Mounted brake linings from India is in demand across the globe. In fact, exports of brake linings in FY2017 has already crossed the total value exported in FY2016. What’s more? The exports of brake linings also promises excellent round-the-year double-digit margins. The Dollar Business analyses what makes this product a bestseller overseas.
Sairaj Iyer | February 2017 Issue | The Dollar Business
Mounted brake linings, though not the top automotive component to be exported from India, contributed about $310 million in foreign exchange to the exchequer between April and October 2016. Interestingly, the product has also seen triple-digit export growth in FY2016 from the preceding year. And if this isn’t something enough to cheer about, the value of exports of the product in FY2017 (so far) has already crossed the total value of its exports for FY2016. Then there are other reasons that have encouraged investors to take the plunge into this business. For, brake linings require low capital investment and offer great margins. And, not to say, the introduction of GST and a strong dollar has only added to the lure. So, what makes them click?
AN INTEGRAL PART
Every time you go on a long road trip, the one thing that you invariably get checked and at times replaced is the brake pads. They are not expensive but they save lives. According to a US Department of Transport report, defective brakes contribute to about 22% of all accidents that can be attributed to vehicle-related failures across the globe. Hence, the replacement market for them is always alive and kicking in all parts of the world. What’s more? The global automotive friction spares industry is predicted to grow at a CAGR of 7.68% to nearly $38.96 billion by 2021. And with India being a home to low-cost, high-quality friction products, such as brake pads, shoe-liner, discs and drum brakes, among others, it’s but natural for India-based original equipment manufacturers (OEMs) to go for the kill. Further, brake linings are an integral part of brake pads that are considered to be the largest motor parts aftermarket by Organisation Internationale des Constructeurs d’Automobiles (OICA), a Paris-based international consortium of automobile manufacturers.
Brake linings contributed $310 million to India’s
forex reserves between April and October 2016.
According to an OICA report, the main reason behind this suddenly growing demand for brake lining is the new and stringent laws of ‘stopping regulations’ in EU. The new regulations require that a vehicle moving at a speed of 20 miles per hour (mph) must come to a complete stop within 12 meter, once brakes are applied. This has resulted in a huge demand for technologically superior brake linings, which is only growing by each passing day.
QUICK AND EASY
Brake lining is also amongst the fastest selling auto components, because unlike engine or gear spares, brakes require the least number of tools and assistance to get replaced. And, it’s important to replace brake pads and linings at regular intervals, depending on the type of the brake and the driving terrain. Further, “The complexity involved in manufacturing auto components is minimal. When we started five years ago, we had minimal resources, but we could still become an OEM for Bajaj,” shares A. K. Desai, CEO of Snehal Auto Parts, an auto components manufacturer based out of Jalgaon in Maharashtra.
Interestingly, Snehal Auto Parts manufactures nearly 4,00,000 brakes a year for Bajaj and yet falls under the micro small and medium enterprise (MSME) classification. In fact, there are nearly 100 to 150 such players, besides large auto components manufacturers like Kalyani, Allied Nippon, Rane Brake Linings and TVS feeding the growing domestic as well as international automotive markets.
Desai explains that manufacturers select the elements used in the linings based on the end-use of the brake i.e. which type of vehicle is it going to be used in. As regulations become more stringent, brake linings are being made using more advanced friction materials. “Brake linings and brake shoes are the most complex and important parts of a braking system. There have been cases where a small temperature change has lead to the cracking of the friction material, and hence, tests and timely compliance must be followed,” adds Desai.
It is rather interesting that Rs.3-5 lakh is all that you would require to start a rudimentary mounted brake linings manufacturing facility. The business requires limited materials, such as a medium lathe, drilling machines, bench grinders, power hacksaws, and a few other tools and equipment. The manufacturing process starts with the purchase and grinding of cast iron. The iron piece is then drilled and filed with a lining material and taped using an adhesive with the cast iron material. Appropriate fitting screws are installed before the product is packed and dispatched. Also, a floor area of 500 sq. ft. is enough to generate an output of 90,000 pieces per year.
The raw materials largely include iron, asbestos and other friction materials, chemical resins and paste, and screws among others. The final cost of production starts at Rs.18 for asbestos-lined brake lining, and can reach upto Rs.50 for vulcanised rubber linings. Cost of production of cermet-lined (cermet is a composite material made from ceramic and metallic materials) brakes is higher.
While the asbestos-based linings fetch a price of Rs.40 per piece in the domestic market, they are sold at a much higher price in export markets. But costs of marketing, testing the product, wages and salaries, repairs and maintenance besides other general administrative expenses can limit the profit margin to a maximum of Rs.10-12 per piece. The interest component on any working capital or term loans can further reduce the margins. The high cost of packaging, compliance and distribution while exporting also eat into the margins of manufacturers.
Few Big Markets
While such profit margins can be enticing, there are only a few markets that the Indian manufacturers of the product are currently tapping into. In fact, the top five importing countries (US, Germany, UK, Denmark and France, and in that order) accounted for a majority (77%) of India’s total exports of the product in FY2016. Interestingly in FY2017, France has overtaken US as the top destination of brake linings from India, with Japan replacing Denmark from the top 5 club.
While world exports of brake linings have been stagnant over the last few years, India’s exports to the world doubled in FY2016 over FY2015. In fact, the ongoing fiscal promises to be even better for India with the country already having exported $309.13 million worth of brake linings between April and October 2016, against $308.77 million in the entire FY2016. This is an impressive growth considering the fact that leaders in the automotive sector such as China and Germany have shown a de-growth of 20% and 15%, respectively, when it comes to imports of brakes and its parts from the world. Salim Khan of Faridabad-based Macas Automotive though agrees that China and Germany are going through a slump, he feels it’s a temporary phase. “There is a great opportunity lying untapped for Indian exporters in other emerging markets across the globe,” adds Khan.
UNIQUE CHALLENGES
While it may seem that breaking into the brake linings industry is easy, the industry has its own unique set of challenges. The brake lining industry has to be always on its toes when it comes to innovation. “The biggest challenge we face while working with an OEM is that we need to innovate constantly to meet the ever-changing requirements of the global automobile industry,” says Khan.
When it comes to competition from Chinese exporters, Khan feels it is largely price-oriented and could be easily tackled by the Commerce Ministry (GoI) by offering convenient logistical support and improving reward rates under Merchandise Exports from India Scheme (MEIS). Agrees S. K. Pahuja, CEO, Driveline Brakes Pvt. Ltd. as he says, “I think incentive under Merchandise Exports from India Scheme (MEIS) is way too low. There is no specific complex challenge that the industry faces, per se, but yes, if there were better incentives, export numbers could potentially increase. Though the current incentive of 3% isn’t sufficient for SMEs, it’s still an important part of our margins.”
In The Fast Lane
Until a few years ago India’s brake lining industry was dominated by big players and rarely did an SME reached its potential. But times are changing. Industry expert believe that the market is ripe for MSMEs to enter – the business requires low capital investment and offers high-growth opportunities. And with developed markets like France, UK and US slowly opening up to Indian exporters of auto components, it may be time that you to take that plunge into its exports. It’s a brake-free zone, literally!
A.K.Desai, CEO, SNEHAL AUTO PARTS
TDB: What motivated you to get into exports of brake linings?
A. K. Desai (AKD): We started an automotive spare parts business in 2008. Initially, our sister company, Snehal Industrial Services was an original equipment supplier (OES) to Bosch Chassis System India Limited. So, entering the market for products such as brake linings came naturally to us. Our experience in the automotive components industry too helped us to begin our exports business. However, the primary reason that prompted us to take up exports of brake linings is that it has a perennial demand across the globe.
TDB: What markets, as per you, are the most favourable for exports?
AKD: Most Asian markets such as Indonesia and Thailand have been favourable. Since, Indian vehicles are hugely popular in these countries, they have emerged as great export destinations for Indian OEMs and OESs. We also tried to export to US, UK and Germany. However, compliance is a major challenge in these, and other such countries.
TDB: What percentage of your revenues comes from exports?
AKD: About 25-30% of our annual revenue comes from exports. The margin ranges between 10-14% in the domestic market. The cost of marketing in domestic market is lower. For an internationally shipped product, we have to bear costs of logistics, packaging, as well as testing and compliance. The advantage with exports is that once a client starts procuring, he continues with the supplier unless there is a compliance failure.
TDB: What other markets can an exporter explore?
AKD: There is an untapped market in Africa and South America. There should be some facilitation beyond MDA scheme that help target Zone A, B and C destinations. The assistance offered for the two markets should be improved.
S.K.Pahuja, CEO, DRIVELINE BRAKES PVT.LTD.
TDB: What’s behind the rising exports of brake linings from India?
S. K. Pahuja (SKP): The low cost of production in India coupled with high demand for the product in international markets are driving its exports from India apart from helping the manufacturers yield better margins. Even when the domestic automotive component market was in a slump, the overseas markets offered good traction. If you look at suppliers from China and Germany, they are slipping fast. China does offer a price advantage, but their products do not conform to standards and regulations.
One also needs to keep in mind that regions such as Africa and CIS countries are large consumers of Indian products. In fact, many of our Indian passenger and commercial vehicles have a great following there. Hence, the market for both OEM and after-market replacement is huge in these regions.
TDB: Currently, what countries do you export to? Are you also exploring any new market?
SKP: We export to Africa and CIS countries – we have a huge base in Kenya. We are also accessing markets in New Zealand and Australia. We have recently opened an office in New Zealand but we are yet to commence any major activity. And I must say that I find the Australian market encouraging because it offers a huge untapped potential to SMEs. We also export to European, Middle Eastern and South East Asian countries.
TDB: What regulatory challenges do you face while exporting?
SKP: The toughest regulations are in EU and US. It’s costly to access these markets because they require a huge portfolio and we have to get the products QC-tested under various regulations. UK also requires that we test the products under the EEC R93 regulation, which costs at least Rs.1.5-2 lakh per product. While some barriers may restrict SMEs, the top players have been able to work around them and export in large numbers.
TDB: Does the Ministry of Commerce or Engineering Export Promotion Council offer any help to the sector?
SKP: There are assistances doled out by Engineering Export Promotion Council (EEPC), but these aren’t in the areas of QC and testing. Moreover, the overseas buyers are more interested in working with exporters who have a portfolio of 500-1,000 products. It is an expensive proposition to invest Rs.2 lakh to register and test each single prototype and then export it. That is a biggest risk! Also, what if you register and market a few product lines for export, but find no buyers? It will be a complete waste of time and money for any company. We can’t export unless we find some agent or buyer in the destination market. So, an SME loses out on both counts. Firstly, it cannot offer too many designs and secondly, offering a handful of designs unless the demand or the design requirement comes from the importer is fruitless.
TDB: So, you mean to say the big players have a distinct advantage?
SKP: I was with Allied Nippon till 2005. Big players such as TVS, Rane and Allied Nippon may face these issues, but they are in a better position to counter some of the concerns easily. For instance, Allied Nippon is comfortably exporting to Middle Eastern countries. There is a huge trust that is being built by the these brands. Also, recently, we participated in a trade show in Sri Lanka and it was surprising to find that they wanted to trade only with Rane Brake Linings, which shows the trust and credibility these companies have built.
TDB: What have been the benefits of participating in trade shows?
SKP: We have participated in Automechanika Germany, but the business generation was not up to the mark. We also attended a few events organised by ITPO, FIEO and EEPC, but sadly, none of them were fruitful. Attending trade fairs is a costly proposition. For instance, to partake in events held in Europe, one has to keep at least Rs.5 lakh ready per person; for Dubai it’s Rs.3 lakh per person. So, after spending such huge amounts if you cannot convert the leads into money, that’s a huge loss. However, we have been regularly participating in most of the conferences and buyer-seller meets organised in India.
TDB: Is there any facilitation role that the EEPC could play?
SKP: There are events that are being organised by EEPC, but these are limited. EEPC should lobby for better incentives for this industry. I think incentive under Merchandise Exports from India Scheme (MEIS) is way too low. There is no specific complex challenge that the industry faces, per se, but yes, if there were better incentives, export numbers could potentially increase. Though the current incentive of 3% isn’t sufficient for SMEs, it’s still an important part of our margins.
TDB: Do you think Goods and Services Tax (GST) would help the industry increase the margins?
SKP: Yes, it should, but not substantially for traders. Currently as manufacturers we pay an indirect tax of about 24-28% including VAT and excise. We are talking of a 15% slab under Goods and Services Tax. So, margins for companies that are into manufacturing and then exporting, will be huge. For exporters involved in trading, the advantage may not be substantial enough.
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