With so much attention focused on China, growth potential in other parts of Asia sometimes gets overlooked.
India is one example. Yet some smart money from big overseas investment funds has been finding its way into Indian auto supplier stocks in recent months.
And for good reason. Indian suppliers such as Bharat Forge Limited (BFL), have moved up through the gears in recent years.
Such companies have evolved from small, locally focused businesses to become aggressive international players.
They have often drawn upon European, North American and Japanese suppliers through joint ventures.
Globally competitive cost positions have been established, not just through low labour costs. More importantly, the competitiveness has come from investment in world leading process technology.
Good management skills and a sophisticated financial and legal system developed over decades, have given leading suppliers the confidence to expand to world markets, acquiring weakening overseas competitors along the way.
This has not gone unnoticed by globally active investors, constantly seeking value in less-fashionable corners of the global auto sector. It may also serve as a blueprint for the evolution of the Chinese auto supplier sector, especially as some of the Indian majors are moving into that sector.
Pool of engineers
Investors continue to regard India as a country of paradoxes. Poverty, poor infrastructure and the predominantly agrarian economy co-exist with a huge pool of highly trained engineers and technical graduates that has fostered a globally competitive software and IT sector.
Economic reforms have driven higher levels of growth and broadened the industrial base. This has included two-pronged growth in the auto sector. Vehicle manufacturing has stepped up a gear as domestic demand for four-wheelers has accelerated and exports have grown.
The components sector, in turn, has gained a firmer footing in global markets, based on major gains in quality and cost efficiency, coupled with a growing ability to harness the technology-astute labour pool.
The result: high capacity utilisation rates, significant top line growth and impressive profit margins.
Exports could hit $10 billion
More importantly for investors, this appears sustainable. Analysts at Merrill Lynch believe exports of automotive components from India could rise to around $10 billion by 2010, up from around $1 billion recently.
Suppliers in India report a recent surge in interest from global OEMs. DaimlerChrysler sourced and exported €72 million worth of components from India last year and plans to raise this to €100m each year to the end of 2006.
It has also signed a memorandum of understanding with 28 suppliers in India, including Bharat Forge and Sundaram Fasteners.
Institutional investors pile in
The confidence of foreign institutional investors is clear. In March 2003, foreign investors held around 5.3% of leading forgings producer Bharat Forge’s equity.
The recent figure has been around 12.5%, led by funds such Emerging Markets Management, Robeco Institutional Asset Management and HSBC Global Investment Funds.
Amtek Auto, the second largest forgings producer after Bharat Forge, has seen its foreign institutional investors share rise from under 9% to almost 17%. Amtek raised its limit on FFI holdings in the company from 24% to 49% at the end of 2003. Similar trends have been evident at suppliers such as Amforge Industries, Exide Industries and Sundaram.
And such examples probably underestimate investors’ appetites for such stocks. With the free float in many companies’ equity limited by major domestic shareholding blocks, opportunities to invest remain capped. Many Indian stocks just have too small a market capitalisation for large global funds to take big positions.
Bharat has made a breakthrough
As one of India’s largest auto suppliers, BFL is a case study for small-time, domestically focused suppliers wishing to make a breakthrough into the global arena.
Now the second largest forgings producer in the world and pushing ThyssenKrupp for the leadership position, the company has built on its traditional strength in the commercial vehicle raw forgings sector in India.
Exports currently account for around 40% of group sales, with strong volumes with the US Class 7 and 8 truck producers and expanding business in China. A growing focus on higher value-added machined components is also visible, as is a concerted push into the passenger car engine components business.
But it was BFL’s acquisition of one of Germany’s leading but struggling forgings suppliers, Carl Dan Peddinghaus (CDP), in early 2004 that revealed BFL’s ambitions.
An intense investment programme to lift domestic forging capacity is currently underway, which will underpin future organic growth. But the acquisition of CDP signalled a future growth plan based on an inorganic strategy that simultaneously broadens both the customer and geographic market base.
Further acquisitions in Europe and, possibly North America appear on the cards.
The acquisition route
Sundaram Fasteners and Amtek Auto have also taken the acquisition route to growth recently. Sundaram Fasteners, a TVS group company that had already bought Autolec, a Malaysian-based water pumps producer, purchased Dana Spicer Europe’s precision forging business in early 2004, now operating as Cramlington Precision Forge.
This business, manufacturing mainly warm forged bevel gears, aims to double turnover by 2005. Sundaram has also very recently opened a high tensile fastener facility in China, Sundram Fasteners (Zhejiang) Ltd, a major step forward for the Indian supplier sector, especially as BFL will undoubtedly follow the same road shortly.
Amtek Auto, based in northern India and a producer of ring gears, crankshafts, steering knuckles and other small and medium forgings, acquired the UK’s GWK Group, including Coventry-based King Automotive Systems at the end of 2003, having acquired New Smith Jones Inc in the US earlier in the same year.
While a significant number of Indian suppliers fall far short of global competitive standards, the number making the grade is growing. Company names that were unknown outside India a few years ago are now appearing on the world stage, being actively sought out by purchasing teams from the leading OEMs.
Comparisons with the Chinese supplier sector are inevitable. The current shortcomings in China will be familiar to those recalling the Indian supplier sector of some decades ago.
These shortcomings were highlighted by Jack Perkowski, CEO of Chinese supplier ASIMCO earlier this year.
As well as citing the general challenges to doing business in China – lack of a familiar legal framework, a chaotic distribution system, accounts receivable issues, absence of a functioning capital market and, above all poor management resources, Perkowski also outlined a number of other common problems faced by all companies, whether sourcing for export or for the China market.
These boil down to the country’s sheer geographical size and fragmented industrial base, inconsistent quality systems, time differences, long supply chains and definite language barrier (which becomes severe with suppliers outside major cities).
The evolution of the Indian supplier sector has been slow, but is picking up pace. A similar evolution will be required in China – but maybe a much swifter one.