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Consolidation seen in auto-component sector

The Rs 126-billion Indian automotive component industry is in for a spate of mergers and acquisitions with the top players consolidating their positions.

''In the recent past, there have been quite a few mergers, acquisitions and alliances in the domestic market and the trend is expected to intensify in future,'' said an exhaustive study done by ICRA Limited, one of the country's experienced credit rating agencies.

The Indian components industry produces the entire range of parts required by the domestic automotive industry. While there are close to 400 players in the organised sector and 5,000 players in the unorganised sector, the industry's business is less than one per cent of the global automotive components industry. It is characterised by a low volume and fragmented into various sectors.

However, it is changing and the change is quite rapid, thanks to the entry of the global players in the market. ''Entry of various transnational vehicle manufacturers in India has so far been accompanied by the simultaneous establishment of international manufacturing and procurement practices. With the vehicle makers rationalising their supply chains and improving the logistics of manufacture, a revolution is brewing in the Indian automotive components industry. Already, the signs of a major structural shift in the Indian components industry are evident,'' D N Ghosh, former chairman of the State Bank of India and chairman of ICRA said.

With increasing globalisation, the components industry will get transformed from a low volume fragmented sector into a highly competitive sector with world class technology. This would follow the 'tiersation' that is already evident in the domestic components industry.

A recent pointer to the trend of consolidation is the decision of Sundaram Fasteners to pick up a stake in Aulolec Industries and that of Stanley Electric, Japan to take a controlling stake in Lumax Industries.

Companies, which have the foresight to make the necessary investments and establish collaborations with leading global players, will emerge as the key players in the industry.

At the completion of the shakeout, there would be about 25 component makers with the size, resources and technology to become Tier One suppliers. "Most of the other companies are expected to become Tier-2 and Tier-3 suppliers while their margins and bargaining power would decline significantly in the long term," ICRA said.

The Indian market clearly has many attractions for both vehicle manufacturers and components makers. It offers high growth rates, opportunities to export and a sizeable middle class.

More importantly, labour costs are quite low here which has led to decisions of many global firms sourcing their components from India. Some of the recent examples of key sourcing decisions are as follows: General Motors and Caterpillar are sourcing radiator caps from Sundaram Fasterners which has won GM's Best Supplier Award for three years; and GM is sourcing light equipment from Lumax.

Volkswagen, or VW, has studied and graded over 30 Indian suppliers and most of them are expected to supply components to VW's international operations.

VW has tied up with Engine Valves to co-develop valves on a design-in basis for the new VW engine.

Dana and Rockwell of the US and Mitsubishi of Japan are sourcing front axle beams from Bharat Forge.

Ford Motor is reportedly testing various components manufactured by the TVS Group

Sona Steering is supplying steering components to its collaborator Koyo Seiko in Japan which, in turn, is supplying to Japanese OEMs, and Federal Mogul of the US is sourcing components from India through a tie-up with the Anand Group.

As part of the consolidation, collaborations with international component manufacturers remains the most common strategy for meeting the challenges facing the Indian automotive components industry.

''For Indian component suppliers, the prime motive behind collaborations is access to the latest technology. For the foreign collaborator, on the other hand, the incentive is market entry,'' the ICRA study done with the help of industry's top 36 executives said.

Some of these industry leaders included R Seshasayee, managing director of Ashok Leyland Limited, D K Jain, vice-chairman and managing director of Lumax Industries Limited, and Satvinder Singh, senior vice-president of Lucas-TVS Limited.

As competition in the mature markets of North America, Japan and Europe intensifies and global players look for ways to enhance competitiveness, a presence in low-cost production countries would be crucial.

With the Indian automotive policy undergoing changes, following India's endorsement of the World Trade Organisation agreement, foreign companies have the opportunity to play a greater role in supporting Indian component suppliers in all aspects of their activities and in influencing the future development of the industry.

UNI

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