"Growth has been coming from both the domestic markets and exports" Baba Kalyani Bharat Forge

Late September this year, auto parts giant Visteon, a former Ford Motor subsidiary, opened a $10-million (Rs 46-crore) facility in Chennai. Spread over 110,000 sq. ft, the Visteon Services and Technical Centre will provide the parent company and its joint ventures embedded software for everything from audio products to instrument clusters to powertrain electronics to engine control modules. Why open the centre in India and not the US? Two reasons: Engineering design services are cheaper by about 70 per cent, and the skill levels are high. "With the Indian automotive sector poised for unprecedented growth, our Indian operations are a critical asset in further developing Visteon's competitive edge," Visteon's Senior Vice President Bob Pallash said in a release.

Pallash isn't exaggerating. With some of the biggest carmakers like Ford and General Motors bleeding, there's unprecedented pressure on vendors such as Visteon to cut costs. Manufacturing in India costs 30 to 40 per cent less than what it does in the US. As a result, more and more of component manufacturing and sourcing is moving to India. Back in 2001-02, auto part production in the country was estimated at about $4 billion (Rs 19,200 crore then). Last financial year, it was at $10 billion (Rs 45,000 crore then). In that time, auto part exports have jumped from $578 million (Rs 2,774.4 crore then) to $1.9 billion (Rs 8,550 crore), and by 2015 a staggering $20-25 billion (Rs 92,000-1,15,000 crore) worth of components is likely to be outsourced. Says Baba Kalyani, Chairman of Pune-based Bharat Forge: "Growth has been coming from both the domestic markets and exports. But if you don't put your processes in place now, you will never be competitive."

Despite the boom, there are several challenges that Indian suppliers need to overcome. One is that of capacity itself. There are about 5,000 auto parts manufacturers in the country, but only about 10 per cent of them are of any significant size. Two, the industry so far has thrived on contract manufacturing. That is, the vehicle manufacturer hands out specs and the vendor merely makes them. So, original design and development skills are severely limited. Three, quality is a major concern. Four, most Indian vendors are either tier-two or tier-three suppliers, with no direct access to the vehicle manufacturers.

But if a recent McKinsey & Co. survey of Indian and Chinese suppliers is any indication, then Indian vendors (like Chinese) are well on their way to addressing these issues. The survey points to four key findings: Pre-conditions for rapid growth have taken root. These are things like operational skills, global customer access and factor cost advantages that go beyond manufacturing. Two, vendors are moving from "module assembly path (read: physical assembly of proximate parts) to R&D/integration path, which involves designing sub-systems that are integrated through technology". Three, "highly successful suppliers are pursuing aggressive step-outs towards exports and/or globalisation". Four, the top suppliers have aspirations of becoming global tier-one suppliers and are leveraging M&As overseas to "bridge the capability gaps in scale and skill".

There are about 5,000 auto parts manufacturers in India, but only about 10 per cent are of any significant size

Indeed. There has been a spate of overseas acquisitions in the recent years. Kalyani's Bharat Forge, for instance, has acquired six companies abroad in the last five years; Sundram Fasteners, a TVS Group company based in Chennai, hasn't just bought vendors abroad (most recently, a German automotive fastener manufacturer Peiner Umformtechnik for m8.24 million), but set up a facility in China; Sona Koyo, a Delhi-based manufacturer of steering systems, acquired a 21 per cent stake in Fuji Autotech two years ago; and Amtek Auto, another Delhi-based vendor, bought a 70 per cent stake in Germany's Zelter (a manufacturer of turbocharger housing) in July 2005 for about m20 million. Says Suresh Krishna, Chairman and Managing Director of Sundram Fasteners: "We have an edge in terms of blue- and white-collar labour. Skilled work can be done here and at lower costs than developed countries." Kiran Deshmukh, coo of Sona Koyo, says that his company plans to increase exports from 15 per cent to 45 per cent of total production by 2010.

The McKinsey report says that Chinese and Indian suppliers "represent a strong disruptive force on the global automotive stage". In the same breath, it adds that the vendors will need to transform their business models and build new capabilities. How? There are four things the suppliers need to do, according to the report. Pick a segment and create global scale in it; focus on operational excellence; move from mere manufacture of components to design and development of component systems by focussing on R&D; and continue to export and acquire companies abroad to become more global.

As for global vendors like Visteon, they will continue to move more of manufacturing and design work to India. For some of them, low-cost countries like India may be their only hope of survival.