Auto Monitor - June 2013

Auto MonitorAre our suppliers being left behind?

The growth in the Indian automotive industry has created new challenges for industry as a whole. Alagu Balaraman analyzes the impact on suppliers and component manufacturers.

It is a point beyond dispute that the Indian auto components industry has grown and grown substantially. Today, there are companies in this industry which have breached the $1 billion mark and far beyond. When historians write the story of the auto components industry, they will probably mark its birth with the time Maruti Udyog began its operations. More than 30 years have passed since then, and the industry has come a long way in terms of scale and quality. India has become a growth market of note and the components industry has risen with the tide. However, today the industry is at the cusp of a new beginning, and it remains to be seen whether it will take the next leap or whether it will falter.

Along with the growth in the Indian automotive sector, competition has also grown. A young customer base, with rapidly rising disposable incomes, has created a growth market with its own unique characteristics. To start with, the customer profile is very heterogeneous. Some people are exposed to global standards, some are looking for a lifestyle statement. They live in very different environments. Many are concerned about the size of the investment commitment and the interest rate burden. Car companies have responded by launching a slew of products aiming to more sharply profile customers and create a winning fit, as well as inject excitement and demand in a market that tends to splutter even as everyone is convinced of its long term potential.

Changing Times

While the market side of the story is fascinating in itself, another factor that is often hidden from view is the supply side. The automotive industry has been a bellwether for good manufacturing and supply chain practices. However, the Achilles’ heel of the industry continues to be its supply base. This is not a simple case of suppliers not stepping up, but also due to the rapidity of change in the industry and the resultant demand on all players in the supply chain.

Over the first two decades, the supplier base in India had to deal with two factors: scale and quality. OEMs provided the knowhow; suppliers had to build the skill base and invest in infrastructure to meet the ever growing demand for better quality parts. Just as OEMs had to create a supplier base, so too the suppliers had to create their own base: a base of skilled manpower and technological infrastructure in an economic environment of skill shortage and capital shortage (at least initially).

Today the game has changed. Back in 2003 there were seven large car companies, today there are 14. The new entrants have by and large attempted to source from existing suppliers, adding to the complexity of the suppliers’ operations. In 2003, we had around 10-12 product launches. This has increased to 50-odd in 2013. The increased complexity is of a different nature from quality or volumes, and is less easy for people to understand. When you move to the components level, the increase in complexity is even more startling. An auto components supplier who was manufacturing 20-25 components in 2003 is today dealing with some 400 components.

Going beyond product proliferation, auto component suppliers are now dealing with a larger number of markets. Earlier India pretty much supplied India. However, with the country becoming a global manufacturing hub, the number of players who are exporting from India has grown from only Maruti and Hyundai to players like Ford, General Motors, Mahindra, Toyota and Volkswagen. As the number of countries increase, so do the regulations, documentation and logistics that have to be managed by the supply base.

The third type of change that is impacting the supply base is the change in the core product. Cars today are far more complex than they were a decade ago. There is a quantum increase in the use of electronics. Feature lists grow longer. Service packages are wrapped into the product and suppliers have to deal with warranty and aftermarket prices.

What Next?

All in all, auto component suppliers today are facing a dramatically different environment from the one they operated and matured in. For the industry to grow and thrive, the supply base has to evolve and deal effectively with the new challenges that it faces. What worked earlier may not work now. Today, companies need to work collaboratively to deal with demand fluctuations as well as new product design, development and launches. Companies will have to collaborate in building new investments that will give the kind of flexibility required to deal with constant change and diversity. New skills will have to be developed within the supply base.

All this will be a revisit to the era of a quarter of a century ago when the changes that were being implemented by entrepreneurs were non-linear and risky, but immensely rewarding.

The author is Partner & Managing Director – Indian Operations, CGN & Associates India Pvt Ltd