But the rising cost of labour and raw materials, shortages of power and non-availability of capital and technology are becoming speed breakers to further growth.
The Indian auto component industry, consisting of a large number of small and medium enterprises (SMEs), is expected to achieve an annual turnover of $110 billion (around Rs 5 lakh crore) by 2020. To maintain this growth the industry is expected to invest around $35 billion (Rs 1.57 lakh crore), according to the Automotive Component Manufacturers Association (Acma).
However, the rising cost of labour and other inputs, and the non-availability of capital and technology are becoming speed breakers for the industry, according to a senior representative of the association.
Srivats Ram, president of Acma and managing director of Wheels India Ltd, said that the industry is expected to contribute 3.6 per cent of India’s GDP by 2020, up from the current 2.1 per cent.
In 2010-11 the domestic market for auto components was estimated at $30 billion (Rs 1.35 lakh crore), compared to $26 billion (Rs 1.17 lakh crore) in 2009-10, he noted. Exports increased to $5 billion (Rs 0.22 lakh crore) in 2010-11, from $3.8 billion (Rs 0.17 lakh crore) in 2009-10 — an increase of 31 per cent. Imports are also growing, and are currently about $10 billion, Ram said.
The growth was due to the surge in vehicle production in the country. According to a study by Acma and the professional services firm Ernst & Young, India’s passenger vehicle market will grow to about nine million units in 2020, while the commercial vehicle market will cross 2.2 million units.
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The size of the passenger vehicle market is currently about two million units, and the commercial vehicle market is about 530,000 units. The two-wheeler and three-wheeler market is expected to double to 22 million units by 2015 and reach 30 million units by 2020, driven by the low penetration level, expanding rural sales and growth in exports.
Ram said the industry could create employment opportunities for over one million people, especially in tier II and tier III cities, where the major chunk of component makers that supply to original equipment manufacturers (OEMs) is located.
However, the industry faces several challenges, according to Ram — rising auto fuel prices, interest rates, input costs and non-availability of capital. These factors have been hitting company bottom lines and bringing down operating margins and return on capital for the last five years.
The major costs — labour, power and fuel — have almost doubled over the last three years, said Ram. However, productivity has not increased, due to power shortages and technology limitations.
The other challenge is raising capital — financial institutions are not ready to lend these units, since their balance sheets carry no credibility.
He said the withdrawal of Duty Entitlement Passbook (DEPB) with effect from June 30, 2011 will hurt automotive component manufacturers, and particularly SMEs, which cater to the export market.
“With no Value Added Tax in place, the removal of DEPB will make the industry uncompetitive in the global market. Withdrawal of the scheme without accompanying tax reforms designed to ensure that domestic taxes are not exported will leave exporters handicapped in the global markets,” he said.