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1India’s Auto Component Suppliers: New Frontiers in Growth

India’s Auto Component Suppliers: New Frontiers in Growth As India prepares to be a top three global automotive market by 2020, more component suppliers are entering the market to add capacity and upgrade technology. Can India’s homegrown suppliers compete?


Notes: 2W is two-wheeler vehicles; CV is commercial vehicles; PV is passenger vehicles. Due to rounding figures may not add up exactly to total.

Source: A.T. Kearney analysis

Figure 1Auto component sales will increase almost fourfold by 2020

Domestic vehicle production(Million units)

Domestic auto component production ($ billion)

50

40

30

20

10

0

2W

CV

PV

Tractors

Construction

Aftermarket

All vehicles

2020e2011

125

100

75

50

25

0

2020e2011

14

30.8

0.5

1

32

9

26

47

21

21

6

13

2

44

$30

$113

18

4

4

+10% +16%

India’s automotive market is basking in a 13 percent compound annual growth rate, going from five million vehicles produced in 2002 to 18 million in 2011. India, already the second-largest global market for two-wheelers (2W) and the fourth largest for commercial vehicles (CV), is now poised to rank among the top three global automotive markets in all vehicles, including passenger cars, by 2020.

There are two very good reasons for Indian component suppliers to diversify: India is awash in capacity constraints, and the market requires newer technologies.Market growth is naturally translating into growth in the automotive component sector, where suppliers are focused on moving into new vehicle segments and manufacturing new, higher-margin products—for example, engine sensors and advanced exhaust after-treatment products such as diesel particulate filters (see figure 1). As global and Indian manufacturers


invest in new capacity for new programs, more component suppliers are riding their coattails, anticipating short-term growth while eager to capture longer-term advantage.

Indian auto component suppliers that succeed in grasping this opportunity will do so by growing across three strategic dimensions:

• Wider. Diversifying by manufacturing new components for new segments

• Deeper. Developing stronger relationships with existing customers

• Faster. Acting now to capture the next wave of growth

Wider: Diversifying by Manufacturing New Components for New SegmentsIndian component suppliers generally have deep technological capabilities but are not yet deploying them across the total range of vehicle segments. For example, 40 to 45 percent of the approximately 110 suppliers studied in our recent analysis manufacture components for only one segment—two-wheel, commercial, or passenger vehicles—while another 30 to 35 percent focus on just two segments. This stems largely from historic reasons as many suppliers began as ancillaries to original equipment manufacturers (OEMs) and so naturally supply their parent companies. For example, a tier 1 automotive seating supplier manufactures seats and interiors for India’s leading automaker, Maruti Suzuki, but it confines its activities mostly to passenger vehicles when it could diversify horizontally into other segments. (For example, why not build seats and interiors for buses?) Although some suppliers have started moving into new segments, progress is slow.

Indian suppliers that step up their product development capabilities now will have the best chance of capturing this growth opportunity.There are two very good reasons for Indian component suppliers to diversify into new products: India is awash in capacity constraints, and the market requires newer technologies. For example, the trend toward lighter vehicles is moving the industry toward aluminum parts and new technologies such as tailor-welded blanks and hot forming. For select players, some of these new products may be in adjacent industry segments that are relatively easy to enter, while others can be targeted via technology tie-ups or acquisitions.

In diversifying, whether in vehicle segments, component products, or both, the leading component suppliers share three characteristics: They undertake a systematic analysis of the field of opportunity including a validated customer needs assessment; they follow it up with a well-defined strategy, targeting three or four specific opportunities rather than trying to boil the ocean; and they assemble a strong program-management team to drive execution.


Deeper: Developing Stronger Relationships with Existing CustomersAs manufacturers develop large-scale expansion plans for India, the most successful homegrown component suppliers are already busy developing stronger relationships with their existing customers. Of course, the approach taken depends on whether the automaker customer is in the passenger vehicle segment (long dominated by multinationals) or other vehicle segments such as commercial, two-wheelers, or farm equipment, which have been long dominated by Indian manufacturers. The following offers a more detailed discussion of each segment.

Passenger vehicles

India is projected to produce 8.7 million passenger vehicles per year by 2020, with the majority—5.2 million—expected to be compact cars (see figure 2). This will make India the world’s compact-car hub (see figure 3 on page 5). Indians prefer compact cars primarily because they are less expensive and taxes are lower. Many auto industry giants—Toyota, Honda, Ford, GM, Volkswagen, and Renault-Nissan—have built or are building state-of-the-art facilities in India to manufacture compact cars. For most manufacturers, establishing a global presence in an industry or segment requires the following:

Notes: MPV is multipurpose vehicles; UV is utility vehicles. Due to rounding figures may not add up exactly to total.


Figure 2Compact cars will lead the way in the passenger vehicle segment of India’s booming automotive market

Passenger vehicle production(Million per year)

Mini

Compact

Midsize

Executive

Luxury and premium

MPV and UV

2020e2011

1.9

0.5

0.4

0.1

0.1

0.1

1.2

0.8

1.2

8.7

3.0

+13%

5.2


Note: Due to rounding figures may not add up exactly to total.


Figure 3India’s production level of compact cars easily outpaces other developing countries

Passenger vehicle sales, 2010–2011(% by segment)

0 20 40 60 80 100

Compact

Mini

Midsize

Others

32

32

87

10

6

10

60 12

8 35 51

18

2 1

819

2246

42India

Thailand

Indonesia

Brazil

China


Figure 4Too few Indian auto component players do business globally

Suppliers(%)

100

80

60

40

20

0

<10 10-20 20-50 >50Total

Export level 2010–2011 (%)

64

22

113

100


Develop global supply capabilities. As more global platforms are introduced in India for the small- and compact-car segments—joining Ford’s Figo and Nissan’s Micra—manufacturers want suppliers that can operate within global supply chains. Increasingly, it will be difficult for OEM procurement teams to get approval for introducing a local supplier without global capabilities. Most Indian component suppliers have not reached this threshold. Only a small number of them focus on exports or conduct business on a global scale, even as future growth and survival in this market require doing both (see figure 4 on page 5).

While the global automakers may want to develop local suppliers because of the cost advantage, it is often too difficult to do so. Instead, most automakers are establishing state-of-the-art global plants to attract their global suppliers to India.

At the same time, the largest automakers are moving toward fewer global platforms to manage complexity (see figure 5). Volkswagen is adopting a modular strategy, planning to perform more than 90 percent of production on three platforms by 2020. Ford plans to have just nine core platforms by 2013, and GM will have just 14 platforms by 2018, down from a high of 30. In all, 12 global automakers are expected to reduce their platforms from 223 in 2010 to 154 by 2020. This translates into the production of many more vehicles per platform.

Still, the global automakers contend that their ultimate goal is to develop Indian suppliers that can meet global requirements and eventually move up the value chain into more complex assemblies. Both GM and Ford are making efforts to achieve this goal. GM’s Supplier Footprint Optimization team works with Indian suppliers to improve their capabilities and has already developed 25 percent of its Indian supplier base for its global operations. And for the first time, Ford developed Indian suppliers to build its block-and-head castings for its Figo product range.

Improve product development capabilities. As India becomes the global hub for small vehicles, design and development is expected to shift there. Sensing an opportunity, global tier 1 suppliers that entered India in the past few years are becoming increasingly confident in their ability to pull off complex activities. Many are either scaling up their R&D facilities in India or setting up R&D facilities for the first time. For example, Continental, Bosch Chassis Systems, Faurecia, and Tenneco have established R&D centers in India that not only adapt global designs for Indian conditions, but also focus on new product development.

Note: OEM is original equipment manufacturer.


Figure 5Leading OEMs are reducing the number of global platforms

OEM Target Examples

Volkswagen Three platforms by 2020

Ford Nine platforms by end of 2013

GM Fourteen platforms by 2018, down from 30

Renault Nissan Working on its global platforms

MQB platform (Jetta, Golf, Polo, Fabia, among others)

B (Ford Fiesta); C (Focus); C and D (Fusion)

Delta lll (Cruze, Volt, Astra, Zafira); Gamma ll (Aveo, Corsa, Sail)

B0 (Logan, Duster, Bluebird); new generation renamed V (Micra, Pulse)


Indian suppliers that step up their product development capabilities now will have the best chance of capturing this growth opportunity. While more than 90 percent of Indian suppliers budget about 1 percent for R&D, global manufacturers budget 3 to 10 percent for R&D, depending on the technological intensity of components.

The learning curve for Indian component suppliers is likely to be steep and may require technology licensing or small-scale acquisitions to bridge the gaps. Many auto component suppliers in developing markets are ramping up their acquisitions to gain access to more technology across categories. For example, Dynamatic Technologies acquired German component maker Eisenwerke Erla to improve its design and development capabilities in producing complex ferrous castings for engines and turbochargers. Similarly, chassis maker Wonder Auto Technology acquired airbag manufacturer Jinheng to improve its performance in safety systems.

Opportunities will arise for suppliers to become strategic partners in two areas: technology and support.Establish an agile supply chain. As growth explodes in the passenger vehicle segment, so does competition for market share. The growth will not be uniform, and we expect high volatility—periods of very high growth followed by tough periods. This means higher risks for auto component suppliers as they may have to make larger bets (capital investments) to support their customers’ new product launches and capacity additions. Suppliers can reduce their risk by establishing an agile supply chain, and can do so in several ways:

• Standardize. Increase commonality in proprietary products.

• Increase flexibility. Develop a manufacturing strategy that can easily shift capacities across models; when adding capacity, think modular.

• Share investments. Reduce investment threats by sharing investments in tooling with manufacturers.

• Disseminate. Allow agility to filter down the value chain to tier 1 and tier 3 suppliers.

Commercial vehicles, two-wheelers, and farm equipment

These segments will likely remain dominated by Indian manufacturers for at least a few more years, which means opportunities will arise for suppliers to become strategic partners in two areas: technology and support. Manufacturers are constantly seeking differentiation from competitors and the ability to provide cost-effective technology for consumers. To this latter point, one Indian manufacturer started a group called Local Partnerships for Smart Technologies to introduce affordable technologies in India.

Suppliers will succeed by taking a mid- and long-term view—first to understand what will competitively differentiate their automaker customers and then to become a strategic partner in bringing the required technologies to the table. Rapid growth and numerous new vehicle launches will require support from strategic suppliers. For example, one two-wheeler


manufacturer has about 20 strategic suppliers that cater to almost 80 percent of its requirements; these suppliers focus on product development and the creation of flexible manufacturing strategies to support the launch and ramp-up phase. In return, the suppliers acquire a substantial share of the business. The manufacturer credits this strategy for its position as an innovation leader in the two-wheel vehicle segment.

Becoming a strategic partner usually means being indispensable to the manufacturer and having strong account management skills. Both attributes are evident in an advanced account development process and active selling time, as are market intelligence and the ability to manage internal stakeholders during the bidding process and through all stages of product development.

Faster: Acting Now to Capture the Next Wave of GrowthWith the supply market at an inflection point, the time is ripe for all would-be participants to act fast to avoid the risk of falling behind. Already, a host of international tier 1 component makers are in India, and those that have not yet entered say they have plans to enter soon; the supply landscape is expected to rapidly evolve over the next three to four years (see figure 6). As global and Indian manufacturers invest in new capacity for new programs, more component suppliers will have an opportunity to participate in the next wave of growth.

Note: ECU is engine control unit.


Figure 6Many tier 1 players are already in India

Category Top 5 global players

Airbags

Brakes

Clutch

ECUs and sensors

Engine cooling

Autoliv TRW Takata Toyoda Gosei KSS

Continental Delphi TRW-Lucas Bosch WABCO

TRW Exedy Luk Valeo —

Bosch

Behr

Continental Denso Delphi Magneti Marelli

Seats

Steering

Suspension

Transmission

Tires

Wiring harness

Johnson Controls Lear Toyota Boshoku Faurecia —

Valeo Delphi Visteon Denso

JTEKT NSK Nexteer TRW ZF

KYB Tenneco ZF Sachs Showa Magneti Marelli

ZF Getrag BorgWarner JATCO Aisin

Bridgestone Continental Michelin Goodyear —

Yazaki Sumitomo Delphi Leoni Lear

Present in India Planning to enter No presence or entry plans


Authors

Shiv Shivaraman, partner, Mumbai [email protected]

Manish Mathur, partner, Gurgaon [email protected]

Goetz O. Klink, partner, Germany [email protected]

Vinod Kumar, principal, Mumbai [email protected]

Gaurav Gupta, consultant, Gurgaon [email protected]

The authors wish to thank Arunav Tripathi and Tamanna Padhi for their valuable contributions to this paper.

The Pitfalls and the PayoffAs the Indian auto component segment ramps up, more suppliers are moving beyond their current products, customer segments, and capabilities to capture new growth opportunities. The biggest challenges, as discussed in this paper, lie in developing new capabilities and convincing existing customers that an Indian supplier is up to the global challenge. Suppliers that diversify into new products and vehicle segments will be less exposed to demand cycles and more able to pursue the next growth wave. Those that are fully prepared for the competitive angst are not only the most likely to survive in the near term, but also the best positioned to thrive in the longer term.

India’s Auto Component Suppliers: New Frontiers in Growth

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