Auto Components Industry in India: Business Opportunities & Advantages

The Indian auto component industry plays a crucial role in stimulating economic growth and generating employment, currently making up 2.3% of the GDP and providing jobs to 1.5 million individuals. Projections indicate that it is set to contribute 5-7% to the GDP by 2026. With a strong focus on exports, the industry employs over 3.7 crore people and has experienced impressive growth, reaching USD 56.50 billion in FY22, with an anticipated value of USD 200 billion by FY26. It primarily caters to two segments: OEM, commanding an 85% market share, and the Replacement market, accounting for 15% of the market.

Market Overview

The Indian auto components industry has experienced remarkable growth, with its value surging from USD 46 billion in FY21 to a projected USD 200 billion by 2026. Export projections are also impressive, expected to reach USD 80 billion by 2026. In FY21, the industry achieved a trade surplus of USD 700 million. Currently contributing 2.3% to India's GDP, it is on track to become the world's third-largest auto components industry by 2025. The two-wheeler segment, driven by the purchasing power of the Indian middle class, dominated the automobile industry, which saw a total sales volume of 17.51 million units in FY22. This surge in demand has not only boosted original equipment and auto components manufacturers but also garnered increased international demand for Indian products.

Latest Trends

The Indian government has proactively promoted the shift towards electric vehicles (EVs) through various initiatives. Programs like the Voluntary Vehicle Fleet Modernization Programme (V-VMP) incentivize buyers of new commercial vehicles to opt for eco-friendly choices, including EVs. The introduction of Bharat Stage VI (BS-VI) norms in 2020 is part of efforts to reduce carbon emissions and encourage cleaner vehicles, including electric ones. Moreover, the implementation of GST has positively impacted the EV market, making electric vehicles more competitive and accessible to consumers, thus fostering their widespread adoption.

Growth Factors

• India's automotive sector is a growing R&D hub, allocating 8% of its total R&D expenditure to drive innovation and technological advancements in the industry.
• Its strategic geographical location near key markets like ASEAN, Europe, Japan, and Korea positions India as an emerging global sourcing hub for automotive products.
• Reduced excise duty has improved cost competitiveness, leading to increased demand for vehicles in the country.
• As the fifth-largest vehicle manufacturer globally, India holds a prominent position in the automotive industry.
• Projections indicate that India is set to become the third-largest automotive market by 2026.
• Favourable trade policies, including 100% FDI and unrestricted import-export, continue to support the growth of India's automotive industry.
• The Atmanirbhar Bharat 3.0 initiative introduced Production-Linked Incentive (PLI) schemes with INR 25,938 Crores support to boost domestic manufacturing and self-reliance in the automobile and auto component sectors.
• Advantages Of Investing In India
• The Indian automotive industry is on the cusp of remarkable growth, driven by a growing workforce and an expanding middle class, which are significant factors propelling demand. Presently, it holds the fifth spot among the world's largest automobile markets. The shift towards electric vehicles (EVs) presents an encouraging opportunity, with estimates predicting annual EV sales to reach 4 million by 2025 and an astounding 10 million by 2030, propelling the market value to an impressive USD 206 billion. Additionally, the government's efforts to decrease auto component imports are paving the way for domestic players to seize new prospects.
• India's manufacturing base enjoys a distinct competitive edge, boasting operational costs that are 10-25% lower than those in Europe and Latin America. This cost-effectiveness is supported by a vast pool of skilled and semi-skilled workers, bolstered by a robust educational system. Moreover, being the world's second-largest producer of steel further strengthens its appeal as a cost-efficient production destination.
• India has firmly established itself as a key global hub for sourcing auto components, with over a quarter of its production being exported annually. Forecasts indicate an impressive annual export growth rate of 23.9% by 2026. The country's expertise in manufacturing specific auto components, such as shafts, bearings, and fasteners, provides a competitive advantage in the international market.
• The Indian automotive industry receives robust backing for research and development (R&D) and product innovation through dedicated NATRiP centres, fostering a culture of innovation. The government's commitment to electric vehicles is evident through policies like FAME II, offering incentives to drive adoption and manufacturing in this sector. The industry's appeal to foreign investors is further enhanced by allowing 100% Foreign Direct Investment (FDI). Additionally, the substantial allocation of USD 7.8 billion for the automobile and auto components sector through production-linked incentives aims to accelerate growth and foster self-reliance.

Automotive Manufacturing Hubs in India

India's automotive industry holds a significant global position, excelling in two-wheelers, segment A cars, and tractors. Known for its frugal and scalable engineering, India has become a thriving global hub in this sector. The industry's growth is fuelled by vibrant automotive clusters in the West (Mumbai-Pune-Nasik-Aurangabad), South (Chennai-Bangalore-Hosur), and North (Delhi-Gurgaon-Faridabad), with emerging areas like Sri City, Anantapur, and Sanand contributing to progress. The regional base of auto component manufacturers is concentrated in the West, North, and South regions, with Pune, Gurgaon, and Chennai being major hubs. Uttarakhand's industry-friendly policies are transforming it into an auto hub, attracting automotive companies to set up manufacturing facilities and boosting growth in the region.

Car brand clusters are strategically located across states to leverage advantages like skilled workforce, supportive policies, and infrastructure. Chennai is a significant hub with Hyundai, Ford, Renault-Nissan, and Daimler, while Pune hosts Tata Motors, Mahindra & Mahindra, and Volkswagen-Skoda. Gurugram and Faridabad house Maruti Suzuki, Sanand appeals to Tata Motors and MG Motor, and Sriperumbudur attracts BMW. Honda Cars India chose Tapukara, Andhra Pradesh hosts Kia Motors, Uttar Pradesh houses Yamaha, Karnataka hosts Toyota Kirloskar Motors, and Maharashtra's Talegaon once hosted General Motors. The diversity of these clusters underscores India's growing prominence in the global automotive industry

Regulations

• The Auto Policy of 2002 encourages sustainable development by facilitating 100% foreign equity investment in auto component manufacturing and simplifying licensing and approval procedures.
• The National Automotive Testing and R&D Infrastructure Project (NATRiP) invests USD 388.5 million to establish state-of-the-art testing and R&D infrastructure, ensuring adherence to global performance standards.
• The Department of Heavy Industry (DHI) and Public Enterprises support modernization through a USD 200 million fund, providing interest subsidies and export benefits under the DFRC scheme.
• The Automotive Mission Plan 2016-2026 (AMP 2026) outlines a ten-year strategy aiming for a four-fold growth in the automotive industry, creating approximately 65 million jobs.
• The FAME Scheme (Faster Adoption and Manufacturing of Electric Vehicles) incentivizes the adoption of electric vehicles across various segments until March 2019.
• The Motor Vehicles Act, 1988, and Central Motor Vehicles Rules 1989 govern safety and emission standards for vehicles, including the provision of protective headgear for two-wheelers.
• The National Electric Mobility Mission Plan 2020 (NEMMP) aims to achieve 6-7 million electric/hybrid vehicles by 2020, with a cumulative investment of USD 2.15 billion.

Government Support and Incentives

• PLI Scheme for Automobile and Auto Components: The PLI scheme aims to incentivize the production of advanced automotive technology, attract investments, and promote domestic manufacturing. With a budget of INR 259.38 billion, it seeks to drive growth in the industry.
• R&D Incentives: Under section 35 (2AA) of the Income Tax Act, R&D incentives offer a 200% tax deduction for payments made towards scientific research conducted in labs, universities, and other institutions.
• In-House R&D Centre: Section 35 (2AB) provides a 150% tax deduction for companies engaged in scientific research at their in-house R&D centres. This incentive is effective until 31st March 2020.
• State Incentives: Various states in India offer incentives like subsidies, duty relaxations, and financial assistance to promote industrial projects. States such as Andhra Pradesh, Gujarat, and Jharkhand provide such incentives.
• Export Incentives: The Merchandise Exports from India Scheme (MEIS) offers export subsidies for specific tariff lines and countries based on recommendations by the Automotive Component Manufacturers Association of India (ACMA).
• Areas Based Incentives: Special Economic Zones (SEZs), National Investment & Manufacturing Zones (NIMZs), and specific regions receive incentives to foster industrial development and growth.

Raw Materials

India's auto component manufacturing requires a diverse range of raw materials, all tailored to specific component requirements. Luckily, India boasts a well-established industrial base, making it an ideal sourcing destination. For instance, steel, from major producers like Tata Steel and JSW Steel, is used for chassis and body panels. Aluminium, provided by Hindalco and NALCO, is essential for lightweight engine parts. Copper, sourced domestically and through imports, is crucial for electrical components, with Hindustan Copper Limited as a primary producer. Rubber, from states like Kerala and Tamil Nadu, is utilized for tires, belts, and hoses, while synthetic rubber from companies like Reliance Industries and Indian Oil Corporation also plays a role. India's well-established plastics industry supplies materials for interior components like dashboards. Additionally, leading paint manufacturers offer paints and coatings, ensuring protection and a refined finish for auto components.

Estimated Costs

The cost of establishing an auto component manufacturing plant in India can vary significantly, contingent on various factors such as plant size, component types, location, technology, and infrastructure needs. For a medium-sized plant, the estimated cost breakdown includes land and infrastructure (20-30%), machinery and equipment (40-50%), raw materials (15-25%), labour and manpower (5-10%), technology and R&D (5-10%), regulatory and compliance (3-5%), marketing and sales (2-5%), working capital (5-10%), and a contingency fund (5%). However, these figures are subject to change based on specific project requirements and conditions.

Conclusion

Indian and global manufacturers are adopting new strategies, such as expanding their capacities and venturing into untapped markets like the Northeast region of India, to secure long-term benefits. Diversification is a prevalent approach, with Indian firms exploring different segments like 2-wheelers, passenger cars, and commercial vehicles to capitalize on growth prospects. India aims to produce 8.7 million passenger vehicles by 2020, and multinational companies are actively launching new vehicle models to meet the rising demand. Furthermore, India's automotive market potential has attracted global suppliers to establish R&D facilities in the country, enabling them to adapt designs and develop innovative products tailored to the market's needs.


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