Lack Of Research And Development Holding Up India’s Dream To Become Global Auto Component Hub

Times have changed and as the global supply chain in the automobile business witnesses a shift in the aftermath of Covid, India has a new opportunity to cash in on – to become a global auto ancillary hub.

Among the many reasons that may help, global manufacturers and Original Equipment Manufacturers (OEM) are shifting shop from China to the ASEAN countries and India. This drive is driven by cost-effectiveness as well as minimising disruption in the supply chain. Before we get to the opportunity, it is important to understand what it is.

Cars, motorcycles and others have components that are often not made by the company selling the vehicle. These are sourced from OEMs, who procure them from the auto component industry.

Recognising the role that the automobile industry plays in advancing India’s economic ambitions, the government in 2015 came out with an Automotive Mission Plan that envisioned output of the sector to grow more than four-fold between 2016 and 2026 – from about US$72 billion to US$300 billion.

A third of this target – or about US $110 billion – was estimated to be met by the auto components sector, which is also a big job generator. According to an Indian Brand Equity Foundation (IBEF) report, the auto component industry provides direct employment to more than 1.5 million people.

The Covid-19 pandemic, however, played spoilsport in slowing down the economy, globally and locally, as a result of which the auto component industry remains far from realising the targets set in the Automotive Mission Plan.

Lately, however, a rejig of the global supply chain in the aftermath of the pandemic has presented the sector with an opportunity to be in a “sweet spot” and expand at an accelerated pace.

In financial year 2022-23, it recorded a 33 per cent growth with a turnover of US $69.7 billion, according to an HDFC Securities report titled ‘Auto Component Industry: In a Sweet Spot’.

The Opportunity

In recent years, several geopolitical developments have taken a toll on the global auto components supply chain that China dominates. The US-China trade war, Covid-19, shortages of chips used in automobile manufacturing, the Russsia-Ukraine war and now the Israel-Hamas conflict.

According to the HDFC Securities report, this disruption has led to a compromise of an estimated 12 per cent of global automotive output. Therefore, multinational OEMs are now looking at de-risking the supply chain by diversifying as well as shifting away from China. Many are also adopting the China plus one strategy. India is among the countries that can benefit from it.

“India is the ideal investment destination in terms of auto manufacturing, as India has the highest population of youth in the world. This has allowed India to have cheap labour and a young workforce that’s adaptive and efficient,” said P Tharyan, Editor, Motown India, a magazine that covers the automobile sector.

Experts believe the auto components industry has witnessed robust growth in recent years. “The components sector now has high-tech infrastructure and better quality, which is at par with global standards. The manufacturing of domestic OEMs has developed and is more sophisticated now,” Tharyan added.

With hourly manufacturing wages going up in China, OEMs and manufacturers are developing cold feet. According to HDFC Securities, China’s manufacturing wages have doubled to an average US$8.27 per hour since 2023.

If the trend of diversification of the auto component supply chain continues, India can stake claim to be the destination for global manufacturers. “In the long-term, India seems to be in a sweet spot, which is what the OEMs would like to bet on. We are developing technical abilities, which will pave the way for the auto components industry to be at par with other countries,” said industry expert Murad Ali Baig.

Why India Can Stake Claim

Apart from being a beneficiary of global supply chain de-risking, India is aggressively transitioning to Electric Vehicles (EV). This transition has brought the Indian auto component industry in line with global industry standards, making it better equipped to cater to global standards.

Experts believe the auto component industry for EVs is maturing and components are at par with global standards. Separately, government policies and the Make In India push make India far more attractive as an investment destination for OEMs and manufacturers.

The Production Linked Incentive (PLI) and Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles (FAME) are already helping in localisation as well as ramping up EV adoption. The spurt has not been as much in the private vehicle (PV) segment.

It is important to note the PLI Scheme for the Automobile and Auto Component Industry in India was launched by the Government to enhance India’s manufacturing capabilities for Advanced Automotive Products (AAT). The budgetary outlay for the scheme was Rs 25,938 crore for period of 5 years (FY2022-23 to FY2026-27).

The Scheme provides financial incentives to promote domestic manufacturing of AAT products and is an effort to draw investments. The FAME scheme has made EVs more competitive with their fossil-fuel counterparts through subsidy. Such government policies are helping India to be more receptive to the EV segment and bolster demand.

Data also show that buyers are now evolving and leaning towards premiumisation. The Indian auto sales trend also indicates that India is gradually picking up on the premiumisation of vehicles. This means people are more inclined to buy high-end and luxury vehicles.

In FY2023, domestic Private Vehicle (PV) sales grew 27 per cent to 3.9 million units. Moreover, the share of utility vehicles (UVs), including SUVs, MUVs, and MPVs, in overall PV units stood at 52 per cent in FY2023. Separately, the trend for connected car tech is also on the rise.

A news report noted that the penetration of connected cars in the Indian PV market was 35 per cent in 2021, which went up to 46 per cent in 2022. Besides, the adoption of high-end vehicles with Advanced Driver Assistance System (ADAS) feature grew in PV sales figures for FY23.

Government regulations have also forced cars and engines to fall in line with global standards. In recent times, the government pushed manufacturers to build BS6 engines to meet global emission standards.

But there is a flip side that could block India from emerging as the global auto ancillary hub.

Downside Risks

Motown Editor Tharyan said the auto component industry still lacks research and development on the EV front, which is where the future demand will be. “There is a need for auto component manufacturers to also enhance R&D and innovation in the EV segment as global manufacturers and governments are becoming more bullish about EV adoption. India’s auto ancillary sector needs to keep an eye out for industry trends because if EV adoption picks up, India has the opportunity to be the sourcing nation for components,” Tharyan said.

“OEMs in India are not particularly prioritising on R&D of EVs as the domestic market is still dominated by ICE (fossil fuel driven) vehicles. Foreign OEMs based in India are definitely doing massive R&D back home. On the other hand, among purebred Indian OEMs, Tata Motors and Mahindra are doing extensive work on the EV front both in India and abroad, through various global collaborations,” he said.

At the end of the day, auto components industry and OEMs, much like any other industry, focus on profitability, which is why they will prioritise enhancing components and manufacturing which has a larger market.

It is fair to believe that India is still very young in terms of manufacturing components as well as cars in the EV segment. That lack of maturity could lead to inefficient manufacturing.

“If India wants to become the global auto ancillary hub, the industry requires a workshop workforce that is skilled and has exposure to EVs. At the managerial level, the industry is competent but the same can’t be said for the workshop workforce,” Baig said.

All in all, India has the potential to emerge as a global ancillary hub but there are challenges. “India can’t count out China just yet. It is still a much more developed and well-suited destination for OEMs and manufacturers to rely on,” Tharyan said.

This is precisely why India needs to scale up research and development to sustain itself as an auto-ancillary hub while continuing to be cost sensitive.