Consolidation foreseen in auto ancillary industry

CHENNAI, APRIL 13. The entry of global vehicle manufacturers (VMs) into India following the liberalisation of the auto sector in 1993 and the subsequent entry of global component vendors has led to higher levels of competition and a significant transformation in the dynamics of the domestic auto ancillary industry.

In its latest issue of Crisil Insight, the Credit Rating and Information Services of India Limited has analysed the emerging trends in the industry, namely, declining integration levels of VMs, adoption of global logistics and supplier systems, increasing emphasis on quality, declining pricing flexibility, tierisation and consolidation. In order to improve their cost- competitiveness during periods of auto slowdown, the rating agency finds that large VMs in India are reducing their levels of integration by hiving-off certain component divisions. Crisil expects that the falling levels of integration will expand the size of the domestic ancillary market while simultaneously intensifying competition.

This high degree of competition is expected to give VMs significant cost advantages. Moreover, the onus of committing investments towards continuous technical upgradation gets transferred from the VM to the ancillary manufacturer.

In line with global trends, the domestic ancillary industry is witnessing the emergence of single-source supplier systems, which necessitates significant investments in dedicated facilities. This increases the exposure of the component manufacturer to model failure. Moreover, as VMs increasingly focus on inventory management as part of their control measures, component manufacturers are required to commit investments towards the establishment of these systems.

According to Crisil, the entry of global vehicle manufacturers is leading to the adoption of global quality control practices in the domestic industry, leading to improved export competitiveness, better quality perception in the retail market and expansion of the market to include global car manufacturers operating from India. Self-certification, an emerging concept in the industry, obviates the need for a quality check by the VM as components are delivered in a ready-to-use quality certified form.

In the scenario of price-based competition among VMs, component vendors are faced with pressures on realisations and are required to absorb increases in the cost of production with consequent pressure on profitability. Consequently, the rating agency believes that operational efficiency and cost control initiatives are increasingly determining profitability in the industry. The expansion in the range of vehicle models, particularly in the passenger car segment, has necessitated significant investments in the design and tooling capabilities of component manufacturers. Further, the increase in the number of variants has resulted in reduction of the batch size, leading to lower asset utilisation levels and a corresponding increase in cost of production.

Crisil forecasts that the demanding requirements from new VMs, the need for investments in new capacities, quality improvement systems and technology upgradation will lead to the emergence of tierisation in the industry.

The Tier I manufacturers will outsource sub-assemblies from various Tier II players (who in turn buy sub-components from Tier III players), and assemble entire system modules. Players with high integration levels and having superior inventory management systems, quality certification for their product and processes as well as adequate financial strength are well positioned to emerge as Tier I players.

As already witnessed in the global markets, Crisil expects that the domestic ancillary industry is likely to increasingly witness consolidation. Additionally, it is also likely that foreign partners would gradually try to increase their stake in the joint ventures formed with Indian players.

Domestic manufacturers of components are likely to explore mergers and acquisition possibilities to strengthen their market position. Entry of foreign players is also likely in product segments requiring a high degree of quality and technological support.

Send this article to Friends by E-Mail

Section  : Business
Previous : Indo National to pay 80 p.c.
Next     : Max India enters IT arena