Precision automotive components

A large number of Indian component manufacturers were exporting to car makers in the US and Europe. There is now a question mark over that business.

India is an extremely price conscious market. Car makers have for long been under pressure to keep prices low. As a result, they never fail to put pressure on component makers. In return for the large orders, they have no option but to accept low prices. This is a daily struggle in the lives of component makers. And the situation got really out of hand last year when commodity prices went through the roof.

The Automotive Component Manufacturers Association of India recently assigned credit-rating agency ICRA to study the swing in the fortunes of the industry. The ICRA study reveals that while the industry’s net sales grew at a compounded annual growth rate of 16.8 per cent between 2004 and 2009 and operating profits rose 9.3 per cent, overall profits (profit before tax excluding other income) shrank 14.7 per cent.

The profit margins have been declining gradually since 2004 and saw a drastic drop in 2008 and 2009. Average gross profit margin and net profit margin for component makers between 2004 and 2009 were 6.7 per cent and 6 per cent, respectively. The industry recorded the lowest gross profit margin of 2.7 per cent and net profit margin of 1.8 per cent in the year ended March 2009 the lowest in 6 years.

There is another factor at play here. Because of the stiff competition in the car market, most car companies offer thin margins to their dealers on car sales. Instead, they are encouraged to make money on the sale of spare parts. With this in mind, several car makers have told component makers to route all sales in the retail market only through them. The price is the same at which it buys in bulk for its own production lines. In other words, the better profit margins in the retail market are vanishing fast for component manufacturers.

Chinese components are up to 30 per cent cheaper due to various government concessions than similar components produced in India. Several automobile makers have decided to source up to 30 per cent of their components from China. Component industry executives say that even if actual imports are less, the benchmark on prices is now set by China. For long, the industry has lobbied hard with the commerce ministry for anti-dumping duty on Chinese components. The only success has come in tires. As a result, tire companies have reported brisk sales in the last six to seven months.

This perhaps is the reason why SRF wants to reduce its dependence on tire cord. At the moment, it accounts for around 50 per cent of the company’s annual turnover. But the company wants to bring it down to around 40 per cent.

What has helped is that large non-automotive, engineering driven companies have realized the worth of Indian component makers. Their expertise in frugal engineering is now well established. As a result, the movement is not just one-way. EADS, which owns Airbus, has set up an office in the country with the mandate to source components. So, there’s a pull from this side. Indian automobile component makers are high-quality suppliers, have all kinds of ISO certifications, follow TPM and TQM, and hence, are the ideal people to source from. Other aerospace majors like Boeing and Lockheed Martin have also set up full-fledged offices and dedicated teams, but it is likely to be a long haul for Indian auto suppliers.

Many automotive component makers, including Tata and Mahindra & Mahindra, are keen to enter the defense and aviation businesses, but they need to come up with a firm plan, acquire technology for these sectors. This is not like the automotive business. The manufacturing systems, the specifications, and the quality requirements are so different. A car has a life of five to seven years, while a plane flies for up to 30 years. So, the business relationship and cycles are long. The part approvals in aerospace can take anywhere between 15 months and 18 months; in automobiles, it now takes just two months. In other words, there is no scope for failures.