Auto Parts Makers Self-Drive Profit

DURING 2023, passenger vehicle sales in India crossed the four-million mark for the first time ever. This helped the country pull ahead of Japan once again to become the world's third-largest car market by volume. India is already the world's largest two-wheeler, three-wheeler and tractor market. Demand for commercial vehicles remains robust too, thanks to the government's infrastructure push.

But keeping this well-oiled automobile industry's engines running are hundreds of auto parts manufacturers. To say that India's auto component industry is resilient would be an understatement. In just four years, it has braved the pandemic, a prolonged semiconductor shortage, commodity price hikes due to the Russia-Ukraine war and sluggish global car sales that are yet to reclaim their pre-pandemic highs.

Despite headwinds, auto component exports — which contribute around 30% to the total turnover of India's auto ancillary industry — have remained steady. What has worked in India's favour is the China+1 strategy of Western companies looking to decouple their supply chains by shifting away from China. "We haven't seen investments being uprooted out of China and coming to India. That has not happened. But what's played in our favour is huge traction of companies wanting to de-risk China and supply more out of India. So we have been able to keep exports steady despite challenges on the geopolitical front and recession in Europe, one of our largest markets," says Vinnie Mehta, director general, Automotive Component Manufacturers Association of India (ACMA).

Cumulative revenues of the 48 auto and ancillary firms in The Next 500 list grew 25% to ₹1,07,139 crore in FY23, from ₹85,854 crore in FY22.

In the first half of FY24, the turnover of auto component makers has grown 12.6% year-on-year to $36.1 billion. Exports grew 3% to $10.4 billion during the period.

The growth comes on the back of a shift in customer preference towards sport utility vehicles (SUVs) and feature-packed trims. Carmakers sold around 2 million SUVs in 2023, accounting for 49% of total sales compared with 42% in 2022. Buyers prefer the top variants packed with features such as sunroof and advanced driver assistance systems (ADAS), leading to an increase in content per vehicle. There is also a greater push by automakers to source components locally to comply with the 50% domestic value addition requirement for the Production-linked Incentive (PLI) scheme. Passenger cars account for nearly half of total sales of auto component makers.

As the automobile industry transitions to electric vehicles (EVs), component makers are gearing up to tap new opportunities. Auto part supplies to the EV industry grew 50% year-on-year in the first six months of FY24.

"In FY22, our supply to the EV industry was just about 1%. In FY23, it became 3% (excluding battery packs). The cost of electronics that is not localised or battery that is yet to be localised is 40-50% of the cost of an EV. The rest is all local," says Mehta.

"We are seeing a lot of efforts by the industry to transform. There is no way out because if the end customer is going in for EVs, we will have to deliver components for that," he adds.

The biggest trend that has benefitted Gurugram-based auto parts maker Sona Comstar is electrification, according to MD and Group CEO Vivek Vikram Singh. "The market for differential assembly products for EVs didn't exist before 2016-17. It has now become the second-largest part of our revenue," says Singh. When the pandemic struck in 2020, the auto parts maker started producing traction motors for two- and three-wheeler EVs. Around 5% of its revenues now come from this business.

From differential gears, Sona Comstar has now expanded into 13 products. "If you make X product and that is all you do, growth will be limited by the growth of the industry segment. If you keep adding newer industry segments, newer products, you expand by increasing your volume share as well as your market share," says Singh.

The powertrain parts maker gets 28% of its revenues from supplies to battery electric vehicles (BEV). It aims to increase its revenue share from EVs to 45% by 2026. Around 79% of Sona's ₹24,000 crore order-book is from EVs and the U.S. is its largest market. "There will be growth in the electrification space. There is a lot of disruption in the automotive industry and therefore the adoption of new technologies not just in traditional components but also in software-driven vehicles is going to see a lot of growth," says Sunjay Kapur, chairman, Sona Comstar.

Kapur says the China+1 strategy is playing out very well. "Additional capacity is coming to India and you're seeing that in terms of growth of the Indian auto component industry, which grew 13% in the first six months of FY24," he adds.

Auto ancillary companies are enhancing their portfolio by launching new products for EVs. Greaves Cotton, which earlier used to make only ICE engines for two and three-wheelers, has now diversified into electric vehicles. "As part of our fuel-agnostic strategy, over the past five years, we have increased our share of EV business from virtually zero to almost 30% today across the entire value chain," says Nagesh Basavanhalli, non-executive vice-chairman, Greaves Cotton.

But there are challenges. One of those that India faces is the localisation of electronics, says Kapur. The average localisation in the entire vehicle industry is about 70%, according to ACMA.

But what hurts is that the global auto industry has shrunk from its 2018 highs, says Singh. "If you look at the auto industry in 2018, the world sold more than 94 million light vehicles. In 2023, 85 million light vehicles were sold. Automotive has been in decline for a long time. In India we don't see it. We think about global because for us India is such a small market. In volume terms, India is about 4% of the global car market but in value terms it is just 1%," he says.

The average price of a light vehicle in the U.S. is $27,000, while in India it is under $14,000. "India not doing well doesn't impact us as much as Europe and the U.S. not doing well," he says. "With interest rates going up and demand coming down, I don't know if auto will ever go back to 2018 highs and do 94 million vehicles. If the industry keeps shrinking, you have to figure out how to grow," he adds.

The war in Europe has also weighed on demand for auto parts. Russia-Ukraine was a challenge, says Singh. "We would have grown at 30%-plus, instead of that we grew at 25%-plus. Every year there will be something that is not according to your business plan. So, plan for contingencies. You have to plan for 40% growth to eventually achieve 25% growth," he says.

Imports From China

Electronics and advanced technology components unavailable in India have significantly contributed to higher import bill. Imports of auto components grew 3.6% from $10.2 billion (₹79,815 crore) in H1FY23 to $10.6 billion (₹87,425 crore) in H1FY24. "China continues to be the source from where maximum imports happen. Of late, because of so much focus on electric mobility and considering the ecosystem China has been able to create for EVs, there is an increase in imports of batteries and electronics from China," says Mehta.

"There are many reasons why imports happen. They could happen for the reason of technology. They could be for price competitiveness. They could be for some companies' global sourcing strategies," he says.

While there is a focus on localisation now, the frenetic pace at which the Indian auto industry has expanded has led to more imports. "What is happening at this juncture is that the market is also growing rapidly. While we are making all efforts to localise, the rate of growth of the market has an impact on imports," says Mehta. China dominates significantly accounting for nearly 30% of India's auto component imports, followed by Germany at 12%.

Currently, only 30-40% of the EV supply chain is localised, according to ICRA. Battery cells, which constitute 35-40% of the vehicle cost, are entirely imported, the rating agency says.

"We export from India to China. We have Chinese customers as well as a factory in China. There is dependence on Chinese imports in the motor business that is based out of Chennai but that localisation is not possible because of material availability. We import neodymium magnets. India doesn't have it," says Sona's Singh.

Red Sea Crisis

After a wave of attacks by Yemen's Houthi militants on cargo vessels in the Red Sea, auto parts suppliers are now bracing for disruptions in exports. India uses the Red Sea route to access the Suez Canal for its trade with Europe and North America — the two regions account for two-thirds (33% each) of India's auto component exports.

Several shipping companies have suspended cargo transport via the Red Sea route, raising costs and lead time by going around the southern tip of Africa. "If the Red Sea crisis isn't sorted, it will lead to an increase in time as well as cost," says Shradha Suri Marwah, president, ACMA.

According to Mehta, the current situation is that of wait and watch. "We do find murmurs and feedback coming from our members that freight has gone expensive and that there is a delay in the availability of containers. It's not a good thing. But this will reflect anywhere between 45 days and 2 months. We are keeping our fingers crossed and are hopeful things will come in control sooner rather than later," he says.

Sona's Kapur says he is certain of some disruption in the supply chain due to the Red Sea crisis. "The impact will be container shortages, longer lead time and logistical challenges." The firm, which gets 70% of its revenues from exports, has booked containers for the foreseeable future. "We have managed several crises before. I am sure we will overcome this," says Kapur.

Auto parts makers are also counting on aftermarket sales, which contribute nearly a fifth to the industry's overall turnover. The aftermarket segment's size stood at $10 billion in 2023. The industry is now eyeing aftermarket export opportunities worth $35 billion over the next five years. Ageing of vehicles and increased sale of used cars augur well for Indian auto component suppliers, says ICRA.

As India aims to become the world's largest automobile manufacturer by 2029, the auto component sector, which contributes 2.3% to India's GDP and employs about 5 million people, will play a critical role. And for now, the $70-billion industry seems to be on the right track.