Auto Component sector has scope to substitute imports of USD 12 billion: Report

As supply chains shift, India could expand its share in the global auto component trade. The auto component sector has scope to localize and substitute imports of up to USD 12 billion, according to a report released by McKinsey at the 60th ACMA annual convention.

The report titled, 'Shaping the new normal: India’s auto component industry' revealed that the country contributes only a small percentage of the total imports for its biggest buyers – 2.2 percent in the US, 1 percent in Europe and 0.6 percent in China, at present.

India could also ramp up capabilities through recent innovations (such as those made to match BS-VI standards) that could help replace those imports with components made in India.

Possible collaborations with global suppliers who are relocating manufacturing operations to India could further reinforce these efforts and help build new capabilities.

Export Expansion

For export expansion, India could learn from a number of countries that are major exporters of auto components. Germany, for example, has a 15 percent share in the global export market for auto components. China’s share is 11 percent, with Japan and Korea following at 7 and 6 percent respectively, the report underlined.

These countries also have a trade surplus in auto components and have achieved this market position due to advantages such as the presence of large original equipment manufacturers in the domestic market, greater ease of doing business, a significant spend on research and development.

India could pursue higher exports in product categories where the country has a competitive edge, such as shafts, bearings and fasteners. At the same time, component manufacturers could continue to broaden their global export presence by building capabilities for high-value products such as gear-box parts, heating, ventilation and air-conditioning (HVAC) products.

Pursue aftermarket opportunities

Aftermarket could be a growth engine during the lockdown period as more people postpone buying new vehicles in the present scenario, repairs on current and second-hand vehicles could provide a window of opportunity for auto component manufacturers.

Historically, the light vehicle aftermarket has been the most resilient during periods of economic distress. During the last financial crisis, for example, US car sales fell by nearly 17 percent whereas aftermarket spending declined by just 1 percent.

This also turns the lens to the micro-markets, with the nearest repair service centre gaining importance over a distant service provider. Growth opportunities lie in specific micro-market clusters.

Auto component manufacturers could tap into this opportunity in four ways. First by going granular i.e. by concentrating the aftermarket go-to-market strategy in specific areas, for example, the 7 percent of micro-market that contribute to the top 50 percent of demand.

The second way is by encouraging greater agility in the sales force by shifting the emphasis to virtual sales followed by re-planning the stock-keeping unit (SKU) mix by deprioritizing the negative or low-margin/low-volume stocks.

Last but not the least, auto component manufacturers could look at expanding partnerships and innovate on channels by partnering with influencers (such as neighbourhood mechanics) who determine consumers’ choices while repairing or replacing parts.

Explore non-automotive adjacent spaces

Auto component manufacturers could expand into adjacent areas through partnerships to synergize their existing capabilities. The manufacturing capability for several automotive components overlaps with those capabilities required for products in other sectors where demand remains high.

For example, the production process for a vehicle motor could be adapted to produce motors for household appliances such as refrigerators, fans or AC compressors.

Some of the most promising overlaps are with sectors such as consumer electronics, communication equipment and power. Augmenting the manufacturing capacity for these could go a long way towards import substitution and greater emphasis to make in India.

In imports – 88 percent of mobile phone components are imported. India could cut down imports if these were being made within the country. This could be a win-win for manufacturers, as it would amplify the emphasis on Make in India and unlock the government’s production incentives – such as over USD 5 bn for the domestic manufacture of mobile phones.