With leading auto makers like Volkswagen, Renault and others planning to develop global cars for Bric nations (Brazil, Russia, India and China) which means bigger volumes, they are being forced to source components from India that has an edge over others in terms of labour cost, says Nirmal K Minda, managing director, Minda Group which makes and exports automotive horns.
Stringent legislation in Europe and the US regarding safety and emission norms have been putting immense pressure on global car manufacturers to cut down on costs. As a result, almost all auto majors are now looking at India that has lately emerged as a component manufacturing hub with the right mix of quality standards and technology that it is offering, explains Mathur.
Even the overall stability of the nationboth politically as well as in terms of industrial growthhas led to a boom in the sector. The political stability of the country as well as a booming economy and strong industrial growth has added to the trust of global players in India in terms of investment, adds Minda.
If one were to look at individual companies export focus, the thrust is revealing. Minda Group, that largely exports horns to Europe, US and Asean countries and is looking at venturing into Vietnam, Philippines and Brazil from 2008, has around 17% of its revenues from export. The company has recently forayed into batteries and starter motors that are being developed at its Pune plant in association with Valeo.
While low cost continues to draw global players to India, increasing focus on specialisation in the segment is another factor that is fetching business from overseas, feels Pankaj Munjal, managing director, Hero Motors. Lately, there has been a focus on offering domain specific products to global car manufacturers and this has added to the value of exports from the country, he says.
Hero Motors, which has started export operations just two years ago, expects to garner over 70% of its Rs 330 crore revenue from exports during the fiscal 2007-08. The company has recently entered into a share purchase agreement with Kiriu Corporation Japan and Sumitomo Corporation Japan to manufacture and supply brake discs, drums and knuckles to automotive original equipment manufacturers (OEMs), both to domestic as well as global players present in Canada, Austria, US, Germany and Czech Republic. Adds Dr Surinder Kapur, managing director of Sona Koyo, India has become the base for frugal engineering and can offer significantly lower costs. This coupled with improved productivity, quality and reliability has led to a major boost in export of auto components from the country.
Sona Koyo, the Rs 700-crore company, exports high quality precision products to USA, Europe and Japan through technical and marketing alliances with international majors like JTEKT Corporation of Japan, Mando Corporation of Korea, ZF Lemfrder GmbH of Germany, American Axle & Manufacturing (USA) and Sixt (Germany).
Component manufacturing business has been mostly family-owned in the West and the second generation is no longer interested in taking it forward. This has led the global auto majors to look at developing countries to meet their demand in a cost-effective manner, adds V Sankar, chief financial officer, Ennore Foundries. The company exports castings, cylinder heads and cylinder blocks to the OEMs in Italy, US and Germany.
Interestingly, the scenario looks positive with export growth expected to grow at a CAGR of 34% during 2006-14. However, this has a cost attached to it. According to an ACMA-McKinsey Report, the industry will require an investment of around $15 billion by 2015 or roughly $1.5 billion per annumthree times the current investment plan.
But there is a caveat. All this projected growth will not come easy if the rupee continues to appreciate against the dollar as due to which the margins are shrinking and there is very little scope to further cut down on costs. Moreover, with India signing free trade agreements (FTAs) with countries like Thailand, the industry may be hit hard. High quality infrastructure, easy taxation system and better government policies in Thailand has made it a better investment destination than India, says Mathur, adding that if the scenario continues, India will eventually lose out on investment from overseas.
Another worrying factor for the domestic players is rising imports, which have become all the more attractive with a strong rupee and the fact that India has an inverted duty structure. While custom duty on finished products is 0%, it is between 5% and 7.5% on raw material making it unviable for component manufacturers here to import raw material and sell their end-products which are otherwise available from Thailand at no duty structure, explains Mathur.