Turning disruption into growth

Concerted actions across all stakeholders could create a unified push for a thriving automotive industry

Discontinuities are disruptions on the evolution curve that alter the way an industry operates. The automotive component industry in India has been in a growth phase in the past decade with domestic turnover more than doubling and export turnover growing five-fold between 2010 and 2019, according to the Automotive Component Manufacturers Association of India (Acma). 

In recent months, we have seen discontinuities in this sector. Auto sales have declined driven by factors like the liquidity crunch in non-banking financial companies (NBFC), higher acquisition costs for vehicles owing to an increase in the costs of raw materials, insurance and finance; and weaker consumer sentiment. Growth in the automotive component industry declined from 18 per cent in the 2018 financial year to 14.5 per cent in the 2019 financial year. 

While policy measures could bring back growth, the industry can adopt some practical measures to stimulate near-term impact and long-term preparedness:

• Maximise product modularity using a spend pareto across product, sub-system and parts to improve economies of scale and reduce the working capital requirement. A pareto is a statistical technique in decision-making used for the selection of a limited number of tasks that produce significant overall effect;

• Embrace a zero-defect culture at operator level to drive individual and area-level performance management;

• Rationalise the portfolio by focusing on products that bring the majority of revenues and profits and expand after-market activities and export markets; 

• Re-imagine end-to-end sales and operations processes by using digital technologies and analytics, such as forecasting tools, to optimise capital and cost and increase customer satisfaction; 

• Manage fixed costs by establishing a war room to reduce indirect costs services, stores and spares.

Industry discontinuities and their implications

Component makers are bound to be affected by the fundamental changes in the automobile industry. They would do well to prepare for big changes already visible on the horizon in the following ways:

Expedited enforcement of emission and safety standards: Introduction of BSVI (Bharat Stage VI) emission standards (equivalent to Euro VI) will bring India in line with global markets. This will open up global export markets as component makers improve their capabilities and build products targeted to the wider world.

Renewed focus on electric vehicles: The government has earmarked nearly Rs 10,000 crore (approximately $1.4 billion) for electric vehicles and related subsidies, while the private sector has increased its investment to about Rs 400 crore ($56.4 million) in 2019 (up from about Rs 300 crore or $42.3 million in 2018). Electric vehicle adoption could have many subsequent implications: Power train components could change drastically with some becoming rising stars in the age of electrification and others under high pressure; the material composition of vehicles could change fundamentally, and suppliers could transform where and how they play in the auto sector value chain. 

Rise of shared mobility: Changing consumer preferences could prompt the growth of new customer segments, such as fleet owners, and create new revenue pools for auto component suppliers.

Growing demand for connected vehicles: This could gradually change the composition of vehicles with the electronics and software components dominating the mix.

Consolidation of auto original equipment manufacturers: Global auto OEMs are consolidating to take advantage of their mutual strengths and improve their capabilities. Component makers could use this opportunity to hasten modularisation and vendor consolidation.  

Digital and analytics-driven transformation of core business: Digital and analytics will transform automotive organisations across the value chain. Manufacturers will need to use digital technologies heavily for internal transformations. 

Imperatives for auto component manufacturers

Given these changes and possibilities, auto component manufacturers would need to examine their business in the following ways:  

Rethink product strategy: Manufacturers will need to de-risk their portfolio by diversifying across channels, for example, including after-market sales. They would need to redefine customer segments, such as shared taxi aggregators, and rethink their geography, for example, by sharpening export markets. These cannot be one-time efforts and will require annual reviews of strategy.

Partnerships to build capabilities: Faster market access and time-to-market are critical. Manufacturers can co-invest in R&D and product development, building capabilities through partnerships.

Embrace digital: Manufacturers will need a roadmap for this transformation with clearly defined milestones and a taskforce to drive change.

Non-conventional sales approach: Business should develop a hunter/farmer approach, where the hunter focuses on bringing in new business and the farmer works to grow that customer, and invest in the customer of the future. 

Manage organisational and cultural change: Manufacturers would need a transformation office to identify the roles that create the most value for an organisation and assign them projects that will drive growth in the future.

How stakeholders can support auto component manufacturers

Managing the slowdown and embracing discontinuities in India’s automotive component industry requires crucial stakeholders, such as the government, industry bodies and OEMs, to co-create and collaborate. 

The government could continue to encourage electric vehicle manufacturing and adoption, appoint trade representatives at consulates to facilitate exports and incentivise companies to establish operations in India. Industry bodies could work with export promotion councils to identify target markets for exports, facilitate a cooperative supply chain in high-potential export markets, set up incubation centres in metropolitan zones to promote innovation related to automation, connectivity, electric power and the shared-mobility economy (ACES); and conduct training on the impact of digital interventions.

Anchor actions for OEMs include investing in and collaborating with Tier-I and Tier-II component manufacturers to help them build a workforce of the right size and with the relevant skills and knowledge partnerships to embed digital capabilities in their organisations. 

Concerted actions across all stakeholders could create a unified push for a robust and thriving automotive industry in India.

Shivanshu Gupta is a senior partner, McKinsey & Company, based in Bengaluru. Aurobind Sathpathy is a senior partner, based in Chicago; Barathram A is an associate partner, based in Chennai; and Gandharv Vig is a knowledge expert, based in Mumbai