The Indian automobile industry is on track to becoming the third largest in the world by 2026. It is the world’s biggest two-wheeler manufacturer and among the top-three manufacturers of buses and heavy commercial vehicles (HCVs) worldwide. However, any automaker is only as good as the support it gets from auto ancillary suppliers. In India, the success of the automobile industry can be attributed to the strong support from the auto ancillary sector.
The components manufactured by this industry include springs, engine parts, suspension, shock absorbers, gears, headlights, axles, wiring systems, chassis, tyres, lights, batteries, pistons, brakes, bearings, wheels and air conditioning parts.
Some of India’s auto ancillary companies are making an impact both domestically, and on a global scale. These are companies that supply critical components, and new technology-related components like mechatronics, which are playing an increasingly key role in automobiles.
Sourcing of components drives up revenue of auto ancillary players
The chart above shows the movement of the Nifty Auto Index over the past year. From its lows in May 2022, it has surged more than 30% and is trading close to its all-time high. A natural consequence of the rise in the auto index has been the increase in sales of auto ancillary makers. Cars and two-wheelers that are sold in the market today have sophisticated electronic or digital features. Thousands of components or parts need to be sourced from different manufacturers across the world.
Automakers are thus heavily dependent on firms that produce essential auto ancillary components. Correspondingly, the revenues of auto ancillary players have seen a YoY growth, with most of them improving sequentially as well.
Even the latest data on wholesale numbers for November 2022 confirm the trend of higher YoY sales continuing for almost every automaker. Two reasons for this are the easing of chip shortages as well as the low base of last year. Still, the numbers for November sales are impressive with M&M showing a YoY sales growth of 56% at 30,528 units and Maruti logging 14.3% at 18,251 units. Meanwhile, Tata Motors had a 55% YoY jump in PV sales at 46,425 units.
Samvardhana Motherson International is one of the largest players in the auto ancillary space. Formerly known as Motherson Sumi, it is a leading player in wiring harnesses along with other systems like lighting, electronics, etc. In Q2FY23 the share of components in EVs increased to 37%, a sequential increase of 10%.
Tube Investments, a leading manufacturer of bicycles in India, and also makes components for the automotive and power industry. The acquisition of CG Power and Industrial Solutions Limited, a major manufacturer of motors, transformers, switch gears and railway parts, marked a major step up for Tube Investments, amplifying its scale and scope of operations. In the past year, it forayed into the electric vehicle segment with its new subsidiary, TI Clean Mobility Private Limited, and the acquisition of Cellestial E-Mobility Private Limited, a manufacturer of electric tractors.
Pandemic-induced slump ends, profits rise in Q2FY23
As the auto industry recovered demand after a few quarters of a pandemic-induced slump, Q2FY23 saw rising profits for most players. This was aided by the cooling of raw material prices, which added to the margins, as well as the easing of semiconductor chip supplies, leading to more wholesales for the auto industry this quarter.
Sundram Fasteners is an auto ancillary company that has maintained relationships with original equipment manufacturers (OEMs) in components like high-tension fasteners, forged components, radiator caps, etc. It exports to a host of countries, including major orders from countries like China, Brazil, USA, UK and France.
Another auto ancillary player that has been gaining prominence is Uno Minda. It has focused on components like switches, lighting, acoustics (horns), seating systems and castings. It has been expanding its offerings in the EV space with products like telematics, traction motors, battery packs, etc. It has emerged as one of the preferred suppliers for many electric two-wheelers.
The auto ancillary industry in India mainly supplies to OEMs in the automotive industry and their tier-I suppliers in large external markets. For the Indian auto component industry, Europe and North America account for nearly two-thirds of exports. These markets witnessed a swift recovery in industrial production on the back of government support in the aftermath of Covid-19. This led to a spike in demand for auto components across segments as customer demand rebounded and companies ramped up production. Exports in FY22 grew 42.9% to $19 billion.
Exports to touch $80 billion by 2026
The future prospects of this industry are promising. In FY22, for the first time, exports of auto components from India were higher than imports. This trend is likely to continue in FY23. Leading the change are companies that dominate in at least one of their product segments and companies that are expanding their offerings to gain market share in the EV segments.
The auto ancillary industry in India has witnessed healthy growth over the past few years, expanding by a CAGR of 3.28% from FY16 to FY20 to touch US$45.90 billion in FY21. It is estimated that the industry will reach US$200 billion by FY26. According to the Automobile Component Manufacturers Association (ACMA), the export of auto components from India is expected to hit US$80 billion by 2026.
Manufacturers globally are moving to diversify their sourcing and suppliers outside China to ensure continuity in business operations and reduce dependence on a single country. India has witnessed the benefits of this diversification strategy, as a favourable low-cost alternative for large manufacturers’ sourcing needs. “The China+1 policy may not have resulted in an outpouring of investments into India, but we have seen the benefits in terms of order book growth," Vinnie Mehta, Director General of ACMA, said
According to ACMA, the trade surplus continued in Q2FY23. Fears that exports could be hit due to geopolitical disruptions have not materialised as shipments to European markets continued at a healthy pace. With continued ?emphasis? on localisation, a government push to add more domestic capacity and healthy demand for automobiles, the industry expects the trade surplus to remain in FY23 as well. Exports are expected to grow 23.9% annually to reach $80 billion by 2026. The Indian auto ancillary industry is hoping to zoom ahead as the auto sector shifts into top gear post pandemic.