ACMA-McKinsey’s ‘Vision 2015’ for the Indian supplier industry: how achievable is it?
The Indian automotive components industry has seen hectic growth in the recent past. The last three years have seen the industry grow at a particularly rapid rate. Output is estimated to have grown from USD 3.95 billion in 2000-01 to USD 6.73 billion in 2003-04. More importantly, exports have nearly doubled over the last two years from USD 578 million in fiscal 2000-01 to an estimated USD 1.0 billion in 2003-04. Deepesh Rathore and Tilak Swarup report.
So far, export growth by Indian suppliers has exceeded forecasts. Supplier body ACMA has recently issued a forecast of USD 1.0 billion exports in 2005, with a target of USD 2.5 billion for 2010. With the USD 1.0 billion threshold achieved last year, it was time to set a fresh estimate for the industry's growth.
At its recently held annual convention, the Automotive Components Manufacturers Association (ACMA), the apex body of automotive suppliers in India, presented a vision statement for the Indian supplier industry. The statement, prepared by McKinsey & Co., has set a projected figure of USD 33-40 billion by 2015 as an achievable output level for the Indian supplier industry.
This is not a forecast for the industry, as McKinsey consultants point out repeatedly, this is just a vision for the industry, a path of growth that the Indian supplier industry is capable of following, even as analysts and critics are busy counting the number of hurdles and potholes that line the growth path to success.
But first let us have a brief look at the procedure followed by McKinsey in arriving at this 'Vision Figure' of USD 33-40 billion for Indian suppliers. The consultant estimates the global components industry to be worth USD 1.65 trillion in 2015. This estimate, the consultant says, has been reached via a 'deep study' of global market trends, utilising McKinsey offices across the globe. This broad figure includes the light vehicle industry, the commercial vehicle industry and the aftermarket.
Component and market characteristics decide the potential for Indian players. McKinsey segments components on the basis of the type of raw material used (steel, aluminium, plastics, rubber, electronics etc.) and the nature of design and manufacturing (labour, process engineering or technology intensive). Markets can be segmented by sophistication, propensity to offshore to low-cost countries and size of average vehicle platforms.
Based on these market segmentations, McKinsey identifies six key market segments for Indian suppliers. These include the domestic Indian market, the North American and West European light passenger vehicle (high sophistication, high propensity to offshore) market, North American commercial vehicle market (high sophistication, high propensity to offshore), Chinese and emerging markets (emerging sophistication, low propensity to offshore), Japanese market (high sophistication, low propensity to offshore) and the global aftermarket (low/medium sophistication and high propensity to offshore).
McKinsey estimates that about 40-percent of the global estimated USD 1.65 trillion (estimate for 2015) auto component market will potentially be 'addressable'. Here 'addressable' is the key word. The consultant defines addressable as the estimated markets that have a high propensity to offshore. These markets amount to USD 650-700 billion according to McKinsey's analysis - a potentially huge market.
Rough calculations suggest that only about 60-percent of the value of a car can provide outsourcing opportunities for vendors. This 60-percent is represented by the figure of USD 650-700 billion.
Based on inherent country characteristics (factor costs, pool of skilled engineering manpower) and the maturity of domestic supplier markets (scale, technical prowess, quality levels), India is expected to have an advantage over most low-cost countries in engineering skill-intensive and aluminium-intensive parts. It is likely to be at par in simple labour, steel, cast iron and rubber intensive parts and at a disadvantage to other low-cost countries in the manufacturing of electronics and plastic intensive parts.
These are the assumptions made by McKinsey on a broad scale and may differ from company to company. For example, India's largest exporter of automotive components is Bharat Forge which is mostly dealing in iron forgings, a sector where McKinsey rates Indian chances "at par".
Based on the likely offshorability to low-cost countries within various components and market segments and India's relative competitiveness against other low-cost countries, India based suppliers have the potential to capture USD 33-40 billion of this opportunity by 2015. The figure is based on the assumption that India based suppliers will be able to corner only a small slice of the supplier market.
This includes USD 13-15 billion of the domestic market and indirect exports and USD 20-25 billion in direct exports. McKinsey takes into account the propensity of global sourcing increasing in the future and the USD 13-15 billion figure for the domestic market takes into account the fact that Indian OEMs will also be looking at suppliers outside the country. Bajaj Auto, for example, has already started sourcing components from China while Maruti Udyog will start doing so in the near future.
The growth in the auto supplier industry could potentially create 2.5-3.0 million additional direct and indirect jobs by 2015, increase India's GDP growth by approximately 0.5 percent per annum and propel the share of the auto component sector in the total manufacturing exports from approximately 3-percent currently to 7-8 percent by 2015. This will also require an additional investment of USD 15-20 billion by 2015.
McKinsey has based its estimates on the assumption that Indian automotive suppliers can cater to only limited non-proprietary components. Also, components like seats, safety glass, large skin panels etc. are not very transport friendly. And proprietary components, McKinsey reckons, are most likely to be sourced from regular 'associate' vendors. In doing so McKinsey has overlooked a segment of Indian suppliers like Bharat Forge, Amtek Auto, Sundram Fasteners, Mahindra & Mahindra and Sona Koyo Steering Systems who have taken over established suppliers in other overseas markets and/or are likely to do so in the near future.
The percentage of business coming from these types of acquisitions may be small at present but is expected to rise in the future. Not only that, but the influence of these acquisitions on their parent companies will enhance their parent companies' image and acceptance in global markets. Bharat Forge, for example, is now globally much more accepted than it was sometime back, thanks to its acquisition of loss-making Carl Dan Peddinghaus forge in Germany, a company that BFL has since then turned around.
Further, Indian suppliers can only aim to supply components where they have a cost competence (quality being a constant) and such cost competence diminishes as factors such as geographical distances come into play. This is a non-tariff limitation for India based component suppliers. In the future, Indian suppliers may lose a number of contracts to East Europe based suppliers thanks to relative geographical proximity. The opposite may also happen but with a larger number of production units located in Europe, the Eastern European suppliers have an advantage. At the same time, Indian OEMs are expected to look at global sourcing seriously and McKinsey expects about 15-percent of Indian automotive components requirement to be fulfilled by suppliers outside India, primarily from those based in China, Thailand and other ASEAN countries. Under such circumstances, taking into account all factors, McKinsey estimates that the Indian component industry is in a position to capture USD 33-40 billion of the opportunity by 2015. This includes USD 13-15 billion in the domestic market and indirect exports and USD 20-25 billion in exports.
The figure of USD 33-40 billion my sound very promising but its achievability is debatable. The industry currently stands at USD 6.7 billion and the McKinsey figure requires a five-fold jump in eleven years. That is a big task by any standard.
The accuracy of the figure quoted by McKinsey is questionable given that it is based on estimates and assumptions on the global market in 2015. Many of McKinsey's estimates may be proved wrong in the future, while there may be factors that the consultant has failed to recognise.
India has over the last decade developed into a strong IT and ITES-BPO hub with many companies providing business solutions to global conglomerates. A big pool of engineers ready to work at a fraction of their western counterparts' salaries, aided by fundamentally strong entrepreneurs and pockets of dedicated IT development parks have helped the country achieve strong growth in the IT sector.
However, the manufacturing sector is a different story altogether. The IT story has not been repeated in the manufacturing sector as yet. Infrastructure requirements and different technological and logistical parameters have resulted in Indian companies only realising a fraction of their potential. The issues are various though infrastructure problems like port clogging, road and rail infrastructure limitations and bureaucratic laxity seem to be the foremost problems. Indian ports have a turnaround time of about three days while the movement of containerised goods inland on state roads is a problem because of the roads' narrowness.
While the IT story was realised as it was driven more by brainpower - there is plenty of it in India - the manufacturing sector requires a fair amount of infrastructure inputs to be sustainable and competitive in the international scene. And this is where the Indian manufacturing sector faces problems, even if it is the automotive supplier industry, which has achieved a fair amount of success in the recent past.
In the midst of this, there are a few suppliers in India that warrant a special mention. These companies have been aggressively pursuing a policy biased towards strong export growth. Bharat Forge is the foremost here. The company is Asia's largest forgings supplier and ranks second globally behind ThyssenKrupp. It had acquired Carl Dan Peddinghaus Forge in Germany a year or so ago and since then has turned the loss-making company around.
Amtek Auto is another aggressive player in the Indian industry. The company has made a number of acquisitions in Europe and aims to make exports its main revenue source. Sundram Fasteners is one of the few companies that have started manufacturing operations in China. Recently the company has entered into engine components, with much of the new operation dedicated to exports.
Sona Koyo Steering Systems, the leading manufacturer of steering systems in India has set up a 100-percent export-oriented unit in Sri Perumbudur, near Chennai. The company will initially make 250,000 steering systems per annum at this facility with dedicated orders of 120,000 steering units from Koyo and 60,000 units per annum from Mando.
Deepesh Rathore / Tilak Swarup