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No reason for India to worry about FTAs

AMMAR MASTER | Updated on September 25, 2014 Published on September 25, 2014

Positive outlook India’s FTA drive can create new ventures forcomponent makers RAMESH SHARMA

AMMAR MASTER

For component manufacturers, they can be turned into a new opportunity

It is inevitable that India will sign more free trade agreements (FTAs) to actively engage with an increasingly globalised world. This is imperative to place the country on a level playing field with other competitor nations and open yet untapped markets for its industry.

Welcome opportunity

For the automotive sector, this should be viewed as an opportunity to expand business and de-risk over-dependence on the domestic market. While vehicle manufacturers welcome India’s greater trade liberalisation (since it would allow them to expand exports), the auto components sector is worried about losing critical domestic business with OEMs likely to import parts at cost-effective prices. This is already happening with Chinese components whose manufacturers have the advantage of scale to keep costs in check.

Exports have played an important role for Indian light vehicle makers to hedge the risk against a slowdown in the domestic market. In the last five years (2008-2013), exports have risen at a compound annual growth rate (CAGR) of 12 per cent versus 11 per cent for domestic sales. Last year’s figures are even more telling when domestic sales fell 11 per cent year-over-year against just a one per cent decline for exports. One name that immediately comes to mind is Bajaj Auto whose exports now make up for 45 per cent of its overall output and is slated to grow even more in the coming years.

The same holds true for the components sector where exports have grown at a CAGR of 15 per cent in the last five years (FY 2009-2014), according to data from the Automotive Components Manufacturers Association of India (ACMA).

India’s FTA drive can be turned into a new opportunity for the component makers both through increased OEM orders (thanks to higher exports) and through direct exports to newer geographies. The latter may especially play into the strategy of bigger players since the new government has proposed FTA negotiations with Latin America, Africa and CIS.

Strategic prospects

Many of India’s Tier 1 suppliers are already looking to raise their exposure in Latin America and Africa. At present, each makes up for just seven per cent of India’s total component exports compared to 38 per cent for Europe, 25 per cent for Asia and 21 per cent for North America, according to ACMA. An FTA with these two large regions can thus provide greater market access.

To say that further improvements in production quality, cost reduction and operational efficiency will be required is a moot point. Certainly, the components industry will have to move to the next level of maturity. The development of new products/modules, enhanced design capabilities and diversification will be the order of the day.

This becomes inevitable as MNCs increase sourcing out of India which offers the twin benefits of good quality at competitive price points. Renault-Nissan is an example where there is a lot of engineering work being farmed out to India. Likewise, Fiat-Chrysler has people in its Chennai R&D Centre working on global projects which will eventually involve the participation of component manufacturers. Yamaha has already identified India as an important sourcing destination where FTAs will give the strategy a huge fillip.

In turn, the Government will have to play remove many bottlenecks plaguing the industry, including underdeveloped infrastructure and inadequate power supply. It will also have to look at the inverted duty structure while forging new FTAs.

It is quite natural for component makers to be apprehensive of trade pacts and this was rather evident during the recent ACMA convention in New Delhi. After all, there are justifiable concerns about the country of origin where parts could find their way from China into another country (which has an FTA with India) and then get shipped here. Yet, a potential global superpower in automobiles cannot afford to exist in isolation especially when its components industry has grown by leaps and bounds over the years.

The writer is Senior Market Analyst, LMC Automotive

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Published on September 25, 2014
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