ACMA debates the future of components

The Union Government has reiterated its commitment to the recommendations of the Automotive Mission Plan 2006-16 for developing India as a global automotive hub. To take this initiative to fruition necessitates a fresh impetus for manufacturing in the country. However, with a number of challenges promising to assume greater contours over the next 20 years, the road ahead will not exactly be a smooth one.

The 51st Annual Session and National Conference on Benchmarking for Progress, Performance and Competitiveness of the Automotive Component Manufacturers Association of India (ACMA) held in New Delhi on September 6 found government officials underlining the need for India to develop as a manufacturing hub. At present, the automotive sector contributes 22 percent to the country’s GDP and is set to grow to US$ 150 billion in a short period of time from the existing US$ 75 billion.

For morphing into a global manufacturing hub, India needs to cut its dependence on auto component imports. The component industry notched a turnover of US$ 39 billion with exports constituting US$ 5 billion and imports exceeding exports at US$ 8.5 billion in 2010-11. Praful Patel, Union minister of Heavy Industry and Public Enterprises, visualises the gap between exports and imports as a potential that's waiting to be exploited in the future. The challenges in achieving the manufacturing expertise going forward will revolve around land acquisition, power availability and other issues that will need to be deliberated in a larger perspective. This will necessitate harnessing of education and vocational training and expanding its reach further.

Though Tamil Nadu, Karnataka, Maharashtra, Haryana and NCR have taken the lead in manufacturing and the ACMA Centre of Excellence, NATRiP and the National Automotive Board are working towards harnessing skills and upgradation of technology, still more broadbasing of industrial production is the need of the hour for achieving long-term sustainability of the sector, feels Patel.

Today, competition for the Indian auto component sector has hugely increased and is not limited to that from China alone but is expanding to countries like Cambodia, Vietnam, Thailand and Malaysia that are equally competitive in terms of cost.

Furthermore, several opportunities have been lost to imports in the past two years due to lower cost of imported components and capacity constraints in the domestic supply chain, challenges and time lag in scaling up of capacity and inadequacy of design capabilities of suppliers to match newer vehicle models and variants that are being launched in quick succession. To expedite the competitiveness of the automotive industry, the NATRiP project for auto testing, homologation and for establishing R&D infrastructure is in an advanced stage of finalisation and will be completed by December 2012, assures S Sundareshan, secretary, Department of Heavy Industry. He adds that enabling structure for collaborative R&D between industry, academia and government is also in an advanced stage of development, while the Automotive Skill Council has been already set up to upgrade the skill sets of the sector. However, in a capital intensive industry, he points out that availability of capital at low cost is necessary to spur investments in new technology, new processes, R&D, new plants and machinery.

ACMA had been pitching for extension of the Duty Entitlement Pass Book (DEPB), a refund scheme for exporters, and asking the government to either replace it with a new scheme or extend it further to maintain export competitiveness of the sector. The DEPB that was to be withdrawn by the government from June 30 was extended till September 30. The DEPB scheme is expected to be replaced by a modified duty drawback scheme. Sundareshan clarifies that the department is supportive of setting up a scheme for facilitating investments through partial subvention of interest rates as mooted by ACMA but this idea still requires a lot of work and refinement before being considered by government.

While the past two months experienced a hardening of interest rates and tighter credit controls that led to the auto component industry feeling the pinch, government officials expressed optimism about this trend not being a permanent feature with the ministry expressing commitment to the sector’s growth for etching a mark on the national and international fronts. Talking about the performance of the vehicle industry in FY’11 and its impact on component makers, ACMA president Srivats Ram says it grew by 26 percent with passenger vehicles crossing 25 lakh units, commercial vehicles growing to 67 lakh units and two-wheelers exceeding 117 lakh units. “This significant growth in the vehicle sector had the auto component industry extremely stretched on capacity but it rose to the challenge and grew to US$ 39 billion. The component industry was also able to invest US$ 2 billion in additional capacities over the last year,” he says.

To address the challenge of capacity management and building of better linkages with Tier II and IIIs, improvement of communication and information exchange was undertaken by ACMA in sync with the vehicle industry. Better communication with the capital goods industry was also forged. However, a financial study of companies undertaken in the segment in the early part of the year by ACMA found half the companies operating on a return on capital employed less than the risk adjusted weighted average cost of capital. Further, the study showed that profitability and returns for smaller companies, especially in the lower tiers, were under considerable pressure. The high level of inflation over the last one and a half years has been eroding the sector’s competitive advantage. “This is especially worrisome if we look at the good growth prospects over the medium and long-term and when you look at the need for sufficient investment in capacity,” adds Ram.

Industry captains felt that Brazil and Turkey had very high inflation figures but these countries reduced their interest rates. Today, in Turkey the inflation rate is in single digits and nearing half of what it is in India. In Brazil, interest rates are on the downward trend and also in single digits. Meanwhile, the Society of Indian Automobile Manufacturers (SIAM) and ACMA are working closely together with consulting firm KPMG to develop IT interface standards for better management of the value chain.

Speakers were of the view that the need for companies adopting next practices and in addition to benchmarking processes, practices and methodologies, trying to innovate newer solutions that had the potential to become game-changers and a source of competitive advantage was necessary. Besides, fast depletion of fossil fuels and concerns over vehicle impact on environment and climate change, the need for sustainable transportation were also felt as major challenges in the growth of the sector. This would necessitate a new range of product solutions and adoption of newer technologies, development of new competencies, greater adoption of electrical mobility and an entirely new ecosystem.

Supplier-OEM study findings released

ACMA in association with JD Power Asia Pacific also launched a benchmarking study – 'Insights into Supplier- OEM Relationships'. The study has zeroed down on quality, cost and delivery as critical pre-requisites defining this relationship between OEs and Tier I suppliers. It has also found that productivity and quality upgrading of Tier II and III suppliers is critically important to the continued growth and success of Tier 1s.

According to Mohit Arora, executive director, J D Power Asia-Pacific, Singapore, one of the key highlights of the study is that OEMs and suppliers in the Indian market share strong mutual interest. He says, "Across the five countries that the study was conducted, Tier-1 suppliers in India reported the fewest areas of expectation mismatches on the dimension of ‘Trust’.

"Beyond the conventional criteria of quality, cost and delivery, OEMs across the world prefer to engage with suppliers who have stable lines of communication, good work culture, effective process orientation and end-customer knowledge," says Ram. "Further, they prefer suppliers who can jointly work with the OEMs in developing products and technologies to be delivered with a global footprint.”

Baba Kalyani, chairman and managing director, Bharat Forge, called for government support in creating Indian Robert Boschs, Densos and Delphis out of local component makers along with industry and institutional assistance. He expressed confidence in the capability of the people of the country in spurring change saying they were the backbone of a company. Drawing attention to the fundamental question of the recognition of total interdependence of growth and prosperity on each other, R C Bhargava, chairman of Maruti Suzuki, points out: “OEs nursing serious global ambitions need each one of their suppliers to match international standards.”

Arvind Kapur, vice-president of ACMA, called for a new manufacturing policy for the auto industry and for forging bilateral Free Trade Agreements (FTAs) with Brazil and South Africa where a ready market for Indian products is available but the hurdle is high tariff barriers. Further, FTAs with other countries should not be on an inverted duty structure that becomes a disincentive for OEMs to source locally in India. So India needs to invest in manufacturing if it wishes to achieve growth in the upcoming 12th five-year plans, sums up Arun Maira, member of the Planning Commission.