Auto Ancillaries : Future Outlook

There has been a conscious effort by manufacturers to improve productivity of the suppliers in the past few years. Though the number of active vendors has declined significantly for auto manufacturers, technology transfer and fresh fund infusions have resulted in improved productivity in the remaining ones. Relaxation of FDI norms for the small-scale sector could emerge as one of the key growth drivers in the long run. The Indian automotive components industry has lined up sizeable investment schedules for the next few years.

	The automobile sector is cyclical and dependent on the growth of the economy and improvement in infrastructure. Factors like increased public spending, favorable interest rates and general improvement in per capita income point towards higher demand for automobiles in the future. Also, government's initiatives in the infrastructure sector such as the Golden Quadrilateral project and NHDP (National Highway Development Programme) are likely to give boost to four-wheeler sales especially CVs. Just to put things in perspective, we expect CV segment to grow by 7% to 8%, 2-wheeler demand to increase by around 12% to 15% and passenger car sales growth at 10% to 12% over the medium to long term. This is a positive for auto ancillary manufacturers.
	In the long term, the growth of this sector will depend partly on pace of indigenisation levels across all segments. The prospects look bright as most companies are increasing the indigenous components, in an effort to reduce their currency losses and remain competitive. Also, the fact that auto manufacturers like Ford, Hyundai and Maruti are exporting cars, make the prospects look encouraging.
	Margins are likely to come under pressure in the long term because as competition increases, manufacturers will find it difficult to increase prices and will try to cut costs. The burden will eventually fall on auto ancillary players. In the near future though, companies will need to have manufacturing lines that can be adapted for new models, have strong technology backing, an ability to export to developed markets, market dominance in specific products and a growth plan driven by volumes and product innovations. Companies will have to focus on quality and abide by delivery schedules if they want to survive. As manufacturers sourcing components are keen to get components from fewer sources in future, this will lead to consolidation in the sector.
	The growing number of Free and Preferential trade agreements being signed by India with countries like Thailand, Singapore and other ASEAN countries will hurt the cost competitiveness of Indian companies as Indian players play significantly higher duties than their Asian counterparts. Therefore, Indian companies might lose out on big orders if the duty structure is not rationalised.