Indian auto component industry faces mounting pressure to stay competitive

At the end of 2007, India's auto component industry faced mounting pressures as margins were squeezed, the appreciating rupee value made exports non-competitive, and fierce competition from foreign players increased. Now, however, Indian auto component makers are continuing to struggle against the backdrop of rising input costs for materials such as steel and rubber. Furthermore, as India is a labor-intensive economy, increasing labor costs caused by inflationary pressures have only increased the working capital requirement for manufacturers. These factors, coupled with an unfavorable tariff regime, are pushing India towards becoming a net importer of auto components. In order to safeguard the industry in the areas where it lacks competitiveness, industry bodies are proposing certain import restrictions. For example, the Auto Components Manufacturers Association has recently announced restrictions on the import of tires from China. Over the past few months, Indian auto component manufacturers have crossed borders in their efforts to increase their sales base and hedge the rising production costs at home. In addition to acquiring design-engineering companies abroad in order to support product innovation requirements, many Indian auto component manufacturers are outsourcing by setting bases in China. Mahindra and Mahindra, a leading auto manufacturer based in India, has recently made acquisitions under its Systec label in order to enhance its powertrain product capabilities for fulfilling OEM contracts, as well as to support the design-engineering requirements of sub-component manufacturers. Domestic auto component manufacturers will need to target their R&D efforts towards producing parts that are price-efficient, environmentally friendly and customized to meet the precise specifications of global vehicle manufacturers. Any advances in these areas will lead to consolidation among smaller players, intensifying competition for domestic market leaders and foreign entrants, and causing margins to slide even further. From an investment point of view, however, the situation in India's auto market is far from gloomy, with a potential injection of $15 billion on the cards over the next few years. Also, the sanction of the much-required modernization/upgrade fund from the Indian government, which will be used to support domestic sub-component manufacturers, should insulate their operations. Although India's auto component industry has traditionally been dependent upon exports for its profits, with burgeoning opportunities in the country itself, manufacturers may be able to offset China and other southeast Asian countries' long-held production advantage in the next few years, and help the industry to reach its targeted market value of $40 billion by 2014.