Tapping into India’s automotive market

In light of the gloom and doom surrounding the global automotive industry — Chapter 11 woes, North American overcapacity, and volatility among the OEMs — some automotive parts manufacturers are heading for calmer, uncharted waters.

In particular, part makers are eyeing Asian-Pacific countries such as India, both as production hubs and strong emerging domestic markets. India, for instance, is a trillion dollar economy with a population of more than 1.1 billion people. More than 70 per cent of the Indian population is 35 years old or younger, and the country’s middle class is growing exponentially. Thus, forecasters are predicting unprecedented growth in domestic automotive markets, keeping in pace with a more literate and wealthy populace.

In addition to an expanding domestic market, India possesses the ideal base of technical expertise – for example, the country adds hundreds of thousands of engineering graduates each year – and reduced labour costs, making the country a formidable candidate for joint venture partnerships and offshore production opportunities.

LOOKING FOR A REASON

Foreign investments are not without their risks, and many automotive companies use the existing sector as a barometer for a country’s viability. Thus, although India’s automotive sector has been on the industry’s radar for several years, recent developments have established the country as a major automotive hub.

“Suppliers have said they can’t take the risk to go there until there is at least one million vehicle units per year, the market has to be a certain size before it is perceived as being profitable enough to warrant the business risk of going there,” explained Automotive Parts Manufacturers’ Association (APMA) president Gerry Fedchun.

“In 2006, the scale tipped to over one million units per year, so India is finally at the beginning of a large market expansion,” he continued.

Looking at the larger picture, India’s economy has experienced a stable annual growth rate of eight to nine per cent. Additionally, according to the Society of Indian Automobile Manufacturers, the automotive industry has seen a marked increase in both domestic sales and exports, with a compound annual growth rate of 14 per cent in domestic sales and 40 per cent in exports over the last five years.

In terms of foreign interest and investment, stakeholders from every part of the global automotive industry are expanding their presence in India. For example, the APMA’s most recent bi-annual study found that India received $1.85 billion or 34 per cent of the total worldwide investments by major automotive assemblers in the first half of 2007. In comparison, the United States received $1.68 billion or 31 per cent of the total.

Deep Kapuria, chairman of the Automotive Component Manufacturers Association of India’s (ACMA) Globalization Committee, also noted that the country’s automotive components exports increased by 33 per cent in 2006-2007. Indian manufacturers exported $2.8 billion, compared to $2.1 billion in the previous year.

Aurora, Ont.-based Magna International Inc. recently indicated that it would significantly boost its parts purchasing base in Canada. The company currently purchases $20 million worth of auto parts from Indian companies, but Magna expects to purchase $120 million worth of components from the country’s suppliers by 2010.

INDIA VS CHINA: THE INEVITABLE COMPARISON

Given India’s economic and industrial trajectory, it is almost impossible to ignore the comparisons to China. However, industry proponents note that a direct comparison does not give a clear picture of India’s progress.

“Don’t just compare [India] to China now, but to China 15 years ago,” explained Consul-General of India Satish Mehta, noting that India is at the same stage as China more than a decade ago.

In this respect, although Mehta noted that growth rates in infrastructure haven’t been as fast as they should be, India is outpacing Chinese economic reforms.

APMA’s Fedchun also made note of several practical reasons to do business in India over China. “A huge advantage in doing business in India over China is that the language of business and of the educated population and government workers is English,” he said.

“There are a variety of languages spoken in India, but the one common language is English,” he continued.

Also, the political and legal framework in India may be more conducive to doing business with local companies.

“India has the rule of law, and of intellectual property protection and runs the same patent and trademark rules with which we in Canada are familiar, and they can be enforced. It’s not like China, where enforcing them is extremely difficult,” argued Fedchun.

“Also, India is the world’s biggest democracy, which means there is little to no political risk doing business there,” he continued. “In China, it is still a dictatorship and there might be political upheaval at some point down the road – an investor simply doesn’t know, and that political risk has to be factored into investment decisions.”

THE ROAD AHEAD

Industry associations in both India and Canada are encouraging suppliers to look for joint venture opportunities and technological partnerships, as a means of increasing value and improving the competitiveness of both parties.

India’s ACMA conducted a survey of the collaborations and joint ventures in the auto component sector, and found that 117 of the 244 surveyed were involved in technical collaborations. An additional 42 respondents had embarked on joint ventures with other companies.

ACMA’s Kapuria identifies six “golden” rules for a successful partnership, which essentially boil down to aligning the values of the two companies and seeking operational effectiveness.

Kapuria suggested that a company pick a target that is a good strategic fit, and then find value at both ends for a win-win result. He noted that companies should also lay the groundwork for expedited approval, so to avoid regulatory delays.

Companies should also seek operational effectiveness, Kapuria said, managing the core integration and organizational change effectively. In addition, manufacturers should do their homework — researching everything from governmental roadblocks to social issues — in order to reduce the likelihood of disruptions.

Parties interested in foraying into India’s small but growing automotive components market should also consider loan and financing opportunities. Export Development Canada, for example, noted that it did more overall loan financing in India in 2006 than the rest of Asia combined.

“The Indian market is going to be a substantial market, just as China is a substantial market,” said APMA’s Fedchun. “In order to be more competitive at the Tier 1 and Tier 2 levels, you need to be able to supply your customers more globally.

“We need to globalize the supply base,” he continued. “There still are constant pressures on suppliers to lower costs, and one of the ways to do that is to find a partner or product source in India.”

APMA leads mission to India

The Automotive Parts Manufacturers’ Association (APMA) will lead a Business Development Mission to India from January 16 to 22, 2008.

The objective of the mission is to gather market intelligence, explore business opportunities, develop networks, and identify potential partners, sources or affiliates.

The mission will commence with Auto Expo 2008 in New Delhi, the largest automotive fair in India. Mission participants will also tour Pune and Chennai, two leading automotive centres in India.

Mission activities will include meetings to promote Canada’s auto sector capabilities, site visits to leading Indian automotive companies, briefing sessions by Indian industry experts, a matchmaking program, one-on-one meetings, networking receptions, and a mission book profiling the participating Canadian delegates.

Visit the APMA websi
te for additional information or to register for the mission at www.apma.ca. The deadline for registration is November 30.