Auto Components Industry in India
Tue, 22 August 2023
The Indian auto component industry is a crucial driver of economic growth and job creation, contributing 2.3% to the GDP and employing 1.5 million people. By 2026, it is expected to contribute 5-7% to the GDP.
The industry is a leader in exports, employing over 3.7 crore people and showing impressive growth, reaching US$ 56.50 billion in FY22 with a projected value of US$ 200 billion by FY26. It mainly serves two segments: OEM, accounting for 85% market share, and the Replacement market with 15% share.
Market Study
The Indian auto components industry has been witnessing remarkable growth, with its value increasing from $46 billion in FY21 to an estimated $200 billion by 2026. The sector's exports are also projected to surge, reaching $80 billion by 2026. In FY21, the industry achieved a trade surplus of $700 million. Currently contributing 2.3% to India's GDP, it is expected to become the world's third-largest auto components industry by 2025. The two-wheeler segment, fuelled by the Indian middle class's purchasing power, dominated the automobile industry, which recorded a total sales volume of 17.51 million units in FY22. This significant demand for automobiles also led to the emergence of more original equipment and auto components manufacturers, enhancing India's expertise and driving international demand for Indian products.
Recent Industry Trends
The Indian government has taken significant steps to encourage the transition to electric vehicles (EVs). Initiatives like the Voluntary Vehicle Fleet Modernization Programme (V-VMP) incentivize buyers of new commercial vehicles to opt for environmentally friendly options, including EVs. The implementation of Bharat Stage VI (BS-VI) norms by 2020 aims to reduce carbon emissions, promoting cleaner vehicles, including electric ones. Additionally, the positive impact of GST has made electric vehicles more competitive and accessible to consumers, further driving their adoption.
Growth Drivers of the Industry
India has emerged as a growing R&D hub, dedicating 8% of its total R&D expenditure to the automotive sector, driving innovation and technological advancements. Its strategic location near key markets like ASEAN, Europe, Japan, and Korea positions it as an emerging global sourcing hub for automotive products. Cost competitiveness has been improved by reducing excise duty, stimulating demand for vehicles. As the fifth-largest vehicle manufacturer globally, India holds a prominent position in the automotive industry. It is projected to become the third-largest automotive market by 2026. With favourable trade policies, including 100% FDI and unrestricted import-export, India's automotive industry continues to thrive. The Atmanirbhar Bharat 3.0 initiative introduced Production-Linked Incentive (PLI) schemes with INR 25,938 Crores support to boost domestic manufacturing and self-reliance in the automobile and auto component sectors.
Why Invest in India?
- India's automotive industry is set for significant growth, driven by a growing working population and an expanding middle class as key demand drivers. It ranks as the fifth-largest global automobile market. The shift towards electric vehicles (EVs) holds promise, with projections of 4 million EVs sold annually by 2025 and 10 million by 2030, driving the market value to US$ 206 billion. Plans to reduce auto component imports create opportunities for domestic players.
- India's cost-effective manufacturing base offers a competitive edge, keeping operational costs 10-25% lower than Europe and Latin America. Abundant skilled and semi-skilled workforce supported by a strong educational system and being the second-largest global steel producer further enhance its attractiveness for cost-efficient production.
- India emerges as a prominent global hub for auto component sourcing, with over 25% of production being exported annually. Projections indicate a 23.9% annual growth in exports by 2026. India's specialization in auto components like shafts, bearings, and fasteners contributes to its competitive advantage in the international market.
- India's automotive industry receives strong R&D and product development support, with dedicated NATRiP centres fostering innovation. The government's commitment to electric vehicles is evident through the FAME II policy. Foreign investors find attractive prospects, as 100% FDI is allowed in the sector. A substantial US$ 7.8 billion allocation for the automobile and auto components sector under production-linked incentives promotes growth and self-reliance.
Automotive Manufacturing Hubs Established in India
The car brand clusters in India are strategically located across different states to leverage various advantages. Chennai, Tamil Nadu, stands out as a significant automotive hub with Hyundai, Ford, Renault-Nissan, and Daimler attracted by its central location, skilled workforce, and supportive policies. Pune, Maharashtra, hosts Tata Motors, Mahindra & Mahindra, and Volkswagen-Skoda due to its automotive expertise and excellent connectivity. Gurugram and Faridabad, Haryana, house Maruti Suzuki for their proximity to the capital and skilled manpower. Sanand, Gujarat, appeals to Tata Motors and MG Motor for its investor-friendly policies and robust infrastructure. Sriperumbudur, Tamil Nadu, attracts BMW with its favorable investment climate. Tapukara, Rajasthan, is chosen by Honda Cars India for its supportive business environment. Andhra Pradesh is home to Kia Motors, and Uttar Pradesh houses Yamaha, while Karnataka hosts Toyota Kirloskar Motors, each drawn by various advantages like a conducive business environment and skilled labour. Maharashtra's Talegaon once hosted General Motors, and Chakan in Rajasthan is another location for Mahindra & Mahindra. The diversity of these clusters showcases India's growing prominence in the global automotive industry.
Regulatory Framework
- Auto Policy of 2002: Fosters sustainable development by allowing 100% foreign equity investment in auto component manufacturing and streamlining licensing and approvals.
- National Automotive Testing and R&D Infrastructure Project (NATRiP): Invests US$ 388.5 million to establish cutting-edge testing and R&D infrastructure for global performance standards.
- Department of Heavy Industry (DHI) and Public Enterprises: Supports modernization with a US$ 200 million fund for interest subsidies and export benefits through DFRC scheme.
- Automotive Mission Plan 2016-2026 (AMP 2026): Ten-year strategy aims for four-fold growth, creating 65 million jobs in the automotive industry.
- FAME Scheme (Faster Adoption and Manufacturing of Electric Vehicles): Incentivizes electric vehicle adoption across segments until March 2019.
- Motor Vehicles Act, 1988 and Central Motor Vehicles Rules 1989: Governs safety and emission standards for vehicles, including protective headgear for two-wheelers.
- National Electric Mobility Mission Plan 2020 (NEMMP): Aims for 6-7 million electric/hybrid vehicles by 2020 with a cumulative investment of USD 2.15 billion.
Incentives and Support
- PLI Scheme for Automobile and Auto Components: Aims to incentivize advanced automotive technology production, boost domestic manufacturing, and attract investments, backed by INR 259.38 billion budget.
- R&D Incentives: Offers 200% tax deduction for scientific research payments to labs, universities, etc., under section 35 (2AA) of the Income Tax Act.
- In-House R&D Centre: Section 35 (2AB) provides 150% tax deduction for companies engaged in scientific research, effective until 31st March 2020.
- State Incentives: States offer subsidies, duty relaxations, financial assistance, and more for industrial projects. Andhra Pradesh, Gujarat, and Jharkhand are examples
- Export Incentives: MEIS offers export subsidies for various tariff lines and countries based on ACMA recommendations.
- Areas Based Incentives: SEZs, NIMZs, and specific regions receive incentives to promote industrial development.
Raw Materials
Manufacturing auto components requires a wide range of raw materials, each catering to specific components' requirements. India is home to a diverse and well-established industrial base, making it also a favourable destination for sourcing the raw materials required for manufacturing auto components. Some include:
- Steel: Used for chassis, body panels, etc. Tata Steel, JSW Steel, SAIL are major producers.
- Aluminium: For lightweight parts like engine blocks. Hindalco, NALCO are significant producers.
- Copper: Essential for electrical components. Sourced domestically and through imports. Hindustan Copper Limited is a primary producer.
- Rubber: For tires, belts, hoses. Natural rubber from states like Kerala, Tamil Nadu, Karnataka. Synthetic rubber from companies like Reliance Industries, Indian Oil Corporation.
- Plastics: Interior components like dashboards. India has a well-established plastics industry.
- Paints and Coatings: Provides protection and finishing. Offered by leading paint manufacturers.
Project Estimations
The cost of setting up an auto component manufacturing plant in India can vary widely depending on several factors, including the scale of the plant, the types of components to be manufactured, the location of the plant, technology used, and infrastructure requirements. The estimated cost breakdown for setting up a medium-sized auto component manufacturing plant in India includes land and infrastructure (20-30%), machinery and equipment (40-50%), raw materials (15-25%), labor and manpower (5-10%), technology and R&D (5-10%), regulatory and compliance (3-5%), marketing and sales (2-5%), working capital (5-10%), and a contingency fund (5%). These factors can vary depending on the scale, location, and type of components to be manufactured.
Pathways to Expand
- New Strategies: Indian and global manufacturers invest in expanding capacities and exploring untapped markets like the Northeast region of India for long-term advantages.
- Diversification: Indian firms diversify into different segments like 2-wheelers, passenger cars, or commercial vehicles to capture growth opportunities.
- Capacity: India targets 8.7 million passenger vehicle production by 2020, with major multinational companies introducing new vehicle models.
- R&D Facilities: Global suppliers set up R&D centres in India to adapt designs and develop innovative products, leveraging the market potential.
How can we help?
- Feasibility Study: Assistance in evaluating the project of setting up the Auto Components manufacturing facility.
- Technical Collaboration: Assistance with collaboration with an entity for technical know-how and providing advisory on installation and procurement of raw materials.
- Fundraising: Assistance in the raising of funds and/or financing for the project.
- Legal Services: Assistance in legal formalities including corporate and regulatory compliances, approvals, and all other legal formalities.
- Sales Network: Assistance in creating a good sales network in domestic and foreign market based on consumption of an application.