Don't mandate localisation; incentivise it: ACMA President Sunjay Kapur

ICE is not going away, and we're going to see that continue for quite some time, specifically in India, says the president of ACMA and chairman of Sona Comstar

We saw an explosive growth in exports of 43 per cent in FY22, and we had a trade surplus for the first time, said Sunjay Kapur, speaking in his capacity as president of the Automotive Component Manufacturers Association of India (ACMA). We've seen many opportunities, whether because of China plus one or because we have had sourcing opportunities outside India. ICE is not going away, and we're going to see that continue for quite some time, specifically in India. Kapur's also chairman of SONA Comstar, one of the world's largest manufacturers of precision forged gears. Edited excerpts below:

Can you give us an update on how the auto component sector is performing? How do you see the looming threat of electric vehicles, and how would the ICE-oriented component sector adjust in the current scenario?

I will give you an update on the automotive sector, with opportunities for electric vehicles as opposed to a threat. Last year (FY22), we grew 23 per cent from pre-pandemic levels to almost $56.7 billion. We saw growth in exports of 43 per cent at $19 billion, and for the first time ever, we've had a trade surplus, which is definitely a positive. We've seen many opportunities come, whether it be because of China plus one or because we have had sourcing opportunities outside of India. We don't see why we will not see this kind of growth going forward. In the domestic industry, we have seen a 20 per cent increase in passenger cars and a 30 per cent increase in commercial vehicles. So definitely looking much better than it was before. We've seen a lot of technology disruption, bringing about many opportunities, not just from the vehicle but the ecosystem as well. So if you look at the vehicle, what's changing is the electrification of the vehicle, and the second is connectivity.

If you take ICE to go back to your question, it is not going away, and we'll see that continue for quite some time, specifically in India. Outside of India, several car companies have announced that they will go electric and not build ICE vehicles any longer, so that becomes an opportunity for Indian component suppliers where ICE exists. When you look at India specifically, 2Ws are rapidly changing to electric, and commercial transport will go electric. However, I wouldn't say that the ICE engine will go away entirely; if you look at components that go into ICE, they will also go to EVs, other than the engine.

So it seems that the opportunities for the Indian automotive component sector are on the software side. Isn't the Indian auto component industry more hardware oriented?

At the moment, it is, but that's about to change. In ACMA, we have onboarded two non-automotive companies into the executive committee, and they're both from the electronics field. Electronics are going to become very important for us to localise. Right to say we have traditionally been a hardware industry, and we will continue -- so forgings will exist, sheet metal will exist, casting will exist. Will we change materials? Yes, will we move, let's say to carbon fiber, possibly. Will we move from aluminium to titanium? Possibly, so that's the shift that'll happen. Will we have software players in the industry? Yes, and therefore will the competitive landscape of our industry change? Absolutely. Maybe ten years from now, the president of Microsoft will be the president of ACMA because software is entering our industry. The PLI schemes have automotive and non-automotive players entering the scheme.

Are component makers facing pressure on margins because of price pressures? Do you see threats of a global recession and impact on the rupee affecting component suppliers and exports?

The industry is very resilient. We have reached a stage where we're building a very efficient business. We are continuously improving margins or our cost structures and, therefore, can hold on to our margin, so I don't see any significant change in that from an industry perspective.

Our largest export market is the US, and that will continue. We have two benefits if you now look at the government PLI schemes. One is a deep localisation benefit that allows us not to depend on other countries or imports. When you look at EVs and all the investments already kicked in, we need to have a large market to supply into. From that perspective, India is a very small market in terms of volume, so when we really want to tap into the market, you're looking at exports as an opportunity.

You speak of opportunities in the EV space, but the number of components in an ICE vehicle is much more than in an EV. So how do you see that panning out? Are Indian component makers able to substitute Chinese components in the EV space?

The short answer is they are able to. It may have been a volume issue, to begin with, and that's going to change very rapidly, and that's the case in any transitional phase. As the volumes start growing, you can localise and justify the economies of scale. Imports will reduce as we increase volumes, and we're able to meet the capex required to put up capacity today. Let me put this in another way. Fifty per cent of the vehicle is still the same; of the other 50 per cent, 30 per cent will also remain the same with certain different requirements. The remainder, which is the engine, will go away. But you still need a seat or a headlight, or a steering.

What kind of government policies are needed for the component manufacturing industry, especially with the budget around the corner?

The government has been extremely supportive of the auto component industry if you look at the PLI schemes. From all our conversations, the government is open to increasing the spending if we're able to execute. I think 75 companies have been approved from the auto component space.

From an infrastructure point of view, there could be a push when it comes to charging infrastructure. The only other thing I could really talk about for help is financing. How can we make this priority lending? There are a lot of apprehensions about lending to startups in the 2W EV space that could become priority lending.

In the renewable space, from April onwards, the government increased import duties on the import of solar modules. It also brought out a list which mandates the purchase of modules only from domestic manufacturers. Do you see something like that being needed for the auto component sector?

I'm not a big fan of that because if we don't invest in technology, we're going to get left behind. So for us to get into a system where the government mandates that a certain percentage has to be bought locally, and we don't have a tech for it, it will not get us anywhere. The government should do what they're doing by saying here you go, here's an incentive. If you invest in technology, you're going to get an incentive. We should create an automotive manufacturing hub in India to supply the world. That's really where we need to go. That's the vision of the auto component industry from my perspective.