Auto Component MSMEs Face Capability Gap, ₹39,000cr Tied Up

India’s automotive supplier ecosystem is facing a capability gap as the industry moves towards autonomous vehicles and multiple powertrain technologies, including EVs, hybrids, hydrogen, ICE and fuel cells. The transition is increasing the need for investment in R&D, new materials, technology and workforce training.

A Vector Consulting Group white paper, The broken flywheel: Building a future-ready automotive supply ecosystem, estimates that 95% of surveyed industry leaders believe MSME suppliers are not investing quickly enough in capabilities needed for future growth. MSMEs account for around 80% of India’s auto component manufacturers.

The study, based on inputs from senior executives at automotive MSME suppliers and discussions with Tier-1 and Tier-2 component companies, identifies a gap between capabilities considered important for future competitiveness and those currently available across the supplier base.

Automotive MSMEs face gaps in technology capabilities

The gap is particularly visible in areas linked to emerging automotive technologies. Systems integration and product development are considered important for future competitiveness by all respondents, but only 14% estimate that MSMEs currently possess these capabilities.

Embedded software is considered important by 81% of respondents, while around 10% estimate that MSMEs currently have the capability. Advanced engineering is considered important by all respondents, but only 38% assess current capabilities as being at developing-to-mature levels.

Auto suppliers face a capacity utilisation paradox

The study also highlights a gap between installed capacity and effective productive capacity. Plants operate at an average utilisation of 75%-85%, yet 91% of respondents identify capacity as a considerable challenge.

According to the study, frequent changeovers, quality losses, rework and inefficient material flow can reduce productive capacity even where installed capacity is available.

Vector Consulting Group managing partner Ravindra Patki said the issue is not necessarily a lack of installed capacity, but the inability to consistently convert existing capacity into productive output. The study links operational instability with working-capital requirements and reduced funds available for engineering, technology and product development.

₹29,000-39,000 crore working capital could be released

The Indian automotive component industry has an estimated ₹98,000 crore tied up in inventory, according to the report. Vector's implementation experience indicates that companies using consumption-based replenishment approaches typically reduce inventory by 30%-40%.

If applied across the industry, the study estimates this could potentially release ₹29,000-39,000 crore in working capital, including ₹4,000-5,600 crore from the MSME ecosystem.

The report also estimates that automotive component MSMEs account for approximately ₹2.4-2.9 lakh crore in turnover. A 30% productivity improvement across this base could enable an additional ₹74,000-88,000 crore in annual turnover. After material costs, the study puts the illustrative incremental value pool at ₹29,000-44,000 crore.

Supplier productivity could fund capability upgrades

Vector's proposed approach is based on three levers: improving operational flow, strengthening supplier economics and directing the resulting surplus towards advanced capabilities.

The report says greater operational stability can release working capital, while productivity improvements can generate recurring surplus. Improved economics could also increase suppliers' ability to attract external capital, with investment in technology, engineering and product development potentially allowing companies to participate in higher-value segments.

Patki said capability development needs to extend across the supplier ecosystem rather than being addressed only at the MSME level, with OEMs, Tier-1 and Tier-2 suppliers, technology partners and industry institutions having roles in building capabilities across tiers.

The report concludes that the competitiveness of India's automotive industry will increasingly depend on the ability of its supplier base to generate sufficient surplus for continuous investment and upgrades. As vehicle value shifts towards batteries, power electronics, embedded software and integrated electronic systems, supplier capabilities will also influence India's ability to expand domestic localisation and global sourcing.