Top automotive component makers want to diversify to new markets.
Baba Kalyani, the chairman of Bharat Forge, is perhaps the best-known name in the world of automotive components. His list of clients is long and he has done a string of acquisitions abroad to grow. Yet, he expects supplies to non-automotive sectors to bring in 40 per cent of his revenues by 2012, and eventually 75 per cent by 2016.
SRF is the undisputed leader in the tyre cord market with a share of over 50 per cent. There isn’t much competition in the marketplace. Its order books are full. Still, SRF wants to diversify into new areas like pesticides and grow its specialty textile business.
Surinder Kapur is another venerated name in the automotive components industry. His customers include the who’s who of the automobile world: Maruti Suzuki and Mahindra & Mahindra, amongst others. Yet, the chairman of the Sona Group is trying to de-risk his exposure to the passenger car business by widening his product range to parts for trucks and farm machinery, and is also looking at developing a non-automotive business.
Margins under squeeze
As profit margins come under pressure, Indian component makers are drawing up plans to de-risk their business by leveraging their core manufacturing strengths or processes to develop allied businesses.
“All businesses need to de-risk over time. We need to widen our range. We have 55 to 60 per cent share of the Indian market in the products we make for passenger cars, but we may not be able to retain this kind of share. Hence, we need to look at other products, segments and geographies as well as non-automotive businesses,’’ says Kapur.
Kapur plans to engage a consultant to develop non-automotive revenue streams. “We are trying to use our core strengths of machining, heat treatment and assembly (as well as casting, forgings and stamping capabilities) to develop new applications,’’ says Kapur. He’s already supplying parts for the Tata World Truck and is developing parts for construction equipment. He also owns a car rental company.
Some like the Pune-based Bharat Forge Group adapted early to this game. ‘‘In 2005-06, we made a strategic move to focus on the non-automobile business,’’ says Kalyani. The automotive business is largely cyclical, and follows a cycle of four to five years. The downturn in commercial vehicles in 2001-02 hurt Bharat Forge badly as Tata Motors was a key customer. ‘‘We thought the best way to de-risk against the cycle is to develop non-automotive businesses using our base knowledge of forgings, metallurgy and machining,” he adds.
Today, besides automobiles, Kalyani makes forgings for the energy (for hydro and wind turbines), railway (axles for high-speed trains in Europe, crankshaft for locomotives) and marine (ship components) sectors. Bharat Forge has a large number of customers in energy, railways and oil & gas. It supplies rotor shafts for BHEL’s turbines, crankshafts for diesel locomotives of the Indian Railways, and also forged components for hydro and industrial turbines.
There’s a good reason why Kalyani wants to focus more on the non-automotive business. Margins in these sectors are well in excess of 20 per cent as these are high-value and custom-made items, though volumes are lower. Things for the automotive sector, on the other hand, don’t look too good at the moment. Worldwide, though not so much in India, the sentiment has turned against car makers. They are under tremendous pressure to cut prices. Indian component makers were the first to integrate themselves with global automobile makers. Till the late 1980s and early 1990s, they were content to supply to the Indian market. Car technology was old, the roads were bad. As a consequence, the replacement market gave them very good orders. But with automobile technology growing by leaps and bounds, the need for regular replacements came down sharply. This forced them to look at car makers in the West for orders.
Though India and China have grown at a fast clip, the automobile market worldwide is still in pain. A large number of Indian component manufacturers were exporting to car makers in the US and Europe. There is now a question mark over that business.
Home disadvantage
India is an extremely price -conscious market. Car makers have for long been under pressure to keep prices low. As a result, they never fail to put pressure on component makers. In return for the large orders, they have no option but to accept low prices. This is a daily struggle in the lives of component makers. And the situation got really out of hand last year when commodity prices went through the roof.
The Automotive Component Manufacturers Association of India recently assigned credit-rating agency ICRA to study the swing in the fortunes of the industry. The ICRA study reveals that while the industry’s net sales grew at a compounded annual growth rate of 16.8 per cent between 2004 and 2009 and operating profits rose 9.3 per cent, overall profits (profit before tax excluding other income) shrank 14.7 per cent.
The profit margins have been declining gradually since 2004 and saw a drastic drop in 2008 and 2009. Average gross profit margin and net profit margin for component makers between 2004 and 2009 were 6.7 per cent and 6 per cent, respectively. The industry recorded the lowest gross profit margin of 2.7 per cent and net profit margin of 1.8 per cent in the year ended March 2009 (the worst in last six years).
There is another factor at play here. Because of the stiff competition in the car market, most car companies offer wafer-thin margins to their dealers on car sales. Instead, they are encouraged to make money on the sale of spare parts. With this in mind, several car makers have told component makers to route all sales in the retail market only through them. The price, mind you, is the same at which it buys in bulk for its own production lines. In other words, the better profit margins in the retail market are vanishing fast for component manufacturers.
Then there is the China angle. Because of various concessions, Chinese components are up to 30 per cent cheaper than similar components produced in India. Several automobile makers have decided to source up to 30 per cent of their components from China. Component industry executives say that even if actual imports are less, the benchmark on prices is now set by China. For long, the industry has lobbied hard with the commerce ministry for anti-dumping duty on Chinese components. The only success has come in tyres. As a result, tyre companies have reported brisk sales in the last six to seven months.
This perhaps is the reason why SRF wants to reduce its dependence on tyre cord. At the moment, it accounts for around 50 per cent of the company's annual turnover. But the company wants to bring it down to around 40 per cent. According to SRF Managing Director Ashish Bharat Ram, any new business that his company will get into should have a large number of buyers (unlike the automotive sector) and intellectual property protection for its products.
What has helped is that large non-automotive, engineering-driven companies have realised the worth of Indian component makers. Their expertise in frugal engineering is now well established. As a result, the movement is not just one-way. EADS, which owns Airbus, has set up an office in the country with the mandate to source components. ‘‘So, there’s a pull from this side. Indian automobile component makers are high-quality suppliers, have all kinds of ISO certifications, follow TPM and TQM, and hence, are the ideal people to source from,’’ points out ACMA Secretary General Vishnu Mathur. Other aerospace majors like Boeing and Lockheed Martin have also set up full-fledged offices and dedicated teams, but it is likely to be a long haul for Indian auto suppliers.
Many automotive component makers, including Tata and Mahindra & Mahindra, are keen to enter the defence and aviation businesses, but they need to come up with a firm plan, acquire technology for these sectors and understand that it is simply a different ballgame. ‘‘This is not like the automotive business. The manufacturing systems, the specifications, and the quality requirements are so different,’’ says a sector expert. ‘‘A car has a life of five to seven years, while a plane flies for up to 30 years. So, the business relationship and cycles are long. The part approvals in aerospace can take anywhere between 15 months and 18 months; in automobiles, it now takes just two months.” In other words, there is no scope for failures. There are, after all, no garages in space.
