The Indian Auto Components Industry: A Long-Term Bet!

THE INDIAN AUTO COMPONENTS INDUSTRY OVERVIEW

The Indian auto components industry had a turnover of USD 56.5 bn in FY22 and contributed to 2.3% of India’s GDP. As per Automobile Component Manufacturers Association (ACMA), the Indian auto component industry aims to achieve USD 200 bn in revenue by 2026 which is almost 4-fold growth from FY22 levels (37.2% CAGR between FY22-FY26E). India is expected to become globally the 3rd largest auto component manufacturer by 2025E and contribute 5.0% to 7.0% of India’s GDP by 2026E.

Let’s look at the key tailwinds that will lead the Indian auto components industry into becoming an attractive global manufacturing hub.

Government Incentives Are Encouraging For The Indian Auto Components Industry

The Government has introduced several initiatives for the development of the auto and auto components industry and to encourage manufacturers to Make-in-India. The government has adopted an enabling approach toward making India a global manufacturing hub. A few of the schemes initiated over the last 2 years include:

The Union Cabinet announced the Production-Linked Incentive (PLI) Scheme in the Automobile and Auto Components sectors with an outlay of INR 259 bn to boost domestic manufacturing of advanced automotive technology products and attract investments in the automotive manufacturing value chain. A total of 95 applicants have been approved under this PLI scheme. The Government is providing financial support from 8.0% to 13.0% of the sales value of specified components for auto component makers. The PLI scheme promotes domestic manufacturing and less reliance on imports.
The Government approved a PLI scheme with an outlay of INR 760 bn for semiconductor manufacturing. It is a comprehensive program for developing the semiconductors and display manufacturing ecosystem in India.
To encourage the manufacturing of EV batteries in India, a PLI scheme of INR 181 bn was introduced for Advanced Chemistry Cell (ACC) battery storage, with an aim to achieve a manufacturing capacity of 50 GWh of ACC. Four companies (Rajesh Exports, Hyundai Global Motors Company, Ola Electric Mobility, and Reliance New Energy) were selected as beneficiaries. Excluding Hyundai Global Motors Company, the other 3 selected companies signed the Program Agreement in July 2022. The objective of the Government is to improve domestic value addition and ensure cost competitiveness of Indian-manufactured batteries.

The Government extended the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME-II) scheme till 2024 to promote electric mobility. The scheme is designed to support the electrification of public and shared transport and develop a charging infrastructure.

‘China Plus One’ Strategy Of Global Automotive Players To Help India Auto Components Players

As per the last available data from the pre-pandemic period of CY19, China contributed a 35.0% share of global auto component manufacturing and an 11.3% share of global auto component exports. The global automotive supply chain faced tremendous disruptions in the last 2 years due to the COVID-19 pandemic-led restrictions. The uncertainties have further extended due to geo-political issues. This has brought the need for supply chain diversification into the limelight.

As global automakers look at de-risking their value chains by reducing their dependence on countries like China, the emergence of new supply hubs is expected, and India is expected to be one of the beneficiaries. Carlos Tavares- CEO of Stellantis, the multinational automaker headquartered in the Netherlands, has said that India is best placed to benefit from the geopolitical tensions between China and the Western countries.

India provides proximity benefits to some large automotive markets such as ASEAN, Europe, Japan, and Korea. India is cost-competitive by 10.0% to 25.0% when compared to Europe and Latin America. However, the benefit to India will not materialize overnight. China is not only one of the largest auto components exporters globally, but it has the top share of auto parts imported into India. In FY22, China remained the biggest source of auto components imported into India, accounting for 30.0%. Thus, India has opportunities on 2 fronts- reducing import dependence on China and increasing its export share globally. To achieve this, India has a long way to go and needs to build capabilities.

In FY22, the Indian auto components industry recorded its highest-ever trade surplus of USD 700 mn, against a trade deficit of USD 500 mn in FY21. The performance was reflective of the global OEMs’ China plus one strategy. According to ACMA, the exports of auto components from India are expected to reach USD 80 bn by 2026 from USD 19 bn in FY22, which is a CAGR of 43.0% over the 4-year period.

Localization To Enhance The Supply And Improve The Cost Efficiency

Last year, the Society of Indian Automobile Manufacturers (SIAM) and ACMA, identified 12 key components that have localization potential. The list of key components included drive transmission and steering, engine and engine components, electrical and electronic components, and iron and steel. These account for more than 75.0% of auto components imported into the country. The aim is to reduce imports by 15.0% to 20.0% over a period of 5 years.

At the 62^nd Annual Session of ACMA held in September 2022, Commerce and Industry Minister Piyush Goyal said that government will take serious note of Original Equipment Manufacturers (OEMs) if they pressure component makers to import components instead of localizing them wherever the opportunity exists. The growing presence of global automobile OEMs in the Indian auto components industry has also led to a rise in the localization of components.

Over time, as a higher scale of local sourcing is achieved, it will be beneficial across the value chain as it will make the auto supply chain more resilient and cost-efficient.

Increased Capex Outlay On R&D

Auto component makers are planning for investments in the development of advanced technology and EV components. The PLI scheme should further accelerate R&D investments and the development of new technologies. Sustained efforts on R&D will help India to become technologically self-reliant. ICRA expects auto component suppliers to increase their Capex outlay in FY23E, where the investments will be primarily towards capability development.

Opportunity For Premiumization And Higher Content Per Vehicle

Indian auto components manufacturers have a potential for higher content per vehicle due to factors such as premiumization of vehicles, higher localization, improved export potential, enhanced safety for passengers, emission control and fuel economy, and new EV opportunities.

In FY22, the auto components industry sales to the EV sector were just ~1.0% of overall sales to OEMs. With higher electrification led by government regulations and consumer demand, EV is a big opportunity for auto component makers.

Conclusion

In conclusion, the global automobile industry is looking to enhance the resilience of its supply chains by diversifying its country’s exposure. In the context of the ‘China plus One’ strategy, India is in a position to offer, benefits of scale and lower cost. The Government is encouraging the technological development and self-reliance of the Indian auto and auto component industry by introducing several fiscal and non-fiscal incentives. The stage is set for the Indian auto component industry to have strong growth in the medium and long term.