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FAT sourcing deals. Million-dollar acquisition stories. Bulge-wallet reserves. India’s auto component companies never had it so good, right? Well, not exactly. Behind the deal frenzy and sourcing saga, there’s an alternative reality — of
margin squeeze, competitive pressure and search for scale.
Speak to any top-auto component CEO and the feedback is almost identical. While those at the top of the heap are going after foreign deals like never before — Amtek, M&M, Bharat Forge, Sona, Rico among the most active — back home, the pinch is beginning to hurt. The sector is facing the double whammy of a stronger rupee, which is decreasing profitability in the export business, and a lower tariff regime which is helping imports and increasing competition in India.
According to the Automotive Components Manufacturers’ Association (ACMA) exports
are estimated to grow at 15.8%, while imports are likely to grow at more than double that rate — 35% — this fiscal.
The industry has been lobbying hard for some duty reversals, particularly since the tariff rate is expected to come down further to ASEAN levels this year.
“Our profits are shrinking. While the dollar debacle has cut our margins, the flooding of imports from China and our free trade agreement (FTA) partner Thailand is making us uncompetitive. India has become a net importer of components. The pressure on prices and profitability with cost increase due to increase in higher interest rates is making us uncomfortable,” ACMA President Sanjay Labroo said.
Original equipment makers or vehicle manufacturers are looking at China and Southeast Asia to source cheaper components. Customs duties on vehicles have consistently come down in the last three years — by 5% in 2005 and 2.5% each in 06 and 07. That has meant price cuts for import-heavy or all-import cars, which is a good thing for consumers.
Trouble is, that segment is a mere 8-9% of the total market. The rest of the car market sources components locally and that’s what has propped up India’s automotive competitiveness.
To be fair, the component industry is fighting the import threat and export squeeze by focusing on cost reduction, R&D and product development spend. Hence the demand for a moderate rate of taxation to stay globally competitive.
Ashok K Taneja, President of Shriram Pistons & Rings Ltd, said: “Skilled manpower development needs special emphasis. There is shortage of skilled work force and India’s advantage in developing low-cost components of global quality will be lost if the talent resource is not generated.”
The component industry is reeling under the peak customs duty of 10%, which are at all time low, the recent blow came with duty coming down to 7.5% on selective components.
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