Is auto component industry ready to be world class? The Indian auto component industry is expecting a positive growth in the next financial year. However, there are certain bottlenecks that should be removed to make the industry world class.
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India's ratings and research firm, Fitch Group, has recently revised its outlook on the domestic automobile industry to "stable" from "stable to negative" for 2015-16 financial year. It is estimated that there will a significant spike in the passenger vehicle segment. It is likely to have a year-on-year growth of 2-5 per cent in this fiscal. Similarly, it is projected that the growth in cars and utility vehicle segments will increase by 3-5 per cent and 4-7 per cent respectively.
The rating agency expects that the growth in the commercial vehicle segment for fiscal year 2016 will be driven by medium and heavy commercial vehicle segment, which is expected to grow 13-17 per cent year-on-year. Above-mentioned figures indicate that there will be growth in the automobile industry in the next fiscal, hence pushing the demand for auto component or parts in the near future. Currently, 90 percent of the auto component industry comprises the small and medium enterprises (SMEs).
Fitch observes that the growth can be on account of greater recovery in industrial activity. India's industrial growth is showing a positive outlook currently. According to the government's latest data, the production in mines, utilities and factories rebounded much more than expected in last November, posting annual growth of 3.8 per cent. Although, the growth slowed a little to 1.7 per cent in December but still the pressure is low.
According to the Automotive Component Manufacturing Association (ACMA), the auto component industry is showing early signs of recovery and is confident that the industry will have positive growth this year. The concern for the industry is the burgeoning interest rates. Sudden reduction in the RBI's repo rate by 25 basis points and Statutory Lending Rates (SLR) by 50 basis points give a clear indication to the banking sector to make liquidity and funds available to spur industrial growth further. The industry is heavily dependent on banking loan for performing manufacturing activity.
Additionally, the sluggish demand condition in the western markets, especially in the Europe, is a cause of major concern. In addition, the weakening of Euro against the US dollar is another challenge that will significantly affect India's exports to the eurozone in future.
"Currently, the export of domestic auto components to European nations and the US are experiencing an unprecedented slowdown. However, the export market for auto components will regain strong traction once the demand from Europe and the US gain momentum. The current state of the industry suggests that patterns in investment and purchasing habits need to change in order to kick-start advancement," says Udit Sheth, Executive Director, Setco Automotive Ltd.
As per ACMA, the auto component sector recorded around 17 per cent growth in exports during the first six months of financial year 2014-15, scaling $5.68 billion. Last year, the auto component industry clocked a turnover of $35 billion with exports at $10.2 billion.
Indian auto components are exported to more than 160 countries and have been growing at 15 per cent per annum over the past six years and currently account for 29 per cent of overall auto component industry's turnover. Moreover, the aftermarket in 2013-14 grew by 12 per cent (Rs 35,603 crore from Rs 31,788 crore in the previous fiscal).
Commenting on the performance of the auto component industry, Ramesh Suri, President, ACMA, says, "We are concerned about the performance of the commercial vehicle industry. Although there has been some pickup in the medium and heavy commercial vehicle segment, things are slow. I hope that with reforms in the infrastructure sector, coal and mining sector, and with growth in the construction and housing industry, the commercial vehicle sector will also pick up soon."
He adds, "There is a need to create favourable and stable policy environment that will expedite industrial revival and boost growth in domestic auto sector. We at ACMA aspire to cross $100 billion in turnover, grow our exports to $35-40 billion and build revenues of $20-22 billion through our overseas assets by 2020."
Sheth says, "There are some significant difficulties that the auto component industry have been facing since 2012, and we hope that the potential interest rate reduction and incentives will aid the development and financial growth of the industry. The industry has requested the government to restore excise duty on auto parts to 10 per cent. With the excise duty concession on auto components expiring on 31 December 2014, the tax rate has gone up again to 12 per cent."
"Moreover, we endeavour to continue to produce premium quality Lipe brand clutches for commercial vehicles throughout India, and it is our priority to ensure that the commercial vehicle industry has a significant growth throughout 2015 fiscal. We are confident that the 2016 fiscal year will provide ample opportunities for innovation and financial growth," he adds.
The current instability in rupee value is hindering the growth of the industry. The fluctuating currency against the greenback has been a major concern for the industry. "We are susceptible to volatility. Setco has witnessed a healthy recovery in business performance since 2009-10, and our current BB/Stable rating reflects Setco's stable yet improving operating capabilities and its established presence in the domestic clutch component business," says Sheth.
In fact, the recent trend in the Euro is a matter of concern as the industry believes that it will impact their profit margins and growth tremendously. According to ACMA's industry performance review of 2013-14 fiscal, Europe accounted for 38 per cent of exports followed by Asia at 25 per cent and North America at 21 per cent.
Exports to Europe increased by 14.5 per cent over the previous fiscal, while exports to Latin America and Asia registered the growth of 16.5 per cent and 5.4 per cent respectively. The key export items include engine parts, transmission parts, brake system and turbochargers.
However, weakening of Euro will make imports cheaper for India. The imports of auto components grew by 3.6 per cent to $12.8 billion in 2013-14. Asia and Europe contributed to 57 per cent and 34 per cent of the imports respectively. Within Asia, China, Japan, South Korea and Thailand contributed to maximum imports; while from Europe, the key contributors were Germany, France, the UK, Italy and Spain.
The government's dream to build world-class manufacturing industry in the country is also compelling the industry to focus on "Zero Effect and Zero Defect" quality of products. Industry expects the government to provide an environment conducive for growth and should revive the investment climate. To align with the government, the industry is taking potential initiatives.
Suri says, "For the last 25 years, the ACMA Centre of Technology (ACT) continues to make path-breaking interventions through its cluster programmes to bring process transformation and global best practices to its members. Till date, we have helped over 400 plants across the country to become world-class and environmentally sustainable."
There is a constant effort to achieve zero defect, zero waste and zero rejections through initiatives like smart design, and by applying various Total Productive Maintenance and Total Quality Management techniques.
Ravindra Nath, Chairman and Managing Director, National Small Industries Corporation, says, "The zero-effect quality means the manufactured products should not be creating pollution in the environment. And, zero defect means when we export, the products should not be of defective quality. To manufacture such high-quality products, the industry should be able to upgrade the technology. The technology should not create pollution, and they should be precision-oriented. In fact, the exact specification that are required by the buyers whether in India or abroad, the suppliers and manufacturers should be able to produce it. In fact, SMEs should focus on low-cost manufacturing, lean manufacturing procedures, producing zero waste, focus on automation, and drive innovation."
The industry needs to adopt a strategic and holistic approach to become world class. "It is of our utmost priority to facilitate the production of zero defect auto component products in India. Moreover, our role in developing new products to suit the dynamic and growing consumer requirements is at the forefront of our service agenda," says Sheth.
"The Indian auto components industry is well-suited to face international competition.Additionally, we must capitalise on reputable supplies so as to keep pace with the increasing demand and support the growth of auto component exports from India," concludes Sheth.