The Hindu Business Line : Auto parts sector sees tough times ahead

The three factors
Falling domestic demand
Loss of export competitiveness due to rupee appreciation
Competition from cheap imports from China and other Asean countries.

T. Murrali

Chennai, Dec 31 As the year 2007 draws to a close, the auto components industry finds itself battered on three counts – falling domestic demand, loss of export competitiveness due to rupee appreciation and competition from cheap imports from China and other Asean countries.

The industry fears that unless remedial steps are taken quickly, auto component makers are headed for long-term profitless growth. Mr Vishnu Mathur, Executive Director, Automotive Component Manufacturers Association (ACMA), says that the drop in physical exports would jeopardise the Automotive Mission Plan’s (AMP) vision of achieving a $20-25 billion of exports of auto components by 2016.

Domestic demand

Demand from the domestic commercial vehicle industry has declined sharply because the Original Equipment manufacturers themselves are finding it tough to sell. This, in turn, is because of a steep rise in interest rates, which has made vehicle financing expensive. Passenger cars have, somehow, maintained a positive growth rate through launch of new models and incentive schemes.

Overall, the vehicle industry fell by 3.5 per cent in the first half of the current fiscal compared to the same period last year. The slowdown has resulted in direct impact on the production and domestic sales of the component manufacturers. From an average growth rate of 34 per cent in 2004-05 and 2005-06, the industry is now growing only at 15 per cent annually in terms of production and output.

Export growth

The compounded annual growth rate of exports of auto components over the last five years has been 35 per cent. However, since early 2007, the rupee has appreciated by around 15 per cent, eroding export competitiveness. The impact is more, since more than 70 per cent of the export is directed to the global OEMs and Tier 1 companies, where prices are relatively inflexible. Companies that are in negotiations find it difficult to compete with China and other Asean countries, whose currencies have appreciated against the dollar less than the Indian rupee.

The peculiarity of auto component exports is that for each programme (components supplied to a model) of each OEM, the gestation period is as long as four years. It begins with RFQs (request for quotes) followed by supply of drawings by the customers. The process is more stringent in the case of safety critical components. “It is like getting a doctorate for every component with every overseas customer,” says Mr C Jayaraman, Managing Director of the Bangalore-based Aditya Auto Products & Engineering.

Imports - the China factor

The strong rupee has made imports cheaper and a trend where imports are growing “ten times faster” than exports is evident. But the industry is most fearful of China, from where most imports have been coming. The last two years have seen a growth of 87 per cent from China, which has crossed Rs 1,200 crore.

According to Mr Srivats Ram, Chairman, ACMA-Southern Region, China is a matter of concern with its managed exchange rate and subsidy structure. In addition, it has directed tax policies and better infrastructure, which has resulted in a 130 per cent increase during the last four years, in import of auto components from China (close to Rs 1,300 crore). While China’s exports to India in auto components have grown, India’s exports to China (Rs 86 crore) are lower than what they were four years ago, he says.

“The policies of the Chinese government create a factor cost advantage for local companies at the same time they have a policy that discourages export of the same factor elements,” says Mr Ram, noting that China’s imports to India have grown from Rs 9,000 crore to Rs 100,000 crore in four years.

Fixed rate

The Chairman of the Rane Group, Mr L Ganesh, says the strengthening of Indian rupee has serious implications for the auto component industry. “The Chinese being our main competitors, we should look at this in the context of heavily subsidised export from there and a fixed exchange rate between the Chinese Yuan and the US dollar. The long-term competitiveness of Indian auto component industry in the global market hinges very much on this,” he adds.

Mr S Ganesh, Managing Director of the Vijayawada-based Liners India Ltd, notes that while the Chinese auto industry faces a flat 17 per cent indirect tax, Indian companies are burdened with a number of un-reimbursed levies such as octroi, taxes on electricity and service tax.

Mr Jayaraman says, “We cannot get to cover the raw material cost for the prices quoted by Chinese companies. This is primarily due to cheaper cost of power, finance and labour, flexible labour laws besides flexible funding for exports.”

Wage costs

Mr Ganesh notes that China has withdrawn VAT concession on exports of raw material, while retaining them on finished goods. Therefore, Indian companies that were buying cheaper Chinese steel have lost the advantage. In addition, SMEs, which cannot invest huge sums in automation, have to contend with rising wage costs and indeed struggle to find and retain talent. Against this backdrop, Mr Ganesh suggests that a separate fund be set up to modernise the Indian auto components industry on the lines of the Textile Upgradation Fund.

ACMA has demanded fiscal sops. It wants export profits to be tax-exempt. The DEPB (Duty Entitlement Passbook) rates for castings and forgings currently have a value cap. The industry body states that this value cap should be reviewed for industry to maintain their export competitiveness specially vis-À-vis China as lot of castings and forging are being sourced from India by European countries.

Plea on octroi

Currently, auto components attract 7.5 per cent customs duty and the industry wants this to be reverted to peak customs duty rate of 10 per cent. The industry also seeks abolition of octroi and entry tax among other measures to enable it to be competitive in the emerging scenario.

Ms Vaishali Jajoo , automotive analyst of the Mumbai-based Angel Broking Ltd, foresees the demand for auto component industry to grow at a CAGR of around 15 per cent in next 4-5 years. “With greater number of global OEM expected to set up base in India, we expect a boost in the demand for auto components arising from their local demand for rising levels of indigenisation and their outsourcing plants for manufacturing bases outside India,” she says. In this scenario, investors can go for diversified and quality high-end product companies where margins are relatively better. Dependence on single segment and/single OEM put the revenue and return in risk, she cautions.

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