Indian Auto Component Industry: New Destination for Outsourcing?

Published: 11 Nov 2003
By V.G. Ramakrishnan
 
The Indian auto component industry is receiving attention like never before. A great deal of interest is being shown by global automobile and auto component manufacturers to outsource components from Indian manufacturers. Auto component manufacturers in India are looking to replicate the success of the software sector. What are the reasons for such optimism? What are the fundamentals driving exports of auto components making industry participants project US$10 billion in exports over the next few years from the current US$450 million levels?
 
Exporting is not new for auto component manufacturers in India. A classic example is Sundaram Fasteners that has been exporting radiator caps to General Motors (GM) for the last few years. Leading auto component manufacturers like Rane and TVS Group have been exporting components to the extent of 10 to 25percent of the company’s turnover in the past. The exports were to countries in Europe and to the U.S. catering mainly to the aftermarket. Tire manufacturers have traditionally been strong exporters. Exports of tires have been growing at a compound annual growth rate (CAGR) of 19 percent over the past 10 years.
What has transformed Indian auto component manufacturing? This market once feared the Chinese dragon’s onslaught, and now is grabbing a larger pie of the exports market.
 
Key Trends
 
The key trends that are shaping the fortunes of the auto components industry in the export market are:
  • Strong engineering skills, high quality and relatively low cost of highly skilled man power makes India a preferred destination for automakers
  • Increasing competitive pressure on global automakers forces them to outsource from low cost manufacturers
Automobile manufacturers in U.S. and Europe are facing pricing pressure and weak demand. To improve competitiveness, manufacturers are looking to outsource components from countries like India that produce comparable quality components at lower prices. As the global markets continue to face sluggish growth, discounts and attractive finance options are used to attract customers further bleeding the bottom line of automobile manufacturers. The only way to achieve sustained cost reduction is to outsource to countries like India, which has inherent cost advantages. Hence, this trend is expected to help Indian manufacturers in garnering more outsourcing contracts from global automakers.
 
The opening up of the economy, even though calibrated, raised fears that Chinese manufacturers would swamp Indian markets. This fear, in turn led to Indian manufacturers improving their quality and establishing systems to ensure low failure rate. Indian manufacturers were quick in embracing quality certifications like ISO and QS to enhance their quality. The presence of leading automakers like GM, Ford, Toyota, and Volvo has also helped Indian auto component manufacturers to improve the quality of components supplied. These components meet global standards and Indian manufacturers are demonstrating that they have the necessary skills to work effectively with global manufacturers. The rising confidence level of global automakers has translated into large orders for components from companies like DaimlerChrysler, Deutz, and Navistar among others. The strong engineering skills of India’s workforce combined with high quality is expected to drive exports business
Products and Companies
 
Component manufacturers that have significant export focus are Bharat Forge, JK Tyres, MICO, Motherson Sumi, Rane Engine Valves Limited, Rane Madras Limited, Sona Koyo, Sundaram Fasteners, and Visteon. Software development is another area where global automotive companies are utilizing the strategic strength from India. Companies like DaimlerChrysler, Bosch, and Visteon have set-up software development centers in India for automotive solutions to cater to their global requirements.
 
India’s competitiveness lies in casting and forging and components that are labor intensive. Other product categories that offer Indian auto component manufacturers export opportunities include electrical components such as alternators, starters, horns, electric bulbs, rubber components, instrument clusters, and plastic molded products.
 
Competition
 
Auto components exports from India form a small percentage of the global exports market. India is not alone in developing its auto component industry to take advantage of growing exports business. Countries like Thailand, Turkey, and Mexico are trying hard to become a Detroit in their respective regions. China has been trying to replicate its success in capital goods manufacturing to the automotive segment. All leading automakers have either entered or are queuing up to enter China’s large vehicle market. A growing Chinese vehicle market is both a challenge and an opportunity to the Indian auto components manufacturers.
 
Strategies to Compete
 
One obvious way for the Indian manufacturers to compete in the global export markets is to focus on their current areas of strength. As the industry continues to grow with new export orders from automakers some strategies that Indian manufacturers can adopt to gain success in these markets include:
  • Identify products where there is continued aftermarket demand for older technologies, even though the original equipment market has moved forward. For example, tire manufacturers export cross ply tires to the developed world as the manufacturing has moved on to radial.
  • Focus on low volume products and niche vehicle segments like off-road vehicles in U.S. and Europe that will provide good volumes for Indian manufacturers.
  • Continue to build strong relationships with existing original equipment customers.

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