Auto and Auto Ancillaries Sector in India

A BRIEF REPORT ON AUTO AND AUTO ANCILARIES IN INDIA May, 2014

A brieef report on Auto & Auto Ancillariees in India

   

1. OV VERVIEW W OF AU UTO IND DUSTRY 1.11

Current Status otive industrry occupies a prominen nt place in th he Indian in ndustrial sceenario. As a result of itss Automo forwardd and backw ward linkagess with severral key segm ments of the economy, automotive a industry i hass a strongg multiplier effect e and iss capable of being the drriver of econ nomic grow wth. India haas one of thee most co ompetitive auto a parts manufacturi m ing industryy in the wo orld. Today India has become thee outsourrcing hub for several glo obal automo obile manufaacturers. ments is anticcipated, as much m as 30 new n automo obiles factorries, mergerss A four-fold increase in investm p in next 8 years. Poiseed to grow by over thrree-fold, thee and acqquisitions aree estimated to come up Indian auto comp ponent induustry is one of the ffront runneers for grab bbing the global auto o nents outsouurcing markket while thee automobille industry to t emerge aas the fourth h largest carr compon produceer. Marrket Share b by Volumee 2013

Markett Share byy Volume

15%

4% 4%

Passengerr Vehicle Commerccial Vehicle

77%

Three Wh heeler Two Wheeler

Sourcce: SIAM Arannca Research 

1.22

Segmen ntal details

1.22.1 Commerccial Vehicles The do omestic com mmercial veh hicles (CV) industry en nded with another a mo onth of dep pressed saless volumess as reflecteed by a declline of 29.8% % year on year y (yoy) in n February 22014. In com mparison to o the prio or year, slow wdown in th he current yeear has been n sharper ass small comm mercial vehiicles (SCVs)) have alsso come un nder the grrips of a cyyclical slowddown. Follo owing almost five yearrs of strongg Private & Confidential Co

 

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A brief report on Auto & Auto Ancillaries in India

   

growth, the demand for SCVs have also reached a point of saturation across metros and tier II/III cities. Among segments, the M&HCV segment reported a decline of 24.0% during February 2014, while sales volumes in the LCV segment contracted by 32.5% during the same period. The demand contraction continues to be across the board with M&HCV (trucks) being affected the most, registering a drop 22.1% in volume sales during the same period. Overall, M&HCV sales have been declining for over 22 consecutive months, reflecting the impact of weak economic activity, subdued industrial activity and as a result low freight/cargo availability. In terms of market share, Tata Motors has gained some its lost market share in the M&HCV (Goods) segment in 11m 2013-14, while its market position has weakened in the LCVs (Goods) segment as slowdown has caught up with the sub 2t category where it commands a strong market share. In contrast, the 2-3.5t segment has witnessed strong growth where M&M has relatively strong market position with its wide portfolio of pick-up trucks. 1.2.2 Passenger Vehicles The domestic passenger vehicle (PV) industry volumes at 217,749 units in Feb 2014 declined by 3.9% YoY as both the Utility Vehicles (UV) segment as well as the Vans segment shrunk by 9.1% YoY and 32.8% YoY, respectively. However, breaking the streak of volume decline that was being witnessed during the prior four months, the Passenger Car (PC) segment recorded a mild growth of 1.4% YoY on the back of healthy volumes of several new models. The reduction in excise duty on PVs in Feb 2014 is expected to result in an uptick in demand over the next few months given that (a) the excise duty sop is applicable only till June 30, 2014 which could lead to sales advancement to some degree; (b) around 40% of the industry’s sales are attributable to replacement demand, a segment of buyers that may choose to avoid postponement of their purchase decision further to capitalize on the currently available window of reduced PV prices. 1.2.3 Two Wheelers Two Wheelers accounted for the largest share in the export market at 67 per cent in 2013. The month of Feb 2014 marked seven consecutive months of positive volume growth for the domestic two-wheeler (2W) industry, unlike various other automobile segments. With volumes at 1.2 million units, domestic 2W volumes grew by 9.7% YoY in Feb 2014 riding mainly on continued robust demand for scooters. Accounting for 24.1% of 2W industry volumes (in 11m 2013-14), scooter volumes expanded by a robust 28.2% YoY in Feb 2014, with demand for motorcycles also growing by a steady 5.4% YoY during the month. Within the motorcycles segment, growth dynamics have undergone a change in 11m 2013-14 compared to 2012-13. While volumes in the 100cc segment had shrunk by 1.9% in 2012-13 (over the previous year), growth has been moderately positive in this largest motorcycle sub-segment in 11m 2013-14 at 4.2% YoY. In contrast, the fastest growing subsegment of 2012-13 i.e. 125cc bikes has seen its growth taper-off from 26.0% in 2012-13 to minus () 3.8% YoY in 11m 2012-13. In terms of market share, Honda continues to expand its share having increased it from 18.9% in 2012-13 to 23.6% in 11m 2013-14 at the expense of Hero MotoCorp, Bajaj Auto and TVS Motor.

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Totaal Productio on of Autom mobiles in In ndia in million units 13.4

14 10.5

12 10

8.5

7 7.6

6.5

8

8.4

8

6 4 2

15.9

5 15.5

16

0.4 1.2 0 0.4

4 1.3 0.4 0.4

1.3 0.6 0.5

1.6 0.5 0.6

8 1.8 0.40.5

2.4 0.6 0.6 6

05 FY0

FY06

FY07

FY08

FY09

FY1 10

3

8 0.8 0.8

3.1

0.8 0.8

3.2

0.8 0.8

0

Passenger Veehicle

Commercial Veh hicle

FY11

Three Wheeler

FY12

FY13

Two Whe eeler

Sourrce: SIAM, Ara anca Research h 

1.33

Financial Perform mance Automo obile compaanies acrosss segments continue c to o face tremeendous presssure on pro ofit marginss due to elevated e inflation levels.. Added to this t are the h heightened marketing m co osts incurred and heavyy discoun nts offered b by vehicle manufacture m ers to attractt consumerss to the sho owrooms. This T partiallyy explainss the price h hikes initiateed by the vehicle OEMss to protect margins, deespite the weak w demand d environ nment. Goin ng ahead, am midst rising market m comp petition, new w product laaunches, as also a productt refreshees planned, OEMs are expected to o increase sspend on marketing m & promotion nal activities. Althouggh commod dity prices arre not expeected to witn ness steep hikes, h overaall cost and competitivee pressurees would keeep the profiit margins un nder pressurre.

1.33.1 Domesticc Sales Cattegory Passsenger Veh hicles Com mmercial Veh hicles Thrree Wh heelers Tw wo Wheelers Graand Total               SSource: SIAM                Private & Confidential Co

 

Auttomobile Dom mestic Sales Trends T 2009-10 2010-11 2011-12 1,951,333 2,501,542 2,618,072

2007-08 1,549,882

2008-09 1,552,703 1

2012-13 2,686,429

490,494

384,194

532,721

684,905

809,532

793,150

364,781

349,727

440,392

526,024

513,251

538,291

7,249,278 9,654,435

7,437,619 7 99,724,243

9,370,951 122,295,397

11,768,910 115,481,381

13,435,769 17,376,624

13,797,7488 17,815,6188

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A brief report on Auto & Auto Ancillaries in India

   

1.3.2 Exports Category Passenger Vehicles Commercial Vehicles Three Wheelers Two Wheelers Grand Total Source: SIAM 

1.4

2007-08 218,401

Automobile Exports Trends 2008-09 2009-10 2010-11 335,729 446,145 444,326

2011-12 507,318

2012-13 554,686

58,994

42,625

45,009

74,043

92,663

79,994

141,225 819,713 1,238,333

148,066 1,004,174 1,530,594

173,214 1,140,058 1,804,426

269,968 1,531,619 2,319,956

362,876 1,947,198 2,910,055

303,088 1,960,941 2,898,659

Major Automotive Players in India Companies Ashok Leyland Asian Motor Works Bajaj Auto BMW India Daimler Chrysler India Eicher Motors Fiat India Force Motors Ford India General Motors India Hero Honda Motors Hindustan Motors Honda Hyundai Motors Kinetic Motor Mahindra & Mahindra Maruti Suzuki Piaggio Royal Enfield Motors Skoda Auto India Suzuki Motorcycles Swaraj Mazda Ltd Tata Motors Cars Toyota Kirloskar TVS Motor Co Volvo India Volkswagen India Yamaha Motor India

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Segments LCVs, M&HCVs, buses M & HCVs Two and three wheelers Cars and MUVs Cars LCVs, M & HCVs Cars MUVs and LCVs Cars and MUVs Cars & MUVs Two wheelers Cars, MUVs and LCVs Two wheelers, cars and MUVs Cars and MUVs Two wheelers Three wheelers, cars, MUVs, LCVs Cars, MUVs, MPVs Three wheelers, LCVs Two wheelers Cars Two wheelers LCVs, M & HCVSs, buses MUVs, LCVs, M&HCVs, buses Cars, MUVs Two wheelers M & HCVs, buses Cars Two wheelers

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A brief report on Auto & Auto Ancillaries in India

   

1.5

Profile Of Major Players In India

1.5.1 Tata Motors Instigated in the year 1945, Tata Motors has a wide network of retailers and suppliers across India. It was in 1954 that the company launched its first vehicle. Today more than 3 million Tata cars and heavy vehicles glide through Indian roads. The company gained the prestige of being the first from engineering industry of India to be listed under the New York Stock Exchange in September 2004. Besides being second biggest in the passenger car division, Tata Motors is also ranked as fifth highest in the category of medium and heavy commercial vehicles at international level. With the help of its associates, Tata Motors offer high end manufacturing and automotive solutions to its customers. It's foremost indigenously made car was Tata Indica, followed by a mini-truck Tata Ace in 2005. In the year 2009, the firm marked its name in the pages of automotive history by introducing the world's fuel efficient and cheapest car - Tata Nano. 1.5.2 Mahindra and Mahindra Mahindra and Mahindra is the flagship company of Mahindra Group. It was set up in 1945 to make general purpose utility vehicles for the Indian market and soon it started manufacturing agricultural tractors and light commercial vehicles (LCV). The company has recently started a separate sector, Mahindra systems, and automotive Technologies (MSAT) in order to focus on developing components as well as offering engineering services. Mahindra and Mahindra have two main operating divisions. One is the Automotive Division for the manufacturing of utility vehicles, LCV and three wheelers. 1.5.3 General Motors In 1928 General Motors began with assemblage of Chevrolets, trucks, buses, and batteries. Although it closed operations in 1954, it has been in Indian market as a part of tie-ups with Hindustan Motors to produce Bedford trucks, Vauxhall cars, Allison transmission, and off-highway equipment. In 1994, General Motors India was incorporated as a 50-50 joint venture with C.K. Birla Group of Companies. In 1999 it became a fully owned subsidiary of General Motors when General Motors Overseas Corporation bought the remaining shares. The existing General Motors plant was originally built by Hindustan Motors. In 1994 General Motors modernized it. The plant is located at Halol, near Vadodara, Gujarat. 1.5.4 Ford India Ford has been in India since 1907 when it launched Model A here. In 1926, Ford India was established, but the operations were discontinued in 1954. Again in 1995, Ford Motor Company received government approval to establish Mahindra Ford India, Limited (MIFL). It was 50:50 joint ventures with Mahindra and Mahindra Limited (M & M). In November 1998 Ford Private & Confidential

 

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received approval to increase its stake in the joint venture to 92.18%. The Company was rechristened as Ford India Limited. It has set up a modern, integrated manufacturing facility in Maraimalai Nagar near Chennai. 1.5.5 Bajaj Auto Ltd Bajaj Auto Ltd. is the largest exporter of two and three wheelers. With Kawasaki Heavy Industries of Japan, Bajaj manufactures state-of-the-art range of two-wheelers. The brand, Pulsar is continually dominating the Indian motorcycle market in the premium segment. Its Discover DTSi is also a successful bike on Indian roads. Since 1986, there is a technical tie-up of Bajaj Auto Ltd. with Kawasaki Heavy Industries of Japan to manufacture state-of-art range of latest two-wheelers in India. The JV has already given the Indian market the KB series, 4S and 4S Champion, Boxer, the Caliber series, and Wind125. 1.5.6 Maruti Udyog In February 1981 Maruti Udyog Limited (MUL) was incorporated under the provisions of the Indian Companies Act, 1956. It was established to meet the growing demand of a personal mode of transport caused by the lack of an efficient public transport system. A license and Joint Venture Agreement was signed between Government of India and Suzuki Motor Company (now Suzuki Motor Corporation of Japan) in October 1982. It manufactured India's first affordable cars. In the past twenty years it has diversified into various types of passenger cars catering to the need of different section of the population. The manufacturing Unit of is located at Palam Gurgoan Road, Gurgoan, Haryana. 1.5.7 Hero Honda Motors Hero Honda Motors, an India based Two-wheeler Company. It is regarded as the World’s Largest Manufacturer of Two-wheelers. It manufactures geared and gear-less two-wheelers. It caters low powered bikes to high power bikes to its wide pool of 15 million customers world-wide. Products like Hero Honda Splendor, Hero Honda Passion, CD Dawn, Hero Honda CBZ and Hero Honda Karizmaare extremely popular among masses. Their products are well known for fuel efficiency and as well as power delivery coupled with affordability. Its gearless or step-thru models like Hero Honda Street and Hero Honda Pleasure are also gaining huge popularity amongst young Indian ladies. 1.6

Government Initiatives Government has taken several policy initiatives and pro-active measures to enhance the effectiveness and drive growth in Automotive Sector. Major steps have been taken to make India a global automotive hub under the Automotive Mission Plan' for the period of 2006-2016. The Mission Plan aims to make India emerge as the destination of choice in the world for design and

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manufacture of automobiles and auto components, without put reaching a level of US$ 145 billion. Some of the other key initiatives include:          1.7

Formation of National Automotive Board (NAB) to look into the issue of recall of vehicles; hence improving manufacturing standards Reduction of excise duty on small cars Launch of the National Mission for Hybrid & Electric Vehicles under Budget FY12, to make hybrid vehicle kits cheaper by reducing the excise duty rebate to 5% from 10% State Government promoting industrial space especially in the automobile sector Open to Public Private Partnerships (PPP) Establishing special auto parks and virtual SEZ's for auto components industry by providing an interest subsidy on loans and investment in new plants and equipment Export benefits to intermediate suppliers of auto components against the Duty Free Replenishment Certificate (DFRC) Automatic approval for 100% Foreign Equity Investment in auto components manufacturing Manufacturing and importing in this sector exempt from licensing and approvals

Future Perspective The rapid improvement in infrastructure, huge domestic market, increasing purchasing power, established financial market and stable corporate governance framework have made the country a favorable destination for investment by global majors in the auto industry, as per Automotive Mission Plan (AMP) (2006-16). Additionally, the introduction of alternative fuels like hydrogen and bio fuels needs to be promoted to ensure sustainability of the industry over the long term. The vision of AMP 2006-2016 aims India to emerge as the destination of choice in the world for design and manufacture of automobiles and auto components with output reaching a level of US$ 145 billion accounting for more than 10 per cent of the GDP and providing additional employment to 25 million people by 2016. In addition, the US-based car major, Ford aims to make India its export hub and plans to sell its products in more than 50 countries over a period of time. The company has committed a total investment of US$ 2 billion in India so far (November 2012). The luxury car market of India is set for growth over the medium and long term. The market is about 30,000 cars a year and is rising steadily.

1.7.1 Strategic Insight Some of the key strategies that vehicle manufacturers are likely to adopt in 2013 are listed below: a) Commercial vehicles  Launch new models  Increased customer focus by expanding sales and service network  Focus on product innovation to create new market segments Private & Confidential

 

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   

Develop new products for the international markets Expand footprint to newer export markets Continue thrust on cost control & productivity improvement measures Greater thrust on and expansion of less cyclical businesses.

b) Passenger vehicles  Launch new vehicle models, especially more diesel models  Increase focus on tier II and tier III markets, even for high-end models  Expand sales and service network for enhanced customer satisfaction  Increase focus on expanding pre-owned vehicle business  Continue thrust on cost control & productivity improvement measures  Leverage social media to establish closer bonds with customers. c) Two wheelers  Increase focus on small towns and rural markets (e.g. expansion of distribution/service network)  Increase focus on emerging markets such as Brazil, Africa, Argentina, Indonesia, etc to push exports.

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2. OVERVIE O EW OF AU UTO COMPONENT INDU USTRY 2.11

Current Status A – Com mponent Ind dustry coverrs a wide sp pectrum of industries, i tthat is, rubb ber, iron and d Indian Auto alloy steeel, plastic, oils o and greaase, fabricatiion tools, saafety gadgetss, air conditiioning, radiaators, mould d making,, battery in ndustry, eleectrical fitttings, interior furnishiings, musicc system, sheet s metall fabricatiion, lamps aand bulbs, spring s manuufacturers – it covers baasic industryy and white goods. Thiss sector has h a bearin ng on Powerr consumpttion and skiilled labour availability and has a considerable c e contribuution in GD DP Manufactturing) – forr FY 12 GD DP at factor cost c is 2.1% % Com mprehensivve Product Range Drivee Transmisssion & Steerring Partss 19% %

Passenger Vehicles ommercial 15.7% Co V Vehicles 4.66%

Body &Chassis & 122%

SSuspension & B Braking Parts 12%

Threee Wheellers 2.95% % Two Wheellers 77.32%

* lateest data as availaable   

As per industry i estiimates, out of the total turnover off the Indian auto compo onents induustry, around d 60% is derived fro om sales to o domestic OEMs, around 25% comes c from m sales to th he domesticc ment markeet and aroun nd 15% is derived d from m exports. Thus, T domeestic demand recovery/ / replacem sustenan nce will be the primaryy variable th hat will goveern the auto omobile inddustry’s reveenue growth h and pro ofitability pro ospects overr the short term. t In term ms of exports, while thee prevailing weakness w off INR vs USD will n not have an ny material impact on th he industry’’s exports profitability at a a broaderr o ~15% of the industry’s totall revenues - individuall level - given that exports acccount for only nies that do o have meaaningful exp ports depen ndence, sho ould benefitt from theiir enhanced d compan exports competitiveeness arisingg from the prevailing p w weakness of the Indian ccurrency. Th he weaknesss c persist in 2012-13; yet, in overaall revenue growth of the auto components industry iss likely to p EBITD D Amargins may m remain intact or evven improvee as compan nies’ step-up p focus on cost c control, besides benefitting from a ben nign raw material cost eenvironmentt. Moreover, the industrry’s planned d o for 2012-13 2 also o remains conservative c e since a laarge magnituude of greeen-field and d capex outlay brown-ffield capacitty expansion n was concluuded duringg the course of the last two years th hat providess sufficien nt capacity buffer b to meeet the level of demand envisaged over o the shorrt term.

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A brief report on Auto & Auto Ancillaries in India

    113

120 100

CAGR 200721: 11%*

USD billion

80

66.3

60 40

39.9

43.5

2010-11

2011-12

30.1

26.5

23

2007-08

2008-09

20 0 2009-10

2015-16

2020-21

Figures for financial year – April to March (* Estimates)

2.2

Auto Component Industry - Production Turnover Financial Year Ending Percentage Change (%) * latest data as available 

2.3

2005

2006

2007

2008

2009

2010

2011

2012

25.6

38.7

20.8

6.5

-0.7

28.4

34.2

13.3

Major players  Sona Koyo Steering Systems, Rane Madras and Rane TRW Systems are the key players in steering systems.  Bharat Gears, Gajra Bevel Gears and Eicher are some of the major players in the gears sub-segment. Two international companies, Graziano Transmission and SlAP Gears India, have set up their base in India.  Clutch Auto, Ceekay Daikin, Amalgamations Repco and Luk Clutches are the major players in the clutch sub-segment. RaneBrake Lining and Rico Auto are the key players manufacturing clutch-facings.  GKN Drive shafts (India) and Delphi cater to the drive shaft requirements of passenger cars and SonaKoyo Steering Systems services to the commercial vehicle segment.  Brakes India, KalyaniBrakes and Automotive Axles are the three major brake system suppliers in the country.  Rane Brake Lining, Sundaram Brake Lining, Hindustan Composites and Allied Nippon dominate the brake linings sub-segment.  Jamna Auto and Jai Parabolic are the major manufacturers of leaf springs.  Gabriel India, Delphi and Munjal Showa are the key manufacturers of shock absorbers.  Lumax, Autolite and Phoenix Lamps are the key players in the headlights sub-segment.\  Premiere Instruments and Controls is the leading player in the dashboard sub-segment  Jay Bharat Maruti, Omax Auto and JBM Tools are the major players in the sheet metal parts sub segment. Private & Confidential

 

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 Lucas TVS, Denso, Delco Remy Electricals, and Nippon Electricals are the key players in this segment.  Phoenix Lamps, Autolite, Hella-India, and Lumax are prominent players manufacturing sheet metal parts. 2.4

Government Initiatives The Government of India (GoI) plans to introduce fuel-efficiency ratings for automobiles to encourage sale of cars that consume less petrol or diesel. The GoI plans to push the supply of vehicles powered by electricity over the next eight years. It is expected that there will be a demand of 5-7 million electricity-operated vehicles by 2020. The GoI allows 100 per cent foreign direct investment (FDI) in the automotive industry through automatic route. The Automotive Mission Plan (AMP) 2006-2016 aims at doubling the contribution of automotive sector in gross domestic product (GDP) by taking the turnover to US$ 145 billion in 2016 with special emphasis on export of small cars, multi-utility vehicles (MUVs), two & three wheelers and auto components.

2.5

India: The Global Auto Hub  Nissan India is currently exporting a number of child parts, engine and body parts to overseas markets. “We export to about 101 countries worldwide and there are many parts that we export from India regularly to 14 countries, including big markets like the UK, Brazil, Mexico and USA.  South Africa is pitching its auto component industry to Indian automakers for partnerships. Accompanied by a delegation of 27 companies.  RSB Transmissions has entered into a partnership with DHB Automotives, Brazil to launch auto components in India. The new range of products was unveiled at the Auto Expo 2014 Components Show at Pragati Maidan, New Delhi.  Volkswagen is looking at investing US$ 248.55 million over the next five years to set up a diesel engine manufacturing facility.  Infosys has signed a multi-year contract with Volvo Cars to provide application development services to the latter's global operations. The application development work includes maintaining applications to support multiple domains, including marketing and sales, customer service, manufacturing, product development and corporate business functions. Furthermore, India is fast becoming a major procurement centre for Yamaha Motor for its global operations. “We are supplying around 125-130 parts from around 37 companies in India to Yamaha’s global facilities including Indonesia, Vietnam and Thailand. In the next 3-4 years, we plan to supply around 300-400 parts and double the number of vendors from India,” as per Mr Sanjiv Paul, Group Head – Purchase Operations, India Yamaha Motor (IYM).

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2.6

Future Perspective It is estimated that by 2016-17, the total production of the auto component industry would be $75 billion with exports accounting for $15 billion, 20% of the total domestic production. The demand for auto components in the same year is expected to cross $80 billion. Domestic Indian companies have developed strong manufacturing capabilities that have helped them till now in keeping costs low and quality under control. As volumes increase, Indian component manufacturers will have to scale up their operations and further improve quality, cost and delivery performance to global standards demanded by customers, it added. Over 70% of the auto component companies in India are SMEs. Government support for R&D/new product development is critical. It also asked for elimination of customs duty on alloy steel, aluminum alloy and secondary aluminum alloy.

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