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CONTENTS

• The Automotive Aftermarket

• Scope, Size & Composition

• Peak into the Past

• Crisis Impact

• Analyzing growth trends

• Key growth drivers

• Key challenges

• Strengths & Threats

• Global Advantage

• Future Prospects

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AUTOMOTIVE AFTERMARKET IN INDIA

The Indian automotive industry has emerged as a 'sunrise sector' in the Indian economy. India is being deemed as one of the

world's fastest growing passenger car markets and second biggest two wheeler manufacturer. It is also home for the largest motor

cycle manufacturer and the fifth largest commercial vehicle manufacturer. The Indian automobile industry is capital and technology

intensive with a high level of economy of scale and diverse linkages with down – stream industries leading to making a strategic

industry to the Industrial Economy as a whole.

Automotive aftermarket:

India’s automotive industry is one of the larger markets in the world and has been one of the fastest growing global markets. The

effervescent domestic automotive market is companioned by a similarly lively domestic automotive manufacturing industry. Most of

India’s automotive consumption is satisfied by vehicles produced in India with a high level of localization of sub-assemblies and

components. The automotive after sales sector is a complex, robust and highly competitive market that provides the support

network for cars, vans, trucks and buses. The automotive aftermarket’s versatile and diverse segments cover the whole repair,

maintenance and service spectrum from parts supply to fitment and servicing. The Automotive Component Manufacturers

Association of India (ACMA) is the apex body representing the interest of the Indian Auto Component Industry, more aptly it is the

nodal agency for the Indian Auto Component Industry.

Scope, Size & Composition: The automotive aftermarket is defined as the secondary market available after the sales of the original equipment; the automotive

aftermarket comprises accessories, replacement parts, appearance products, and lubricants, among others. Players in the

marketplace include independent companies, manufacturer/OEM owned dealers, and manufacturer-authorized dealers. . The

aftermarket does not include gasoline sales or convenience store retail sales. The aftermarket industry helps keep vehicles on the

road by providing customers the choice of where they want their vehicles serviced, maintained or customized. It encompasses parts

for replacement, appearance and performance enhancement. It provides a wide variety of parts of varying qualities and prices for

nearly all vehicle makes and models on the road.

To meet the wide range of consumer needs, the automotive aftermarket is made up of various aggressively competitive parties that

provide different levels of service; ranging from the authorized networks of the vehicle manufacturers, independent repairers, repair

franchises and a mix of original and non-original parts suppliers. In 2009, the automotive components aftermarket was dominated

by original equipment suppliers (OES) with a 76 % share, whereas exports contributed US $ 3.8 bn to the total turnover. The

remaining 12–13% constituted the Indian automotive aftermarket, thus completing the picture.

The Indian Auto Component Industry manufactures a wide range of products and Chart 1 displays the share under each of these

categories. It covers:

a. Body and Structural parts

b. Engine and Exhaust

c. Electronics and Electrical

d. Interior

e. Suspension and Braking

f. Drive Transmission and steering parts.

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Chart 1: Composition of the Auto component industry

Source: ACMA

Indian Auto – Component Industry covers a wide spectrum of industries, that is, rubber, iron and alloy steel, plastic, oils and

grease, fabrication tools, safety gadgets, air conditioning, radiators, mould making, battery industry, electrical fittings, interior

furnishings, music system, sheet metal fabrication, lamps and bulbs, spring manufacturers – it covers basic industry and white

goods. This sector has a bearing on Power consumption and skilled labour availability and has a considerable contribution in GDP

(Manufacturing) – for FY 12 GDP at factor cost is 2.1%.

For India, various estimates of the components aftermarket have been derived from time to time based on diverse methodologies

and assumptions. Some recent studies and reports put the estimated size of the automotive aftermarket in India between Rs 190

billion and Rs 240 billion. Currently, the total size of the parts aftermarket is estimated at approximately INR 280 bn, while service

(excluding parts) is pegged at approximately INR 100 bn. The parts market is expected to grow between 9% - 11% until FY 15 to

reach the INR 370 bn mark while service is likely to reach approximately INR 130 bn mark. The aftermarket has experienced

phenomenal growth in recent years both for auto components as well as the servicing of vehicles. This growth is strongly correlated

with and follows close at the heels of the spurt in sales growth of automobiles in the country. The Indian aftermarket is likely to

maintain its robust growth trajectory over the next several years.

As disposable income is rising and more and more vehicles are rolling out with attractive price tags, vehicle sales are fast breaking

the ‘metro’ barrier to penetrate Tier 1 and Tier 2 towns as well as rural India. This growth is not just limited to PVs. The road

transport industry too has received a strong boost with improvements in interstate roads and better linkages through new as well as

renewed national highways. This has brought about dramatic improvements in the turnaround- time of interstate CVs. At the same

time, with coverage of 67,000 km, national highways constitute less than 5 % of India’s total road network. It is true that this

miniscule proportion carries 40 % of the road traffic, but the state highways network is double the length at 132,000 km. And the

next category, major districts roads, adds up to 468,000 km and constitutes 14 % of the network. Finally, rural roads stand at

2,650,000 km and make-up 80 % of the total network. Local and arterial road networks all over India are in appalling condition,

consistently and unfailingly assaulting the vehicles that run on them. This coupled with growing vehicle parc and poor culture of

preventive maintenance among vehicle owners in general has led to a significant opportunity for an undistinguished aftermarket

industry. According to the SIAM, more than 20 million MUVs, PVs and CVs, and two-wheelers have been sold in the last seven

years but bad roads, irregular servicing, and poor fuel quality have ensured rapid wear and tear of steering,

On the whole, the Indian aftermarket of on-road vehicles is valued at Rs 330 billion with 25 % on account of servicing (labour

charges) and the remaining majority from components, putting the components aftermarket at around Rs 248 billion. Two-wheelers

again were the top contributors to the total aftermarket at 46% Three-wheelers contributed 3 % to the aftermarket, while PVs and

CVs had comparable contributions at 26 % and 25 %, respectively.

Unlike in the triad markets (US – Western Europe – Japan) where features and reliability outscore affordability and value perception

(value-for money), India is more value conscious. Unlike China, India has a higher preference for perceived value than even vehicle

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price. Hence, brand perception and resale value are also important contributors in vehicle choice decision. More inclusive

warranties for longer duration or run, which add to perceived value of vehicle, are therefore being increasingly offered by OEMs

nowadays. There is greater consumer preference for latest style and design. As a result, many OEMs are going beyond the

standard definition of a service station to meet consumer convenience expectations by offering on-road breakdown assistance.

Consumers are gradually shifting towards safer and more relaxed driving, higher levels of personalization and driving for pleasure.

Safer driving in India mainly revolves around vehicle security and passenger safety, which has now become important due to higher

permitted speed limits on highways. To fulfill the need for relaxed driving consumers are increasingly demanding features that

reduce fatigue including seats, climate control, parking assist, etc. There is a need for chauffeur-driven cars even in the B+

segment. Personalization and possibility of using the car for leisure activities is also adding to the demands being made of OEMs.

Despite rising pollution levels in cities, growing concern from environmentalists and NGOs and increasing focus on air quality in

cities by government, consumers largely are ignorant or indifferent towards these issues. However, with infusion of new technology

even cost conscious consumers are opting for more environment-friendly options. Commercial vehicle owners on the other hand

mostly take their decision based on statutory requirements and also in keeping with commercial considerations.

Peak into the past:

In 1980s it has followed a planned growth process and has given a major fillip to the development of Indian Auto – Component

sector. The initial part of development of Indian Auto Component Industry is primarily due to the implementation of Phased

Manufacturing Programme (PMP) as per the GOI policy enabling the auto component industry to induct new technologies, new

products with a higher level of quality in their operations enabling them to be swift and effectively localize the component base; led

to developing and creating highly capable, competent and quality conscious components. Phased Manufacturing Programme

(PMP) for new projects in New Industrial Policy 1991 and for existing projects in 1994 has been abolished. This followed by Auto

Policy 2002 enactment with a Vision: To establish a globally competitive automotive industry in India and to double its contribution to

the economy by 2010. Accordingly automobile manufacturers (OEMs) and Auto component manufacturers have made a significant

contribution to the Indian Economy as per the policy objectives. It has reflected in the growth of Indian Auto Component Industry

ever since in terms of earnings (domestic and export) and encouraging capital investments.

Crisis impact: The Indian economy which underwent a high growth experience between FY 04 and FY 08 was impacted by the

global financial crisis. Through FY 10, as the world gradually recovered from the global financial crisis, there was a significant

change in the world economic order. The crisis and the way in which it exposed the structural weaknesses of the triad (US–Western

Europe–Japan) markets, pushed the world economy to become multi-polar in many ways. In this emerging milieu, China went on to

become world’s second largest economy displacing Japan from that position Emerging economies attained significance beyond

their existing market size, which was substantially greater than the pre-meltdown focus of businesses on these markets. The

Dragon and Tiger economies of China and India with GDPs at US $ 5.6 trn and US $ 1.3 trn respectively have undoubtedly been

driving growth and investment in the world. It would be very difficult to find a single company dealing in automotive components that

remained entirely unaffected by the global financial crisis, as demand from traditional markets dwindled. However, automotive

component manufacturers from India fared better than many of their global counterparts from the triad markets or those with greater

exposure to the high income markets

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Chart 2: Automotive components industry trends

Source: CII TF Research

Except for large automotive distributors, players across the aftermarket industry have faced margin pressures in the last few years.

This trend is likely to continue, as most players in the Indian aftermarket are still sub-scale and will be at risk of margin decline due

to pricing pressures as well as rising costs. While the market structure of the automotive aftermarket in India has gradually begun to

consolidate to realize scale benefits, it will still be necessary for players to make smart granular choices on “where to compete” and

“how to compete” to achieve sustainable and profitable growth. The Indian aftermarket offers significant opportunities for profitable

growth, and players who proactively make right “where to compete” and “how to compete” decisions will emerge as winners in the

long run.

Analyzing growth trends:

In 2000 ACMA, jointly with SIAM and ATMA (Association of Technical Market Analyst) commissioned a study by NCAER (National

Council for Applied Economic Research) to work out the projected growth rates in Auto Component Industry over two 5 year

periods from 2002 to 2012.

Chart 3: Projected growth rates Chart 4: Actual growth rates % yoy

Source: ACMA Source: ACMA, CII TF Research

Chart 3 is the 10 year estimate Five year plan of production turnover from the FY 02 to FY 07 and FY 07 to FY12 and comparing

with actual production turnover for the same period; signify the benefits obtained after the implementation of AUTO Policy 2002. In

FY 12 of total industry production size of Rs. 2063 billion, 70% was contributed by domestic OEMs, 14% by replacement market and

the balance 16% by exports.

Chart 4 depicts the changes in percentage terms i.e. yoy production turnovers. The maximum increase is in FY 08, that is, 65% as

compared to increase in FY 07 which is 20.79%. In value terms in FY 06, 07, 08 it was Rs.534, Rs. 645 and Rs.1067 bn

respectively. The least growth being (0.66% in the year FY 09 due to recession market affecting across the industry in export and

import. In terms of actual value the maximum increase is in the year FY 11 comparing with FY 10, which is Rs 464 bn and least

being in the negative of Rs 7 bn in FY 09. Generally in all these years, growth has been in the double digit range. Product quality,

cost and timely delivery are the key factors in the growth of this industry. In a bid to remain competitive and to produce high quality

product range for export, component manufacturers are increasingly focusing on maintaining high quality standards and are

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acquiring quality certifications. Most ACMA members have at least one standard certification. More emphasis is being laid on

adopting modern shop floor practices such Kaizen, 6 Sigma, TQM etc. Looking back at the past, the various GOI policies have been

favourable and encouraging, in fact, they have acted as a catalyst to improve in exports and to expand the installed capacity. Quality

Certifications have significantly contributed to the growth of the industry, companies from abroad preferred Indian companies. Also,

the Indian auto component industry possesses competitive advantage due to its quality produce, timely delivery, dependable and

low cost capabilities. All of these factors have contributed in putting into place a large potential and competitive edge for the sector.

The achievements with respect to various certifications obtained are indicated in Chart 5.

Chart 5: Quality certificates and recognitions

Source: ACMA, CII TF Research

Key growth drivers: Apart from Auto Policy 2002, the other favourable measures in aiding growth are:

a. Increasing demand for Vehicles

b. Setting up of a technology modernization fund focusing on small and medium enterprises by AMP 2006-16

c. The Department of Heavy Industries and Public Enterprises (DHI and PE) creating a fund of USD 200 mn to modernize

the auto components industry by providing an interest subsidy on loans and investment in new plans and equipment and

provided export benefits to intermediate suppliers of auto components against the Duty Free replenishment Certificate

(DFRC).

The revenue growth of the auto components industry is likely to be a close reflection of the blended growth of individual automotive

segments. That said, the performance of individual auto component manufacturers will continue to vary depending on their revenue

mix (OEMs/ Replacement Market), segment leaning (PV/CV/2W) and geographical diversification (domestic/ exports). Overall, auto

component manufacturers who have a growing presence in the replacement market and also have geographically dispersed

customer base, are likely to be better equipped to offset the expected moderation in business volumes of select domestic

automobile segments over the short term.

Key challenges:

The Indian auto components industry has been witnessing a moderation in its revenue growth following the deceleration in sales

volume growth across all automobile segments post criss. While lower yoy volume growth of domestic OEMs, particularly those

belonging to the passenger vehicle (PV) and Medium and Heavy Commercial Vehicle (M&HCV) segments, translated into muted

revenue growth for the auto components industry in FY 12; the sluggishness was partly arrested on the back of rise in component

exports and higher domestic replacement market sales. While the long term prospects for the industry remain strong in line with the

outlook for the OEM segment, the industry faces strong challenges in the form of threat of low cost imports, currency volatility and

ability to invest on product development to be able to move up the value chain.

Despite strong growth, the return on capital (ROCE) has been under pressure for players across the industry. Barring large

independent national distributors, ROCE has declined across players – spare part retailers, independent service workshops, and

dealership service centers. This is primarily due to rising operating costs, particularly rentals and manpower costs, and higher

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capital lock-in for higher inventory and other fixed capital (e.g., land, building, and equipment). In contrast, a few leading aftermarket

distributors in the country have maintained or increased their ROCE during the past few years through operational excellence. The

value chain in India is highly fragmented and requires significant intermediation for parts to reach end customers. The production of

parts is split between original equipment manufacturers (OEM), original equipment suppliers (OES), and generic manufacturers.

While OEMs may rely on their own distribution networks, selling parts through directly-owned or franchised dealers, the independent

channel has grown in significance in recent times. Original equipment suppliers have an edge as they can both directly supply

OEMs, and go through independent distributors. The parts and service markets are largely fragmented, but there are clear

indications of consolidation.

Separately, regulatory environment that includes emission norms, steadily advancing safety regulations and noise reduction

measures (in line with European countries), will also bring in new opportunities and challenges for component manufacturers..

Nevertheless with prices of key commodities showing trends of softening and providing partial relief to the industry players that had

grappled with commodity cost pressures FY 11, the challenges can be overcome.

Strengths & Threats: The distinct and great achievement is relating with Deming awarded by Japan and India is the first country to obtain this award for

outside Japan established organizations in this sector followed by largest in number.

Strengths:

a. Globally cost competitive being low manufacturing cost

b. Adheres to strict quality controls

c. Access to latest technology

d. Ability to cater to low volume,

Threats:

a. Essentially cheap imports from other low cost countries such as China, Thailand, Taiwan etc

b. Continued pressure on prices from OEMs c) Lack of design capabilities with the domestic auto component manufacturers

is leading major OEMs in importing the requirements for their new launches and variants.

Global Advantage: The Indian Automotive Aftermarket Industry is one of the few sectors in the economy that has a distinct global advantage in terms of

Cost and Quality. Indian auto is being considered for outsourcing by developed countries (USA and Europe) owing to its low cost of

production and quality sustenance produce. Global OEMs like Volvo, Fiat, Ford, Renault, Toyota and Daimler are sourcing

components from India. The list includes castings, forging, power train components, gearbox and engine components, leaf springs,

propeller shafts, etc.. Global sourcing from India is also being carried out by companies like Bosch, Magna, Valeo, and Brose, etc..

India has also become a centre for low-cost innovation with several global auto majors setting up R&D centers in India. Fifteen

global car makers like GM, Audi and Daimler have established outsourcing offices in India.

Future prospects:

Currently, the auto components industry in India is around two-thirds the size of the OEM segment. This proportion is around one to

two times in mature markets of Europe, America and Japan. This indicates

a. Higher proportion of imports of auto components in India by OEMs

b. Lower replacement market sales.

Given the healthy growth prospects of the Indian automobile industry over the medium term, one can expect the size of the auto

components industry to grow at a rate faster than the OEM segment, driven by OEMs’ thrust on localization and steadily growing

replacement market demand. Many people love their cars, and enthusiasts often want to make their cars the best or the fastest cars

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that they can afford. That's where aftermarket auto parts come in. With growing disposable incomes and greater thrust on

consumer preferences, the future is bright for the automotive aftermarket.

Several favourable trends will positively impact the Indian automotive aftermarket in the years ahead. However, all players remain

susceptible to certain risks and so will need to focus on implementing key imperatives in order to enjoy high margins and growing

profits. While increasing customer affluence and an already well-established network give OEMs a sound starting position, they

must continue to create barriers to entry for independent players by expanding networks, demanding exclusivity and increasing

warranty periods. Similarly, despite the unique position of OESs that enables them to ride off the success of both OEMs and

independent distributors, it is vital they seize opportunities to forward integrate along the value chain. The growing number of parts

suitable for manufacturing by generic players and the increasing vehicle parc (especially in rural India) puts generic manufacturers

and independent garages in a very attractive position. However, the focus must increasingly shift towards quality and reliability as

customer expectations grow.

The Indian auto component industry is expected to reach a turnover worth US$ 113 bn by FY 21 from US$ 43.4 bn in FY 12. The

exports from the industry are expected to grow at a compound annual growth rate (CAGR) of 17 %. The amount of cumulative

foreign direct investment (FDI) inflow into the automobile industry during April 2000 to November 2012 was worth US$ 7,518 mn,

amounting to 4 % of the total FDI inflows. Consequently, the Indian automobile and auto components industry can be expected to

surpass China's growth path by 2021.

Supportive government policies, positive business environment, availability of reasonably priced talented workforce and stable

outlook for the industry has made India a global hub for the international manufacturers to set up their facilities in the country. The

auto components manufacturers are also reaping the benefits.

The Indian automotive aftermarket is at an inflection point – vehicle parc is increasing, parts are getting more complex, customers

are more price sensitive, and global suppliers are expanding their sourcing and distribution presence in India. Scaling up capacity to

service the growing demand will be a challenge for Indian companies across the value chain, especially with margins likely to come

under pressure. Overall, the industry revenue pools will significantly increase, and players who adapt their business models to the

changing scenario, are likely to emerge as winners.

Indian automotive industry has a promising future and so has the automotive aftermarket. In the coming years of this decade, the

economy is set to witness some structural changes in the Indian automotive aftermarket owing to a continuously transforming

business environment. Game-changers will latch on to these trends earlier while others will also need to sooner or later move into

the new orbit. Winners will be those who are able to take advantage of the growth opportunity in the market, changing business

landscape and their organization’s responsiveness to these factors.