|K. Mahesh, CMD, Sundaram Brake Linings: Cautious,
|SUNDARAM BRAKE LININGS:
Mahesh feels it may be too early to cheer. he says the hype
over export figures may result in a dotcom-like bust
few years ago, if you told a punter on Dalal Street to put some
easy money on stocks with names like Motherson Sumi, Rico Auto,
and Rane Brakes, you'd be lucky to escape unscathed. These days,
any investor who has made fantastic returns in the ongoing bull
rally-and there are thousands of them-would have at least a couple
of the 30-odd auto component stocks that figure in the BT 500 in
his portfolio. Market caps of many like Bharat Forge, Motor Industries,
Asahi India Glass, and Motherson Sumi have doubled in the past six
months. These players may be nowhere close to rubbing shoulders
with their larger-cap brethren in corporate India, they may still
be small, highly-fragmented, family-owned and low on the pr trimmings,
but make no mistake: Most of them have relationships with global
automobile majors who could provide them with orders that could
result in these fledglings taking on gigantic proportions in the
To be sure, the Rs 20,000-crore Indian auto
components industry has come a long way over the last six to seven
years. Since 1995, as more and more multinational auto majors set
up shop in India and decided to step up the local content, the auto
component firms had little alternative but to improve quality and
reduce costs. And thanks to that, this industry is today growing
at 15 per cent annually and shipping out exports to all major multinational
automobile manufacturers. Exports of auto parts have recorded an
increase of 65 per cent over the last 18 months. "The growth
in the auto component industry is essentially driven by the performance
of the domestic auto industry," says C.S. Patel, Chief Executive
Officer of the Anand Group, which owns Gabriel India. In the last
18 months, four-wheelers have recorded a growth of 65 per cent,
two-wheelers a growth of 16 per cent, and commercial vehicles close
to 30 per cent.
The Big Bang
What promises to propel the auto component
sector into another league altogether is the increasing keenness
of global auto majors to use India as a low-cost source. The potential
for exports is enormous. While the size of the domestic components
sector is only around Rs 20,000 crore, the global industry is almost
98 times that. As per figures provided by the Automotive Component
Manufacturers Association (ACMA), exports of auto components have
grown from $578 million (Rs 2,601 crore) in 2001-02 to $800 million
(Rs 3,600 crore) in 2002-03 and by the end of the current financial
year, exports should be around $900 crore (Rs 4,050 crore).
ACMA's target: Exports must touch $1 billion
by 2005 and $2.5 billion by 2010. Industry persons for their part
are sanguine that these targets could be achieved ahead of those
Almost every global vehicle manufacturer worth
its wheels is today outsourcing components and vehicles out of India.
While Toyota is making India the hub for transmission systems, Hyundai
and Suzuki are making India the export hub for small cars. Fiat,
Renault, and Volvo are outsourcing components and assemblies out
of India. Honda Motorcycles and Scooters wants to make India the
hub for two-wheelers, and two Chinese truck original equipment manufacturers
(OEMs) are sourcing drive trains from India. Ford is already exporting
engines out of India. And players like GM, Caterpillar, Cummins,
Delphi, Volvo, Denso and global tier-I vendors have big plans to
outsource components from India. Obviously, this translates into
more business for Indian auto component firms.
|C.S. Patel, CEO, Anand Group: Riding
the outsourcing wave
The Anand Group company has a unique export track record
in the US and EU
Compare this to the situation five years back,
when 80 per cent of India's $330 million worth of exports were to
the aftermarkets (spare parts sector). Today, suppliers are becoming
more oriented towards OEMs and 40 per cent of all exports are to
OEMs. Global majors too, are showing interest in Indian firms. In
the last 12 months, Spicer Axle Holdings Inc made an open offer
to buy stake in Axles India, GKN Automotives GmbH made an open offer
in GKN Driveline India and Kirloskar Oil Engines in Kirloskar Systems.
"Auto components is a booming sector largely
because India has a number of technical skills," says Amit
Kalyani, Vice President and Chief Technology Officer, Bharat Forge.
India is highly competitive in metal parts, electricals, forgings,
castings, plastics, transmission and distribution systems, engine
parts, and tyres. Bharat Forge saw its turnover rise from Rs 473
crore in 2001-02 to Rs 684 crore in 2002-03. It is exporting to
MNCs like Mercedes-Benz, New Holland, Volvo, the DANA Corporation
(USA), Meritor Corporation (USA), Mitsubishi Motors, Lister Petter
(Europe), Dirona (Mexico), Renault, Toyota, Spicer, Caterpillar-Perkins,
Isuzu Motors, and Ssang Motors. Last year, it 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.
"Structurally, the automotive components
industry in India is rapidly transforming into a highly competitive
sector," says Amul Gogna, Executive Director at rating agency
ICRA. As per data available with ICRA, the end-of- the-line rejection
rate has improved considerably for Indian auto part companies with
the current figure standing at 0.5.
Kalyani, VP and CTO, Bharat Forge: Exports
are buoying up the bottomline
The company posted a turnover of Rs 684 crore in 2002-03
and is exporting to MNCs like Mercedes-Benz and Toyota
The Cost Angle
Thanks to cheap availability of labour, engineering
skills, and a new thrust on quality and cost reduction, Indian auto
companies are today highly competitive in the global market. According
to a survey conducted by ACMA, the wage cost/sales ratio in the
forgings industry was as high as 38.8 per cent in the case of DANA
Corporation of the US. For Indian firms, it was as low as 9.4 per
cent. According to the report, the average wage rates are $ 8 per
hour in India, as opposed to $20 per hour in the developed markets.
"We hope to see 100 per cent growth in
exports this year," says Arvind Kapur, Managing Director of
Rico Auto. Kapur's company has bagged large orders from Ford Motor
of the US and the deliveries start in September 2004. In fact, over
the last one year itself, Kapur has bagged five global orders for
exports. Kapur is focusing on China, the US, Europe, and Thailand.
"Auto components is a booming sector largely
because India has a number of technical skills," says Kalyani.
Right now, 40 per cent of Bharat Forge's turnover comes from exports.
"I believe this proportion will grow, simply because the global
market is a lot bigger than the domestic market," he adds.
What's also helped 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 Nashik. "For
overseas business, we at Anand Group follow a different business
model. We partner the growth of our business associates," says
Patel. Since the group works with its collaborators, the risk is
much less. "We also do some private labels," he adds.
The Anand Group has added about 25 per cent of its customers (in
value terms) in last two years.
Kapur, MD, Rico Auto: Its
order books are running full
|RICO AUTO: It
hopes to see 100 per cent growth in exports this year and has
bagged large orders from Ford Motor of the US
Just A Beginning
The progress made by the Indian auto component
industry is really the proverbial drop in the ocean. "In my
opinion, there are islands of excellence in auto component industry.
We still have a long way to go," says K.Mahesh, CMD, Sundaram
"It's nice to know we are making progress.
But it's too early to believe that we are a global player,"
says Mahesh. "Many players know nothing about warranty failures,
product recall, product liability insurance, etc, but are nonetheless
excited about exporting to the US and Europe," says A.K. Taneja,
Senior Executive Director, Shriram Pistons & Rings. Taneja is
one of those who feels that the export target of $1 billion (Rs
4,530 crore) set by ACMA will be achieved this year itself, two
years ahead of the original plan. "It is possible that exports
will grow to $2 billion (Rs 9,060 crore) within the next three years,"
he adds. However, Mahesh feels that there is little to cheer about.
"When the base is low, percentage growth figures have no meaning."
Mahesh is also of the view that the hype over export figures may
result in a dotcom-like bust. The robust global revenue model of
the Indian auto components sector will ensure it doesn't go the