New opportunities to make Indian auto industry more vibrant in 2019
India is poised to soar, higher than many fast-growing large economies over the next decade. At the same time, automotive original equipment manufacturers (OEMs) and component manufacturers in the country aspire to achieve global eminence. The future of the auto OEM and auto component industry is being shaped by multiple trends, policies and discontinuities. What opportunities do these trends create for the auto component industry? And how can the industry prepare itself to capture a share of these opportunities? According to the Auto Components Manufactures Association (ACMA) and McKinsey & Company report, the growth indicators paint a picture of optimism for India. It might emerge as the world’s fifth-largest economy by 2019 and become worth USD 4.7 trillion in 2023. Anticipation of a growing consumer class, enhanced ease of doing business, expanding infrastructure and such favourable factors could propel the country forward, and with it, the automobile industry too.
On a strong footing
The Indian automotive OEM industry is already in a strong position. Globally, it is at the forefront of many segments—leading in two-wheelers, segment-A cars, and tractors. The industry aspires to triple vehicle sales by 2026, from 26 million to 65 million to 76 million vehicles, across segments. These could be definitive tailwinds for the Indian automotive components industry, which has ambitions of its own—to double the contribution to manufacturing GDP with a 4-fold growth in size and a 6-fold growth in exports by 2026. While industry turnover has more than tripled (in Rupee terms) in the past decade, India’s contribution to global turnover is approximately 3%. Clearly, there is substantial scope for growth in an industry being shaped by a variety of trends.
Exports are expected to grow by 9-11% in fiscal 2019 mainly on account of improving global economic conditions. In major export destinations, such as USA, auto sales,
mainly class 8 trucks, have grown by 70% in CY2017 and are expected to record strong growth in 2019. Europe also has shown signs of revival. Auto component exports to other emerging economies such as South East Asia and Latin America have also shown substantial growth and will continue to drive demand in fiscal 2019. Crude oil price is expected to move north which signals improvement in the West Asian economy.
Imports are estimated to grow at a higher pace of 9-11% despite anti dumping duties and localisation efforts by the players as domestic demand is expected to drive growth. Higher imports of components pertaining to safety (due to various mandatory requirements), body parts, etc. continue to contribute to the import growth. In the long- term, availability of new technology due to collaboration of the domestic players with foreign players and localisation efforts by the OEMs will keep imports in check.
We expect the auto component demand to remain healthy in FY20 on account of strong growth across asset classes. As the BS-VI emission norms are expected to come into effect in FY20, this would result in a price increase across all automotive segments and pre-buying of cheaper BS-IV vehicles in 2019 is likely to drive volumes up. A strong domestic demand and a pick-up in exports is expected to aid overall auto components growth this year.
The 2018 calendar year came to a close with a slight drop in overall CV sales. It was M&HCVs, which saw a significant drop in sales when compared to the other CV segments. Linked with the implementation of new axle norms, the drop in sales is said to be a result of the extra capacity added almost overnight, and in a market environment where the demand is not very strong. Following strong CV sales in FY2016-17 and FY2017-18, the drop in CV sales at the fag end of the 2018 calendar year also reflected on the rise in input costs, according to an industry expert. The rise in input costs could not be passed on by the fleet operators to their customers, he said. If this would affect the growth of the CV industry in 2019, the rise in fuel prices, which rank at the top of the input costs of a fleet operator, and account for the biggest operational expenditure, proved to be a big dampener. Vinod Sahay, CEO, Mahindra Truck & Bus, said that their calculation showed that fuel costs have come to account for over 55% of the operating costs post the diesel price hike. Earlier they accounted for 50%. Terming 2019 to be a challenging year, Sahay drew attention to the benefit of the new axle norms going to the consignor rather than the fleet operator because of the demand and supply situation.
With most CV majors having passed on the rise in input costs to CV buyers in the form of a price hike, the quest for efficient CVs is going to increase in 2019, an industry expert said. This would be against a backdrop of rising stress on the transporters. With toll costs starting to eat into the operational costs, fleet operators in 2019 are expected to replace their aging trucks with newer, fuel efficient and reliable CVs. If this would include a move to higher tonnage, the possibility of overloading cannot be ruled out. With the talk of yet another important regulation on safety coming in, an industry source opined that it would serve to fully implement the Bus Code and Truck Code in 2019. He claimed that the 2 codes with a substantial safety imperative are being followed by OEs in flesh and spirit rather than the unorganised truck and bus bodybuilders. In response to a query on the upcoming safety regulation, Sahay said that an OE player has to meet the norms when he makes a CV truck cabin or a bus body. The same norms may not apply if a cabin on a cowl chassis is made outside. “Chances are that the application of AIS155 norms that are coming into force from April will be limited to OE players,” he added. According to V G Ramakrishnan, Managing Director. Aventuem Advisors LLP, there is a need to
ensure that safety regulations are effectively implemented.
BS-VI emission norms
With BS-IV emission regulation having the shortest lifespan of 3 years, the race to meet the BS-VI emission regulations by April 2020 wills intensity in 2019. It will be the trend of the year, Ramakrishnan said. Kaushik Madhavan, Vice President, Mobility (South Asia), Frost & Sullivan, said that urbanisation, infrastructure development, connected mobility, and alternative fuel as well as hybrid technology would be the key trends for 2019. Echoing Ramakrishnan’s sentiments, he said that an amount of pre-buying was expected in 2019. Of the opinion that pre-buying in 2019 would trigger high volume growth, Ramakrishnan averred, “CV makers will start introducing BS-VI CVs from as early as October and November 2019.”
“Since a BS-IV truck cannot be sold even if it were produced earlier (before the BS-VI deadline), no CV major will be ready to take the risk of building stock with an impression that it will sell before that deadline. Since the size of the opportunity will be difficult to gauge, the only window available would be between August 2019 and December 2019,” Sahay said.
In the January-March 2020 quarter, manufacturers are expected to produce CVs to order. Challenges in 2019 will be manifold for certain. Vendors are likely to stop producing some of the components that are moving to BS-VI by as early as August 2019. CV majors are expected to stop producing some of the low selling variants by around the same time. Regular production of lead models would most likely stop in December 2019. According to Ramakrishnan, heavy discounts on vehicles that are slow moving will be a key event in 2019. Many models will be phased out in March 2020, he said.
Changes in GST
If some of the phased out models could be earmarked for exports, the year 2019 is slated to be a challenging year for certain. Judicial interventions, reinforcing the need to adhere to BS-VI regulations, are expected in 2019, he said. The CV industry could gain from the ongoing warehousing consolidation and mechanisation. With trucks expected to work like aircraft, and spend less time at the loading and unloading bays in view of the asset quality and costs going up, the CV industry in 2019 is also set to gain from some changes in the GST structure that are likely. Not a year of downcycle, according to Sahay, the CV industry should do reasonably well in 2019. A reason for some worry, however, is on the account of the macroeconomic parameters that are not as good as they were a few months ago. If the same trend continues in 2019, its effect on growth cannot be ruled out. With the market outlook not as positive as it was a couple of months ago, the CV industry in 2019 could profit from some dip in operational costs on account of fuel prices staying low.
This would be influenced by a subdued global economic atmosphere, according to Ramakrishnan. A trend identified in 2018, and expected to continue in 2019 would be of bigger fleets taking advantage of GST for their ability to pay tax through forward charge mechanism. This would ensure them better profit margins, and reduce their need to contract smaller fleets. In view of the same the markets are consolidating on higher tonnage. The trend has been evident for the last 5 years. As the movement towards consolidation of buying and shifting of loads increase as CV costs go up, the pressure on business expansion by smaller fleets would also go up, Ramakrishnan said.
Shift in sales trend
If the smaller fleets are expected to find new ways of staying relevant amid rising challenges in 2019, the year is also expected to be a period of stricter implementation of overloading norms. Gaining from the sanction of large government
infrastructure projects, tipper sales in 2019 are expected to exceed that of the haulage segment. With the third and fourth quarter of 2019 expected to witness high sales volumes, according to Ramakrishnan, 2019 will also be a year of national elections. An amount of uncertainty will be there. With the risk of fiscal expansion at the cost of increased fiscal deficit, 2019 is likely to be a year of much pre-buying as well. CV makers are expected to reveal the price of the BS-VI CVs as they firm up on the technology strategies they will pursue. They are currently said to be experimenting with EGR, EGR and SCR combinations, and even EGR and EGR combinations to meet Euro-VI norms.
With the new axle norms adding almost one full year of sale in the industry in one day, and diesel prices not backed by an equivalent rise in freight rates, 2019 calendar year is expected to see a decent uptake in the first 3 months. The period between July 2019 and December 2019 will be good for the CV industry, according to Sahay. He said that TCO will be a critical challenge for fleets.
Madhavan said that the shift towards higher tonnage will continue in 2019 with an eye on profitable operating economy. In a year of shift towards fully-built CVs, and of fresh investments by OEs to further arm as well as expand their network, an expansion of spares and service network is expected to rank high in line with rising dependence of operators on CV makers in 2019. If the CV makers will invest in training mechanics to cater to the service needs of BS-IV CVs in 2019, they are also expected to chalk out similar strategies for the period after BS-VI norms come into force. To take advantage of the spares and service market growth for CVs, new players are expected to enter the fray in 2019. They could play the role of a franchise for CV majors, or look at investing in an independent network.
Year of fewer launches
Expected to be a year of fewer launches, 2019 will see CV manufacturers work on new models that they would introduce post the implementation of BS-VI. These would stress on a higher payload in the rigid as well as the tractor-trailer segments, even though the number suggests that the tonnage shift has slowed post the axle norms. In the rigid segments, manufacturers and their vendors are expected to spend an amount of their time and resources to re-engineer some of their existing as well as new models at the lighter and heavier end. This would be borne out of the packaging challenges posed by the need to move to BS-VI, and at the higher end, to accommodate the changes effected by the new axle norms. With the 37-tonne shifting to 41.5-tonnes with the new axle norms, CV majors are expected to look at the next level of 47.5 or 49-tonnes. With the 49-tonnes tractor-trailer combination going to 55-tonnes effectively with the new axle norms, a shift is expected in that segment too. It is subject to the road conditions and the length of the vehicles, if not for the availability of load.
Indian automotive manufacturers have been very successful across segments in the local market as the population becomes more and more upwardly mobile. Globally, India’s automotive industry is at the forefront of many segments. India is renowned as a global hub for frugal and scalable engineering. Busy automotive clusters across India drive the industry— especially the 3 major clusters of Mumbai–Pune– Nasik–Aurangabad in the West, Chennai–Bangalore–Hosur in the South, and Delhi–Gurgaon– Faridabad in the North, as well as the upcoming areas like Sri City, Anantapur and Sanand.
Indian auto component manufacturers exports wide range of powertrain components across the globe