With a purpose of giving you insights into the world of auto component exports, The Dollar Business sweat details of the business with CEOs of many businesses and experts. Profits were discussed. Markets were evaluated. Innovations were praised. Policies were debated. And products were zeroed-in on. Interviews and many-an-analyses later, we arrived at one conclusive suggestion for exporters on this dockyard – play big or snooze on. Turns out, auto component exports isn’t about a drive to nowhere

Steven Philip Warner, Manish K. Pandey | @TheDollarBiz

Hyundai India’s head of branding and marketing, Nalin Kapoor, is a calm, dynamic marketer. He’s been associated with the company for over six years now – and in close to a decade in the world of automobiles, has seen another American giant fall and rise. When we caught up with Nalin at his Jasola office in New Delhi, he was as we described earlier: “calm”. And why not? 2012 was the year when sales in the Indian auto market was projected to reach levels never touched before. It happened. In CY2012, Hyundai India (HMIL) recorded domestic sales of 391,276 units (a rise of 4.7% y-o-y). What came as a bonus for Hyundai was that it had increased its lead in the exports category as well. Despite slowdown hitting its major export markets, its shipments climbed 3.12% y-o-y to 250,005 units. During our hour-long interaction, the light blue shirt and dark blue suit-clad Nalin used words like “exports” and “global campaign” many times. We discussed Hyundai’s products, marketing strategy, consumers, technology, rebranding, and its attention to markets like US. We even discussed how 2013 could become “a difficult year” for Hyundai and its industry peers, and how in general “the years ahead are expected to be tougher than those that went by”. In response, he spoke about how his company is striving to “give the same experience to the user sitting in North America, Europe or India,” while at the same time confessing that “there are some localisation issues that need to be taken care of in India”. He was perhaps hinting at the big ballgame shifting to markets beyond the pond. Then, 2013 happened. Rather, it crashed upon those involved in the game of cashing-in on the automobile industry in India. For the first time in over a decade, demand in the Indian auto market had shrunk by 9.59% (to 1.81 million units as per The Society of Indian Automobile Manufacturers, SIAM). Exports of automobiles did grow, but only because there was a boost from the two-wheeled and three-wheeled categories. Four-wheelers grew just modestly. As for Hyundai India, its car exports fell by double-digit margins that year. Describing the nightmare of a year, the Federation of Automobile Dealers Associations (FADA) said, “The downturn during the year 2013 was the worst the auto market had ever witnessed. The slowdown was all-pervasive cutting across segments…” “We work in a business where failures are not allowed,” were the words from Nalin when we discussed how umbrella branding could be disastrous in the global market. In the present day, car exporters are not exactly having a ball. [Forget about sellers in the domestic market who are so anxiously waiting for the clock to tick.] But given the current environment, and going by how auto component exporters and manufacturers are ruling the roost (imagine, while in India car sales were hit by a slump in 2013, auto component exports almost breached the $10 billion mark!), automobile sellers and exporters (someone even as confident and calm as Nalin) would be wishing that they had a greater proportion of revenues coming from the high-margin game of auto component exports. [Or at least we hope they do!]

What’s export got to do with it?

It might sound like the only word that bridges the words “auto component” and “bonanza” is “exports”. You’re thinking right. And thinking big. We don’t say it. Experts at global management consulting firm A.T. Kearney do. And so do the many auto component exporters, who are enjoying margins that in the present weather (marred with inflation, rising input costs and not so happily earning customers) are literally incredible.

“A higher export-domestic ratio makes for more profits,” says B. M. Jain, CMD of TCML, while speaking to The Dollar Business. Jain’s company dedicates in excess of 20% of its auto component capacity to exports and says he makes neat net margins of anywhere between 10-15% from selling in foreign lands. For a realistic him, his focus lies where his the earnings are. And he can’t be more truthful when he says, “Our component exports can be classified into two sub-categories – high-tech parts and aftermarket parts. Aftermarket parts are more lucrative compared to high-tech parts as far as net margins is concerned.” R. Seal, CEO, Walia Auto Ancillaries Pvt. Ltd. echoes Jain’s voice when he tells The Dollar Business that, “Auto component manufactures with a higher export-domestic ratio certainly make more profits!” At present, Seal’s company is eyeing a market like Indonesia and other untapped and lesser-tapped markets in Latin America. He dedicates 25% of his production volumes to exports and earns net margins of over 10% on average from overseas markets. Call it a difference of philosophy, but unlike TCML’s Jain, his bet is on high-tech parts. Hemachandra Shrotri is currently the CEO of Sunny Engineers, a fast emerging player in the field of auto component exports. Being a tier-2 supplier, his faith is in the potential of markets like Brazil and Czech Republic (two markets where the Indian government has given an incentive like MLFP Scheme to exporters, besides offering a duty drawback advantage). Listen to him and your apprehensions about auto component exports vapourise: “Overall, net margins are higher in export business. There is high risk, but if the right market and mix is chosen, export margins are easily 5-10 % higher than margins obtained on domestic sales.” Shrotri currently makes a net profit of 15% on his exports to the two markets of Germany and US. And like Walia Auto, one-fourth of his company’s production is meant for markets beyond the Indian Standard Time zone.

A.T. Kearney’s new report titled, ‘India’s auto component suppliers: New frontiers in growth’, states how OEM manufacturers are looking at strong bonds with auto component suppliers with a global supply chain capability. It complains: “Only a small number of Indian auto component makers focus on exports or conduct business on a global scale, even as future survival and growth in this market require doing both!”

At present, an alarming 64% of India auto component suppliers export less than 10% of their produce. And only a small percentage (14%) have more than 20% of their product volumes exported! According to what the experts say, with automakers looking at suppliers with a global supply chain capability, localised component sellers could (and would) go out of business in a few years from now. Surgically put, “It will be difficult for OEM procurement teams to get approval for introducing a local supplier without global reach.” Thankfully, a player like Sona Koyo realised this some years back. It’s leading an easy life now. A typical day at the Sona Koyo Steering Systems’ manufacturing plant (located on National Highway 8 between Delhi and Jaipur, spread over an area of close to 15,000 square metre) reflects this fact. When we walked into the facility last spring, we came across a handful of blue-collared employees busy at umpteen assembly lines that roll out steering wheels for all types of passenger and commercial vehicles. [India exported steering systems worth Rs.144.12 crore in 2012 and Rs.124.54 crore in the nine months leading to December 2013, of which the company’s share stood at 45%!]. The factory employs over 5,300 workers today and is the largest manufacturer of steering systems in India. Just outside the main factory area, we noticed heaps of finished products. When questioned, the factory manager told us that, “These will be shipped overseas soon…” [“How soon?” was a question that struck us given how the products we thrown in the open, and piled one on another as if the purpose was to touch the moon and back!] To cut a long story short – our conversation with the very serious and seasoned Sunjay Kapur, Vice-Chairman & MD, Sona Koyo Steering Systems, led us to believe that whether it be experimenting with a new category like off-road vehicles or farm equipment, aerospace or defence, he will continue to serve foreign markets. In fact, his first tie-up for his new experiment (off-road vehicle component-making) is with a US company and Kapur expects to start shipping his products very soon. And stick he will to component making! Aircraft wings could be next on cards. But one thing’s for sure – he’ll never sell an aircraft! Why sell a house when shipping bricks is easier and there’s money to be made in loads? Especially when you have total profits from exports rising by 46.3% in a matter of a year (in FY2012-13)!  

On the top ‘profit’ gear

It’s not easy to talk about high profit and growth games at a time when the year gone by has proved the slowest in terms of growth (in half-a-decade) for an industry. We’re talking about FY2012-13 and the auto component industry. Still there is confidence in the air. And we dare say, there’s no better time than now. Today Indian auto components are exported to more than 160 countries. Revenues have been growing at 17% year-on-year over the past 5 years and currently account for 24% of the industry’s total turnover. Even the global economic headwinds now seems to have slowed down. As per the latest IMF economic forecast, the world economy is poised to grow 3.6% and 3.9% in 2014 and 2015 respectively, as against 2.2% and 2.4% in 2012 and 2013 respectively. WTO’s global trade growth forecast of 4.7% in 2014 (2013: 2.1%) is also welcome news for Indian exports. In fact, the green shoots are now clearly visible. While ICRA does not expect operating margins of auto component manufacturers to deteriorate much in FY2013-14 and FY2014-15 vis-à-vis FY2012-13, Mumbai-based brokerage Prabhudas Lilladher expects ancillary companies to post a growth of 15.7% year-on-year in FY2013-14, mainly due to higher realisation in the export markets and strong traction in European operations.

Exports of auto components offer huge value if past trends are anything to go by. A February 2014 study titled ‘India's Automotive Industry: Necessary steps on our way to global excellence’ by industry body ASSOCHAM and strategy consultants Roland Berger states that since CY2000, Indian auto components suppliers have continuously outperformed global suppliers on every indicator. While the EBITA (earnings before interest, tax, depreciation and amortization) margins of foreign suppliers have ranged from 8% to 11.5%, the same for Indian suppliers have stayed between 11.5% and 14.5%. ROCE (return on capital employed) for Indian suppliers too have remained on the higher side between 15% and 25%, as against a maximum of 13% of foreign suppliers. Further, while global players are still struggling to hold their grounds, Indian players seem to have moved ahead in time. Despite experiencing a weak demand from domestic OEMs, export volume growth has enabled players like Amara Raja Batteries, Bharat Forge, Exide Industries, Motherson Sumi Systems, Balkrishna Industries to clock-in better net margins over the last fiscal (FY2013-14) - 16.9%, 17.8%, 13.5%, 9.5% and 24.7% in FY2014 as against 15.8%, 13.9%, 13%, 7.6% and 20.8% in the previous year (FY2012-13) respectively. Profits there certainly are, and in two-digit percentages.

You can’t bet on everything

Although all major component categories have shown a healthy growth in exports in FY2013-14, categories such as transmission shaft and cranks, gear boxes, drive axles, mounted brake linings, suspensions, starter motors, generators, bumpers, et al, have been the real value drivers for exporters. In fact, gear boxes and bumpers have been front-runners when it comes to exports of auto components from India in terms of value. Indian manufacturers exported gear boxes worth $329.17 million in CY2013 (source: UN Comtrade) making it their favourite export component in terms of value. [The Dollar Business Research estimates it to top the exports chart in FY2013-14, with a remarkable growth of 46.15% y-o-y.] Simple reason: better margins. The Dollar Business conducted a study on some leading gear box manufacturers and exporters in India and found that the average of their last five years' net profit margins ranged between 9.5% and 15.88%. Bumpers too are not far behind. With $245.80 million worth of bumpers exported in FY2013, this component is no.2 on the popularity chart. [For FY2013-14, The Dollar Business Research projects the category to grow by 26.07%] A study conducted on leading bumper exporters in India revealed that the average of their last five years' net profit margins ranged from 12.56% to 17.60%. True. You can’t bet on everything. But you can certainly bet smart in a poker game when the “Flop” gives you a straight flush, and if we reveal the “Turn” and the “River” much before the hand is dealt. And we already have. Haven’t we?

Making money on away ‘market’ games

India has been a textbook example of how to create buzz through wheeling and dealing in auto components. Reviews of progress on the export front do seem encouraging. Yet there is much proof that Indian auto component exporters have left much to luck and less to strategy. Especially when it comes to closing-in on the demand-supply gaps in various markets. Consider the largest auto component sub-category bought and sold by importers and exporters from nations across the world – gear boxes. In 2013, the total value of gear boxes imported globally amounted to $53.03 billion (Sources: United Nations Statistics and World Trade Daily). How much of this huge demand was catered to by India? Hold your breath: under 1% (just 0.91% to be dead precise)! Clearly Indian exporters need to quickly evaluate the economics of the huge opportunities that importing nations present. If you go by what the United States, Canada, Germany, United Kingdom, Brazil, France, Japan, Spain, Belgium and Turkey – the largest importers of this product globally – have to promise, the story of lost opportunities and underperformance by Indian gear box exporters reads the same. In 2012, India supplied only 0.41% of gear boxes imported by US (in value terms). The same stood at 0% for Canada, 0.01% for Germany, 0.14% for UK, 2.64% for Brazil, 0.01% for France, 0.28% for Japan, 0.01% for Spain, 0% for Belgium, and 1.82% for Turkey. Not to be confused as an act of patting ourselves at the back, but India did fairly well to maximize business from markets like Thailand and Brazil to cross the $50 million export revenue-mark from each market. However, when viewed in toto, India catered to supplying just 0.43% of the total imports of the world’s top ten gear box importing nations. Not a forward moving case study that makes for Indian exporters.

There are factors like bilateral trade treaties and cost advantages of various importing nations that act as a deterrent to India’s export capabilities in this respect. But there are also pro-export policy initiatives – viz.

Export Promotion Capital Goods (EPCG) Scheme that allows auto ancillary manufacturers and exporters to import capital goods at zero duty, Focus Market Scheme that gives exporters of all products to 125 markets around the world (including 31 in Latin America, 52 in Africa, 10 in Commonwealth of Independent States, 5 in Eastern Europe and 27 in Asia; specified in tables 1 and 2 of Appendix 37C of HBPv1, FTP 2009-14) an entitlement for Duty Credit Scrip equal to 3% of FOB value of gear boxes exported, a Special Focus Market Scheme that gives an additional 1% Duty Credit Scrip for exports to 50 markets (including 12 in Latin America, 31 in Africa, and 7 in Commonwealth of Independent States; specified in table 3 of Appendix 37C of HBPv1, FTP 2009-14), Duty Drawback Scheme (1.7% of FOB value of exports) and Market Linked Focus Product (MLFP) Scheme that provides for an export incentive of 2% of FOB value of gear box exports (in free foreign exchange) from India to markets like Brazil, Japan, South Africa, South Korea, Iran, China, Czech Republic, Russia and 27 countries in EU (refer Table 2, Appendix 37D, HBPv1, FTP 2009-14).  

How Indian exporters of this product are resisting temptations of making money from added margins is a fact hard to understand. In these favoured export destinations, India doesn’t seem to be making monster moves. For instance, think of each of these markets specified in the MLFP Scheme. Exporters from India aren’t looking to sweat it out. In 2013, India supplied just 2.64% of Brazil’s imports of gear boxes, 0.09% of China’s 0.28% of Japan’s, 4.52% of South Africa’s, 0.25% of South Korea’s and a negligible 0.01% of Russia’s. India doesn’t account for more than 5% of gear box imported by EU27. And how about Czech Republic’s shipments? Here’s information that shows how the exporting community doesn’t always get it right.

While the Czech Republic imported gear boxes worth $868.65 million in 2013, India supplied just $928 worth of gear boxes to the country! We’re serious. Are exporters in India just being pessimistic about their export estimates? Or are they not aware of the opportunities that lies in many-a-market overseas? The answer to the second question obviously is an easy one. There is a fraction of this exporting society that has a fair idea of how to deal with harsh, unhelpful foreign tides – one that has been on a high (tide) in recent months, with all the murmur about rupee volatility, gold and stock markets doing the rounds. There’s a stereotype in the exporting community that subtlety has no place in risk-laden and cumbersome lands. Here you either play big or back out. There are markets. And there is the exporting community that is throwing big chips on the table. Argentina, Columbia, Sudan (4% Duty Credit Scrip under FMS; excluding other exemptions) and Nigeria, Kenya, Lithuania (3% Duty Credit Scrip under FMS; excluding other exemptions), etc., are some select geographies where Indian gear-box exporters have made big inroads, and today cater to a credible share of the market’s overall import needs (between 3%-40%). New entrants in the business of gear box exports have an option to side with these very emerging markets or to earn from markets that Indian gear box exporters haven’t served too faithfully. [Ed’s note: Which markets? Go back four paras and you get the proper nouns.]

About half a billion dollar worth of gear boxes and bumpers are exported by India each year

Flaccid fundamentals doesn’t seem an option in the second-largest traded auto component segment either – bumpers. Good news. [Globally, brakes and parts are the second-highest selling category. World trade in this category amounted to $20 billion in 2013. In India however, brakes are considered less important than bumpers; no pun intended!] In 2012, the total value of bumpers that flew out of nations’ boundary walls crossed the $4.2 billion mark (source: United Nations Statistics). India exported 5.8% of this value. How are Indian exporters performing in this overseas demand-supply game? In the largest importer markets, India’s share of exports is much higher than in the gear box category: 8.46% in US, 2.02% in Germany, 1.43% in Belgium, 0.23% in Canada, 3.18% in UK, 1.95% in France, 0.57% in Spain, 0.16% in Slovakia, 1.45% in Malaysia, and 1.98% in Sweden. Overall, India supplies 3.77% of bumpers (by value) imported by the ten top markets. A good sign of exports being built on import needs. Where there is 3.77%, there certainly is capacity for more. There top ten markets should therefore be looked upon as potential export points for the product. Given this progress in this product category, the policymakers have provided tailwind to accelerate the progress of exports in this category by including the bumper category in the MLFP Scheme (like was done to include the gear box category in June 2012). Select markets in Africa (like Algeria, Egypt, Kenya, Nigeria, Tanzania, South Africa), Ukraine, Brazil, Australia, New Zealand, Cambodia, Vietnam, China and Japan, could therefore become bigger hunting grounds for bumper exporters from India. Increasing duty credit scrip rates by a percentage point or two could work magic in the name of export incentives. It will especially enable Indian exporters of bumpers to get famous in a high-growth BRIC economy like Brazil where Indian exports currently account for only 0.77% of total bumpers imported. Some food for thought there for the policymakers!

Talking about exporters incentivized by the Focus Markets scheme, there are a handful of territories where Indian exporters have gone beyond the beta testing phase. And these are the very markets where new exporters can try their hands at, when it comes to exporting automobile bumpers and its parts thereof. The power of regulations driving forward incentivised growth can be understood from the fact that high volumes of Indian exports fulfil demands across Special Focus Markets like Sudan, Uganda and Focus Markets like Tanzania, Togo (where over 43% of the bumper exported are ‘Made In India’ tagged), and Ghana (10%). In Latin American markets, Indian exporters haven’t hit the neighborhoods yet – with under 2.5% of imports to their names across Special Focus Markets like Argentina, Columbia and Peru. But from a long term perspective, with the Indian government relaxing norms on exports from the manufacturing sector by the day, and with the new Foreign Trade Policy expected to set in place higher standards of governance and a better trading environment to make living worthier for exporters, gobbling up the profit pie from these Latin American markets will be difficult for just a handful of Indian exporters. There’s room for exporters aplenty. Speaking to The Dollar Business, Vinnie Mehta, Executive Director of The Automotive Components Manufacturers Association (ACMA), gives his opinion on which markets as per him appear the most lucrative. His easy bets: Brazil and Africa. Relatively tough bet: China. “Brazil is an important market for us. There are some sweet spots in Africa too. Interestingly, we at ACMA have also undertaken a study as to how we could possibly start exports to China. It is not that easy, but there could be some sweet spots in China that need to be explored.” China is an interesting destination as far as a choice for market is concerned.

Despite an incentive like Market Linked Focus Product Scheme given by the Indian government, auto component exporters from India cater to only 0.01% of Russia's imports of gear boxes (CY2013)

And the Chinese are known for making available quality products at the lowest costs. So what’s our take on China as an export market? China is very interesting because like the focus of our government is in terms of localisation of OEMs, when we look at the Chinese case from a macro angle, in that market too, 90-95% OEMs are localised. The localisation is at the level of OEMs, so there is little opportunity for Indian companies to make a dent in the market. But at the Tier-1 level, Indian exporters have a substantial opportunity, because a significant amount of products are imported into China as the Tier 1 groups are essentially either assembly or sub-assembly people. There is a significant amount of import bill and if Indian policymakers can leverage their relationship with the OEMs or Tier 1 companies in China, Indian exports can gain a strong foothold in the Chinese market as well. China is the largest automotive market in the world, so it cannot not present an opportunity, especially in the Tier 1 space. Mehta agrees on this valid explanation and talks more about the “sweet spots in China”, and adds that, “Though an option to enter China exists, but it is not that easy. It is not as if the Chinese component manufacturers are not competitive. Whatever it is we have to make sure that our landed cost in China is cheaper than the Chinese supplier. That is definitely going to be a challenge, with the fact that the cost of logistics in this country can be very high. China is very big. China can be difficult and some of the Indian auto component suppliers who have been there have had mixed results.” True –Sundaram Fasteners entered China and still have presence there, while Bharat Forge entered the market and later exited it.

Not missing the gold rush

There is much happening in the name of capacity building. Auto ancillary players around India are investing heavily in capacity building and technology upgradation. In fact, as per ACMA, on a pan-India basis, between 2011 and 2013, investments to the tune of Rs.2,500-3,000 crore were made on product development and getting the manufacturing systems in place.

Brazil, Indonesia and Africa are ‘fresh’ sweet spots for Indian auto component exporters

What will all the capital investments lead to? When OEMs and Tier 1 players around the world are looking for auto component suppliers with a global presence (in the name of supply chain), where will all the money spent in innovation and assembly lines lead to? Obviously, it all doesn’t add up to the business of selling credit cards! The natural answer is – auto component exports. Small and big. New and old. There are fortunes to be made in this business overseas, especially in Latin American, African and other emerging markets. Indian auto ancillary players have significant opportunities to take that much-needed giant leap. While on one hand the domestic market is attracting more OEM players who are in need of localisation, on the other, global players are in search of low-cost suppliers to optimise their operations. Like we said before, it might sound like the only word that bridges the words “auto component” and “bonanza” is “exports”. Actually, there’s another. “You”.  

Xenophobia? No more...

Automotive enthusiasts and experts claim there cannot be a better time for Indian auto components exporters. We agree with them when we see Indian players clocking double-digit growth rates at a time when global players are struggling to stay afloat. But we don’t side with them when they say these players are making the most of it. Still, India caters to just about 1% of the total global demand for auto components. In fact, gear boxes and bumpers – the highest selling components globally – clearly explain the other side of the growth story. Indian players supply just 0.43% and 3.77% of gear boxes and bumpers (by value) imported by the top ten importing nations of these products. What is handicapping India’s export capabilities? Is it the tariff structure of these top importing nations? Or, is it sheer complacency on the part of Indian exporters? The Dollar Business Intelligence Unit compared the duty structures of US, China, EU, Canada and Mexico – the largest importers of gear boxes globally – and found that import duties levied by these nations on gear boxes imported from India were almost equal to duties levied on gear boxes from Japan, Germany and US – the three largest exporters of gear boxes globally. Similar was the case in Thailand, Argentina, Mexico, European Union and Brazil – the five largest importers of gear boxes from India (see chart). The story isn’t different when it comes to bumpers. Import tariffs in US, EU, Singapore, Russia and China – the biggest importers – are not different for bumper exports from India and the three largest exporters globally i.e. Japan, Germany and US (see chart). If this is the scenario, Indian exporters certainly need to go back to the drawing boards and conceive strategies that better their performance. A strong outsourcing tailwind in times to come could be useful. While many companies are shifting production base or sourcing from China – as costs climb in the dragon nation – to more cost-effective destinations, manufacturers from developed countries like Japan, EU, etc., are eyeing low-cost sourcing havens.

The new Foreign Trade Policy (2014-19) can perhaps be kinder to auto component maufacturers as far as incentives and tax sops are concerned. The minimum value addition limit can be reduced from the current 15% levels (Advance Authorisation scheme) and export liabilities under the EPCG scheme can be relaxed (from the current 8x levels) so as to ensure a more free-willed participation of players. For instance, in Thailand, to encourage auto components export from the current levels, in addition to incentives provided by the Ministry of Finance, the government has decided to give its own incentives to the auto component industry – including zero export requirements (for duty-free import of capital goods), no minimum local value-addition requirements, etc. The new FTP can also take a lesson from what the Malaysian government recently did to encourage auto component exports and manufacturing using a fresh injection of incentives from the new National Automotive Policy (NAP). The new policy is a mix of duty exemptions (like extension of excise duties and import taxes exemptions for both CKDs and EEVs) and customised incentives for both FDI and domestic investors (such as Pioneer Status, Investment Tax Allowance, Grants for R&D and training, infrastructure facilitation, etc.). Indian policymakers too could work out something attractive in the new FTP to encourage the creation of a competitive auto-components export hub. According to a report (‘Driving out of uncertain times) by Deloitte, world production of auto components is expected to reach $1.7 trillion by 2015. And of this $1.7 trillion, about $700 billion worth of auto components will be sourced from low cost countries by 2016. If India targets just 10% share of this lucrative pie, it would mean $70 billion, nearly five times the current size of the industry in India. The pleasures of foreign demand, as we call it.  

"BRAZIL AND AFRICA ARE IMPORTANT MARKETS FOR US" - Vinnie Mehta, Executive Director, Automotive Components Manufacturers Association (ACMA)

While drivetrain, engine and electrical parts have been the main drivers of exports growth so far, India has started to emerge as a global hub for small engines. In an exclusive interaction with The Dollar Business, Vinnie Mehta, Executive Director, Automotive Components Manufacturers Association (ACMA), explains why and how emerging markets like Brazil may prove to be a good bet for Indian auto component exporters

Vinnie Mehta, Executive Director, ACMA

TDB: FY2014 was a year of stagnation for automobile exports. Exports of Indian car makers remained flat as compared to the previous year. But for auto component exporters, the storyline read better. There was a four-plus percentage growth in export value. How was FY2014 particularly a “good” year for the auto component sector?

VM: In FY2013, our exports stood at $9.7 billion as against the previous year’s figure of $8.8 billion. Even in the first three quarters of FY2014, auto component exports grew at 4-5%. Although the results for the last quarter are pending, I am sure we should have clocked a growth of 10-15% year-on-year. As long as the rupee stays in the 55-65 range, exports will continue to grow. In fact, today, about 25% of the auto components manufactured in India are exported.

TDB: Besides the three largest importing nations of auto components from India – US, Germany and UK – which emerging markets are you betting big on at present?

VM: Brazil is an important market for us. There are some sweet spots in Africa too. Interestingly, we at ACMA have also undertaken a study as to how we could possibly start exports to China. It is not that easy, but there could be some sweet spots in China as well. We are focusing on more and more exports out of India. In fact, a big delegation from India had recently visited China. China is interesting because like India, they too are keen on localisation. The localisation I am talking about is at the level of OEMs. Once we come down to Tier-1, we have substantial opportunities because a significant amount of products at this level are imported. We need to find a way to leverage our relationship with OEMs. We need to gain a foothold in China as it’s the world’s largest automotive market.

TDB: One way of drawing synergy could be the MNCs with presence in both India and China. For instance, SAIC which forayed into Indian market through General Motors India...

VM: Although options exist, it is not that easy. It is not as if the Chinese component manufacturers are not competitive. Whatever it is, we have to make sure that our landed cost in China is less than that of Chinese suppliers. This is particularly a big challenge, considering the high cost of logistics in China.

TDB: Would you recommend your members to set up shop in China?

VM: It will be premature for me to say anything because right now we are in the process of doing a detailed and in-depth study on China. In 3-4 months, we will have an outcome and will be able to say what would be a workable strategy. China is very big. China can be difficult. Some of the Indian auto component suppliers who have been there have had mixed results. For instance, Sundram Fasteners still has a presence in China, while Bharat Forge entered the Chinese market and has now exited. What we feel is that Indian suppliers have world class competence. Therefore, it would be foolish for us to ignore the world’s largest automobile market. Typically, we have for long been focusing on the OEM market only. When we began about two decades ago, our primary target used to be the aftermarket. Over the years, our competence has grown in terms of quality, productivity and delivery. Today, about 80% of our exports are OEM and 20% are aftermarket. What is also interesting is that having focused on OEMs, both in terms of quality and delivery, our acceptance in the aftermarket has also grown. In fact, in some of the mature markets like USA, we are now exploring the possibility of aftermarket exports.

TDB: Which product categories in the auto component industry are the most lucrative (both in terms of demand and net margins) as far as exports are concerned?

VM: India’s strength is in precision automotive supplies, precision casting, machined engineering goods etc. This is what we mostly export. Apart from this, we export various other items as well.

TDB: Do you believe that auto component manufactures with a higher export-domestic ratio make more profits?

VM: For the year ending March 2013, we produced $39.7 billion worth of goods, out of which exports were worth $9.7 billion. Hence, we export almost a quarter of our production. However, I am not in a position to talk about the profitability of companies.

TDB: What, according to you, are the smartest strategies that an exporter can adopt to maximise profits in the auto components exports business?

VM: There’s no one-size-fits-all approach. You have to look at what works best for you and matches your competencies. You could look at emerging markets like Brazil, which offers margins, but exports technologically oriented products. Europe happens to be the single largest export destination for us as we export high-end technology products. It all depends upon who you are competing against. If the competition is relatively less, one can enjoy a better margin.

TDB: Are you happy with the incentives being provided to exporters? Would you suggest any alteration?

VM: I think the existing framework of the Foreign Trade Policy (FTP) is fairly conducive for exports. There are several products that enjoy a whole lot of incentives. There are various export-oriented schemes such as Focused Product Scheme, Incremental Exports Scheme, Market Focus Scheme and the Incremental Exports Incentivising Scheme. By utilising these schemes, one can actually get some margins and offset taxes. The FTP has been there for the last five years and is up for a review. We have asked the government to continue with the existing policy framework since it has been very good for the industry.