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AUTOMOBILEANCILLARIES

A

Project Report

On

AUTO MOBILE ANCILLARIES

BY-

SANKET KUMAR

INSTITUTE OF PRODUCTIVITY & MANAGEMENT


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CONTENTS

1. Introduction ......................... 4-6

2. Background ......................... 7-83. Current Status ......................... 8-94. Component-wise share of production ....... 9-10

5. Auto-component Production ..................... 106. Auto-component Export ......................... 11

7. Competition Overview ......................... 12-138. Major Players ......................... 13-17

9. Investment Policy and Initiatives .............. 17-18

Policy Initiatives ......................... 18-191. Challenges and Opportunities ................. 19

Investment opportunities ................. 19

Destination India ......................... 19-20 Domestic Investments ......................... 20 Foreign Investments ......................... 20-21

1. Key Challenges ......................... 21

Sustaining the growth rate ................ 21-22

Demand to Go Up ......................... 22-23 Budget Measures ......................... 24 Budget Impact ......................... 24

1. Key Points ......................... 252. Need for Innovation ......................... 263. Enhancement of share of auto component in global

trade ......................... 26-27 4. National Automotive Testing and R&D

Infrastructure Project (NATRIP)

......................... 27

5. Conclusions ......................... 28



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Introduction

In todays competitive business environment, automobile

companies worldwide are shifting their attention towards

understanding and implementing extended supply chain

management that integrates the product, process and

information flows within and across organizational

boundaries.

In such a scenario, there is a pertinent need to understand

and evaluate existing supply chain metrics followed byAuto and Auto Ancillary Industries in India, and

benchmark them with the best practices within the industry

to bring in improvements in the existing system.

This study, Benchmarking survey on Best Supply Chain

Management (SCM) Practice of Auto and Auto Ancillary

industries in India seeks to assess the current supply

chain metrics (SCM) across various parameters, followed

by Auto and Auto ancillary industries, thereafter, identify

the leader(s) under each set of parameters and ascertain

the best SCM practices employed by the identified leader

industries.

The automobile OEM companies have been grouped into

the following categories:

Cars & utility vehicles

Tractors

Trucks

Two wheelers



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The auto ancillary industry players have been grouped as

per the following classification:

Engine parts

Transmission Electrical

Ancillaries others

The study covers all metrics in the extended supply chain

of an organization, both inbound and outbound supply

chain. For the purpose of identification of leaders, therelevant parameters were categorized under four broad

heads, namely,

Cycle time metrics

Cost metrics

Service quality metrics and

Asset metrics

A sample of 27 Auto OEMs and 51 Auto Ancillaries were

met across the country for the identification of the leaders.

Having analysed and evaluated the current supply chain

practices of the companies surveyed, 11 players among the

Auto OEMs and 14 among the Auto Ancillaries players

were identified as leaders across different supply chainactivities.

The various practices followed by the leader industries

were identified and grouped under the following broad

heads:

Strategy

Marketing



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Procurement

Manufacturing

Quality

Logistics Information technology

Based on detailed analysis of the data, the best practices

followed by the leaders within each of the categories

above, were ascertained.

Background

Surge in automobile industry since the nineties has led torobust growth of the auto ancillaries sector in the country.



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The auto Components Manufacturing in India took the shapeof an industry in the early 1940s. Since than passing throughvarious phases of ups and downs, the industry has emerged as

one of the fastest growing manufacturing sectors that isglobally competitive as well.

A close look at the evolution of the industry gives us a vividpicture of three different stages of development. Period prior to the entry of Maruti Udyog Ltd, Period after the entry of Maruti Udyog Ltd and Period post Liberalization

The period prior to the entry of Maruti Udyog Ltd wascharacterized by small number of auto majors like HindustanMotors, Premier Automobiles, Telco, Bajaj, Mahindra andMahindra, low technology and assured business for most ofthe auto-component manufacturers.

The entry of Maruti in the 1980s marked the beginning of thesecond phase of the industry. The autoancillary industry inthe country really showed a spurt in growth during thisperiod. This period witnessed the emergence of a newgeneration of auto ancillary manufacturers who wererequired to meet the stringent quality standards of MarutisKorean collaborator Suzuki of Japan. The good performanceof Maruti resulted in a upswing for the domestic autoancillary industry. It was during this period that autocomponents from India began to be exported. The entry offoreign automobile manufacturers ranging from MercedesBenz, Ford, and General Motors to Daewoo following thegovernment liberalizing the foreign investment limits saw thebeginning of the third phase of the evolution of the industry.



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In tandem with the industry trends, the Indian componentsector has shown great advances in recent years in terms ofgrowth, spread, absorption of new technologies and

flexibility. At present there are around 500 key players, whichcontribute more than 85 per cent of India's production.

India has also emerged as an outsourcing hub for auto partsfor international companies such as Ford, General Motors,Daimler Chrysler, Fiat, Volkswagon, and Toyota.

India enjoys cost advantage with regard to castings and

forgings. The manufacturing costs in India are 25 to 30 percent lower than its western counterparts. India's competitiveadvantage does not come from costs alone, but from its fullservice supply capability.

Current Status

Indian auto component industry is quite comprehensive witharound 500 firms in the organised sector producingpractically all parts and more than 10,000 firms in smallunorganised sector, in tierized format. The sector has beengrowing at 20 per cent per annum since 2000 and is projected

to maintain the high-growth phase of 15-20 per cent till 2015.

The industry, over the years, developed the capability ofmanufacturing all components required to manufacturevehicles, which is evident from the high levels ofindigenization achieved in the vehicle industry as well as thecomponents developed for the completely Indian madevehicles like the Tata Indica, Tata Indigo, Mahindra Scorpio,Bajaj Pulsar, TVS Victor and TVS star.



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The industry has now holistic capability to manufacture theentire range of autocomponents e.g. Engine parts, Drive,

Transmission Parts, Suspension & Braking Parts, Electricals,Body and Chassis Parts, Equipment etc.

Component-wise share of production

Over the last few years the Indian Auto Component Industryhas created a robust capacity base and all of the worldsmajor manufacturers have set up their manufacturing units inthe country. The quality of the components produced by thecomponent industry in the country is certified by the fact that,

out of the 498 ACMA members, 9 are Deming Prize winners,4 are JIPM award winners and 1 is Japan Quality Medalwinner.

Auto-component Production

Production of auto ancillaries was estimated at USD 10billion in 2005-06 and has been growing at a robust 20 percent per annum since 2000.



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Auto-component Export

Till the 1990s, the auto component industry was solelydependent on the domestic automobile industry to drive thedemand for ancillary products. This composition of themarket however is undergoing radical changes with globaloutsourcing gaining momentum. In recent times, exports hasemerged as a significant driver of growth, and the demandemanating from global OEMs and Tier I manufacturers hasopened new opportunities for the auto component industry inIndia. At the same time, a bright outlook for the domesticautomobile industry also offers significant growth potential,given the fast rising income levels with a rapidly growing

middle and high incomeconsumers.

Exports of auto components have been strong growing at 24per cent per annum since 2000. This growth in exports ifsustained for another five years will see Indias autocomponents exports will touch USD 5 billion by 2011 fromthe USD 2 billion at present.

COMPETITION OVERVIEWThe automotive component industry is an important sector ofthe Indian economy and a major foreign exchange earner forthe country. There are around 400 major players in the autocomponent sector. Most of them are distributed in the north,south, and, western parts of India around major Automotive

Vehicle Manufacturers (AVMs). These AVMs contributed



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largely towards the development of component suppliersthrough technical and or financial collaborations.

The automotive component industry manufactures a widerange of parts including castings, forgings, finished, semi-finished components, assemblies, and subassemblies for alltypes of vehicles produced in India.

Presently, the Indian automotive component industry is highlyfragmented. This industry can be divided into the organizedand the unorganized categories of manufacturers. The

organized component manufacturers supply components to atleast one of the Original Equipment (OE) vehiclemanufacturers. They also have access to technology due totheir tie-ups with some of the foreign collaborators orthrough associate AVM. The unorganized sectorpredominantly caters to theThe OE market is predominantly catered to by the organized

sector. The 400 odd organized producers contribute around80 percent to this market. Presently, these manufacturershave grown in size and numbers beyond the control of OEmanufacturers. They control about 65 percent of theaftermarket.

There are 402 medium and large key players in autocomponents in the organized sector along with 6000 ancillaryunits. However in the unorganized sector there areapproximately 5000 SSIs. The direct employment generatedby the medium and large firms in the organized sector is2,50,000. No figures are available for unorganized sector.

The geographical spread of medium and large companies asper records of Automotive Component Manufacturers

Association of India (ACMA) is as under



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North region 161

Western region 123

Southern region 91

Eastern region 27

Major Players

Bharat Forge Ltd

Established in 1966, Bharat Forge Limited (BFL) is theflagship company of the USD 1.50 billion Kalyani Group. The

company has manufacturing operations across nine locations



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and six countries 2 in India, 3 in Germany and one each inSweden, Scotland UK, USA & China. Its customer baseincludes virtually every global automotive OEM and Tier I

supplier. Daimler Chrysler, Toyota, BMW, General Motors,Volkswagen, Audi, Renault, Ford, Volvo, Caterpillar -Perkins, Iveco, Arvin Meritor, Detroit Diesel, Cummins,Dana Corporation, Honda, Scania and several others sourcetheir complex forging requirements including machinedcrankshafts, front axle beams and steering knuckles fromBharat Forge.

Denso

Denso India Limited (Formally Nippondenso India, DIL), ajoint Subsidiary of three Japan companies Denso Corp.,Asmo Co. Ltd. and Sumitomo corp. was incorporated in

November 1984 and is into manufacture of automotiveelectrical equipments.This includes, alternators, generators, magnetos, wiper motoramoung others. The company manufactured 193,770alternators, 196,590 starter motors and various otherautomotive electrical components in FY 2002. Till FY 1993,DIL was incurring losses because of the rising value of the

yen and high custom duties. The companys performanceimproved considerably after the collaborator, DensoCorporation, Japan (Formerly Nippon-Denso, Japan)assumed effective control of the DIL from 26 per cent to 37.90per cent, while Sumitomo, Japan, and Maruti Udyog (Maruti)picked up 9.5 per cent each.



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Lucas TVS

Lucas - TVS was set up in 1961 as a joint venture of Lucas

Industries plc., UK and T V Sundaram Iyengar & Sons (TVS),India, to manufacture Automotive Electrical Systems. One ofthe top ten automotive component suppliers in the world,Lucas Varity was formed by the merger of the LucasIndustries of the UK and the Varity Corporation of the US inSeptember 1996.

Lucas TVS reaches out to all segments of the automotive

industry such as passenger cars, commercial vehicles,tractors, jeeps, two-wheelers and off-highway vehicles as wellas for stationary and marine applications.

Motor Industries Company Ltd (MICO)

MICO was incorporated in 1951 as a subsidiary of RobertBosch AG, Germany, is Indias largest auto-ancillarycompany. MICO Engineers are skilled in the design andapplication of brake systems and components.

Lumax industries

Established as a trading company in 1945, today amanufacturing company, Lumax accounts for over 60%market share in Indian Automobile Lighting Business, fueledin no small measure by its two decade old technical andfinancial collaboration with Stanley Electric Company



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Limited, Japan, a world leader in Vehicle Lighting andilluminationproducts for Automobiles.

Lumax has seven ultra modern manufacturing plants in India.Of these, two are located in cities of Gurgaon, Dharuhera inthe state of Haryana, near New Delhi and three plants inPune, near Mumbai in Maharashtra and one plant nearChennai.

Lumax is listed on major stock exchanges in India and depicts

a shareholding holding of 39% by Indian Promoters, 19% isheld by Stanley Electric and 42% by Public and CorporateBodies.

Sundaram-Clayton Limited (SCL)

Sundaram-Clayton Limited (SCL) is part of the US $2.6billion TVS group of companies, the largest automotivecomponent manufacturing and distributing group in India.SCL began its operations in Chennai in 1962, incollaboration with Clayton Dewandre Holdings Plc, UK,(presently WABCO Vehicle Control Systems, UK) which is apart of the US $9.5 billion American Standard Inc. SCL has

pioneered the manufacture of airassisted and air brakesystems for commercial vehicles in India.

SCL established its Die casting division in 1968 for qualityand high precision aluminium castings. The division's twoplants, one at Chennai and the other at Hosur are equippedwith the latest technology in Pressure Die Casting, GravityDie Casting and Low Pressure Die Casting.



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SCL established its state-of-the-art Software design centre in2005, an export oriented unit catering to the embedded andbusiness application software needs of American Standard

Companies

INVESTMENT POLICY AND INITIATIVES

With the idea of establishing a globally competitive

automotive industry and to double its contribution to theeconomy by 2010, the government of India in the year 2002announced itsAuto policy and Vision 2010.

The Auto Policy allows automatic approval for foreign equityinvestment upto 100 per cent in the automotive sector anddoes not lay down any minimum investment criteria, removingall the quantitative restrictions that were in place till 2001.

In February 2007, Indian government announced theAutomotive Mission Plan(AMP)for transforming the country into a global destinationfor design andmanufacture of auto components. The plan envisions thesectors turnover to swell to US$ 145 billion by 2019 from the

current USD 9.8 billion, thereby contributing 10 per cent tothe GDP against 1 per cent now. The proposals include a taxholiday for investments over Rs 5 billion. Also proposed are100 per cent tax deduction on export profits and 50 per centdeduction on foreign exchange earnings.

Earlier, the Finance Bill 2006 has given a further boost to theAutomotive Industry by reduction of the excise duty on thesmall motor vehicles, the reduction in the duty for raw



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material which is now between 5 to 7.5 per cent as comparedto the previous level of 10 per cent, and the thrust oninfrastructure development.

As a result of constant persuasion by the Department ofHeavy Industry, some of the objectives like imposition ofexcise duty on body building activity of Commercial Vehicles,lower excise duty on the small cars, extension of 150 per centweighted deduction on R&D expenditure to the automotivesector, increased budgetary allocation for R&D activities inthe sector and moving towards a lower duty regime have been

achieved and steps are being taken to further strengthen thecapability of the sector.

Policy Initiatives

The government has taken many initiatives to promote foreign

direct investment (FDI) in the industry.Automatic approval for foreign equity investment up to

100 per cent of manufacture of automobiles andcomponents is permitted.

The automobile industry has been delicensed.There are no restraints on import of components.

CHALLENGES AND OPPORTUNITIES

Investment opportunities



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India has several advantages making it an attractivedestination for investment in the automobile sector Low-cost, high-skill manpower with an abundance of

engineering talent the second largest in the worldWell developed, globally competitive Auto Ancillary

IndustryEstablished automobile testing and R&D centres.Among the lowest-cost producers of steel in the world.

Destination India

According to the Investment Commission of India, globalautomobile manufacturers see India as a manufacturing hubfor auto components and are rapidly increasing the value ofcomponents they source from India due to:India s cost competitiveness in terms of labour and raw

material.

Its established manufacturing base.

Makers of luxury cars are increasingly looking at makingIndia a sourcing hub for components, besides using morelocal components in cars for the Indian market. BMW is likelyto sign the first direct sourcing deal with local vendors by theend of this year. Skoda Auto India is looking at increasinglocalisation for its small car Fabia to over 50 per cent overthe next two years. Mercedes Benz India expects growth insourcing from India to continue at 10 per cent.

Domestic Investments

The market is so large and diverse that a large number of

players can be absorbed to accommodate buyer needs. The



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sector not only has global players looking to invest andexpand but leading domestic component companies are alsopumping in huge sums into expanding operations. An auto

park is coming up near Hyderabad with investments worthover US$ 409.30 million from around 34 automotive ancillaryunits. This is in addition to a US$ 245.59 million Greenfieldproject being set up by MLR Motors near the park.

Foreign Investments

India enjoys a cost advantage with respect to casting andforging as manufacturing costs in India are 25 to 30 per centlower than their western counterparts. Seeing the growingpopularity of India in the automotive component sector, theInvestment Commission has set a target of attracting foreigninvestment worth US$ 5 billion for the next seven years to

increase India s share in the global auto components market

from the existing 0.9 per cent to 2.5 per cent by 2015. Continental Automotive Components (India) Private

Limited, a whollyowned subsidiary of GermanybasedContinental Corporation, is planning to invest over US$79.2 million in its Indian operations during the next twoyears ending December 2010.Canadian auto component major Magna International

Inc is mulling options to set up an integratedmanufacturing facility in India for its nine businessdivisions.



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Key Challenges

Sustaining the growth rate

There is a potential for much higher growth in the domesticmarket due to the fact that the current car penetration level inIndia is just 7cars per thousand. The increase in purchasingpower at the top echelon of about 300 million people in thecountry, where the per capita income is over USD 1000,implies that passenger car growth in the domestic market is

on the verge of a major and sustained boom. It is expectedthat the passenger car market which was 1million in 2003-2004 can easily cross the 3 million mark by 2015. This canlead to an increase in the size of the domestic auto-componentmarket from the current level of USD 9.8 billion (2005-06) toat least USD 15 billion by 2015.

Demand to Go Up



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In line with the subdued demand witnessed in the autoindustry, the auto ancillary industry also went through tough

times in FY09. In fact, with a significant part of the revenuesfor the industry also coming from exports to the developedmarkets, which remained in shambles, it will not be wrong tosay that the Indian auto ancillary industry suffered even morethan the auto industry. However, some respite was providedto players with strong positioning in the replacement marketas demand in this market remained robust on account ofstrong auto sales in the previous fiscals. Going forward, while

domestic markets have begun to look up, uncertaintycontinues to plague exports.

Indian automotive component makers are getting backinto top gear, with European car companies showing ademand revival. They either supply parts to car makersin Europe or to Indian manufacturers for exports there,

and have recorded a steady rise of 1012 per cent in

demand during the past twothree months.

Indian auto parts suppliers to the `Big 3 of Detroit

General Motors (GM), Ford and Chrysler havewitnessed a steady increase in demand for componentsfrom these car manufacturers. Sales of light passenger

vehicles, comprising cars and trucks, began to increasefrom March this year.

Auto sales for the month of June grew by 14.26 per centover the same month a year earlier, according to areport released by the Society of Indian AutomobileManufacturers (Siam). The growth posted in May was

8.86 per cent, suggesting an acceleration in sales



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coming mainly from motorcycles, light commercialvehicles (LCV) and passenger cars. Good auto salesnumbers are also a thrust to the auto components

manufacturers.

Segment Jun08 Jun09 %

change Passenger vehicles 129,536 140,243 8.29

Two

wheelers 601,941 706,937 17.44Threewheelers 29,804 33,727 13.17

Commercial vehicles 40,324 36,193 12.51Total 801,605 917,100 14.26

Budget Measures

Reduction in excise duties in select segment ofautomobiles

Fringe benefit tax (FBT) abolished.Rate of minimum alternate tax (MAT) on book profits

has been increased from 10% to 15%, but with aprovision of carrying forward the tax credit on MAT toten years from the current seven years.

Higher allocation towards defense and agriculturalcredit



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A weighted deduction of 150% for expenditure relatingto inhouse research and development will be extended

Budget Impact

Higher defence and agri credit allocation will encouragenew vehicle buying which in turn will benefit the industryplayers.Increased thrust on road infrastructure is a positive for

all the automobile manufacturers especially passengervehicles and CVs. This in turn will drive demand for autocomponents.

As the Indian auto ancillary industry becomes moresophisticated, weighted deduction on R&D will furtherincentivize players to spend more on R&D.

Key Points

Supply:Low for high technology products. Unorganized

sector dominates the domestic component market due toexcise benefits. Generally, excess supply persists.

Demand:Linked to automobile demand. Export demandis linked to the increasing acceptance towardsoutsourcing.

Barriers to entry: Capital, technology, OEM (originalequipment manufacturers ) relationships, customerservice, distribution network to meet replacementdemand.



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Bargaining power of suppliers:Low with OEMs.Relatively high in the replacement market

Bargaining power of customers: Companies operating

in the export market face competition at a global level.At the domestic level, market structure is fragmented fora large number of ancillary products. Most companiesadopt low cost and differentiation strategies. In someproducts (like batteries), only two or three companiescontrol over 80% of the market.

Competition: Will intensify, as global players will enterthe market leading to consolidation. Dereservation of

SSI will result in access to capital and technology.

Need for innovation

The competitiveness in the sector will largely depend on thecapacity of the industries to innovate and upgrade. Theindustry will also benefit if it has strong domesticcompetition, home based suppliers and demanding localcustomers. There is no denying the fact that the factors likelabour cost, duties, interest rate and economies of scale arethe most important determinants of competitiveness. Butproductivity is the prime determinant of the competitivenessand also impacts the national per capita income. The globally

successful OEMs and auto makers will ultimately make their



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base in places which are high on productivity factor andwhere essential competitive advantages of theenterprise canbe created and sustained. It would also involve core products

and process technology creation apart from maintainingproductive human resource and reward for advanced skills.The OEMs also look for the policies of the state whichstimulates innovations in new technologies.

Enhancement of share of auto component in

global tradeThe global auto component industry is estimated to be USD1.2 trillion in value and is likely to increase to USD 1.7trillion by 2015 as per ACMA. Sourcing from low costcountries is likely to increase from USD 65 billion in 2002 toUSD 375 billion by 2015. Although Indias exports are stillsmall (USD 1.8 Billion in 2005-06), it could leverage this off

shoring trend and the quality of its supply base to builddominant top two position in auto component exports fromlow cost countries by 2015. A position in the top two wouldenable India to achieve export of USD 20-25 billion by 2015.This would increase Indias share of world auto componenttrade from 0.9 percent in 2005-06 (Provisional) to 2.0-2.5percent by 2015, inclusive of domestic consumption. Such a

high growth in the Auto component Sector is expected to leadto an additional 750,000 directjobs in its sector alongwith indirect employment of 1.8 millionpeople over the next 10 years. In addition to creatingincremental employment of about 2.5 million people in directand indirect jobs, it is also expected to result in incrementalrevenue of USD 3.8 billion to the exchequer. Investments inthis sector would also grow by USD 15 billion from thecurrent level of USD 3.1 billion.



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National Automotive Testing and R&D

Infrastructure Project (NATRIP)

The most critical intervention of the Government thus far inthe automotive sector has come in the form of an ambitiousproject on setting up world-class automotive testing and R&Dinfrastructure in the country to deepen manufacturing,encourage localized R&D, boost exports, converge Indias

unparalleled strengths in IT and electronics with automotiveengineering sectors to firmly place India in US$ 6 trillionglobal automotive business. NATRIP aims at facilitatingintroduction of world-class automotive safety, emission andperformance standards in India and also to ensure seamlessintegration of Indian automotive industry with the globalindustry. The project aims at addressing oneof the most critical handicaps in the overall growth of

automotive industry today, i.e. major shortfall of testing andpre-competitive common R&D infrastructure.

Conclusions

The survey shows that there is a huge performance gap

between the best supply chain practitioners and the rest.

As an overall strategy, they outsource their non-corerequirements and have integrated their SCM processes

In marketing they do customer service measurement and

demand planning

When it comes to procurement they do vendor rating and

certify their vendors

As far as manufacturing is considered they have

preventive maintenance and product layout



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While In quality they have quality improvement tools

and total quality management

Inventory control and outsourcing of logistics services

are followed in LogisticsIn Information technology the best in class companies

use ERP and CAD / CAM.

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