INDUSTRY ANALYSIS REPORT

ON
AUTO ANCILLARIES

Submitted By

Abdullah Saghir Ahmad (C002)

Atharva Gaikwad (C011)
Gaurav Agarwal (C020)
Mantasha Rahman (C029)
Payal Kadam (C038)
Saurabh Chatterjee (C047)
Surbhi Rakheja (C056)

Under the guidance of

Prof. Narayani Ramachandran and Prof. Vasant Cavale

Narsee Monjee Institute of Management Studies, Bangalore

2017-2018
 ACKNOWLEDGEMENT

We would like to sincerely thank Prof. Narayani Ramachandran and Prof. Vasant Cavale for
guiding us throughout the course of analyzing the Auto Ancillary Industry of India. The insights
provided by them have helped us to analyze the industry in a comprehensive manner considering
various factors and looking at the industry from different perspectives. We are also immensely
grateful to them for their comments on the earlier versions, although any errors are our own and
should not tarnish the reputations of these esteemed professionals.
TABLE OF CONTENTS
EXECUTIVE SUMMARY ............................................................................................................................. 5
INTRODUCTION ....................................................................................................................................... 6
ECONOMIC PROFILING ............................................................................................................................ 6
PRODUCTION ...................................................................................................................................... 6
TURNOVER .......................................................................................................................................... 7
EXPORTS .............................................................................................................................................. 7
IMPORTS ............................................................................................................................................. 9
NATURE OF COMPETITION ...................................................................................................................... 9
KEY PLAYERS ........................................................................................................................................ 9
INDIAN MARKET SHARES AND FORECASTS ......................................................................................... 11
MARKETING ANALYSIS ........................................................................................................................... 11
SEGMENTATION ................................................................................................................................ 11
CUSTOMER SEGMENTS .................................................................................................................. 12
PRODUCT SEGMENTS..................................................................................................................... 12
TARGETING .................................................................................................................................... 13
POSITIONING ................................................................................................................................. 14
MARKETING MIX................................................................................................................................ 15
PRODUCT....................................................................................................................................... 15
PRICE ............................................................................................................................................. 15
PLACE ............................................................................................................................................ 16
PROMOTION .................................................................................................................................. 16
BCG MATRIX FOR BOSCH ................................................................................................................... 17
ANSOFF MATRIX FOR BOSCH ............................................................................................................. 17
PRODUCT LIFECYCLE FOR BOSCH ....................................................................................................... 19
GROWTH ANALYSIS ............................................................................................................................... 20
INTERNAL GROWTH RATE .................................................................................................................. 20
SUSTAINABLE GROWTH RATE ............................................................................................................ 21
DIVIDEND ANALYSIS .............................................................................................................................. 21
CAPITAL STRUCTURE ANALYSIS .............................................................................................................. 22
WORKING CAPITAL ANALYSIS ................................................................................................................ 23
OPERATING CYCLE AND CASH CYCLE .................................................................................................. 24

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ASSET COMPOSITION ANALYSIS ............................................................................................................. 26
RETURN ON EQUITY .............................................................................................................................. 27
IMPACT OF GST ..................................................................................................................................... 28
SWOT ANALYSIS .................................................................................................................................... 28
PESTEL ANALYSIS ................................................................................................................................... 29
POLITICAL .......................................................................................................................................... 29
ECONOMIC ........................................................................................................................................ 29
SOCIAL............................................................................................................................................... 29
TECHNOLOGICAL ............................................................................................................................... 29
ENVIRONMENTAL .............................................................................................................................. 29
LEGAL ................................................................................................................................................ 30
PORTER’S FIVE FORCES ANALYSIS .......................................................................................................... 30
THREAT OF NEW ENTRANTS (MODERATE) ......................................................................................... 31
BARGAINING POWER OF SUPPLIERS (LOW TO MODERATE)................................................................ 31
BARGAINING POWER OF CUSTOMERS (HIGH) .................................................................................... 31
THREAT OF SUBSTITUTES (LOW) ........................................................................................................ 32
RIVALRY AMONG COMPETITORS (MODERATE) .................................................................................. 32
VALUE CHAIN ........................................................................................................................................ 32
SEGMENT WISE PROFIT POOL ANALYSIS ................................................................................................ 33
SUPPLY CHAIN COST .............................................................................................................................. 34
HUMAN RESOURCE MANAGEMENT ISSUES ........................................................................................... 35
PROFILE AND DISTRIBUTION OF HUMAN RESOURCES ........................................................................ 36
CRITICAL SKILL GAPS IN INDUSTRY ..................................................................................................... 36
ADDRESSING THE GAPS ..................................................................................................................... 36
ACQUISITIONS ....................................................................................................................................... 37
MOTHERSON SUMI SYSTEMS LTD. ..................................................................................................... 37
BOSCH ............................................................................................................................................... 37
JOINT VENTURES ................................................................................................................................... 37
GLOBAL SCENARIO ................................................................................................................................ 38
FOREIGN DIRECT INVESTMENT .......................................................................................................... 38
GOVERNMENT INITIATIVES ................................................................................................................ 38
FORECAST.......................................................................................................................................... 39
CHALLENGES ......................................................................................................................................... 39

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 HIGHLY COMPETITIVE ........................................................................................................................ 39
CONSOLIDATION ............................................................................................................................... 39
TRADE AGREEMENTS ......................................................................................................................... 39
INVESTMENT DECISION ......................................................................................................................... 40
PRIMARY RESEARCH: BOSCH PLANT VISIT .............................................................................................. 41
CONCLUSION ......................................................................................................................................... 41
REFERENCES .......................................................................................................................................... 43

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LIST OF FIGURES
Figure 1: Production Breakup .................................................................................................................. 6
Figure 2: Turnover .................................................................................................................................. 7
Figure 3: Exports ..................................................................................................................................... 7
Figure 4: Distribution of Exports ............................................................................................................. 8
Figure 5: Imports ..................................................................................................................................... 9
Figure 6: Distribution of Imports ............................................................................................................. 9
Figure 7: Auto Component Consumption by OEM................................................................................. 12
Figure 8: Domestic market potential by components (2020E)................................................................. 13
Figure 9: Product segmentation of auto components .............................................................................. 13
Figure 10: List of Products .................................................................................................................... 15
Figure 11: BCG Matrix for Bosch .......................................................................................................... 17
Figure 12: Ansoff Matrix for Bosch ....................................................................................................... 18
Figure 13: Product Life Cycle ................................................................................................................ 19
Figure 14: SWOT Analysis .................................................................................................................... 28
Figure 15: Porter's Five Forces Model ................................................................................................... 30
Figure 16: Value Chain .......................................................................................................................... 32
Figure 17: Engine Parts ROCE .............................................................................................................. 33
Figure 18: Electrical ROCE ................................................................................................................... 33
Figure 19: Batteries ROCE .................................................................................................................... 34
Figure 20: BCG Profile of people employed at Auto OEM’s and Tier-1 suppliers .................................. 36
Figure 21: Distribution of Human Resources across functions ............................................................... 36

LIST OF ABBREVIATIONS
ACMA – Automotive Component Manufacturers Association of India
ACT – ACMA Centre for Technology
INR – Indian Rupee
USD – United States Dollar
LCV – Light Commercial Vehicle
SUV – Sport Utility Vehicle
OEM – Original Equipment Manufacturer
CAGR – Compound Annual Growth Rate
GDP – Gross Domestic Product
MOU – Memorandum of Understanding
IISc – Indian Institute of Science

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EXECUTIVE SUMMARY
The Indian automotive ancillary industry is one of the fastest growing industries and is banking on
the success of the automobile sector. Coupled with technological advancements and growing
demand, the auto component industry in India has emerged as a key market in Asia as well as in
the world. India currently supplies auto components to a number of international automobile
makers, such as Toyota, Ford, General Motors, and Volkswagen amongst others.

The market size for auto component sector increased by 11.5 per cent reaching to US$ 43.5 billion
in FY17 from US$ 39 billion in FY16. The number of manufacturing units in the unorganized
sector (10000) are far higher than those in the organized one (700)1. Original Equipment
Manufacturers (OEMs) dominate production volumes by market range; encouragingly, exports
account for around 28 per cent. The aftermarket is dominated by smaller players and is adversely
affected by counterfeit products and spurious parts. A higher GST rate can compel a lot of players
to gravitate towards non-compliance and survive by means of under-invoicing2.

Auto component suppliers are focused on entering new vehicle segments & manufacturing new
products with higher margin. Both Indian & global manufacturers are investing in new capacities
& newer programmes, in order to get long term advantage. As markets in North, West & South
are getting saturated, components makers are now focusing on untapped market like the Northeast
region of the country.

To get a deeper understanding of the industry, we picked 5 major players, namely, Bosch India,
Motherson Sumi, Exide Industries, Amara Raja Batteries and Sundaram Clyaton. The financial
analysis done on the chosen companies using techniques like Du Pont analysis, calculating
industry aggregates of the important ratios and analyzing the cost structure indicate that the
industry is experiencing a robust growth. The stable RoE indicates that the industry is providing
consistent profits and returns on investments. With market leaders such as Bosch and Motherson
Sumi, the capital investment required would be huge and the investment will be primarily utilized
in competing with the established players. So, from an investment point of view, auto ancillary
industry is not a lucrative option.

1
https://www.ibef.org/industry/autocomponents-india.aspx
2
http://businessworld.in/article/Indian-Auto-Component-Industry-Could-record-50-in-revenues-by-FY-18-
ACMA/05-06-2017-119490/

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INTRODUCTION
Indian auto ancillary or auto component industry is one of the fastest growing industries in India.
It is piggy riding on the success Indian auto industry and is highly competitive with the presence
of a large number of global and Indian auto-companies. The industry has a growing demand and
technological advancements. The industry is characterized by low manufacturing cost, high
standard of quality and engineering expertise. It currently contributes to around 7% of India's GDP
and provides direct and indirect employment to around 1.9 Crore people. The auto ancillary
industry in India has emerged as one of the major market in Asia as well as in the world.

ECONOMIC PROFILING
PRODUCTION
The industry over the years has developed its capability of manufacturing all components required
to manufacture vehicles. This is evident from the high levels of indigenization achieved in the
vehicle industry as well as the components developed for the completely Indian made vehicles like
the Tata Indica, Tata Indigo, Mahindra Scorpio, Bajaj Pulsar etc. The domestic component industry
has now holistic capability to manufacture the entire range of auto-components e.g. engine parts,
drive, transmission parts, suspension & braking parts, electricals, body and chassis parts,
equipment etc.
Driving transmission & steering parts is the first largest segment and contributes nearly 19% of
the total component production in the domestic auto ancillary industry after the engine parts, which
contributes 31% to the total component production.

Engine Parts Driving

7% Transmission &
9% Steering
31% Parts
10% Body & Suspension
Chasis & Braking
Parts
12%

19% Equipments Electrical

12%
Parts

Figure 1: Production Breakup

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TURNOVER
The turnover of the Indian auto
ancillary industry is growing
with a CAGR of 6% and is likely
to meet a target (set by ACMA)
of INR 7.3 Lakh Crore of sales
by 2021, with domestic market
share of about 56% of the total
sales. The Indian auto
components industry is well
Figure 2: Turnover
poised to achieve robust growth
in the coming years owing to rising domestic demand in the OEM market. Also, the decline in raw
material cost, such as decrease in cost of rubber, will help in improving the operating margins and
consequently aid in increasing the exports from the auto components sector in India.
Further, favorable government policies such as Auto Policy 2002, Automotive Mission Plan 2006-
2016, National Automotive Testing and R&D Infrastructure Projects (NATRIPs) as well as
concessions provided on excise duties in the Union Budget 2015-16, will help the Indian auto
components industry achieve considerable growth. India is all set to become a global outsourcing
hub with several foreign players such as Honda, Ford, etc., investing in the country. This will
significantly help the auto components sector to grow.

EXPORTS
The domestic industry’s focus on exports
has been part of industry’s initiatives to
counter the cyclicality in the domestic
auto sector.

The key export items include engine

parts, transmission parts, brake system &
components, body parts, exhaust
systems, turbochargers etc. Figure 3: Exports

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Exports have been growing with a CAGR of 18%.
Europe and the US will continue to be the largest markets, but growth will be faster in emerging
geographies - the Association of Southeast Asian Nations, Latin America and North Africa.

Indian auto component makers are well positioned to benefit from globalisation of the sector as
exports potential could be increased by up to four times to INR 2,42,900 Crore by 2020 from
current INR 61,500 Crore (FY 2013-14 analysis), according to a joint report published by ACMA
and McKinsey -- Capturing the global opportunity. Indian suppliers are well positioned to benefit
from these global trends and can significantly accelerate their international presence in the next
few years.

India is building a reputation in designing and manufacturing low cost cars. Additionally, Global
automobile majors are looking to leverage India's cost-competitive manufacturing practices and
are assessing opportunities to export SUVs to Europe, South Africa and Southeast Asia too.

Further the government aims to develop India as a global manufacturing hub and expect that Indian
auto component sector has huge export potential.
The auto component industry is also scaling up, as global car manufacturers are increasing their
component sourcing from India, due to cost competencies. However, the competition is intense
in the component sector as most global firms have entered the market.

EXPORT DESTINATIONS: TOP 10

COUNTRIES (IN %)
EXPORTS
6%
4%
USA 23.59 THAILAND 3.18 25% ASIA

CENTRAL AMERICA
GERMANY 6.96 UAE 3.15 EUROPE
25%
3% NEW ZEALAND & AUSTRALIA
TURKEY 6.22 FRANCE 2.99
NORTH AMERICA

UK 5.43 BRAZIL 2.62 1% SOUTH AMERICA

AFRICA
36%
ITALY 3.86 MEXICO 2.59
Figure 4: Distribution of Exports

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IMPORTS
Imports have been growing with a CAGR
of 13%.
Availability of cheap infrastructure support
such as cheap power, hidden subsidies and
economy of scale puts China in an
advantageous position. Germany holds the
second spot by commanding 14.29% of the
total Indian auto part import, followed by
South Korea, Japan and Thailand.
Figure 5: Imports

ORIGIN OF IMPORTS: TOP 10 COUNTRIES

(IN %) 0.50% Imports
7.90% 1.70%
0.40% ASIA
CHINA 23.15 USA 7.63
CENTRAL AMERICA
GERMANY 14.29 ITALY 3.43 EUROPE

30.90% NEW ZEALAND & AUSTRALIA

SOUTH 11.2 UK 2.58 58.60%
NORTH AMERICA
KOREA
SOUTH AMERICA

JAPAN 10.65 FRANCE 1.64 0.50% AFRICA

THAILAND 8.07 SWEDEN 1.40 Figure 6: Distribution of Imports

NATURE OF COMPETITION
KEY PLAYERS
There are a larger number of domestic players in the Indian automotive component industry. Let
us see the few of the key players and their respective turnovers for the last two financial years.

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 Turnover (in INR Turnover (in INR Crores)
Key Players
Crores) 2015-2016 2016-2017

Bosch India Pvt. Ltd. 10013 10750

Motherson Sumi Systems Ltd. 36528 41984.2
Bharat Forge Limited 4569.24 4403.51
Exide Industries Ltd. 6809.2 8950.5
Amara Raja Batteries 4633 5335
Apollo Tyres 11708 14053

Bosch India Pvt. Ltd. manufactures mainly electrical and engine components. Motherson Sumi
Systems Ltd manufactures wiring harness. Both Exide Industries Ltd and Amara Raja Batteries
manufacture batteries.
Moving to the component wise key players according to the six components discussed earlier.

Engine parts Transmission Suspension & Equipment Electrical Other

& steering braking parts
parts

Goetze, Bosch Sona Koyo Brakes India, Jay Bharat TVS, Motherson
India, Shriram Steering Kalyani Brakes, Maruti, Denso, Sumi
Pistons & Systems, Rane Automotive Omax Delco Systems,
Rings, India Madras, Rane Axles, Rane Auto, JBM Remy Exide,
Pistons, Samkrg TRW Brake Lining, Tools Electricals, Amara Raja
Pistons, Rane Systems, Sundaram Nippon Batteries,
Engine Bharat Gears, Brake Lining, Electricals Phoenix
Valves, KAR Gajra Bevel Hindustan Lamps,
Mobiles, Ucal Gears, Eicher, Composites, Autolite,
Fuel Systems Bharat Forge, Allied Nippon, Hella India,
and Spaco Clutch Auto, Jamna Auto, Apollo
Automotive

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 Carburettors, Axles, Luk Gabriel India, Tyres,
Escorts Auto Clutches, Sharda Motors Lumax
Components, Rane Brake Industries and
Mico, Delphi, Lining, Delphi
TVS Diesel Motherson
System and Sumi Systems
Tata Cummins and Delphi

INDIAN MARKET SHARES AND FORECASTS

According to the Auto Component Manufacturers Association of India (ACMA) the market share
of auto component sector has increased by 8.8% from INR 256130.87 Crores in Financial year
2015 to INR 259457.25 Crores in financial year 2016.
Forecasts for exports and revenue for 2026 are given below 3:
Year Exports (INR Crores) Revenue (INR Crores)
2016 71849.7 259457.25
2026 465692.5 1330550

MARKETING ANALYSIS
SEGMENTATION
The industry, over the years, has developed the capability of manufacturing all components
required to manufacture vehicles, which is evident from the high levels of indigenization /
localization achieved in the vehicle industry as well as the components developed for the
completely Indian made vehicles like the Tata Indica, Tata Indigo, Mahindra Scorpio, Bajaj Pulsar
etc. The component industry has now holistic capability to manufacture the entire range of auto-
components e.g. Engine parts, Drive, Transmission Parts, Suspension & Braking Parts, Electricals,
Body and Chassis Parts, Equipment etc. Indian auto component industry can be broadly segmented
on the basis of two criteria:

3
Rate of conversion taken as USD 1 = INR 63.83 for uniformity

Auto Ancillary | 11
CUSTOMER SEGMENTS
The Indian auto-component industry can be broadly classified into the organised and unorganised
sectors. The organised sector caters to at-least one of the original equipment manufacturers
(OEMs) and consists of high-value precision instruments, while the un-organised sector comprises
of low-valued products and caters to the aftermarket category.

The OEM market for auto

Auto Component Consumption by OEM
components is characterized by
cyclicality in line with end-user 3% 3% 1% PVs
4%
automobile industry. The component 5% Two-Wheelers
Tractors
manufacturer expands capacities and 5%
MCV
undertakes production in line with 46%
5% HCV
production schedules of vehicles Three-Wheelers
manufacturers. Further, servicing the 7% LCV

OEM market requires access to Backhoe Loaders

Others
technology necessary to meet quality
21% SCV
requirements and price
competitiveness. India in last decade Figure 7: Auto Component Consumption by OEM

has grown into a large automotive

market particularly for Japanese OEMs, while the European and American’s have also entered for
the long haul.
By vehicle segmentation, the production mix of Indian auto component industry is skewed heavily
towards PV segment which is the main customer, demanding 46% of the total production volumes,
followed by two-wheelers segment which accounts for 21% of the total auto component production
volumes.

PRODUCT SEGMENTS
On the basis of products, Indian auto component industry can be broadly segmented into six
major segments:

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 Figure 9: Product segmentation of auto components

Market Share

Engine & Engine Parts

6.4

25.6 Transmission & Steering Parts

23.1
Suspension & Braking Parts

Equipment
17.1
17.1 Electrical Parts

10.7
Others

Figure 8: Domestic market potential by components (2020E)

TARGETING
The companies of the industry target the segment created on the basis of customers as well as the
segment created on the basis of products. Today auto component companies have significant

Auto Ancillary | 13
opportunities to take the giant leap. At this juncture, many companies have adopted a strategic
shift to be able to ride the opportunity wave.

For example, Motherson Sumi Systems Limited; initially the company focused on targeting the
product segments but now they have also ventured in customer segments. The present product
range of MSSL comprises of - wiring harnesses, rear view mirrors, moulded plastic parts including
car interior and exterior parts, bumpers, dashboards and door trims, complete modules, rubber
components for automotive and industrial applications, high precision machined metal parts,
injection molding tools and HVAC systems. MSSL’s diversity of product range coupled with sheer
depth within each product portfolio, has helped the company garner leadership in its area of
operations. In 2015, MSSL stunned its peers when it announced that it had closed a INR 15,400
crore deal with Daimler AG to supply a range of parts for future generations of Mercedes-Benz
cars4.

Whereas, Exide Industries Limited (category- Automobile batteries) primarily target the product
segment of Auto & Truck Parts. So, the companies of the auto component industry primarily target
the product and/or the customer segments, based on their strategy.

POSITIONING
Positioning defines where your product (item or service) stands in relation to others offering
similar products and services in the marketplace as well as the mind of the consumer. As there is
a wide range of products in the auto component industry, the positioning depends on the product-
type they offer. Exide, that services Auto & Truck Parts and targets vehicle owners wanting
reliable batteries with a superior service positions itself as suppliers of batteries built to be rugged
and reliable with lifetime warranties. Amara Raja, another player in the same segment, positions
itself as the go-to choice for batteries, no matter the type of automobile. As the auto components
make up the automobile, all the auto component companies, in general, position themselves as
reliable and go-to manufacturers.

4
http://www.livemint.com/Companies/BVXafY0Pclh7xi9eJUaa6N/A-behemoth-in-the-making.html

Auto Ancillary | 14
MARKETING MIX
PRODUCT
The Indian auto ancillary industry can be broadly segmented into six major segments.

Figure 10: List of Products

PRICE
Auto ancillary pricing internally (within the company) is done in alignment with the external
market so that we can achieve consistency in pricing and establish prices that make sense to the
customers.

OEMs’ segregate their competitive parts from captive ones and apply market based pricing only
on the competitive parts. Market based pricing is based on competition part prices where
companies try to keep their own prices competitive in the market. It could be average priced,
minimum priced or maximum priced.

For example, Exide has a diverse product range which has got a diverse pricing for its products.
Exide has been in fierce competition with Amara Raja Batteries Limited, due to which they price

Auto Ancillary | 15
their products as driven by the market. As a prime manufacturer of Lead Acid type batteries, lead
costs drives the actual cost of the battery, efficient utilization of lead smelting facilities has helped
them keep down the costs and thus ultimately the prices of its Lead Acid batteries.

PLACE
According to our primary research5, Bosch India has a tight knit network of 40,000+ dealers who
cover the entire country.

Exide distributes its products primarily via retail chain. Exide batteries can be easily available in
any battery or automobile retail shop. It also has exclusive retails who sells only Exide batteries at
their outlets. With 35,000+ retail outlets, Exide dominates the Fast-Moving Consumer Durables
Industry. More than 70% of their sales come from retail sales. Exide’s primary and tertiary
distribution network forms the base of their retail strategy. Being an Indian brand and being present
in the market since independence, the rural reach which Exide has is highly integrated. Exide pays
fair margin to its distributors, which helps them to maintain a strong network of retail chain. In the
online sales, Exide batteries can be purchased from online ecommerce platforms, but the online
sales are limited as consumers tend to buy more from the retailers instead.

PROMOTION
The auto component industry is not promotion intensive. Following are the details of the
marketing expenditure of the chosen companies:

INR Crores 2013 2014 2015 2016 2017

Bosch Promotion Expenditure 102.5 131.7 115.4 78
Revenue 9172.70 9109.30 12650.80 11045.50 11860.00
% of revenue 1% 0% 1% 1% 1%
Exide Promotion Expenditure 72.91 82.64 58.71 53.51 72.61
Revenue 6147.25 5997.27 6906.22 7785.32 8702.53
% of revenue 1.19% 1.38% 0.85% 0.69% 0.83%
Amara Raja Promotion Expenditure 15.41 27.58 26.282 33.15 24.35
Revenue 3005.47 3482.17 4253.56 4736.36 6030.63
% of revenue 0.51% 0.79% 0.62% 0.70% 0.40%
Aggregate % of revenue 0.94% 0.72% 0.84% 0.81% 0.63%

It is evident that this industry demands only about 1% investment on promotion.

5
Data collected by visiting the Bosch India, Bangalore plant and office

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BCG MATRIX FOR BOSCH6
BOSCH Battery & spark plug- STAR (high market
share and high market growth)
BOSCH wiring assembly- Mark (low market share and
unknown opportunities)

BOSCH fuel injector, power tools- CASH COWS

(market isn’t growing, opportunities are limited)

BOSCH generators- DOG (market share is also low

and low market growth)

Figure 11: BCG Matrix for Bosch

ANSOFF MATRIX FOR BOSCH
EXISTING PRODUCTS NEW PRODUCTS

EXISTING MARKET PENETRATION PRODUCT DEVELOPMEMT

MARKETS

 Operates in India  Bosch has developed a

through six companies powertrain system that makes
 18 manufacturing sites it possible to bring new
and 7 development and vehicles to market with very
application centers short lead times
 Employs over 31,000  Bosch also provides solutions
associates that make electromobility
 Focuses on quality affordable in larger cars
and reliability and innovative
technology
 State-of-the-art Components
 Eco-friendly products
 At Bosch, connected driving is
already a reality: 1.5 million
vehicles are already connected
via the Bosch IoT Suite

6
Data based on primary research done by interviewing Bosch officials and research

Auto Ancillary | 17
 NEW MARKET DEVELOPMENT DIVERSIFICATION
MARKETS
 Bosch has been expanding its  Future mobility will be
manufacturing and service efficient, electrified,
capabilities in ASEAN connected and automated.
member states and expects to  Bosch has been pioneering
continue seeing positive solutions in powertrain and
development in the region electrified, connected and
automated segments and
shaping the change in
mobility solutions
 Bosch is working
systematically to further
develop gasoline and diesel
powertrains
Figure 12: Ansoff Matrix for Bosch

MARKET PENETRATION
Notwithstanding the recent slowdown in the key automotive market segments in India, the auto
components sector has the unique opportunity to sustain its growth trajectory by rapidly growing
its export footprint while scaling its capacity to serve the domestic market that will return to its
growing ways. However, achieving this will require the automotive components makers to further
raise their competitiveness and drive vigorous innovation in products and processes.

MARKET DEVELOPMENT
The growth of global OEM sourcing from India and the increased indigenization of global OEMs
is turning the country into a preferable designing and manufacturing base. The Indian auto-
components industry is set to become the third largest in the world by 2025 Indian auto-component
makers are well positioned to benefit from the globalization of the sector as exports potential could
be increased to INR 465692.5 Crore by 2026. Therefore, we can say that the market for the
component industry is well in place.

PRODUCT DEVELOPMENT
Extending the product range available to the firm's existing markets would involve heavy
investment in Research and Development. National Automotive Testing and R&D Infrastructure

Auto Ancillary | 18
Project (NATRiP) focuses on providing low-cost manufacturing and product development
solutions.

DIVERSIFICATION
It is estimated that there will be a huge demand in India for low cost hybrid and electric vehicles
(xEVs) that are suitable short-distance urban commutes (averaging 50-100 kms per trip) and
rugged enough to perform reliably in the summer and in the monsoon season in India. Over the
next decade, this will lead to newer verticals and opportunities for auto-component manufacturers,
who would need to adapt to the change via systematic research and development.

PRODUCT LIFECYCLE FOR BOSCH

The product life cycle is an important concept in marketing. It describes the stages a product goes
through from when it was first thought of until it finally is removed from the market. Not all
products reach this final stage. Some continue to grow and others rise and fall.

We have tried to explain the PLC by using the products that we used in the BCG matrix.

Figure 13: Product Life Cycle

:
Introduction: This stage is characterized by high cash consumption and low cash
generation as it involves researching, developing and launching the project. The wiring
assembly of Bosch is in the introduction stage as it is a question mark quadrant product,
their market share is low. In some years either it will grow and mature or else directly
degenerate into the decline stage as a dog.

Auto Ancillary | 19
 Growth: In this stage the cash consumption remains high, but the product starts
generating much more revenue as well, as we have seen in the case of Bosch’s battery
and spark plug. These products are the stars of the BCG matrix, and hence enjoys a large
market share. If it continues to retain its market share then, it will become a cash cow that
is it will mature, when the market growth declines.
Maturity or Stabilization: This stage is characterized by the fact that the asset generates
more return than the market growth rate as in the case of fuel injection pump and the
power tools, which are in the cash cow quadrant of the BCG matrix. The aim of this stage
is to generate as much cash as possible, by investing as little as possible.
Decline: It is the final stage of the Product Life Cycle, when the sales begin to fall. That is
to say that the market share becomes very low and the growth rate falls heavily or else
become negative in some cases, as seen in the cash of Bosch generators, which are in the
dog’s quadrant of the BCG matrix. Hence in this stage the cash is trapped and the
potential is very low. It leads to divestiture.

GROWTH ANALYSIS
INTERNAL GROWTH RATE
2017 ROA Ploughback Ratio IGR
Bosch India Pvt Ltd 15.9% 0.706 12.68%
Motherson Sumi Systems Ltd 6.7% 0.669 4.70%
Exide Industries Pvt Ltd 10.2% 0.706 7.79%
Amara Raja Batteries Pvt Ltd 13.3% 0.848 12.77%
Sundaram Clayton Ltd 2.4% 0.396 0.95%
Table 1: Internal Growth Rate

Internal growth rate for the companies gives the maximum growth rate that can be achieved
without external financing that is growth only with internal reserves. This growth rate is dependent
on the return on assets and the plough back ratio for the company. For the auto ancillary industry,
due to heavy investment in fixed assets, the return on assets is low. Hence among the five
companies by comparison of ROA and plough back ratio, Sundaram Clayton is highly dependent
on external financing and Amara Raja being the least dependent on external financing by banking
on its internal reserves.

Auto Ancillary | 20
SUSTAINABLE GROWTH RATE

2017 ROE Plough back Ratio SGR

Bosch India Pvt Ltd 21.38% 0.706 17.77%
Motherson Sumi Systems Ltd 20.68% 0.669 16.07%
Exide Industries Pvt Ltd 13.97% 0.706 10.94%
Amara Raja Batteries Pvt Ltd 18.45% 0.848 18.56%
Sundaram Clayton Ltd 28.25% 0.396 12.61%
Table 2: Sustainable Growth Rate

Sustainable growth rate gives the maximum growth rate that a firm can achieve without resorting
to external equity finance that is only retained earnings and debt financing. This growth rate is
dependent on return on equity and plough back ratio. For the auto ancillary industry, the ROE is
higher and for the growing companies, dividend payout is lower which gives higher sustainable
growth rate. Hence among the five companies, Amara Raja Batteries has the highest SGR due to
its higher plough back ratio.

DIVIDEND ANALYSIS

Table 3: Dividend Analysis

Auto Ancillary | 21
 Aggregate DPR
35.00%
30.00% 31.30%

25.00%
20.00% 24.16% 23.89% 22.68% 22.58%
15.00%
10.00%
5.00%
0.00%
2013 2014 2015 2016 2017

Graph 1: Aggregate DPR

DPR is an important factor for investment decision. For the auto ancillary industry, the dividend
payout has been increasing. All the companies in the industry have a significant DPR. Over the
last year the dividend payout ratio has increased which signifies the companies are paying the parts
of the profits to their shareholders. High DPR along with ROE indicates that the auto ancillary
industry is a good option for equity investors.

CAPITAL STRUCTURE ANALYSIS

Table 4: Capital Structure Analysis

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 Capital Structure Analysis
55.00%
53.95%
54.14% 53.41% 53.34%
50.00% 50.75%
49.25%
46.05%
45.00% 46.59% 46.66%
45.86%

40.00%
2013 2014 2015 2016 2017

Aggregate Debt Aggregate Equity

Graph 2: Capital Structure Analysis

Capital structure of the auto ancillary industry is almost equally divided by equity and debt capital.
The stable and matured companies have greater equity capital like Bosch India, Exide Industries
and Amara Raja Batteries. The growing companies have larger contribution of capital from levered
funds like Motherson Sumi Systems and Sundaram Clayton. This is due to lower floatation cost
of raising capital through debt than equity, no dilution of ownership and tax benefits to the
company (in proportion to the D/E ratio).

WORKING CAPITAL ANALYSIS

YEAR INR Crores BOSCH MOTHERSON EXIDE AMARA SUNDARAM AGGR AGGR
SUMI RAJA CLAYTON CA-CL CA/CL
2017 Current Assets 5,899.4 16,087.70 3,176.42 1758.62 2895.67 9,791.7 1.49
Current Liabilities 2,630.0 11,382.70 1,608.49 759.62 3645.34
2016 Current Assets 5,838.2 9,776.60 2,844.61 1408.09 2524.52 6,147.8 1.38
Current Liabilities 2,500.5 8,577.20 1,459.54 629.43 3077.58
2015 Current Assets 5,926.5 8,702.20 2,327.24 1,269.46 2573.17 6,082.7 1.41
Current Liabilities 2,551.1 7,585.80 1,189.11 531.42 2858.43
2014 Current Assets 5,979.8 8,055.50 2,247.63 1,298.62 460.8 5,587.3 1.45
Current Liabilities 2,207.2 8,049.40 1,093.95 633.76 470.71
2013 Current Assets 5,591.0 6,718.70 1,980.01 1,256.87 425.62 5,170.1 1.48
Current Liabilities 1,895.8 6,869.30 999.38 576.23 461.37
Table 5: Working Capital Analysis

Auto Ancillary | 23
 Liquid Ratio
1.49
1.5 1.48
1.48
1.45
1.46
1.44
1.41
1.42
1.4 1.38
1.38
1.36
1.34
1.32
2013 2014 2015 2016 2017

Graph 3: Working Capital Analysis

Working capital is the excess of current assets over current liabilities. For the auto ancillary
industry, because of raw material procurement and inventory management, the current assets are
higher. We see that the aggregate working capital ratio for auto ancillary industry has been above
1 for all consecutive years which states that the companies can pay all of their current liabilities
and still have current assets left over or positive working capital.

Increased positive working capital in 2017 signifies that auto ancillary industry is able to meet its
short-term obligations with its liquid assets. It gives the amount of liquidity present in the industry.

OPERATING CYCLE AND CASH CYCLE

2013 2014 2015 2016 2017
AGGREGATE SALES(INR Crores) 44647.93 50203.71 59851.53 75635.02 84073.96
AGGREGATE COGS(INR Crores) 27814.22 30917.83 36058.21 43771.14 48526.62
AGGREGATE INVENTORY(INR Crores) 5359.81 6199.43 6370.37 6330.22 7993.03
AGGREGATE TRADE RECEIVABLES(INR Crores) 5017.65 5463.49 6634.22 7818.06 9830.28
AGGREGATE TRADE PAYABLES(INR Crores) 4913.6 6075.32 7475.61 8218.93 11182.1
AGGREGATE INVENTORY PERIOD(Days) 70.34 73.19 64.48 52.79 60.12
AGGREGATE ACCOUNTS RECEIVABLE PERIOD(Days) 41.01965 39.72164 40.45829 37.72845 42.67733
AGGREGATE ACCOUNTS PAYABLE PERIOD(Days) 64.48011 71.7221 75.67202 68.53624 84.10778

AGGREGATE OPERATING CYCLE(Days) 111.36 112.91 104.94 90.52 102.8

AGGREGATE CASH CYCLE(Days) 46.88 41.19 29.27 21.98 18.69
Table 6: Operating Cycle and Cash Cycle

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 Operating Cycle Cash Cycle
111.36 112.91 104.94 46.88
120.00 102.80 50.00 41.19
90.52
100.00 40.00 29.27
80.00 30.00 21.98
60.00 18.69
20.00
40.00
20.00 10.00
0.00 0.00
2013 2014 2015 2016 2017 2013 2014 2015 2016 2017

Graph 4: Operating Cycle Graph 5: Cash Cycle

Operating cycle is a measure of the operating efficiency and working capital management of a
company. A short operating cycle is good as it tells that the company's cash is tied up for a shorter
period.

Here we see that the operating period has been declining from 111 days in year 2013 to 90 days in
year 2016 which shows that the industry requires less cash to maintain its operations, and so can
still grow while selling at relatively small margins.

There is slight increase in the operating period from 90 days to 102 days in 2017. This might be
due to extended credit sales duration given to the customers of the industry or due to increase in
inventory on hand due to high order fulfillment policy.

A cash cycle is defined as the time it takes a company to turn raw materials into cash. It refers to
the time between purchasing the raw materials used to make a product and collecting the money
from selling the product. It also functions well as a measure of liquidity: how easily can unfinished
product be turned into cash.

A company with a shorter cash cycle has more working capital and less cash tied up in inventory
and receivable accounts, which means it is less dependent on borrowed money.

As per the figure, we see that the cash cycle has reduced over the last 5 years from 46 days (2013)
to 18 days (2017). This shows that auto ancillary industry is steadily managing its inventory
efficiently and also succeeding in maintaining relationships with its suppliers and customers.

Auto Ancillary | 25
ASSET COMPOSITION ANALYSIS
Year 2013 2014 2015 2016 2017
INR Crores Total Assets
Bosch India Pvt Ltd 7,902.20 8,921.20 10,430.80 12,432.80 11,799.80
Motherson Sumi Systems Ltd 12,827.50 15,362.30 16,987.00 19,904.00 32,369.70
Exide Industries Pvt Ltd 4545.66 4956.62 5402.63 6138.4 6775.6
Amara Raja Batteries Pvt Ltd 1770.5 2139.3 2386.3 2908.34 3584.57
Sundaram Clayton Ltd 914.01 944.60 5,786.93 6216.38 7317.06
INR Crores Fixed Assets
Bosch India Pvt Ltd 2311.2 2941.4 4504.3 6594.6 5900.4
Motherson Sumi Systems Ltd 6108.80 7306.80 8284.80 10127.40 16282.00
Exide Industries Pvt Ltd 2565.65 2708.99 3075.39 3293.79 3599.18
Amara Raja Batteries Pvt Ltd 513.63 840.88 1116.84 1500.25 1825.95
Sundaram Clayton Ltd 488.39 483.8 3213.76 3691.86 4421.39
INR Crores Current Assets
Bosch India Pvt Ltd 5591.00 5979.80 5926.50 5838.20 5899.40
Motherson Sumi Systems Ltd 6,718.70 8,055.50 8,702.20 9,776.60 16,087.70
Exide Industries Pvt Ltd 1980.01 2247.63 2327.24 2844.61 3176.42
Amara Raja Batteries Pvt Ltd 1,256.87 1,298.62 1,269.46 1,408.09 1,758.62
Sundaram Clayton Ltd 425.62 460.80 2,573.17 2,524.52 2,895.67
Aggregate % Fixed Assets 42.87% 44.18% 49.26% 52.96% 51.79%
Aggregate % Current Assets 57.13% 55.82% 50.74% 47.04% 48.21%
Table 7: Asset Composition Analysis

For the auto ancillary industry, the percentage of fixed assets is increasing which signifies that the
companies are investing in sites, plants and machinery. This means that the companies in the
industry are growing by scaling up their operations by increasing manufacturing sites, mergers and
acquisitions to increase their respective market share. Current assets include cash and cash
equivalents, accounts receivable, inventory, marketable securities, prepaid expenses and other
liquid assets that can be readily converted to cash. The percentage of current assets is decreasing
in the auto ancillary industry which may mean that the companies in the industry are decreasing
the accounts receivables or effective management of inventory.

Auto Ancillary | 26
 RETURN ON EQUITY
ROE 2013 2014 2015 2016 2017
Net Equity Net Equity Net Equity Net Equity Net Equity
INR Crores Income Income Income Income Income
Bosch
India Pvt
Ltd 884.7 5,573.30 884.7 6,294.30 1337.7 7,347.00 1448.9 9,534.90 1881.2 8,799.60
Motherson
Sumi
Systems
Ltd 450.70 2,289.00 1,096.80 2,959.30 1,291.50 4,831.30 1,756.20 5,909.40 2,172.40 10,504.90
Exide
Industries
Pvt Ltd 522.78 3,423.59 487.08 3,731.46 545.87 4,054.59 624.46 4511.43 693.64 4,963.59
Amara
Raja
Batteries
Pvt Ltd 286.71 17.08 367.44 17.08 410.86 17.08 489.45 17.08 478.49 17.08
Sundaram
Clayton
Ltd 35.42 292.06 53.66 343.63 71.16 456.60 141.66 503.11 172.8 611.62
Aggregate
ROE 18.80% 21.65% 21.89% 21.78% 21.68%
Table 8: Return on Equity

Aggregate ROE
23.00%
22.00%
21.00% 21.89% 21.78% 21.68%
21.65%
20.00%
19.00% 18.80%
18.00%
17.00%
2013 2014 2015 2016 2017

Graph 6: Aggregate ROE

Return on equity measures the profitability generated with the shareholders invested money. The
auto ancillary industry has a steady ROE of 21% is a good option for investors to ensure returns
on the equity invested.

Auto Ancillary | 27
IMPACT OF GST
According to the recently surfaced, spare parts bill of an automobile, it seems that the GST rates are a big
issue within the industry. A tax rate of 28 percent on the spare parts is a heavy tax rate as most of the
consumer base pay the charges on a natural act of wear and tear or upon accidental damages. Bringing such
a heavy tax rate upon such incidents have made the market much more sensitive regarding the price issues.
As the spare parts of vehicles both commercial and private had fallen into the bracket of highest slab rate
i.e. 28 percent, it made a misery moment for the spare parts trading community. Also, the complex
compliance makes it more vicious for the traders to indulge in any kind of taxing activity. Many of the
traders complained that the GST made their business to the lowest rank and are expecting only 10 percent
of the business of what they were earlier doing. The auto parts industry states this equation to be the main
factor of decreased sales after the implementation of GST.

SWOT ANALYSIS

STRENGTH WEAKNESS
1. Globally cost competitive 1.Lower labour productivity
2.Adheres to strict quality controls 2.Exposure to cyclical downturns in the
3.Research and development capability automotive industry
4.Provides support to latest infrastructure 3. Most component companies are dependent
industries on global majors for technology

SWOT
ANALYSIS
OPPORTUNITIES THREATS
1.May serve as sourcing hub for global 1.Presence of large counterfeit components
automobile majors market poses a significant threat
2.Significant export opportunities may be 2.Pressure on prices from OEMs continues
realized through diversification 3.Imports pose price based competition in the
3.Implementation of Value added tax will replacement market
negate the cascading impact of prices 4.Further marginalization of smaller players
Figure 14: SWOT Analysis

Auto Ancillary | 28
PESTEL ANALYSIS
POLITICAL
Voluntary Vehicle Fleet Modernization program (V-VMP): It offers incentives worth 8-12% of the cost
of a new vehicle for surrendering the old one so as to generate steel scrap worth INR 11,029.8 crores every
year. This reduces the import burden of steel.

ECONOMIC
Dept. Of Heavy Industries & Public Enterprises: Export benefits to intermediate suppliers of auto
components against the Duty Free Replenishment Certificate (DFRC). Created INR 1,276.6 crores fund to
modernize the auto components industry by providing an interest subsidy on loans and investment in new
plants and equipment. NHAI and Pradhan Mantri Gram Sadak Yojna: Allocation amounting to INR
95,234.36 crores to improve road infrastructure.

SOCIAL
Automation and a push for electric vehicles likely to render unskilled workforce jobless. Production
technology in auto components leads to higher greenhouse gas emission and subsequently increases overall
carbon footprint reducing quality of air leading to health. Preference for fuel efficient cars with low running
costs has increased.

TECHNOLOGICAL
Diesel Particulate Filter (DPF) & Selective Catalytic Reduction (SCR): For reduction of Particulate
matter and Nitrogen oxides emissions in diesel vehicles using combination of filtration mechanisms. Strong
support to R&D through establishment of National Automotive Testing and R&D Infrastructure
Projects (NATRIP) centers for testing and validation. Increased deployment of IT-enabled automobile
support systems Global Positioning Systems (GPS), Anti-Braking Systems (ABS), Automatic Speech
Recognition(ASR)

ENVIRONMENTAL
Bringing sustainability in auto ancillary sector: Using high performance low weight functional auto
components. Feb 2017, Gestamp invested INR 232 crore for new plant in Pune for safer and lighter vehicles.
The technology is expected to reduce overall weight of vehicle by 30%. Green strategy for auto suppliers:
Reducing carbon footprint by using energy efficient Mitigation measures. Reducing energy consumption
by up to 40% by optimizing ancillary processes such as heating, deploying modern, energy-efficient motors.
Sep 2016, Marquardt set up greenfield plant in automotive hub of Pune. Faster Adoption &

Auto Ancillary | 29
Manufacturing of Electric Hybrid vehicles (FAME): It seeks to provide demand incentives to electric
and hybrid vehicles from two-wheeler to buses.

LEGAL
Corporate average fuel economy (CAFE) norms in 2017: It requires cars to be 10% or more fuel efficient
between 2017 to 2021 and 30% or more from 2022. Focuses on reducing the carbon footprint and to have
better fuel economy. Bharat Stage VI emission standards by 2020: Move to BS-VI norms from BS-IV
norms will bring down Nitrogen oxides emissions by 25% in petrol engine vehicle and by 68% in diesel
engine vehicles. Particulate matter emissions expected to come down drastically by over 80% in diesel
engine vehicle.

PORTER’S FIVE FORCES ANALYSIS

Figure 15: Porter's Five Forces Model

Let us look at Porter’s 5 forces and analyze the competitive environment in this sector:

Auto Ancillary | 30
THREAT OF NEW ENTRANTS (MODERATE)
 De-licensing has opened the market new entrants
 However, there are still many barriers to entry for the auto components market. Initial
capital is very huge in the organized market restricting smaller players
 Technology and quality demands are very stringent
 As OEMs constitute the largest customer segment, component manufacturers get into
strategic long term relationships, esp. for high value items
 Other advantages to existing players include customer service and distribution network.
We can conclude that threat of new entrants is moderate

BARGAINING POWER OF SUPPLIERS (LOW TO MODERATE)

 Raw material cost comes to 50-60% of the total production cost
 Suppliers to the auto component sector include companies from the electronics,
fabrication, plastic and rubber, casting/forging, machine tools industries
 Bargaining power is low for high technology products
 Unorganized sector dominates the domestic component market due to excise benefits
 Generally, excess supply persists

In 2016, India overtook Japan to become the 2nd largest producer of steel in the world and
among the lowest-cost ones as well. India has various cost advantages and has evolved as a
cost-effective manufacturing base that keeps costs lower by 10-25 per cent relative to
operations in Europe and Latin America. China's steel prices are on the rise. In March, Beijing
announced plans to slash steel capacity by 50 million metric tons this year in efforts to tackle
pollution and curb excess supply. Hence, suppliers exercise medium level of control over the
industry.

BARGAINING POWER OF CUSTOMERS (HIGH)

 Bargaining power of customers is very high. The demand for auto ancillary products in
linked to automobile demand
 The OEM market is very competitive and component manufacturers have to compromise
on margins to bag bulk orders

Auto Ancillary | 31
THREAT OF SUBSTITUTES (LOW)
The only substitutes to auto component manufacturers are organized component players working
closely with R&D teams of OEMs. However, this threat is very low. The unorganized components
market faces a greater threat as replacement market consumers are shifting to genuine components.

RIVALRY AMONG COMPETITORS (MODERATE)

Competition is moderate. At the domestic level, market structure is fragmented for a large number
of ancillary products. Most companies adopt low cost and differentiation strategies. In some
products (like batteries), only two or three companies control over 80% of the market. Increasing
presence of foreign firms due to favourable FDI and cheaper imports of components from China
indicate a high intensity of competition. If the steel and aluminium prices rise in China, then the
imports would come down and the intensity might reduce.

VALUE CHAIN

Figure 16: Value Chain

Auto Ancillary | 32
SEGMENT WISE PROFIT POOL ANALYSIS
The Profit Pool is a strategy model that is used to help managers or companies focus on profits,
rather than on revenue growth.

The auto ancillary industry has many segments within itself namely: Engine and engine parts,
Transmission and Steering, Suspensions and Braking, Electrical parts, Equipment, Others. Profits
on these different segments is calculated using Return on Capital Employed (ROCE). For this
report the following three segments are considered on the basis of the companies selected:

 Engine Parts
 Electrical
 Batteries

ROCE is calculated for the year of 2017 on the selected companies for segment wise profit pool
analysis.

Engine Parts Engine Parts ROCE

Bosch India 2017 20.00% 17.75%
PBIT(INR Crores) 2094.40
15.00%
Capital Employed(INR Crores) 11,799.80
ROCE 17.75% 10.00%
Table 9: Engine Parts
5.00%

0.00%
Bosch India

Figure 17: Engine Parts ROCE

Electrical
Electrical ROCE
Motherson Sumi 2017
15.00% 13.69%
PBIT(INR Crores) 4,431.00
Capital Employed(INR Crores) 32,369.70 10.00%
ROCE 13.69%
Table 10: Electrical 5.00%

0.00%
Motherson Sumi

Figure 18: Electrical ROCE

Auto Ancillary | 33
In Engine parts and Electrical segments, Bosch India and Motherson Sumi Systems have
monopolies respectively. They have ROCE of 17.75% and 13.69% respectively.

Batteries
Batteries ROCE
Exide Industries 2017
PBIT(INR Crores) 975.73 25.00%
19.59%
Capital Employed(INR Crores) 6,775.60 20.00%
14.40%
ROCE 14.40% 15.00%

Amara Raja Batteries 10.00%

PBIT(INR Crores) 702.21 5.00%

Capital Employed(INR Crores) 3,584.57 0.00%

Exide Industries Amara Raja Batteries
ROCE 19.59%
Table 11: Batteries Figure 19: Batteries ROCE

For the Batteries segment of the auto ancillary industry, there is a duopoly among Exide Industries
and Amara Raja Batteries. They share a ROCE of 14.4% and 19.59% respectively in this segment.

SUPPLY CHAIN COST

INR Costs as % Aggregate Costs

Supply Chain Costs Companies
Crores of Sales as % of Sales

Bosch 101.4 0.85%

Exide 371.51 3.02%
Warehousing Cost 1.58%
Amara Raja 16.54 0.27%
Sundaram Clayton 13.29 0.84%
Bosch 168.5 1.42%
Motherson Sumi 91.9 1.28%
Transportation
Exide 209.17 1.70% 1.73%
Cost
Amara Raja 151.73 2.52%
Sundaram Clayton 52.97 3.33%
Bosch 1263.028 10.65%
Motherson Sumi 740.119 10.32%
Carrying Cost Exide 1634.2859 13.29% 12.23%
Amara Raja 874.1365 14.49%
Sundaram Clayton 251.5998 15.83%

Warehousing Cost: The large component industries usually have many warehouses and keep them
well stocked with inventories so that large customer base can be well served. For example, Bosch

Auto Ancillary | 34
has approximately 800 warehouses that ensure the interconnection of 500 thousand customers and
350 subsidiaries. This helps them to operate efficiently.

Transportation Cost: For many plants, transportation lead times can be high as most of the factories
are located outside the city. Also the raw materials are often bulky and the transport costs can be
significant. The transportation cost is 1.73% of the total sales. This suggests that the procurement
and distribution sources are in the vicinity of the production house.

Carrying Cost: It includes work in progress inventory and finished goods that are yet to be sent out
for distribution. For the auto ancillary industry this cost is quite high (12.23% of sales). This
implies that there is a need of better inventory management systems.

HUMAN RESOURCE MANAGEMENT ISSUES

With the advent of foreign players in the OEM space, employees at OEM’s / Tier I suppliers are being
attracted by the foreign players into their fold. Thus a major challenge currently being faced by OEM’s /
Tier I suppliers, is retaining their skilled employees, thus leading to increasing cost of human resources.
The fluctuations in the demand forces auto component industry to have limited number of Permanent
laborers. Thus only some casual laborers are employed in order to meet the increased demands of customers
wherever required. They have to train the laborers to operate the machines and to meet the demand
fluctuations of customers in the meantime which results in wastage of time and money for the medium scale
auto component manufacturers. The HR professionals are expected and required to keep in tune with the
changing times in this leading industry. The speed of the recruitment process has to match the speed of this
process industry. The Automotive Industry in India is characterized by maximum proportion of the
workforce being male. Women employed in the Auto Industry in India, are mainly employed in functions
such as design, HR, finance and in support office functions. This has primarily been the case due to the low
availability of women who take up courses such as mechanical engineering in college. Companies,
especially auto OEM’s and Tier I suppliers, are making a conscious effort to increase the participation of
women in the workforce, including in the core operations function. The workmen constitute of mainly ITI
and few diploma holders and the rest executives, managers and supervisors are the degree holders. The
manufacturing sector constitutes almost 4/5th of the auto component industry.

Auto Ancillary | 35
PROFILE AND DISTRIBUTION OF HUMAN RESOURCES

Figure 20: BCG Profile of people employed at Auto OEM’s and Figure 21: Distribution of Human Resources
Tier-1 suppliers across functions

CRITICAL SKILL GAPS IN INDUSTRY

ADDRESSING THE GAPS

Certain initiatives undertaken by the industries itself to build a stronger talent pipeline apart from
government initiatives like skill India. Several automotive companies in recent past have tried to overcome
problems by adopting industrial training institutes or by partnering with the government to provide
vocational trainings to students, setting up their own dedicated training academies with programs focusing
on technical and soft skills.

Bosch Vocational Center: Since 1960’s the Center produces well-trained apprentices who are “industry-
ready” who get placed in good manufacturing jobs. BRIDGE (Bosch’s Response to India’s Development
and Growth through Employability Enhancement): To help reduce youth unemployment and
underemployment in the society, especially among the underprivileged groups.

Auto Ancillary | 36
Public Private Partnership model: Bosch is taking efforts to upgrade 88 I.T.I.s across Karnataka,
Maharashtra and Rajasthan by improving quality of training, setting up Bosch Technical Lab, modernizing
the curriculum as per industry requirements, training the I.T.I. Vocational Trainers through Faculty
Development Programs and providing industry exposure to selected students. Bosch has also joined hands
with Tata Strive (Tata Group’s Skilling Initiative) in 2016 and has jointly launched the “Bosch-Tata
Strive Joint Skill Development Initiative for Youth Empowerment”. The Amara Raja Skill Development
Centre at Pattamitta held its third convocation where 83 students were trained as Multi Skill Technicians.

ACQUISITIONS
MOTHERSON SUMI SYSTEMS LTD.
PKC Group Plc - PKC was acquired in 2017, for over INR 4,150 Crore. It is a global tier -I supplier of
wiring harness. The takeover will help Motherson expand its footprint in the American and European
commercial vehicle segment.

Peguform- Peguform was acquired in 2011, for INR 895 Crore. It is Germany's second largest supplier of
door panels and its third largest instruments panel supplier. This acquisition will lead to creation of 3,000
additional jobs in India, with new plants planned in Chennai and Tapukara in the Gurgaon-Manesar belt.

Visiocorp- Visiocorp was acquired in 2009, for INR 160 crore. It is world’s largest automotive rear view
mirror maker. Absorbing Visiocorp, which had revenues of around INR 40 Crore in 2008, had almost
doubled the Motherson Group’s size to sales INR 7,680 Crore and given it a global footprint spanning 20
countries and 80 manufacturing units.

Stoneridge- Stoneridge was acquired through asset purchase for a consideration of INR 42 Crore on no
cash no debt basis. The acquisition expands MSSL’s wiring harness business in North America, serving
Commercial Vehicles, Agricultural & Material Handling Equipment makers.

BOSCH
Seeo- Acquired in 2015, it is a California-based company that has developed next-generation lithium-ion
batteries. Seeo has an exclusive license to core patents from Lawrence Berkeley National Laboratory that
could help Bosch produce lightweight batteries on an industrial scale.

JOINT VENTURES
 Motherson Sumi Systems is a joint venture between Samvardhana Motherson Group and
Sumitomo Wiring Systems of Japan.
 Sundaram Clayton is a joint venture with Clayton Dewandre Holdings PLC

Auto Ancillary | 37
  Amara Raja Batteries is in a joint venture with Johnson Controls Inc.
 Bosch is in a joint venture with Daimler, Igarashi Motors India, GS Yuasa and Mitsubishi
 Exide Industries is in a joint venture with Shin Kobe Electric Machinery Co. Ltd. Japan

GLOBAL SCENARIO
FOREIGN DIRECT INVESTMENT
Talking about global scenario, there has been 100% FDI in the auto-component industry. The cumulative
Foreign Direct Investment (FDI) inflows into the Indian automobile industry during the period April 2000
- June 2017 were recorded at, INR 1.04 Lakh Crore as per data by the Department of Industrial Policy and
Promotion (DIPP).

Some of the major investments made by the companies that we have chosen in this sector in India are as
follows:

 Exide Industries- They have plans to invest around INR 300 crore in West Bengal to expand its
capacity for advanced motorcycle batteries over a period of 18 months.
 Motherson Sumi Systems Ltd- They have acquired PKC Group Pic for INR 4150 Crore, which will
help the company expand its presence in the global wiring harness business for commercial
vehicles.
 Sundaram Clayton-They have plans to invest INR 321.96 Crore in US and INR 400 crore in India
over the next three years.
 Bosch Ltd- It opened its new factory at Bidadi, near Bengaluru, which is its fifth manufacturing
plant in Karnataka. The company has also signed a memorandum of understanding (MoU) with
IISc, Bengaluru with a view to strengthen Bosch’s research and development in areas including
mobility and healthcare thereby driving innovation for India-centric requirements.

GOVERNMENT INITIATIVES
Government has drafted Automotive Mission Plan (AMP) 2016-26 which will help the automobile industry
to grow and will benefit Indian economy in the following ways: -

 Contribution of auto industry in the country’s GDP will rise to 13 per cent, currently which is less
than 10 per cent
 More than 100 million jobs will be created in the economy
 Companies will invest around INR 5.15 lakh crore as a part of their capital expenditure.
 End of life Policy will be implemented for old vehicles

Auto Ancillary | 38
FORECAST
The Indian auto-components industry is set to become the third largest in the world by 2025 Indian auto-
component makers are well positioned to benefit from the globalisation of the sector as exports potential
could be increased by up to four times to INR 4000 Crore by 2020.

CHALLENGES
HIGHLY COMPETITIVE
Margins are likely to come under pressure in the long term because as competition increases, auto
manufacturers will find it difficult to increase prices and will try to cut costs. The burden will
eventually fall on auto ancillary players.

CONSOLIDATION
As manufacturers sourcing components are keen to get components from fewer sources in future,
this will lead to consolidation in the sector. Companies will have to focus on quality and abide by
delivery schedules if they want to survive.

TRADE AGREEMENTS
The growing number of Free and Preferential trade agreements being signed by India with
countries like Thailand, Singapore and other ASEAN countries will hurt the cost competitiveness
of Indian companies as Indian players play significantly higher duties than their Asian
counterparts. Therefore, Indian companies might lose out on big orders if the duty structure is not
rationalized.

Other challenges:

 High Cost of Capital

 Capacity Utilization
 Infrastructure Challenges & Cost
o Roads
o Ports
o Power
 Combating Counterfeit Parts
 Building R&D Competence & Ecosystem
 Changes in regulatory environment

Auto Ancillary | 39
INVESTMENT DECISION

Sl. FACTOR TO BE WEIGHTAGE DON’T JUSTIFICATION FOR THE

INVEST
No. CONSIDERED % INVEST SCORE

Capital investment
1 25 3 7 Capital requirement is high
required (minimum)
Working capital
2 10 4 6 WCR will be high
requirements
Profitability in terms of
Industry aggregate margin is
3 Profit margin/operating 9 3 7
low
profit margin
Profitability in terms of The profitability being high,
4 9 7 3
ROE it’s a good market to invest in
Established firms dominate
the organized sector whereas
5 Market structure 6 3 7 there are bleak chances of
success in the unorganized
sector
Due to established players in
Ease of entry and doing
6 7 3 7 the market, there is a huge
business
barrier to entry

Since industry has moderate

7 Competitive Pressures 4 4 6 to high competitive rivalry, so
we should not invest

Government Policies are

Governmental regulations
8 5 5 5 helping the players but the
and controls
regulations are stringent
Greater part of investment
will be used in competing for
the resources and not in
9 Marketing issues 10 6 4 enhancing the brand image.
On the other hand, the
industry trend is not to invest
heavily on promotions
Labor productivity and
required skill set is usually
10 HRM issues 4 3 7
missing, so not a good option
to invest

Manufacturing process Standard manufacturing

11 9 7 3
issues setup

Auto Ancillary | 40
 Vendor selection process is
efficient. Informational flow
12 Operational issues – SCM 6 6 4 is relatively not that efficient.
But it is being streamlined by
the existing players

As these are established

Collaboration / foreign
13 4 7 3 companies, it will not be
investment or funding
difficult to collaborate

Not many differentiation

14
Innovations possible 4 4 6 strategies are adopted, so
lesser scope of competition
Investment depends on the
availability of capital and the
latency period of returns to
15 TOTAL 100 43.6 56.4 the investor. Since the
capital requirement is high,
it’s not a lucrative option for
investment

PRIMARY RESEARCH: BOSCH PLANT VISIT

Visited the Bosch manufacturing plant at Bidadi, Bangalore. Following were the observations and
information gathered from the Bosch officials:

 Plant facilitates intermediate processing of diesel fuel injector Common Rail System (CRS)
pumps
 Client specific manufacturing of CRS pumps
 Revenue from CRS pumps: 600 – 700 INR Crores
 Network of 4500 suppliers for CRS pump distribution
 Problems faced regarding retention of skilled employees due to higher switching

CONCLUSION
Today the mood is cautious, and industry growth has moderated. But nonetheless the long term
prospects are strong, as India is poised to be one of the fastest growing automotive markets
worldwide over the next decade. And to harness this opportunity, effective management of the
short term challenges and implementation of sustainable strategies is the key to robust industry
growth.

Auto Ancillary | 41
Several auto ancillaries, especially those dependent on steel have witnessed Y-o-Y decline in raw-
material cost during Q3FY2018, due to range bound steel prices over last 2-3 quarters and
ancillaries’ ability to pass on price escalation to its customer (OEMs) in the interim.

The auto aftermarket sector has come off age over the years in handling changes and facing
challenges. The auto industry has transformed over the last decade, be it the entry of the world’s
best passenger car makers, the shift from a duopolistic to a fiercely competitive CV market,
burgeoning growth in the two-wheeler space, apart from qualitative changes in terms of better
performance, improve fuel efficiency, enhanced safety and comfort, adoption of technology, focus
on connectivity, etc. Through all these changes, the aftermarket has kept pace in its own way, with
companies coming up with suitable solutions in the form of compatible products, wider network
reach, digital solutions and many other initiatives and innovations.

From an investment point of view, auto ancillary industry is not a lucrative option. With market
leaders such as Bosch and Motherson Sumi, any new entrant would be a small fish in the sea. The
investment will be primarily utilized in competing with the established players as they already
have up-to-date resources, machineries and higher decision making power. The capital investment
would be huge in order to compete with the big fishes. According to Union Budget 2017-18, the
rules and regulations in the automobile industry have been revamped. The safety mechanisms have
to be strengthened thereby affecting production processes and hitting the quality standards.
Moreover, the established players have the maximum share and a new company would not have
any competitive advantage. Hence, investing in this industry will not bear any fruit to the investor.

However there is an alternative investment option with potential investors in the EV vehicle
initiative taken up by the Indian Government by 2030. Interested investors have an option to invest
in the key EV components and create a niche market for EVs. The upcoming wave for EV’s may
create an attractive market for the companies under batteries segment of the auto component
industry. Given the increasing consolidation in the auto component industry, there is a high
possibility of a bigger player acquiring such a niche company for EVs. This will facilitate for short
term investors who want early lucrative returns and exit the industry.

Auto Ancillary | 42
REFERENCES
Resource Center:
IBEF (https://www.ibef.org/)

ACMA (https://www.acma.in/)

Capitaline (https://www.capitaline.com/)
Make in India (http://www.makeinindia.com/home)

Other Links:
http://auto.economictimes.indiatimes.com/news/industry/top-10-mas-in-auto-industry-in-
2016/56285539
http://www.livemint.com/Companies/OVmUHqd53fhtmcfe7mzk0M/India-looking-
outwards.html
http://www.globalspec.com/learnmore/manufacturing_process_equipment/machine_tools/gear_c
utting_forming_finishing_machines
http://auto.economictimes.indiatimes.com/autologue/impact-of-bharat-stage-vi-norms-on-indian-
auto-auto-component-industry/1543
http://auto.economictimes.indiatimes.com/autologue/impact-of-bharat-stage-vi-norms-on-indian-
auto-auto-component-industry/1543
https://www.transportation.gov/mission/sustainability/corporate-average-fuel-economy-cafe-
standards
https://automotivemanufacturingsolutions.com/focus/sustainable-production-through-energy-
savings
https://auto.economictimes.indiatimes.com/news/auto-components/icra-upgrades-indian-auto-
component-industrys-growth-to-13-15-in-fy18/63127105
http://www.motorindiaonline.in/aftermarket/indian-auto-aftermarket-challenges-ahead-
opportunities-inherent/

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