Auto part firms thrive on sourcing deals

The multi-billion dollar auto component sourcing industry in India has brought relief to many domestic component suppliers in the form of improved margins and long-term supply contracts.

Global auto majors such as Daimler, General Motors, Ford, Volkswagen, Renault, Nissan and Honda have been buying higher quantities of components from India, which has resulted in the margins of component firms improving 8-10 per cent.

As of the last financial year, auto component sourcing has touched $3 billion in India and is expected to double by next financial year-end. Many such auto majors have set up an India purchase office, which buys inexpensive Indian components to cater to their huge overseas plants.

Such sourcing has provided Indian players with the opportunity to charge a premium that varies between 5 and 10 per cent. Many foreign car makers prefer to make engineering changes to the components before incorporating them in their engines and other parts.

Some of the more common components sourced include axle bar, propeller shaft, crank shaft, cylinder heads, bearings and cylinder blocks. Foreign firms get a 25-30 per cent cost advantage through such deals.

M Radhakrishnan, joint managing director, Autoline Industries, said, "We are supplying original equipment makers (OEM) such as GM, Ford, Nissan and Honda. Not only have the margins improved due to premium pricing, but volumes have grown significantly, too. These players get a benefit of 20 per cent cost reduction for our products."

According to projections made by the Auto Components Manufacturers Association, global sourcing from India will increase to $20 billion by 2014.

Daimler India sourced components worth $2.2 billion from India last year and this year the figure is expected to swell by 20 per cent or $440 million.

Many component manufacturers say that though there are servicing (fabrication) costs involved, which tend to raise the overall cost, it is compensated through premium settlements by OEMs.

Praveen Gupta, chief executive, auto and engineering business, Yash Birla Group, said, "Direct supplies to tier I players do involve high margins, stable demand and volume. We are looking to expand our reach beyond our tier II customers such as Cummins."

Experts believe that strong negotiations on component prices by Tata Motors for the Nano, which lead to a squeeze on margins for suppliers, will be tackled through sourcing deals.