‘If the Make in India campaign has to succeed, the entire auto eco-system has to be pushed.’
R Raghuttama Rao, MD of ICRA Management Consulting Service Ltd (IMaCS), speaks to Kiran Bajad on the Indian auto industry, future growth prospects and trends.
The ‘Make in India campaign’s focus is on manufacturing. How you see this initiative benefiting the auto industry?
The auto industry – both OEs and component manufacturers – have a large share of the manufacturing output in the country in terms of investments, taxes, output and employments of 30-40 percent. If the “Make in India” campaign has to succeed, not only should the auto sector be pushed and incentivised but also the eco-system that feeds into it.
For example, machinery makers and material handling equipment players; there is an entire range of machinery-making and of course factory construction, industrial consumables, general engineering, and capital goods industry that need to be encouraged in tandem. This way, the auto industry directly and a large part of the manufacturing chain will get a substantial boost under this campaign.
Automotive electronics imports are growing in cars. What is your comment?Yes, the value share of electronics will gradually grow in automobiles and in a few years may constitute as much as 40 percent of the cost of a car. Already, the car has become a computer on wheels, and the number of sensors in some cars is more than in a jet plane. Where are these sensors and other electronics of automobiles manufactured? Are they made locally or are they imported? Already electronics is threatening to become the second highest item in India’s import bill.
Because of the growing telecom and automobile industry, the electronics sector will become one of the biggest drains on foreign currency, and if the rupee depreciates or the import duty remains high, the industry will lose margins. So domestic manufacturing in electronic industry should be encouraged for a variety of products and components.
In terms of technology, how does the Indian auto industry compare with global counterparts?
Technology has several connotations and dimensions. If you consider design capabilities of vehicles in India, I think we are not there as yet. Even leading Indian firms are reliant on European or Japanese design firms. Also, knowledge of advanced materials, testing methods and procedures, and access to advanced manufacturing processes remain a big gap in technology for Indian players. Both as an industry and at a company level, we have to make a big leap in these areas of technology.
What role can the government play to promote technology?
I would say the government should encourage Indian auto companies (including auto component companies) to buy out foreign firms that have high technology, by offering incentives and tax subsidies. For example, if you look at textile companies, they get capital subsidies for upgrading technology. I would recommend the government consider extending low-cost finances or tax breaks or any other kind of incentives for automotive companies and component makers to buy firms or technologies overseas and get the technology to be applied in India.
Today India is competitive in manufacture of automotive vehicles and components vis-a-vis most developing and developed nations. However, such cost competitiveness tends to last only for a few years, while being proficient in technology is a more sustainable proposition. Therefore, it is imperative that government and industry work hand in hand to make use of this window of competitiveness that India enjoys today, to put in place the foundations of technological superiority for the auto industry.
The auto industry has been under pressure since the past two years but the green shoots of recovery are now seen. What is your assessment on future growth?
The industry has gone through a cyclical downturn for the past 2-3 years. I call it cyclical and not structural because India remains an under-penetrated market for automobiles. Passenger cars and two-wheelers currently have a rather low penetration rate in comparison to several other countries, and there is an aspiring class in India which will seek ownership and use of vehicles as their incomes rise in the future. We have already witnessed a sharp growth in automotive ownership in the first decade of this century, and I believe this is the growth phase India will enjoy for the next two decades easily.
What, according to you, is the sustainable rate at which the Indian auto industry will grow?
The last 10-12 years saw a good secular growth rate for automotives in India. At this year’s SIAM Convention, we made a presentation on a Vision for the Indian Auto Industry over the next 10-12 years. We feel that by the end of the next Automotive Mission Plan period in 2026, the Indian automobile industry would be a $300 billion market; today in 2014 it is $60 billion which includes vehicle, finished components, aftermarket, and exports. We believe in 12 years, it would be five times bigger. India will be the third largest in the automotive industry – the figure seems large but is a doable plan.
Do you think the industry still needs more excise duty benefits which are now expiring in December?
This is a difficult question, because from the auto industry’s and consumers’ point of view, you would like the lower excise duty regime to continue. But the question from the government’s point of view is “can this be sustainable”? The government is facing fiscal constraints, and my view is that the low excise duty regime has to go at some point –- it can’t go on forever. Whether it’s now or in the Union Budget 2015 I don’t know -- it’s a question of “when” and not “whether”.
Despite a low penetration of cars in India, our infrastructure is not at par with the growth as cities are getting chockablock with traffic?
We have seen several moves by the government to ease congestion on the road in various cities. I think the government should look at initiatives not to curtail the ownership of vehicles but initiatives that define the quality of mobility (ridership or use).
In future in India, I believe that mobility will not be linked to personal ownership of a vehicle but will be linked to transportation and movement by a variety of means including public transportation, and even walking. Regulating mobility will mean introducing concepts like congestion charges, parking charges, designing safe roads, vehicles and enforcing regulations to ensure that you have safe riding and driving conditions and putting an appropriate cost on wrong behaviour -- then industry and users will make the right decisions. But importantly, the government has to provide the correct environment to improve mobility for consumers including reliable public transport.
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