China factor makes Indian auto parts makers see red

They were everywhere at the Delhi Auto Expo this year — over 100 of them. The Chinese auto component makers recorded the biggest presence among all foreign automotive players in the event. With good reasons.

From about Rs 30 crore in 2000, imports of Chinese auto parts increased to over Rs 2,500 crore in 2009, accounting for 10 per cent of the total Indian auto components market. It was less than 1 per cent in 2000.

The Automotive Component Manufacturers Association of India (ACMA) says imports of components from China has registered a 97 per cent compounded annual growth rate over the past seven years. The reason why China is making inroads is simple: According to a report by research firm A T Kearney, the 12,000-odd auto parts companies in China are far more competitive than the 5,000-plus companies in India due to several factors, including lower wages, steel price, power tariffs and taxes.

According to estimates, wage rates in China are 15 to 25 per cent lower than in India and the companies there get higher subsidy on power usage. ACMA has found that the difference between Indian and Chinese auto component companies’ factory-to-factory cost – taking into consideration the cost of transport, octroi, Customs duty and others – is a huge 45 per cent in China’s favour. The flood started after the government lowered the import duty from 15 per cent in 2005 to 12.5 per cent in 2006 and 2.5 per cent the following year.

India is already the third biggest importer of cheap Chinese tyres, which not only cater to the demand from the after-market but also service the original equipment manufacturer (OEM) demand. The demand recently shot up due to unavailability of adequate commercial vehicle tyres in the local market.

An executive from one of the Chinese companies says their products are about 40-50 per cent cheaper than India-made products having the same quality standards.

Ashok Taneja, managing director and CEO, Shriram Piston and Rings, says: “Without doubt, a lot needs to be done to contain the heavy influx of components from China, as this could pose as a big threat in the not-too-distant future.”

Chinese-made components as well as tyres service the after-market more in India than the OEM one, as is the case internationally, as a long-term sourcing contract from a China-based company is difficult to establish.

Misplaced fears?
However, many say the fears may be misplaced, as more and more Indian companies are going in for 100 per cent localisation and are finicky about quality.

Rajendra Kankaria, chairman, Uma Precision, says: “At least in precision components, there is no sign of any threat to Indian suppliers on the basis of quality. Precision components require special attention, as these form critical parts in any machine. Even in terms of cost, we match them or are even lower than them.”

Besides, vehicle makers in India – comprising cars, two-wheelers and commercial vehicle making companies – prefer steady and uninterrupted supply of parts that could help ramp up production in the shortest period of time, while not compromising on quality to avoid any lag period.

Michael Boneham, president and managing director, Ford India, says: “There is a significant cost advantage in India on components that is second to none. The understanding that we have with our local suppliers is much stronger and superior than we could have had with a Chinese counterpart. We will continue to source Indian parts even if the same parts are sold by Chinese companies at a lower cost.”

Similarly, Japanese auto major Nissan, which is establishing a new factory just outside Chennai, recently signed several supply contracts with Indian suppliers to gain from the low-cost advantage. The new facility will start production this month with the first product being the Micra small car.

A senior executive of the company says Indian suppliers are much more adept and easier to work with, as any alterations in design of the component can be made without much hassles.