India is fast emerging as the world’s automotive powerhouse. Recently the country overtook China in automobile exports – India recorded a jump of over 22 per cent in auto exports this year. The bulk of the growth was led by the two-wheeler segment which grew at 32.31 percent. Commercial vehicles and passenger vehicles exports grew by 19.10 percent and 9.37 percent respectively, according to government figures.
The market for automotive components has also been growing at a fast-paced 27.2 per cent since 2002. The auto parts industry is expected to touch USD 40 billion by 2016. According to the Automotive Component Manufacturers Association of India or ACMA, the turnover of the auto component industry was estimated at over USD 18 billion in 2007-08, an increase of 27.2 per cent since 2002.
The growth is due to a number of factors including the 7 per cent growth in OEMs and an 8.5 per cent rise in exports and after-market segment. The Centre for Monitoring Indian Economy or CMIE estimates that auto ancillary production would grow by 8.2 per cent in 2009-10. Investments in the auto component industry were estimated at USD 7.2 billion in 2007-08 and are likely to touch USD 20.9 billion by 2015-16.
Much of the investment comes from international majors as well as domestic players. A number of car manufacturers are opting to use India as hub for sourcing components. For example, BMW is sourcing components from India, Skoda Auto India plans to increase the local content of its Fabia model to over 50 per cent over the next couple of years and Mercedes Benz plans to increase sourcing from India at a rate of 10 per cent annually, according to the India Brand Equity Foundation or IBEF According to the IBEF, India’s cost advantage is what attracts foreign direct investment or FDI. The cost of manufacturing in India is nearly 30 per cent lower than in Western countries. The industry has also had help from the Government of India. A few years ago, the government drew up an Automotive Mission Plan 2006-2016. The aim of this plan was to help India “emerge as a destination of choice in the world for the design and manufacture of automobiles and auto components”. The fiscal aim was to ensure that by 2016, the automotive industry would touch USD 145 billion, accounting for over 10 per cent of the country’s GDP and provide additional employment to 25 million people.
The plan seems to be working. Very recently, an Indian firm Steel Strips Wheels clinched a 28 million Euro contract with French carmaker Renault to supply steel wheel rims to the OEM’s greenfield plant in Morocco. Under the agreement, the Indian company will supply more than 3 million wheel rims to Renault over a period of five years. And then there is Michelin which is investing USD 2.26 billion to set up a tire plant in Tamil Nadu. Bosch upped its investment in India with a proposed USD 27 million plan to set up manufacturing units that will make electronic control units. The list goes on.
Of course, it’s not just foreign companies that continue to grow their investments in India. Domestic automotive firms are also stepping up spending on increasing manufacturing. While rising exports is one reason for this, the other reason is the growth in the domestic market. According to the Society of Indian Automobile Manufacturers or SIAM, domestic sales of passenger vehicles during the period of April to October 2009, was up by over 16 per cent. Sales of commercial vehicles were up by over 5 per cent during the same period.
All this means that there is a definite buzz among auto majors. Two auto parks worth a joint USD 654 million are coming up in the southern Indian city of Hyderabad. IBEF points out that much of the domestic investment is made with foreign partners – such as the USD 20 million Hero Motors is investing with the Austrian firm BRP Powertrain to make automotive transmissions.
The government has helped the automotive industry by deregulating and delicensing the sector. So today, 100 per cent foreign direct investment or FDI in the automotive sector is allowed without any minimum mandatory investment level required and no local tie-ups necessary. Excise duties and customs have been kept in check in order to help promote the sector. Recently the railways pitched in with the Union Railways Minister proposing the setting up of ten new auto hubs across the country for the loading and unloading of vehicles and their transportation using the railways. Indian Railways plans to offer land to auto companies to set up these hubs which can also be used as locations for auto ancillary industries.
The Indian automotive industry is definitely on an upswing. The growth is likely to be sustained in the future. Goldman Sachs had predicted that India would be the third largest economy by 2050 after China and the US. Already India enjoys the distinction of having the largest three wheeler market in the world, the second largest two wheeler market and the fourth largest passenger vehicle market in Asia. Some of the reasons why auto companies will continue to be bullish on India is that the GDP growth of the country is growing, there is a marked increase in disposable incomes and interest rates on auto loans are going down. There are a growing number of people shifting from two wheelers to four wheelers and those replacing old four wheelers with new ones.
Automotive Industries caught up with Shri R. Maitra, Executive Director of the ENGINEERING EXPORT PROMOTION COUNCIL, India
AI: Will India continue to enjoy a cost advantage especially as there are cheaper destinations in Asia and Eastern Europe? Or will India’s pool of highly skilled workforce help India continue to be an attractive destination?
Maitra: I do think that one of India’s big advantage is that its share in world auto exports is still rather small at about 0.53% as of 2008. This is largely because of the size of the domestic industry and the scale. With investments in the auto sector increasing in recent years, I do believe that India will continue to enjoy a cost advantage as the scale increases in India and the economic reforms ensure greater total productivity and lowering of transaction costs, both of which will ensure Indian companies to maintain cost competitiveness.
AI: How do India’s automotive exports compare to other countries in Asia? What do Indian auto companies need to do to boost exports?
Maitra: With respect to Auto Vehicles, Algeria, Sri Lanka, USA, Italy and UAE account for 34% of India’s total vehicles exports mostly in the small petrol car of engine capacity of less than 1500 cc. In fact, India’s neighbouring countries of Bangladesh, Sri Lanka and Nepal are important markets for Indian auto vehicles. Sri Lanka was the second largest destination for India’s auto vehicles exports in 2008. Bangladesh and Nepal are also among the top 10 export markets for India. In addition to being major markets, India’s auto vehicle exports growth to them is slightly on the lower side as India already accounts for a large share of their auto requirements. India’s auto vehicles exports to these countries include a diverse set of passenger vehicles, commercial vehicles and two wheelers.
With respect to auto components however, India’s neighbouring SAARC countries are not as major a export market destination as is the case of auto vehicles. Together the three SAARC countries of Sri Lanka, Bangladesh and Nepal account for about 4% of India’s total auto component exports in 2008. In terms of growth rate too, SAARC countries have not shown great buoyancy with annual average growth of less than 15%.
In order to boost India’s auto exports, strategies are required to expand trade markets, enter or create new segments, focus on green technologies, enhance cost competitiveness and technologies, enable quicker integration of global acquisitions to enable technology transfers and increase sourcing from India, build on the relative scale advantages that the domestic market accords to Indian companies as well as look at developing synergistic trade relations with various importing countries.
AI: What are some of the initiatives your organization is doing to help boost Indian auto exports?
Maitra: Let me just point out to you the most important initiative that EEPC India is taking in the aftermath of the global recession which affected the auto sector in the developed world immensely. EEPC India is developing a comprehensive strategy to boost Indian auto exports. In this direction we have commissioned a leading international consultancy organization to carry out a strategy for increasing auto exports from India for the next five years. We will be presenting this Strategy to the Government and also holding discussion sessions with the auto industry to highlight the recommendations of the study.