Making Indian auto component industry future-ready...Making Indian auto component industry future-ready 03 Foreword For India to become a US$ 10 tn economy in 2030 from its 2016 level

February 2018

Making Indian auto component industry future-ready

Section Page

Foreword 03

GlobalAutoIndustry 05

TheIndianAutoComponentIndustry 10

Export&ImportinAutoComponentIndustry 12

Disruptions in Auto Industry & their impact on the Indian AutoComponentIndustry 15

Challenges & Considerations for Indian Auto ComponentManufacturers 24

Conclusion 26

Contents

02 Making Indian auto component industry future-ready

Making Indian auto component industry future-ready 03

Foreword

ForIndiatobecomeaUS$10tneconomyin2030fromits2016levelofUS$2.26tn,andpossiblythethird-largesteconomyintheworld,itsrealrateofgrowthmustbeatleast7percentperannum.However,iftherealgrowthrateis9percent,itsGrossDomesticProduct(GDP)willbeUS$14tn,reflectingthefuturereadiness of our economy to take on challenges and make the mostofopportunities.

International Monetary Fund (IMF) has endorsed India as the fastestgrowingeconomygloballywithagrowthprojectionof7.4percentin2018,whileitsglobalgrowthforecaststandsat3.9percent.Themanufacturingsectorwillbethemothershipofthisgrowth.MakeinIndiainitiativebyourHon’blePrimeMinisterShriNarendra Modi aims to increase the share of the Manufacturing sectortoGDPto25percentby2022,fromthecurrentrateof16percent.Thiswillcreate100mnnewjobsby2022.

TheIndianautoindustryisoneofthelargestintheworld.Theindustryaccountsfor7.1percentofthecountry’sGDP.Itispoised to become fourth largest manufacturer of automobiles globallyby2020afterChina,theUSandJapan.Nottomention,Indiaiscurrentlyworld’ssecondlargesttwo-wheelermanufacturer.Whilegovernmentsacrosstheworld,includingtheIndiangovernment,havebeenfocusingonreducingtheirglobalcarbonfootprint,thedisruptionstriggeredbytheintroductionofelectricvehicles(EV),digitisationandconnectivityacrossautoandautocomponentsindustry,ishardtoignore.

Goingforward,itwillbecriticalforIndianautocomponentmanufacturers to address the following challenges and gaps across four areas:1 Developing capability in R&D and technology in software

anditsintegrationwithhardwarecomponents.

2 Addressing skill gaps in talent required for driving innovation acrossnewtechnologiesandproductofferings.

3 IncreaseglobalfootprintthroughM&As.4 Improve the existing industry perception from ‘print to

manufacture’toa‘customisableandintegratedoffering’industry.

UnionBudget2018-19waswellreceivedbytheIndianautocomponentsector.Theincreaseincustomdutyoncriticalcomponents such as engine components and transmission parts to15percentfromearlier7.5percentisawelcomesteptoencouragelocalisation.Reductionofcorporatetaxto25percentforMSMEswithturnoverofINR250crwillhelpunorganisedautocomponentsegmentasover80percentofthesupplierbasefallsundertheMSMEbracket.Simplificationofprocedureforcredit availability through online system for SMEs is a welcome steptoo.

However,giventhegovernment’svisiononelectricmobility,rationalising GST rates on EVs and EV batteries and components willbecritical.Thegovernmentneedstoensurethatitprovidesa conducive policy environment that boosts industry confidence andattractscapitalforlocalmanufacturingandinnovation.Clarity on policy and roadmap for industry transition will be critical for Original Equipment Manufacturers (OE) and component manufacturers to meet requirements and prioritise resourcesandefforts.

Disruptionisthenewnormal.ThisistherighttimeforIndia’sautomotive and auto component industry to display its resilience andcapabilityontheglobalstage.

Vishesh C ChandiokNational Managing PartnerGrant Thornton India LLP

The government needs to ensure that it provides a conducive policy environment that boosts industry confidence and attracts capital for local manufacturing and innovation.


The global automotive and auto component industry is at aninflectionpoint.Increasedenvironmentalconcernsandvarious governments trying to meet their respective climate agenda has forced OEs to move towards cleaner and greener transportationtechnologies.

The global automotive industry is staring at headwinds arising outofdisruptionsonaccountofshiftinpowertraintechnology,from traditional internal combustion engines to electric and enhanced connectivity of vehicles with myriad connected features.Thisdisruptionwillchangethewayautoindustryhasbeenoperatinginthelast100yearsorso,usheringinboth,opportunitiesandchallengesforOEsandcomponentmanufacturers.

TheIndianautocomponentindustry,undertheAMP2026policy,issettotouchUS$200bn(currentlyestimatedatUS$43.5bn).ExportsareexpectedtoreachUS$70to80bn,roughlyaccountingfor40percentshareinthetotalturnoverwithkeyemphasisontechnologyandR&Ddevelopment,collaboration and alliances to address capability gaps and positioning Indian auto component industry as a preferred manufacturingdestinationforautocomponentsglobally.

Foreword

Improving exports (currently in deficit) will be key to achieve thistarget.Theindustrywillhavetotakesignificantmeasuresand steps to convert from being an export deficit industry to an exportsurplusone.

There will be significant challenges for powertrain engine and transmission manufacturers as ICE will witness reduced demandincomingyears,puttingpressureonplayerstodevelopcapabilitiesacrossEVpowertrain.Therecentdecisionby the government to withdraw subsidy on hybrid vehicles and increase GST on hybrid vehicles is not favourable considering itsvisiontohaveallemission-freevehiclesonroadby2030.

ThispaperhighlightskeyopportunitiesasIndia’sautoindustrymatures and covers the strategic positions that players could takeinordertoberelevantwithchangingbusinessdynamics.

Saket Mehra PartnerGrant Thornton India LLP

The industry will have to take significant measures and steps to convert from being an export deficit industry to an export surplus one

Global Auto Industry


Theglobalautomotiveindustryisatacrossroad.Unlikethepastcyclesofboomsandbusts,theindustryiswitnessingdisruptionsacrosstechnology,vehicleconnectivity,consumerpreferencesandbusinessmodels,thatwillresultinanindustrythat bears little resemblance to what it was just a decade ortwoago.Theshifttocleanerandgreenertransportationmediums in the form of roll-out of Battery Electric Vehicles (BEVs) coupled with vehicles that are more intelligent as ever; theintegrationofautonomousfeaturesacrosssafety,drivingand parking are all indications on what the future holds for the industry.

The next wave of growth in the auto industry will be led by emergingandvibranteconomies.TheIndianeconomyisprojectedtogrowat7.4percentin2018,markingitthefastestgrowingemergingeconomyglobally.Theindustryiswitnessinga significant shift in the focus of Automotive OEs in the form of their investments aimed towards executing their market strategythoughmanufacturingandproductrollout.

Real GDP of Major Economies

Percentage change 2014 2015 2016 2017 2018

World 2.8 2.8 2.5 2.9 3.1

United States 2.4 2.6 1.6 2.3 2.6

Canada 2.6 0.9 1.4 2.3 2.4

Eurozone 1.2 1.9 1.7 1.6 1.6

United Kingdom 3.1 2.2 1.8 1.6 1.2

China 7.3 6.9 6.7 6.5 6.2

Japan 0.2 1.2 1 1.1 0.9

India 7.2 7.9 6.7 7.2 7.4

Brazil 0.5 -3.8 -3.5 0.3 1.8

Russia 0.7 -2.8 -0.2 1 1.7

Source:IHSMarkit

Theworldeconomyisprojectedtogrowat3.1percentin2018.IndiaandChinaaretheonlytwoeconomiesthatareprojectedtosurpasstheworld’sgrowthratewhichispeggedat7.4percentand6.2percentin2018respectively.Thematureeconomiesonthecontrarywillwitnesssub2.2percentaveragegrowthrates.

Emerging Markets’ Potential

0

70

60

50

40

30

20

10

2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

Mature January 2017 Emerging January 2017Emerging January 2016Mature January 2016

Source:IHSMarkit

China’seconomicgrowthisexpectedtoslowdownbecauseofimbalancesincredit,housing,andindustrialmarkets,resultinginlessmomentumbehindautossalesgrowth.Political uncertainties could lead to an “eccentric” phase ofglobalisation.Also,theslowpaceofeconomicreformsinmany economies with emerging market is holding back income growthandvehicledemand.

RussiaandBrazilareexpectedtorecoverin2018,buteconomic crises can have magnified impact on car sales and boththemarketsmayfinditdifficulttochasegrowthtargets.Wideeconomicdislocationhasalastingandloweringeffectoncarmarketpotential.

Many mature markets have been witnessing quicker releases ofnewervehiclesonaccountofincreaseddemand.BrexithashadsignificantimpactonthevehiclesalesinEurope.Forexample,Germanywitnesseda2.6percentincreaseinvehiclesalesover2016,registeringsalesof3.7mnunitsin2017.UKwitnessedadropinsalesbyalmost6percentin2017afterregisteringsalesfor5straightyears.Thistrendisexpectedtolasttill2019.

Migration from a Mature to a Vibrant & Emerging Economy


TheIndianeconomyisprojectedtogrowat7.4percentin2018asagainstChina’s6.8percent,makingitthefastestgrowingemergingeconomyglobally.TheaccelerationinIndia’sgrowthrateaheadcomesaftertheslowdownlastyeardue to demonetisation and the implementation of Goods &ServicesTax(GST).Thegovernment’simpetusonMakeinIndia,investmentinroadandtransportationinfrastructure&SmartCities,risingmiddleclassdisposableincomeandlowerinflationwillcumulativelycontributetothisgrowth.

WhatthismeansfortheAutomotiveindustryisastrategicshift in focus from mature economies to vibrant emerging economies.Theindustrywillwitnessasignificantshiftinthedemandforcomponentstoo.Tighteningofregulatoryenvironment,intensifyingsafetystandardsandgreateradoption of technology has triggered disruptions in the form of Electrification,Autonomousdriving,andConnectedcars.Themigration of powertrains from traditional Internal Combustion Engine(ICE)platformtoElectric,connectedfeatureevolutionintheformofV2VandV2Iconnectivity,translatesintosignificantopportunities and challenges for OEs and component manufacturers.

Component manufacturers across engine parts and drive transmission segments will witness maximum heat emerging outofheadwindsEVmigration.However,manufacturersacrossbodypartandchassis,suspensionandbraking,electricequipmentandpartswillnotwitnessandchallenges.

Deal Landscape 2016 (non-exhaustive)

Year Target Acquirer Region Target Region Acquirer Value (US$ Mn)

2016 GETRAGGmbH&CieKG Magna International Inc Europe ROW 2,670

2016 CGSHoldingAS Trelleborg AB Europe Europe 1,250

2016 Alliance Tire Group BV Yokohama Rubber Co Ltd Europe Asia 1,180

2016 Punch PowerTrain NV Yinyi Group Co Ltd Europe Asia 1,100

2016 Gestamp Automocion SL Corporacion Gestamp SL Europe Europe 990

2016 Key Safety Systems Inc NingboJoysonElectronicCorp US Asia 900

2016 VibracousticGmbH Freudenberg & Co KG Europe Europe 830

2016 Faurecia SABumpers business Compagnie Plastic Omnium SA Europe Europe 720

Source: Secondary Sources

Survival of the fittestAlthough2016witnesseddecreasedM&Adealvalue(-34percent),thevolumeofreporteddealsstoodwellpast580,down1.4percentintheglobalautomotiveindustry.Unlikepast,whereM&Adealswerefocusedon,thefutureofM&Adealswill be largely governed by technological acquisition and new serviceandbusinessmodelexpansion.

M&A within the Automotive Component Manufacturers will be largely governed by an intent to access expertise and technology across three broad areas: 1 Migration from traditional platforms to self-driving and

electric platforms2 Driver and Vehicle interface technology & 3 Electronics Technology

In2016,China,theUSandJapancontributedtoover80percentofthedealvalue(~US$32bn)asacquirercountries,however,China,USandGermanyremainedkeytargetnationsforM&Aaccountingforover50percentofdealvolume.


Indiawitnessed22mainstreamIPOsraisingUS$2.5bnintheYTD2017.Keysectorswerebankingandfinancialservices,healthcareandpharma,transport,educationandIT&ITES.

IndiaentereddealsworthUS$47.8bninYTD2017,34percenthigherthanYTD2016.InspiteofambiguityamongPEinvestorsontheimpactofGST,thedealactivityexhibited74percentgrowthinYTD2017ascomparedtolastyear.

M&Avalesrecordedapromising22percentgrowthasthecountrysawincreasingdomesticconsolidation.Therehavebeen11M&AsealsfromJan-May2017intheautomotivesector,upby170percenttoUS$254.8mnascomparedtothelastyear.

PEinvestmentrose607percenttoUS$90.2mnresultingfromthreedealsinAutoPartsandEquipment.TheseincludedPiramalFinance’sinvestmentofUS$42.5mninRSBTransmissionsIndiaandUS$44.9mninIndoShellMould.SAIFPartnersIndiainvestedaroundUS$2.8mninFiemIndustries.

Select M&A deals 2016-18. 1 M&M’s acquisition of BSA: M&M acquired classic British

motorcyclebrandBSAforINR28croreasapartofM&Msbusiness strategy to create more lifestyle brands and expansionofsegmentoffering.Mahindrahasalreadyannounced that it will not be launching the BSA motorcycles here in India very similar strategy as we have seen Peugeot Motorcycles.

2 Ashok Leyland acquiring LCV business from Nissan Motor Corporation: In late November Ashok Leyland completedtheacquisitionofNissanMotor’sstakeineachofitsthreejointventuresformedbetweenthetwocompanies.Under the new deal Ashok Leyland will continue to build Dost,MitrandPartnerLCVswhicharebasedonNissan’sdesignandtechnologyunderalicensingagreement.

3 M&M’s acquisition of Turkey based Erkunt Traktor Sanayii: Mahindra&MahindraLtd.,theworld’slargesttractorcompanybyvolumeandpartofUS$19bnannounceditssecondacquisitioninTurkeyon20thSeptember2017.Afteracquiringstakeof75.1percentinHisarlarinJanuary2017,M&MagreedtoacquireErkuntTraktorSanayii,the4thlargesttractorbrandinTurkey,and

anassociatecompanyforanenterprisevalueofUS$117mn.Itwillacquire100percentoftractormakingoperationsforUS$76mnand80percentoffoundrybusinesswhichprovidescastingstomachineservicesforUS$41mn.Thisdeal would not only allow M&M to tap the fourth largest tractormarketintheworld,butalsotohaveastrongbrandpresence,wideportfolioofproductsandaccesstomanufacturingcapacity,dealernetworkandneighbouringmarketssuchasMiddleEast,CIS,&NorthAfricanmarkets.

4 Mahindra & Mahindra and Ford Motors: Mahindra & Mahindra has entered into a partnership with American cargiantFordMotorsCompanyinSeptember2017.Thisassociation is expected to help Mahindra & Mahindra expanditsglobaloutreach,andhelpFordMotorCompanygainsomemoremarketinIndia,benefitingfromthesuccessfulbusinessmodelofitsnewpartner.BesideshelpingeachothergetbettermarketswithinandoutsideIndia,thetwo car companies will cooperate in endeavours like mobility programmes,connectedvehicleprojects,andproductdevelopment.OnepivotalavenueinthepartnershipbetweenMahindra Group and Ford Group will be developing electric vehicles.Thiswillbeacrucialstepforwardintimeswhenother auto companies are also looking to make a mark in the emergingelectricvehiclesegment.

TherewerefewM&AdealswithintheAutoComponentspace.Select example include:1 Bharat Forge’s acquisition of Walker Forge Tennessee,

PMT Holdings:WiththedealvaluedatINR95cr,WalkerForge Tennessee has been renamed as Bharat Forge Tennessee,whichisasupplierofcomplexandhighalloysteel,engineandchassiscomponentsandhasadiversegroupofcustomersacrossautomotiveandindustrialsector.

2 Bharat Forge Ltd and Analogic Controls India Ltd: Auto components maker Bharat Forge Ltd completed the acquisitionofbalance40percentsharesofAnalogicControlsIndia(ACIL)on21stSeptember2017postwhichACILhasbecomewhollyownedsubsidiaryofBharatForge.Hyderabad-basedAnalogic’sfoundersagreedtosellthestakeasthecompanyhadanegativenetworthofINR7.88croreasofMarch2017.BharatForgeacquireda60percent


stakeinthecompanyin2013.BharatForgesaidAnalogicis “strategically important” as it has the resources and technicalcapabilitytoexecuteprojectsrelatedtodefence,aerospaceandelectroniccomponentsandsub-systems.

3 IMC International Metalworking Companies BV and L&T Cutting Tools Ltd: On16thAugust2017,Larsen&Toubro Ltd (L&T) agreed to sell its entire stake in its unlisted unit L&T Cutting Tools Ltd to IMC International Metalworking CompaniesBV,ownedbyWarrenBuffett-ledBerkshireHathawayInc.,forINR174cr.ThesaleispartofL&T’sstrategytoexitnon-corebusinesses.L&TCuttingTools,incorporatedin1952,manufacturesfabricatedmetalproducts.

4 Motherson Sumi’s acquisition of auto business unit of Abraham and Co:HungarybasedAbrahamandCowas acquired by auto component major Motherson Sumi SystemsLtd(MSSL)foraboutINR77crinOctober2016.MSSL,throughits100percentsubsidiary,wouldacquiretheland,buildingandmachineryofAbrahamandCoLtdforapurchasepriceconsiderationofEUR10.4mn.Thisacquisition will help MSSL to further expand is synergies through supplies to SMR and to the new upcoming facilities inEurope.

The Indian auto component space is largely fragmented withfamilyownedbusinesses.Thereisanincreasedneedfor small business houses to embrace globalisation in order to be competitive by actively looking at opportunities acrossM&A,JVsandtechnicalcollaborationstoaddressgapsinR&D,Technology,TradeandGlobalexpansion&SkillsetandTalent.M&AincomponentindustryislargelydrivenbylargeTier1suppliers.

These companies need to embrace the right governance and culture in order to attract investors or joint venture partners.Theirabilityandskillsneedtoberealignedtowards a global competitive environment through demonstrationofrightpractices,policiesandworkingenvironment.

The Indian Auto Component Industry


TheIndianautoindustryisoneofthelargestintheworld.Theindustryaccountsfor7.1percentofthecountry’sGrossDomesticProduct(GDP).GlobaldisruptionsarisingoutofEVs,connectedandautonomousvehiclesispoisedtohaveasignificantimpactontheindustry.Whiletheindustryispoisedtobecome4thlargestmanufacturerofautomobilesgloballyby2020afterChina,USandJapan(Indiaiscurrentlyworld’ssecondlargesttwo-wheelermanufacturer),theindustryisstillat a nascent stage with regards to the level of preparedness

The growth of the Indian auto component industry largely dependsuponthegrowthofOEsandafter-marketdemand.TheOEdemandaccountsfor~80percentofthetotalcomponentdemand;theremaining20percentisprimarilybyreplacement/after-marketsegment.TheIndianautocomponentindustryisvaluedatUS$39bnin2016,growingattherateofover8.5percenty-o-yandcontributingtoover2percentofIndia’sGDP.

Thesectorislargelyunorganisedcomprisingover10,000players operating in the unorganised segment primarily catering to replacement/after-market segment which contributesto~15percentoftotalindustryrevenues.Thereplacementdemandoff-latehasbeendecreasing,puttingpressureontier3and4players.

The organised sector comprises big players supplying componentsdirectlytoOEs.Thereareover700playersoperatinginthissegmentcomprisingofTier1&2players.Theycontributeto85percentofthemarketrevenues.

and evolution maturity for facing headwinds emerging out of disruptionfromEVplatformmigration,vehicleconnectivityandevolutionofautonomousfeatures.

The production output of the Indian automobile industry stood at25.32mnvehiclesincludingPV,CV,3W,2Wduring2016-17againstanoutputof24.0mnvehiclesin2015-16,registeringagrowthof5.4percent.

The automobile industry is considered to be a job engine forIndia,andsimultaneously,Indiaisupgradingitsexistingcontribution in the automobile Global Value Chains (GVC) to reaphighereconomicbenefits.Ingeneral,high-valueactivitiesareskillintensiveandlow-valueactivitiesarelabourintensive.SincebulkofIndia’sthrusttillnowhasbeensustenanceforits people – much of our GVC participation in automobiles isalonglabourintensiveassembly,components,andbasicmanufacturing.

Indian Automobile Production Trend

Category 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 Growth Rates

Passenger Vehicles 3,146,069 3,231,058 3,087,973 3,221,419 3,465,045 3,791,540 9.40%

Commercial Vehicles 929,136 832,649 699,035 698,298 786,692 810,286 3.00%

ThreeWheelers 879,289 839,748 830,108 949,019 934,104 783,149 -16.20%

TwoWheelers 15,427,532 15,744,156 16,883,049 18,489,311 18,830,227 19,929,485 5.80%

Grand Total 20,382,026 20,647,611 21,500,165 23,358,047 24,016,068 25,314,460 5.40%

Source: SIAM

Migration from a Export Deficit to Export Surplus

High-valueactivitieslikeR&D,design,standards-development,specifications,andmarketdevelopmentareperformedinIndia,thoughatlowerscalescomparabletodevelopednations.Thus,theviciousnessofthecycleisthatupgradingIndia’sGVCcontributionwillleadtoadevelopedIndia,andadevelopedIndiawillattractupgradationofGVCcontribution.


Theautomotivecomponentexportsin2016wasestimatedatUS$10.9bn,registeringaCAGRof~18percentfrom2011,whiletheimportswereestimatedatUS$13.9bnin2016,registeringaCAGRof~13percentsince2011;importsform35percentofthetotalindustryturnover.

DemandfromAsiaandEuropeincreasedin2016-17witnessingagrowthof~4.5percentand2.5percent,respectively.NorthAmerica witnessed a de-growth in the demand to the tune of ~3.9percentonaccountoflowerreplacementdemandduetoincreasedbuyingin2015-16onvehiclepurchase.Theindustryisexpectedtohaveasignificantimpactonautosalesin2018due to federal rate hike impacting cost of borrowing and interestratesonloansincludingautoloans.

Currently the Indian auto component industry exports to more than160countries.KeyautocomponentsexportedfromIndiaincludegearboxesandparts,hydraulicpowersteeringsystemsandsteeringgearsystemsanditsparts,dieselengineparts,drive-axlesandparts,suspensionsystemsandparts,brakesandservo-brakes,sparkignitionandparts,amongothers.

Engine,transmissionandsteeringpartscontributetoover40percentofthetotalexportportfolio.Theremaining60percentcomprisesproductsincludingchassis,bumpers,rubberproducts,etc.

Exports: Top 10 Destinations (figures in per cent)

3

3

3

3

3

4

5

6

7

24

Brazil

Mexico

UAE

France

Thailand

Italy

UK

Turkey

Germany

USA

Source: ACMA

TheshareofimportsfromAsiawitnessedanincreaseby~2.5percentin2016-17;importsfromNorthAmericaandEuropewitnessedade-growthof~14.5percentand7.1percent.

Nearly30-35percentoftheautocomponentsusedbyOEMsareimported.Theshareofimportedconsumptionhassignificantly increased over the last one decade with the entry ofnewglobalOEs.

In2015-16,importsfromtop10countriescomprisedover80percentofIndia’simportsofautocomponents.Regionwise,shareofAsiawasthehighestat58.6percent.ThiswasfollowedbyEuropecomprisingabout31percentofIndia’simports.About8percentimportsofautocomponentscamefromNorthAmerica.CentralandSouthAmerica,Africa,NewZealand and Australia formed the remaining share of the Indian importsofautocomponents.

Enginetransmission,steeringandsuspensionpartsaccountforover50percentofthetotalcomponentimportportfolio.

Imports: Top 10 Destinations (figures in per cent)

1

2

3

3

8

8

11

11

14

23

Swedan

France

UK

Italy

USA

Thailand

Japan

South Korea

Germany

China

Source: ACMA

Export & Import in Auto Component Industry


The dependence on the imports presents itself as both a threat and an opportunity for the Indian auto component manufacturers,consideringthefragmentednatureoftheIndianautocomponentindustry,OEswilllookatforminglong-termsupplycontractswithsuppliersoverseas,thereforeputtingpressureonlocalmanufacturers.Theopportunityforlocal manufacturers is to understand OEs requirements and move up the value chain while focusing on cost and quality competitiveness.Forexample,Chinesecomponentsareatleast30-35percentcheaperascomparedtoIndianproducts.TheIndiacustomerispriceconscious.OEswilllookatbringingdownthecomponentcoststoensurecompetitiveplatformpricing.

Localisationofcomponentswillbecriticaltoo.Whilemostofthemassbrandsaresourcinglocally,theopportunityacross component requirements for luxury platforms and upcoming electric vehicles will be a crucial for auto component manufacturers.Luxurycarmanufacturersatthemomentlook at local assembly due to scale and attractive taxes on assemblyversusCBU.Indianautocomponentmanufacturerswould need to focus on developing capabilities to tap into such opportunitiesthoughmodularisation.

Whilepolicyplaysacrucialroleinassistinglocalmanufacturers(e.g.anti-dumpingduties,localisationandsourcingnorms,etc.)there will also be a need to address the dichotomy with regards tobeingtrulyglobal.ComponentmanufacturersinIndiawillbeforced to go beyond their comfort zone to ensure they remain relevantinthecompetitivemarket.

Foreign trade with regards to Export and Import has witnessed asteadygrowthoverthelastfiveyears.However,theshareofimportshasbeenfarmorethanexports.

Export Import Trend (figures in US$ bn)

5.9 6.68.1

9.510.5 10.9

7.7

10.311.5 11.9

12.813.9

0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16Export Import

Source:ACMA,GTAnalysis

TheAutomotiveMissionPlan2026(AMP2026),isacollectivevision of the Government of India and Indian automotive industry defining growth path for Indian OEs and auto componentmanufacturers.Themainobjectiveistobeamongthetopthreenationsgloballyinengineering,manufacturingand exports of vehicles and components by focusing on five key areas:

1 Making Indian automotive industry as a driver for growth andsteertheMakeinIndiaprogramme.

2 Generating employment and becoming a significant contributortoSkillIndiaprogramme.

3 Enhance universal mobility by focusing on cleaner and smarter transportation mediums aimed at reducing pollution,congestionsandglobalwarming.

4 Increase exports of Indian vehicles and components by positioningIndiaasamajorexporthub.

5 Actasanenablerforpolicydispensation.


TheAMP2026hassetstringenttargetsforIndianautomotiveindustry(includingOEsandComponentManufacturers).Itenvisagesthatindustrywillgrow3.5to4timesinvaluefromitscurrentoutputi.e.from~US$74bntoUS$260-300bn(2015-26).

AMP 2026 Targets and Sector Glide Path

39,900 178,700 200,000 69,000

436,700 462,500

62,500

223,300 295,000

83,200

183,800

200,000

84,300

148,500

183,000

125,100

445,000

549,000

FY15 FY26 Base Case FY26 Optimistic Case

Component After-marketComponent ExportsOEM ExportsOEM Value AdditionComponent ImportsSystems/ Components/ In-house/ Domestic

464,000

1,616,000

1,889,500

292,600

777,300

932,000

OEM Domestic

Source:ACMA,AMP2026Policy(FiguresinINRCr)

TheIndiancomponentindustry,undertheAMP2026policy,issettoreachasizeofUS$200bnwhichiscurrentlyestimatedatUS$43.5bn.Theexportsin2015wereestimatedatUS$10.9bnandisexpectedtoreachUS$70to80bni.e.roughlyaccountingfor40percentshareinthetotalturnover.TheAMP2026alsoaimsatdevelopingtheindustry competitiveness through:1 Developing capabilities in Automotive Electronics and

SystemIntegration.2 Collaboration with academia and other non-automotive

stakeholderssuchasIPfirmsandsoftwarecompanies.3 Development of testing and validation facilities as a

sourceofrevenues,bothdomesticandinternational.4 Establishing and positioning India as a preferred

manufacturinghubforautocomponentsglobally.

Exports will form a key component in achieving this target whichcurrentlyisindeficit(importsgreaterthanexports).

The industry will have to take significant measures and steps to convert from being an export deficit industry to an export surplusindustry.Componentmanufacturerswillneedtofocusonredefiningtheirbusinessmodels,productportfolioand offering in line with emerging demands from regions across the globe while continuously meeting global quality standardsonproductofferingsatacompetitiveprice.

Addressing challenges related to acquisition of technology (mechanicaltoelectronics),investinginR&D,attractingandretainingtalentandskillsetwithinorganisation,accesstoglobal markets and emphasis on changing brand perception of Indian auto component manufacturers and industry at large will be key to facing headwinds from industry disruption.


The current generation of customers as we look around know vehiclesthataredrivenbyICE.VehiclespoweredbyICEshavebeen the technological solution that defined mobility and dominated the automotive industry though transport systems andplatformsglobally.Growingconcernsoverclimatechangeandtheurgentneedtodecarbonisetheworldeconomy,hasledtothedevelopmentofalternativepowertraintechnologies.HybridandfullyelectricpowertrainsareattractingconsiderableinvestmentsfromOEs,andsodonewmobilityconcepts and services at the interface of the transport and the energysystem.

Howindustriesadapt,whichalternativesemerge,howrapidlythey become competitive and eventually substitute the incumbenttechnologies,however,dependoncountry-specificfactors,includingpolicyframeworks,theexistingindustrialstructureandspecialisation,demandconditions,etc.

Auto component manufacturers will not be left untouched from suchchanges.Thecomponentmanufacturerswillbefacedwith opportunities and challenges to be relevant amidst this transition.Unlikethepastdisruptionsintheautomotiveindustry(whichwasmainlywithintheICEspace),themigrationof

ICEtoHybridandElectricPowertrainandincreasingvehicleconnectivity and autonomous vehicles backed by digitisation posesignificantheadwindsforautocomponentmanufacturers.

The future mobility powertrains will be mainly electric implying lessercomponentrequirementsunliketoday’spowertrains.Whatthismeansforautocomponentmanufacturers,bigorsmall,remainsakeypriority.

Powertrain Migration: ICE to ElectricElectric powertrain is poised to take over the conventional ICE powertrainincomingyears.In2016,over750,000newelectricvehiclesweresoldglobally.

Chinaisthelargestmarketforelectricpowertrainin2016,withsalesofover336,000electricvehicles,whichismorethandoublethanthatofUSAwheresalesin2016stoodat~160,000.Europeancountriesaccountedfor~215,000electricvehiclesinsalesdominatedbyNorway,UK,France,Germany,NetherlandsandSweden.Globally,95percentofelectriccarsalesaretakingplaceinjusttencountries:China,theUnitedStates,Japan,CanadaandsixleadingEuropeancountries.

Disruptions in Auto Industry & their Impact on the Indian Auto Component Industry


World’s Top 10 EV markets

0%

5%

10%

15%

20%

25%

30%

0

50

100

150

200

250

300

350

400

China US Norway UK France Japan Germany Netherlands Sweden OthersCountries

New

ele

ctric

car

regi

stra

tions

('00

0)

2010 2011 2012 2013 2014 2015 2016 2016 Market ShareM

arke

t Sha

re (2

016)

Source: ICE

The disruption across powertrain migration has had a significantimpactonglobalautocomponentmanufacturers.

EBIT Margins: Powertrain Manufacturers (Global)

6.6 6.87.3 7.6 7.3

5.9

11.5

8

6.4

7.8

6.15.5

Tyres Chassis Powertrain Exterior Electrics/Infotainment

Interior

2010 2017 (est.)

EBIT margin 2010-2017 (est.)

Avg. 2017 (est.)= 7.3

2.90% 4.90% 6.00% 7.40% 5.60% 5.60%Revenue CAGR 2010-2017 (est.)

Source: Roland Berger

Manufacturers of Powertrains are facing increased pressure on their profitability witnessing a sharp decline in the EBIT margins from2010-17at7.3percentto~6.5percentonaccountofmigration of powertrains (from ICE to Electric) along with increasingcompetitioninthisspace.

India’sEVmarketisatanascentstagewith~0.4mnunitsoftwowheelers,<0,1mne-rickshawsand<5000unitsofPVsin2016.ThissegmenthasgainedconsiderableimportanceandattentionamongOEs,globalcomponentmanufacturersandthegovernment.

The Indian auto component manufacturers comprise of over 700componentsupplierswithintheorganisedsegmentandover10,000playersintheunorganisedsegment.Theorganisedsectorcontributestoaround85percentofthetotalautocomponentindustryturnoverwhiletheremaining15percentiscontributedbytheunorganisedsector.


Product Classification - Indian Auto Component Industry

Engine Parts

Others

Electrical Parts

Equipments

Suspension & Braking Parts

Body & Chassis

Drive, Transmission, Steering Parts

31%

7%9%

10%

12%

12%19%

Source: ACMA

Engine components fall into three broad categories: coreenginecomponents,fueldeliverysystemandothers.Thissegmentaccountsfor31percentoftheautocomponentmarket(byvalue)andincludesproductssuchaspistons,pistonrings,enginevalves,carburettors,crankshafts,sumpconnectingrods,etc.Thesearethemostcriticalcomponentsandrequirehighlevelofprecisionandqualityadherence.Accordingly,thereishighlevelofcoordinationbetweencomponentmanufacturersandOEMs.

The drive transmission and steering component segment accountsforaround19percentoftheautocomponentmarket.Thissegmentconsistsofproductslikegears,wheels,

steeringsystems,axlesandclutches.Clutchdiscs,coverassemblies and kits components are the key sub-categories in clutchsub-segment.

The migration of ICE to EV powertrain means that OEs would no longer require engine parts and drive transmissioncomponents.Componentsupplierswillhavetorelookattheirproductofferings,R&Deffortsfordevelopingand supplying electric motors (PM and induction motors),inverters,converters,rectifiers,EMS(PowertrainComponents).

The Indian OEs are struggling to achieve a smooth transition toBSVIemissionnorms(deadlinebeing2020)asthisisdependentonpolicyenvironment.BSVItechnologyisanadvancedone,itisnotpossibleforthecountrytodevelopthesamelocally.SothebasetechnologymightcomefromEurope and it has to be made suitable for the domestic marketthroughinnovation.Unlikethelocalarmsoftheglobalautomakersthathaveparentcompaniestofallbackon,Indiancompanies will have to develop solutions with the help of globalfirmsspecialisinginemissioncontroltechnologies.Earlyintroduction of technology would also require support from the oilcompaniesforBSVIfuelavailability.Thus,companieswouldhave to develop requisite technologies and capabilities locally asagainstimportingthembecauseofmuchbiggerscale.

Emissions Levels

0.36

0.15

0.1

0.02 0.01

Reduction of 58% from BS I to BS II

Reduction of 33% from BS II to BS III

Reduction of 80% from BS III to BS IV

Reduction of 50% from BS IV to BS VI (estimate)

Emis

sion

sta

ndar

ds fo

r hea

vy-d

uty

vehi

cles

(in

g/km

)

8

7

5

3.5

0.4

0123456789

BS I BS II BS III BS IV BS VIEmission Standards

NOxReduction of 12.5% from BS I to BS II

Reduction of 29% from BS II to BS III

Reduction of 30% from BS III to BS IV

Reduction of 89% from BS IV to BS VI (estimate)

Emis

sion

sta

ndar

ds fo

r hea

vy-d

uty

vehi

cles

(in

g/km

)

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

BS I BS II BS III BS IV BS VIEmission Standards

Particulate Matter

Source: GT Analysis


Further,itisimportanttonotethatBSVInormswilladdressone of the inherent flaws in the European emission standards which permits diesel cars to emit more particulate matter and nitrogenoxide(NOx).Indieselcars,thejumptoBSVInormswillresultinreductionofnitrogenoxideemissionby68percentandparticulatematter,whichhasadamagingeffectonairqualityandhumanhealth,by82percent.Similarly,inheavydutyvehiclesliketrucks,theshifttoBSVInormswouldresultinreductionofnitrogenoxideemissionsby87percentandparticulatematterby67percent.

FAME India: GoI introduced the Faster Adoption and ManufacturingofHybridandElectricVehicle(FAMEIndia)asapartofNationalElectricMobilityMissionPlanin2015aimedat offering incentives on EVs and hybrid vehicles of up to INR 29,000forbikesand1.38lakhoncars.TheschemeenvisagedINR795crtosupportthefirsttwofiscalsfrom2015-17.Thissubsidy was discontinued for diesel mild hybrid vehicles in April2017.Thisschemewouldhavehelpedintransitionofpowertrains to pure electric in a phased manner as OEs would havemigratedtohybridfromICEsandthentopureelectric.

Absence of Hybrid Powertrains: The Indian government hastakenastrongandselectivestandonHybridpowertrainsbyimposinga43percentduty(28percentGST+15percentCess)asagainst12percentonEVs.Globally,Hybridshavebecomethevitaltransitionplatformto EVs as a hybrid platform uses energy from electric batteriesaswellasconventionalICE.Thegovernmenthasmandatedthatby2030,allvehiclesinIndiashouldbe100percentelectric.Whilethisisanidealscenario,the road to such transition will be difficult and have many casualtiesalongthevaluechain,especiallyforIndianautocomponentmanufacturers.

The discontinuation of FAME subsidy has put OEs and componentmanufacturers’resourcesonafreezeasthefocusthenwastodevelopHybridpowertrains.Theabsenceofsuch incentives now have put OEs and suppliers with a dead investmentproposition.

Exploring Alternative Fuels: Whilethegovernmenthasbeenpushingfor100percentEVrolloutby2030,there are several opinions on exploring alternative fuels thataresustainable,costefficienttodrivefuturemobilityrequirements including methanol based transportation systems.ThiscontradictstheearliernotionofEVrolloutcreating confusion in the minds of OEs and component manufacturers.

Supporting OEs with electric powertrain components by 2030willbeamajorchallengeforIndianautocomponentmanufacturers and the industry is bound to put a few players outofbusiness.TheabilitytoadaptandinvestinR&D,andshorteningthe“timetomarket”willbekeytosurvival.


Union Budget 2018-19TheUnionBudgetreleasedonFebruary1,2018wasreceivedwellbytheIndianautocomponentindustry.Itwasabudgetfocusedondevelopmentofruraleconomy,manufacturing,infrastructure,education,easeofdoingbusiness,attractinginvestmentsandencouraginginnovationanddigitisationall,contributingtothegrowthofthevibrantIndianeconomy.

The increase of Custom duty will contribute towards increased localisationandpromotelocalsourcingfromOEs.Thissegmentwillemergeasanattractivesegment,attractingsignificant investments and encouraging R&D and technology development.Engine,Powertrain,GearboxandTransmissioncomponentaccountforover50percentofUS$43.5bndomesticcomponentindustry’sturnoverandover30percentofitsUS$11bnexports.Dutiesoncomponentssuchasengineandtransmissionparts,brakes,gearboxes,airbags,etcincreasedfrom7.5percentto15percent.

Mass formalisation of the MSME sector post-demonetisation and GST impact will benefit the auto component sector to alargerextent.Further,reductionincorporatetaxto25percentforMSMEswithturnoverofuptoINR250crwillfacilitatethe medium and small Indian auto component manufacturers asover80percentofthesupplierbasefallwithintheMSMEbracket.Thismeasure,hasalsoenhancedbudgetaryallocationofINR.3,794crforcreditsupport,capitalandinterestsubsidyandwillalsohavealiberalimpactonthesmallerenterprises.Thatapart,simplificationofprocedureforcreditavailabilitythroughonlinesystemforSMEsisaverywelcomestep.

TheUnionBudget2018-19hasfocusedonincreasingthefarmincome through various measures like productive and gainful on-farm and non-farm employment for farmers and landless families,fixationofMinimumSupportPrice(MSP),earmarkinga fund for developing agricultural markets and creation of new 42state-of-the-artmegafoodparks.Theincreasedoutlaywillboostfarmer’sincome,generateemploymentresultingintoapushtothetwo-wheelerandentrylevelcarsegment.

Increased outlay on infrastructure and roads will contribute tothedemandforvehiclesacrosscommercialvehicles,construction equipment and passenger vehicles thereby giving afilliptothedemandforautocomponents.

However, given the government’s vision on electric mobility, rationalising GST rates on EVs and EV batteries and components was expected in the Union Budget which somehow remained unaddressed. Moreover, allowance of weighted deduction on Research & Development to 200 per cent from the current 150 per cent could have given a boost to EV batteries and component makers.


Connected CarsAstheworlddawnsintoaneweraofdigitalandsmartmobility,the smartphone and the vehicle will become more connected asever.Withtheadvancementofhighspeedcellularnetworks,theconnectedcarVehicle-to-Vehicle(V2V)andVehicle-to-Infrastructure(V2I)technologyisbecomingmoresophisticated,fromrealtimelocationstoin-car-infotainment,geo-fencing applications that gets tagged to digital services and integration of popular operating systems such as iOS and Android,theconnectedcarwillbeakeydifferentiatorforOEs.

Connected Car Landscape

Infotainment

Safety

Navigation

Payment

Diagnostic Efficiency

Source: GT Analysis

The strategy for any OEs concerning connected cars will belargelybasedonbigdata(internal&external).Thecombination of market strategy and big data will not only optimisecostsandbusinessagility,butalsocreatenewerrevenuestreamsacrossindustryandstakeholders.OEsandConsumers (either or both) will be benefited via predictive informationonmaintenance,vehicleperformancedashboards,supplychainefficiencies,dealersatisfaction,mobilityservicesincluding dynamic navigation and parking space ready identificationandroadwayconnectivity,etc.

Component base mix: Shift from Mechanical to ElectronicsThe connected cars will have a significant impact on componentsuppliers.ComponentssuchasElectronicsandElectrical Components will witness greater applications acrossplatformofferings,drivenbyincreaseddependenceon electronics to enhance mechanical system performance such as powertrain control modules and advanced electronic controlunits,allcontributingtoemissioncontrolandefficiencyenhancementofthevehicle.

Example: Carburettor,couldbeaconnectedcomponentasthecars become smarter by way of OBD (on-board diagnostics) system which can be accessed via a smartphone app for diagnosis.Suchconnectivitymeanscarmakerscannotonlynotifydriversthesecondapartfails,theycanalsointheoryguidethemtothenearestdealerwiththepartinstock,andpredict the likely waiting time for that part and/or send it via an onlineorder.

The implications for auto component suppliers will be addressing complexities on how suppliers add software and integration elements to their offerings that will identify their productswhenproblemdiagnosesoccur,otherwisetheymaybeleftoutofdiagnosticsreports.Ifindependentafter-marketsuppliers choose not to make a connected product and ones thatsatisfyAutomotiveOEM’sspecifications,theymightstillbeabletomanufactureasuperiorparttotheoriginal,butthatpartmaynotregisteronnewerdiagnosticsboards.

Braking,suspension,andsteeringwillremainlargelycommoditisedoffering.Asconnectedcarsandride-sharingadoptionincrease,passengerswouldnotoptforon-roadperformanceinformation.Regenerativebrakinginelectricvehicles reduces wear and tear and may drive down demand forreplacementbrakepartsconsiderably.

Standard plastic body components would witness a significant decline in the demand by OEs and they will be replaced with moreofglassforgreatervisibility.

Body glass could become more important in the future if the need for metal and plastic structural components declines and futuredesignsfeaturemoreglassforgreatervisibility.Wemayseedesignersintegratemoreandmoredisplaysintotheglass,enhancingtheriderexperience.


As the vehicle platforms move towards increasing connectivity and electrification of powertrains andcomponents,themarketswilltendtowitnesscommoditisation of select components and segments which will be priced competitively as there will be a volumeplayinbodyparts,batterycases,electronicpanels,accessories,etc.dominatedbyalargenumberofsmallersupplierscateringtoTier1supplierswhowillbeassemblinginlargevolumesforOEs.Itwillbecriticalfor such suppliers to consolidate supply chain so ensure margineffectiveness.

Some auto component manufacturers will take up niche positions in the markets focusing on design and developmentofhighvaluecomponents.Itwillbecriticalforcomponent manufacturers to incorporate sensors across component offerings that will help them gather data on partperformanceandapplicationenvironment.ThiswillhelptheminR&Dandgaincompetitiveadvantage.

Software to take precedenceThe cockpit will be a battle ground place for every component supplier; this is a medium for driver and passenger integration andexperience.

There will be a significant increase in demand by drivers and passengersintheformofadvancedaudio,video,telematics,infotainment,telematics,ande-commercerelatedfeaturesintheircars.Thiswillrequireadditionalelectroniccontentandconnectedserviceintegration,backedbypowerfulin-carcomputing hardware and software and touch and heads-up units.

Component suppliers will need to develop capabilities for development and integration of software in components that are customisable as per OEs requirement (digital and physical). Component manufacturers will face heat fromplayersoutsidetheindustryashistorically,componentmanufacturers have focused on innovation and design on ‘mechanical’sideofbusinessoffering.InvestmentinR&Dandtestingwillbekeytofirst-moveradvantage.Thedevelopmentofsoftware,itstestingandintegrationwithhardwarewillbecomethebackboneforconnectedcarcomponentsgoingforward.

Component supplier will need to explore strategies to enhance product development cycles and address gaps related to talent and skills at the same time.

India’sconnectedcarlandscapeisatanascentstage.WhileIndiaisstillinthetransformationstagefromBSIVtoBSVI.Therearen’tmanytech-companiesbuildingsolutionsaroundtheconnectedvehicleindustryinIndia.The2015start-upbubble is a proof that most companies that raised billions in fundingweremostlye-commerceservicebasedcompanies.Automotiveasasectorwasnottheflavour.In2017,howevera few companies have started to pivot themselves in this direction.

It is ironical that most of the companies that are investing in building solutions for global automotive multinationals arebasedoutofIndia,asmostoftheR&DisdoneinIndia.However,IndiaremainslowinconnectedvehicletechnologiesduetochallengesacrossinfrastructurerequiredforV2VandV2Itechnologyrollout,consumeracceptanceandawarenesslevels,maturitylevelofautocomponentmanufacturers(dominatedbytier2)andregulatorypolicy.

2015-16: Start-up Funding Landscape

30%

7%

7%

6%5%5%

4%

4%

4%

3%

3%

3%

3%

3%2%

2%2%2%2%

1% 1%

Others E-commerce Heathcare FintechDiscovery Traveltech Edtech EnterprisetechHyperlocal Service Hyperlocal Delivery SaaS SubscriptionFashiontech Aggregator Analytics FoodtechLogistics Automobile Hiretech Artificial IntelligenceInternet of Things

Source:SecondarySources,PressArticles&GTAnalysis


Indian auto component industry is highly fragmented dominatedbyunorganisedsector(over10,000companiesaccountingfor15percentofindustryrevenues).Thesecompanies will face stiff challenges to upgrade their product offeringsduetochangingapplicationofcomponents.Itwillbe critical for component manufacturers in India to focus on R&D and build capabilities across software and hardware integration.TraditionalTier1Indianmanufacturerswillnotbeleftoutofthistooastheylackscale,skillsandglobalOErelationshipsascomparedtoglobalmultinationals.

Grant Thornton conducted discussions with select automotive professionals in the Indian auto industry to take their point of viewonConnectedCars.Thekeyinsightgatheredindicatedthat India is far below western countries for roll out of connectedcarfeatures(V2V,V2I),althoughselectfeaturesarecurrentlyavailableinfewhighendIndianluxurycarplatform,that only a small section of the available customer base has accessto.

The key reasons are attributed to the following:

OEM’s side: Challenge in developing adaptive machine learning algorithms based on existing driving and road conditions due to: • Erratic and dangerous driving habits of drivers on roads

• Broken traffic lights

• Drivingconditions:IntegratingV2VandV2Itechnologyintoexisting road and traffic condition with roads varying from well-madeblacktoptodirttracks,abandonedsignages,broken road and traffic lights and animals and pedestrians venturing into busy roads

Fact: “Indiaranks60thamong79developingeconomiesinTheWorldEconomicForum’sInclusiveDevelopmentIndexasof2017.ConnectedCardeploymentwouldneedtohaveawell-developedandan‘integrated’infrastructure(physicalanddigital).Indiaaccountsforhighestnumberofroaddeathsintheworld*withmorethan1.46lacfatalitiesannually.Thisaccountsfor10percentofglobalroadaccidents.

Connected Car Roll Out Landscape: Global vs India (V2V & V2I)

Area Features 2014 2015 2016 2017 2018 2019 2020 ~2025 >2030

Safety Pedestrian Detection

EmergencyOutOff

Emergency Steering Assistance

Driving Lane Change Assist

Congestion Assistant

Intersection Assistant

Congestion Pilot

HighwayPilot

Automated Driving

Fully Automated Driving

Parking Parking Assist (Steering)

App Summon

Valet Parking

Source: GT Insights India Deployment (Forecasted)

Global Deployment (Forecasted)


WeaskedthebusinessexecutivesontheirpointofviewaboutconnectedV2VandV2Ifeaturerolloutrunway.SomeofthefeaturessuchasPedestrianDetection,LaneChangingAssistance,andParkingAssistarecurrentlybeingofferedbyselectluxurysegmentplatformssuchasBMWandTesla,amongothers,inwesterncountries.InIndia,selectfeaturessuch as Assisted Parking are currently available in select luxury cars,butnotinmasssegment.

Mostoftheofferingincoming3-5yearswillhaveconnected features inside the car cabin including advancedaudio,video,telematics,infotainmentandpayments as this segment has latent consumer aspiration bothwithinluxuryandmassbrandsoffered.OEswillbeselectiveinsourcingsuchcomponents.However,itwillbe the premium segment that will take the first-mover advantage as customers of luxury segment will be more willing to pay premium on new features as compared to masses.Also,therolloutofsuchfeaturesacrossplatformsinmasssegmentswilltaketime.


TheIndianautoindustryispoisedtobecomethe4thlargestautomobilemarketgloballyovertakingUKandGermany.Stringent environment regulations and compliance with environment sustainability agenda have forced the government and stakeholders to go beyond the conventional ICE platforms andofferelectricpowertrainsby2030,puttingpressureonOEMstodevelopElectricPowertrainsforfuturerollout.

Asthetechnologyevolves,demandforconnectedfeaturesis also bound to increase as this will be key to OEs platform differentiation.Componentmanufacturerswillbeforcedtoexplore technology and capability development across digital andhardwareintegrationtoremainrelevant.

Key challenges and imperatives for component suppliers include:

Area Description Impact on Suppliers

Time to Market – (powertrain migration & connected features)

• OEs will be pressured to launch EVs by 2030inlinewithgovernment’spolicy

• OEs will be forced to look at modularisation offeatures,developalternativepowertrains,introduce ADAS and connected features that will be critical for OEs platform differentiation

• OEs to make selective calls on vendor tieupsdependingonpricing,supplyingcapacity,quality,technologyandsupplychain alignment with OEs

• Manufacturers of powertrains & transmission will be under pressureastheywillbeforcedtoinvestinR&D,developtechnical capability as well as reduce time to market; the ability to invest in powertrains will be largely governed by the level of alignment and scale of operations that supplier will have with OEs (both in India and globally)

• Suppliers will also be forced to look at acquiring software development and integration capabilities

• Mediumandsmallerlevelsupplierswillbefindingthemselvesamidst cash crunch in R&D

• Absence of hybrid powertrain will further squeeze breathing space for component suppliers

• Increased competition from technology and consumer product companies to match quality and price

Pricing and Viability • Indiancustomerispriceconscious.Itwillbechallenging for OEs to sell EVs considering infrastructure inadequateness (charging infrastructure) and developing a viable businesscaseforcustomerw.r.ttotalcostofownership for EVs

• Connected features will be available in luxuryplatforms.OEsofferingmassmarketplatforms will face pressure to introduce connected features

• Margins for powertrain and transmission manufacturers will be under severe pressure

• Componentsupplierswillneedtofindinnovativewaystodifferentiateofferingsw.r.tconnectedcomponentsbywayofsoftware integration to command price premium

• Increased competition from technology and consumer product companies to match quality and price

The survival of the Indian auto component manufacturers will be largely dependent on how soon and effectively are they able to adapt and transform their business models in line with theindustrydisruption.

Suppliers of Auto component will have to reimagine their business models and assess where they are and where they want to play in line with their competencies and their appetite toenduredisruption.

The industry will give several opportunities for component manufacturers,definingwheretoplayandhowtoplaywillbedependent on the component manufacturers in line with their longtermstrategyandabilitytorespondtochanges.

The level of R&D requirement and profitability/margin will be key parameters that will determine strategic playground for componentmanufacturers.

Challenges & Considerations for Indian Auto Component Manufacturers


Strategic Play: Component Suppliers

DiversifiedSuppliers

NicheSuppliers

Commodi sedSupplier Play

Low

Low

Margin High

High

R&D

& T

echn

olog

ical

Acc

ess

Source: GT Analysis

Commoditised market playSuppliers willing to operate in this segment will have to build their business onthebasisofscale,pricing,levelofalignment with OE demand as well asquality.Suppliersoperatinginthissegment will have to focus on multiple geographies,customercontractsand expansion of global footprint via alliances,exclusivecontracting,andM&A.TheprospectofM&Awillbelargelydependent on the appetite to invest and abilitytotakerisks,astheproductswillbe fairly standard and commoditised and such players will operate on lean margins.

Niche market playSuppliers willing to operate under this segment will have to take a calculated call on deciding their niche with regards to products and customer and regions as this segment will be largely dependent onR&Dandtechnologyintegration.Itwill be critical for suppliers to develop software capabilities with acquisition of technologiesthroughM&A.Thissegmentwill also be the most competitive as traditional component suppliers will face stiff competition from new entrants including software & technology and consumerproductcompanies.

DiversificationAsthemarketevolves,supplierswillhaveto constantly evaluate diversification options within the automotive industry as the industry transitions from pure mechanical to data and software drivenmarket.Theywillbeforcedto look at options such as charging stations,fleetmanagement,andafter-market servicing businesses that will be built around differentiated offerings andrequirements.Thiswillbeagoodreinvention point for suppliers facing declining volumes and margins on account of inability to face and endure challenges.


Theglobalautomotiveindustryisatacrossroad.Theshifttocleaner and greener transportation mediums in the form of roll out of Battery Electric Vehicles (BEVs) coupled with connected features and vehicles and the integration autonomous features acrosssafety,drivingandparkingareallindicatorsofwhatthefutureholdsfortheindustry.

Theworldeconomyisprojectedtogrowat3.1percentin2018.India and China are the only two economies that are projected tosurpasstheworld’sgrowthratewhichispeggedat7.4percentand6.2percentin2018,respectively.OEsgloballyarefocusing their efforts and investment from mature economies tovibrantandemergingeconomies.Theindustrywillwitnessasignificantshiftinthedemandforcomponentstoo.Tighteningofregulatoryenvironment,intensifyingsafetystandardsandgreateradoptionoftechnology,hastriggeredkeydisruptionsintheformofelectrification,autonomousdriving,andconnectedcars.ThemigrationofpowertrainsfromtraditionalICE platform to electric and connected feature evolution intheformofV2VandV2Iconnectivitymeanssignificantopportunities and challenges for OEs and component manufacturers.

Component manufacturers will be forced to build capabilities beyondtraditionalMechanicalfield.M&Awithintheautomotive component manufacturers will be largely governed by an intent to access expertise and technology across three broad areas: 1 Migration from traditional platforms to self-driving & electric

platforms2 Driver and vehicle interface technology and 3 Electronics technology

The Indian auto component industry will not be left untouched fromthisdisruptiontoo.

Thesectorislargelyunorganisedcomprisingover10,000players operating in the unorganised segment primarily catering to replacement/after-market segment contributing to ~15percentoftotalindustryrevenues.Theorganisedsectoraccountsfor85percentoftheindustryrevenues.

TheAMP2026hassetstringenttargetsforIndianautomotiveindustry(includingOEsandComponentManufacturers).It

envisagesthattheindustrywillgrow3.5to4timesinvaluefromitscurrentoutputi.e.from~US$74bntoUS$260-300bn(between2015and2026).

Exports will form a key component in achieving this target whichcurrentlyisindeficit(importsgreaterthanexports).The industry will have to take significant measures and steps to convert from being an export deficit industry to an export surplusone.

Highdependenceonimportswillbeanopportunityandthreatfor component manufacturers in India; while OEs will look at forminglong-termsupplycontractswithsuppliersoverseas,localmanufacturerswouldneedtomoveupthevaluechain,focusingoncostandqualitycompetitiveness.Localisationof components will be critical too especially across luxury platformsthataremostlyundertakingassemblyroute.Indianauto component manufacturers would need to focus on developingcapabilitiestowardsmodularisation.

The industry faces headwinds on account of shift of powertrain from ICE to Electric and integration of connected features in vehicle platform due to changing customer needs and requirements.

Enginecomponentsanddrivetransmissionaccountfor50percentoftheindustry’sportfolio.ThemigrationofICEtoEV powertrain means that OEs would no longer require/have reduced demand for engine parts and drive transmission components.Componentsupplierswillhavetorelookattheirproductofferings,R&Deffortsfordevelopingandsupplyingelectricmotors(PMandinductionmotors),inverters,converters,rectifiers,andEMS(powertraincomponents).

AbsenceofHybridpowertrainsintheIndiancontextduetogovernment decision to stop subsidy under FAME India has addedextraburdenonOEsandcomponentmanufacturers.

A clear roadmap and clarity on policy and implementation by the Government will be beneficial for industry stakeholders to meet requirements and prioritising resources and efforts towards R&D and Technology development for EV & Alternative fuelsbasedtransportation.

Conclusion

Component manufacturers will also be faced with challenges to develop capabilities for development and integration of software in components that are customisable as per OEs requirement(digitalandphysical).Componentsupplierwillneed to explore strategies to enhance product development cycles and address gaps related to talent and skills at the sametime.

Mostoftheofferingincoming3-5yearswillhaveconnectedfeaturesinsidethecarcabinincludingadvancedaudio,video,telematics,infotainmentandpaymentsasthissegmenthaslatent consumer aspiration both within luxury and mass brands offered.However,itwillbethepremiumsegmentthatwilltakethe first-mover advantage as customers of luxury segment will be more willing to pay premium on new features as compared tomasses.Also,therolloutofsuchfeaturesacrossplatformsinmasssegmentswilltaketime.

The survivability of the Indian Auto Component manufacturers will be largely dependent on how soon and effectively they are able to adapt and transform their business models in line with theindustrydisruption.

Suppliers of auto component will have to rejig their business models and assess where they are and where they want to play in line with their competencies and appetite to endure disruption.

Astheindustrymatures,thecomponentsuppliersareexpectedto take their respective industry positions that defines their strategicturf.Fewcomponentmanufacturerswillbeexpectedto play in a commoditised market segment that are driven by volumesandmargin.Playersundersuchsegmentwillbeseentooperateundermultiplegeographies,havemultiplecustomercontractsandexpansionofglobalfootprintviaalliances,exclusivecontracting,andM&A.

Few players will choose to operate in a niche segment that will bedrivenbyR&Dandinnovationacrossproduct,customersandregions.ItwillbecriticalforsupplierstodevelopsoftwarecapabilitieswithacquisitionoftechnologiesthroughM&A.Players will also face competition from software and consumer companies.

Some players will completely diversify into new markets and productofferingssuchaschargingstations,fleetmanagement,andafter-marketservicingbusinesses.

The disruption from electric and vehicle connectivity is a single biggest disruption after the invention of mobile phone and internet.Whileindustrydisruptionposeschallenges,itcreatesneweropportunitiesforplayers.

Irrespectiveofthepositionthatplayerstake,theIndustrywouldneed to focus on three critical areas to be future-ready:1 FocusonR&DandTechnologythroughM&As,JVs,and

technicalcollaborations,bothwithincomponentindustryaswellassoftwaredevelopers.

2 Focus on addressing skill gap development through increased industry and academia interaction as well as investmentintrainingandcertifications.

3 Embrace globalisation by creating an in-house company cultureofbeingtrulyglobal.

There has been no better time for innovation in the history of automotiveindustry.


Sources

• www.siamindia.com

• www.acma.in

• www.fadaindia.org

• www.ibef.org

• Grant Thornton Internal database:

– Grant Thornton Autotrack – Grant Thornton Dealtracker

• Industry reports and publications

– ACMA – Roland Berger


Acknowledgements

Forfurtherinformation,pleasewriteto:Saket MehraPartner,Grant Thornton India LLPE:[email protected]

Karunakar DubeyAssociateDirector,Grant Thornton India LLPE:[email protected]

Editorial review Design

Rohit Nautiyal Gurpreet Singh

For media queries, please contact:

Spriha Jayati E:[email protected]:+919323744249


Notes



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CHANDIGARHB-406A,4thFloorL&TElanteOfficeBuildingIndustrial Area Phase IChandigarh160002T+911724338000

CHENNAI7thFloor,PrestigePolygon471,AnnaSalai,TeynampetChennai-600018T+914442940000

GURGAON21stFloor,DLFSquareJacarandaMargDLF Phase IIGurgaon 122002T+911244628000

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KOCHI6thFloor, Modayil Centre pointWarriamroadjunctionM.G.RoadKochi682016T+914844064541

KOLKATA10CHungerfordStreet5thFloorKolkata700017T+913340508000

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NOIDAPlotNo.19A,7thFloorSector–16ANoida201301T+911207109001

PUNE3rdFloor,UnitNo309to312WestWing,NyatiUnitreeNagarRoad,YerwadaPune-411006T+912067448800

Making Indian auto component industry future-ready...Making Indian auto component industry future-ready 03 Foreword For India to become a US$ 10 tn economy in 2030 from its 2016 level

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