Auto Ancillaries : Five Forces

The fortunes of the auto ancillary sector  re closely linked to those of the auto sector. Demand swings in any of the segments (cars, two-wheelers, commercial vehicles) have an impact on auto ancillary demand. Demand is derived from original equipment manufacturers (OEM) as well as the replacement market. Out of the total revenues, engine parts account for 31% of the total revenues of the industry in FY10.

 ACMA, the Indian auto component industry body had around 588 players registered with it in FY10. 

	Margins in the replacement market are higher than the OEM market. The OEM market is very competitive and component manufacturers have to compromise on margins to bag bulk orders. Moreover, delivery schedules and quality standards have to be adhered to very strictly.
	Indian auto ancillary sector has traditionally suffered from poor quality. While this still holds true for the unorganized sector, the organized sector has been resorting to increased automation to reduce the defect levels.
	Lower labour costs give Indian auto ancillary companies an absolute cost advantage. To put things in perspective, ACMA numbers suggest that wage cost accounts for 3% to 15% of revenues for Indian manufacturers as compared to 20% to 40% for US players. India's strength in exports lies in forgings, castings and plastics historically. But this is changing with more component manufactures investing in upgradation of technology in recent years.

Key Points Supply Low for high technology products. Unorganized sector dominates the domestic component market due to excise benefits. Generally, excess supply persists. Demand Linked to automobile demand. Export demand is linked to the increasing acceptance towards outsourcing. Barriers to entry Capital, technology, OEM relationships, customer service, distribution network to meet replacement demand. Bargaining power of suppliers Low with OEMs. Relatively high in the replacement market   Bargaining power of customers Companies operating in the export market face competition at a global level. At the domestic level, market structure is fragmented for a large number of ancillary products. Most companies adopt low cost and differentiation strategies. In some products (like batteries), only two or three companies control over 80% of the market. Competition Will intensify, as global players will enter the market leading to consolidation. Dereservation of SSI will result in access to capital and technology.