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Monday, October 16, 2006
India's auto parts firms shifting to assemblies
India's fast growing auto parts firms are scaling up from producing individual components to making assemblies and systems, as automobile makers seek to manage fewer vendors and trim costs, industry players said.
For instance, those that made parts for gear boxes have now begun to make the entire gear box, gaining higher revenue, profits and market share in a price-sensitive industry.
One such firm embracing the shift is Amtek Auto Ltd which expects revenue from assemblies and sub assemblies to double to 30 percent of sales in 18 months.
"The business model is changing. It is entirely in our hand to move over to assemblies or remain as a component maker and be lost," Amtek's Chief Financial Officer Santosh Singh said.
Besides Amtek, Mahindra & Mahindra Ltd's auto component unit, Motherson Sumi Systems Ltd and Sona Koyo Steering Systems Ltd are also working to double revenue from machined and assembled components in 2 years.
Better margins were one reason for the shift, said Hemant Luthra, president of Mahindra's auto parts unit, Mahindra Systems & Automotive Technologies.
"At times margins for assemblies and value-added components can be double that of components," he said adding they would typically rise by 4-5 percentage points with a shift to assembly manufacture.
Shooting Wage Costs
Rising wages have forced automotive firms to buy completed assemblies rather than parts, analysts said.
"Auto makers wage cost has been found to be three times that of an ancillary maker. They are better off outsourcing more and more of their work," an analyst with brokerage Enam said.
India's largest car maker Maruti Udyog Ltd has cut the number of suppliers to around 200 from 350 in the last few years.
India's top truck and bus maker Tata Motors Ltd has also 'significantly cut' supplier base to 1,000 in the last three years, a company spokesman said. "We believe in working with select specialised vendors," he added.
Global auto firms such as General Motors Ltd, Ford Motor Co and Toyota Motor Corp have said they would source gearboxes, steering systems, engine transmission sub assemblies and axle assemblies from low-cost countries.
"Auto firms see financial sustainability with fewer vendors," Singh said.
Even those firms that lack the technology and bases abroad to move into assemblies, are shifting to manufacture sub-assemblies, riding the consolidating trend.
Sona Koyo's Managing Director Surinder Kapur said it was too early for his company to begin assembly making and the company would stick to sub-assemblies.
Analysts say Bharat Forge Amtek and Mahindra & Mahindra bought firms abroad with an eye on the technology and bases close to large customers.
Others such as Motherson Sumi and Rico Auto Industries Ltd expect their technology tie-ups to make the transition.
Bullions: Consolidation before a rally
Gold is likely to continue its current consolidation before a rally in the fourth quarter. The magnitude of a slowing US economy would prevent Gold from a sharp downside given the rising appetite for the yellow metal by the Indians.
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