Auto OEMs ditch China for India

There is a “plus-one” trend that India can ride to become an A-lister in the global auto component industry.It started when several original equipment manufacturers (OEMs) in the auto space started considering moving their component sourcing operations — or at least a part of it — out of China, long considered the world’s factory. The decision comes as the US and other countries have accused China of manipulating its currency and making it uncompetitive for them. In 2018, the US imposed tariff and trade barriers on goods from the East Asian giant. Anti-China sentiment reached a peak when the novel coronavirus was traced to a market there. These and other simmering geopolitical issues have encouraged OEMs — which have been complaining of the rising cost of doing business in the country — to look at other options. This drive to de-risk the global supply chain from events like the coronavirus gives India an opportunity to become a major manufacturing hub. While several southeast Asian countries are looking to attract these companies, India provides an unparalleled opportunity to auto OEMs, given that it already has an established auto sector. We should grab the chance during this global realignment, experts say.80190608China’s auto-parts industry is still gargantuan at $550 billion, against India’s $50 billion. But two recent trends suggest India can narrow this gap if the right initiatives are taken quickly. First, global automotive players and tier-1 suppliers are increasingly talking about the “China Plus One” model — a strategy to diversify geographically. Second, and more significantly, at least 30 international purchasing offices — offshore outfits that procure parts — have now become active in India, from 8-10 earlier.The international purchasing offices (IPO) are witnessing a significant increase in inquiries, says Praveen Katte, directorglobal purchasing, India BCC & Australia, Meritor. Some analysts say there is a 40-50% increase in inquiries. As part of their de-risking strategy, these IPOs have set larger targets for sourcing from India. This indicates they expect a geographical diversification in the global supply chain hub, and India is seen as a favourable destination.Several companies ET Magazine spoke to confirmed they were moving their critical and aftermarket components businesses from China to India. At least two major US-based tier-1 suppliers said they have moved 35-40% of their sourcing to India in the past six months. These companies requested anonymity as they feared a backlash in China if their strategy became public.80190612Analysts say more firms want to move. Kavan Mukhtyar, partner and leader-automotive at PwC, says the IPOs of BMW, Ford, Daimler, Cummins, Bosch, TRW, Meritor and others are keen to de-risk their supplies, especially of electronic components, from China. The offices of Cummins or Daimler could source Rs 1,500-2,000 crore worth of parts from India, experts estimate. They reiterate India must convert this short-term opportunity into a long-term one. The government will have to move aggressively, they add.The government has been encouraging. Prime Minister Narendra Modi has asked Indian companies to be self-reliant and not depend on imports. Recently, MSME Minister Nitin Gadkari asked the domestic industry to end its dependence on electric vehicle components from China. The government also introduced a production-linked incentive (PLI) scheme to encourage manufacturing. Automobiles and auto components received a lion’s share of about Rs 57,000 crore. Vinay Raghunath, partner and automotive sector leader, EY India, says, “Indian auto component suppliers have a great opportunity to leverage the PLI scheme and complement it with their proven competency of automotive parts manufacturing.” Government sources say they will announce PLI’s details soon. This has made people like Anurang Jain, MD of auto component maker Endurance Technologies — a large exporter of aluminium castings, transmission and shock absorbers — wait for the fineprint to get clarity on incentives. “But we are in talks to increase our exports to tier-1 companies,” Jain adds.Cummins says India-based companies are seeing a pick up in orders. Sowmya Chaturvedi, head of supply chain at the engine manufacturer, says the company will gain 1-2% more revenue due to a supply chain arbitrage and lower inventory carrying cost. “While there is a major demand for cylinder heads and blocks, we are still dependent on China for niche products like aluminium pressure die casting parts,” she says.80190615India has to cover a lot of ground to be competitive, especially as some basic issues still have not been sorted out, say stakeholders. Rising commodity prices and other input costs are areas of concern, they say, also pointing to the recent challenges on managing the global supply chain driven by ocean freight constraints. Most industrialists also fret about the high cost of logistics and capital. Ashok Taneja, MD of Shriram Pistons and Rings, says multiple statutory compliances make India less competitive. Only the government can address this, he says. In a bid to address specific issues and accelerate component manufacturing, the government had in July formalised a Steering Committee for Advancing Local Value-Add and Exports (SCALE). The committee — conceptualised immediately after the lockdown started in March, and headed by Mahindra & Mahindra’s MD and CEO Pawan Goenka — is discussing with stakeholders ways to ease overregulation, remove embedded taxes and reduce logistic cost by 30%. Other focus areas are reducing power tariff, having foreign trade agreements, encouraging the industry to build scale and invest in technology and research and development, and skill development, Goenka says. “We need to move beyond labour arbitrage if India is to become globally competitive. The industry has to make a longterm commitment and take a bit of risk in investment decisions. The industry is not investing enough on R&D and intellectual property rights,” he says.80190623Global aftermarket requirements provide enough opportunity but the product range from India is not wide enough, say analysts. Katte of Meritor, a US-based supplier for the commercial vehicle and industrial markets, agrees. “The R&D and engineering capability of Indian auto components manufacturers needs focus and requires improvement on innovation and technology adoption,” he says.While SCALE is examining ways to incentivise production, create scale and export more, Goenka emphasises the need to capture the window of opportunity right now. “We can’t afford for that to close. We must be able to make some significant changes quickly in the way we do business,” he adds.On their part, auto component companies such as Wheels India, Lucas TVS, Sundram Fasteners, Rico Auto, Shriram Pistons, Sona Comcast, Endurance Technologies and others have confirmed they were able to increase their exports in the past several months. The leading component players by revenue include Motherson Sumi, Endurance, Varroc, Bosch India, MAHLE Group and Lumax.Even the smaller MSMEs are seeing a distinct movement of orders from OEMs and tier-1 companies to India, says JS Rangar, MD of Stork Rubber. The rubber parts and engine maker, which exports more than 60% of its output, is now looking at expanding capacity in Chennai as OEM orders are rising. But executing these smoothly can be a problem, says Rangar, pointing out that sudden shortages in steel, carbon black and containers are troublesome.80190628A lot of operational issues have to be sorted out before we can take on a country like China, says Sunil Arora, MD of Abilities India Pistons & Rings. Remember, cautions Taneja of Shriram Pistons and Rings, India is not the only option for OEMs and aftermarket buyers in Europe and the US.Vietnam has offered competitive terms to companies implementing the China Plus One strategy. “The government needs to reduce the cost burden in many areas. For instance, logistics and power. The cost of power is higher here than in competing nations. On top of that, companies also have to invest in backup facilities. We will win only if we are competitive in cost and quality,” adds Taneja.Even a partial win would help the automotive component industry, which has had a particularly bad year in FY2020 because of a sluggish economy. It posted its worst numbers — revenues fell 11.7%. Then came the crippling pandemic woes.But it is still optimistic of growth. Vinnie Mehta, director-general of Automotive Component Manufacturers Association (ACMA), says they are aiming at $80 billion component exports in about six years, from $15 billion now. Europe and North America account for the maximum exports at 31% and 30%, respectively.The optimistic sentiment seems to be spread across the sector. “We hope to see doubledigit export growth,” says Arathi Krishna, MD, Sundram Fasteners, part of TVS Group. “We are investing actively to expand our capacities to cater to export markets in various segments.”Sona Comstar, a starter motor manufacturer that mainly caters to the US market, has been increasing capacity for 15 months because of increased activity. “Our two plants will cater more towards the export market,” says Sunjay Kapur, its chairman, and vice-president of ACMA.“We are well-positioned to supply globally and leverage the opportunity.” Wheels India, another TVS company, has seen an increase in orders from Europe and the US. Srivats Ram, MD, says there has been a 20% spike in orders.“We are also developing products for a lot of new customers.” The increased focus on deep localisation and manufacturing schemes will definitely make the sector self-reliant, says Deepak Jain, president of ACMA and MD of Lumax. He expects exports to soon form a larger part of the turnover of companies. But the question is will India be able to capitalise on the opportunity before the window closes.
Read More

Leave a Comment

Your email address will not be published. Required fields are marked *