1. Make in India: Reaching an inflection point

Make in India: Reaching an inflection point

Auto industry is expected to embark on the next wave of investment, growth

By: | Published: February 18, 2016 12:20 AM

The automotive industry is one of the largest contributors to manufacturing GDP, and thus the success of the Make-in-India mission in the automotive industry is a prerequisite for taking the country’s manufacturing sector to the next level.

The automotive vehicle and components industry has seen healthy growth in investments, production and exports, and total investments over 2006-16 from domestic as well as foreign companies exceeded R1.5 lakh crore. The recently announced Automotive Mission Plan 2016-26 has set ambitious growth aspirations for the industry and its annual output is expected to grow by over 3.5 times by 2026. With these aspirations, the industry is expected to embark on the next wave of investment and growth.

* Growing domestic demand: India has tremendous headroom for growth in demand for vehicles. As income levels rise, the automotive industry is projected to grow both in volume and value. A robust market demand supports a strong case for greater investments.

* Local engineering talent: Indian engineers have demonstrated their capabilities to design and make full vehicles and complex auto parts. This capability is being recognised by most OEMs and global auto parts companies. This, combined with cost arbitrage opportunities, supports a strong business case to make further investments in manufacturing and R&D in India.

* Depreciating rupee encourages localisation: Companies with significant dollar imports will find it difficult to be competitive in the market place. We are already seeing many programmes by global OEMs in India embarking on localisation initiatives.

* Growing vehicle and component exports: India has proven its capabilities as a competitive global manufacturing hub, especially in small cars, two-wheelers and low HP tractors. These are segments where we have economies of scale due to huge domestic market. Vehicle exports provide a similar hedge for auto component suppliers to any volatility in the domestic market. Encouraged by the quality of automotive components produced in India and ongoing cost pressures, many global companies have set up international procurement offices in India. Exports act as a powerful hedge for companies to justify their India investment business case. The ability to diversify revenue streams between domestic and exports reduces risk and facilitates investments.

The enablers

* The government has identified improving the ease of doing business as a top priority. Concerted efforts are being made to simplify regulations, approval and compliance processes. Digital initiatives are bringing greater efficiency in government service delivery. Healthy competition among states for investments is driving incremental reforms on labour and land. One-stop approvals and investment facilitation by state governments is becoming a norm. All these inspire confidence among automotive investors to expand their investments.

* The high energy international outreach by Prime Minister Narendra Modi and similar initiatives by state governments have made global investors a lot more optimistic about India. Focus on infrastructure investments, Smart Cities, Digital India and Make-in-India are giving investors the optimism to consider investing in India.

* Growing domestic demand, good quality engineering talent, need for localisation and exports potential are encouraging companies to make in India.

Make-in-India has inspired an entire industry and its employees. Inspiration has the power to trigger confidence. Confidence encourages entrepreneurs to take calculated risks and make investments. It appears that the automotive industry is reaching an inflection point for the next wave of investment growth. Companies that hold back may become uncompetitive.

The author is partner, Management Consulting, PwC India

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