Budget 2005-06: Auto Ancillaries
With $1 trillion worth of opportunity knocking at its doors, the Indian auto industry with its low cost manpower and homegrown IT advantage is all set to grow its revenues to $5 bn by FY08, a five fold increase from the current levels. However, dated technology and competition from countries like China and Thailand might disrupt the industry growth story.

Budget Measures Customs duty on lead cut to 5 per cent. Excise duty is being reduced on tyres, tubes and flaps from 24 per cent to 16 per cent  No change in excise duty on automobiles. Excise exemption on tractors to continue. Customs duty reduction on select capital goods and inverted duty structures (i.e. the duty on input costs being higher than the product itself) reduced from 15 per cent to 5 per cent or 10 per cent. Customs duty on the basic plastic material to 10 per cent. Customs duty on selected petro-chemicals reduced from 10per cent to 5per cent. Customs duty on natural rubber to continue at 70 per cent. But peak customs duty reduced from 20 per cent to 15 per cent. VAT implementation.  Budget Impact The reduction in customs duty on lead to 5 per cent will result in lower raw material costs for automotive manufacturers like Exide [Get Quote]. Lower excise on tyres could potentially boost the tyre sales and will be margin accretive. The reduction of peak customs duty will benefit almost all auto ancillary majors.  Sector Outlook The auto ancillary sector is lot more diversified in nature with companies specializing in their own niche. As far as the sectors that are under our coverage, automotive battery, tyre companies, forging players will benefit from the budget proposals. This would enable to partially absorb the incidence of firm raw material costs in the short-term.  Industry Wish List Key pre-budget memorandum for 2004-05 from Automotive Component Manufacturers Association of India (ACMA) is as follows:: Setting up of 3 domestic SEZs in the North, West and Southern India clustering around the major automotive manufacturing hubs. There should be exemption from customs duty on inputs, sales tax & excise duty for supplies to units in the SEZ. All barriers to inter-state trade and commerce should be removed and a uniform national market to be created on the implementation of VAT. Status quo to be maintained on import tariffs on auto-components so that they would be kept at the current levels of 25 per cent for the next 2-3 years Benefit of 150 per cent weighted deduction for investment made on R&D maybe extended to auto component manufacturers also, as it has been done in the case of other notified industries.  Budget over the years Budget 2002-03 Budget 2003-04 Budget 2004-05 Reduction in customs duty on metals used by industry. While duty on copper, zinc and lead reduced from 35 per cent to 25 per cent, duty on Aluminium reduced from 25 per cent to 15 per cent. De-reservation of a number of items in the SSI sector. Measures to bring in large-scale public investment in infrastructure development and acceleration in the Golden Quadrilateral project. Additional levy of a cess of 50 paise per liter of diesel and motor spirit, which will contribute Rs 2600 crore (Rs 26 billion) and help in acceleration of highway development program. IT companies will continue to enjoy the benefits of 10A/10B benefits even after a change of management. Reduction in excise duty on cars from 32 per cent to 24 per cent and electric vehicles from 16 per cent to 8 per cent. Decrease in freight rate on iron and steel by around 5.3 per cent. Duty on key inputs such as non-alloy steel to be reduced from 15 per cent to 10 per cent. Duty on alloy steel, copper, lead, zinc and base metals also reduced from 20 per cent to 15 per cent. Consortium of banks formed to ensure speedy conclusion of loan agreements and implementation of infrastructure projects. 2 per cent education cess on all taxes.
Key Positives Cost advantage - Due to cost related pressures on global auto players and Tier 1 suppliers, a lot of them have started outsourcing components from Indian auto ancillary players. The industry, which exported components worth over US$ 1 bn in FY04, is also benefiting from strong domestic sales. Large untapped market - Global auto components market is worth over US$ 1 trillion and considering India's market size, which is just 0.8% of the total market size, there exists tremendous growth opportunity for the domestic auto players to exploit. Milking the MNC experience - The entry of global players such as Ford, GM, Toyota and Honda into the Indian market has allowed the Indian manufacturers to work with these players on global production, quality and delivery systems. It has also helped the global players to see for themselves the evolution of many auto components manufacturers and they are therefore now entrusting them with more work. IT advantage - Thanks to the country's IT advantage, the industry is capable of becoming a full-fledged service provider (research, design, development, testing) to global OEMs and thus score over competitors like China and Thailand. This combined with low cost quality manpower strengthens our stand in the global arena.		Key Negatives Not enough economies of scale - Despite being around 60 years old, the domestic auto industry is even behind countries like South Korea, Brazil and Mexico in terms of production and sales, thus depriving it the benefit of economies of scale. This makes it difficult for companies to invest extensively in R&D and development, a key competitive tool in the global market. Competitive threats - Countries like China and Thailand might put a spanner in domestic industry's wheels. While China has huge economies of scale and lower labour cost than India in some areas, Thailand is believed to have excess capacity (legacy of East Asian crisis) and depreciated assets. Therefore, these countries are capable of beating India at its own game, that of low cost. Trade agreements might hurt - The growing number of FTAs (Free Trade Agreements) that are being signed by India with countries like Thailand, Singapore, China etc is likely to hurt the domestic players as they pay a relatively higher duty of around 25% as compared to 1%-10% being paid by its Asian counterparts.

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