Automotives

Auto components are increasingly being sourced from India by the global majors. Many foreign companies have even set up R&Dcentres here. Darrel Philip reports on India emerging asa vendor in the nearly trillion dollar business.

Demand for Indian expertisecomes in waves. In the early1990s, information technologyrode the crest, and then came

business process outsourcing. Now the carcomponents industry is on the verge ofmaking a big splash. Global carmakers arefast turning India into a manufacturing,sourcing and R&D hub. According to areport by corporate consultant McKinsey &Company, by 2008 the global BPO industrywill be worth US$150 billion and the IT

sector $ 200 billion worldwide. In contrast,the report puts the value of projected glob-al outsourcing of carmanufacture at morethan $1,000 billion by 2008. The potentialis obvious.

Multinational companies, such asGeneral Motors, Volkswagen, FederalMogul, Toyota, Ford and Mico Bosch, useIndia as a base not only to source car partsbut also to house their R&D facilities andeven to procure cheap cars. A recent reportfrom another corporate consultant, KPMG,

forecasts that within the next four yearspassenger cars made in India will traverseEuropean roads. This has alreadyhappened.

Mumbai-based second-largest passen-ger-vehicle maker, Tata Motors, built asmall car, Tata Indica, from scratch for only$ 340 million against a global benchmark ofalmost $ 1 billion that it normally costs todevelop a car from start to finish. Britain’sMG Rover gave Indian engineering a liftwhen it introduced it to British roads as the

City Rover, pitting it against brands such asFiat’s Panda and Volkswagen’s Golf. The‘Made in India’ brand received a furtherboost when Ford began to export its popu-lar model, Ikon, to South Africa.

The $ 6.3 billion Indian car parts indus-try is poised to take off as global outsourc-ing gains ground. Car component exportsrose from $ 330 million in financial year ‘98(ending March 1998) to $ 800 million in FY‘04. With a cumulative aggregate growthrate of 21.5 per cent, the figure is expect-

ed to reach $ 2.6 billion by 2006. Despite a relatively small share of Asia

in the global pie, India has notched up thenumbers. During 2003-04, Indian car-partsexports crossed $ 1 billion and theAutomotive Component ManufacturersAssociation believes this figure will touchthe $ 5 billion level by 2010.

AT Kearney sees the car componentsmarket in India growing at a cumulativeaggregate rate of 15 per cent a year until2012. And what is helping is that the

industry is emerging from its dependenceon the Indian car market and is graduallyestablishing itself in global markets, whereit looks for sustained growth.

The presence of passenger cars fromestablished firms, such as General Motors,Ford, Hyundai, Toyota, Honda, Volks-wagen’s Skoda and Suzuki in India hashelped the Indian car parts industry toattain global standards.

The growth of volumes in the domesticcar industry can be credited for helping the

Groomed for Global Growth

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components industry to attain a criticalmass. Two decades ago, there were justtwo models manufactured here underlicence, and their combined annual saleswas about 60,000 units. But, now, themarket is on the verge of grossing a millionunits — between April and October sales ofcar spares crossed half a million units. Andgrowth is expected to be around 20 percent in the near future.

Sales of spares for commercial vehicleshave followed a similar trend as moresophisticated vehicles with higher payloadshave begun to replace older technology.

Cost pressures are forcing globalOriginal Equipment Manufacturers (OEMs)and tier-one suppliers to outsource fromlow-cost manufacturing destinations. Indiahas an edge as it offers low costs withoutcompromising quality.

Six Indian car parts makers —Sundaram-Clayton Ltd. Brakes Division;Sona Koyo Steering Systems; SundaramBrake Linings; Brakes India Ltd., FoundryDivision; Rane Brake Linings and Lucas-TVS — have won the coveted Deming qual-ity award. Out of 400 key car componentsmakers in India, 80 per cent have ISO 9000

certification, 50 per cent have QS 9000certification and about 10 per cent haveISO 14001 certification.

Multinational companies have begun tosee the benefits of sourcing from India. GM and Caterpillar source radiator capsfrom Sundram Fasteners — the companyhas won GM’s best-supplier award forthree years. GM sources light equipmentfrom Lumax.

Volkswagen has tied up with EngineValves to develop valves for a new engine.Mitsubishi of Japan sources front-axlebeams from Bharat Forge and Federal Mogulof the US sources components from Indiathrough a tie-up with the Anand group.

Ford India will source parts worth $ 160million from India. Skoda will source partsfrom India for its European operations andraise the level of indigenisation for its Indianmodels to more than 70 per cent.

Previously, Indian automobile partsmakers used to be involved mainly indesign and development (D & D) forforeign car manufacturers. This includedsupport work, such as testing and reverseengineering. But this is now changing —Indian firms are moving up the value-chaininto R&D, as well.

GLOBAL COMPANIES ARE REAPING THE BENEFITS OF SOURCING AUTO COMPONENTS FROM INDIA: Cost-cutting at work

How India ranks in the Business*India, China and Thailand have been ranked on various parameters on a scale from one to five, in which onedenotes the best and five denotes the worst.

Parameters India China Thailand

Quality of supply 1 4 2Ability to supply consistent quality 3 4 2Price competitiveness 4 1 3Design & Engineering capability 1 4 3Customer/After Sales Support 3 4 1Maturity of auto component industry 1 4 3Govt. regulations 4 3 1Attractiveness of Domestic Market 2 1 3Compliance and transparency 2 4 3

TOTAL SCORE 21 29 21*Ranks: Lower the better Source: Frost & Sullivan

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Mikuni of Japan will entrust its R&Dactivities to its offshore joint-venture part-ner, UCAL Fuel Systems, which is based inChennai. Maruti’s Gurgaon R&D centre willbe Suzuki’s Asian development hub forcompact cars by 2007. When Suzukirevamped its Zen model in India, it was thefirst time that the company redesigned acar outside its R&D facilities in Japan.

Daimler-Chrysler, too, has an R&Dcentre in India, which is involved in appliedresearch in avionics, simulation and soft-ware development. Components companyMico Bosch’s global development centre inBangalore is the first such developmentcentre outside the US.

What has fuelled this new interest?Restructuring. Over the past few years,Indian manufacturing has shed its stodgyways of doing business. Says SundaramClayton’s managing director, VenuSrinivasan, “Now India has a robust manu-facturing base after rightsizing, restructur-ing and implementing TPM and TQMprocesses. It is well equipped to tap theboom in the outsourcing market.” India haswhat it takes to attract global groups thatseek to outsource output.

Several multinational firms are in Indiato leverage skills in R&D, innovation,engineering and management. Theirreasons are many — from low costs to theneed to be closer to a large market, orsimply to leverage the engineering skills ofa large English-speaking workforce forcompetitive advantage.

Besides, in the recent past, New Delhi’smindset, and consequently its policies,have begun to shift from being a regulator,to a facilitator, of industry. Moreover,Indian banks are more willing than everbefore to invest in more than mere manu-facturing.

According to L Ganesh, vice-chairmanof the component making Rane Group,

“India is definitely ahead of China in termsof quality, productivity, technology andcommunication skills. Exposure to India hascome thanks to the entry of giants, such asGM, Ford, Hyundai and Toyota.” And theIndian attraction is spreading fast.

Many Korean firms have already madeIndia a hub. Hyundai Motors is India’ssecond largest carmaker and is bent onmaking India its global hub for the smallcar. BVR Subbu, president of HyundaiMotors India, says, “Selling the ‘Made inIndia’ brand wasn’t easy. But we followedthe ‘seeing is believing’ policy in exportsto convince global buyers.” The Indiansubsidiary of Hyundai is now increasinglyenlarging its presence in Asia and Europeeach year.

The demand for car parts is having arub-off effect on Indian cars which are nowtravelling to foreign lands. The Ford Ikonseems to be a bigger hit abroad than inIndia. The Indian arm of the world’s secondlargest carmaker has emerged as one of thelargest exporters of cars. Exports of theIkon in completely knocked down kits fromits Maraimalai Nagar plant in India recentlycrossed a significant 100,000 units.

TOYOTA KIRLOSKAR AUTO PARTS’ $ 80 MILLION UNIT WILL EXPORT GEAR BOXES GLOBALLY: Assembly at the Toyota Kirloskar plant

Where on earth have all ourspares gone?Region-wise exports of Indian car sparesin 2003 (in percentage)

US 25Europe 35Africa 13Asia 17Others 10

Source: ACMA

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David Friedman, managing director andpresident of Ford India, described the featas a ‘significant achievement’. Set up over70,000 sq feet, the Ford India export plant,a green-field site, started operations in May2000 by exporting Ikon parts in CKD condi-tion to Ford Mexico, Ford South Africa, andlater to Ford China. The export plant islocated adjacent to its passenger-car manu-facturing facility.

The City Rover, which was launched inBritain in 2004, has already sold 3,000

units. MG Rover has positioned the car asa value-for-money model in the face ofcompetition from products like the FiatPanda. “All the markets throughout Europeare highly segmented,” explains Michael J.Booth, MG Rover’s corporate head forproduct development. “We like to positionour products, including the City, distinctive-

ly, as a value-for-money proposition. Ofcourse, the City will continue to be exam-ined within that parameter.”

As part of its agreement withMG Rover, Tata Motors will supply sparesto the City Rover’s after-sales market.Booth explains that there are five agree-ments with Tata Motors — sourcing Rover-badged Indicas for Britain and the Europeanmarket, sourcing Safari SUVs for Britainand Europe, and sourcing after-sales sparesfor the Rover City.

For all that success, the ‘Made in India’tag still evokes images of poor safety andmanufacturing. Most multinationals andIndian firms must rectify this impressionbefore developing products — an exercisethat can be lengthy and expensive.Consequently most companies do not lastthe course. But, for those that perseverethe rewards can be big — the cost base for

car components in the US is $ 430 billionwhereas, in India, it is no more than $ 2 billion.

According to an analyst at a Mumbai-based brokerage, “Global car makers fromthe US preferred outsourcing from Indiaover China, Mexico and Brazil.” This isbacked by recent findings in a report byFrost & Sullivan, as shown in the table(Where on earth have all our spares gone?).Although India needs to work on someareas, the numbers in the table indicatethat if a global car firm is looking for areasonably priced source of quality andvalue-added engineering, then India with itslow-cost and high-skilled personnel is theplace to be.

Besides suitable personnel, India alsooffers an abundant supply of metal-basedraw material. India is the lowest costproducer of aluminium and some grades ofsteel. This goes down well with companiesthat want to make India a componentsoutsourcing hub, especially in the face ofrising metal prices. The low cost of Indianaluminium must please carmakers as manyof them use it to reduce the weight of theirvehicles to boost their fuel efficiency.

However, analysts say India’s compet-itive advantage doesn’t come from low costs alone but from its full servicesupply capabilities. As product life cyclesand lead times for product developmentshrink, Indian component makers have evolved from ‘build to print’ tocustomised offerings.

FORD INDIA SCORES A BIGGER HIT ABROAD THAN IN INDIA: The Ford Ikon

BHARAT FORGE LTD., based in the industrial cityof Pune, 180 km southeast of Mumbai, is thelargest forging company in Asia and the second inthe world. It is India’s largest exporter of autocomponents, and is one of the world’s largest axle-component manufacturers, with a 50 per centmarket share in the US. It has just bought itssecond overseas manufacturing facility, CDPAluminiumtechnik at Ennepetal, Germany for

6.3 mn, in an all-cash deal. A year ago, inNovember 2003, it had acquired an associatecompany Carl Dan Peddinghaus, now renamedCDP-Bharat Forge.

The latest acquisition takes the $ 830 millionBharat Forge group into a related but new businessarea with considerable prospects for growth;aluminium forgings. As Baba N Kalyani, CMD,Bharat Forge, stated on his group’s latest initiative,

“The CDP Aluminiumtechnik acquisition will signif-icantly strengthen the company’s position in theglobal passenger car and chassis component busi-ness. CDP AT will enhance Bharat Forge’s productrange and technical capabilities in both steel andaluminium.”

In end 2004, Bharat Forge was included, for thesecond consecutive year, in the Forbes ‘Best undera Billion’ list of companies.

The forging major is looking at acquiring manufac-turing facilities both in the US and China as part ofits overall strategy of becoming a $ 1 billion compa-ny by 2008.

The strategic objectives of these proposed acquisi-tions are different. “Our plan is to make China andIndia the manufacturing back end and Europe andthe US the technology front end of our operations,”says Kalyani.

The Future is in Forgings

ENHANCING TECHNICALCAPABILITIES:Baba Kalyani

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