China India Supplier Comparison

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Comparative Assessment of Indian andChinese Auto-component Landscape

August, 2007


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A.. Kearney

I

ncreasing margin pressure on automotive OEMs in developed markets is compelling

them to source components from Low Cost Countries to reduce costs. This, coupled

with the growing domestic automotive demand, is expected to fuel the growth of the

Indian and Chinese autocomponent industries. Structurally, with presence of a large

number of very small players, the autocomponent industry in both these countries is

fragmented. While global tier-1 suppliers have limited manufacturing footprint in these

countries, several of them have technology tie-ups with large local players. A study of

the brakes segment shows that top manufacturers in both countries, while local, have

the quality capabilities to supply to global customers. Both countries have signifcant cost

advantage over western counterparts; they will however need to invest in R&D to emerge

as world class suppliers.

Background:Te automotive markets in China and India have witnessedhealthy growth rates over the last ew years. While sales opassenger vehicles in China have grown at a healthy rate oover 40% CAGR rom 2001 to 2006, India has grown at14% CAGR during the same period.

Signicantly, these markets have recordedphenomenal growth in passenger vehicle production andthis trend is expected to continue. As shown in Figure 1,

Chinese passenger vehicle production is expected to growrom 5.1 million units in 2007 to 9 million units by 2011(15% CAGR), while production in India is expected togrow rom 1.5 million units to 2.3 million (11% CAGR)during the same period.

Te attractive growth rates in the Indian andChinese markets, especially in the context o stagnant growthin developed markets, have attracted large scale investments

rom leading global OEMs and auto component companiesacross the entire value chain spectrum (rom product designto integration and delivery). Tese investments along withinvestments by local manuacturers are leading to rapidramp up o capabilities in terms o product quality andtechnological sophistication.

As North American and European OEMsincreasingly ace revenue and protability pressures, theyhave turned to sourcing components rom suppliers rom low

cost countries. Over the last ve years, as shown in Figure 2,US autocomponent imports rom China grew rom US$1.8billion to US$5.4 billion (CAGR o 32.4%); while importsrom India grew rom US$179 million to US$463 million(CAGR o 26.8%). Te rising interest rom OEMs andier-1s in developed markets, is thus driving several suppliersin China and India to think beyond their domestic markets,and strive to emerge as global suppliers.

Figure 1: Passenger vehicle production and projected growth in China and India (MM Units)

0

3

6

9

FY'11FY'07FY'06FY'05FY'04FY'03

PV Production India

(Million units)

2.2 2.53.1

4.25.1

9.0

0

2

4

6

8

10

FY'11FY'07FY'06FY'05FY'04FY'03

PV Production China

(Million units)

0.7 1.01.2 1.3

1.52.3

2003-2007

CAGR=23%

2007-2011

CAGR=15%

2007-2011

CAGR=11%

2003-2007

CAGR=21%


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A.. Kearney

0

5000

10000

15000

20000

25000

201020052000

3,340

3,965625

9,430

11,300

1,87015,890

23,969

8,079

Indian Auto Components Sales (US$, Million)

Exports

CAGR

(05-10P)

34%

Domestic 11%CAGR: 23%

CAGR: 16%

0

20000

40000

60000

80000

100000

120000

201020052000

7,408

8,6961,288

39,408

50,245

10,837 86,156

115,593

29,437

China Auto Components Sales (US$, Million)

Exports

CAGR

(05-10P)

22%

Domestic 17%

CAGR: 18%

CAGR: 42%

Objective and Scope of study: With the Indian and Chinese autocomponent industriesassuming increasing global signicance, do they have thecapabilities to capitalize on these opportunities? Have thesuppliers in these countries acquired the requisite capabilitiesin product design, manuacturing, quality and delivery?Are suppliers in both countries capable o only supplyingcomponents, or do they have the potential to graduateto assemblies and modules? What are the competitive

advantages o companies in these two countries in the autocomponent space? What is the relative competitiveness ocompanies in these two countries?

o answer these questions, A.. Kearneyconducted an assessment o the autocomponent supplierbase in India and China, to compare their emergingstructure o the industry, supplier capabilities andrelative competitiveness. For the purpose o the study,we have assessed both macro as well as micro dimensionso the industry.

For the macro analysis, we have assessed the size, growth,ownership proles and ragmentation o the industry, aswell as government policies. For the micro analysis, we have

assessed the brakes segment, which is characterized by highengineering value addition, assembly-level integration andsystem design requirements. We have primarily comparedthe cost structures, quality and product developmentcapabilities o suppliers in both the countries.

Macro AnalysisOverview of the autocomponent industry in China andIndia

Market size and growthWith over US$50 billion in revenues in 2005, the size othe Chinese autocomponent industry dwars the size o theIndian industry valued at US$11.3 billion. As shown inFigure 3, Chinas auto component sales has seen explosivegrowth o 42% CAGR over the last ve years while theIndian auto component sales has witnessed a comparativelysedate growth o 23%. However, going orward, the growthin the Chinese market is expected to signicantly slow downalthough China will still continue to slightly outpace Indiain overall growth (18% vs. 16%). Tis slowdown in growth

can be attributed to three key actors:Sales o passenger vehicles is expected to cool down toaround 14% in China going orward (partly driven bythe government to cool the economy)Global auto companies are beginning to invest in andsource rom other LCCs as a natural hedge to theircurrent overexposure in ChinaCompetitors rom other low cost countries like Indiathat ramp up in size and scale and become crediblealternatives

1.

2.

3.

0

1000

2000

3000

4000

5000

6000

200520032001

1,758

179

1,937

2,788

234

3,022

5,871

5,408

463India

CAGR

China

26.8%

32.4%

Figure 2: US auto component imports rom China and India(US$, MM)

Figure 3: Indian and Chinese auto component sales (US$, MM)


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Supplier landscapeTe automotive landscape in China and India are similar tothe extent that both are still highly ragmented with a large

number o small players. As shown in Figure 4, while only12.4% (1,484 o nearly 12,000) o the auto componentcompanies have revenues greater than US$1 MM in China,the percentage is lower at 8.9% (443 o nearly 5,000) inIndia.

Relatively, ragmentation is higher in Chineseautocomponent sector vis--vis India. op 10 suppliers inIndia accounted or 31% o the market while in Chinathey accounted or only 18% o the market. Tis is dueto a scattered geographical OEM ootprint and greaterragmentation in the OEM market in China. In India,

op 2 passenger car OEMs account or over 60% share othe market, while in China, they account or only 22% othe market.

Government policyGovernment regulations in both countries have playeda signicant role in driving growth o the local supplierbase. Import duties on vehicles and components in bothcountries were initially maintained at very high levels,encouraging local production. However both governmentshave progressively reduced import duties (10% in China

- down rom 50% pre-WO and 12.8% in India - downrom 44% in 2001). Both the governments have also beenactively encouraging oreign investments in the automotiveand autocomponent sectors. A signicant part o Chinasrecent automotive growth has been driven by its entry intothe WO in 2001, which has resulted in the entry o several

global OEMs and tier-1 suppliers into the Chinese market.Over US$6.3 billion o oreign investment in the automotivesector has entered China between 2002-04, resulting in

signicant investments in capacities and production.Te easing o regulatory rameworks in both the

countries has leveled the playing eld and there is nodiscernable diference in government policy between Indiaand China in most major areas like oreign ownership,localization, import tarifs and incentives or R&D.

Figure 4: Market share and auto component supplier turnover

India China

Foreignownership andentry barriers

No restrictions on oreign ownership or minimum size oinvestment

Automatic approval o 100% FDI or automobiles andcomponents

No restrictions on oreign ownership or automotive suppliersMinimum investment required or establishing a acility

Minimum US$190 MM or engine productionMinimum US$64 MM or R&D center

Auto components FDI must be approved by PRC commercialdepartment

Domestic sourc-ing/ localization

No government regulations mandating localization No government regulations mandating localization, but parts localizationencouraged through tax incentives

Import duties High import duties on CBUs (60%) restricts signicant importsand promotes local productionNo special concessions extended or SKDs (import duty @60%)Import/ Customs duties on Autocomponents have allen to12.8% in FY07 (From ~44% in FY01)No import quotas exist

25% import tarifs on vehicles (down rom 70-80% pre WO)25% import tarifs on SKD10% import tarifs on vehicle components (down rom 15-50% pre

WO)Import quotas phased out

R&D Fiscal and nancial incentives to promote R&D (150% taxrelie on R&D), planning to be extended or another ten yearsEuro III emission norms implemented nationwide by April2005

Fiscal and nancial incentives to promote R&D (150% income tax relieon R&D expense, may be carried orward or 5 years)Environment protection and energy saving technology

Adoption o Euro III in 2007 and Euro IV beore 2010

Others VA has recently been introduced replacing multiple state taxeson raw materials and sales Import duty is exempted or production machinery o auto engine,

assemblies, and auto electronics productsVA ax reund or product export (13% o COGS)Bonded warehouses are not allowed to store imported cars since 2005

Figure 5: Comparison o government regulations

Cumulative market share(Top 10 autocomponent suppliers)

No. of Auto Component Suppliers with Turnover >US$1 MN

ChinaIndia

31%

18%

ChinaIndia

443

1,484

Note: (1) Market share based on share of organized sector revenues; for India, 498 suppliers registeredwith ACMA have been considered as part of the organized sector; China market share is based on shareof Top 10 suppliers in revenues of all suppliers registered with China Auto Association and withturnover greater than US$1 MM


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Micro Analysis Brakes SegmentTe supply base in the brakes segment in both countries wasproled along two dimensions:

Supplier landscape assessmentSupplier capability assessment

Supplier landscape assessmentTe brakes segment is characterized by high engineeringvalue addition, and typically commands higher margins.Globally most large brake suppliers are enhancing theirsystem design capabilities (complete brake assemblies toront corner modules) to gain a competitive advantagein this segment. As suppliers in low cost countries gainmaturity in this segment, North American and European

OEMs are increasingly looking at opportunities to sourcebrake components and some sub-assemblies rom LCCsuppliers.

Te sophistication o the brake market in Indiais slowly catching up with that o developed markets asindicated by the increasing penetration o Anti-lock BrakingSystems (ABS) units in passenger vehicles. ElectronicStability Control (ESC) is expected to be introduced inmass volume cars in a ew years. Chinese brake market isalso witnessing greater penetration o ABS and ESC.

Te brakes segment is typically associated with high

barriers to entry restricting the market to large organizedplayers. Due to the high saety and hence product liabilityconcerns associated with brakes, capital requirement orsetting up testing and validation acilities or completebrake systems is high. Continuous innovation in the brakesystem market with introduction o new products like ABS,ESP etc. requires a high level o technical sophistication,which smaller players do not have.

Chinese automotive brake and brake componentsmarket has more than double the number o companiesvis--vis India with revenues greater than US$1 MM. Te

Indian market is more consolidated as indicated by the actthat the top 5 companies in India account or 80% o themarket, whereas in China, op 12 companies account or80% o the market as shown in Figure 7.

Te Indian brake industry is a near-oligopoly with the top two companies Brakes India and RobertBosch Chassis Systems dominating the complete brakesystem market, accounting or more than 60% o themarket. Moreover, three o the top 5 Indian brake andbrake component manuacturers are controlled by a singlepromoter amily the VS group.

In revenue terms, the size o the top 5 companiesare comparable in both the countries. It is also interesting tonote that although China has a higher number o companies

having revenues greater than US$1MM, the top two Indiancompanies are larger than their Chinese counterparts asshown in Figure 8.

Note: (1) FY04 data or Brakes India Ltd. Revenues rom brakes division ~US$119 MM

Figure 6: Number o players in brakes segment

Figure 7: Level o consolidation among brake companies

Indian brake and brakecomponent manufacturer

Chinese brake and brakecomponent manufacturer

Company Revenue(2005)US$ MM

Company Revenue(2005)US$ MM

Brakes IndiaLtd(1)

191Yatai Brakes

100

Robert BoschIndia Ltd.

114Hongyu Brakes

88

SundaramClayton Ltd.

84Mando Brakes

83

Rane BrakeLinings Ltd.

42Wanxiang

45

Sundaram BrakeLinings Ltd. 36

ASIMCO37

Figure 8: Key Indian and Chinese brake manuacturers

Note: (1) Only Organized sector brake suppliers have been considered (In case o India this reers to suppliers who are registered with ACMA)

Note: (1) Only Organized sector brake suppliers have been considered (In case o India this reers to suppliers who are registered with ACMA)

ChinaIndia

5

12

No. of brake and brake component manufacturerwhich account for ~80% of the market

ChinaIndia

15

38

No. of brake and brake component manufacturerswith revenues >US$1 MM


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Most Global OEMs have still not penetrated enough in these two large markets except Robert Bosch in India and Mandobrakes in China. Most o the top Indian and Chinese companies are controlled by local players. Historically, many othe local suppliers have entered into technical collaborations and JVs with global ier I suppliers as a means to acquire

technology and basic product design capabilities.

Figure 9: Ownership profle o brake and brake component manuacturers

We also notice that most o the global MNCs have their presence in both the countries only through technical tie-ups andnot through a large manuacturing presence. Even the companies that have manuacturing subsidiaries in these countriesare not large in scale, except or Bosch in India.

Figure 10: Presence o global MNCs in India and China

Indian brake and brake componentmanufacturer

Chinese brake and brake componentmanufacturer

CompanyOwnership

(Technical Collaboration)Company

Ownership(Technical Collaboration)

Brakes India Ltd. Indian amily controlled (Technical allianceswith several oreign Tier 1s (TRW, Tokicoltd, Akebono Brake Ind. Co. Ltd, MeritorAuto))

Yatai Brakes Chinese owned; Limited MNC technicalcollaboration

Robert Bosch IndiaLtd.

Bosch Subsidiary (80% owned by Bosch) Hongyu Brakes Chinese owned; also has JV subsidiary withTRW; (15% product technology licensedrom Tokico and TRW; 85% producttechnology developed by Hongyu R&Dcenter (mainly reverse engineering))

Sundaram ClaytonLtd.

Indian owned (Technical and fnancialalliance with WABCO, UK)

Mando Brakes Foreign enterprise (Korean parent company)

Rane Brake LiningsLtd.

Indian owned (Technical collaboration withNisshinbo Industries, Japan)

Wanxiang Chinese owned (Acquired technology romsubsidiary JVs, Bosch, and Korean supplier)

Sundaram BrakeLinings Ltd.

Indian owned Asimo Chinese owned (Licenses technology romBosch)

Global BrakeManufacturer

India China

Bosch Subsidiary - Robert Bosch Chassis Systems

(Earlier Kalyani Brakes India).

Subsidiary - Bosch Automotive Products (Suzhou) Co. Ltd.

TRW echnical collaboration with Brakes India Ltd. Wholly owned subsidiary - RW Automotive Components(Shanghai) Co., Ltd. (ACS)

Continental echnical Collaboration with Mando andAnand Group JV (Mando Brakes India)

JV - Shanghai Automotive Brake Actuation Co. Ltd. (SABA)

Aisin Seiki Not Present in the Brakes Segment in India Subsidiary - Hosei (Fu Zhou) Brake Industry Co. Ltd.ADVICS (global brake/ brake parts supplier with a 40% AisinSeiki stake) has 2 subsidiaries in China

Wabco echnical collaboration with Sundram Clayaton Subsidiary - WABCO Jinan

Delphi Subsidiary Delphi India Subsidiary H Delphi Dynamics & Propulsion

Meritor echnical Collaboration with Brakes India JV with FAW group in China

Tokico echnical Collaboration with Brakes India echnical tie up with Hongyu; also present directly through asubsidiary

Akebono echnical Collaboration with Brakes India Subsidiaries in Guangzhou and Suzhou


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Comparison o export o brake and brake products romboth these countries reveals a sizable lead or China in termso export turnover. Currently China is exporting nearly 10

times more brake and brake component parts globally ascompared to India. China has consolidated its leadershipposition in the export market due to its manuacturing headstart. Exports will continue to increase steadily in comingyears as more Chinese suppliers, driven by intensiyingdomestic price competition, develop or expand theiroverseas customer base. Exports rom India have grown butare still behind the Chinese counterparts.

Figure 11: Comparison o total exports o automotive brakesand brake components (US$ MM)

Supplier capability assessmentValue chain positioningier-1 suppliers in India and China are largely componentmanuacturers that have gained capabilities to assemblecomplete brake systems typically through JVs and technicalcollaborations. No supplier has yet graduated to assemblyo complete modules. Brake assemblers in both countriesare similar in that both have a large portion o indigenousmanuacturing content. In addition, these companieshave developed strong engineering, product design andintegration capabilities.

Figure 12: Value chain positioning o Indian and Chinesemanuacturers

While the product development capabilities osuppliers in India and China are still evolving, a comparisono the R&D spend indicates that a majority o the players

in both markets spend less than 1-1.5% o revenues onR&D. Some o the top suppliers in China are spendingon par with global standards at 2.5-3% o revenue while

their large Indian counterparts spends are slightly lowerat 1.5-2% o revenue. Still a majority o the Indian andChinese companies seem to be part-to-print suppliers andhave not graduated to developing products on their own.

Quality capabilitiesAs shown in Figure 13, majority o suppliers in both countriesare well outside the global quality benchmarks o less than50 ppm. Relatively Indian ier-1 suppliers are better withdeects in the range o 50-200 ppm vis-a-vis Chinese tier-1suppliers who have much higher deects variation ranging

rom 10-350 ppm. Tis variation is attributable to the actthat some global MNCs have been able to exceed globalquality standards by producing brake parts or ~10 ppm inChina. Having said that, some leading Indian and Chinesebrake suppliers currently do meet global standards onquality. Most o the op 5 Indian and Chinese suppliers,have a quality level o


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Cost competitiveness Assessment o key cost drivers indicate a marginal costadvantage or China vis--vis India. Te key cost drivers

include wage rates, steel prices, power tarifs and taxes. While India and China are comparable on raw

material costs, wage rates in China are 12% - 35% cheaper(depending on skill level) than India. In addition, Chinesesuppliers also enjoy a higher subsidy on power, adding to

their cost advantage.In order to estimate the overall impact o the above

actors on unit cost, we have compared the Pre-VA price to

OEM o one ront disc-brake module or B-segment (smallhatchback) cars between the two countries. Our studyshows that the benets enjoyed by the Chinese supplierstranslate into an ~ 8% overall cost advantage (Pre-VA) orthem vis--vis Indian players.

Figure 14: Comparison o cost drivers between India and China

India China

Steel price per kg Average steel price: ~US$ 0.4-0.6/kgCast iron: US$ 0.37-0.38/kg

Average steel price: US$ 0.40-0.52/kgNodular cast iron: US$ 0.30-0.40/kg

Labour cost/ hrSkilled labour

~US$ 2.4/hr US$ 2.10/hr(1)

Labour cost/ hrunskilled labour

~US$ 1.3/hr US$ 0.85/hr(1)

Power tarif per KWh ~US$ 0.09-0.1/KWh Industry electricity price: US$ 0.05-0.085/kWh

Indirect tax rate Indirect tax/VA: 12.5% VA: 17%

Other overheads (%)

o revenues

~7-8%(2) ~7-8%(2)

Notes: (1) Based on monthly wages + ringe benefts, assume 22 working days per month, 8 hours/day, overtime cost not included(2) Based on analysis o fnancial statements o Indian and Chinese brake and brake component systems suppl iers; includes SG&A and other overheads (Excluding depreciation

and interest)

Figure 15: Pre-VAT prices to OEMs India vs China (US$/ Front Disc-brake unit)

Note: (1) Caliper Assembly consists o Caliper Piston, Sealing Ring, Sliding pin, Piston boot, caliper housing, brake pads

ChinaIndia

14.2

5.5

US$ 19.7

12.4

5.8

US$ 18.2

Brake Disc

Caliper Assembly(1)


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Conclusion:

Increasing competition due to stagnant automotive growth in advanced markets has resulted in OEMs

coming under margin pressure. Tis is resulting in OEMs orcing component manuacturers toundertake progressive cost reduction, continuous upgradation in quality and more importantly setupmanuacturing base in Low Cost Countries (LCC) to cut costs.

Both Indian and Chinese autocomponent industries are expected to grow robustly to reachUS$24 billion and US$116 billion respectively by 2010, driven by the robust growth in the domesticautomotive markets and healthy exports growth. Enabling government regulations have played asignicant role in driving growth o local suppliers in both countries. Tey had been shielded withhigh import duties in the past which have been progressively reduced to 10% in China and 12.8% inIndia.

A supplier landscape assessment o the brake and brake component segment indicates a relatively higherlevel o ragmentation in China vis--vis India shown by the act that the op 5 companies account or80% o the market in India when compared to op 12 companies in China. However, a comparisono the top 5 companies in both countries indicate a similarity in their sizes. Also, global MNCs havelimited presence through manuacturing acilities in these two markets but most domestic players havetechnical collaboration with global majors.

Supplier capabilities indicate that Chinese ier-1s show a higher variance on quality when compared

to Indian ier-1s. Tis variance is attributable to the act that some global MNCs have been able toexceed quality standards by producing brake parts or less than ~10ppm in China. However, we havealso seen that top domestic players in both countries are on par with the best in the world and have thecapabilities to supply to global OEMs today.

On the technology ront, we nd that the supply base in both countries lack the ull product designand development capabilities. Most suppliers in both countries are part to print manuacturers, anddepend heavily on their oreign partners or product development. Investment in R&D is imperativeor them to compete globally and emerge as important bases or of-shore design and engineering

(D&E) in the uture.

From a cost perspective, while both China and India have distinct cost advantage over their westerncounterparts, Chinese suppliers are nearly 10% less expensive than Indian companies on comparablebrake products. We believe that this price diferential is due to lower wage rates and higher subsidy onpower tarif in China.

Based on our assessment o the supplier base in the brakes segment, we believe that Indian and Chinesecomponent suppliers have the potential to emerge as global suppliers. However, they should increasetheir consistency in quality and invest in R&D to live up to this potential, and truly emerge as world

class suppliers.


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A.. Kearney

A.T. Kearney is a global strategic management consulting rm known for

helping clients gain lasting results through a unique combination of strategic

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provide management advice concerning issues on the CEOs agenda. Today,

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