Small auto part firms take the big leap

A combination of cultural issues and a business-friendly environment seem to have given smaller Indian auto component companies an edge over their Chinese competitors as the move to acquire companies in the developed markets gets under way.

Recently, Ucal Fuel Systems and El Forge - both having turnover well below $ 75 million - kicked off processes to acquire companies in the US and UK, respectively.

Such deals show that Indian companies have spotted opportunities to access well-regarded names in the auto industry through acquisitions, and also ease the pressure on the acquired firms by manufacturing some of their products in India.

K V Ramachandran, managing director, El Forge, feels that smaller companies in the developed western markets find the cultural barriers while dealing with Chinese firms too difficult to overcome. Because of this, Indian companies are better placed than their Chinese counterparts in striking deals with companies in developed western markets, he says.

El Forge, which is in the middle of acquiring the UK-based Shakespeare Forgings, will let the existing management continue. With a turnover of Rs 90 crore (about $ 21 million), El Forge will increase its turnover by a third in one stroke when it completes the Rs 36 crore Shakespeare Forgings acquisition.

Ucal will more than double its Rs 271 crore ($62 million) sales once its acquisition of the $72 million Amtec Precision Products is complete. In this case too, Amtec's existing management is expected to continue.

Through the acquisition, Ucal would gain access to Cummins and Caterpillar, said K Jayakar, vice-chairman and managing director, Ucal.

Relentless cost pressure on western companies has opened up opportunities for Indian players which operate in a lower cost environment.

The Automotive Component Manufacturers Association (ACMA) in India estimates that the average industry wage rate here is $6 a day, while it is $20 an hour in developed markets.

According to ACMA's classification, just 16 of the 402 companies in its list have a turnover over $50 million (about Rs 220 crore). Despite the preponderance of small companies in the Rs 38,300 crore industry, a friendlier business climate has made it easier for a growing number to look for acquisitions overseas.

K V Shetty, managing director, IP Rings, who headed ACMA last year, said that financial intermediaries were confident about the prospects of auto component companies.

The confidence on their part has made it easier for smaller companies to raise resources for the big move. "To remain small is not going to help," says Shetty in the context of growing overseas opportunities.