Auto focus

Lifeline for small Indian suppliers

SANDEEP N HATTIHOLI | Updated on June 12, 2014 Published on June 12, 2014



The government can take cues from UK's model to revive the automobile sector

It is an initiative that India would do well to emulate.

Two years ago, in the backdrop of a resurging manufacturing sector, the Chancellor of Britain announced an ambitious target of doubling exports to £1 trillion in his Budget speech. To ensure this objective would be achieved, the UK Government zeroed in on aerospace, media, pharmaceuticals and automotive as the key growth drivers. This was quickly followed up by a decision to extend R&D tax credits and provide financial support to companies with export potential. A £1 billion fund spread over a decade was created to inject cash into high technology projects for the transport sector.

In April this year, the Government announced the first four projects that received a grant of £30 million. Focused on improving fuel efficiency and reducing carbon emissions, these included a) upgrading Ford’s EcoBoost Engine; b) regenerative braking technology for GKN; c) start-stop diesel technology to Cummins; and d) hydraulic power delivery systems to JCB.

An overriding priority for the UK Government was to engage smaller companies participating in this project. For instance, a grant of £13 million on Ford’s £100 million EcoBoost engine upgrade programme will not only involve large Tier 1 suppliers such as Continental, Schaeffler, Eberspacher but smaller counterparts like Cambustion and Raicam Clutch. The universities of Bath, Bradford and Nottingham will also work with Ford to develop future technologies.

Learning experience

Why is this detailed narrative so relevant to us? Today, India has overtaken the UK, France and Italy on car sales. There is a new Government in place keen on reenergising the economy. Will it continue to push for India to be an export hub or create a sustainable environment for long-term research-oriented product development? Will there be a new ecosystem where smaller players get a level playing field to think out-of-the-box?

India’s automotive sector employs 13.1 million people and contributes to six per cent of the national GDP, 22 per cent to manufacturing GDP and a substantial 21 per cent of excise collections. Yet, its performance both on the domestic front and exports over the last couple of years has been abysmal. While inflation, high interest rates and negative sentiments have been touted as the causes, it is the component sector that has had to bear the brunt of a growing trade deficit with imports in 2010-11 touching $5 billion.

In a recent report, the Ministry of Heavy Industries listed the following reasons for the current negative scenario.

Increased competition from other low-cost countries, especially China. Doing business with smaller companies is hampered by lower efficiencies, especially at Tier 3-4 levels and higher transaction costs of doing business in India.

Lack of design capabilities with the domestic industry has led to major OEMs sourcing parts for new launches and variants from abroad.

Lack of adequate capacity coupled with industry’s inability to scale up capacity has forced component makers to meet a large part of domestic demands through imports.

Automotive plastic trims highlight the dismal state of affairs. A host of OEMs are forced to import injection mould tools specifically for production of instrument panels, bumpers and other large parts from Japan, South Korea, Portugal and China. Ironically, they would rather source from India as these components are large and difficult to handle apart from other benefits here relating to logistics and confidentiality clauses.

The hitch is that Tier 2 (and below) companies have been unable to raise capital, build competence and scale up business. This is equally true for other products such as powertrain, body and electronics. This has resulted in imports substituting 27 per cent of domestic demand in 2009-10. As a result, there is an imbalanced supplier structure where the top ten control 50 per cent of the market with the next 10 accounting for 28.2 per cent. The rest make up a disintegrated list of smaller companies which are gasping for funds to buy machinery and technologies.

Technology coup

The other impending threat for traditional Indian suppliers is from big names such as Bosch, Denso, Magna, Johnson Controls and Faurecia have been gobbling up high technology companies. The US-based Johnson Controls, which bought Kieper, Recaro and CRH in Europe, is happily placed with a large network of plants globally. It also has a wide variety of technologies in the seating domain and companies such as Johnson are able to fit in with OEMs’ strategy of high volumes across fewer platforms.

Consequently, Indian entities/subsidiary of these mega suppliers can present a strong case to local OEMs in appointing them as preferred suppliers. This is because they have tremendous scale and competence as compared to traditional Indian suppliers stuck in a build-to-print business model for decades. The only way they can compete is on price and this is when they fall prey to a vicious cycle of making just enough to maintain a status quo in operations. Ideally, these suppliers should be investing in technologies and processes for the future.

The previous UPA regime had formed an inter-ministerial working group which recommended setting up a National Automotive Board (NAB). This would oversee support initiatives and ensure action on recommendations made in the Automotive Mission Plan 2016.

One of the key items on its agenda is to undertake investments including creation of the Auto Component Technology Development Fund that provides access to finance at reduced interest rates to modernise, upgrade and acquire technology.

Taking a cue from the UK, the Indian government should empower the NAB with selecting projects that focus on incremental low cost innovations in the areas of powertrain, processes, body electronics, safety and emissions. These, in turn, should be jointly funded by the industry which will help local suppliers, institutes and design houses to work hand-in-hand on developing intellectual properties. In addition, a fund in partnership with the industry should be created to encourage fresh start-ups and entrepreneurs with ideas.

(The writer is Associate Vice President - Symphony Teleca Corporation)

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Published on June 12, 2014
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