Is more the merrier?

Global auto suppliers setting up base is a threat and an opportunity

“Obviously it will affect us. They have better technology and get capital at 1% and we pay 12% here,” vents Raj Bhatia of Bony Polymers, a mid-size plastic parts supplier to OEMs, on being asked about the fallout of the recent entry of global auto parts suppliers into India. Auto ancillary companies from around the world are looking at the Indian market more seriously than ever for multiple reasons.  

With growth slowing in a massive market like China, biggies are hoping that India will pick up some of that slack. “India looks like a solid story for the next five to ten years. It will be a very good entry time for suppliers who have technology. For example, five years ago, airbag penetration levels were negligible. We are a three million market now and will be five million by 2020,” says Puneet Gupta of IHS Automotive.

No wonder North America’s largest auto parts giant Magna opened two new facilities in Sanand, Gujarat a week back. Magna is a strategic global partner of Ford Motors which has a factory in Sanand. But Magna has been reported as saying that it definitely wants to add the likes of Hyundai and Maruti (whose first car factory outside its home turf of Gurgaon is coming up in Gujarat) to its OEM list. Magna even wants to supply to India’s CV market which in the light of tightening regulation will require better technology.

Does this worry the country’s largest auto suppliers body and can small and medium sized suppliers cope? “There is no denying that global OEMs prefer to source from their established supplier base and everybody wants to minimise the number of supplier contact points,” says Vinnie Mehta of ACMA. He feels that local players should gear up to face competition as Indian suppliers have strong credibility. “One way of harnessing potential is to export to OEMs in another location. In the last five years, international procurement offices have increased from 25 to 40. These IPOs are responsible for identifying suppliers in India for OEMs global operations,” he adds.

But Bhatia feels that for smaller guys it’s not that easy. “Bent of the OEMs is towards MNCs. They want high quality at much lower price from us but to their country counterparts, they are ready to pay their price.” Analysts, too, feel that going forward it could be hard for small and medium guys but there is no other way to evolve but to approach it as an opportunity.

What one has noticed in the last three years is a mindset change in OEMs. Shifting away from a mass offering like Alto, even Maruti is paying more attention to B and C segment cars. “With cars getting technologically superior, role of global suppliers would be very critical going forward. So Indian suppliers either have to take the acquisition route or opt for joint ventures with global suppliers. Going forward we will see lot of investment from global suppliers,” feels Gupta. Not just mass players, even premium players like Mercedes and BMW will increase localisation in India once volume threshold is crossed. That increases scope for suppliers who are not present in India.

Mehta feels that India’s auto story is too promising to be shaken up by the entry of foreign suppliers like Magna. In fact, he feels there will be opportunity for tier 2 and 3 suppliers to support them. Clearly, there is both, threat and opportunity in this transition phase. The likes of Bhatia will have to gear up quickly to ensure that it is the latter.