Airbag makers to pull out all stops as market to grow three-fold by FY27

With the government deferring the implementation of the mandate to fit six airbags in all passenger vehicles by a year, Indian airbag makers see a huge opportunity beckoning in the Indian passenger vehicle market for next year—buoyed by record dispatches and order books by original equipment manufacturers (OEMs) and showing resilience to intermittent price hikes by OEMs due to rising input costs.

According to ratings agency ICRA, the airbag industry is currently the fastest-growing sector in the auto-component segments, and is expected to benefit from the increase in content per vehicle arising from higher regulatory requirements and voluntary increase in the number of airbags per vehicle for enhancing safety. ICRA expects the industry to grow to ₹6,000-7,000 crore by FY27—from the current levels of ₹2,400-2,500 crore, at a four-year CAGR of 25-30%.

"The mandatory content per vehicle for airbag manufacturers is expected to rise from ₹3,000-4,000 currently to ₹8,000-10,000 by October 1, 2023. The average number of airbags per car sold is about three currently, and this is expected to increase significantly post the mandatory implementation of six airbags per car from October 1, 2023," says Vinutaa S, vice president and sector head, ICRA.

Sukhdeep Sandhu, head, BU passive safety and sensorics, Continental Automotive India, believes that the Indian industry has shown its mettle in the past two years, which were marred by the Covid-19 pandemic and other black-swan events. Continental India makes the control units of the airbags—which detect and assess how severe the impact is, in case of a crash, and then trigger the restraint system. Continental currently supplies to Japanese and Korean OEMs, and also exports to other markets from India.

Sandhu believes that while there may be minor roadblocks in the industry, it has been doing exceedingly well. "Had there been any significant roadblocks, the industry would not have been doing the numbers it has," he says. Continental also sees itself well-positioned in India as one of the market leaders. "We see higher volumes, and better use of production lines," he adds. According to Sandhu, Continental manufactured more than a million control units for the Indian market last year and has been making an aggregate of a million control units for the past four to five years.

Sandhu's sentiments are echoed by Suresh KV, president, and regional head, ZF India. "We definitely see an upside for our business in India. When two airbags become six, and we win more projects, there will be a lot of benefits for our JV in India," he says. ZF, a German maker of car components and parts, operates in India via a joint venture with the Chennai-based Rane Group. ICRA says that the industry sees a dominating trend of overseas parents/joint venture partners—which stems from the lack of indigenous technological capability and the absence of adequate volumes.

Arguably the gravest concern around this legislation has been the incremental cost for the car buyer. "The price increase with six airbags will be substantial, but not drastic," says Suresh. He believes that the Indian car buyer has evolved to believe that the spike in price will not be perceived pejoratively. "The car buyer will know that this is not an unwanted, avoidable price increase. They will be paying for their safety," adds Suresh. His statement comes as an aftermath of the rude awakening of an overwhelming majority of Indians' aversion towards wearing seatbelts in the rear—which has been one of the reasons behind Cyrus Mistry's demise in a road accident.

Suresh's confidence also comes at a time when there is ambiguity around the price increase that will entail after the implementation of the mandate. In August, Nitin Gadkari, the union minister of road transport and highways, said in the Lok Sabha that an airbag costs ₹800. "On average, around five lakh road accidents occur in India and 1.5 lakh deaths are caused by them. As of now, two airbags in cars are mandatory (in cars). People sitting at the back have no airbags for them. An airbag costs ₹800, and our effort is to ensure maximum safety," he said.

Industry experts, however, do not believe that the ₹800 per airbag is what the carbuyer will pay. "We are looking at a price increase of somewhere in the ballpark of ₹40,000-₹50,000," says Hemal Thakkar, director, transport, logistics and mobility, CRISIL. Thakkar also explains that the price of the smaller vehicles, which are positioned as an entry-level model, could even see an additional price increase because they would require structural alterations in the car to accommodate the additional airbags. According to Vinutaa of ICRA, the cost for OEMs could increase further depending on modifications required in cars' structural changes and the deployment of additional sensors.

While Maruti Suzuki India Limited (MSIL)—India's largest maker of passenger vehicles and with the largest fleet in the entry-level segment—remains tight-lipped about its plans of transitioning its fleet to six airbags, chairman RC Bhargava has not shied away from expressing his disapproval of safety regulations like the said mandate. "The focus has been to add passive safety features to drive the price up. They, along with NCAP standards, have no significant impact on the number of accidents," he says. According to him, driver behaviour is one of the biggest reasons behind accidents. "There exists a very rigorous programme of training and testing before a person is certified to get a licence. There's no such thing in India."

Suresh, meanwhile, explains that ZF India was involved in discussions, both with the OEMs and the ministry, and the impression they got was that it was a sensitive issue to reach a consensus on. "There were certain OEMs who had taken a stand against the cost, the timelines, capacities as the constraints to implementing it," he says. On the other hand, the government had taken the high ground in the debate. "Their stance was clear—the safety of the occupants in even the entry-level car will not be compromised because of constraints like cost," he adds.

What Suresh does acknowledge is that there are constraints which will make the transition from two airbags to six, not a smooth ride, especially given that supply-chain issues continue to jolt component makers. ZF India, for instance, is on an escalation clause for semiconductors on a daily basis—which are headwinds for increased demand for airbags, for it would mean more sensors in a car. "It's a matter of time before the capacity will increase, but right now, it is a stretch," he says. "For safety systems, we will not have apprehensions, because the technology will only evolve from here," he says.

According to estimates, the industry currently imports 60-70% of its components. ICRA believes that unless there is adequate backward integration for the incremental airbags expected to be produced, the import content would only increase further going forward.

However, the silver lining is that there is immense scope for localisation and development of tier-II vendor ecosystem in this space and increasing volumes could make this economically viable. It can improve margins through greater value addition and ease supply-chain challenges for airbag manufacturers. Airbag component manufacturing is a part of the PLI scheme, for facilitating an increase in indigenous manufacturing. Given the potential for multifold increase in airbag volumes, most airbag manufacturers are in the process of localising key components.

ZF India localises the manufacturing process, but the raw materials are imported. "For some raw materials, we are already buying in bulk for our global operations, and the shipping costs are not that prohibitive, we do not find it viable to invest to localise," says Suresh. He sees that the company can achieve localisation levels between 70-80% within three years of implementation of the mandate. Sandhu, on the other hand, says that the localisation of the manufacturing of the control unit was achieved by Continental around four years ago.

"Capacity building in the next year is critical to meet regulatory requirements in a timely manner. Several players have started undertaking capacity enhancements in the last 6-8 months to gradually scale up their facilities, and ICRA expects a capex to the tune of ₹1,000-1,500 crore in the next 12-18 months for capacity enhancements and localisation measures," adds Vinutaa.

However, this transition—which appears to be a tall order—will not hit the industry as hard as transitioning from BS-IV to BS-VI. "When the government decided to leapfrog from BS-IV to BS-VI, there were a lot of constraints. Fortunately, the limited timing made it possible for the industry to stretch to make the transition, but it was not a comfortable transition," he explains. This serves as a precedent for the industry that if it stretches itself to the brink—at the cost of its comfort—it can realise what can be a difficult transition.

On the other hand, Continental does not see migrating to six airbags as an issue. "The control unit is already fitted in cars because of the two-airbag mandate. The units are adept for six airbags, so we do not require any alterations. What this would entail for us is increasing the number of firing loops. We use higher, stronger microcontrollers. There will be some incremental cost, but the base is already there," says Sandhu of Continental Automotive India. In a crash, the firing loop sends current—generating some heat to fire the detonator in the inflator, which inflates the airbag.