New op­por­tu­ni­ties to make In­dian auto in­dus­try more vi­brant in 2019

Auto components India - - CONTENTS - Story by: Bhushan Mhapralkar & Bhar­gav TS

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.

Com­mer­cial ve­hi­cles

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

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