Smaller auto component firms threatened by Asian FTAs: KPMG report

Smaller and indigenous automotive and component companies may find themselves at a disadvantage due to the Free Trade Agreements (FTAs) being put into place across Asia, says a report released by KPMG.

The only option left to them is to merge or perish, the reports adds.

The report also states that overseas auto component firms, which are scrambling to supply car firms in Asia, are being forced to come up with a strategy for Asia sooner than later. According to the study, Asia will manufacture 1.7 crore units of cars by 2009, putting the continent on par with the US.

At present, about 16 crore cars are manufactured annually in the US, about 50 lakh cars are manufactured in Japan and around 10 lakh cars are manufactured in India.

But while the growth in markets such as the US has been about two per cent annually, the growth in an Asian market such as India is between eight and nine per cent.

Some of the significant FTAs that have come up in Asia or are scheduled to come into force include China's FTA with ASEAN, which commenced on January 1, 2005, the South Asian Free Trade Agreement, which is set to come into force from January 1, 2006 and the ASEAN-Japan Comprehensive Free Economic Partnership, which is set to come into force from October 2006.

There are about 5,000 to 6,000 auto and component units in the country, a majority of which have a turnover of less than Rs 10 crore.

"There could just be about 200 companies that have production of some scale and enjoy a turnover of Rs 300 crore or more. The remaining could face a serious existence situation as a result of the major shift that is taking place in the region's automotive and component market," said Sanjay Upendram, director, business advisory services, KPMG.

Speaking to Business Standard, Upendram said: "The automotive markets in the US, Europe and even South America are huge, but are saturated. The Asian markets and particularly, a country like India will be the focus of the industry for the next decade or more."

He added that according to the study the passenger market in Asia can be as big as that of the US or Europe by the end of the decade.

The growth potential of the car market in a country like India is evident from the fact that while there are about 600 cars per 1000 population in the US, in a country like Malaysia, the ratio is 200 cars per 1000 population.

"In India, the ratio is six cars to a population of 1000 persons and clearly, the sweet spot is the B and C segment, which will drive sales in the coming years," Upendram stated.

Quoting the study, Upendram said that with FTAs between markets increasing, and with barriers to trade and projectionist measures falling, it is likely that the Asian automotive market will become more closely integrated.

"China and India are likely to become major production markets," he said.