Business Standard

Bhupesh Bhandari: Components of competition

Chinese automobile component makers have a huge, seemingly invincible, lead over their Indian counterparts

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Ratan Tata, in an interview to Bloomberg’s global TV network last week, talked of the great benefits of sourcing automobile components from China. China, he said, had become the world’s largest market as well as producer of cars. So, the quality of its components was very good and the prices were unbelievably low. would, therefore, in the days to come source sub-assemblies from — automatic transmissions, etcetera.

Tata Motors has, in fact, been buying components from China since 2005: tyres, steel wheels, forgings, glasses, and parts for clutch, brake and steering. It is not certain how much Tata Motors sources from China, but the number can’t be very high because the company’s vehicles are 95 per cent indigenous. But China’s contribution will certainly grow in the days to come. A few days after the interview, Tata said at the annual general meeting of the shareholders of Tata Motors that the Nano (the company’s small car) had great potential “throughout the developing world”. It is possible that the China factor will come into play when it’s time for the Nano to go abroad. The gap between China and India is truly enormous. The reason is that the Chinese market for cars is almost six times bigger than India. While India sold 2.5 million cars last year, China sold 14 million. This gives Chinese component makers economies of scale Indians can’t even begin to dream of. So they produce inexpensive components. Some Chinese car makers also export in large numbers. This has given a huge boost to their quality standards. Both the factors put together have given Chinese component makers a huge, and seemingly invincible, lead over their Indian counterparts.

Some say that only half the preference for Chinese components can be explained by the price difference — the other half arises because of the of Indian component makers and the superior quality of Chinese components. Anyways, with the recent rapid depreciation in the rupee vis-à-vis the dollar, the price advantage of Chinese components has reduced. The upshot is that Chinese components are no longer considered of an inferior quality. Most Indian automobile makers till now have gone to China to appoint their second or third supplier for a product — the first would always be an Indian. Many companies now say they may appoint the first supplier in China. At the moment, Chinese components haven’t flooded India. Mahindra & Mahindra too imports less than 5 per cent of its components, mainly from China. But the situation could change in the days to come.

The Chinese have been aggressive for a while now. In the 2008 Delhi Auto Expo, over 100 Chinese component makers showed up. The idea was to showcase their wares and garner business. Chinese component imports had shot up from Rs 30 crore in 2000 to Rs 2,500 crore in 2009. These accounted for 10 per cent of the Indian market, up from less than 1 per cent in 2000. An A T Kearney report, which said that the 12,000 or so component makers of China were far more competitive than the 5,000-odd Indian makers, was the final straw. That set the alarm bells ringing in the domestic component industry.

Some automobile makers assured their local suppliers that they would cap their purchases from China at 10 per cent of their total requirement. That was a big help. But the industry knew it was an informal assurance that could be revoked in the future. So, sometime before that, the Automotive Component Manufacturers Association, or Acma, the lobby group for the industry, had taken a team to China to study how inexpensive components were made there. (At that time, the price difference between Indian and Chinese components was, on average, 30 per cent. Even though imports weren’t life-threatening, this had created new price benchmarks in the market.) A member of that team commented on his return that they could explain only 50 per cent of the difference in prices — the other half they couldn’t figure out. A more recent study by Acma shows that Indian components are, on average, 16 per cent higher priced than those produced in Southeast Asia and China. And this time component makers have a definite answer for their higher prices: subsidy on fuel and inputs, coupled with massive volumes, in China and high production costs in India. These, says one prominent component maker, are the embedded costs of our socialist policies. Power is a sore point with industry: because farmers must get it free, industry is charged a higher price. This makes them uncompetitive not just overseas but in the domestic market as well.

This is not to say that the Indian component industry is on its last legs. Between 2007 and 2011, the industry grew at 14.6 per cent per annum, to $39.9 billion. Acma expects the growth to soften somewhat in the days to come, but has still projected it at 11 per cent between 2011 and 2021. With such growth, the industry will become $66.3 billion in 2015-16 and $113 billion in 2020-21. Exports grew 11 per cent between 2007 and 2011 to $5.2 billion, and are projected to grow at 18.8 per cent per annum to $12.3 billion in 2015-16 and $29 billion in 2020-21. Automobile makers buy 80 per cent of the exports, while the replacement market accounts for only 20 per cent. This means the quality of Indian products is good. The last three years have seen investments of $6.5 billion being made into the sector. But that may not be enough.

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