In the face of moderating vehicle sales growth and a shifting automotive landscape, India’s auto component industry maintains a resolute optimism about its future. The Automotive Component Manufacturers Association of India (ACMA) points to ongoing capacity expansions and a strong focus on localisation as key indicators of the sector’s resilience and long-term potential.
While the current financial year presents a mixed outlook across various vehicle segments, industry leaders argue that short-term fluctuations should not overshadow the broader trend of growth and investment in the sector. This confidence comes against a backdrop of evolving market dynamics, including the rise of electric vehicles and global supply chain disruptions.
Gearing for future
The biggest challenge facing the auto component industry at present is the muted sentiment that has enveloped the automotive industry in India.
India’s auto component industry generates 44% of its revenue from the passenger vehicle segment, followed by commercial vehicles (25%) and two-wheelers (19%).
In the domestic market, most of the vehicle segments, such as passenger vehicles and commercial vehicles, are staring at a lacklustre FY25.
“The off-take of vehicles, particularly in the passenger vehicle and commercial vehicle segments, has been slower in the first quarter of the year. But the momentum is likely to build up in the coming months,” ACMA President Shradha Suri Marwah said.
The downtrend in the broader auto market could be attributed to the high base of the previous year and the disruption caused by general elections in April-June.
This is also expected to impact the auto components sector, which had seen revenues rise by 9.8% last year to Rs 6.14 lakh crore (USD 74.1 billion). ACMA is of the opinion that growth would range between 7-10% this year.
“We are witnessing good offtake in the domestic segment. Exports are likely to be stable, with growth in single digits expected,” ACMA Director General Vinnie Mehta said. The industry association is also hopeful that the third phase of the FAME subsidy scheme will be rolled out soon and it can boost the electric vehicle adoption in the country.
Despite the apparent slowdown, the industry seems to be sticking to its investment plans. Auto component makers in India are expected to invest USD 2.5-3.0 billion in FY25. Mehta said this investment will largely go for expanding the capacity.
“We see that automakers are doubling their capacity, and component makers are following suit. So everyone is investing to increase their capacity,” Marwah said.
Most of the investment is taking place in technology and upgrades, driven by a thrust by major OEMs to localise as much of their supply chain as possible, she pointed out.
Marwah also noted that R&D spending on an industry level is pretty low at sub 1% right now, as compared to global standards which are at around 4%. But it is going to increase gradually, amid the localisation push.
Forex impact
One of the results of the localisation push by OEMs has been the benign impact it has had on India’s trade balance. For example, during FY24, the components industry posted a trade surplus of USD 300 million, compared to a deficit of USD 200 million in FY23. This was because exports rose 5.5% to USD 21.2 billion, while imports grew by only 3% to USD 20.9 billion.
The biggest items of import are engine components, chassis, drive transmission and steering, and suspension and braking. China continues to be the biggest source of imports, accounting for 29% of the total. Nevertheless, the industry has been able to offset the imports by exporting more. Over the past five years, exports have grown twice as fast as imports, Marwah pointed out. “We believe that auto industry value chains are global. We always believe there will be imports. But exports should be higher than imports. That implies we are creating value, we are adding net value.”
Challenges
About 6% of the auto component industry’s turnover in FY24 came from the EV industry, up from 3% in the previous financial year. However, there has been a slowdown in the sales of EVs, both in India and globally. This is attributed to the saturation of the early adopter market, a failure by the charging infrastructure to keep up with sales, concerns about resale value, and visibility over government incentives.
However, the component industry believes that these are temporary fluctuations and remains unfazed by short-term sales dips, maintaining its long-term growth outlook and production targets. “Overall electric vehicle sales are growing. There will be blips and bloops. But it will continue to grow,” Marwah said.
The second headwind that the auto component industry is facing is logistics. On the one hand, turnaround time and costs have increased considerably due to Houthi attacks in the Red Sea this year, while on the other, major ports on the South Asian coast are now facing heavy congestion.
The Red Sea is a crucial channel for trade between Europe, Asia, and Africa, connecting the Mediterranean Sea and the Indian Ocean through the Suez Canal. Following Houthi rebels’ attacks on commercial vessels passing through the Red Sea, shipping companies have been diverting their vessels around the Cape of Good Hope at the southern tip of Africa.
Some of the major countries to which the industry exports are the US, Germany, Turkey, Brazil and UK, while imports come from countries such as China, Germany, South Korea and Japan. Mehta noted that the time to deliver has risen to twice or thrice the usual duration.
“We are facing bottlenecks in Southeast Asia. The Singapore port is very congested. Sri Lanka and China are also cluttered. Today, freight companies are asking for a congestion surcharge of up to USD 1,000-USD 1,500 per container, and we are also having to hold more inventory,” Marwah added.
This feature was first published in Autocar Professional’s August 15, 2024 issue.