Canadian parts companies eye India’s surging auto sector

By Peter Diekmeyer

 

Canadian auto parts suppliers are facing stagnating North American, European and Japanese markets. For growth, many are turning to fast-growing Asian markets, like India, where domestic players such as Tata Motors are seeking partners.

 

Like many businessmen who frequent Delhi, Mumbai and other Indian cities, Prasen Agali, is constantly amazed by the massive number of motorcycles that buzz in and out of traffic. Not surprisingly, the country produces more than any other except China. But while some may regard the swarms of motorcyclists as a dangerous nuisance, Agali sees them as a potential opportunity.

 

Agali is Country Head of Canadian auto parts giant Magna’s India operations. He expects that the eight million or so Indians who buy motorcycles each year, will soon buy cars instead. In fact, annual car demand in the Asia-Pacific region is expected to double to 17 million vehicles within the next 10 years. 

 

“This is the right time for Canadian car parts companies to establish a presence in India,” says Agali. “It is an emerging market so it’s not surprising that motorcycles, which are cheaper to run, sell so well. But living standards have been rising rapidly and we are seeing an increasing number of cars in those swarms of motorcycles.”

 

India’s economy is changing quickly. India has been growing in excess of 8 per cent per year for the past three years, and the outlook for 2007 is for only a modest slowdown, to about 7.5 per cent. Furthermore, productivity has been rising rapidly and about 130 million people will enter its workforce during the next six years. That means India’s growth may persist for some time.

 

A growing middle class wants wheels

The strong economy is pushing increasing numbers of Indians into the country’s middle class, which experts variously peg at somewhere between 300 and 450 million consumers. Although per capita income among India’s middle class is still not yet up to Western levels, whichever number you use, many more Indians now have the means to acquire a new car.

 

According to the Society of Indian Automobile Manufacturers, passenger vehicle production by local players such as Tata Motors, Mahindra & Mahindra, Maruti Udyog and Hindustan Motors shot up from 669,000 in 2001-2002, to 1.31 million during 2005-2006.  Agali expects that number to hit 2 million within two years.

 

One tangible indication of how much car sales could increase during the coming years comes from Indian two- or three- wheeled motorcycle production which last year stood at close to 8 million. Passenger car stock in India remains low, at 8 per 1,000 people, compared to 235 in Taiwan.

 

Exports are another key factor driving growth. In fact, domestic Indian automobile manufacturers are increasingly realizing their potential as regional, and in some cases, global players.

 

Earlier this year, India’s Ministry of Heavy Industries and Public Enterprises released a 10-year Automotive Mission Plan (AMP) to transform the country into an automotive manufacturing and design hub. Between now and 2016, sector growth is expected to provide employment to 25 million new workers and boost  production six-fold to $145 billion a year.

 

Canadian auto parts manufacturers want in

Agali is convinced that Magna can get a piece of that action. To do so, the company has been taking an incremental approach, investing gradually in smaller ventures and seeking out new opportunities as they arise. For example Magna has invested in a sales and engineering office in Mumbai, a mirror manufacturing facility and a two-piece flexplate assemblies plant. Agali says these are small initial steps and the company will undertake more initiatives as opportunities arise.

 

According to Peter Nesbitt, EDC’s Chief Representative in India, Magna isn’t the only Canadian auto parts company that is looking at the sub-continent for growth.  Canadian automotive exports to India were a modest $2 million during 2005 but that could change said Nesbitt.

 

Canadian automotive industry manufacturers have had a rough go of it lately. During 2006 exports slumped 6 per cent in value, due to falling parts prices and the stronger Canadians dollar. The ongoing struggles of the big three North American automakers are also a significant worry for parts and component manufacturers. In fact compared to growing demand in Asia, western automotive markets look pretty grim.

 

“The auto industry has pretty much hit a plateau in North America, Western Europe and Japan,” says Nesbitt. “If auto parts companies want to continue to grow, they are going to have to diversify their customer base. That will mean developing a presence in emerging markets either alone or in joint ventures.”

 

Recently, Nesbitt has helped an increasing number of auto parts companies who are staking out opportunities in India. He sees the sector’s interest as part of an overall trend among businesses who are rushing to get in on the ground floor of the sub-continent’s growth. 

 

“During 2006 we did more overall loan financing in India than we did in the rest of Asia combined,” said Nesbitt. “However the auto sector there is building on a small base and there is a lot of room for growth.”

 

Murray Jans, president of M.A. Jans & Associates, who has been working on India related automotive trade initiatives since 1998, agrees. “Canadian auto parts manufacturers have a lot to offer India in areas ranging from advanced materials, design engineering, metal processing and ICT skills to lean manufacturing techniques,” said Jans.  “But until recently, many parts companies appeared to have little incentive to move, due to their comfortable positions in NAFTA, which is the world’s largest car market.”

 

Comparisons between India and China

Much of Canadian auto parts manufacturers’ interest in India stems from a desire to replicate the successes they have had in China. Both Magna and Leggett & Platt Automotive Group, have made inroads into the Chinese automotive sector and their executives have noted many similarities between the two markets.

 

Both Asian countries have more than a billion people, as well as economies which have undergone substantial deregulation and which are lifting millions out of poverty each year. That said, according to Peter Hoehne, Leggett & Platt’s Vice President Sales and Marketing Worldwide, there are some key differences. “China is growing faster and has broader auto demand,” says Hoehne. “They are benefiting from a growing mid-size and luxury car segment. India is focusing more on smaller cars.”

 

India has been surprisingly innovative in its small car development. For example, Tata Motors, which has been in the business for less than a decade, is currently developing what it calls a “one lakh car,” which is stated to be manufactured in the West Bengali Kolkata region.  

 

The car gets its name because Tata had hoped it would retail for one lakh (a lakh is 100,000 rupees, equivalent to about USD $2,272). That has proven to be overly optimistic. According to the Economist magazine, Tata, which currently profitably makes cars that sell for about $USD5,000, will eventually market the new vehicle for about USD $3,000.

 

According to Hari Prakash, Country Head of Husky Injection Molding Systems India operations, a Canadian company which is working closely with Tata, the one lakh plan “would drive most two-wheeler (buyers) to move into the four-wheeler segment.”

 

That said, China is about 10 years ahead of India, having initiated its initial economic reforms in 1979, whereas India’s, were launched in 1991. The upshot is that auto sector players moving into the Indian market may have more upside potential than they would in China.

 

Foreign investment expected to play a big role

India’s domestic players are not expected to meet its automotive industry’s growth plans by themselves. In order to implement its AMP, India would need to attract an additional USD $35 to $40 billion of new investment during the next 10 years.

 

Indian officials recognize that much of China’s growth has been the result of an immense flow of foreign capital and they hope to repeat the trick.  So far, their success has been limited but is increasing: foreign investment into India grew by 12 per cent annually for five years, before spiking 43 percent in 2006.

 

Much of that relative weakness is related to continuing growth obstacles that face companies that invest in India. India’s most obvious constraint is basic infrastructure – water, waste treatment, energy and transportation. India ranks low in many of these basic competitiveness ingredients. Major economies spend 5 to 7 percent of their GDP each year on infrastructure, whereas India spends around 1 percent per year.

 

The AMP proposes a variety of measures designed to make India a more attractive place to do business. These include tariff policy adjustments, tax holidays, support for R&D and various labour reforms.

 

Given the Indian auto market’s huge growth potential, it’s not surprising that many key international players have already made significant investments; General Motors, Ford, BMW, Daimler Chrysler AG, Renaud, Toyota, Honda and Hyundai, to name a few. And if the AMP’s recommendations are implemented that list is likely to grow.

 

Ground floor opportunities in India’s parts industry

Because India’s automobile industry is still in the early stages of what is widely expected to be explosive growth, and investments there are still far lower than in China, the early birds will benefit from significant ground floor opportunities.

 

Growing India’s USD $14 billion auto parts sector is an important Automotive Mission Plan goal. Domestic demand will be a key driver, but parts exports, which have shot up rapidly during the last five years, are also seen as a big opportunity. Like many sectors, India’s auto industry is concentrated is regional clusters, made up of key of supply chain players. These are located throughout the country including Indore, in central India, Manersar in Northern India, Pune in the West, Chennai in the South and Kolkata in the East.

 

That said, though the opportunities are widespread, targeting them is not easy. India benefits from a low-cost labour force and has excellent pool of qualified engineers. That means Canadian parts manufacturers cannot assume instant efficiency gains. They need to prove they can add value to Indian auto industry supply chains.

 

Leveraging western competitive advantages

One advantage that Canadian parts manufacturers bring to the table is their expertise in auto industry global “best practices.” For example safety standards tend to be higher in Western countries than in Asia. Many Canadian parts suppliers are trying to get a foothold in India by first opening up manufacturing facilities that produce products for export, as a first step toward developing the country’s domestic markets later on. It’s an interesting strategy with plenty of potential. Canadian auto parts firms already export a big percentage of their output and thus can add considerable value to these initiatives.

 

Leggett & Platt Automotive Group is one such company—they recently invested in a factory in Chennai that will manufacture lumbar supports for seating, cables and flex mats, much of which will be destined for Europe. “It’s one the best ways to get involved in the India market,” said Hoehne. “There are so many things to learn about doing business there; how to set up operations, regulatory structures, managing a workforce and so on. If you begin operations with a set export market, when you start to land local contracts, with larger production runs, you’ll be ready.”

 

Leggett & Platt Automotive Group operates four plants in China, so the company already has extensive experience in large emerging markets. Hoehne’s advises new investors in the Indian market to at least initially pair themselves in joint ventures with local partners.

 

India’s auto component industry includes 500 firms in the organized sector coupled with about 10,000 smaller, non-unionized firms. Many of these companies lack financing, technical knowledge and marketing expertise, which are precisely the value that many Canadian parts firm bring to the table.

 

“Partnerships with local players bring key advantages,” said Hoehne. “They will know the ins and outs and can help you operate efficiently in a new environment. You may know your business. But they will know how to mesh your strengths with the local economy.”

 

Becoming a part of global supply chains

In addition to the export support that EDC traditionally provides through its trade finance and risk management solutions as well as its market intelligence, EDC is also helping Canadian players to invest overseas so that they can become a part of global supply chains. “Foreign investment is essential to Canada’s ongoing success at international trade,” says Nesbitt. “As a result, we are constantly adapting our products and services to support it.”

 

“If we help a Canadian company to build their presence in overseas markets, the benefits often come right back to Canada,” says Nesbitt. “For example many automotive industry players are increasingly implementing global purchasing policies.  That means if a parts company wants to supply its customers in North America, it needs to be able to also supply them in Europe and Asia.”

 

Magna’s Agali agrees. “Many of our customers have plans that are global in nature and we need to follow them,” said Agali, noting EDC’s support in its India initiatives. “We have a very close relationship (with them) which so far has led to exchanges of information and cooperation in seeking out new opportunities.”

 

EDC is working with local buyers and borrowers within emerging markets who are the customers of Canadian suppliers, to provide financial tools that encourage procurement and partnering with Canadian firms and their subsidiaries. For example, under a financing arrangement with Tata Motors, EDC took a $20 million position in a $60 million syndication loan refinancing for a Tata subsidiary, to fund the purchase of INCAT International. The agreement included Tata’s commitment to consider purchases from Canadian suppliers.

 

“Tata Motors is very much in expansion phase,” says Alison Nankivell, until recently a financing manager with EDC’s transportation sector team. “They have huge opportunities in the coming years. They are creating new platforms on which new cars such as the one lakh initiative will be based and they will need new tooling, new technologies and new suppliers.”

 

For Canadians parts companies that means setting up shop locally. Indian automakers, like those in many advanced markets, work on a just-in-time basis and want close supplier access. Another beneficiary of the Tata financing arrangement was the Indian affiliate of Husky Injection Molding Systems, late last year announced the $1.1 million sale of an injection moulding machine to Tata, a deal that EDC will finance.

 

The challenges of tackling India’s parts industry

Despite the vast opportunities offered by the Indian market, there are challenges too. India is a vastly diverse economy comprised of 28 states and 18 official languages. Though economic growth has been strong, average per capita income remains low. That means that investors there need a long-term horizon.

 

According to a Global Competitiveness Survey of 104 countries, India ranked 43rd, behind regional rivals such as Hong Kong, China and Singapore, though the Indian government’s Automotive Mission Plan, intends to remedy that.

 

Furthermore, Indian automotive industry productivity is substantially higher than that of other sectors of the economy and it has huge potential for further improvement. According to Magna’s Agali, India has considerable core strengths beyond its strong economy that make it an attractive potential market and investment destination.

 

“English is one of the two national languages (the other is Hindi) and is spoken by almost all of the business and government officials that you are likely to come into contact with. India also benefits from a solid and well-entrenched legal system,” says Agali.

 

Getting a foothold in the Indian automotive industry is not easy, but the opportunities make it worth the investment for Canadian parts companies, as India’s economic growth continues, and auto production accelerates. 

 

The most visible sign of increased opportunity will be the further development of India’s road infrastructure. “China’s investments in its streets, highway system and other local road networks were the key to their auto industry’s rapid growth,” says Agali. “If a country wants a car industry it needs roads for those cars to travel on. Road building resulted in rapid growth not just in China’s auto sector, but also in its overall economy as well. That could happen in India too.”

 

That said, India’s potential is so promising, that Agali and Magna continue to aggressively scout out new deals.  And while the old expression says that potential is a fancy word for “ain’t done nothin’ yet,” in India’s case, the signs point to that potential being realised sooner rather than later.

 

 

 

Sidebar chart: India’s auto sector in numbers:

 

Motor vehicle production*

 

                                                2004-05                     2005-06

CVs                                             350,000                   390,000       

Passenger vehicles                1,210,000                1,310,000

Two-wheelers                        6,530,000                  7,600,000     

Three-wheelers                          370,000                     430,000     

 

Total                                        8,460,000                  9,730,000

 

* Society of Indian Automobile Manufacturers

 

 

 

Peter Diekmeyer (peter@peterdiekmeyer.com) is a Montreal-based freelance business and economics writer. 

 

 

  

 

 

 

Sidebar: Our Experts: For this article, we consulted several experts with a broad range of experience related to Canada’s auto parts industry and its efforts in India. They are:

 

Peter Nesbitt

EDC’s Chief Representative, India

(011) 91-11-4178-2603

pnesbitt@edc.ca

 

Alison Nankivell

Senior Portfolio Manager EDC Equity

(613) 597-8657

anankivell@edc.ca

 

Peter Hoehne

Vice President Sales & Marketing Worldwide

Leggett & Platt Automotive Group

phoehne@schukra.com

 

Hari Prakash

Country Head, India

Husky Injection Molding Systems

hprakash@husky.ca

 

Prasen Agali

Country Head, India

Magna

Prasen.Agali@magna.on.ca

 

Murray Jans

Consultant

maj@cogeco.ca

(905) 877-7474

 

 

 

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