Auto Industry : Regulatory Framework

In India the Rules and Regulations related to driving license, registration of motor vehicles, control of traffic, construction & maintenance of motor vehicles etc are governed by the Motor Vehicles Act 1988 (MVA) and the Central Motor Vehicles rules 1989 (CMVR). The Ministry of Shipping, Road Transport & Highways (MoSRT&H) acts as a nodal agency for formulation and implementation of various provisions of the Motor Vehicle Act and CMVR.

In order to involve all stake holders in regulation formulation, MoSRT&H has constituted two Committees to deliberate and advise Ministry on issues relating to Safety and Emission Regulations, namely –

• CMVR- Technical Standing Committee (CMVR-TSC)
• Standing Committee on Implementation of Emission Legislation (SCOE)
• CMVR- Technical Standing Committee (CMVR-TSC) –
  This Committee advises MoSRT&H on various technical aspects related to CMVR. This Committee has representatives from various organisations namely; Ministry of Heavy Industries & Public Enterprises (MoHI&PE)), MoSRT&H, Bureau Indian Standards (BIS), Testing Agencies such as Automotive Research of India (ARAI), Vehicle Research Development & Establishment (VRDE), Central Institute of Road Transport (CIRT), industry representatives from Society of Indian Automobile Manufacturers (SIAM), Automotive Component Manufacturers Association (ACMA) and Tractor Manufacturers Association (TMA) and representatives from State Transport Departments. Major functions the Committee are:
  • To provide technical clarification and interpretation of the Central Motor Vehicles Rules having technical bearing, to MoRT&H, as and when so desired.
  • To recommend to the Government the International/ foreign standards which can be used in lieu of standard notified under the CMVR permit use of components/parts/assemblies complying with such standards.
  • To make recommendations on any other technical issues which have direct relevance in implementation of the Central Motor Vehicles Rules.
  • To make recommendations on the new safety standards of various components for notification and implementation under Central Motor Vehicles Rules.
  • To make recommendations on lead time for implementation of such safety standards.
  • To recommend amendment of Central Motor Vehicles Rules having technical bearing keeping in view of Changes in automobile technologies.

CMVR-TSC is assisted by another Committee called the Automobile Industry Standards Committee (AISC) having members from various stakeholders in drafting the technical standards related to Safety. The major functions of the committee are as follows:

• Preparation of new standards for automotive items related to safety.
• To review and recommend amendments to the existing standards.
• Recommend adoption of such standards to CMVR Technical Standing Committee
• Recommend commissioning of testing facilities at appropriate stages.
• Recommend the necessary funding of such facilities to the CMVR Technical Standing Committee, and
• Advise CMVR Technical Standing Committee on any other issues referred to it

The National Standards for Automotive Industry are prepared by Bureau of Indian Standards (BIS). The standards formulated by AISC are also converted into Indian Standards by BIS. The standards formulated by both BIS and AISC are considered by CMVR-TSC for implementation.

• Standing Committee on Implementation of Emission Legislation (SCOE) – This Committee deliberates the issues related to implementation of emission regulation. Major functions of this Committee are –

• To discuss the future emission norms
• To recommend norms for in-use vehicles to MoSRT&H
• To finalise the test procedures and the implementation strategy for emission norms
• Advise MoSRT&H on any issue relating to implementation of emission regulations.

Based on the recommendations from CMVR-TSC and SCOE, MoSRT&H issues notification for necessary amendments / modifications in the in Central Motor Vehicle Rules.

In addition, the other Ministries like Ministry of Environment & Forest (MoEF), Ministry of Petroleum & Natural Gas (MoPNG) and Ministry of Non-conventional Energy Sources are also involved in formulation of regulations relating to Emissions, Noise, Fuels and Alternative Fuel vehicles.

Auto Ancillaries : Business and Financial Risk Analysis

BUSINESS RISK ANALYSIS 

Customer Concentration Risk
Most of the auto ancillary units face customer concentration risk. Due to high dependence on few
customers, the performance of their customers is important for the auto ancillary unit. Diversified
customer base would result in lesser volatility and less correlation performance with specific
OEM.

Performance of the OEM
 Past and expected performance of the OEM as well as share of OEM in the automobile market
should be considered. Expansion plans helps to understand the increase in potential orders.

Balance between direct sales to domestic OEM, Export and Aftermarket
Perfect balance with direct sales to domestic OEM,  export and aftermarket ensures smooth
functioning of the auto ancillary units in various business cycles.
Position & Significance in the Value Chain
Position of the auto ancillary unit in the value chain is important to understand its significance in
the value chain. Higher the position in the supply chain ensures lesser threat of new entrants and
less risk of price erosion.

Technology & Processes
Technology used by auto components in the developed countries is much better than developing
countries like India. Japanese automobile industry  has influence on the Indian automobile
industry and its allies. OEM also checks the quality management practices that are adopted  by
the auto ancillary units.OEM also ascertains as to whether the auto ancillary unit practices like Six Sigma, JIT, etc are practiced.

FINANCIAL RISK ANAL

One follow the standard criteria used in all manufacturing companies for the financial risk 

analysis of the auto ancillary industry. Here various financial ratios are tracked to have an idea of
the performance of the industry.

CONCLUSION 

The key success factors of the Auto Ancillary industry are

Customer Concentration Risk

Position & Significance in the Value Chain

Technology & Processes

Ancillaries : Defining SMEs

Auto  component  SMEs   are   one  of  the  fastest  growing  within  the   SME  category  of 
industries.  These  units  are  key  contributors  to  the  total  production  of  auto  components 
and also have a significant share in the exports of the industry.  
As  part   of  a  highly   fragmented  industry,  these  companies  mostly  are  part  of  the 
unorganized sector. They operate  in  a  tier  framework,  and  most of  the  companies  in  the 
SME segment are in the Tier II or below. Few of the suppliers to  OEMs  are  medium  scale 
enterprises. 
The  SMEs  are  riding  a  boom  phase,  driven  by  demand  from  global  auto  manufacturers. 
The   industry  is   undergoing  a  major  restructuring  and  many   existing  companies  are 
expected  to  move  up  in  the  value  chain  to  a  higher  tier.  Nevertheless,  sustenance  and 
survival  still  remains  an  issue  of  concern  for  these  companies as they will have to absorb 
global best practices in this competitive environment. 
Cost  competitiveness,  customer  orientation,  lead  time,  are  some  key  factors  the  auto 
component SMEs will have to imbibe to survive in the new global set‐up. At the same time, 
these companies face the limitations of being SMEs, like 
 Low capital base  
 Limited generation of surplus funds for re‐investment due to tight working capital 
cycle  
 Lack of awareness of business opportunities  
 Inadequate exposure to international environment  
 Limited geographical diversity of markets  
 Obsolete Technology  
 Poor infrastructure facilities  
Despite  these  limitations,  the  SMEs  have  managed  to  significantly  contribute  towards 
development of India’s industrial base. The key risks that the auto component SMEs faces 
include: 

Auto  component  SMEs   are   one  of  the  fastest  growing  within  the   SME  category  of 
industries.  These  units  are  key  contributors  to  the  total  production  of  auto  components 
and also have a significant share in the exports of the industry.  
As  part   of  a  highly   fragmented  industry,  these  companies  mostly  are  part  of  the 
unorganised sector. They operate  in  a  tier  framework,  and  most of  the  companies  in  the 
SME segment are in the Tier II or below. Few of the suppliers to  OEMs  are  medium  scale 
enterprises. 
The  SMEs  are  riding  a  boom  phase,  driven  by  demand  from  global  auto  manufacturers. 
The   industry  is   undergoing  a  major  restructuring  and  many   existing  companies  are 
expected  to  move  up  in  the  value  chain  to  a  higher  tier.  Nevertheless,  sustenance  and 
survival  still  remains  an  issue  of  concern  for  these  companies as they will have to absorb 
global best practices in this competitive environment. 
Cost  competitiveness,  customer  orientation,  lead  time,  are  some  key  factors  the  auto 
component SMEs will have to imbibe to survive in the new global set‐up. At the same time, 
these companies face the limitations of being SMEs, like 
 Low capital base  
 Limited generation of surplus funds for re‐investment due to tight working capital 
cycle  
 Lack of awareness of business opportunities  
 Inadequate exposure to international environment  
 Limited geographical diversity of markets  
 Obsolete Technology  
 Poor infrastructure facilities  

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.

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.

Industry Analysis : Ancillaries

—  While some Indian companies were winning plaudits for their work in the services field such as IT and BPO, companies from the manufacturing sector weren’t exactly treading the same path. However, if the developments that have taken place recently in the auto ancillary industry are any indication, it won’t be long before the auto ancillary industry in the country does a repeat act. And this newfound optimism in the industry is not without reason.

      For one, the industry exports have grown at a CAGR of 19% in the last five years. Secondly, many among the best global auto makers have started either outsourcing from the Indian auto ancillary companies or have set up their own manufacturing bases in the country. In this article, let us try and find out why the auto ancillary industry has the potential to become the next big outsourcing story and what are the obstacles in the path.

       Following are some of the reasons as to why we are bullish about the auto ancillary industry:

     US auto industry, the biggest exports market for the Indian auto ancillary industry, is under increasing pressure to cut costs. The ‘big 3’ automakers have been steadily losing markets shares to their cost competitive Japanese counterparts and discounts and rebates on their models is causing enormous strain on their margins. While these companies posted an operating margin of 2% in 2002, their net margins had come down to a mere 1% in the same period.

      Therefore, it is only natural that these companies have started looking at low cost destinations from where they could import cheaper components. This is where India’s technically qualified low cost manpower acts as a key advantage. It is estimated that while Indian manufacturers spend 3%-15% of sales as labour cost, global companies spend anywhere between 20%-40% of sales on wages. Not only this, if one considers that India accounted for only 0.26% of US imports of around US$ 69 bn in 2002, it gives us an idea of the huge market that is out there waiting to be tapped.

       Another factor that has led to the growth in exports from the auto ancillary industry is the changing perception about the ‘Made in India’ products. While the Indian manufacturing industry is not exactly known for its cutting edge technology and stringent quality standards, things are beginning to change. The fact that as many as six companies boast of the coveted Deming awards (four auto ancillary companies and two auto companies) is a testimony of the fact that the Indian auto ancillary industry is capable of manufacturing products that are at par with the best in the world in terms of quality. Not only this, about half of the auto ancillary companies have QS 9000 certification, considered to be an important pre-requisite for supplying to the US based OEM’s.

      Another reason we are bullish on the industry’s export prospects is the huge global market. The size of the market is estimated to be around US$ 1 trillion out of which about 75% is accounted for by the OEM’s and the remaining 25% by the replacement markets. Therefore, in addition to the US, the auto ancillary manufacturers can also focus on the European and the growing Chinese automobile market for growth. Already, a couple of companies have made some strategic acquisitions in the European markets (Bharat Forge acquired a German forging company and Sundram Fasteners acquired precision forging business of Dana Spicer Europe). This would help these companies to reduce their dependence on the US markets and also open up windows of opportunity in the European markets. In fact, Sundram Fasteners is also setting up a plant in China to cater to the Chinese domestic market, which is also growing at a very fast pace.

      Therefore, on account of a host of favorable factors given above, according to industry estimates, the exports from the Indian auto components industry should total roughly around US$ 50 bn by 2015 (that’s a 39% CAGR from current levels).

      However, there are a couple of caveats. While the Indian IT industry got a headstart over its rivals, the same cannot be said about the auto components industry as countries like China and Thailand might throw cold water on India’s ambitions. While China has huge economies of scale and lower labour cost than India in some areas, Thailand is believed to have excess capacity (legacy of East Asian crisis) and depreciated assets. Therefore, these countries are capable of beating India at its own game, that of low cost.

      But there is a light at the end of the tunnel for Indian auto ancillary manufacturers. It is being observed that over the last few years, automakers have been increasingly passing on greater responsibilities to their suppliers and they no longer want mere manufacturers but suppliers who can provide them with complete set of services like research, development and design, testing etc. and this is where India can score over its Asian rivals, as thanks to the country’s IT advantage, it can bridge this gap faster than its rivals

Auto Industry : Growth Drivers

Growth Drivers—

Rising industrial and agricultural output

—Rising per capita income

—Favorable demographics with rising working population and middle class urbanization

—Increasing disposable income in rural agri-sector

—Availability of variety of models meeting diverse needs and preferences

—Easy financing schemes

—Favorable government policies

—Robust Production

KEY FACTORS

Per Capita Income

— Motor Vehicle Tariffs

— Domestic Good Prices – Metal & Steel

— Crude Oil Prices

— Interest Rates