With around US$ 15 bn to be invested in the sector over the next 10 years, the Indian auto ancillary industry seems well on its way to take advantage of both the internal as well as external growth opportunities.

Not to forget the growing capability of the Indian component suppliers whether be it in design and development or with respect to cost effective and flexible production.

 What more, the companies are also becoming increasingly global in their outlook, as evident from the growing overseas acquisitions and manufacturing foot-prints. However, rising input costs, infrastructural bottlenecks and talent transformation issues are likely to remain some of the key challenges.

Hence, it will only be players with enough economies of scale and strong technical capabilities that will be able to translate the expected buoyant topline growth into equally impressive bottomline growth.

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Industry wish list

• The government should create a level playing field in terms of input costs and taxes thereof especially in light of the proposed FTAs with ASEAN and other countries like China
• Tax incentives should be provided for setting up new industrial parks dedicated to auto and auto components so that India could be made a global manufacturing hub in the long run
• The government should do away with the complexities of the current labour laws and make them much simpler so that the industry becomes more competitive.

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Budget over the years

Budget 2005-06

• Customs duty on lead cut to 5%.
• Excise duty on tyres, tubes and flaps reduced from 24% to 16%
• No change in excise duty on automobiles.
• 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% to 5% or 10%. Customs duty on the basic plastic material reduced to 10%. Customs duty on selected petro-chemicals reduced from 10% to 5%.
• Customs duty on natural rubber maintained at 70%. But peak customs duty reduced from 20% to 15%.
• VAT implemented in majority of the states.

Budget 2006-07

• Peak custom duty reduced from 15% to 12.5%
• Excise duty on cars having engine capacity upto 1,200 cc (petrol based engines) and 1,500 cc (diesel based engines) and length of the car upto 4,000 mm reduced from 24% to 16%.
• Continued thrust on road infrastructure
• Custom duty on alloy steel and non-ferrous (primary and secondary) metals reduced from 10% to 7.5%

Budget 2007-08

• A secondary and higher education cess @ 1% of the aggregate of duties of excise has been imposed on excisable goods including auto ancillaries. This would be in addition to existing education cess of 2% imposed in budget 2004 
• Hike in the dividend distribution tax from the current 12.5% to 15%
• Vocational training programmes based on public-private partnerships to be initiated

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Key positives

Auto industry potential: Since the auto component industry tracks the auto industry, the bright future of the latter augurs well for the former. As per the automotive mission plan 2016; the auto industry plans to achieve a domestic turnover of US$ 145 bn by 2016 and employ more than 25 m people. Hence, it is only natural to expect the auto ancillary industry to grow at a similar rate if not more.

The export story: With the Indian auto ancillary industry graduating to world class standards, it has caught the attention of a lot of global auto majors, all of whom are keen to outsource some of their work to India.  Already, exports have logged in a growth of more than 30% in the past five years and are expected to grow at more than 20% atleast for the next 10 years. What is also noteworthy is the fact that exports to OEMs and Tier 1 suppliers now constitute more than 75% of total exports as against a mere 35% in the early nineties.

Technical proficiency: The entry of global players from different continents has led to the Indian manufacturer's proficiency with all global automotive standards such as American, Japanese, Korean and European. 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.

Quality consciousness: While the Indian manufacturing industry is not exactly known for its cutting edge technology and stringent quality standards, things are beginning to change. The fact that as many as nine companies boast of the coveted Deming awards is a testimony of the fact that the Indian auto ancillary industry is capable of manufacturing products that are at par with the best in the world in terms of quality. Not only this, about 81 companies in India have QS 9000 certification, considered to be an important pre-requisite for supplying to the US based OEM's.

Key negatives

Rising costs: Prices of key inputs like steel and aluminium have remained firm over the last few years and this is hurting the profitability of the auto ancillary players.  Further, with the auto companies themselves engaging in fierce competition, there is pressure on auto component players to further reduce prices and improve productivity. Thus, this squeeze from both the ends may not allow the smaller companies to invest suitably for future growth.

Competition from other Asian countries: While the Indian IT industry got a headstart over its rivals, the same cannot be said about the auto components industry as 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.