Home Articles Auto components: Investments are inevitable

Auto components: Investments are inevitable

Auto components: Investments are inevitable

In 2018-19, the turnover of the Indian auto
components sector was Rs 3,95,902 crore ($57 billion), its contribution to GDP
2.3 per cent, and to manufacturing GDP 25 per cent. The sector also exported
components worth Rs 1,06,048 crore ($15.16 billion), primarily to North America
and Europe. But its exports, as compared to global auto trade, are still less
than 1.5 per cent. The Covid-19 crisis presents an opportunity for the Indian
auto components sector to become the factory of the world

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Today, the auto components industry is under
tremendous pressure reduced liquid capital, stalled payments, slow movement of
raw material across the sates are some factors.

Challenges in the auto sector

BS VI effect: Due to the BS VI deadline of April 2020, the
automobile prices have increased by 10-15 per cent, according to the Federation
of Automotive Dealers Association (FADA) observations. Given that the automotive
market was already into a slowdown and the current situation has worsened the

As India shifted quickly top BS IV to BS VI and it
was clear when BS IV was made mandatory that BS VI will soon be here. Component
manufacturers in the industry had a very short time to supply their OEMs and
aftermarket. They also missed out on R&D and innovation. The technology has
improved, but all that has been built outside India.

Movement of goods: Indian value chain and companies are
slowly coming on track for exports and its operations but better coordination
in the movement of goods will help grab better opportunities in the global
market. Jagdish Kumar, Group President and CEO, Anand Automotive in a webinar
held by CRISIL highlights, “The movement of goods in the nation is not yet that
fast. To grab export opportunities and even the local opportunities, the
movement of goods inter-state will play a vital role. State governments should
intervene and find a solution over the same.”

Post-Covid 19 situation: Due to lesser business movement in
the market, in the last 2-3 months, cash flows have dried in the tier-2 and
tier-3 regions. These suppliers will be put to test. Assistance from the
government is there but is not sufficient as there is no immediate help offered
in the recently announced package. Companies will cut down on costs wherever
possible. In this situation, all have explored digital mediums. Thus, work from
home will be a new normal. All kinds of overhead costs will be cut; for
example, air travel will come down and will be transformed into online
meetings. This year every business will try and monitor its processes,
business, workforce, supply chain, etc to cut unnecessary expenses and utilise
it in the right manner.

Shrikant Badve, MD, Badve Group of Industries,
points out, “The buying mediums are expected to change from offline to online.
However, customers will be looking for better quality, features and designs in
the products. Cost-rich companies can build an edge over the others in this scenario
and will try to benefit from the market.  

Opportunity in disguise
There have been
several speculations that China will lose its global position due to Covid 19.
Interestingly, China is such an integrated part of the global value chain that
it will be very hard to ignore. In this situation, India can attract all the
expansion activities being planned by the global companies to India, as these
companies will be on a hunt for the ASEAN region post-Covid 19.

The Japanese government is assisting companies who
are willing to shift their centres into Japan from China. India too, like Japan
has announced some policy benefits to attract companies in India.

Industry is experiencing a shift in the purchase
approach. Finding a new supplier is also a big challenge. If large companies
strengthen local suppliers to improve their capacities and develop new
products, it will be a win-win situation for the auto component industry. Large
companies who source supplies from foreign nations are working with their local
suppliers to build and manufacture components efficiently. Assistance in terms
of R&D, finance & design are being provided to such suppliers by large
companies. Such activities in the industry increase competency.

Amid these negative market sentiments, a positive
approach has come from OEMs, Kumar states, “Some of our OEMs have helped us
with faster payments, so we can also complete our payment cycles to our
vendors, keeping the supply chain active.”

Ramesh Gehaney, Director & COO, Endurance Technologies
recently speaking at the CRISIL webinar observes, “The supply chain is ready to
kick-off. There may be some links that may be weakened and we have to move and
support them.”

Replacement market
It is expected that the replacement demand from OEMs will go down across all
categories accept 2-wheelers. The 2-wheeler market is expected to pick up by
end of Q3 or by Q4. Further, the export markets for the replacement segment
will also not be of prime importance as domestic businesses are under pressure.

EV market
electric vehicle (EV) market may perform well if the sales go up. Given that
the EV market has also been hit. Component manufacturers depend on a very small
share of the EV industry. “Looking at the adoption, the government was first to
adopt EV buses for public transport. Such adoptions and handovers have
completely stopped. The ones that are in the process of manufacturing will be
delayed. This will have an impact on the industry and will also put pressure on
the carbon footprint target. The positive side of the story is that the buses
will come into play faster. Further, payments from the government to their
suppliers have not stalled.”

EV market boom may be delayed by a year or so which
can only be tackled by some innovation in technology.

Technology transfer
One of
the significant benefits that India may get due to the Covid 19 is that of
technology. There will be collaborations with Chinese and other global players,
opening more avenues to explore for the Indian industry. “Indian auto component
industry has to invest to upgrade and to up its game. This will make the
companies ready and equipped to achieve global competency. Such investments are
inevitable,” informs Badve.

The Covid 19 situation had some positive side to it that the companies
across sectors are coming together and communicating for a better future.
Deepak Jain, President, Automotive Component Manufacturers Association of
India, “Collaboration is in the air, going forward. More concentration on the
health of the workforce but companies are looking at the quality of people, and
this is a massive opportunity of investing in people. Entities who focused on
cash flows will emerge winners in this scenario. There will be a new way of
approaching and acquiring new customers, and so this is an opportunity for the
whole industry to become asset-light. People might get more into private
ownership of vehicles, so this is the right time for the government to rethink
certain taxations and get the scrappage policy to incentivise consumption—to
get the customer confidence back.

This is an opportunity for the auto components sector to become the
factory of the world. Quality of components is a proven fact as 65 per cent of
exports were to high-quality product markets such as North America and Europe,
but we need to work with the government. A different approach towards export
opportunities backed by government policy infrastructure.

Lastly, it will also be crucial to see how the
government ensures support to the MSMEs for absorbing this Covid 19 blow.
However, component manufacturers will have to invest to upgrade, and bring
digitalisation in their operations and manufacturing to build products of
better quality, designs, and features. 

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