The Auto Components Industry in India post liberalization

Key Developments for Auto component Sector:

1968: Tariff commission recommends continued protection for automobile

manufacturers with emphasis on indigenous motor car units
1983: MUL set up
1985: Auto industry exempt from MRTP act. Automotive component industry is
delicensed.
1991: Foreign equity allowed upto 51%. Entry of MNCs.

Although MUL brought in new organizational culture, the industry opened up to global
competition only in 1991. Faced by the pressure to export, only from mid 1990s the auto
component industry embraced the global quality standards like TQM and TPM.

Structure of Auto component sector

Of the total demand for auto components, OEM market comprises 55% and replacement
market 35%, remaining 10% comprising exports. Of this, the organized sector accounts
for 99% of OEM market and 40% of replacement market and 100% of all auto
component exports, with an aggregate share of 78% of total auto component production
in the country. The share of unorganized sector accounts for around 1% of OEM, 60%
replacement, with an aggregate share of 22% in total auto component production.

Unorganized sector
The unorganized sector is mostly involved in the production of low technology products
that have lower production complexity, such as gaskets, engine valves, pistons and sheet
metal parts. The segments that face intense competition from unorganized sector are fuel
delivery parts, gaskets, brake linings and transmission gears. According to a study,
unorganized sector is conspicuous in electrical parts (38%), pistons (15%), engine valves
(10%), lights (30%) and brake assembly (20%). In the unorganized sector, the spurious-
parts manufacturers control about 20% of the replacement market. The cost advantage of
unorganized sector stems from the fact that it does not have to pay any excise
duties/tariffs. The growth rate of unorganized sector is less influenced by the growth of
automotive industry and more by the replacement market. Factors influencing the
demand for replacement parts are: size of national population, overall age of national
vehicle population, pollution norms, the average number of kilometers driven per vehicle,
road/infrastructure condition and price of related replacement parts.

Organized sector
The export market constitutes 10% of total auto production. The share of Europe, North
America and Asia accounted for 31%, 24% and 19% respectively in 1997-98. The
advantages stem from the following facts:
 Share of labor costs higher in total cost of production, in assembled parts such as
clutches and lighting equipment.
 Environmental regulations have rendered production of certain parts costly, such
as castings.
 Minimum economic scales are low and Indian producers have established
technologies for products like castings and forgings.

Exports go to OEMs who have operations in developing countries (Kalyani brakes

supplies drum brakes to M.Benz for its operations in Indonesia), vendors who supply to
foreign auto component producers like Dana Corporation, Valeo and Delphi (Bharat
Forge supplies front axle beams for trucks to Dana and Rockwell as well apart from
OEMs).

The replacement market abroad accounts for a large proportion of exports for the
following reasons:
 Validation process by OEMs abroad takes long time. Example, in case of pistons,
it could take up to 3 years from the time of identification of an OEM to the final
delivery of an order.
 OEMs abroad prefer suppliers located nearby for faster delivery.
 OEMs also require joint R&D efforts by suppliers, which requires access to latest
technologies.
 Quality and volume requirements to supply to an OEM are very high.