Tamil Nadu auto component industry scaling new heights

INDUSTRY IMPACT 2005

The roots of India's auto component industry can be traced to Tamil Nadu where some of the earliest component units came up. The industry pools many defining features of industrial activity in the state: the depth in engineering manpower, good infrastructure and ability of even medium-sized companies to export to demanding markets.

The Indian auto component industry has had a good run recently. The industry has grown from a turnover of $5.4 billion in 2002-03 to about $8.7 billion in 2004-05. Detailed data on the component industry in Tamil Nadu is hard to come by. However, the Confederation of Indian Industry (CII) reports say that Tamil Nadu-based units contribute about 30 per cent of the national turnover.

As for the future, a report of Automotive Component Manufacturers Association of India (ACMA) and McKinsey forecast that Indian industry has the potential to achieve a revenue of $33-40 billion by 2015. On paper, things can not be better for auto component units here.

BOOM AND COST SQUEEZE, THE CATALYSTS
The auto component industry is on a strong wicket as growth is being driven by both domestic demand and global developments. The domestic market for automobiles has grown sharply over the last couple of years. In 2004-05, 7.8 million units were sold, growing by over 15.9 per cent. The sales of passenger cars exceeded a million units in the year.

Though automobile growth has shown signs of tapering this year, the auto component industry is confident that long-term portents are good. Hyundai Motors, for instance, has begun work to increase its installed vehicle capacity at its Sriperumbudur plant by over 60 per cent to 4 lakh units.

Export opportunities abound today because auto companies in the west are under pressure to check costs. The ACMA-McKinsey says that original equipment manufacturers (OEMs) need to find ways to reduce 20 per cent of the total expected cost of a car by 2015. A by-product of the changing dynamics has given Indian auto component companies opportunities to acquire companies in Europe and US to establish a foothold there.

Among local companies, Sundram Fasteners has been a pioneer in looking out for business opportunities. The highlight of 2005 was that much smaller companies began to acquire companies abroad.

Among key acquisitions effected by relatively smaller companies were those by Ucal Fuel Systems and El Forge. Ucal acquired America's Amtec Precision while El Forge got hold of UK's Shakespeare Forgings. The common thread underpinning the acquisitions is that it gives Indian companies access to top-end customers. There were intangible benefits too.

El Forge's managing director, K V Ramachandran, says that when his company acquired Shakespeare Forgings it opened opportunities to learn.

In general, western companies seem to have a culture of product innovation built into them. While manufacturing some components may be cheaper in India, Ramachandran feels that it also gives the Indian side a chance to imbibe something important.

SCALING UP FAST ENOUGH?
The opportunity exists, both at home and abroad. In this scenario, Suresh Krishna, chairman of Sundram Fasteners, says that the key challenge ahead is bringing about a situation, which would allow the industry to scale up fast to meet customers' needs.

An investment banker says that the auto component industry in Tamil Nadu seems to have a mental block in taking risks without which scaling up won't happen.

He estimates that auto component units (loosely defined) in Tamil Nadu raised about Rs 1,400 crore through a variety of instruments and over varying durations over the last 12 months. During the same period, there was a potential to raise Rs 4,000 crore, he feels.

He goes on to compare the attitude of the textile industry in the state with that of the auto component industry. The textile industry remains unfazed by the stellar performance of Chinese companies this year, and is preparing the ground to raise large amount of capital to scale up, he says.

Scale and China seem to automatically follow one another and bother Indian industry. Towards the end of the year, Chinese companies, especially in power steering and wheels, had become bothersome for the industry here. The Chinese industry could disrupt the best laid plans here.

IN A NUTSHELL
The big picture suggests that auto components could be India's best manufacturing bet along with textiles and pharma. The industrial belts around Chennai, Coimbatore and Hosur seem very likely to see the benefits flow in.