India is poised to soar, higher than many fast-growing large economies over the next decade. At the same time, automotive original equipment manufacturers (OEMs) and component manufacturers in the country aspire to achieve global eminence. The future of the auto OEM and auto component industry is being shaped by multiple trends, policies and discontinuities.
The automobile sector is set to experience a big move, here's how
India's automobile sector is set to experience a major transformation due to global supply chain diversification, government initiatives, and rising consumer class. This will open up multiple opportunities for auto component manufacturers to benefit from the shift with increased exports and domestic investments.
What opportunities do these trends create for the auto component industry? And how can the industry prepare itself to capture a share of these opportunities? This report outlines the growth potential and aspirations of the industry, the trends that are impacting it, the specific opportunities these create, and how auto component manufacturers could change themselves and ask for support from the ecosystem to capture these opportunities.
A major restructuring is underway in global supply chains following widespread disruption in recent times due to Covid and the Russia-Ukraine conflict. In an attempt to diversify their supply chain, many global companies are moving away from traditional manufacturing bases to countries with similar manufacturing strengths. This has benefited countries like Vietnam, (in electronics) and Mexico (in furnishings and appliances).
It believes that in Industrial and Automotive products, India will be a huge beneficiary due to its available supplier ecosystem, scale, competitive cost structure, and most recently government policy initiatives. This shift is likely to be accelerated by recent cost pressures (energy and labour) on European and US Industrial companies and continued lockdowns in China (till recently).
Engineering exports to US, Germany rising
In Industrials, India’s exports to certain countries have grown at a healthy pace. On a 5 year CAGR basis, exports to USA, Thailand and Singapore grew by 23%, 34% & 17% respectively in the industrial machinery and equipment segment, while in the electrical machinery segment exports to USA, UAE and Germany grew by 24%, 28% and 18% respectively.
Categories that are expected to gain more traction would be parts of internal combustion engines and bearings in industrial machinery (IM), mobile/telephone sets, electric gensets and rotary converters, valves and similar appliances in electrical machinery (EM)
India’s automotive sector is also well placed to benefit from structural shifts: In the automotive sector, several global companies are looking at export-oriented production in India. FDI inflow into the automotive sector in FY22 jumped sharply to USD7bn to form 12% of the total FDI inflows into India. India’s automotive exports have traditionally grown by 6-8% pre-pandemic vis-à-vis strong double-digit growth in the preceding year. Automotive exports to both North America and Europe grew.
40% led by drive transmission, engine suspension and braking components. This growth is attributable to
1) Global impetus on supply chain diversification,
2) Strength of Tier 2 & 3 domestic supplier base,
3) Low-cost advantage vs. developed economies and
4) Government initiatives on Make in India (PLI, FAME scheme). Companies such as Hyundai-Kia, Kubota, and ZF have recently announced plans to make India their export hub or set up a global R&D base in India.
These companies, with a manufacturing unit in India, will likely be the beneficiaries of the shift in the global supply chain. Component manufacturers in metal forming/industrial segment and tyres will also benefit from higher sourcing from India.
A leader among emerging economies, India is expected to be at the forefront of growth over the next few years. It could be the world’s fifth-largest economy in 2019,8 and a USD 4.7 tn economy in 2023.
India has been notching up successive trillions quicker than before, and might continue this pace, earning its third trillion in five years, and its fourth in just three more years. It also conquered 30 spots on the World Bank’s Ease of Doing Business rankings between 2016 and 2017 to make it to the top 100 countries.
With rapid urbanisation, over 500 mn people will be living in Indian cities by 2030. Growing incomes could help many of these cities and regions mirror the GDP per capita of some high and middle-income nations. For instance, by 2026, New Delhi might match up to Russia of 2014, with a comparable GDP per capita.
As prosperity grows, consumption rises—India’s consuming class is expected to expand from 27 mn households in 2014 to 89 mn households by 2025. The automotive industry is also expected to flourish, with the burgeoning consumer class investing in more and better vehicles across segments to serve their rising mobility needs.
This exciting forecast for automotive manufacturers also implies healthy growth for auto component manufacturers.
The auto component industry’s turnover increased from ₹1.1 lakh cr (USD 24 bn) in FY 2009, to ₹3.5 lakh cr (USD 51.2 bn) in FY 2018.18 The industry now aspires to double its contribution to manufacturing GDP with a fourfold growth in size and a six-fold growth in exports by 2026.
Few of the companies like Cummins India, Timken India, MTAR Technologies, Rolex Rings, Escorts, ZF Commercial Vehicle, and Tube Investments, to highlight these trends.
Shuchi Nahar is a Certified Research Analyst. She can be found on Twitter at @shuchi_nahar
Note: This article is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related investment-related decision.