CHAPTER IINTRODUCTION

1.1 Background of the study:

The Automotive industry is an important segment of the economy in any country, which provides substantial stimuli through its backward and forward linkages with various other industry and services. One such backward linked industry is an Auto Ancillary industry, the fortunes of which are inextricably linked to the performance of its dominant customer- the automotive sector. Apart from demand, the automotive industry also impacts the industry structure of automotive components, critically. Further, the automotive component industry, by itself, lends support to sectors such as copper, steel, aluminium and machine tools many others.

The 1940s witnessed the emergence of the domestic auto ancillary industry, as a supplier of components to Hindustan Motors and Premier Automobiles. The sector continues to meet almost all the component requirements of the automobile sector, which has grown multifold over the last five decades, both in terms of output, as well as in the number of vendors and the models offered by each. However, the relatively small size of the Indian automobile industry, and the lack of standardisation of required components, has resulted in the setting up of economically unviable capacities in the auto ancillary industry. Technological up gradation and the scaling of manufacturing capabilities remain critical success factors in this fragmented industry.

The industry has more than 500 large to medium key participants that form the organized sector whereas there are more than 6,000 ancillary units which constitutes the unorganized sector. OEM dominates the auto component market constituting almost 75 per cent of the market while the replacement market has share of 25 per cent. Unorganized players mainly dominate the replacement market or they are generally tier 3/4 component manufacturers.

The Indian Auto component industry has transitioned from a supplier for the global aftermarket to becoming a full-scale global Tier 1 supplier. Industry policies like manufacturing and imports free from licensing and approvals, 100% FDI in auto sector and no local content regulation of the Government have helped the auto component sector to grow in the past.

1.2 Overview of Auto Component industry:

The world’s automotive manufacturing sector consists primarily of about 20 very large multinational corporations. The automotive supply sector, however, comprises of thousands of firms ranging in size from a few employees to more than 100,000. According to industry estimates, the size of the global auto component industry in the year 2008 was approximately US$1.4 trillion and is likely to grow to about US$1.9 trillion by 2015. Out of this total auto

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Component demand by 2015, about 40% (i.e. US$ 750 billion) is likely to be sourced from low cost countries (LCCs) such as China, ASEAN countries and India.

1.2.1 INDIAN AUTO COMPONENT INDUSTRY

The Indian Auto Component industry is one of the India’s sunrise industries with tremendous growth prospects. From low-key Supplier providing components to the domestic market alone, the industry has emerged as one of the key auto component centres in Asia and is today seen as a significant player in global automotive supply chain. India is now a supplier of a range of high-value and critical automobile components to global auto makers such as General motors, Toyota, Ford and Volkswagen, amongst others.

The Indian automobile ancillary sector is transforming itself from a low-volume, highly fragmented one into a competitive industry, and backed by competitive strengths, technology and transition up the value chain. Broadly the Indian automotive component industry can be divided into the organized and the unorganized segments. While the forte of the organized sector is the high valued added precision engineering products, the presence of a large unorganized sector is characteristic especially of the lower value-added segments of the industry.

The Indian auto component industry is one of the few sectors in the economy that has a distinct global competitive advantage in terms of cost and quality. The value in sourcing auto components from India includes low labour cost, raw material availability, technically skilled

manpower and quality assurance. An average cost reduction of nearly 25‐30% has attracted several global automobile manufacturers to set base since 1991. India’s process engineering

skills, applied to re‐designing of production processes, have enabled reduction in manufacturing costs of components. Today, India has become the outsourcing hub for several global automobile manufacturers.

The Auto Component Sector clocked a turnover of US$ 25 bn. (approx.) during 2010-2011. This sector has the potential to easily zoom to a level of US$ 110 bn. by the year 2020. India has about 500 major players in the auto components field catering to the OE market. India-made auto parts are prized and demanded by the best brands of the world. Characterised by high quality and economical prices, India is regarded internationally as amongst the most competitive auto parts manufacturer in the world. The industry is projected to clock a growth rate of 15 per cent annually in the coming years. In view of the imminent growth potential, the local component industry is planning to invest nearly US$ 35 bn. in the coming few years. The domestic Automotive Aftermarket of India currently has a share of 13% and is valued at over US $ 5 bn.(2010). It is expected to grow to US $12.8 bn. by 2020 Several large Indian auto component manufacturers are already gearing to this new reality and are in the process of substantially investing in capacity expansion, establishing partnerships in India and abroad, acquiring companies overseas and setting up green field ventures, R&D facilities and design capabilities.

Some leading manufacturers of auto components in India include Motor Industries Company of India, Bharat Forge, Sundaram Fasteners, Wheels India, Amtek Auto, Motherson Sumi,

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Rico Auto and Subros. The India’s Top 500 Companies, published by Dun& Bradstreet in 2006, listed 22 auto component manufacturers as top companies in India with a total turnover of US$ 3 bn. These companies are in the process of making a mark on the global arena, and some have already acquired assets abroad.

1.2.2 Industry Structure

The industry has the resources to manufacture the entire range of auto products required for vehicle manufacturing, approximately 20,000 components. The entry of global manufacturers into India during the 1990s enabled induction of new technologies, new products, improved quality and better efficiencies in operations. The Indian auto component industry is extensive and highly fragmented. Estimates by the Department of Heavy Industries, Government of India, indicate there are over 500 large firms who are part of the organised sector and cater largely to the Original Equipment Manufacturers (OEMs). Another 6,000 firms exist in the

unorganised sector that operates in a tier‐format. The firms in this segment operate in low technology products and cater to Tier I and Tier II suppliers and also serve the replacement market around 4% of the companies operating in the auto component segment cater to 80% of the demand emanating from OEMs.

1.2.3 Tier Structure of Auto Component Market

The auto industry globally is structured based on vendor-supplier relationship with 3 to 5 nodes in the value chain ending at OEM (Original Equipment Manufacturer), that are also the automotive major. In general, the OEMs in India typically have 100 to 500 Tier-1 equipment suppliers. These vendors are further classified as per the auto component sub-segments that has been explained in the next section of this report. The tier structure in the automotive industry is shown in the Figure below:-

Figure 1.1 Tier structure in the Auto Component Industry

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1.2.4 Transition of Indian Auto Component Industry

The Indian Auto component industry has transitioned from a supplier for the global aftermarket to becoming a full-scale global Tier 1 supplier. The transition has been brought upon by increased competition from foreign players that have helped Indian auto component industry becoming auto component manufacturer and export of complex auto spare parts. The exports from Indian auto components manufacturers to U.S. top 3 automotive majors have been in excess of US $ 900 Million last year.

Figure 1.2 Auto Component Industry salesSource: ACMAThe ACMA-McKinsey Vision 2015 document forecasts the potential for the Indian auto component industry to be US$ 40-45 billion by 2015. Investments and exports in this segment are witnessing continuous growth. Global automobile manufactures see India as a manufacturing hub for auto components and are rapidly ramping up the value of components they source from India due to:

• The cost competitiveness in terms of labor and raw material

• Its established manufacturing base

• Fine quality of components manufactured in India (used as original components for vehicles made by General Motors, Mercedes, IVECO and Daewoo among others).

1.3 Objectives The objective of this study is to understand

I. The growth and evolution of the auto ancillary industry in India. This includes understanding the product profile and the potential of innovation in the auto ancillary sector. The economic, industrial and trade policies would also be looked in to understand the same.

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II. The demand analysis which would include demand determination of the industry, price, income, penetration and replacement demand. The various products, technology and life cycle stages would also be dealt.

III. The marketing strategy analysis which would include marketing research, key issues and current trends, segmentation and positioning products, quality and technology, customer service, pricing, promotion, distribution channels, logistics management, major players in India, number of companies and market share of various firms.

IV. The financial scenario of the auto ancillary industry which would include an analysis of profit margin, cost structure, leverage, profitability, Du Pont, Earning per share, Dividend per share, Price-earnings and sustainable growth rate.

V. The industry analysis by undertaking various analyses such as PESTEL, Five forces and SWOT. The PESTEL analysis will include analysis of taxes and levies, import duties on components and finished goods, non-tariff barriers, disposable finance, socio-cultural environment, research and development and distribution of households by income.

VI. Futuristic scenario of the industry.

1.4 Scope:

According to the global standards, segmentation of four wheeler automobiles can be done on various bases. First segmentation is on the basis of Market type such as OEM Market, Replacement Market and Export Market. Currently break up of OEM and Replacement market is 70 % and 30 % respectively. An auto component industry can be segmented on the basis of the production of component types such as Engine Parts, Drive Transmission and Steering Parts, Suspension and Brake Parts, Electrical Parts, Equipments, Other Parts.

In India the auto component industry is structured in three basic categories.

• Indian companies without any collaboration or having very minimal collaboration with any foreign companies for e.g. Sundram Brake Lining, Sundram Fastners.

• Indian companies with foreign collaboration, such as Indian Nippon Electricals, Hinoday etc.

• MNCs completely owned subsidiaries or the units in which they have major control. For e.g. Delphi, Visteon, Denso, MICO etc.

So there is a good scope of study about Auto ancillary industry. Auto ancillary industry being an essential industry for Automobile sector its pricing and other marketing aspects need to be carefully analyzed. The macro environment of the Indian auto component industry can be assessed by understanding the social / consumer shifts, understanding its political and legal environment, technological environment and economic shift can be explored.

1.5 Methodology

Since it is difficult to visit all the auto ancillary companies’ exisiting in the industry, we would be undertaking secondary data collection method to complete the study. This would

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include collecting data from secondary sources such as books, journals, magazines, newpapers, articles, annual reports of the concerned companies and internet. For the same purpose, the reports published by Centre for Monitoring Indian Economy (CMIE) will be referred frequently and also research publish by ACMA.

1.6 Importance

India is being recognized as potential emerging auto market. Many foreign players are adding to their investments in the Indian Auto Industry and Auto component industry. India is the world’s second largest manufacturer of two wheelers and within this segment motorcycles contribute 80 per cent of the segment size. India is also fifth largest manufacturer of commercial vehicles that dominates the Indian Car Market (79 per cent). India is 9 th largest car manufacturer in world and fourth largest car market in Asia recently crossing the one million mark. There has been an increase of 14.16 per cent in the passenger vehicles segment from 2004 to 2010 on an average. Contribution of automotive industry to the GDP of India has risen from 2.77 per cent in 1992-93 to 4.14 per cent in 2008-09. So demand of Auto Component industry is booming in India.

The industry is also making a contribution of 17 per cent to the indirect taxes of the Indian Government. According to India Today, the auto industry employs around 13 million people in direct and indirect jobs. By an estimate, the Indian automobile industry will create another five million direct and indirect jobs by 2012. This is in line with the Automotive Mission Plan to take the employment level to around 25 million by 2016. Auto Component Industry which is growing at 20 per cent per annum and has a turnover of USD 22 billion and Steel Industry which contributes 65-70 per cent of steel for the weight of the car are the two industries that are partially dependent on the Automobile Industry.

The manufacturing of automobile depends on auto components and the manufacturing of auto components largely depends on the steel. Therefore, the automobile industry has a relation of backward integration with the former two industries and thus the growth and turnover of the auto component and the steel industry is in a way dependent on the growth of automobile industry.

Thus it is important to study the four wheeler automobile industry in this project because 1) It creates a large number of employment opportunities 2) Its contribution to the GDP of India is vital and increasing 3) This industry has been growing at an increasing rate 4) Its growth has cascading effects on Auto component and steel industry 5) The auto ancillary industry of India has emerged as well as has been emerging as a representative of India in the global scenario and it also has the capacity to contribute to the growth of world.

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CHAPTER IIGROWTH AND EVOLUTION

2.1 Growth and Evolution:

The Indian auto component industry has been navigating through a period of rapid changes with great plan. Driven by global competition and the recent shift in focus of global automobile manufacturers, business rules are changing and liberalisation has had sweeping ramifications for the industry. The global auto components industry is estimated at US$1.2 trillion. The Indian auto component sector has been growing at 20% per annum since 2000

and is projected to maintain the high‐growth phase of 15‐20% till 2015.

The Indian auto component industry is one of the few sectors in the economy that has a distinct global competitive advantage in terms of cost and quality. The value in sourcing auto components from India includes low labour cost, raw material availability, technically skilled

manpower and quality assurance. An average cost reduction of nearly 25‐30% has attracted several global automobile manufacturers to set base since 1991.

India’s process engineering skills, applied to re‐designing of production processes, have enabled reduction in manufacturing costs of components. Today, India has become the outsourcing hub for several global automobile manufacturers.

The Auto component Industry is directly dependent on Auto industry; the industry was of very small size in the period of 1970s, the growth initiated after the entry of Maruti Udyog Ltd. Many new auto component manufacturers emerged in 1980s.

The Indian auto industry has evolved around three major clusters geographically West, North & South of India Major automotive clusters – West- Mumbai, Pune, Nasik, and Aurangabad. South - Chennai Bangalore, Hosur and North- Delhi, Gurgaon, Faridabad. The set up of Tata motors, Bajaj, Mahindra & Mahindra, Skoda, General Motors etc. and auto component manufacturers like Bharat Forge, DGP Hinoday, Kirloskar Brothers, SKF Bearings, Kalyani Brakes etc. in the west region. Maruti Suzuki during 1990s created a base in the North accordingly the other auto industry like Honda, Eicher etc., and auto component companies like Delphi, Denso India, Lumax, Minda, Sona Koyo, Shriram Pistons etc., setup a hub in the central North.

In the South region the auto & auto component industries are Ashok Leyland, Ford, Toyota Kirloskar, Hyundai, TVS Motors, Brakes India, MICO, Lucas-TVS, Rane Brakes, Sundram Fasteners etc. constituting a major hub.

The quality consciousness, value chain inherited through the automobile companies towards the suppliers. Further the entry of more MNC’s & giant domestic auto manufacturers prompted supply chain developments to enhance the productivity and responsiveness towards both the ends suppliers as well as automobile companies.

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The auto component industry can also be segmented through the supply chain tierization like first tier, second tier, third tier and fourth tier as the levels of supply category and involvement in the supply chain of automobile company. The fourth tier suppliers supplies raw material as a small jobs while a second tier suppliers produces a full auto components further the first tier suppliers identified as a OEMS/ Assemblers (Original equipment manufacturers).

There are new direct suppliers, who design systems and coordinate almost the entire chain encompassing the manufacturing and assembly process and these are the Tier 1 and 0.5 who have major involvement as a supplier in manufacturing of automobiles, they provide semi – assembled modules of automobiles like steering system, rear axle system etc. which can be directly fixed on the final assembly of the cars. The risks and challenges are being transferred to the tier 1 & 0.5 suppliers.

Production of auto ancillaries was estimated at US$10 bn in 2005‐06 and has been growing at a robust 20% per annum since 2000. Exports of auto components have been strong growing at 24% per annum since 2000. This growth in exports if sustained for another five years will see India’s auto components exports will touch US$ 5 bn by 2011 from the US$ 2 bn at present.

Till the 1990s, the auto component industry was solely dependent on the domestic automobile industry to drive the demand for ancillary products. This composition of the market however is undergoing radical changes with global outsourcing gaining momentum. In recent times, exports has emerged as a significant driver of growth, and the demand emanating from global OEMs and Tier I manufacturers has opened new opportunities for the auto component industry in India.

At the same time, a bright outlook for the domestic automobile industry also offers significant growth potential, given the fast rising income levels with a rapidly growing middle and high income consumers.

Share of exports in total production has risen from 10% in 1997 to 18% in 2006. The composition of exports in terms of the proportion of OEM and aftermarket has also undergone a sweeping change since the past decade. The ratio of OEM to aftermarket has changed from 35:65 in the 1990s to 75:25 in 2006.

While exports have been booming, there has been a sharp rise in imports of auto components as well, especially in the last three years. From an import of US$ 250 mn in FY03, they have gone up to US$750 mn in FY06. This is a healthy trend, indicative of rising domestic demand.

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2.2 Product profile:

An auto component industry can be segmented on the basis of the production of component

types as below:

Figure 2.1: Market share of different Auto Component Sector

Source: ACMA

Figure 2.2Auto Ancillary Segmentation

Source: ACMA

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2.2.1 Engine Parts:

- Requires high precision and high quality adherence

- These fall into three broad categories: Core engine parts, fuel delivery system and others.

- The sub-segments include pistons, piston rings, engine valves, carburettors, fuel-delivery and cooling systems and power train components.

- Engine parts comprise the largest product segment of the auto components industry with a 31 per cent production share.

Major players

•The four major players in the pistons sub-segment include Goetze, Shriram Pistons & Rings, India Pistons and SamkrgPistons, while RaneEngine Valves, KAR Mobiles and Shriram Pistons & Rings lead the engine valves sub-segment.

•Ucal Fuel Systems and Spaco Carburettors & Escorts Auto Components are prominent players that manufacture carburetors. In diesel-based fuel injection systems, Mico, Delphi, TVS Diesel System and Tata Cummins are the major players.

2.2.2 Drive Transmission and Steering Parts:

-Major sub-segments in this category include gears (tones), wheels/wheel rims, steering gears and systems

- Major parts include starter motors, generators and spark plugs, gears, steering gears and systems, wheel, clutch etc

- Technology intensive, top ten players account for about 80% of the total segment size

- Size of replacement market for this segment is likely to increase esp. for wheels

- Transmission and steering parts comprise the second-largest product segment in the Indian auto components industry, with a 19 per cent production share.

Major players

•Sona Koyo Steering Systems, Rane Madras and Rane TRW Systems are the key players in steering systems.

•Bharat Gears, Gajra Bevel Gears and Eicher are some of the major players in the gears sub-segment. Two international companies, GrazianoTrasmissioni and SlAP Gears India, have set up their base in India.

•Clutch Auto, Ceekay Daikin, Amalgamations Repco and Luk Clutches are the major players in the clutch sub-segment. RaneBrake Lining and Rico Auto are the key players manufacturing clutch-facings.

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•GKN Driveshafts (India) and Delphi cater to the drive shaft requirements of passenger cars and SonaKoyo Steering Systems services to the commercial vehicle segment.

2.2.3 Body and chassis:

This is the third-largest product segment with a 12 per cent production share.

- The chassis is the skeleton upon which all other components are positioned

- The parts under this segment include underbody, closure, body side, doors, plastic-molded parts and exhaust systems etc

2.2.3 Suspension and Brake Parts:

This is the third-largest product segment with a 12 per cent production share.

-The primary sub-segments comprise brakes, brake assemblies, brake linings, shock absorbers and leaf springs.

-The demand share of the replacement market in this segment varies from 30 to 70 per cent, depending on the product.

Major players

•Brakes India, KalyaniBrakes and Automotive Axles are the three major brake system suppliers in the country.

•Rane Brake Lining, SundaramBrake Lining, Hindustan Composites and Allied Nippon dominate the brake linings sub-segment.

•Jamna Auto and Jai Parabolic are the major manufacturers of leaf springs.

•Gabriel India, Delphi and Munjal Showa are the key manufacturers of shock absorbers.

2.2.4 Equipments:

This is the fourth-largest product segment with a 10 per cent production share.

The primary sub-segments include headlights, halogen bulbs, wiper motors, dashboard instruments, switches, electric horns and other panel instruments.

The demand share of the replacement market in this segment varies from 30 to 70 per cent.

Major players

•Lumax, Autoliteand Phoenix Lamps are the key players in the headlights sub-segment.

•Premiere Instruments and Controls is the leading player in the dashboard sub-segment.

•Jay Bharat Maruti, OmaxAuto and JBM Tools are the major players in the sheet metal parts sub-segment.

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2.2.5 Electrical Parts:

This is the fifth-largest product segment in the auto components industry, with a 9 per cent production share.

•The primary sub-segments comprise starter motors, generators, distributors, spark plugs, ignition coils, flywheel magnetos, voltage regulators and electric ignition systems (EIS).

•The demand share of the replacement and export markets is low at about 25 per cent, while that of the OEM segment is about 75 per cent.

Major players

•Lucas TVS, Denso, Delco Remy Electricals and Nippon Electricals are the key players in this segment.

2.2.6 Others

This segment is one of the fastest growing within the automotive components industry, with a 19 per cent production share.

The segment includes components such as sheet metal parts, pressure die castings, plastic moulded components, fan belts and hydraulic pneumatic equipment.

Major players

Phoenix Lamps, Autolite, Hella India and Lumaxare prominent players manufacturing sheet metal parts.

2.3 Innovation Potential:

2.3.1 IT adoption in the Indian Auto Component Industry

Studies have shown that the adoption of IT based technologies can increase the performance of firms. While policy initiatives to encourage adoption have been explored, it is equally important to understand the process of IT adoption by firms along with the constraints faced by them.

The auto component manufacturing sector in India has seen tremendous growth in recent years and therefore one expects this sector to be ahead of others in IT adoption. An understanding of IT adoption processes in this sector can be useful in defining adoption strategies for this as well as other sectors.

A large majority of the firms (over 85 per cent) in the Auto Component Industry are SMEs. These firms serve both the OEM as well as replacement demands and work with a variety of technologies in areas of machining, electronics, plastics & rubber moulding, welding, casting & forging, etc. These SMEs also vary considerably in terms of their capabilities depending upon, often, on the markets that they serve, i.e., exports or domestic and within domestic –

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national or regional. Increasing IT penetration in the SME segment of the auto component sector is a critical enabler for enhancing their competitiveness.

The need of organisations to integrate various functions and processes has driven them to implement ERP, SCM and other similar packages, and as a result, in firms that have implemented IT, there has been a considerable increase in the productivity as well as revenues. However, very few firms adopt a clutch of applications to maximise the potential of efficiency gains and this obviously has an adverse effect on the efficacy of IT adoption.

2.3.2 IT adoption – implemented applications/systems

Enterprise Resource Planning (ERP) is the most widely adopted IT application among auto component firms. Some effort is also being undertaken to integrate the firm’s production facilities with the other constituents of the supply chain, so that real-time accurate information on the inventory, production schedule and materials is available as and when required. In order to have better access to business information, many auto component firms have deployed intranets which are made available to all the relevant in-house business functions and enable effective planning and scheduling. A significant proportion of firms that were surveyed have also implemented wireless LANs to achieve this, whereas large organisations have also deployed Virtual Private Networks Broadly, large firms are ahead of small and medium firms in the adoption of all application systems except Customer Relationship Management (CRM) and Sales Force Automation (SFA) where adoption rates are similar. In the adoption of networking and groupware systems also, large firms are generally ahead of the small and medium firms.

Figure 2.3 Adoption of IT in Auto component Industry

Source: NASSCOM - IT Adoption in the Indian Auto Component Industry

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2.3.3 Key features of IT adoption in auto component firms

Raw material price fluctuations and maintaining price competitiveness figure as major challenges for BU heads in auto component firms. IT heads do not seem to perceive their function as an integral part of organisation goals and find it difficult to prove the value of IT in their companies. Despite this perception, BU heads do expect IT to be a strong enabler to meet changing customer requirements, track production costs and gain access to critical business information for better decision making. While the larger companies are more positively disposed towards IT solutions (constant up gradation, branded IT solutions, etc), the small ones are trying to get their basic IT infrastructure in place.

Aligning IT strategy with supply chain capabilities

Firms in the Auto Component Industry grow by producing more complex products that have higher value add and the situation in India is no different especially with the changes in the product technology. The Indian Auto Component Industry comprises firms ranging from tiny and small producers to large firms who supply to both the OEM and replacement markets. As a result, there is enormous diversity in the intent and strategies of the firms in the auto component sector.

The top five key business processes are as follows:

1. Order receipt and demand management2. Production planning3. Order processing4. Material scheduling5. Accounting

Quick access to reliable business information is a key bottleneck as the auto component firms possess disparate systems including manual paper based processes that lead to disconnect amongst the supply chain constituents. This has two major impacts – firstly, it impedes real-time decision making and secondly, it results in creation of ad-hoc sources of information which further exacerbate the problem of availability of accurate data.

While the basic procedures with respect to order receipts and processing seem to be running smoothly, a need is felt by the BU heads for real-time visibility of certain key information. ERP systems have either been implemented or are on the short-term IT investment horizon of most firms.

The need for real-time data capture, applications that cater to shop floor operations and those having a greater focus the key business processes defined above have driven the advent of PLCs, shop floor automation applications and Manufacturing Execution Systems (MES). As firms expand their IT application portfolio and move to an automated real-time information system, these are likely to gain in popularity.

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2.4 Industrial and Trade policy:

Foreign Direct Investment

The Indian automotive industry with a turnover of US$ 34 billion and the auto parts industry with a turnover of US$15 billion offer excellent scope for FDI.

The automatic approval for foreign equity investment up to 100 per cent of manufacture of automobiles and component is permitted. The import of components is freely allowed. The import of technology/technological up gradation on the royalty payment of 5% without any duration limit and lump sum payment of USD 2 million is also allowed under automatic route in this sector.

The norms for Foreign Investment and import of technology have also been progressively liberalized over the years for manufacture of vehicles including passenger cars in order to make this sector globally competitive. With the gradual liberalization of the automobile sector since 1991, the number of manufacturing facilities in India has grown progressively.

Auto Policy

The industry provides direct and indirect employment to 13.1 million people. The contribution of the automotive industry to GDP has risen from 2.77% in 1992-93 to 5% in 2006-07. The industry is also making a contribution of 17% to the kitty of indirect taxes of the Government. In order to provide special attention to the auto industry, the Government of India has drafted the Auto Policy whose objectives are mentioned below:

Objectives

This policy aims to promote integrated, phased, enduring and self-sustained growth of the Indian automotive industry. The objectives are to:-

Exalt the sector as a lever of industrial growth and employment and to achieve a high degree of value addition in the country;

Promote a globally competitive automotive industry and emerge as a global source for auto components;

Establish an international hub for manufacturing small, affordable passenger cars and a key center for manufacturing Tractors and Two-wheelers in the world;

Ensure a balanced transition to open trade at a minimal risk to the Indian economy and local industry;

Conduce incessant modernization of the industry and facilitate indigenous design, research and development;

Steer India's software industry into automotive technology; Assist development of vehicles propelled by alternate energy sources; Development of domestic safety and environmental standards at par with international

standards.

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Automotive Mission Plan 2016

The Ministry of Commerce, with the help of SIAM (Society of Indian Automobile Manufacturers) and ACMA (Automotive Component Manufacturers Association of India) has devised automotive mission plan 2016 to emerge as the destination of choice in the world for design and manufacture of automobiles and auto components with output reaching a level of US$ 145 billion accounting for more than 10% of the GDP and providing additional employment to 25 million people by 2016.

The Automotive Industry offers huge growth potential in terms of sales volume (including exports) and also immense employment opportunities. The likely future volumes of different vehicle categories were estimated on the basis of projections made by iMaCS, NCAER and AT Kearney. The value of projected domestic output was computed based on historical average vehicle prices. The export potential was estimated on the basis of current trends and possible opportunities in major export destinations.

The demand for after-market auto components and export output was also included in computing growth potential of the industry. According to AMP, Government will encourage collaboration of Industry with research and academic institutions like CSIR, IIT, and machine tool industry for the development of appropriate technology and creation of IPR to meet more stringent regulations as well as to develop relevant machine tools and equipment that improve manufacturing processes and quality of the vehicles and components produced by the industry. The interface with the Core Group on Automotive Research (CAR) would be strengthened.

National Automotive Testing and R&D Infrastructure Project (NATRiP)

The government aims to set up NATRiP at a total cost of US$ 388.5 million, to enable the industry to adopt and implement global standards of vehicular safety, emission and performance standards.

NATRiP will focus on enhancing the industry’s competitiveness by providing low-cost manufacturing and product development.

Department of Heavy Industries and Public Enterprise

Initiatives such as lowering excise duty on small cars, extension of 150 per cent weighted deduction on R&D expenditure, increased budgetary allocation for R&D activities and lowering of the duty regime have been undertaken to further strengthen the capability of the sector.

The department has also suggested the creation of a fund, worth US$ 0.2 billion (INR 10 billion), to modernise the auto components industry by providing an interest subsidy on loans and the purchase of new plants and equipment.

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De-reservation of items for small scale sector

This will include extension of deemed export benefits to intermediate suppliers of auto components against the duty free replenishment (DFR) scheme in the government’s EXIM Policy for 2004–05 .

It is aimed at benefiting all auto component manufacturers to enable them to avail of duty drawbacks, refund of terminal excise duties and an advance licence for duty free import of input.

Other incentives

These include reduction of excise duty on smaller passenger vehicles and reduction in the duty levied on raw material to 5 to 7.5 per cent from the earlier 10 per cent.

Emission norms and environmental standards, in line with those of developed world, and enforcement of Euro IV and Bharat Stage IV emission norms, have fostered the growth of the

Indian auto components industry.

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CHAPTER IIIDEMAND ANALYSIS OF AUTO ANCILLARY INDUSRTY

3.1 DEMAND DETERMINANTS

The Indian auto ancillary industry largely driven by sustainable economic growth with multiple factors upholding its growth, including increasing demands for vehicles, auto parts prices (which are determined largely by wages and raw material costs) and exchange rates, the running cost of a vehicle (mainly determined by the price of petrol), income, interest rates, scrapping rates, and product innovation.

3.1.1 Exchange Rate: Movement in the value of Rupee determines the attractiveness of Indian auto ancillary products overseas and the price of import for domestic consumption.

3.1.2 Income: Movement in income and interest rates determine the affordability of new

motor vehicles. As the demand for new cars increases, it will lead to increase in the demand

for auto parts Product. Innovation is an important determinant as it allows better models to be

available each year and also encourages manufacturing of environmental friendly cars. India

is the 4th largest GDP (PPP) and 10th largest GDP (Nominal, USD 1.8 trillion) in the world

and one of the fastest growing economies having growth rate of 7% in the fiscal year 2011-

12. India’s average GDP growth rate is 8.4% over past 5 years.

3.1.3 Demographics: It is evident that high population of India has been one of the major reasons for large size of automobile industry in India which is industry attractiveness for auto ancillary industry. Factors that may be augment demand include rising population and an increasing proportion of young persons in the population that will be more inclined to use and replace cars. Also, increase in people with lesser dependency on traditional single family income structure is likely to add value to vehicle demand.

3.1.4 Infrastructure: Longer-term determinants of demand include development in Indian’s infrastructure. India’s banking giant State Bank of India and Australia’s Macquarie Group has launched an infrastructure fund to rise up to USD 3 billion for infrastructure improvements. India needs about $500 billion to repair its infrastructure such as ports, roads, and power units. These investments are been made with an aim to generate long-term cash flow from automobile, power, and telecom industries. (Source: Silicon India)

3.1.5 Price of Petrol: Movement in oil prices also has an impact on demand for large cars in India. During periods of high fuel cost as experienced in 2007 and first –half of 2008, demand for large cars declined in favour of smaller, more fuel efficient vehicles. The changing patterns in customer preferences for smaller more fuel efficient vehicles led to the launch of Tata Motor’s Nano – one of world’s smallest and cheapest cars.

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3.1.7 Interest Rates and Availability of Finance: Automobile sales are heavily dependant on the availability of retail finance. Higher interest rate and stringent lending norms can adversely affect the demand. On the other hand, lower interest rates stimulate demand as it result in lower cost of acquisition.

3.1.8 Taxes and Duties: Reduction in excise duties and the introduction of VAT regime can act as catalyst for higher demand of automobiles. A cut in excise duty reduces prices, which, if passed on, enhances the affordability for buyers.

3.1.9 Disposable Income of Consumers: Increase in per capita income and standard of living in the country results in higher demand for cars. Greater penetration of cars in semi-urban and rural areas can also result in higher demand.

3.1.10 Regulation of Safety and Emission Standards: Environmental and safety regulations may need to be addressed by upgrading technology which may result in higher cost, which in turn can affect the demand for automobiles.

3.1.11 Share of Road Transport: Improvement in road infrastructure is expected to enable a more effective distribution of goods and increase in passenger movement across the country and hence higher demand for automobile vehicles. Indian Government is undertaking various projects, like Golden Quadrilateral, to improve the road infrastructure. The adoption of hub and spoke model will boost the demand for small commercial vehicles. On the other hand, competition and new initiatives from railways, such as reducing unit cost to improve efficiency and dedicated freight corridor, may keep a check on rising share of roads in freight movement.

3.1.12 Restriction on Overloading: While legislation on overloading of goods exists, strict compliance and enforcement of such legislation is generally lacking in India. Stricter enforcement of such legislation can stimulate demand as transporter may need to buy more vehicles.

3.1.13 Price Sensitivity: The passenger car market, particularly the mini and compact segments, is highly price-sensitive, with emphasis on value for money. Indian consumers usually prefer compact cars that are fuel-efficient with low operating and maintenance costs.

3.1.14 Brand Building and New Product Launches: Due to increase in choice available to the consumer, the demand for a particular brand of a car is a function of customer perception and satisfaction. Further, new product launches provide significant push to car sales, as customers are tempted to bring forward their decision to purchase vehicles.

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3.2 MARKET SITUATION AND DEMAND:

The Indian Auto Component industry is one of the India’s sunrise industries with tremendous growth prospects. From low-key Supplier providing components to the domestic market alone, the industry has emerged as one of the key auto component centres in Asia and is today seen as a significant player in global automotive supply chain. India is now a supplier of a range of high-value and critical automobile components to global auto makers such as General motors, Toyota, Ford and Volkswagen, amongst others.

Figure 3.1 Auto Component Industry Turnover: 2010-11

The size of the auto components industry has been estimated at US$ 19 billion in 2008–09, growing at a compound annual growth rate (CAGR) of about 23 per cent over the previous five years. The industry is expected to grow to US$ 40 billion by 2016.

Among the 6,400 players present in the Indian market, only 600 constitute the organised sector and contribute more than 77 per cent of the country’s total production of auto components.

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3.3 Classification of Auto Component Market

The auto component industry can be classified into the 3 channels; as far as auto component market is concerned. The classification of auto component market, as per the market spread, is shown in the exhibit below:

1. Original equipment Manufacturers (OEM) market2. Replacement Market3. Export Market

Figure 3.2 Breakup of OEM and Replacement Demand

3.3 Replacement Demand:

Though replacement market caters to 30% of the total (domestic and exports) auto component market, several channels selling genuine and spurious parts make it the most dynamic market segment out of the other two markets i.e. OEM demand and export market. Due to the squeezing margin for the OEM auto component segment, the replacement market has relatively better margins for OES and additional stream of income for OEMs. The replacement market has become increasingly competitive with the focus on OEMs, imports and reducing price difference between OEM/OES products and spurious auto components. The exhibit below details out the critical factors that have recently transformed the aftermarket demand.

Increasing competitive pressure among the suppliers caused by OEM actions has suppliers revaluating the replacement parts industry. This segment offers suppliers a vigorous source of revenues, since the margins are typically higher and the average age of the automotive fleet is ageing (which means more cars need repairs and repair parts). Further, many suppliers will focus on this market to offset the inherent volatility of the OEM segment. The numbers reveal the financial opportunity. In recent years, replacement parts makers have benefited from the ageing of many vehicles in the US as consumers held on to their cars longer.

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Figure 3.3 Growth drivers for Replacement Demand

The major multinational component suppliers who dominate the business tend to be vertically integrated, serving both the OEM and replacement products segments. Leaders in the trade include Allied Signal (US), Robert Bosch (Germany), Cooper Industries (US), Denso (Japan), Echlin (US), Sony (Japan), T & N (UK).

In addition, many of the major light vehicle manufacturer such as GM (Via Delphi Automotive Systems), Nissan, and Ford (via Visteon) maintain captive parts manufacturing operations that often do an extensive replacement business. Ford and Visteon are expected to increase their activity in this segment. Among replacement product types, electronic controls and modules hold the growth prospects, benefiting from both as less mature market base at the replacement market level and the potential for price/performance-enhancing technological innovation. Nonetheless, replacement demand for mechanical and electrical products will be significant as well, as a result of generally favourable replacement market prospects in developing countries, and some firming in average prices for many products.

3.4 CONSUMER PREFERENCES FOR AUTO COMPONENTS

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The understanding of consumer preference for the replacement market provides an insight on the factors consumers consider important while purchasing the auto components, be it for 2/ /3 wheelers, cars or commercial vehicles.

Figure 3.4 Key purchase Criteria (Replacement Demand)

As per the exhibit above, quality, brand and price are three key criteria for both individual customers and customers owning a fleet of vehicles, either for personal or commercial use. However, price is a less important factor for crucial components like engine and transmission parts. The same finding can be extended to high value, low volume IC (Integrated Circuit) based components as well.

When it comes to the sources of purchase for the organized replacement market, majority of the individual customers rely on OEM and branded parts. As per the exhibit below, almost more than one-third of the individual customers purchase OEM parts i.e. the parts available from OEM distribution channel. Around half of the customers, except for transmission parts, purchase branded components, available from dealers or auto component shops.

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Figure 3.5 Source of Purchase (Replacement parts)

3.5Auto Component Export Demand:

Figure 3.6 Auto Component Exports 2010-11

The domestic industry’s focus on exports has been recent and has been part of industry initiatives to counter the cyclicality in the domestic auto sector. During the period between 2010-11 Overall Exports grew by 54% Exports led by recovery in key markets – North America, Western Europe and Asia

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Figure 3.6 Continent-wise export of Auto component 2010-11

3.3Imports:

Figure 3.7 Auto Component Industry Imports: 2010-11

Imports of the Sector grew by 30.2% during the period, of which 85% of the imports done by the OEMs and 15% imports by Replacement market.

3.3 Auto component Industry performance:

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Figure 3.8 Auto Component Industry performance 2010-11

Auto Component industry performance is outstanding during the time period 2010-11, is approximately US$ 39.9 billion which is showing increasing growth from last year which is US$ 30.1.

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CHAPTER IV

MARKETING STRATEGY ANALYSIS

4.1 Marketing Research

Though the Indian automotive market has been able to hog the limelight in the recent years and has received many foreign investments, it is yet compete with the world's other major developing nations, such as China. However, this scenario is expected to change in the coming years. As India's transport networks are expanding at a very fast pace, the automotive industry is also growing by leaps and bounds. This broad industry has also facilitated employment to a large section of the Indian populace. Thus, the role of Auto ancillary industry in the development of the Indian economy cannot be overlooked.

Global automotive companies typically seek collaborative partnerships with government and academic institutions to build centers of excellence in automotive engineering and research. A process of collaborative investment embracing OEMs, universities and government is already underway in India, but should be deepened in the coming decade.

The Indian government’s Automotive Mission Plan 2006-2016 foresees an increase in the contribution to GDP of the automotive industry from 5% to 10% by 2016, and includes a commitment to provide infrastructure that would allow industry to focus on design, as well as manufacture, of leading products.

A key component of R&D infrastructure development in India is the government’s National Automotive Testing and R&D Infrastructure Project (NATRIP), a US$380 million joint industry and government investment over six years. Its aim is to support the creation and extension of seven testing and R&D centers across India (Manesar, Bareilly, Silchar, Indore, Ahmednagar, Pune and Chennai) operated by the Automotive Research Association of India (ARAI – India’s consumer vehicle testing agency), the International Center for Automotive Technology (ICAT), and the Global Automotive Research Center in Chennai. NATRIP is already generating substantial revenues in both mandatory testing and in automotive development services – although companies say that testing facilities will need to be developed further.

At the same time, some individual OEMs are developing their own centers of excellence in collaboration with Indian institutions. For example, the Mercedes Benz Research and Development Center India in Bengaluru, Karnataka is researching the bio-diesel source Jatropha in collaboration with the Indian Central Salt and Marine Chemicals Research Institute and the University of Hohenheim, Stuttgart.

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The India Science Lab of General Motors in the same location has a wide range of academic collaborations in materials testing and virtual manufacturing. Ford Motors is researching hydrogen storage and exhaust technologies in collaboration with the Indian Institute of Technology, Chennai, where Ford has established a professorial chair. And Volvo is engaged in urban transport research in collaboration with the Indian Institute of Technology, Delhi.

Such OEM investments in building centers of R&D excellence in India are significant, but remain small relative to India’s ambitions and potential.

Experience elsewhere suggests that proactive government support is critical in attracting large scale R&D investment. For example, in 2005 General Motors announced a US$2.5 billion investment program designed to develop an ‘Automotive Innovation Network’ based on collaborative R&D involving GM Canada, automotive suppliers, and eight Canadian universities, with the objective of enhancing commercializable R&D in the automotive supply chain. Significantly, the Canadian project enjoyed strong political and investment support from the Ontario government: to match investment of this scale, the Indian government at state and federal level is likely to have to be similarly proactive.

Furthermore, India's mass production skills coupled with strong research and development (R&D) and software development workforce promise to be the pillars of strength on which its future is secure. Thus, it remains to be seen when and how this industry marches ahead for its augmentation process and how far it succeeds in its endeavor.

Most companies agree that incentivization of R&D investment in India is no longer an outstanding issue of concern: Indian incentives for capital investment and revenue spending in R&D are comparable to the best available elsewhere in Asia. Although India does not offer tax credits or R&D grants, competitive current and enhanced tax deductions are available, and India does allow deductions for R&D-related property investment, currently available in only four out of 17 significant Asian economies. The current incentive regime allows tax deductions of up to 150% for most capital and revenue R&D expenditures until 2012, and zero income tax for export-oriented R&D until 2010, and extensive import duty exemption. Corporate concerns focus on the renewal of the incentives after 2010: this remains a lobbying issue for Indian and global companies.

4.2 Key Issues & current trends

The Indian auto ancillary industry has flourished like never before in the recent years. This extra-ordinary growth that the Indian automotive industry has witnessed is a result of a two major factors namely, the improvement in the living standards of the middle class, and an increase in their disposable incomes.

Also, the institutionalization of automobile finance has further paved the way to sustain a long-term high growth for the industry.

4.2.1 Issues and Challenges – Indian Auto Component Industry

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As is the case with many other young, aspirant and rapidly growing industries, Indian auto component industry is also engulfed with certain challenges. These challenges can be dissected into two categories – internal factors i.e. the challenges faced at organizations’ level and external factors where the other entities, issues outside the organization / industry influence the growth of the industry. The exhibit below highlights the issues and challenges Indian auto component industry is facing today:-

Figure 4.1 Issues and Challenges of Indian Auto Component Industry

Source: BIRD, IMRB International

4.2.2 Emerging Trends

Declining integration levels of VMs:

In order to improve their cost-competitiveness (lower fixed costs) during periods of auto slowdown, the large VMs in India are reducing their levels of integration by hiving—off of certain component divisions into separate companies. The falling levels of integration are expected to expand the size of the domestic auto ancillary market while intensifying the competition simultaneously. By reducing in- house manufacturing and increased out sourcing, the need for investment and technical up gradation is transferred from the TM to the auto ancillary manufacturer. Further, the increasing competition levels in the ancillary

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industry and the resultant pressure on component parts may also permit VMs to derive cost advantages.

Adoption of global logistics and supplier systems:

In line with global trends, the Indian auto ancillary industry is currently witnessing the emergence of single-source supplier systems which require the component manufacturers to make significant investments in dedicated facilities, such as design, tooling and production for the manufacture and delivery of the required components. Hence, component manufacturers are increasingly exposed to the risk of model failure. Driven by the need to be cost-competitive in the scenario of increasing competition levels and declining pricing flexibility, auto manufacturers are also resorting to implementation of inventory management techniques, such as Just-In-Time, which in turn has resulted in an increase in the working capital requirements of component manufacturers.

Increasing emphasis on quality:

The entry of global vehicle manufacturers in the domestic market is leading to the adoption

of global quality control practices in the domestic industry. Effective quality control leads to

improved export competitiveness, better quality perception in the retail market and increased

acceptance by global passenger car manufacturers operating in India. Self-certification is an

emerging concept in the industry, which obviates the need for a quality check to be

undertaken by the vehicle manufacturer as the components are delivered directly to the OE

clients in a ready-to-use quality certified form. However, enforcement of quality control calls

for increased investments in technology and automation of facilities.

Declining Pricing Flexibility:

As the auto ancillary industry is characterised by derived demand, pricing flexibility in the industry is constrained by the pricing pressure on the end-user auto sector. In the scenario of price-based competition amongst VMs, the component manufacturers are faced with considerable pressure on their realisations and are frequently required to absorb increases in the cost of production with consequent pressure on profitability. Consequently, operational efficiency and cost control initiatives increasingly determine profitability in the industry. However, certain players in industry segments such as fuel injection equipment and engine valves have not been significantly impacted, primarily on account of their strong competitive position in terms of market presence and operational efficiencies.

Technological Changes and Impact on Profitability:

The expansion in the range of vehicle models, particularly in the passenger car segment, has warranted significant investments in the design and tooling capabilities of component manufacturers. Further, the increase in the number of variants has the effect of reducing the Batch size thereby leading to lower asset utilisation levels and an increase in the cost of production.

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Tierisation:

The demanding requirements from the new VMs, the need for investments in new capacity, quality improvement systems and technology up gradation are expected to lead to the emergence of tierisation in the industry. The Tier I manufacturer outsources sub-assemblies from various Tier II players, (who buy sub-components from Tier III players), and assemble entire system modules to be used as inputs by the VM. The Tier I supplier would be made responsible for the quality of the sub-assembly including the sub- components and would he required to make significant investments in quality control and inventory management. Players engaged in the manufacture of complete assemblies and having superior inventory and production management systems, quality certification for their product and processes and financial strength are well positioned to emerge as Tier I players.

Consolidation:

As witnessed in the global markets, the domestic auto ancillary industry is also likely to increasingly witness consolidation. Additionally, it is also likely that the foreign partners would gradually try to increase their stake in the joint ventures formed with the Indian players. Further, domestic manufacturers of components are likely to explore mergers and acquisition possibilities to emerge as sub-assembly manufacturers. Entry of foreign players is also likely in the product segments requiring a high degree of quality and technological support.

4.3 Market Segmentation

The auto ancillary industry can be broadly classified on a functional basis into engine parts, transmission and steering parts, suspension and braking components, electrical equipment and others. The engine parts segment is the most significant contributor to the ancillary industry in terms of value and accounts for around one-third of total production. The market for auto ancillaries is classified into original equipment (OE) market, the replacement market and exports. Approximately 40% of the demand in terms of value is derived from the OE market while exports account for 10% and the replacement market accounts for the balance. However, this segmentation varies across components and the size of the replacement market depends upon the durability of the component, the criticality of the component in the performance of the vehicle, the stringency of emission norms,The auto component industry can be classified into the 3 channels; as far as auto component market is concerned. The classification of auto component market, as per the market spread, is shown in the exhibit below:

4.3.1 Market Segmentation of Auto component market:

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Figure 4.2 Auto component market segmentation

1. Original Equipment Manufacturers (OEM) market:

The OEM market for auto ancillaries is characterised by cyclicality in line with the end-user automobile industry. The component manufacturers commission capacities and undertake production in line with the production schedules of the Vehicle Manufacturers (VMs). Servicing the OEM market requires access to technology necessary to meet quality requirements, ability to meet the stringent delivery schedules of the VMs, price competitiveness and in some cases proximity to VMs

Figure 4.3 Breakups of OEM and Replacement Demand Source: ACMA

2. Replacement Market:

The size of the replacement market in India is significant owing primarily to the large vehicle base approximating 40 million vehicles. The low vehicle scrappage rate in the country, also necessitate frequent replacement of parts. The replacement market acts as a steadying factor in the industry, and provides a partial hedge against the risk of recession in the auto sector. The component manufacturers enjoy better bargaining power in the replacement market as compared to the market and as a result, the margins in the replacement market are higher.

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Figure 4.4 segmentation of replacement market by type of vehicle Source: ACMA

3. Export Market:

The domestic industry’s focus on exports has been recent and has been part of industry initiatives to counter the cyclicality in the domestic auto sector. During the period between 2010-11 Overall Exports grew by 54% Exports led by recovery in key markets – North America, Western Europe and Asia

Figure 4.4 Continent-wise export of Auto component 2010-11Source: ACMA

Figure 4.5 Composition of Exports Source:ACMA

Growth in the export market is however constrained by poor price-competitiveness on account of the domestic industry’s uneconomic size of operations, higher defect rates of Indian products, high investments required to be made in warehousing facilities and

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inadequate technological development. A significant portion of the industry’s total exports is to the overseas replacement markets and the domestic component manufacturers have limited exposure to the global OEMs.

4.3.2 Segmentation within the auto component industry

Figure 4.6 Segments within auto component industry

4.4 QUALITY & TECHNOLOGY 

While most of the key markets in the US and Europe are still struggling with negative growth, India and China are perhaps the only two auto markets that have shown sign of quick recovery from the slowdown. Even today India has only seven car owners per thousand citizens compared that with China’s 27 cars per 1000 citizens and one can realize that the car

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market in India is still relatively small. Inspite of these fact global major players continue to show heightened interest in the Indian market”. Low cost, design innovation and economies of scale are now becoming the hallmark of the Indian automobile industry. In fact, thanks to the Indian ingenuity in design and engineering, the nation is fast becoming a manufacturing hub for passenger cars, especially small cars. Government aims to give full support to the automotive SME and particularly to technology up-gradation. The government has already been encouraging cluster based geographical development for enterprises having similar lines of business enabling technical, administrative and financial economies. Besides, to facilitate easy availability of funds, the government is also encouraging banks to adopt a cluster-based lending approach. 

The emergence of the Indian auto components industry as a serious global player was equally impressive. Today the Indian components industry already earns more than $ 3 billion a year through exports. And it is just about reaching the takeoff stage. Besides, the global downturn has forced more international car makers to go back to their drawing boards and explore ways to cut costs without denting quality and the $ 19 billion Indian auto component industry has caught their fancy like never before. Major global majors have already marked India as their component hub thanks to the cost advantage and quality assurance. It has placed the sector on the global auto industry map. It will be the springboard for the future development of the industry as well as the manufacturing sector in India.

4.5 Cost Structure:

There are two important cost elements for the Indian automotive component industry:

1. Material Cost

2. Employee Cost

These two elements together account for more than 70% of the total operational cost and more than 60% of the total operating income. The cost structure of automotive component companies has stayed relatively stable over the last six years.

The raw material has to work under extreme stress. This requires auto components to assure long life, meet high quality standards and exhibit favourable wear properties. In absence of continuous availability of imported raw materials, the industry has to reconcile to the indigenous materials. The Indian players have started backward integration by acquisition of foreign companies to reduce the raw material cost and also for the procurement of quality raw materials to meet the global quality standards.

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Table 4.1 Segment-wise Cost Structure in Auto Component Sector

Source: Database Search

India has competitive advantage of lower wages cost over European and North American companies with one fourth of wages prevalent in India as compared to that of develop countries.

4.6 PROMOTIONAL SCHEMES

Promotional schemes are always a good tool to attract customers. However the kind of promotional activities that one carries out differs for each industry. The promotional activities carried out for consumer durables are different than those for engineering industry. Promotional activities that can be carried out in this industry are:

Price cut due to competition. Transportation charges are beared by the company manufacturing the equipment. Free spare parts are given along with the equipment for replacement purpose in

Replacement market.

4.7 DISTRIBUTION CHANNEL

At a broader level, the channel structure for the replacement market can be classified into 3 categories: the OES / OEM channel, the spurious component channel and the import channel where products are sold by importers.

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Figure 4.7 Channel structure in the auto component aftermarket

According to the study conducted by IMRB International for SIAM in 2006-07, the counterfeit components constitute about 35% - 51% of private vehicle components replacement market. The exhibit below shows the product flow across different channels. In the replacement market, it is estimated that spurious product market is bigger than the market catered by genuine parts.

4.8 Logistics management

Logistics is the organized movement of materials and, sometimes, people. The term was first associated with the military but gradually spread to cover business activities. Logistics Management is defined as a business planning framework for the management of material, service, information and capital flows. It includes the increasingly complex information, communication and control systems required in today's business environment. Logistics management includes a whole gamut of processes like planning, procurement, transportation, maintenance, distribution and replacement of personnel and material.

The process of logistics management differs from one firm to another. In some firms, all these activities are placed within a single logistics department; in others, they are shared among the departments. The firm may also go in for what is called third-party logistics, which is a contract with an outside party to perform specific logistics services. Some of the important parts that are to be focused at are:

1. Customer Service: All the activities that are done to keep the existing customers satisfied come under the gamut of customer service.

2. Demand Forecasting: This process includes various statistical measures that enable the firm to estimate the demand in the future, which in turn helps in proper demand management.

3. Documentation Flow: This process covers the movement of the paperwork that accompanies the movement of physical product.

4. Interplant Movements: This is only applicable to those firms where production process is accomplished in more than one plant, requiring the movement of semi-finished products from one plant to another.

5. Inventory Management: Inventory management requires a cost effective maintenance of stocks of goods and materials.

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6. Order Processing: Order processing starts with the receipt of an order from a customer and ends when the order is ready for packaging.

7. Packaging: Packaging is done mainly to protect the product when it is being transported from the source to the destination. It can also be used for promotional purposes.

8. Parts and Service Support: This covers the whole after-sales service process.

9. Plant and Warehouse Site Selection: This function is carried to determine where the plant and the warehouse are going to be located, keeping cost-benefit analysis in mind.

10. Production Scheduling: This function's task is to balance demand for products with the existing plant capacity and availability of inputs.

11. Purchasing: This is a very important function in the logistics management as the quality of inputs that are purchased determines the quality of the finished product. Vendor selection is an important sub-process of this function.

12. Returned Products: There are many categories of returned products. A few are subjects of product recalls, meaning that a safety defect or hazard has been discovered. E.g. laptop battery recall by Dell. These products are removed from the shelves, and both retailers and consumers attempt to return them to the manufacturer. This is a form of reverse distribution, with goods moving in the opposite direction of their usual flow.

13. Traffic Management: All the transport requirements needed to move a firm's freight is known as traffic management.

14. Warehouse and Distribution Centre Management: This logistics activity involves management of the locations where the firm's inventories are stored.

A common type of Supply and distribution system followed by most of the manufacturers is:

Figure 4.3 Segmentation within the auto component industry

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Figure 4.8 Order-to-delivery processes in auto industry supply chain

4.8.1 OEM Vendor Selection Process

The research team of IMRB International tried to understand the vendor selection process of LCV and Commercial Vehicle manufacturers. The OEM vendor selection process was found to be almost similar in all the OEMs visited during the course of this study. In general, OEMs select vendors in the following steps:-

Step 1: First, the vendor contacts OEM’s sourcing or purchase department. Due to high number of parts, the sourcing department is categorized into 4 – 5 vendor management groups. After submitting the credential documents and filling the vendor application form, it is submitted with respective departments within the sourcing department of OEM. The party should be financially and technically sound. It should have prior experience as supplier to other vehicle manufacturers. For some parts, specific commercial vehicle technical expertise as vendor is required whereas for other components the vendor is qualified if the party is supplying to LCVs.

Step 2: After initial qualification, a team of people from various departments (i.e. Engineering, Sourcing etc) is formed that checks for quality aspects, the vendor’s manufacturing set-up and technological capabilities etc. OEMs evaluate them whether they would be able to meet OEM’s expectations with the economies of scales and quality levels.

Step 3: After the party qualifies, OEMs involve in the commercial discussion about the cost, inventory and other nitty-gritty. OEMs have long term association with vendors. The process of vendor selection takes few weeks to few months.

4.8.2Inventory in Supply Chain of OEM suppliers

4.8.2.1 Small and Medium OEM vendors

The small to medium auto component industry that are not leveraging the information flow are the most vulnerable to the market volatility because of the “bullwhip effect” leading to piling up of inventory all levels i.e. RM (Raw Material), WIP (Work In Process) and FG (Finished Goods).

The OEMs are well connected to their strategic vendors either because of their physical proximity to the vendors or because of prompt information exchange through ERP

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(Enterprise Resource Planning) software. It enables these vendors to change the supplies as per the changing Master Production Scheduling at OEMs’ end.

The percolation of technology in India hasn’t seeped beyond Tier-1 suppliers, resulting in excess inventory at various levels. The exhibit below pictorially represents the inventory build-up in a typical supply chain of Indian auto component industries.

Figure 4.9 Inventory in the supply chain of small auto component industries

4.8.2.2 Large OEM vendors / strategic Tier-1 suppliers

Though the supply chain of automotive industry in India is lagging behind in term of technology adoption when compared with developed economies, the OEM and Tier-1 supplier relationship maintains some level of information flow that enables them to keep a tab on the inventory levels. The exhibit below pictorially represents the ideal supply chain situation that exists in the handful value chains in the Indian automotive industry

Figure 4.10 Inventory in the evolved value chain of automotive industries

4.9 Major Automobile Component Players (Two, Three and Four Wheeler)

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There is not any distinction between the two wheeler and four wheeler automobile component players in the Indian automobile component industry. The major organized players who are catering to two wheeler OEMs are also catering to four wheeler OEMs. However, for some niche commercial vehicle components, due to specialized load bearing and design requirements, some automobile component players are the vendors only to commercial vehicles.

The exhibit below shows the major players operating in the key sub-segments in the product segments of the auto components:-

Figure 4.11 Auto Component Sub Segments and Major Players in Indian Markets

Source: Database search

4.10 MAJOR AUTO ANCILLARY COMPANIES IN INDIA:

4.10.1ASAHI INDIA GLASS LIMITED:

Company Profile:

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Asahi India Glass Limited (“AIGL”, erstwhile Asahi India Safety Glass Ltd) was promoted jointly by Asahi Glass Company Limited and Maruti Suzuki India Limited. Incorporated in the year 1984, AIGL is the largest integrated glass Company in India offering end to end solutions across the entire glass value chain. AIGL’s manufacturing plants (four plants and three sub-assembly units) are located across India with its integrated glass plant located at Roorkee (Uttarakhand) and produces wide range of automotive glass, float glass, architectural processed glass, glass products and windows apart from providing services like glass installation, design and retail, repair etc. in the automotive and architectural glass value chain.

Product Profile and segment mix: AIGL’s products are sold under the brand, AIS. The company’s product profile includes automotive safety glass, float glass, architectural processed glass, reflective glass, mirrors and other glass products and services; broadly falling under the company’s three business units :AIS Auto Glass, AIS Float Glass, AIS Glass Solutions.

AIS Auto Glass segment is the key segment for the company adding ~52% of total standalone revenues of the company. The segment meets ~77% of the car industry’s requirement for auto glass and 64% of MUV’s demand for auto glass in the OEM space. The company also holds strong share in the after-sales and service market and is garnering steady share in the commercial vehicle segment. AIGL is a major supplier for all key OEMs like Maruti, Hyundai, Volkswagen, Tata Motors, Toyota, M&M, Honda, etc. Thus, the segment’s performance is directly linked with the growth pattern of automobile industry.

To meet the growing demand for auto glass given the favourable outlook for the industry, the company has been adding capacities over years. In the last few years, AIGL faced pressure on margins arising from capacity constraints, locational demand-supply mismatch and consequent rise in freight costs. To avoid similar pressures, AIGL is undergoing stage-wise capacity expansion. As at end of 2010-11, the company’s total laminated and laminated capacities stood at 4.45 million pieces and 7.76 million sqm respectively.

AIS Float Glass is another key segment adding more than 45% of company’s total revenues and supplies products like clear glass, tinted glass, reflective glass, etc. The company commands 25% share in the float glass market with the products finding application in construction and automotive industries.

AIS Glass Solutions is a subsidiary of AIGL, providing innovative architectural glass solutions by supplying range of architectural processed glass comprising of toughened glass, laminated glass, insulated glass and other varied products. AIS Glass Solutions is the architectural glass processing SBU of AIS.

4.10.2 BANCO PRODUCTS (INDIA) LIMITED:

Product Profile - BPIL is a leading manufacturer of radiators, intercoolers, oil-coolers and various types of engine gaskets, and the company supplies its products to both automotive as

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well as non-automotive industries. Within the automotive segment, the company supplies to commercial vehicle and passenger cars segment. The company also supplies radiators to certain non-automotive applications including agricultural and forestry equipment, locomotives, diesel engines for power generation, construction equipment and wind turbines. BPIL acquired Nederlandse Radiateuren Fabriek B.V. (NRF) which is engaged in a similar line of business as BPIL and manufactures radiators, marine coolers and other air cooling products at various manufacturing facilities across Europe. Acquisition of NRF has strengthened presence of BPIL in Europe, especially in radiator market wherein NRF supplies air-cooling products for automotive, industrial and marine applications. While BPIL largely supplies to after-market customer, NRF primarily caters the requirement of OEMs. Over last few years, the company has made investment towards setting up Extra Neutral Alcohol (ENA) and cement manufacturing plant in Tanzania (Africa).

Competition: BPIL is amongst leading player in domestic automotive radiator and gasket market, and the company is Tier I supplier to all major OEMs in the domestic market. In radiator business, BPIL is largely present in commercial vehicle and industrial applications business wherein it competes with Tata Toyo Radiators Limited (Tata Toyo), Modine Manufacturing Company, Alcraft Radiator and others. In gasket business, BPIL mainly competes with Talbros Automotive Components Limited (Talbros) and Victor Gaskets Limited (Victor). Tata Toyo is the largest player in domestic radiator market followed by BPIL, whereas in meal gasket business Talbros is the market leader followed by BPIL and Victor.

4.10.3 BHARAT FORGE LIMITED

Product Profile - BFL operated in two major product segment, Automotive and Non-Automotive business. In automotive business segment, company manufactures a range of engineered critical and safety components for chassis and engine component business wherein it is Tier I and Tier II supplier to all major automotive OEMs globally. The non-auto segment is driven by five verticals – energy, oil & gas, aerospace, transportation (including railways and marine applications) and the mining sector. In nonautomotive business segment, BFL Supplies products such as windmill shafts, gas engine components for energy; structural and rotating components for aerospace; valve bodies, bonnets, choke bodies and composite blocks for oil and gas; engine components for construction and mining; engine components and turnouts for railways, and engine components for marine applications. BFL has strong presence in European automotive market via direct export and also through its wholly owned subsidiaries CDP Bharat Forge (CDP-BF) and BF Aluminiumtechnik (BF-AT) in Germany, and BF Kilsta (BFK) in Sweden.

Competition -BFL is amongst the world largest forging company with major presence in India, Europe, United States and China. BFL operates in highly technology oriented safety and engineered value added products like crankshaft, steering columns for automotive application where competitive intensity is low. The company has also forayed into non-automotive applications like marine, oil & gas. BFL is the largest forging company in India with strong market share in automotive chassis and engine component business, especially

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for M&HCV segment. Mahindra Forgings Limited (MFL) and Amtek Auto Limited (Amtek) are its key competitor in domestic market, whereas MFL also competed with BFL in European market. Amtek has strong presence in domestic passenger car market; however, over past few years, there is increasing shift towards higher tonnage vehicle which have more axles and hence more forged components which augurs well for BFL having dominant share in domestic chassis and engine component business. While non automotive business constitutes ~40% of standalone revenue, the company still has marginal presence in globally for non automotive segment. The non automotive segment is likely to be the key growth driver for the company over medium to long term.

4.10.4 EXIDE INDUSTRIES LIMITED

Product Portfolio - EIL’s operations are divided into two strategic business divisions (SBUs) - Automotive (~65% of revenues) and Industrial batteries (~35% of revenues). The automotive segment comprises of both OEMs as well as the replacement market; and the industrial segment comprises of Fast Moving Industrial Batteries (FMIB), which include inverters and UPS), traction batteries (used in forklifts, golf carts) and batteries for infrastructure applications (used in railways, power and telecom). EIL is amongst the few organized players in the domestic market that has a presence in both the automotive and industrial segments, providing it diversification and scale benefits. The design and internal construction differs between automotive batteries and industrial batteries. While the former is designed for starting, lighting and ignition (SLI) needs of an automobile, the latter is designed to operate for deep cycle applications1. EIL has a technical collaboration with Furukawa Battery Company Limited (Japan) for SLI batteries and with Shin-Kobe Electric Machinery Company Limited (Japan) for both automotive and industrial batteries. In 2009-10, EIL had renewed its agreement with Shin-Kobe for all varieties of lead-acid batteries and components used for automobile batteries and also for Valve Regulated Lead Acid (VRLA) Batteries for industrial applications with effect from April 1, 2010 for a period of five years. In January 2012, EIL also entered into technical collaboration and assistance agreement with East Penn Manufacturing Co. Inc, USA for the manufacture of automotive, motive power, standby, telecom, UPS, solar and traction batteries, besides seeking technical support for the two captive smelters of EIL.

Competition – EIL has displayed a strong business growth over the last several years by virtue of its strong brand franchise (Exide and Standard Furukawa); presence across multiple price points and applications; and existence of a wide distribution network. In the automotive battery segment, EIL faces competition primarily from Amara Raja, Tudor India, AMCO Batteries and Tata Auto Comp GY; in the industrial battery segment, EIL faces competition primarily from Amara Raja, HBL Power Systems and imported batteries from China and Vietnam. Around 45-50% of EIL’s total lead requirements are met by the company’s subsidiaries viz., Leadage Alloys India Limited and Chloride Metals Limited, which are engaged in smelting operations. This is a source of competitive advantage for EIL since having captive smelting units provides benefits in terms of an assured lead supply as well as cost advantage due to relatively lower dependence on pure lead.

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4.10.5 HINDUJA FOUNDRIES LIMITED

Hinduja Foundries Limited (“HFL”, erstwhile Ennore Foundries Limited) is part of the Hinduja Group of companies, a conglomerate with interests in Transport, Energy, Information Technology, agriculture, and financial services. The group’s flagship entity, Ashok Leyland Limited is the country’s second largest player in the M&HCV industry. HFL is engaged in the business of manufacturing grey iron and aluminium gravity die castings for automobiles, compressors, industrial engines, power generators and tractors. With manufacturing facilities located in Tamil Nadu and Andhra Pradesh, HFL’s total capacity is 1,22,000 MT of Grey Iron Casting and 3,000 MT of aluminium gravity die-casting.

Product Profile and segment mix: Commencing its operations way back in 1961, HFL gradually expanded the capacities over years and established relationships with major OEMs and Tier-1 suppliers in the automotive and engineering segments. The company was operating as a captive foundry for Ashok Leyland Limited (ALL) for many years, but with gradual addition of capacities and new customer acquisitions, HFL expanded its customer portfolio. HFL currently caters to more than 25 customers and has emerged as one of the largest automotive jobbing foundries in the country. HFL largely addresses the casting requirements of the domestic market with marginal exports.

The company’s key customers (other than ALL) include Mahindra & Mahindra (M&M), Tata Motors, Escorts, TAFE, New Holland Fiat to name a few. HFL’s product range includes Cylinder Blocks, Cylinder Heads, Flywheels, Flywheel Housings, Transmission Casings, Clutch Plates, Brake Drums, Intake Manifolds and Clutch Housings finding application in CV, tractors, construction equipments and passenger car segments.

4.10.6 LUMAX INDUSTRIES LIMITED

Product Portfolio - LIL is engaged in the manufacture of automotive lighting systems which include head lamps, tail lamps, sundry and auxiliary lamps. The company manufactures and supplies these products to a large number of customers in the PV, CV, 2W, 3W, tractor and off-highway segments. Amongst the top five customers which accounted for 70% of LIL’s revenues in 2010-11, Maruti Suzuki was the largest contributing 37% to its revenues. Over the years, LIL has made regular investments (Greenfield and brownfield) to expand capacity and set-up new units in close proximity to key customers. Currently, LIL has seven plants located at Gurgaon (Haryana), Dharuhera (Haryana), Noida (Uttar Pradesh), Chinchwad (Maharashtra), Chakan Plant-I and Plant-II (Maharashtra), and Pantnagar (Uttarakhand); and is in the process of establishing three new ones at Sanand (Gujarat), Bawal (Haryana) and Bidadi (Karnataka). LIL has a two-decade old technical and equity collaboration with Stanley Electric Co., Japan that holds 37.5% equity stake in the company. The above collaboration has helped LIL garner business from almost all Japanese OEMs in India, besides various other domestic OEMs.

Competition – In its addressable product range, LIL enjoys an estimated market share of 50% in the domestic market which has been under pressure due to rising competition from several players including India Japan Lighting (IJL), Minda Industries, Fiem Auto Industries,

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Valeo Lighting and AV Light Automotive. IJL, a 50-50 JV between Lucas TVS (Chennai) and Koito Manufacturing Company (Japan) is the closest competitor of LIL in the automotive lighting space. From the halogen-based reflector-type design of automotive lamps currently prevalent in most small cars in India, the PV industry (particularly in the premium segment) is fast transitioning to Xenon/ LED based projector-type designs. The ability of domestic lighting system suppliers to meet the evolving customer specifications will be critical for gaining market share going forward.

4.10.7 MAHINDRA FORGINGS LIMITED

Mahindra Forgings Limited (MFL) is amongst leading forging company with plants in Germany, UK and India. Over past few years, the Company has grown by a combination of organic and inorganic growth designed to achieve scale, technology and customer reach. Between all its plants, the Company is capable of producing most of the forging components in a car or a truck. The Indian operations focus on design, development & machining of crankshafts whereas the German operations are a full range provider of forging parts while being one of the top axle beam manufacturers in the world. The German operations are the largest and account for more than two thirds of the Company’s revenue

Product Profile - MFL is the largest manufacturer of crankshaft and stub axle for cars/MUVs and tractors in the domestic market. Being a Mahindra Group Company, M&M is the biggest customer for MFL’s product in the domestic market. In Europe, a significant portion of the product portfolio consists of value added products like complex and machined forgings. Majority of MFL’s revenue in Europe comes from OEMs in commercial vehicle segment. The Company is sufficiently de-risked through a diversified customer base with the top 5 customers accounting for less than 50% of the business. Daimler AG is the largest customer for MFL is Europe, and the company is successful in increasing its order-book share in Daimler AG over past few quarters.

Competition - Forging industry is a capital intensive and technology intensive industry which acts as an entry barrier for new player. In domestic market, MFL competes with Bharat Forge Limited (BFL) and Amtek Auto Limited (Amtek) whereas in European market, MFL competes with BFL along with international majors like ThyssenKrupp, Sumitomo and Hirschvogel.

4.10.8 MOTHERSON SUMI SYSTEMS LIMITED

MSSL has a diversified automotive products portfolio which includes automotive vision systems, wiring harnesses, polymer parts, tooling, metal machining, and elastomers processing. Accounting for around 60% of revenues, the wiring harness segment used to be the largest contributor to MSSL’s (consolidated) revenues till 2008-09. However, following the acquisition of SMR by the Samvardhana Motherson Group in March 2009, the Automotive Mirrors segment emerged as the largest business segment of MSSL

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(consolidated) which accounted for 56% of its revenues in 2010-11. Now with the acquisition of Peguform (Germany) by the Samvardhana Motherson Group, the polymer business has become the largest segment and estimated to account for 50-55% of MSSL’s (consolidated) revenues by 2012-13E.

Competition – Peguform is amongst the leading manufacturers of bumpers, cockpit assemblies and door trims in Europe and competes with Faurecia, Johnson Controls and Magna in interior plastics segment and Plastic Omnium and Faurecia in exterior plastics segment. For polymer components business, MSSL competes with a large number of domestic players such as Mutual Industries, TACO Group, Visteon, Krishna Maruti, Machino Plastics, Hanil Automotive, Varroc, Toyoda Gosei and Mobis etc. For automotive mirrors business, SMR enjoys a global market share of ~25% and competes with Magna Donnelly, Ficosa and Gentex etc. For wiring harness business, MSSL together with its JV Kyungshin Industrial enjoys an estimated market share of 69% in the domestic PV industry and 40% market share in the domestic CV industry and competes with Tata Yazaki, Delphi, Tyco and Minda Furukawa.

4.10.9 SONA KOYO STEERING SYSTEMS LIMITED

Product Portfolio - SKSSL’s product portfolio comprises of two key segments - steering systems which include manual and power steering systems and driveline products which include case differentials, axle components, rear axle assemblies and propeller shafts. The company supplies products mainly for the PV segment with its exposure to the commercial vehicle (CV) and tractor segments being negligible. Between the two product families, the bulk of SKSSL’s business is derived from the steering segment which accounted for 80% of its revenues in 2010-11. SKSSL’s portfolio in the steering segment comprises of four products viz., manual steering columns, manual steering gears, column-based electric power steering (C-EPS) systems and hydraulic power steering (HPS) systems. SKSSL’s driveline products comprise of case differentials supplied to various models of Maruti Suzuki, Tata Motors and Fiat; and axle assemblies and propeller shafts supplied to multi-purpose vehicles (MPVs) of Maruti Suzuki.

Competition - Steering system business is capital intensive and technology intensive in nature, which acts as an entry barrier to new players. The domestic market is currently dotted by only a few players with Sona Group (Sona Koyo and JSAI) and Rane Group dominating in the PV segment and ZF Steering catering to the CV segment. Due to the technology intensive nature of the product, all the major players in the industry have technical tie-ups with international majors. While Sona Koyo has technical collaboration with JTEKT (Japan) and Mando Corporation (Korea); the Rane group has tie-ups with NSK (Japan) for EPS and TRW(USA) for HPS systems.

4.10.10 SUNDRAM FASTENERS LIMITED

Company Profile: Incorporated in 1962, Sundram Fasteners Limited (SFL) manufactures high-tensile fasteners, cold formed/ extruded parts for automobile and non auto applications, precision-formed gears and radiator caps. The company holds a domestic market share of

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~40% in the automotive fasteners market. The company has eleven manufacturing facilities in India and four facilities located overseas. The company is present in UK, China and Germany through its subsidiaries. The company has five subsidiaries and also expanded its reach in global automotive hubs like UK, China and Germany through acquisitions. A brief on overseas operations:

a) China - Sundram Fasteners (Zhejiang) Limited (SFZL), China manufactures high tensile fasteners and bearing housings

b) Germany - Operations are carried out through Peiner Umformtechnik GmbH (Peiner), TVS Peiner Services GmbH (TVSP) and PUT Grundstucks GmbH (PUTG)

Peiner manufactures standard and special fasteners catering to the automotive, industrial and construction sectors. TVSP is engaged in providing warehousing and logistical services

c) UK - Cramlington Precision Forge Limited is engaged in manufacture of precision forged components for application in heavy vehicles for on-highway and off highway applications

Product Profile and segment mix: SFL has a wide product portfolio consisting of standard, special & high tensile fasteners, cold extruded & precision forged parts, radiator caps, powder metal parts and engine & pump components. Of the above, fastener business accounts for ~40% of revenues, Pump assemblies add ~18% of revenues, engine parts contribute ~ 13%, while cold formed parts, powder metal parts, precision forged parts and radiator caps constitute the balance portion. With a large product repertoire, SFL acts as a Tier-I supplier to many large OEMs. More than 65% of sales are derived from sales to OEMs, while the aftermarket sales add ~10%. Key customers include Bajaj Auto, Maruti, TVS Motor, Tata Motors, M&M, Ashok Leyland, TAFE etc. In terms of segmental mix, sales to CV segment represent ~45% followed by two wheelers, passenger cars and tractors. SFL also exports its products to large OEMs like Cummins, John Deere, General Motors, Delphi, Volvo, Daimler Chrsyler, Rover, JCB, Caterpillar, Proton, Mitsubishi, Komatsu, among others. Exports sales account for more than 20% of company’s total sales.

Geographical diversification, balanced segmental mix and limited concentration risk on customers lends stability to company’s revenues. The company is also entering the non-auto segment and has been shortlisted by a few players in the aerospace industry, including Airbus and GE for supplying fasteners. Entry into non-auto business insulates the company from the cyclical trends in the automotive industry.

4.10.11 WHEELS INDIA LIMITED

Wheels India Limited (WIL), part of the TVS Group, is the largest manufacturer of wheel rims in the country with presence across all automotive segments - passenger cars, CVs, utility vehicles (UV), tractors and Earth Movers (EM), except two-wheelers. The company also manufactures air suspension systems for luxury buses in India. WIL’s manufacturing facilities are located at Chennai (Tamil Nadu), Rampur (Uttar Pradesh), Ranjangaon (Maharashtra), Bawal (Haryana), Sriperumbudur (Tamil Nadu), Deoli (Maharashtra) and Pant Nagar (Uttaranchal).

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Product Profile, segmental mix and geographical diversification: WIL’s sales mix is largely skewed towards wheel rims, contributing ~95% of sales, while other segments consist of air suspension and power plants. WIL’s strong market position in wheel rims segment supported by its well diversified presence across all segments insulates WIL’s revenues from demand downturn in any specific segment. In terms of geographical mix, around 80-85% of total sales are made to the domestic players, largely to OEMs (75% in 2010-11) with WIL addressing to almost all automotive segments.

Exports represent ~15-20% of sales with its key markets comprising of Europe, Korea, U.S. and Japan. In terms of end user segments, commercial vehicle segment is the major revenue driver for WIL adding ~30% of total sales during 2010-11. Tractors and passenger cars further add ~40% of sales followed by earthmovers segment (12%). WIL holds more than 50% market share in M&HCV and LCV segments, where it holds share of 70% and almost 100% in tractors and passenger cars respectively.

However the share has dropped over years with rising competition from its close peers (Steel Strips Wheels Ltd and Kalyani Hayes Lemmerz Ltd), apart from increasing Chinese imports. To improve the share, WIL has been adding capacities in the last few years at its plants in Pune and Pantnagar apart from expanding capacities across its existing units. WIL has also entered into a technical agreement with M/s Topy Industries, a Japanese steel wheel maker,

towards process, design and development of steel passenger car wheels.

The company partners with almost all key auto customers - major being Tata Motors Limited, Ashok Leyland Limited and Mahindra & Mahindra with the three collectively adding ~35% of WIL’s total sales in 2010-11. Other major customers include Hyundai, TAFE, Maruti, Escorts, Eicher to name a few. Aided by strong demand growth in all segments, the sales growth was robust in the last two years; especially CV and earthmovers segment grew by 48% and 148% respectively. In the current fiscal, while sustaining the growth rates could be a challenge due to challenging macroeconomic environment, segments like tractor and LCVs are expected to report healthy growth. WIL, apart from addressing domestic demand, also meets the overseas demand. Export sales grew by 114% during 2010-11 over past fiscal and are likely to support the revenue growth going forward too.

4.10.12 ZF STEERING GEAR (INDIA) LIMITED

Product profile - ZFI’s product portfolio comprises of Steering Products which include Steering Columns and Steering Gears (Manual & Power assisted). ZFI manufacture and supply hydraulic power steering (HPS) gears, mechanical steering gears (MSG) and other types of steering and gear boxes for commercial and passenger vehicles as well as tractors. The demand for power steering (PS) from CV segment has benefited by the regulation making PS mandatory in HCVs since April 2003. Currently, CVs mainly use HPS because of durability and its ability to withstand high pressure. ZFI is pioneer in HPS in India, and it caters to all major CV OEMs in India. The company is also present in mechanical steering systems which are largely used in tractors. HPS continues to be the major revenue driver for company, accounting for about 85% of total revenue followed by MSG which accounts for remaining share.

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Competitive Intensity - Steering System are technically complex and capital intensive in nature, which acts as strong entry barrier for new player. The domestic market is dominated by few players with ZFI and Rane TRW catering to the CV segment whereas Sona Group and Rane NSK catering to the passenger vehicle segment. Due to technical intensive nature of business, all major players in the industry has technical tie-up with international majors. The choice for the type of steering power-assist system to be deployed in a vehicle depends on particular OEMs marketing strategy, its supplier affinity and past experience. While utility vehicles as well as higher Gross Vehicle Weight (GVW) passenger cars (especially luxury segment) continue to work on HPS technology due to certain unique advantages offered by HPS coupled with the high cost of Electronic power steering (EPS) systems in bigger vehicles; the small cars and many of the mid-size and executive segment sedans launched over the last few years in the domestic market bear EPS system designs. However, HPS is expected to continue being a preferred option for larger vehicles having higher GVW.

4.11 Market Share of Various firms:

Market share according to product segmentation

4.11.1 Piston Rings: 2007-08 2008-09 2009-10Federal-Mogul Goetze 28.9 30.46 30.26Shriram Pistons &Rings 23.41 27.44 24.72Federal-Mogul T P R 7.97 7.46 9.12Perfect Circle India 8.49 7.89 7.79India Pistons 9.07 7.75 7.61

Table 4.2 Trends in market share –Piston Rings

Figure 4.12 Trends in market share –Piston Rings

4.11.2 Automotive Valve:

2007-08 2008-09 2009-10

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2007-08 2008-09 2009-100

5

10

15

20

25

30

35

Federal-Mogul Goetze

Shriram Pistons &Rings

Federal-Mogul T P R

Perfect Circle India

India Pistons

TRENDS IN MARKET SHARE- PISTON RINGS

Rane Engine Valve 29.62 28.77 30.43Shriram Piston & Rings 12.39 13.66 17.37K A R Mobiles 13.29 13.04 11.44Triton Valves 10.29 10.14 11.3Varroc Engineering Pvt. 2.53 2.92 6.57

Table 4.3 Trends in market share-Automotive Valve

Figure 4.13 Trends in market share-Automotive Valves

4.11.3 FUEL INJECTION EQUIPMENT

2007-08 2008-09 2009-10Bosch 77.17 75.96 71.93Delphi T V S Diesel Systems 17.3 18.24 22.32Denso Haryana Private 3.57 3.74 3.89

Table 4.4 Trends in market share-Fuel injection equipment

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2007-08 2008-09 2009-100

10

20

30

40

50

60

70

80

90

BoschDelphi T V S Diesel SystemsDenso Haryana Private

TRENDS IN MARKET SHARE- FUEL INJECTION EQUIPMENTS

2007-08 2008-09 2009-100

5

10

15

20

25

30

35

Rane Engine ValveShriram Piston & RingsK A R MobilesTriton ValvesVarroc Engineering Pvt.

TRENDS IN MARKET SHARE- Automotive Valves

Figure 4.14 Trends in market share- Fuel injection equipment

4.11.4 FUEL INJECTION EQUIPMENT SPARES

2007-08 2008-09 2009-10Bosch 82.62 80.94 83.1Usha International 3.03 2.72 3.06Pricol 2.19 2.02 2.24Rambal 1.9 2.43 1.84Jay Bharati Maruti 0.82 1.04 1.25

Table 4.5 Trends in market share-Fuel injection spares

Figure 4.15 Trends in market share- Fuel injection Equipment Spares

4.11.5 CLUTCH ASSEMBLES, PLATES AND DISCS

2007-08 2008-09 2009-10F C C Rico 19.18 20.93 22.99Clutch Auto 13.27 11.47 11.25Setco Automotive 9.3 8.76 9.82Amalgamations Valeo Clutch Pvt 9.67 10.66 9.04Exedy India 7.16 6.77 8.25

Table 4.6 Trends in Market share-Clutch assemblies, plates and discs

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2007-08 2008-09 2009-100

5

10

15

20

25F C C RicoClutch AutoSetco AutomotiveAmalgamations Valeo Clutch PvtExedy India

TRENDS IN MARKET SHARE- CLUTCH ASSEMBLIES, PLATES AND DISCS

2007-08 2008-09 2009-100

102030405060708090

BoschUsha InternationalPricolRambalJay Bharati Maruti

TRENDS IN MARKET SHARE- FUEL INJECTION EQUIPMENTS SPARES

Figure 4.16 Trends in Market share-Clutch assemblies, plates and discs

4.11.6 STEERING GEAR

2007-08 2008-09 2009-10Sona Koyo Steering Systems 30.11 31.03 32.59Hi-Tech Gears 16.03 19.77 18.08Rane T R W Steering Systems 18.07 15.76 16.31Z F Steering Gear (India) 15.12 13.06 13.17Rane (Madras) 12.14 10.93 10.99

Table 4.7 Trends in Market share-Steering Gear

Figure 4.17 Trends in Market share-Steering gear

4.11.7 AUTOMOTIVE GEARS INCL. CROWN WHEEL

2007-08 2008-09 2009-10Bharat Gears 19.72 21.58 19.88H V Transmissions 17.8 14.49 19.26Sona Okegawa Precision Forgings 12.33 11.84 14.61Gajra Gears Pvt. 11.08 12.09 9.01

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2007-08 2008-09 2009-100

5

10

15

20

25

30

35

Sona Koyo Steering Sys-temsHi-Tech GearsRane T R W Steering Sys-temsZ F Steering Gear (India)Rane (Madras)

TRENDS IN MARKET SHARE- STEERING GEAR

2007-08 2008-09 2009-100

5

10

15

20

25F C C RicoClutch AutoSetco AutomotiveAmalgamations Valeo Clutch PvtExedy India

TRENDS IN MARKET SHARE- CLUTCH ASSEMBLIES, PLATES AND DISCS

Punjab Bevel Gears 7.69 7.64 8.4

Table 4.8 Trends in Market share-Automotive Gear Incl. Crown wheel

Figure 4.18 Trends in Market share-Automotive Gear incl. Crown wheel

4.11.8 Axle shafts

2007-08 2008-09 2009-10Automotive Axles 41.46 13.25 39.67Spicer India 15.57 15.24 20.01Axles India 12.79 10.65 14.46Bharat Forge 15.46 11.3 7.92Sona Koyo Steering Systems 7.1 6.08 7.5

Table 4.9 Trends in Market share-Axle shaft

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2007-08 2008-09 2009-1005

1015202530354045

Automotive AxlesSpicer IndiaAxles IndiaBharat ForgeSona Koyo Steering Sys-tems

TRENDS IN MARKET SHARE- AXLE SHAFTS

2007-08 2008-09 2009-100

5

10

15

20

25

Bharat GearsH V TransmissionsSona Okegawa Precision ForgingsGajra Gears Pvt.Punjab Bevel Gears

TRENDS IN MARKET SHARE- AUTOMOTIVE GEARS INCL. CROWN WHEEL

Figure 4.19 Trends in Market share-Axle Shaft

CHAPTER VI

FINANCIAL ANALYSIS

Financial analysis is the starting point for making plans, before using any sophisticated forecasting and planning procedures. Financial analysis is the process of identifying the financial strengths and weakness of the firm by properly establishing relationships between the items of the balance sheet and profit and loss account. It can be undertaken by management of the firm, or by parties outside the firm, viz, owners, creditors others.

5.1 RATIOS ANALYSIS

Ratio Analysis is a powerful tool of financial analysis. Management should be particularly interested in knowing financial strengths of the firm to make their best use and to be able to spot out financial weaknesses of the firm to take suitable corrective actions. Financial analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing relationships between the items of the balance sheet and the profit and loss account.  Financial analysis can be undertaken by management of the firm or by parties outside the firm like owners, creditors, investors and others.

WHAT IS RATIO?A ratio is defined as "the indicated quotient of two mathematical expressions" and as "the relationship between two or more things".  The relationship between two accounting figures expressed mathematically is known as 'financial ratio'.  Rations help to summaries large quantities of financial data and to make qualitative judgment about the firm's financial performance. It measures the firm's liquidity. Greater the ratio, greater the firm's liquidity and vice versa. The point to note is that a ratio reflecting a quantitative relationship helps to form a qualitative judgment.

STANDARDS OF COMPARISION:

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The ratio analysis involves comparison for a useful interpretation of the financial statements.  A single ratio is itself does not indicate favourable or unfavourable condition.  It should be compared with some standard.  It consists of:

PAST RATIOS: Rations calculated from past financial statements of the same firm. COMPETITORS RATIOS: Ratios of some selected firms, especially most

progressive and successful competitor, at the same point of time. INDUSTRY RATIOS: Ratios of industry to which the firm belongs. PROJECTED RATIOS: Ratios developed using the projected or Performa, financial

statements of the same firm.

5.2 CLASSIFICATION OF RATIOS:

The parties interested in financial analysis are short and long term creditors, owners and management.  Short term creditor’s main interest is I the liquidity position or short term solvency of the firm.  Long term creditors on the other hand are more interested in the long term solvency and profitability of the firm.  Similarly, owners concentrate on the firm's profitability and financial condition.  Management is interested in evaluating every aspect of the firm's performance. They are classified into five categories

o Liquidity Ratios

o Leverage Ratios

o Activity Ratios

o Profitability Ratios

o Shareholders Ratios

5.3 GROSS AND NET PROFIT MARGIN ANALYSIS

Gross Profit margin is calculated by dividing gross profit by sales. This margin reflects the efficiency with which management produces each unit of product. Net Profit is obtained when operating expenses, interest and taxes are subtracted from the gross profit. The net profit margin ratio is measured by dividing profit after tax by sales. This ratio establishes a relationship between net profit and sales and indicates management’s efficiency in manufacturing, administering and selling the products.

Table 5.1: Gross and Net Profit Margin Analysis

 Industry Average

2011 2010 2009 2008Profit Margin Analysis        Gross Profit Margin (%) 11.6 11.4 9.8 11.6Net Profit Margin (%) 4.6 3.7 2.1 4.7

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Figure 5.1 Gross and Net Profit Margin Analysis

We can see a decline in the gross profit margin from 11.6 per cent to 9.8 per cent. This may be due to fall in sales price or higher cost of goods sold due to the industry’s inability to purchase raw materials at favourable terms, inefficient utilization of plant and machinery, resulting in higher cost of production. Similarly the net profit margin has also been declining from 4.6 per cent to 2.1 per cent. The decline in the net profit margin means there has been a decline in the operating expenses of the industry as a whole.

5.4 COST STRUCTURE ANALYSIS

The cost structure analysis has been performed on the basis of the average expenses of the four companies in the four years. The expenses include raw materials, power and fuel cost, employee cost, manufacturing expenses, selling and administration expenses and other such expenses.

Table 5.2: Cost Structure Analysis

  2011 2010 2009 2008

Cost Structure Amount % Amount % Amount % Amount %

Raw Materials 61584 75 52009 75 43388 74.3 39943 74.8

Power & Fuel Cost 3130 4 2506 4 2135 4 2131 4.0

Employee Cost 7726 9 6579 9 5737 10 5194 10other operating exp of indl expenditure 426 0.5 375 0.5 253 0.4 250 0.5Selling and Administration Expenses 2521 3 2084 3.0 1819 3 1769 3other operating exp of non-fin services enterprise 67 0.1 6

0.01 2 0.003 0 0

Interest paid 2221 3 1986 2.9 1886 3.23 1413 2.65

Depreciation 3951 5 3719 5 3148 5.39 2648 4.96

Amortisation 37 0.05 53.00.05 52 0.1 33 0.06

Total expenditure 81663 100.00 69317.0 100 58420 100 53381 100

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2011 2010 2009 2008Industry Average

0

2

4

6

8

10

12

14

11.6 11.4

9.8

11.6

Debt-equity ratio(TD/NW)Gross Profit Margin (%)Net Profit Margin (%)

We can see from the above table that almost 75% of the total expenditure was on Raw material. More than 9 per cent of the expenses are counted under employee cost expenses. This means that for an automobile industry, raw materials and employee cost expenses play a major role. Another major expense was amortisation and depreciation. Interest was also at the rate of 3 percent.

5.5LEVERAGE RATIOS

The second category of financial ratios is leverage or capital structure ratios. The long-term creditors would judge the soundness of a firm on the basis of the long-term financial strength measured in terms of its ability to pay the interest regularly as well as repay the instalment of the principal on due dates on in one lump sum at the time of maturity. The long-term solvency of a firm can be examined by using leverage or capital structure ratios. The leverage or capital structure ratios may be defined as financial ratios which throw light on the long-term solvency of a firm as reflected in its ability to assure the long-term creditors with regard to:

I. Periodic payment of interest during the period of the loan andII. Repayment of principal on maturity or in predetermined installments at due dates.

These ratios are computed from the balance sheet. These ratios indicate mix of funds provided by owners and lenders. Leverage ratio include following ratios:

1. Debt Ratio2. Debt-Equity Ratio3. Capital Employed to Net worth Ratio

1. Debt RatioMEANING

The proportion of a firm’s total assets that are being financed with borrowed funds. The debt ratio is calculated by dividing total debt by total assets/net assets. It gives a general idea of the leverage of the company along with the potential risks the company faces in terms of its debt load.

FORMULA

Debt Ratio=TD/CE

Table 5.3 Debt Ratio  2011 2010 2009 2008

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Total debt 25861 25672 26272 22062Total assets 88137 80914 72521 65990Debt ratio(times)(TD/TA)

0.29342 0.31728 0.36227 0.33432

2011 2010 2009 20080

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.293420000000001

0.317280000000001

0.362270.334320000000001

Debt ratio(times)(TD/TA)

Debt ratio(times)(TD/TA)

Figure 5.2 Debt Ratio

The ratio computed above for the year 2011-2010 was 0.29 means that the company has total debt of Rs.0.29 against each rupee of net assets of the firm; it also suggests that the external stakeholders have less amount of claim in the company. The ratio for the year 2010, 2009, 2008 has changed but not by much difference. It can be suggested that the company has capacity to borrow some more loan from outsiders.

2. Debt-equity ratio

MEANING

The debt to equity ratio is a financial ratio indicating the relative proportion of equity and debt used to finance a company's assets. This ratio is also known as Risk, Gearing or Leverage. It is equal to total debt divided by shareholders' equity.

FORMULA

Debt to Equity Ratio=TD/NW

  2011 2010 2009 2008Total debt 25861 25672 26272 22062Networth 34571 30771 25736 24761Debt-equity ratio(TD/NW)

0.74805 0.83429 1.02083 0.891

Table 5.4 Debt Equity Ratio

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2011 2010 2009 20080

0.2

0.4

0.6

0.8

1

1.2

Debt-equity ratio(TD/NW)

Debt-equity ratio(TD/NW)

Figure 5.3 Debt- Equity ratio

The debt-equity ratio computed above reflects the relative contribution of creditors and owners of the firm in financing the assets of the firm. It can be seen from the above chart that the debt equity ratio of the firm has been fluctuated over the last four years and then in the year of 2008-09 it has increased over previous year. The ratio computed above for the year 2011 was 0.74 means the firm has total debt of Rs.0.74 against each rupee of owners’ fund; it also suggests that the outsiders have high amount of claim in the firm. In the year 2009, debt-equity ratio was 1.02 which was higher than last four years. The ratio was higher that year as the company has retained lower amount of funds in the business. As the company’s assets have been largely financed by owners thus it is advantageous in raising funds from creditors in future.

3. CAPITAL EMPLLOYED TO NET WORTH RATIO

MEANING

It is an alternative way of expressing the basic relationship between debt and equity. It helps in knowing, how much funds are being contributed together by lenders and owners for each rupee of owner’s contribution. This can be found out by calculating the ratio of capital employed or net assets to net worth.

FORMULA

CE to NW=CE/NW

  2011 2010 2009 2008Total assets 88137 80914 72521 65990

Networth 34571 30771 25736 24761CE/NW 2.54945 2.62955 2.8178

82.66508

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Table 5.5 CE/NW

Figure 5.4 CE/NW Ratio

It can be seen from the above chart that the capital employed to net worth ratio of the company has been fluctuated over the last four years. The ratio for the year 2011 was 2.54 means the lenders and owners of the firms have contribute Rs. 2.54 against each rupee of the owner’s funds. The ratio in the year 2009 was higher than the other year because the company has paid dividend. It can be also seen that both the lenders and owners have contributed almost more than 1.5 times of the owner’s contributions as an average over the last four years. Thus it shows that the owners and lenders of the firm are contributing an average amounts in the funds.

5.6 PROFITABILITY RATIO

A company should earn profits to survive and grow over a long period of time.  Profits are essential but it would be wrong to assume that every action initiated by management of a company should be aimed at maximizing profits, irrespective of social consequences. Profit is the difference between revenues and expenses over a period of time.  Profit is the ultimate output of a company and it will have no future if it fails to make sufficient profits.   Therefore, the financial manager should continuously evaluate the efficiency of the company in terms of profits.  The profitability ratios are calculated to measure the operating efficiency of the company. Generally, there are two types of profitability ratios

Profitability in relation to sales Profitability in relation to investment

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Industry Average

0.95

1

1.05

1.1

1.15

1.2

1.25

Assets Turnover Ratio

Assets Turnover Ratio

The profitability ratios in relation to sales are:

I. Gross Profit Margin RatioII. Operating Profit Ratio

III. Net Profit Ratio

The profitability ratios in relation to investments are:

1. Return on Capital Employed2. Return on Shareholders’ Equity

1. RETURN ON CAPITAL EMPLOYED

MEANING

It is the capital investment necessary for a business to function. It is calculated by dividing operating profit by capital employed. ROCE compares earnings with capital invested in the company. It is similar to Return on Assets (ROA), but takes into account sources of financing.

FORMULA

Return on Capital Employed= (EBIT X 100)/CE

  2011 2010 2009 2008EBIT 8222 6316 4290 5691Capital employed

88137 80914 72521 65990

Return on capital employed (%)

9.33 7.81 5.92 8.62

Table 5.6 Return on Capital Employed

2011 2010 2009 20080123456789

10 9.33

7.81

5.92

8.62

Return on capital employed (%)

Return on capital employed (%)

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Figure 5.5 Return on Capital Employed

It can be seen from the above chart that the ROCE of the company has been fluctuating over last four years. The company has earned satisfactory return on its investment in the assets. The higher ROI of the company indicates that it has utilized its assets effectively in generating the large volume of sales and hence profit. The ROI of the company in the year 2011 has increased to 9.33% which indicates the company has not better utilized the assets of the company. The low ROI of the company also indicates the low profitability and less opportunity to attract the future investment.

2. RETURN ON EQUITY

MEANING

This ratio is one of the most important relationships in financial analysis. It is calculated to see the profitability of owners’ investment. It is calculated by dividing profit after tax by net worth. It indicates how well the firm has used the resources of owners.

FORMULA

Return on Equity= (Pat X 100)/NW

RATIOS AND CHART

  2011 2010 2009 2008PAT 4884 3363 1611 3480Net worth 34571 30771 25736 24761Return on Equity (%)

14.13 10.93 6.26 14.05

Table 5.7 Return on Equity

Figure 5.6 Return on Equity

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The return on equity ratio of the company has been fluctuating over the last four years. The ratio had increased in the year 2011 almost by 14.13% as compared to the previous year 2010; this is largely due to the large amount of the profit over the previous year. This ratio is of greatest to the present as well as prospective shareholders and also of great concern to the management as it indicates the true profitability condition of the company. The high level of ROE helps in attracting future investment for the company.

It is also earning good amount of net profit to distribute it’s earning to its shareholders and retain some earnings for future expansion of its various divisions.

DUPONT ANALYSIS

The DuPont Model is a technique that can be used to analyze the profitability of a company using traditional performance management tools. To enable this, the DuPont model integrates elements of the Income Statement with those of the Balance Sheet. It is a method for analyzing Return on Equity (ROE).

FORMULA

ROE = Net Margin X Asset Turnover X Leverage Factor

  Industry Average2011 2010 2009 2008

RONA (%) 9.33 7.81 5.92 8.62Assets Turnover Ratio 1.19 1.10 1.05 1.10Gross Profit Margin 11.6 11.4 9.8 11.6

Table 5.8 Dupont-1

2011 2010 2009 20080

2

4

6

8

10

12

14

RONA (%)Assets Turnover RatioGross Profit Margin

Figure 5.7 Dupont-1

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Table 5.9 Du pont-2

  2011 2010 2009 2008EBIT 8222 6316 4290 5691Total asset

88137 80914 72521 65990

RONA 9.33 7.81 5.92 8.62

2011 2010 2009 20080123456789

10

RONA

RONA

Figure 5.8 Du-pont-2

  2011 2010 2009 2008Sales 25.4 15.9 4.1 16.3Net asset 88137 80914 72521 65990Assets turnover Ratio

1.19 1.10 1.05 1.10

Table 5.10 Asset turnover Ratio

2011 2010 2009 200895

100

105

110

115

120

125

Assets turnover Ratio

Assets turnover Ratio

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Figure 5.9 Asset turnover ratio

Leverage Factor

  2011 2010 2009 2008PAT 4884 3363 1611 3480EBIT 8222 6316 4290 5691PAT/EBIT 0.59 0.53 0.38 0.61

2011 2010 2009 2008NA 88137 80914 72521 65990NW 34571 30771 25736 24761NA/NW 2.55 2.63 2.82 2.67

 Industry Average

2011 2010 2009 2008

Return on Equity14.13 10.93 6.26 14.05

Table 5.11 Return on Equity

2011 2010 2009 20080

2

4

6

8

10

12

14

16

Return on Equity

Return on Equity

Figure 5.10 Return on Equity

The ROCE of the company is 9.33 which indicate the blow operating performance of the company. The ROCE of the company is product of its Profit Margin and Assets Turnover Ratio. The company can improve its ROCE by reducing its cost of production. The company can convert its ROCE into an impressive ROE through financial efficiency. Financial leverage and debt equity ratios affect ROE and reflect financial efficiency of the company. Thus, ROE is product of ROCE (reflecting operating efficiency) and Financial Leverage Ratios (reflecting financial efficiency).

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Inspite of decreaing gross profit margin and slightly declining assets turnover ratio, the above table shows that the return on net assets has increased over the years. This increase has been on account of the operating leverage. But this return on net assets faces a trade-off between asset turnover and gross profit margin. Therefore the RONA can be converted into an impressive Return on Equity (ROE) through financial efficiency. Financial leverage and debt-equity ratios affect ROE and reflect financial efficiency. ROE is thus a product of operating performance and leverage factor. ROE can be calculated as (EBIT/NA)*(PAT/EBIT)*(NA/NW).

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CHAPTER VI

INDUSTRY ANALYSIS

6.1 PESTEL ANALYSIS:

PESTLE Analysis is a simple, useful and widely-used tool that helps you understand the "big picture" of your Political, Economic, Socio-Cultural and Technological, Legal and Environmental aspects. As such, it is used by business leaders worldwide to build their vision of the future.

PESTLE analysis is concerned with the environmental influences on a business. Identifying PESTLE influences is a useful way of summarizing the external environment in which a business operates. However, it must be followed up by consideration of how a business should respond to these influences.

PESTEL Analysis deals with the analysis of those six factors as mentioned above, which have an impact on the working of any organization. This impact or impacts may be direct or indirect.The table below lists some possible factors that could indicate important environmental influences for a business under the PESTLE headings:

Political / Legal Economic Social Technological

- Environmental regulation and protection

- Economic growth - Income distribution - Government spending on research

- Taxation - Monetary policy - Demographics - Government and industry focus on technological effort

- International trade regulation

- Government spending

- Labor / social mobility - New discoveries and development

- Consumer protection - Policy towards unemployment

- Lifestyle changes - Speed of technology transfer

- Employment law - Taxation - Attitudes to work and leisure

- Rates of technological obsolescence

- Government organization / attitude

- Exchange rates - Education - Energy use and costs

- Competition regulation - Inflation - Fashions and fads - Changes in material sciences

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- Stage of the business cycle

- Health & welfare - Impact of changes in Information technology

- Economic "mood" - consumer confidence

- Living conditions - Internet!

Tabal : PESTEL Analysis

6.1.1 Political Factors

Any country has a government which makes policies, for effectively running the entire country. Any organization which is present in India is bound to follow the Indian government policies concerned with its industry and accordingly prepare its own company policy. Any change in the type of government and its policy is going to affect the organizations working in that country .The political arena has a huge influence upon the regulation of businesses, and the spending power of consumers and other businesses. Political Factors include Government regulations and legal issues and define both formal and informal rules under which the firm must operate.

Some of the political factors are as mention below:

• In 2002, the Indian government formulated an auto policy that aimed at promoting integrated, phased, enduring and self-sustained growth of the Indian automotive industry

• Allows automatic approval for foreign equity investment up to 100% in the automotive sector and does not lay down any minimum investment criteria.

• The government announces excise duty rollback being limited to 2 percent during Union Budget 2010.

• Formulation of an appropriate auto fuel policy to ensure availability of adequate amount of appropriate fuel to meet emission norms

• Confirms the government’s intention on harmonizing the regulatory standards with the rest of the world

• Indian government auto policy aimed at promoting an integrated, phased and conductive growth of the Indian automobile industry.

• Allowing automatic approval for foreign equity investment up to 100% with no minimum investment criteria.

• Establish an international hub for manufacturing small, affordable passenger cars as well as tractor and two wheelers.

• Ensure a balanced transition to open trade at minimal risk to the Indian economy and local industry.

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• The import of technology/technological up gradation on the royalty payment of 5% without any duration limit and lump sum payment of USD 2 million is also allowed under automatic route in this sector.

• Assist development of vehicle propelled by alternate energy source.

• Lying emphasis on R&D activities carried out by companies in India by giving a weighted tax deduction of up to 200% for in house research and R&D activities.

• Plan to have a terminal life policy for CVs along with incentives for replacement for such vehicles.

• Promoting multi-model transportation and the implementation of mass rapid transport system.

• The ministry of Heavy Industry and public enterprises has envisaged the Auto motive Mission plan 2006-2016 to promote growth in the sector. It targets to:

- Increase turnover to US$ 122 billion- US$ 159 Billion by 2016 from US$ 34 Billion in 2006

-Increase Export revenue to US$ 35 Billion by 2016.

- Provide Employment to additional 25 million people by 2016

- The Automotive sector is expected to contribute 10 per cent of the country’s GDP by 2016

MODVAT and CENVAT

Taxation of inputs, like raw materials, components and other intermediaries has a number of limitations. In production process, raw material passes through various processes stages till a final product emerges. Thus, output of the first manufacturer becomes input for second manufacturer and so on. When the inputs are used in the manufacture of product `A', the cost of the final product increases not only on account of the cost of the inputs, but also on account of the duty paid on such inputs. As the duty on the final product is on ad valorem basis and the final cost of product `A' includes the cost of inputs, inclusive of the duty paid, duty charged on product `A' meant doubly taxing raw materials. In other words, the tax burden goes on increasing as raw material and final product passes from one stage to other because, each subsequent purchaser has to pay tax again and again on the material which has already suffered tax. This is called cascading effect or double taxation.

This very often distorted the production structure and did not allow the correct assessment of the tax incidence. Therefore, the Government tried to remove these defects of the Central Excise System by progressively relieving inputs from excise and countervailing duties. An ideal system to realize this objective would have been to adopt value added taxation (VAT). However, on account of some practical difficulties it was not possible to fully adopt the value added taxation.

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Hence, Government evolved a new scheme, `MODVAT' (Modified Value Added Tax). MODVAT Scheme which essentially follows VAT Scheme of taxation. i.e. if a manufacturer A purchases certain components(raw materials) from another manufacturer B for use in its product. B would have paid excise duty on components manufactured by it and would have recovered that excise duty in its sales price from A. Now, A has to pay excise duty on product manufactured by it as well as bear the excise duty paid by the supplier of raw material B. Under the MODVAT scheme, an Original Equipment Manufacturer can take credit of excise duty paid by First Tier and Second Tier suppliers. It amounts to excise duty only on additions in value by each manufacturer at each stage.

MODVAT Scheme ensures the revenue of the same order and at same time the price of the final product could be lower. Apart from reducing the costs through elimination of cascade effect, and bringing in greater rationalization in tax structure and also bringing in certainty in the amount of tax leviable on the final product, this scheme will help the consumer to understand precisely the impact of taxation on the cost of any product.

Subsequently, MODVAT scheme was restructured into CENVAT (Central Value Added Tax) scheme. A new set of rules 57AA to 57AK , under The CENVAT Credit Rules, 2004, were framed and whatever restrictions were there in MODVAT Scheme were put to an end and comparatively, a free hand was given to the assesses.

6.1.2 Economic factors

Many economic factors like GNP trends, interest rates, money supply, inflation, disposable income etc. affect the working of any organization. An industry nature may be cyclical, seasonal, stagnant or growing. Accordingly an industry has to take care of its operations and see to it that it runs profitably. Similarly the funds available to the buyers and suppliers depend on interest rates and money supply. Inflation affects the pricing policy of any industry.

Some of the Economic factors are as mention below:

• The level of inflation Employment level per capita is right.

• Economic pressures on the industry are causing automobile companies to reorganize the traditional sales process.

• Weighted tax deduction of up to 150% for in-house research and R & D activities.

• Govt. has granted concessions, such as reduced interest rates for export financing.

• The Indian economy has grown at 8.5% per annum.

• The manufacturing sector has grown at 8-10 % per annum in the last few years.

• More than 90% of the CV purchase is on credit.

• Finance availability to CV buyers has grown in scope during the last few years.

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• The increased enforcement of overloading restrictions has also contributed to an increase in the no. of CVs plying on Indian roads.

• Several Indian firms have partnered with global players. While some have formed joint ventures with equity participation, other also has entered into technology tie-ups.

• Establishment of India as a manufacturing hub, for mini, compact cars, OEMs and for auto components.

6.1.3 Social Factors

Social factors include the demographic and cultural aspects of the external macro-environment. The social and cultural influences on business vary from country to country. These factors affect customer’s needs and the size of potential markets. The Auto Ancillary sector occupies a distinct position in Indian economy, as it provides job to millions of people directly or indirectly.

• Since changed lifestyle of people, leads to increased purchase of automobiles, so automobile sector have a large customer base to serve.

• The average family size is 4, which makes it favorable to buy a four wheeler.

• Growth in urbanization, 4th largest economy by ppp index.

• Upward migration of household income levels.

• 85% of cars are financed in India.

• Car priced below USD 12000 accounts for nearly 80% of the market.

• Vehicles priced between USD 7000-12000 form the largest segment in the passenger car market.

• Indian customers are highly discerning, educated and well informed. They are price sensitive and put a lot of emphasis on value for money.

6.1.4 Technological Factors:

• The level of technology change is high. The rate of change in technology is medium. Investment in technology by producers has been on the rise.

• The automobile industry in India has seen an enormous development in the engines which are being used.

• More and more emphasis is being laid on R & D activities carried out by companies in India.

• Weighted tax deduction of up to 150% for in-house research and R & D activities.

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• The Government of India is promoting National Automotive Testing and R&D Infrastructure Project (NATRIP) to support the growth of the auto industry in India

• Technological solutions helps in integrating the supply chain, hence reduce losses and increase profitability.

• Customized solutions (designer cars, etc) can be provided with the proliferation of technology

• Internet makes it easy to collect and analyse customer feedback

• With the entry of global companies into the Indian market, advanced technologies, both in product and production process have developed.

• With the development or evolution of alternate fuels, hybrid cars have made entry into the market.

• Few global companies have setup R &D centers in India.

• Major global players like audi, BMW, Hyundai etc have setup their manufacturing units in India.

6.1.5 Environmental Factor:

Physical infrastructure such as roads and bridges affect the use of automobiles. If there is good availability of roads or the roads are smooth then it will affect the use of automobiles.

Physical conditions like environmental situation affect the use of automobiles. If the environment is pleasant then it will lead to more use of vehicles.

Technological solutions helps in integrating the supply chain, hence reduce losses and increase profitability.

With the entry of global companies into the Indian market, advanced technologies, both in product and production process have developed.

With the development or evolution of alternate fuels, hybrid cars have made entry into the market.

Few global companies have setup R &D centers in India.

Major global players like audi, BMW, Hyundai etc have setup their manufacturing units in India.

6.1.6 LEGAL FACTOR:

Legal provision relating to environmental population by automobiles.

Legal provisions relating to safety measures.

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Confirms the government’s intention on harmonizing the regulatory standards with the rest of the world

Indian government auto policy aimed at promoting an integrated, phased and conductive growth of the Indian automobile industry.

Ensure a balanced transition to open trade at minimal risk to the Indian economy and local industry.

6.2 Five Force Model of Michael Porter :

It is very difficult for any firm to progress and to maintain this progress in this competitive world where a firm competes not only with the domestic firms but also with the global firms and this fact is true for any firm and any industry. And the competitors go on increasing when more and more players enter the industry to play their role.

Michael Porter’s Five Forces Model is very effective in explaining the effect of five different kinds of forces which act upon a firm, when it is competing for its presence in the market.These five forces of competition include three sources of “horizontal” competition: competition from substitutes, competition from entrants, and competition from established rivals; and two sources of “vertical” competition: the bargaining power of suppliers and buyers The strength of each of these competitive forces is determined by a number of key structural variables, as shown in Fig 6.1

Figure 6.1 Porter’s Five Forces Model

The price customers are willing to pay for a product depends, in part, on the availability of substitute products. The absence of close substitutes for a product, as in the case of automobiles, means that consumers are comparatively insensitive to price (i.e., demand is inelastic with respect to price). The existence of close substitutes means that customers will

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switch to substitutes in response to price increases for the product (i.e., demand is elastic with respect to price).

The extent to which substitutes limit prices and profits depends on the propensity of buyers to substitute between alternatives. This, in turn, is dependent on their price performance characteristics. The more complex the needs being fulfilled by the product and the more difficult it is to discern performance differences, the lower the extent of substitution by customers on the basis of price differences.

Figure 6.2 the structural determinants of the Five Forces of Competition

6.2.1 Rivalry between Established Competitors

Competition in this industry is high. Competition in this industry is increasing. Automotive industry is a volume driven industry and certain critical mass is a pre-requisite for attracting the much needed investment in research and development and new product design and development. Research and development investment is needed for innovations which is the lifeline for achieving and retaining competitiveness in the industry. This competitiveness in turn depends on the capacity and the speed of the industry to innovate and upgrade. The most important indices of competitiveness are productivity of both labour and capital. The concept of attaining competitiveness on the basis of low cost and abundant labour, favourable exchange rates, low interest rates and concessional duty structure is becoming inadequate and therefore, not sustainable. A greater emphasis is required on the development of the factors like innovation which can ensure competitiveness on a long-term basis.

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India with a rapidly growing middle class (450 million in 2007 as per NCAER Report), market oriented stable economy, availability of trained manpower at competitive cost, fairly well-developed credit and financing facilities and local availability of almost all the raw materials at a competitive cost has emerged as one of the favourite investment destinations for the automotive manufacturers. These advantages need to be leveraged in a manner to attain the twin objective of ensuring availability of best quality product at lower cost to the consumers on the one hand and developing and assimilating the latest technology in the industry on the other hand.

As per Automotive Mission Plan 2006-2016 (2008), the Indian Government recognizes its role as a catalyst and facilitator to encourage the companies to move to higher level of competitive performance. The Indian Government wants to create a policy environment to help companies gain competitive advantage. The government aims that with its policies its encourage growth, promote domestic competition and stimulate innovation.

(Source: Department of Heavy Industry & Public Enterprises Government of India)

6.2.2 Threat of Entry

If an industry earns a return on capital in excess of its cost of capital, that industry acts as a magnet to firms outside the industry. Unless the entry of new firms is barred, the rate of profit will fall toward its competitive level. The threat of entry rather than actual entry may be sufficient to ensure that established firms constrain their prices to the competitive level.

Economies of Scale – Since Indian automobile market is of order $ 350 billion, the economies of scale are very high. Thus, threat of new entrants is low.

Product Differences – Since there is hardly any difference in the offerings of the various providers, so product differentiation is low. So threat of new entrants is high.

Brand Identity – Since there is no big Retailer like Amazon.com or Wal-Mart in India. So threat of new entrants is high.

Government Policy – Since the Government Policy has been quite restrictive till now with respect to the Retail market & FDI, so threat of new entrants is low.

Capital Requirements – The capital requirements for entering in the automobile sector are substantially high( high fixed cost and cost of infrastructure), so only big names can think of venturing into this area So, in that respect threat of new entrants is low.

Access to distribution – Since in India there is no well established distribution network. So threat of new entrants is low.

6.2.3 Bargaining Power of Buyers

The firms in an industry operate in two types of markets: in the markets for inputs and the markets for outputs. In input markets firms purchase raw materials, components, and

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financial and labor services. In the markets for outputs firms sell their goods and services to customers (who may be distributors, consumers, or other manufacturers). In both markets the transactions create value for both buyers and sellers. How this value is shared between them in terms of profitability depends on their relative economic power. The strength of buying power that firms face from their customers depends on two sets of factors: buyers’ price sensitivity and relative bargaining power.

Product Differences – Since there is hardly any difference in the offerings of the various providers, so product differentiation is low. So bargaining power of buyers is high.

Buyer Information – Today’s customers are well educated about the various product offerings in the sector. So bargaining power of buyers is high.

Buyer Switching Costs – Since customers don’t have to pay a fat premium to be registered for provision of services , so bargaining power of buyers is high.

Brand Identity – High Brand Identity and trustworthiness reduce the bargaining power of buyers but, otherwise the bargaining power of buyers is high.

Buyer Profits – Since dealers offers discounts and various bundling services like 0% insurance, old car sale, etc, on different items. Hence bargaining power of buyers is high.

6.2.4 Bargaining Power of Suppliers

Analysis of the determinants of relative power between the producers in an industry and their suppliers is precisely analogous to analysis of the relationship between producers and their buyers. The only difference is that it is now the firms in the industry that are the buyers and the producers of inputs that are the suppliers. The key issues are the ease with which the firms in the industry can switch between different input suppliers and the relative bargaining power of each party.

Product Differences – Since there is hardly any difference in the offerings of the various suppliers, so product differentiation is low. So bargaining power of Suppliers is low.

Supplier Information – Today’s automobile manufacturers are well educated about different Suppliers. So bargaining power of Suppliers is low.

Supplier Switching Costs – Since different Suppliers hold resources as per buyer’s requirements and a large inventory has to be maintained. So bargaining power of Suppliers is low as they would have to incur a huge cost on switching. But if they get automobile manufacturers for similar products who can pay higher Supplier switching cost is low. In such case, bargaining power of Suppliers is high.

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Brand Identity – High Brand Identity and Trustworthiness of a Supplier increases the bargaining power of Suppliers. But, otherwise the bargaining power of suppliers is low.

6.2.5 THREAT OF SUBSTITUTE

Substitutes are those products that apparently are different but satisfy the same set of customer needs. The availability of close substitute is a negative competitive force in an industry. In other words, those industries which have no close substitutes are more attractive than those that have one or more of substitute.

The price customers are willing to pay for a product depends, in part, on the availability of substitute products. The absence of close substitutes for a product, as in the case of automobiles, means that consumers are comparatively insensitive to price (i.e., demand is inelastic with respect to price). The existence of close substitutes means that customers will switch to substitutes in response to price increases for the product (i.e., demand is elastic with respect to price).

The extent to which substitutes limit prices and profits depends on the propensity of buyers to substitute between alternatives. This, in turn, is dependent on their price performance characteristics. The more complex the needs being fulfilled by the product and the more difficult it is to discern performance differences, the lower the extent of substitution by customers on the basis of price differences.

6.3 SWOT Analysis:

The classical tool to assess the industry environment is through SWOT analysis. The exhibit below identifies Strengths, Weaknesses, Opportunities and Threats (SWOT analysis) in the Indian Auto Component Industry:-

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Figure 6.3 SWOT analysis of Auto Ancillary Industry

6.3.1 STRENGTHS

The major strengths of the Indian auto component sector to grow globally are

1. Cost competitiveness in terms of Labour and Raw material

2. Established manufacturing base

3. Qualified and skilled man power

4. Growing domestic automotive industry

5. Manufacturing capabilities with international quality standards

6. High operational efficiency

6.3.2 WEAKNESSES

1. Low investment in Research and Development

2. Limited knowledge of product liability and offshore warranty handling

3. Limited domestic market for various components inhibiting capacity creations.

4. Comparatively poor infrastructure for supply chain and exports

5. Lack of experience in system integration

6.3.3 OPPORTUNITIES

1. The growing need to outsource

2. Huge opportunity in the tier- 1 and tier 0.5

3. Continuous pressure on global OEMs and Tier 1s to reduce cost and source from low cost countries

4. Higher frequency of introducing of newer models by automakers

5. Global market opportunity itself is the ultimate opportunity provided by auto industry.

6. Leverage on product engineering expertise to improve the worthiness and exports of auto component.

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7. The NATRiP, set up by the Indian Government with an investment of US$ 388.5 million, is expected to strengthen the country’s automotive R&D infrastructure.

8. Acquisition in foreign markets. The strengths & opportunities above enabled the growth of Indian auto component industry in extent of global outsourcing; the following are the positive indications.

• The fine quality of components manufactured in India is used as original components for vehicles made by General Motors, Mercedes, IVECO, etc.

• The Japanese and British component manufacturers are seeking joint ventures in India.

• Robert Bosch, auto parts maker of Germany has relocated manufacture of certain products to MICO, India.

• Crosslink International Wheels, Malaysia’s leading automobile security provider has set up its unit at Baddi, Himachal Pradesh, India to make India as export hub for the SAARC region. Some of the key outsourcing deals announced by the major players is as follows

• Ford – Plan - to outsource engines worth US$ 100 million in 2004, which may further be scaled up to US$ 500 million.

• Delphi – Plan- to outsource components worth US$ 410 million.

• Volvo – Plan- to increase its outsourcing to US$ 150 million

• Fiat – Plan- to outsource components worth US$ 200 million, to its international operations which is exporting cars to Sri Lanka, Bangladesh and Nepal.

The foreign automakers like General Motors, Toyota Motor Co., Ford Motor Co., Honda Motor Co., Diamler Chrysler AG and Hyundai Motor Co., seem to make India as export hub by expanding their operations here.

India as an International Manufacturing Hub

• Ford Exporting CKDs (Completely Knockdown Vehicles) to South Africa and other countries

• Hyundai – Exports Base for Small Cars

• HMSI – Hub for Two Wheeler Export

• Skoda – Hub for exporting cars to neighbouring countries

• Visteon exporting India worldwide

• Toyota Motors- global Hub for Transmission

• Daimler Chrysler sourcing more than 100 million Euro

• Delphi, USA- International Purchase Office located

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6.3.4 THREATS

1. Competition from other low cost countries like China, Taiwan, Thailand etc.

2. Free Trade Agreements / Preferential Trade Agreements ( FTA’s)

3. Expansion of the European Union inclusion of Hungary, Czech Republic Poland etc which are major exporting countries to western Europe.

4. Appreciation of Rupee

5. Developments of new technologies like fuel cell, hydrogen powered vehicles, which may affect the auto component industry.

6. Large number of OEMs entering in Indian market may result into migration of talents from supplier to OEMs

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CHAPTER VI

Futuristic Scenario of the industryThe fortunes of the auto ancillary sector are 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.

7.1 The Way Forward

Going forward, the Indian auto components industry is well poised to achieve strong growth owing to rising domestic demand in the OEM market and expanding replacement market. The export market for auto components is likely to see strong traction once the global market stabilises and the economic uncertainty fades away. According to the ACMA, the domestic auto components industry is likely to grow to US$ 110 bn by 2020, with the domestic market at around US$ 80bn. The share of the auto components industry in the country’s GDP is likely to increase to 3.6% by 2020, up from 2.1% inFY10.

Given the bright long term demand prospects in the domestic market and with India emerging as a favoured low-cost sourcing destination, auto component manufacturers are likely to invest in increasing production capacities and technological capabilities. Further, companies would continue de-risking their business by entering other industries. However, market competition is expected to intensify. Further, prices of raw material would maintain an upward trend. This is expected to exert pressure on the industry’s profit margins. In such a scenario, cost control programmes would assume greater significance for the industry players, both big and small.

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

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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 indigenization 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 rationalized.

7.2 Policy Initiatives for Future

The government has taken many initiatives to promote foreign direct investment (FDI) in the industry. Automatic approval for foreign equity investment up to 100 per cent of manufacture of automobiles and components is permitted. The automobile industry is delicensedImport of components is freely allowed. The Ministry of Heavy Industries and Public Enterprises has envisaged the Automotive Mission Plan 2006-2016 to promote growth in the sector. It targets to:

Increase turnover to US$ 122 billion US$ 159 billion by 2016 from US$ 34 billion in 2006

Increase export revenue to US$ 35 billion by 2016 Provide employment to additional 25 million people by 2016 The automotive sector is expected to contribute 10 per cent of the country's GDP by

2016

The auto component industry welcomed the government's announcement of excise duty rollback being limited to 2 per cent during the Union Budget 2010. The government also announced the increase of the deduction limit for Research and Development (R&D) in the sector from 150 per cent to 200 per cent.

Looking ahead

The IT and Auto Component Industry must visualise themselves differently if they are to move to another stage of industrial development and consequently competitiveness. The goal

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must be to create a sector where IT is seen as integral to the competitiveness of the industry and not as a service often provided by external sources.Based on the current status of IT adoption in the Indian Auto Component Industry, firms may not have followed the manufacturing capability – IT adoption trajectory and therefore may have over or under invested in IT. For example, firms that did not require ERP may have invested in ERP and so on. The IT and auto component firms will have to collaboratively think about future IT investments in order to create an environment where IT becomes an integral part of the manufacturing operation and becomes capable of delivering competitive advantage at various levels.

7.3 FUTURE OUTLOOK

Current trends indicate a smooth run for the auto component industry. In fact, since 2000,this is one sector which has made a global mark and has been identified as a sunrise industry. The industry is transforming from being highly domestic‐centric, to a force ready to face global competition.The factors that will drive growth for the auto component industry are:

The growth expected in the domestic automobile industry will give a fillip to the auto component sector. The Indian automobile industry offers great potential considering the low penetration along with rising income levels and a rapidly growing middle class. These factors will see a boost in demand for vehicles, especially passenger cars and two wheelers. These two segments are estimated to grow at between 10‐12% for at least the next five years.

The entry of global OEMs, making India as their manufacturing base, has given a big boost to the industry. For instance, Skoda plans to source parts for its European operations from its Indian base and raise indigenisation level for Indian models to 70%. This trend has also enabled Indian companies to gain a competitive edge in the global market. Further, the model of cluster‐based development prominent in this sector will provide economies of scale.

Export of automobiles has also emerged as a key component of growth. Rising exports of Indian‐made vehicles like M&M’s Scorpio model, Bajaj Auto’s Bikes, Tata Motors’ City Rover are indirectly increasing the demand for Indian auto components. Also, the export of India‐made models of global OEMs like Hyundai’s Santro Xing and Suzuki’s Alto has given a boost to the industry.

De‐regulation and the Government’s policy initiatives have facilitated growth and focus has now shifted towards attracting foreign direct investments. Also, the Government’s initiative towards road development will give a boost to demand for vehicles and indirectly auto components.

The Government’s initiatives towards opening up channels of finance.

Investments coming in for research and development will keep the industry abreast of the latest technology.

Entry of global OEMs has transformed the Indian automobile and auto components landscape. India is being perceived as a major market for cars and two wheelers by global

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OEMs. Before the end of 2006, at least 30 new car models are expected to be launched by foreign OEMs.

These factors portend a robust auto ancillary industry in India and the overall expected good growth will provide several opportunities for the emergence of new enterprises. Extending their reach to global markets is the pre‐dominant outlook among the top auto component manufacturers in the country. The vision to compete globally comes from the inherent strengths the Indian auto component industry possesses. Some features are:

Cost reduction of 25‐30% in production in the domestic market compared to overseas Low labour costs Designing, engineering and technical skills Established quality systems Availability of raw materials Adaptability to new technology Investments in research and development, coming in from global OEMs. This stands

out positively in favour of India. Key players are not only willing to invest in R&D but also in mechanical and engineering operations. These investments are expected to increase in the near future. Though India rides on these inherent strengths, a few risks exist that the auto component manufacturers may have to confront.

A global slowdown can derail the prospects of the industry. Volatility in the prices of metals and other inputs could erode the industry’s cost

competitiveness. Further, global OEMs expect a commitment of 5‐10% reduction in prices every year.

Tier I manufacturers taking up green field projects overseas. Intense competition from counterparts in other emerging economies may add pressure

on margins of manufacturers.

The Indian auto component industry is poised for robust growth till 2010. There is aperceptive exuberance in the industry and growth estimates indicate a booming industry. Going by current trends in production and exports of auto components, indicate a doubling of the domestic auto component industry by 2010.

The production of auto components could grow to US$22 bn by 2010. Similarly, India’s exports of auto components could grow to US$4.5 bn as compared to US$1.8 bn in 2005. Expected growth in production and exports of auto components is shown in the graphs below. This growth outlook implies opportunities for the small and medium enterprises.

The overall trend is encouraging, but remaining competitive in this changing scenario will be the toughest challenge. The combination of low manufacturing costs along with quality systems would give an edge to companies in terms of pricing and quality. Expansion and diversification will help break into new markets. It would be imperative for these companies, which are largely based on traditional management practices, to imbibe technology in a big way. The SMEs can exploit these opportunities through joint ventures, collaboration and technical tie ups. Knowledge, specialisation, innovation and networking will determine the success of the SMEs in this globally competitive environment.

The recovery in the CV and passenger car segments is expected to translate into a significant growth in demand for ancillary segments over the short to medium term. Growth in the two-wheeler segment would continue to be strong with the motorcycle segment expected to record a high growth. Tractors would continue to witness a moderate growth of 10% over the

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medium term. Component manufacturers with exposure to the two-wheeler and tractor segments would therefore continue to witness steady growth rates.

However, growth in the domestic ancillary market would also be dependent upon growth in there placement market. The increasing stock of vehicles in the country and the rising scrappagerates of vehicles are expected to be the key demand determinants in the replacement market. Further, the increasing share of high-value vehicles and increasing outlay for vehicle maintenance necessitated partly by stringent governmental regulations are expected to drive volumes growth in the replacement market. Moreover, reduced competition from the unorganised sector due to the rising complexity of the vehicle parts would also lead to significant growth for the organised sector.

The export earnings from certain segments of the industry, where global players havecommissioned significant capacities such as brakes, shox etc. are expected to increase as these players are developing India as an export base. Existing players would continue to increase focus on exports in order to counter downturns in the end-user auto sector.

The industry’s profitability would be dependent to a large extent on the performance of the CVs segment over the short to medium term, as this segment is characterised by reasonable pricing flexibility. Companies with varied exposure across vehicle segments would also benefit as they enjoy the flexibility of cross-subsidisation, which in turn may lead to higher sales and increase in market share. Over the short to medium term, the performance of players in there placement market assumes importance in order to maintain steady cash flows.

The impact of tierisation in the domestic industry is expected to increasingly relegate a number of small and medium-sized units to servicing the replacement market over the long term. This is expected to increase the pressure on profitability in the replacement market. Moreover, the emerging trend of single-supplier sourcing is expected to find increased acceptance resulting in lower pricing flexibility for component manufacturers unless significant volumes from there placement market is implied. Further, the large number of variants and models is expected to result in lower capacity utilisation levels and a consequent decline in operating profitability.

This could however be partly countered by the establishment of flexible manufacturing systems, which would enable the manufacture of low batch volumes. Moreover, the reduction in the number of vehicle platforms would also translate into significant volumes for the component manufacturer and result in lower developmental cost of components.

Given the significant scale up of capacities by the domestic majors, and their improving global cost effectiveness, the domestic auto ancillaries are well set to sustainable scale up their share of the global auto component pie. The players are aggressively focusing on new client acquisition, inorganic growth in developed countries and cost reduction measures on fronts like quality, delivery, design and management.

Growth in the domestic market would be driven by sustained growth in supplies to OEMs as well as acceleration in the demand from replacement market. Moreover, cars, utility vehicles and CVs made in India are increasingly getting acceptance in foreign markets, thus driving the demand further. Even Indian two-wheeler majors aretargeting markets abroad. Simultaneously, foreign auto majors like Ford and Hyundai are making India its manufacturing base for several models. Overall, the short to medium term outlook for the domestic auto component producers is positive.

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Automobile industry, which is a key driver of auto-component industry, is likely to grow at 12-17%. Along with this some other key drivers including exports, outsourcing, and replacement market are slowing down competitiveness in global markets in turn boosting the productivity of Indian auto components industry. Setting up a new plant by existing companies and out-sourcing by the foreign vendors will result in domestic companies benefiting, either by exporting from domestic facilities or setting up facilities in those locations. To meet the emerging opportunities and challenges, Indian vendors are diversifying across products, processes, clients and markets. Companies that have restricted themselves to domestic business have seen modest growth and flat margins.

A robust business outlook is expected to drive strong revenue growth for the auto-component industry. Steel is a major raw material in manufacturing of parts. Since mid January 2006, the domestic steel prices have been increasing. Similarly, other inputs like non-ferrousmetal, fuel, and transport costs have also been increasing. However, the auto ancillaries are not able to pass on the rise in costs, due to quality and price consciousness of auto majors. Fortunately, healthy rise in volumes, players move up the value chain, increasing exports together facilitated them to cushion the rise in costs, and enabled them to maintain margins.

Bharat Forge Ltd. (BFL), signed a Memorandum of Understanding (MoU) with the Government of Maharashtra to jointly develop a multi-product Special Economic Zone (SEZ) in Khed Taluka of Pune District. The SEZ is expected to attract investments of about Rs. 25,000 crores and generate 120,000 new employment opportunities. The project has received in-principle approval from the Board of Approval, Ministry of Commerce, Government of India. The project would be implemented through a Special Purpose Vehicle (SPV) to be jointly promoted by BFL/ Kalyani Group and the Maharashtra Industrial Development Corporation (MIDC) in which the two promoters would hold upto 74% and 26% of the equity capital respectively.

India is turning out to be an attractive destination as a global outsourcing hub and manufacturing base for original equipment manufacturers (OEMs), especially after the global economic downturn.

The Indian auto components industry, that feeds the requirements of passenger cars, tractors and commercial vehicles, has both organised and unorganised players. Of the Rs 3,000-crore market for clutches, the commercial vehicles segment alone accounts for a third. The demand in countries such as the US, Europe and Japan is stagnant compared to India. Apart from this, lower labour costs also make India an attractive global outsourcing hub and manufacturing base for OEMs.

The finalisation of the AMP to make the country a preferred destination for design and manufacture of automobile and automotive components has led top commercial vehicle manufacturers to set up base here. The plan envisaged an investment of $40 billion and provided a road map to help transform India into a global automobile player. The turnover of the automobile industry is expected to rise to $145 billion by 2016. The AMP proposed a 25-point plan that included making India a manufacturing and export hub for small cars, multi-utility vehicles, two- and three-wheelers, tractors and components.

Changes in the global economic scenario have led to a major transformation in the industry. Global auto companies suffered a setback in 2008 following the economic downturn

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triggered by the subprime crisis in the US. While developed economies like the US are yet to come out of the woods, India is well on its way to recovery.

Multinational companies are focusing on India and the effort will be to release a new AMP that will be operative till 2020.Setco meets 75% of the M&HCV clutch demand in India at the OEM level. Currently, there are five players in various segments of the organised market: Setco, Clutch Auto, Ceekay Daikin, Valeo and Luk. The demand for clutches comes mainly from sales to OEM, sales to original equipment spare part division (OES) and the independent after-market (IAM).Currently, commercial vehicle makers are targeting doubling their production and sales over the next five years. This is expected to result in the growth of clutch segment by almost three times. The replacement market, dominated by the unorganised sector, also offers potential for growth.

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