The Automotive Component Manufacturers Association of India’s (ACMA) annual convention is among the most-looked-forward-to events in the Indian automotive calendar. The annual industry conclave is also where McKinsey & Company, the global management consulting firm, presents its white paper. This year saw the firm detail a comprehensive report titled, ‘Shaping The New Normal’.
Before 2020 dawned, the global automotive industry and other sectors were looking forward to a new year, hoping to put behind the shadow cast by the sales slowdown in 2019. Between 2017 and 2019, global light vehicle sales declined by 4 percent while the operating margins of OEMs and auto component suppliers dropped by 1.2 and 2 percentage points respectively. But few would have imagined the havoc and the widespread chaos that the Covid-19 pandemic would cause. No industry crystal-ball gazer had seen the business- and life-impacting Covid-19 juggernaut coming.
The pandemic led to fluctuating supply chain scenarios, weakened economic and consumer sentiment, and reshaped people’s relationship with mobility. While the 2020 outlook remains cautious, with a fall of over 20 percent expected in yearly sales, August 2020 saw a near-20 percent jump in domestic PV sales, creating glimmers of hope.
Against this background, the report emphasises possible focus areas for component manufacturers as they set their course for the future — strategising to build locally to meet local and global demand, expanding to complementary sectors, and optimising costs — all to regain growth momentum and shape the next normal.
Actions to shape the new normal
In this emerging landscape, with its cautious outlook and green shoots, auto suppliers could prioritise four themes. These build on the industry’s strengths to explore new avenues of growth, while also strategically using and investing in the relevant resources:
- Localise to grow
- Collaborate and step into adjacencies
- Optimise to become competitive
- Enable a winning mindset.
Localise to grow
As supply chains shift, India could expand its share in the global auto component trade. The country contributes only a small percentage of the total imports for its biggest buyers — 2.2 percent in the US, 1 percent in Europe and 0.6 percent in China.
To grow trade, India could benefit from a targeted export expansion and to do that, it could learn from a number of countries that are major exporters of auto components. Germany, for example, has a 15 percent share in the global export market for auto components. China’s share is 11 percent, with Japan and Korea following at 7 and 6 percent respectively. These countries also have a trade surplus in components. They have achieved this market position due to advantages such as the presence of large original equipment manufacturers in the domestic market, greater ease of doing business, a significant spend on R&D — between 2 and 5 percent of GDP, and these countries’ op-25 rank in transport infrastructure.
India could pursue higher exports in product categories where the country has a competitive edge, such as shafts, bearings and fasteners. At the same time, component manufacturers could continue to broaden their global export presence by building capabilities for high-value products such as gearbox parts, heating, ventilation and air-conditioning (HVAC) products.
An analysis to see what automotive parts add to India’s import bill while also featuring as major exports indicates scope to localise and substitute imports of up to US$ 12 billion (Rs 8,812 crore). One option could be to expand the focus on manufacturing high-value parts such as engine/engine components, engine electricals, fuel systems and exhaust parts, and gearbox parts. India could also ramp up capabilities through recent innovations (such as those made to match BS-VI standards) that could help replace those imports with components made in India. Possible collaborations with global suppliers who are relocating manufacturing operations to India could further reinforce these efforts and help build new capabilities.
Collaborate and step into adjacencies
Component companies could seek growth through collaborations that help them deepen their aftermarket presence and address demand for overlapping products in adjacent sectors.
The aftermarket represents a growth avenue in a pandemic-struck world, where consumers make do with what they have, preferring to repair rather than replace. This also turns the lens to the micro-markets, with the nearest repair service centre gaining importance over a distant service provider. Growth opportunities lie in specific micro-market clusters.
Suppliers could tap into this opportunity in four ways:
- Go granular: Concentrate the aftermarket go-to market strategy in specific areas, for example, the seven percent of micro-markets that contribute to top 50 percent of demand.
- Get agile: Encourage greater agility in the sales force by shifting the emphasis to virtual sales.
- Re-balance portfolio: Re-plan the stock-keeping unit (SKU) mix by deprioritising the negative or low-margin/low-volume stocks.
- Expand partnerships: Innovate on channels by partnering with influencers (such as neighbourhood mechanics) who determine consumers’ choices while repairing or replacing parts.
- Explore non-automotive adjacent spaces
Component manufacturers could expand into adjacent areas through partnerships to synergise their existing capabilities. The manufacturing capability for several automotive components overlaps with those capabilities required for products in other sectors where demand remains high. For example, the production process for a vehicle motor could be adapted to produce motors for household appliances such as refrigerators, fans or AC compressors.
Some of the most promising overlaps are with sectors such as consumer electronics, communication equipment and power. Augmenting the manufacturing capacity for these could go a long way towards import substitution and a greater emphasis to make in India. In imports – 88 percent of mobile phone components are imported.
India could cut down imports if these were being made within the country. This could be a win-win for manufacturers, as it would amplify the emphasis on Make in India and unlock the government’s production incentives — such as over US$ 5 billion (Rs 37,005 crore) for the domestic manufacture of mobile phones.
Optimise to be competitive
With margins squeezed, cost has been a critical focus area for auto component manufacturers. Optimising product design and cutting down hidden costs could help manage expenditure.
Rethink product design
Indian auto component manufacturers have scope to optimise the design of their products to be more competitive. For example, over the past few years, the industry invested heavily in new technologies to produce BS-VI compliant parts for cars and two-wheelers. In the absence of a prior blueprint and time pressure to get the product to market, these products were benchmarked against the gold standard. This transition pushed up overall manufacturing costs.
Now, this technology and product design can be optimised for the Indian market to cut down that cost. Component manufacturers could save up to 25 percent of the incremental cost across six categories that make up around 85 percent of the total manufacturing cost increase in the BS-VI transition. For example, the catalytic converter alone offers a 3 to 6 percent saving opportunity.
Minimise hidden costs
A granular analysis of various hidden cost segments could help component manufacturers to cut between 15 to 25 percent of costs. These include categories such as real estate, IT, insurance, logistics and packaging which are traditionally de-prioritised with the focus being on material cost. The post-pandemic world gives an opportunity to fundamentally re-imagine costs in these segments. For example, companies could reduce freight costs to a level of 25 percent by using a mix of simple, short-term levers. This could be operationalised through full freight tender with best PTPK rates, reducing less-than-load shipments and ensuring freight cost chargebacks, among other moves. Organisations could also think about a ‘Phy-Digital’ model for aftermarket sales with a combination of on-ground salespersons as well as a centralised call centre to fulfil the orders from smaller dealers.
Enable a winning mindset
For the component industry, success could also lie in the mindset with which companies approach the next normal. As they explore growth opportunities and optimise resources, they might also embed new ways of working that help them to be future-ready.
Institutionalising the power of digital tools and technologies could make a difference to manufacturing companies. While ‘digital’ has been a buzzword for some time now, many organisations have approached it as optional, making minor tweaks in basic processes but not embracing it as a way of life. The lockdown saw companies having to adapt to various digital tools and technologies for business continuity. Hopefully, the agility and efficiency these have enabled will compel companies to integrate digital, analytics and automation into their everyday operations.
Advanced analytics, process digitisation, as well as robotics and automation could accelerate transformations necessary to evolve for the future. From improved labour productivity to lower machine downtimes and design engineering costs, many different levers across the value chain can contribute to the manufacturing transformation. For example, product design optimisation using virtual tear-down labs for cost of quality improvement or using feature benchmarking to cut design engineering costs could yield returns of between 10 to 30 percent over a 12- to 18-month period. An early and potentially high savings opportunity could lie in real-time batch sizing and scientific dynamic inventory norms, reducing inventory cost by 20 to 40 percent in six months’ time.
Ultimately, the picture is not that bleak for component manufacturers and the overall Indian auto industry. Making the most of shifts in supply chains, mobility and consumer sentiment, playing to their strengths in electrification and aftermarket segments while investing in changing mindsets could pave the path to recovery as the pandemic abates. Meanwhile, focusing on local manufacturing, investing in innovation and collaboration with the government and auto industry bodies could help transform this dynamic industry into the future auto component manufacturing hub of the world. Isn’t that the avowed mission of Atmanirbharta?
This feature was first published in the September 15, 2020 issue.