Auto Component Makers Need Deeper Localisation, Engineering Agility to Tackle Supply Chain Shocks: ACMA

India’s auto component industry needs to move beyond simply building resilience against supply chain disruptions and focus on developing deeper localisation, engineering capabilities and technology readiness as geopolitical uncertainty and input-cost pressures become the “new normal”, industry leaders said at the Automotive Component Manufacturers Association of India (ACMA) annual session in New Delhi.

The industry has continued to grow despite repeated disruptions, including the Covid-19 pandemic, geopolitical tensions, the West Asia crisis and restrictions around critical materials such as rare earths. ACMA said the next phase of growth will require Indian suppliers to become globally competitive and increasingly capable of designing, developing and owning intellectual property from India.

“Despite challenges, the industry has stayed positive, the supplier industry has grown both domestically and globally," said Vinnie Mehta, Director General, ACMA. Mehta said the industry now needs to shift from a defensive approach to one that uses the disruption-driven environment as an opportunity to build capabilities for global markets. "I think we need to now take the next step beyond being defensive. We need to play on the front foot,” he said.

The component industry is also facing inflationary pressures from raw materials and energy, where companies have limited ability to absorb sudden increases in costs. Vikrampati Singhania, Managing Director, JK Fenner, said the focus therefore needs to be on engineering agility and developing alternate sources and materials.

“Number one, one of raw material or energy cost spikes. You know, you can't do much to manage that cost. That's the reality. If suddenly fuel is more expensive, you can't make it cheaper by taking action internally,” Singhania said.

However, he pointed to instances where engineering teams have responded to supply shortages and sharp commodity price increases by qualifying alternative materials and suppliers. “What have we seen the industry do? There have been several examples where a certain commodity saw a supply shortage or a price hike that was way beyond money. And we've seen examples of engineering teams within the industry actually qualifying alternate materials or qualifying alternate sources of that material,” he said.

Industry collaboration across the supply chain is another important way of mitigating shocks, particularly when cost or availability pressures hit smaller suppliers. “We've seen several examples of collaboration between the Tier 1 and Tier 2s or the OEM and Tier 1s that help mitigate some of that pressure. Does it entirely dissipate? It doesn't. But those are two themes I've seen play out in the sector whenever some of these shocks come at us,” Singhania said.

He added that supply chain resilience is not only about controlling costs but also ensuring availability of critical materials. "Apart from cost, sometimes it's about availability. And this is where the collaboration between the OEMs, Tier 1s and Tier 2s has worked very effectively, where sometimes a Tier 2 may not have the same access a Tier 1 has to certain raw materials," he added. 

Working capital support across the supply chain can also help smaller suppliers withstand sudden disruptions, Singhania said.

Sriram Viji, President, ACMA and Managing Director, Brakes India, said the component industry has benefited from strong demand, with the sector recording more than 13% growth over the past year. “It's been fantastic. And the last year particularly was also very good with over 13% growth,” Viji said.

Exports

“We've had particularly strong demand across all the segments, right, which is very unusual. We normally see some spikes, but it's been across all segments. The other area that's encouraging is exports are growing," he said. 

Viji said export competitiveness would increasingly depend on three factors: cost, quality and technology readiness. “So, that is an area where I think ACMA is spending a lot more time and energy is to see how to make India globally competitive in exports. And there are two or three aspects here that we've been discussing as ACMA,” he said.

Indian suppliers have also increasingly diversified their customer base and geographical exposure, while localisation has become a central theme as the industry transitions towards electrification, electronics and other new technologies.

“As we see technologies change, however, electrification, electronics becomes a much bigger portion and flex fuel becomes a bigger portion of vehicle sales. We do see the need to continue this journey to localize further and further, right? So, especially in the electronic space, I think the ecosystem is pretty nascent in India," he added. 

Mehta said, “So the localization is a constant theme. It doesn't make sense for anybody not to localize. There are certain technology gaps that we have which the report also identifies. Especially the electronic space." 

The disruption in rare earth magnet supplies has emerged as another test of the industry's resilience. Mehta said the absence of import licences for heavy rare earth magnets has forced companies to look at alternatives while domestic manufacturing capacity is developed.

“Nobody as yet has got the license to import from China, first of all. So you are resorting to bringing in finished or semi-finished goods,” he said. In the interim, companies are exploring technologies and materials that reduce dependence on restricted imports.

“People have moved on to lighter rare earths where there are no import restrictions. They're looking at magnet-less motors and stuff like that. So again, the resilience comes because of all this,” Mehta said. He added that the depreciation of the rupee could further strengthen the economic case for localisation.

According to Saurabh Chhajer, Managing Director & Partner, Boston Consulting Group, the challenge for component makers is to convert the lessons from recent disruptions into structural capabilities rather than repeatedly relying on short-term firefighting.

BCG has identified five axes of resilience and recommends that companies assess their maturity across each of them and identify their weakest areas. “I think we've defined five axes for what makes companies resilient. Every company has a different starting point on each of these five axes. And what the last few years of growth but uncertainty have taught us is any one of that axes can be your soft spot,” Chhajer said.

“One of the big messages is track where you are on that L1 to L4 ladder across the five axes. Don't have any blind spot on any of the five axes, but also map how do you get from your current level to the next one,” he added.

He identified growth planning, capital allocation, talent and technology as key priorities for component companies.

“We are in a period of robust demand. It's broad-based demand across all factors. We're seeing this, we're seeing export markets open up. We're also in a period of, in general, on average, very healthy corporate balance sheets,” he said.

Technology adoption will also need to move beyond pilots and proof-of-concepts, while companies will need to focus on attracting and retaining the talent required to operate increasingly sophisticated businesses. “The third theme, which again came across multiple times during the panel discussion as well, is the theme around talent and technology. Both, you know, can be big differentiators in our sector,” Chhajer said.

Chhajer said, “A fair amount of time goes in day-to-day operational firefighting. How companies now use that awareness of what the trade-offs are, use the awareness of a lot of time going into firefighting and transition into creating systems and processes that are resilient, that take down the time that goes into firefighting and use that time to make some of these choices is what needs to happen."