Top Gear

The Indian auto component sector is on a high growth trajectory and is passing through a period of rapid transformation.

The industry witnessed a compounded annual growth rate of 20 per cent between 2000 and 2005 and was worth over $10 billion in 2005. It is expected to nearly double every four years to $18.7 billion in 2009 and reach $40 billion by 2014, with an estimated CAGR of 17 per cent during 2005 2014, according to McKinsey-ACMA (Auto-motive Component Manu facturers Association).

The Indian component industry is poised to grow its exports of $1.8 billion in 2004-05 to $5.9 billion in 2008-09 and $25 billion by 2014 with a projected CAGR of 34 per cent. Exports have been growing at a CAGR of 25 per cent over the last five years. According to ACMA, more than 36 per cent of Indian auto component exports head for Europe and about 26 per cent are to North America.

According to R Dinesh, executive director, TVS Logistics, there is a growing global focus on supply chain especially with the auto component industry expected to increase its exports from 19 per cent in 2004-05 to 30 per cent in 2006-07 due to increase in demand of casting in European and Japanese automotive markets.

The statistics further reveal that the industry is dominated by around 500 key players, which contribute more than 85 per cent of India's production. The industry has very deep forward and backward linkages with almost every other engineering manufacturing sector of the economy. It supports industries like automobiles, machine tools, steel, aluminum, rubber, plastics, electrical, electronics, forgings and machining.

Southern story

The Indian automotive and ancillary manufacturing saga has a strong southern flavour, particularly of Tamil Nadu (TN). While Karnataka has an established auto cluster and Andhra Pradesh is keen participate in the auto growth story, TN has established itself as one of the leading automotive centres in the country and its position has only become stronger with the entry of global auto players. It has earned the title 'Detroit of South East Asia.'

With over 100 key players in the world's automobile industry located in Chennai, TN holds 35 per cent of auto components installed capacity. TN accounts for about $240 million worth exports that represents 27.5 per cent of India's total exports.

The auto component industry of the state has witnessed an investment of about $800 million in recent years, according to Arcot N Veerasamy, minister for electricity, government of Tamil Nadu.

The share of TN in the Indian automotive industry is estimated to be 25 per cent with an estimated annual output of up to $3.5 billion. The state presently accounts for 35 per cent of the automobile components production, 21 per cent of the passenger car production and 33 per cent the commercial vehicle production.

Historically, it has been the home to some of the leading OEMs and auto component manufacturers like Ashok Leyland, TVS group, Rane Group and Amalgamations group. The entry of global auto majors like Ford, Hyundai and Mitsubishi with their supplier base has reinforced state's image as a leader.

With a turnover of close to $3 billion, the 94-year-old TVS group is the leading supplier of automotive components and exports around a third of its output. The key component manufacturers of the group are Sundram Fasteners, Wheels India, Sundaram Clayton, Sundaram Brake Linings, Lucas-TVS, Brakes India and Axles India.

Rane Group is also another major player with a group turnover of Rs 1,350 crore. Rane group is looking at a turnover target of Rs 2,500 crore by 2011 when exports are expected to contribute about 20 per cent to the topline.

As per a recent CII survey automotive and auto components industry in TN has witnessed a growth rate of up to 20 per cent during April-September in 2006 compared to previous period.

Automotive manufacturing in TN has several inherent strengths that include availability of skilled manpower, a good work ethic and manufacturing culture, and a general reputation for quality in manufactured goods. Its geographical location to service ASEAN markets region also makes TN unique.

TN has over 230 engineering colleges and the annual turnout of graduates in the state is over 79,000 accounting for a large portion of India's output. Besides, the state produces 58,500 diploma holders from polytechnics.

Over 100 large companies in the auto and ancillary industry are based in the state, maintaining highest production norm by implementing internationally recognised quality standards like TPM (total productivity management), TQM (total quality management), Kaizan, SGA (small group activity), among others.

The state has the highest number of prestigious Deming Award winners for maintaining quality in the auto component industry.

For instance, Sundaram Clayton, bagged the coveted Deming in 1999 for the first time in India. Similarly, another TVS group company, Sundram Fasteners has won a General Motors 'Supplier of the Year'" award five times. Since then, several companies have joined the fray.

The common bond

The automotive industry in TN is concentrated around Chennai, Madurai, Coimbatore and Hosur.

Amongst auto components, the state is one the leading manufacturers if high quality electrical, braking/suspension parts and engine parts and these products, which enjoy a reputation of quality and reliability, are being exported to a number of global OEMs.

The Indian component industry has emerged as an outsourcing hub for auto parts for international companies such as Ford, General Motors, Daimler Chrysler, Fiat, Volkswagen, and Toyota.

Bullish on the growth potential, Hyundai Motor is planning a major expansion programme involving an investment of up to Rs 2,300 crore to set up a second car production facility to scale up its capacity to four lakh passenger cars per annum in two years from the present 2.5 lakh unit.

While a few other domestic players and international players are also looking at the possibilities to put up their manufacturing unit in the state, Malaysia's Naza Motor Corporation plans to invest $150 million to set up a car assembly unit at Sriperumbudur, the manufacturing hub of TN and the company expected to sign a memorandum of understanding with the TN government in the next few weeks.

Shaktikanta Das, secretary "� industries, Government of Tamil Nadu points out there is a huge potential to improve the logistics infrastructure of the state for the auto components industry by linking the components manufacturing hubs of Madurai, Hosur and Coimbatore to Chennai.

To be sure, auto component industry is one of the key sectors in Karnataka, which is also the hub of some leading automobile companies. Out of the total 201 listed auto ancillary firms in India, 10 are based in Karnataka. The state possesses a vibrant auto industry with investments of over Rs. 2,924 crore and annual turnovers of Rs. 2,000 crore, according to a CII industry monitor report.

The automobile sector's contribution to the central excise department of the Karnataka was Rs 3,896 crore during the first half of 2004-05, a 31 per cent growth over the same period previous year.

Role of SMEs

SMEs in the auto component sector are among the fastest growing and form the Tier-3 and Tier-4 of the automotive supply chain. The SME segment is undergoing a major restructuring and a number companies are expected to move up in the value chain, on the back growing demand.

C Sivakumar, CEO, Prabha Engineers "� which is Chennai-based, Rs 54-crore, Tier 1 supplier of front end structures to Ashok Leyland "� points out that the present status of SME sector is not homogenous and is a mix of highly capable growing industry on one side and on the other, is a set struggling to establish itself.

The last decade has been extremely crucial for the SMEs. Companies that looked inward for people development and those that have made initiatives in TQM and TPM processes have been able to meet the increasing demand of the customer.

'One has to be creative'

It has been a fruitful journey for C Sivakumar, Promoter and CEO, Prabha Engineers, who is upbeat about opportunities for SMEs in the auto component sector:

You seem to have ambitious target this year?

We ended the last fiscal with a turnover of Rs 54 crore "� a 90 per cent jump over the previous year. We aim to achieve over 100 per cent growth in 2007, which is realistic going by the sales in the first three quarters.

What are the prospects for SMEs?

SMEs face several challenges and need to provide quality products at a higher volume and lower costs. The availability of skilled manpower and retaining them would be another challenge. High cost of funds is a big issue for SMEs, as the final product pricing has to be competitive. Design capability will be another important factor.

All the industries have to be competitive in the present scenario, SMEs are no exception. Meanwhile, future is bright due to auto industry boom. Many SMEs have moved up the value chain, to become Tier-I suppliers.

How can they cope with rising raw material costs?

A clear procurement policy is important, besides there are many ways of controlling cost. For instance, the cost of procurement is lower for larger volumes, reducing wastage by proper planning, inventory control, higher productivity through better training as well as motivation, cost of borrowed funds can be lowered, TQM and TPM initiatives and many more...The list is endless, one has to be creative, industry-specific and willing to change.

What has really worked well for you?

Our unique training methodology coupled with TQM initiatives resulting in TEI (Total Employee Involvement) has really helped us expanded our operations into Alwar last February and the sales in the new unit has been as per the projections. Our real challenge would be in 2008 when we are anticipating crossing the Rs100-crore mark.

These are the units that have been retained as Tier I suppliers. The Tier II and III SMEs, have not transformed themselves causing the Tier I suppliers to swing like a pendulum tossing between higher quality expectation and cost pressure from their customers on the one side and low quality supply and improper delivery schedules of their vendors on the other side, explains Sivakumar.

According to him, the lack of development in terms of capacities and capabilities to support the larger manufacturers could be the roadblock for SMEs in the realisation of growth targets.

In fact, a CII study validates his view urging SMEs to adopt better quality systems to ensure consistent quality of output, to access latest manufacturing and engineering technology and to overcome inefficiencies resulting from the small scale of operations.

The road ahead...

Exciting times lie ahead and the domestic component industry is expected to capitalise on global outsourcing opportunities with its focus on component exports, CBU exports, primarily as a result of contract manufacturing of specific vehicle categories and outsourcing of engineering activities.

The regions like North America, Western Europe and Japan are expected to be the major destinations for OE exports.

A CII vision statement for the TN automotive sector envisages TN emerging as among the top three destinations of choice in Asia for the manufacture of automobiles and automotive components.

The output of the state's automotive sector will be $18-$20 billion, a share of 30-35 per cent of the Indian automotive industry, by 2015, contributed by components, fully built vehicles and engineering services provided to both domestic and global markets.

Exports of automotive components would be about $7 billion and the domestic sales components and completely built units (CBUs) at $ 5 billion. Exports of CBUs and engineering design services could contribute around $ 1.5-2 billion to the total output by 2015.

Implementing vision 2015 would need an incremental investment of the order of $5 billion to come into TN over next decade. About 65 per cent investment is expected to come from MNCs seeking to make TN their manufacturing base and the remainder about 35 per cent by Indian players.

While the CII report points out that lower labour productivity vis-à-vis competing nations, lack of labour flexibility and quality of infrastructure could be the barriers of growth of the automotive sector, it has asked the state government to encourage SMEs to become viable and sustainable and articulate a plan to create a four hubs around Chennai, Coimbatore, Madurai and Hosur.

Watch the southern hub

Production of auto ancillaries was estimated at $10-billion in 2005-06 and has been growing at a robust 20 per cent per annum since 2000. Sanjay Jayavarthanavelu, Chairman, CII "� Tamil Nadu, talks about the progressive moves made by the SME clusters, especially in the auto components sector.

How do you view the abilities of SMEs?

Auto component SMEs are carving a niche for themeselves. The major issues before them is their ability to scale up and manage the rapidly rising managerial employee costs. In order to make the SMEs globally competitive, CII Southern Region launched the SME Cluster project in 2005. Tamil Nadu alone five SME clusters and the Pricol OEM clusters at Coimbatore is part of this, focusing on auto component sector. They focus on improvement in issues like energy conservation, costing methodologies, employee involvement and reduction of rejection rate among other things.

What are main hubs for this industry ?

Chennai is already a significant auto component centre and is set to become an important exporting hub. According to a CII study, by 2015, TN will emerge as top three destination in Asia for the manufacture of automobiles and auto components "� accounting for $18-billion worth output. To make this a reality, CII here is actively engaged in dialogue with the Tamil Nadu government.

"� Ravi Menon

'We want a level playing field'

ACMA's southern region chairman, V Rama chandran, talks about the role of SMEs.

What are the barriers to growth?

We seem to be losing our competitive edge in the wake of FTAs and RTAs. India has the highest costs and duties structure. We are unable to attract huge green-field investments in comparision to ASEAN and China. FTAs would continue to distort future investments in the auto component sector in favour of Thailand, which also offers a host of incentives. The inverted duty structure has become serious as a result of the Early harvest Scheme of the Indo-Thai FTA. In this scenario, It would be difficult to sustain the competitive edge for exports. ACMA has suggested to the government to amend notification no.27/2004, 23 Jan 04, to bring in zero duty on all the raw materials contained in the notification and also institute an automatic mechanism for zero duty on raw materials for items included in FTA e.g. Advance License Scheme, Duty Free Import entitlement or some other mechanism. We want a level playing field.

The contribution of SMEs and the issues faced by them?

Majority of the 527 ACMA members are SMEs. The ability to constantly add value inspite of increasing cost of inputs is a key challenge. Companies have to constantly invest in process improvement, as many are struggling to keep up their delivery schedules.

According to a recent CII-SR Study, there is a huge gap between supply and demand of trained manpower. Infrastructure is another major challenge. The automotive sector is increasingly going the IT way, where the life cycle of product and technology is getting shorter, requiring companies to work faster on new product development without much change in the price.

What is ACMA doing?

In our Cluster Programmes, members are guided by industry experts. This hand-holding exercise extends up to three years, after which they have to sustain the improvements. We also offer Six-Sigma training, and have more than 300 black belts and green belts to the ACMA members.