The New Auto Champions

WISDOM CAN COME from the most unexpected of places. "The Indian automobile industry is witnessing a renaissance. Customers have become pickier, and choosy. They have become tech-savvy and want a brand persona," actor Shah Rukh Khan, brand ambassador of Hyundai Motor India Ltd., said while unveiling Hyundai Ioniq 5 at the recent Auto Expo, which hosted leaders of the world's biggest automakers.

He may have read from a script but his speech encapsulated the tectonic shift underway in the Indian automobile industry. Nothing makes the changes more apparent than the scorching pace of growth shown by mid-level auto and ancillary companies in spite of regulatory changes, Covid-19, semiconductor scarcity and commodity price spike triggered by Russia's invasion of Ukraine. The 53 auto and ancillary players in Fortune India The Next 500 list grew cumulative revenues by 30% to ₹87,113 compared with ₹66,990 crore last year. Of this, makers of auto parts take the cake — of these 53 fastest-growing companies, as many as 50 belong to the ancillary industry.

And why not? Domestically, auto companies sold 37,92,356 passenger vehicles in 2022, highest in a year, eclipsing the previous high of 2021, according to data from the Society of Indian Automobile Manufacturers. Maruti Suzuki India Ltd., India's largest passenger vehicle maker and industry bellwether, exported 2,63,068 units, 28% more than its previous record in 2021.

The automotive component industry piggy-rode the trend and grew 34.8% to ₹2.65 lakh crore in first half of FY23, according to Automotive Components Manufacturers Association (ACMA). Auto component exports grew 8.6% to ₹79,033 crore during the period. In FY22, it was among India's few sectors that boasted a trade surplus. Sunjay Kapur, president, ACMA, says the industry contributes 2.3% to India's GDP. The automobile industry as a whole contributed 7.1% to GDP and 49% to manufacturing GDP, as per Economic Survey 2023.

The major reasons for such stupendous growth include high demand and premiumisation of vehicles.

Ringfencing the Sector

One of the most important industry trends is premiumisation. In May 2022, a research note by ratings agency CRISIL said cars that cost ₹10 lakh and above are selling five times faster than cars with lower prices. One reason is "stark difference in income sentiment" of consumers buying premium cars vis-à-vis lower-end cars.

"Passenger car segment will see 21-24% volume growth and 35-40% value growth. This shows people spending more than last year," says Shamsher Dewan, senior vice president and group head, corporate ratings, ICRA. He says one reason for higher value growth is demand for latest features. "Price difference between entry-level and range-topping variants was never more than 20%. Today, in some models, it is more than 50%," he says. The reason is simple. Certain features such as sunroof and premium music system are available only in top variants. "We understand 35-40% demand is coming from top variants and only 15-20% from entry-level models." Vikram Gulati, country head and senior vice president, Toyota Kirloskar Motor (TKM), acknowledges that demand for strong hybrid variants towards the top of the range is behind the phenomenal market response to their recently launched Toyota Innova Hycross and Toyota Hyryder. Entry-level Hycross is priced around ₹20 lakh whereas top hybrid variant costs ₹33 lakh. TKM had to recently suspend bookings for Innova Crysta diesel due to overwhelming demand.

Another manufacturer struggling to meet demand is Mahindra & Mahindra (M&M) with unfulfilled bookings of 2,66,000 units. XUV700's waiting period was more than 20 months in November 2022. Now, it is 12 months. M&M says it has 77,000 open bookings for the SUV. In third quarter of FY23, it received 9,900 bookings per month. "The situation is a lot better than earlier. However, there is a residual effect that needs to be managed," says Anish Shah, managing director and CEO, Mahindra Group. But unfortunately for companies, such robust demand has come at a time when there is a shortage of parts such as semiconductors. "We're still facing issues in sourcing airbag sensors, infotainment systems and some other components, primarily for XUV700 and Scorpio-N," says Rajesh Jejurikar, executive director, auto and farm sectors, M&M. The shortage of parts is expected to keep haunting companies considering the frenetic pace at which they have been adding features in new launches. XUV700, for instance, has 200 chips. M&M manufactures about 30,000 utility vehicles every month.

Analysts are surprised that the pandemic has failed to dent demand for automobiles, especially passenger vehicles, and point out that economic consequences of Covid-19 panned out differently for different classes. "Fundamentally, impact of the pandemic was muted for middle and upper-middle class. People who lost jobs were at the lower end of the pyramid, in manufacturing and hospitality and tourism sectors, and not necessarily on payrolls," says Shamsher Dewan of ICRA. That's why two-wheeler sales were hit the most while passenger cars bounced back quickly in a few quarters after the pandemic struck.

Experts also point at demand from other countries. Export of passenger vehicles has been phenomenal, says Hemant Thakkar, director, transport, logistics and mobility, CRISIL. A number of LATAM and African economies, two regions that account for a bulk of Indian auto exports, are big producers of crude oil. The fact that crude oil prices have been strong in FY23 means these markets will continue to perform relatively well. "Exports by OEMs to these regions should see decent momentum. There are no major challenges on the passenger vehicle side," he says.

Boon for Component Makers

While auto industry has been growing at an impressive pace after the pandemic, the auto component industry, which is largely overshadowed by OEMs, will grow much faster. "There are two reasons for this. One, content per vehicle is increasing, and two, localisation is increasing," says Dewan of ICRA. The increase in content per vehicle is largely on the back of addition of technologically-advanced features.

The component industry was able to withstand a period of zero manufacturing when the pandemic was at its peak. "We are a resilient and mature industry, we have always invested in technology, in supply chains, in processes and systems," says Kapur of ACMA. The disruptions caused by the pandemic have drastically changed the industry but also thrown up opportunities, says Kapur. "One big change is digitalisation. Its impact, especially the speed at which it was adopted, has been phenomenal." Initiatives such as adoption of 5G will take the industry to a different level of digitalisation. Further, new-age technologies such as Advanced Driver Assistance Systems are finding increased application, both domestically and globally, which has opened new avenues for the industry.

Vinnie Mehta, director general, ACMA, says none of its members went insolvent during the pandemic. Last year saw development of a number of technologies, says Mehta.

The industry has also gained hugely from government push to local manufacturing through initiatives such as Aatmanirbhar Bharat and Production Linked Incentives (PLI) Scheme (outlay ₹25,938 crore). The scheme offers financial incentives of up to 18% of production to encourage local manufacturing of automobile parts. In March 2022, government announced that the PLI Scheme for automobile and auto component industry has attracted investment proposals worth ₹74,850 crore as against the target of ₹42,500 crore over five years; ₹29,834 crore is from approved applicants under the Component Champion Incentive Scheme. "Benign policy measures for auto component industry are inclined towards latest technologies," says Mehta. Dewan of ICRA concurs. "The self-reliance initiative through Aatmanirbhar Bharat and PLI Scheme will drive localisation. This means auto component makers will gain a higher share of spending by OEMs."

A slew of regulatory changes such as mandatory six airbags in cars from October have also benefited the industry. "With every regulatory change, value per component is going up. This means component manufacturers will gain. This will lead to good momentum in coming years," says Thakkar of CRISIL. Premiumisation, for example addition of telematics or 'connected car' features, has also increased realisations. "Component manufacturers have had a great run, and it will continue in future. The larger picture is positive," he adds.

Budget 2023 & Beyond

Industry observers, though, warn that demand for passenger vehicles may taper a bit. On February 9, Reserve Bank of India increased repo rate for the sixth time since May 2022, making auto loans more expensive. "This will have a detrimental effect on price-sensitive entry-level passenger car segment and entry-level two-wheeler segment which are already under pressure due to regular price hikes," says Manish Raj Singhania, president, Federation of Automobile Dealers Association.

But the Budget brought some good news for the sector in the form of income tax rate cuts. Among other things, it increased the personal income tax rebate limit to ₹7 lakh. "Personal tax rate cuts shall push demand," says Dewan of ICRA. Thakkar of CRISIL agrees. "Rebates under the new income tax regime and steps to boost farm profitability will bring the mojo back for commuter two-wheelers," he says. However, companies in the premium segment remain unfazed. "Yes, there are headwinds, they are real and they will impact the industry. But with the kind of product mix we have, and the segments we are in, we are positioned well today," says Shah of M&M. Thakkar says the Budget was neutral for passenger vehicles.

However, Dewan says demand will start softening even in premium segment in next five-six months. "We see an increase in cost of vehicles. Demand in last few years has been driven by high salary growth and job opportunities in the start-up world. Many of these trends are reversing. Access to capital is not as easy as it used to be," he says. Multiple carmakers have acknowledged that a big chunk of demand is coming from younger generation and those employed in start-ups.

For auto component companies, good news has come in the form of Budget's thrust on skilling and creation of centres of excellence & research labs in hi-tech areas, which will help them become future-ready. "We are delighted by steps for skilling and research in hi-tech areas such as AI, robotics, 5G, mechatronics and 3D printing, among others. Increase in telematics and software content in vehicles will ensure that our industry continues to remain relevant and globally competitive," says Kapur. "We are now competing against companies which were never involved in our business, for instance, software companies," he says. The Budget also announced steps to reduce challenges being faced by MSMEs due to failure to execute contractual obligations during the pandemic. Apart from this, continuation of reduced duties on copper scrap and inputs for steel will increase availability of raw materials for the automotive sector.

However, the auto component industry was hoping that the government would use the Budget to discuss the need for a uniform rate of goods and services tax (GST) on auto components. "We are an intermediary industry, and if we have a uniform rate, the biggest beneficiary will be the aftermarket segment, where we have a large presence. A GST of 28% on aftermarket products is, in some sense, a motivation to evade taxes. If taxes are benign, compliance becomes easy, and it’s a win-win situation," says Mehta. However, Thakkar says uniform GST can be taken up outside the Budget.

While there are near-term challenges on both supply and demand side, the shift in fundamentals has made industry doyens confident. "Economy is stacking well. Demand has been strong across sectors. The industry is reasonably buoyant. We will see some impact of global recession. We are not going to be immune. Inflation has not gone away yet but India is better positioned than others. Commodity prices are going to be impacted once global inflation kicks in but India will fare better than others," says Shah of M&M.