Unlikely to meet the overall targeted turnover of $145 billion by 2016, the Indian automotive industry is working on a second Automotive Mission Plan (AMP) 2026. The Commerce & Industries Ministry has also expressed optimism about the outlook of the final draft Plan, considering that the auto sector is a sunrise industry and a mass generator of jobs. Hence the need to climb up the ladder to the next level.
Speaking at ACMA’s ‘National Conference on Accelerating Export Growth: Leveraging Market Dimensions’ in New Delhi on August 1, S R Rao, secretary, Ministry of Commerce & Industry, questioned the component industry on why its exports are not growing despite the rupee having depreciated almost 30 percent in the past few months. The current crisis, he felt, has given the industry an opportunity to reinvent itself and add value to the existing product range, instead of continuing to remain a supplier of nuts and bolts, gearboxes and clutches to the international market.
“No country gives so much of incentives which you are now getting because of the rupee depreciation. The exchange rate is the biggest incentive for an export-led industry and, as finance minister P Chidambaram says, we need to look at our own industry. The country has entered into international bilateral agreements and you need to leverage the same to push your products. Innovation, technology and moving up the value chain are the only ways to regain our markets,” he added.
Recounting an interaction between a Ministry of Human Resource official and a CEO of an American company in India, he said the latter was of the opinion that Indians in HR at the board level are clearly world-class but on the shopfloor, their skills are dismal.
Though India produces half-a-million engineers with a large number churned out by the large number of private colleges mushrooming in South India and in Maharashtra, these engineers are not employable as they do not possess the requisite skillsets and require further training.
On a recent visit to Vietnam, commerce minister Anand Sharma found the passenger car market to be captured by Japanese models. Iranian roads too are dominated by Japanese cars with Indian vehicles plying in sufficient numbers only in South Asia, Rao recounted.
Sharing his point of view, SurajitMitra, director of the Indian Institute of Foreign Trade, underlined the fact that with product lifecycles turning shorter, the need for innovation and integration of technology is even more critical. “The traditional export system is going to be extinguished over the next 5-6 years, so we have to do global benchmarking, look at the demand of the global market and reorient ourselves.”
Surprisingly, between 2008-2012, the Indian auto component industry posted a CAGR of 22 percent in exports while imports grew at 11 percent but the trade deficit of $2.8 billion in 2008-09 is now pegged at $3.8 billion.In terms of export destinations, Europe accounts for 35 percent, North America 26 percent, ASEAN 20 percent while Africa and South America contribute only 4-5 percent to India's export basket.
“Africa and South America are the emerging markets. Why have we not been able to penetrate them especially as Europe and North America are not going to grow?” asked Mitra. He was of the opinion that success lies in penetrating these markets. Also, if exports are declining, has the component industry looked at the aftermarket potential? Hence, what’s imperative is for industry to revisit the AMP and reorient itself so that in the next five years it can recoup what it has lost in the last three years.
At present, 74 percent of component exports comprise traditional mechanical parts ranging from engine parts, drive transmissions and steering parts. Only 9 percent constitute electrical and electronic goods, a segment which provides greater value addition in vehicles today.
Worldwide, the auto industry is moving towards electric vehicles and in the US 25 percent of the vehicle parc is slated to be electrical by 2022, with Japan, EU and China following. In this evolving environment where EVs and highly advanced turbo engines will play an important role, the structure of the export basket has to be morphed, felt Mitra.
Also, increasingly vehicles are being looked upon as information hubs with vehicle-to-vehicle information transmission an upcoming technology that will require more electrical and electronic goods. This will need an increased fillip in R&D as well as technology shopping with its integration in the manufacturing base.
Harish Lakshman, vice-president, ACMA, said, “The Indian auto component industry today works on a ‘build-to-print’ model and needs to graduate to what is termed as ‘art-to-part’. To overcome the high volatility in the environment, both domestic and international, it is imperative that we increase the geographical spread of exports especially to the non-conventional but India-like markets such as Africa, South-Asia, Russia. We also hope that impending reforms by the government like those of GST, readdressal of issues such as those of inverted duty structure due to FTAs will help improve the export performance in the near future. Lastly, adequate incentives are needed to mitigate challenges of high cost of doing business in India and the cost of infrastructural deficit for Indian exports to be competitive.”
Why Mexico is the hidden star
Giving a perspective on the North American Free Trade Agreement (NAFTA) comprising the US, Canada and Mexico besides Brazil as potential markets for Indian exporters, Rakesh Batra, national leader, Automotive Sector, Ernst & Young, spoke about the US being the second largest customer for auto component exports from India, accounting for about $ 2.5 billion from the total export basket of $ 9 billion. Overall, 28 percent exports from India go to the NAFTA region.
Over the next five years, NAFTA is projected to have a CAGR of 4 percent with the star being Mexico with an outlook of 6 percent. Brazil, like other BRIC countries, has slowed down with the vehicle production outlook pegged at 2 percent, similar to India’s. But the market for light vehicles and commercial vehicles is likely to evolve till 2018. Hence, Mexico seems more attractive. At present, despite the US and Mexico being large importers of components, market penetration by Indian companies is still low with more value-added goods and electrical and electronic content required to garner a higher share.
Mexico is the eighth largest vehicle producer in the world with its auto industry contributing 17.6 percent to manufacturing and three percent to GDP. Nine OEMs including GM, Ford, Chrysler, Renault-Nissan, Fiat, Honda, Toyota and VW are present here with Daimler in the process of opening its plant.
In 2011 Mexico produced 2.5 million cars, of which 79 percent were exported to the US. Ravi Damodaran, president, Technology & Strategy, Varroc Group, said that Mexico would provide access to the goods and service markets in the US as well. Growth in Mexico’s aftermarket is also expected with imports of auto parts projected to increase 6 percent this year. The country, with its strong manufacturing base along with its stable political climate and macroeconomic stability, is a lucrative prospect for Indian exports.
Mexico’s auto component industry grew from $58.6 billion in 2009 to $80.8 billion in 2012. Big potential is visualised for spares and replacement parts for engines, gearboxes, drive axles, catalytic converters, electrical parts, steering wheels and collision parts here. But it is vital for Indian exporters who are keen to enter the market to find a local representative or distributor. This would assure buyers of initial training, spare parts and service. Pricing of products will also play an important role.
Meanwhile, the Brazilian economy will be undergoing changes between 2013-17, according to NileshSinha director of the Caparo Group. As a result, the business environment there would not be very attractive to foreign companies. The Brazilian central government is kick-starting a new tax regime and automotive framework to boost production of local components, increase R&D and generate more local jobs. Hence the need of the hour for Indian exporters will be to understand Brazilian policies clearly and align with IPR and R&D-driven business models to penetrate the market.