today, India has become the outsourcing hub for
several global automobile manufacturers.

Innovation and cost pruning hold the key to meeting the global challenge of rising demand from developed
countries and competition from other emerging economies. Several large Indian auto component
manufacturers are already gearing to this new reality and are in the process of substantially investing in
capacity expansion, establishing partnerships in India and abroad, acquiring companies overseas and
setting up greenfield ventures, R&D facilities and design capabilities.

Some leading manufacturers of auto components in India include Motor Industries Company of India,
Bharat Forge, Sundaram Fasteners, Wheels India, Amtek Auto, Motherson Sumi, Rico Auto and Subros. The
India’s Top 500 Companies, published by Dun & Bradstreet in 2006, listed 22 auto component
manufacturers as top companies in India with a total turnover of US$ 3 bn. These companies are in the
process of making a mark on the global arena, and some have already acquired assets abroad.

Industry Structure

The total turnover of the Indian auto component industry is estimated at US$9 bn in 2006. The industry
has the resources to manufacture the entire range of auto products required for vehicle manufacturing,
approximately 20,000 components. The entry of global manufacturers into India during the 1990s enabled
induction of new technologies, new products, improved quality and better efficiencies in operations. This in
turn effectively acted as a catalyst to the local development of the component industry.

The Indian auto component industry is extensive and highly fragmented. Estimates by the Department of
Heavy Industries, Government of India, indicate there are over 400 large firms who are part of the
organised sector and cater largely to the Original Equipment Manufacturers (OEMs). Another 10,000 firms
exist in the unorganised sector that operates in a tier-format. The firms in this segment operate in low
technology products and cater to Tier I and Tier II suppliers and also serve the replacement market

Around 4% of the companies operating in the auto component segment cater to 80% of the demand
emanating from OEMs. Within the unorganised segment, apart from supplying in the aftermarket, a
number of players are also involved in job work and contract manufacturing.
 Source: ACMA

The range of products manufactured, with each broad product segment having a different market structure
and technology, has negated any possible concentration of the market in a few hands. The market is so
large and diverse that a large number of players can be absorbed to accommodate buyer needs. However,
there are a select few large companies that have integrated their operations across the value chain. The
key to competing in this industry is through specialisation by product-type, and integrating operations
across the related area of specialisation.

An interesting insight provided by a study conducted by the National Council of Applied Economic Research
revealed that the market segments for auto components included OEMs constituting 33%, local
components having 25% with the balance 42% comprising of spurious market including re-conditioned
parts. A large part of the spurious or grey market companies are in the unorganised sector.

The regional base of auto component manufacturers is mostly concentrated in the West, North and South
of India.This regional concentration of auto component manufacturers has been dictated by the emergence
of automobile manufacturers in these regions. The set up of Tata Motors, Bajaj, Mahindra & Mahindra and
TVS in the 1950s and 1960s laid the foundation for auto component manufacturers in the West and South,
whilst the entry of Maruti during the 1980s created the base in the North.

Industry Growth

Production of auto ancillaries was estimated at US$10 bn in 2005-06 and has been growing at a robust
20% per annum since 2000. Exports of auto components have been strong growing at 24% per annum
since 2000. This growth in exports if sustained for another five years will see India’s auto components
exports will touch US$ 5 bn by 2011 from the US$ 2 bn at present.

Till the 1990s, the auto component industry was solely dependent on the domestic
automobile industry to drive the demand for ancillary products. This composition of
the market however is undergoing radical changes with global outsourcing gaining
momentum. In recent times, exports has emerged as a significant driver of growth,
and the demand emanating from global OEMs and Tier I manufacturers has opened
new opportunities for the auto component industry in India. At the same time, a
bright outlook for the domestic automobile industry also offers significant growth
potential, given the fast rising income levels with a rapidly growing middle and high
income consumers.

Share of exports in total production has risen from 10% in 1997 to 18% in 2006. The composition of exports
in terms of the proportion of OEM and aftermarket has also undergone a sweeping change since the past
decade. The ratio of OEM to aftermarket has changed from 35:65 in the 1990s to 75:25 in 2006. While
exports have been booming, there has been a sharp rise in imports of auto components as well, especially in
the last three years. From an import of US$ 250 mn in FY03, they have gone up to US$750 mn in FY06. This
is a healthy trend, indicative of rising domestic demand.

Investments

Since 2000, the auto component industry has recorded an investment level of Rs 18 bn and has attracted
US$ 530 mn in terms of foreign direct investment. Investments in the sector have been growing at 14%
per year. In 2005-06, investments touched US$ 4.4 bn, and are expected to grow significantly in future.

The Investment Commission has set a target of attracting foreign investment worth US$ 5 bn for the next
five years to increase India’s share in the global auto components market from the present 0.4% to 3-4%.
This is a sizeable target considering the meagre amount of FDI currently coming into the industry. The
changing perception of global auto makers is however fast altering this scenario.

With less than 1% share in the global market, India has tremendous potential to emerge as a supply base.
Several global giants like Ford and Toyota have already set up base in India to source auto components.
Outsourcing is fast catching up with domestic OEMs as well, with most Indian OEMs today sourcing nearly
70-80% of their component requirements from vendors.

This changing business scenario is leading to an inevitable outcome of consolidation within the industry.
The takeover of Kar Mobiles by Rane Engine and of Gero Auto by Uma Precision are few instances.
However, such mergers and takeovers will be few and far in between in the auto component industry,
unlike the churn out anticipated in other emerging industries – the principal factor being the vastness of
the market and the range of products that need to be delivered.

Rather than domestic consolidation, the general trend at present is for the large auto component
manufacturers to establish a global presence. Top auto component manufacturers have already set up base
in the global markets, especially in Europe. Overall, there have already been 16 acquisitions, with six made
in 2005. The industry is the third highest among the Indian industries after IT and Pharma, in acquiring
overseas assets. These acquisitions have largely been in Europe and the USA. This trend has been possible
as the auto ancillary industry in these countries have been collapsing, thus making it affordable to acquire
these companies. Nevertheless, this will provide a base for Indian companies to access the European and
American markets.

Indian auto component companies are also setting up bases in other emerging economies, who are
potential competitors, for instance, Sundaram Fasteners’ greenfield facility in Zhejiang and Bharat Forge’s
 joint venture with the Chinese automotive major FAW Corporation. Another auto component manufacturer
with plans to enter China is PMP Components, which intends to set up a sourcing base to establish itself as
a low cost supplier.

These trends are indicative of the changing business environment in the country. Top auto component
manufacturers are gearing to take big risks. Their cross-border vision has established them as global
companies. Though the going-global phenomenon is limited to a handful of companies, the smaller
companies are also indirectly gearing to this trend by entering into formal manufacturing contracts and
specialisation.

Prospects

Looking forward, the industry displays tremendous potential in generating employment and boosting
entrepreneurship in the country. The spate of new investment plans announced by global and domestic
automobile manufacturers promises the emergence of India as a global hub for auto components.

The industry is transforming, and the boost in demand will see the emergence of several new players in the
industry. The vast market for auto components, and the diverse products and technology involved ensures
a place and role for many. At the same time, the entry of several global automobile manufacturers will
bring in more regulation into the industry and see a pruning of the spurious market. Among the smaller
players in the unorganised segment, this implies moving away from being standalone companies, to
entering into either contract manufacturing or being ancillary units. The newly defined rules are
specialisation, development and delivery that hold the key to success in the auto component industry.

Foreign Acquisitions by Indian Companies

Indian Company Acquired Country
Carl Dan Peddinghaus Germany
CDP Aluminiumtechnik Germany
at Forge Federal Forge USA
Imatra Kilsta AB Sweden
Scottish Stampings Ltd Scotland
WOCO Group Germany
erson Sumi
G&S Kunststofftechnik GmBH Germany
GWK UK
ek Auto New Smith Jones Inc USA
Zelter Germany
aram Fasteners Bleisthal Produktions GmBH Germany
 Cramlington Forge UK
CDP GmBH Germany
orge Shakespeare Forgings UK
Autolec RBI Autoparts SND BHD Malaysia
Koyo Fuji Autotech France

Source: Auto Component Manufacturers Association