Charting a new course: (L to R) Deep Kapuria, MD, Hi-Tech Gears; D.K. Jain, MD, Lumax Industries; A.K. Taneja, Senior ED, Shriram Pistons; and Arvind Kapur, MD, Rico Auto Industries

On a lazy Saturday afternoon in Gurgaon, Arvind Kapur and D.S. Jain get together for some greasy chana bhatura and kachori from Haldirams. After a tight hug and a loud exchange of pleasantries, and over the high-calorie repast, Kapur and Jain talk shop. They're thick buddies. They're also managing directors-Kapur of Rico Auto Industries, and Jain of Lumax Industries, two manufacturers of auto components with factories in Gurgaon.

If you think the two honchos are grumbling away about how auto makers are strangling their margins-or perhaps the grease levels in the bhatura being higher than in many car engines-perish the thought. Kapur and Jain are discussing global opportunities. It's no academic discussion, to be sure. The boss of Rico Auto recently bagged orders worth Rs 59 crore from Ford's UK operations for 12 components his company makes. These will be fitted into a new Ford car that's slated for a 2004 launch. He's also picked up orders for components that will be fitted in a Land Rover and a Jaguar.

Jain almost got there. He had bid for three kinds of lights that were to be fitted on a range of models Ford is working on. Those orders would have made Lumax richer by Rs 100 crore, which would clearly have been a windfall, given that the company's exports currently tot up to just Rs 7 crore. Not just that, Lumax's total 2001-02 sales of Rs 200 crore would have spurted by 50 per cent courtesy that single order. That wasn't to be-Ford has opted for a Turkish company-but Jain isn't disappointed. "That Rs 100-crore order might have not happened today. But it will happen some time soon."

There's little reason to doubt those words. For, it isn't as if the Ford order flew in like the proverbial solitary swallow. Indeed, across India the window of opportunity has opened up to scores of component manufacturers, who are bagging huge export orders from global auto majors. In Pune, for instance, ACMA officials point out that Bharat Forge has acquired a Rs 60-crore order to supply forgings to a heavy commercial manufacturer in China. It's also pocketed the order book of a vendor in UK that was shutting shop since it couldn't meet the cost pressures put by countries like India and China.

Till five years back, 80 per cent of all auto component exports from India were to the aftermarkets (the spare parts sector), explains Vishnu Mathur, Executive Director, Automotive Component Manufacturers Association (ACMA). Today, suppliers are becoming more oriented towards original equipment manufacturers (OEMs, or the auto makers) and 40 per cent of all exports are to OEMs. India is highly competitive in metal parts, electricals, forgings, castings, plastics, transmission and distribution systems, engine parts, and tyres, adds Mathur.

"All MNC car majors plan to source components from India. And we are ready to grab that opportunity," says Amit Kalyani, VP and CTO, Bharat Forge. Bharat Forge is also supplying to Toyota, Volvo, Renault, Caterpillar, and Honda, and is amongst the top 10 exporters of auto components in the country (See The Top 10 Exporters).

"In the last seven years, since many foreign car makers have set up shops in India, these vendors have come a long way in terms of 'quality, cost, delivery, design and management'," says Sanjay Labroo, Managing Director, Asahi India Glass. Today, as the global auto industry looks for cheaper components worldwide, these vendors are gearing up to meet this burgeoning demand. To gauge the potential consider these figures: The domestic component sector is a not-to-be-sneezed-at $4 billion, or Rs 20,000 crore. But compare it to the global industry, and it's less than 1 per cent, according to ACMA. Now you know why Kapur, Jain and the rest of the Indian components industry are so excited-the untapped potential, with Indian engineering and design skills coupled with the lower costs as the backdrop, is humungous.

The Cost Factor

Worldwide, the OEM-vendor relationship has changed dramatically over the last five years. It's costs and not allegiances that determine who car makers buy their components from. So a General Motors doesn't really have to only rely on Delphi, or Ford Motor on Visteon, for sourcing components. The OEMs have broken out of that mould and in fact, many tier-I suppliers (vendors who supply directly to the car makers)-like Visteon and Delphi-are today sourcing sub-components from countries like India.

As a result, 20-25 per cent of all suppliers in the US face serious financial challenges today, says Christopher M. Bates, President and CEO, Motor & Equipment Manufacturers Association (MEMA), the association representing the components industry in the US. According to Bates, another 50 per cent of suppliers are profitable on an operating basis, but are not sufficiently profitable to continuously reinvest to ensure long-term competitiveness.

The culture of not relying on one's existing vendor base is fast spreading to even countries like Japan, which has for long been closed to the idea. In fact, according to Ravi Kumaraswami, Group Director, (Sales and Account Management), FreeMarkets Service Private Ltd India, an e-procurement firm, Japanese auto makers realised a cost savings of up to 40 per cent when they eventually did shed their conservatism and change vendors. A recent example is that of Nissan, where CEO Carlos Ghosn turned around the company by reducing cross-holdings between suppliers and Nissan.

What's also helping the Indian industry become more competitive is the movement of many high-cost European and American units into the country. That, for instance, has provided the Anand group with a rather unique export model. Its collaborators in Europe and the US, who are facing cost pressures, are moving some of their units to the Anand group's plants in Nasik. "This way, we save costs by at least 20 per cent," says C.S. Patel, Chief Operating Officer of the Anand Group. The group plans to bring more units into India, since this is a win-win situation for both the joint venture partners. "Since we work with our collaborators, the risk is much less," he adds.

The MNC Effect

The entry of multinational car makers has helped the auto industry a great deal in improving costs and processes. "When these MNCs came to India, they hand-held their vendors, especially on shopfloor management practices," says A.K. Taneja, Senior Executive Director, Shriram Pistons & Rings Ltd. Vendors were lacking in three areas, says Deep Kapuria, Managing Director of Hi-Tech Gears Ltd and President of ACMA: Product technology, process technology and shopfloor practices. "Though product technologies still come to us from outside, process technology and shopfloor practices have evolved a great deal," adds Kapuria. Today, India boasts of two Deming awards (a recognition for companies committed to quality control), and both have gone to the auto component industry.

What's also helped is that today many world cars exist in India. For instance, Ford Ikon is manufactured in Brazil, China, South Africa, Europe and in India. Therefore, it's now possible to source components from all these countries, based on cost and quality considerations. Some, like Toyota, balance out currency fluctuations by imports and exports. For instance, while the engine of Qualis is imported from Thailand, Toyota plans to export transmission systems for its global operations from India.

Manufacturers like Ford, Volvo, Toyota, Suzuki and Hyundai have already declared their intentions of sourcing parts from India. In fact, many foreign car makers-such as Honda, Ford Motor Company, General Motors and Hyundai-are working on smaller cars. Suzuki, on the other hand, wants to make India the hub of small car exports. So opportunities for vendors are bound to grow manifold.

Besides, multinational vendors like Visteon are also buying from many domestic suppliers for exporting products for its global operations. Delphi recently shortlisted 25 vendors from India who as Tier-II suppliers of Delphi will export to its global operations, informs Ravi Khanna, Country President and Managing Director, Delphi India.

The presence of an MNC in India also helps insofar as recommending a vendor is concerned. "They carry the story back to the parent," says Kapur. In the case of Rico Auto, for instance, Ford India made a recommendation to the parent in the US.

The 'Made In India' Tag

India may enjoy its own cost advantages, but it's still a higher cost base when compared to China. One reason for that could be transactional costs, which are 30 per cent higher for Indian auto parts suppliers. For Hi-Tech Gears, which supplies to Cummins in the US, it takes between seven and 10 days for a consignment to reach the port. In China, on the other hand that journey-to the port from any point in China-would take just 48 hours. It's congestions at ports, bad roads, and sundry levies and charges that take their toll of Indian manufacturers.

Small wonder then that the 'Made in India' tag doesn't command its place in the sun. Some companies-Shriram Pistons for one-have been categorically told not to divulge who they are supplying to. "We have two significant overseas original equipment buyers, but they don't want us to talk about them. They want to introduce India gradually in their processes," says Shriram's Taneja. But as Bates points out, the developed world is waking up to the competencies of the Indian industry. "India's components industry is increasingly competitive," adds Bates. And although Taneja may not be able to reveal his buyers' names, companies like Rojee-Tasha Stampings and Rico Auto-who supply to auto parts to manufacturers like Fiat and Ford globally, are clearly not bound by such clauses.

Last year, the Indian domestic components sector clocked exports of Rs 2,775 crore. The target set by ACMA for 2005 is $1 billion, or close to Rs 5,000 crore. But if the orders keep flowing, and more and more companies like Rico are favoured by the global auto majors, that billion-dollar target may be less than three years away. You'll probably still find Kapur and Jain at Haldirams then. The only difference in 2005 would perhaps be that they're discussing how deep an inroad each of them has made into first-world markets.