Auto part makers in China rush

India’s leading auto component makers are making a quiet move. As many as over 20 Indian auto component makers, which include big boys such as Talbros, Ashahi Glass, ZF Steering Wheels, GNA Axles, Luxite and Sundaram Brake Linings, are winging their way to China this week to see the possibility of setting up manufacturing plants in the country.

And they are looking at supplying their products not to Chinese companies but global auto makers ranging from BWW, Mercedes, General Motors, Ford amongst others. These global majors have been outsouring from Indian manufacturers and are aware of their reliable quality.

With Indian auto ancillaries supplying high-quality components to almost every multinational auto majors in the world, moving into China help them leverage this privileged relationship with the same players in China.

“The main reason for foreign companies to set up plants in China is to take advantage of the large Chinese market,” says Suresh Krishna, MD, Sundram Fasteners, the first Indian auto parts company to foray into China four years ago.

“In fact, we started the plant for exports from China in the first phase. In the second phase, we have now started supplying to MNCs in China. In the third phase, we will be covering the Chinese auto companies,” adds Krishna.

Others have also taken their first tentative steps in this direction. Bharat Forge (BFL) acquired a 52 per cent stake in China’s largest foundry unit, FAW Corporation, to become FAW Bharat Forge (Changchun) Co.

The JV has catapulted BFL to become the largest player in forgings & castings in China. And just a few weeks earlier, Tata Autocomp GY Batteries (TGY), a 50:50 JV between Tata Autocomp Systems (Taco) and GS Yuasa International (GYIN) announced plans to set up a manufacturing facility in Nanjing, to be operational in the next 3 months.

Of course, there is a cautious optimism about entering China. Says Arvind Dham, managing director of Amtek Auto, “We will surely go to China by 2010. At the moment, our first stop is Eastern Europe which is also a growing market. We have narrowed down on Rumania. China is an interesting market but not that easy to enter.”

The Chinese domestic auto industry is the fastest growing auto market in the world overtaking the United States’ auto industry. “To tap the Chinese auto industry, one has to be present in China,” explains Vishnu Mathur, executive director, Automotive Component Manufacturers Association of India (ACMA).

The reason: to encourage domestic production of components, the Chinese government stipulates that a vehicle with more than 40 per cent localisation will attract the MFN general duty of between 8 and 12 per cent. Else they attract as much as 25 per cent duty.

Another big attraction is the cost of doing business which directly related to the taxation structure. “It’s 25 per cent cheaper to manufacture goods in China than in India,” explains Mathur.

“While the Chinese have a GST, India has cascading taxes like octroi and special taxes that are yet to abolished. These add to the costs,” adds Mathur.

India has a roadmap for a common GST to be realised by 2010.

Apart from reliable infrastructure such as power, a managed yuan that makes exports competitive and a flexible hire & fire labour policy, China also has a huge stockpile of commodities available at competitive rates to companies operating in China.

“With their high export duty on commodities, raw material such as iron ore is in surplus,” said one industry observer.

Maruti, Bajaj, Hero Honda Feb sales decline

Maruti Suzuki (MSIL), India's largest car maker, registered a marginal (0.4%) rise in domestic sales in February at 59,311 units when compared with 59,095 units sold in February 2007.

The company said the marginal increase is due to customers postponing their purchase decision in anticipation of the excise duty cut in the budget.

Finance Minister P Chidambaram yesterday proposed to bring down excise duty on small cars to 12% from 16%. Maruti has decided to pass on the complete benefit of the excise cut to customers, and has cut prices of its cars in the range of Rs 6,500 to Rs 18,030.

Sales in the A2 segment, including cars like Swift and Alto, increased 2.7% to 44,059 units. The company sold 1,958 units in the A3 segement including SX4 and Esteem - an increase of 8.9%. Exports increased 15.5% to 4,511 units in February.

General Motors India today reported a 80% increase in sales at 5,563 units in February when compared with 3,087 units sold in February 2007.

The company sold 1,681 units of Tavera, 1,102 units of Aveo, 360 units of Optra, 2,229 units of Spark and 191 units of Captiva.

P Balendran, vice president, GM India, said: "We are very pleased to see such a robust growth for all our carlines under the Chevrolet brand. With the consistent surge in monthly sales, our key focus remains to address the changing customer needs while providing them world-class products and best-in-class service."

Bajaj Auto and Hero Honda have witnessed a decline in sales in February on the back of falling demand for entry-level models and restricted availability of finance.

Bajaj Auto reported an 8% decline in motorcycle sales at 158,662 units for February as against 171, 780 units sold in February 2007. A release from the company said: "A degrowth of about 13% in the 100cc segment offset stable sales in the 125cc + segment resulting in an overall degrowth of 10% for the motorcycle industry."

Hero Honda had its biggest fall (5%) in monthly sales in this financial year at 265,431 units from 280,515 units in February 2007. The company has blamed lack of finance as the reason for the decline in sales.

Hyundai, Maruti, GM to cut prices

Hyundai reducing prices in the range of Rs 8,700 – Rs 20,000.

Maruti small segment cars will be cheaper by Rs 6,500- Rs 18,000.

GM price cuts will range from Rs 7,500 to Rs 14,000 on Spark, U-VA.

Car makers have been quick in responding to the announcement in the Union Budget of reduction in excise duty on small cars. Enthused by the excise duty cut, most car makers have announced reduction in the prices of their small cars to pass on the cost benefits to customers.

A short while after the Budget announcement, Hyundai Motor India said that it would reduce the prices on Getz, i10 and Santro. Hyundai announced reduction in prices in the range of Rs 8,730- Rs 13,278 on its flagship model Santro, Rs 11,047- Rs 16,324 on its newly launched premium compact car i-10 and from Rs 13,169- Rs 19,419 on its hatchback Getz.
A major boost

“At a time when the industry sales seemed to be tapering off, this has come as major boost and it will help the industry maintain its growth rate. Today, 75 per cent of the car sales are in the compact segment and this cut in excise duty will benefit manufacturers and customers alike,” said Mr Arvind Saxena, Senior Vice-President, Sales and Marketing, Hyundai.

Maruti Suzuki will also slash prices on all its six models that qualify for lower excise benefit including Maruti 800, Omni, Zen, Wagon R, Swift Diesel and Alto. The reduction would range between Rs 6,500 for Maruti 800 to Rs 18,030 for Swift Diesel (ex-showroom Delhi).

General Motors said it would reduce prices in the range of Rs 7,500 –Rs 14,000 on its best selling Spark and U-VA. “The reduction in duty would make the compact car segment more competitive, apart from boosting sales,” said Mr P Balendran, Vice President, General Motors.

“Tata Motors will lower prices of its small cars and commercial vehicles including buses, bus chassis and bus body in view of the reduction of excise duties announced in the Union Budget. The new applicable prices will be announced in the next few days, after the company has studied the details of the policy changes,” a company statement said.

Auto part firms thrive on sourcing deals

The multi-billion dollar auto component sourcing industry in India has brought relief to many domestic component suppliers in the form of improved margins and long-term supply contracts.

Global auto majors such as Daimler, General Motors, Ford, Volkswagen, Renault, Nissan and Honda have been buying higher quantities of components from India, which has resulted in the margins of component firms improving 8-10 per cent.

As of the last financial year, auto component sourcing has touched $3 billion in India and is expected to double by next financial year-end. Many such auto majors have set up an India purchase office, which buys inexpensive Indian components to cater to their huge overseas plants.

Such sourcing has provided Indian players with the opportunity to charge a premium that varies between 5 and 10 per cent. Many foreign car makers prefer to make engineering changes to the components before incorporating them in their engines and other parts.

Some of the more common components sourced include axle bar, propeller shaft, crank shaft, cylinder heads, bearings and cylinder blocks. Foreign firms get a 25-30 per cent cost advantage through such deals.

M Radhakrishnan, joint managing director, Autoline Industries, said, “We are supplying original equipment makers (OEM) such as GM, Ford, Nissan and Honda. Not only have the margins improved due to premium pricing, but volumes have grown significantly, too. These players get a benefit of 20 per cent cost reduction for our products.”

According to projections made by the Auto Components Manufacturers Association, global sourcing from India will increase to $20 billion by 2014.

Daimler India sourced components worth $2.2 billion from India last year and this year the figure is expected to swell by 20 per cent or $440 million.

Many component manufacturers say that though there are servicing (fabrication) costs involved, which tend to raise the overall cost, it is compensated through premium settlements by OEMs.

Praveen Gupta, chief executive, auto and engineering business, Yash Birla Group, said, “Direct supplies to tier I players do involve high margins, stable demand and volume. We are looking to expand our reach beyond our tier II customers such as Cummins.”

Experts believe that strong negotiations on component prices by Tata Motors for the Nano, which lead to a squeeze on margins for suppliers, will be tackled through sourcing deals.

Car sales up 9% on new models

Thanks to the new models, the car industry maintained its upward mobility, growing at 9 per cent and selling 113,899 units in January in the domestic market. The industry had sold 104,501 units in the same month last year.

Market leader Maruti Suzuki grew by 2 per cent, whereas competitors - Hyundai and General Motors - logged 39 and 46 per cent growth, respectively, riding high the demand for new models such as i10 and Spark.

Tata Motors, third largest car maker, had a disappointing month again as its sales slid by 12 per cent, the Society of Indian Automobile Manufacturers (Siam) said in its monthly figures today.

Aniket Mhatre, auto analyst, Prabhudas Liladhar, said, “Due to a high base in January 2007 where the industry had a good growth, the increase in last month is in the single digit. Tata Motors, however, saw its sales falling this year. The trend is expected to continue in the remaining two months.”

Analysts said due to production constraints, Maruti will be able to produce only 70,000 units a month. GM, too, is facing a production constraint for its most popular model Spark at. The company is building a new plant in Maharashtra, which will become operational by the year-end.

Hyundai India, however, is planning to hike its annual production capacity to 600,000 units from 300,000 units.

The overall passenger vehicle segment, comprising cars, utility vehicles (UVs) and multi purpose vehicles (MPVs), grew by 8.5 per cent in January with 147,186 units sales against 135,654 units in the corresponding month last year. Bike makers, including Hero Honda, Bajaj Auto and TVS Motors, faced a negative month once again as sales declined by 14 per cent year-on-year.

Although Hero Honda managed to stay ahead, it had to satisfy with just a 0.16 per cent growth. Bajaj Auto and TVS Motors recorded 15 per cent and 44 per cent drop in sales, respectively.

Aniket Mhatre added, “Hero Honda was able to put up a better show due to better penetration. The company has a larger product range than the Bajajs and TVS. Bajaj’s XCD bike has not seen huge sales and the company has also witnessed a substantial drop in the sales of its 100cc models.”