Seizing the Automotive exports opportunity

The automotive industry is one of the hardest-hit industries due to the current pandemic. COVID will change consumer behavior in significant ways. More and more consumers are willing to move away from public transportation to private transportation. For instance, in a recent survey conducted by PGA Labs in South East Asia, 52% of respondents said that they will increase usage of private cars and 38% said they will increase the usage of 2W compared to pre-COVID levels. In the medium term, this consumer behavior shift to owned as well as increased usage of private vehicles will fuel demand for the automotive industry.

Global automotive exports overview: Increasingly global supply chains

Global production of vehicles in 2019 was 91.8M units excluding two-wheelers and three-wheelers, registering a CAGR of 0.3% over 2015-19. China at 28%, USA at 11.9%, and Japan at 10.6% were the largest Automobile manufacturers accounting for 50.4% production in 2019. India ranked fifth contributing 4.9%. Global production peaked in 2017 to 97.3M and declined 1.7% in 2018 and 4% in 2019 triggered by US sanctions, a fall in sales in China, and exacerbated by harsher emissions regulations. Despite low growth in production, Automotive exports have grown at a higher CAGR during the same period as supply chains have become increasingly global. 

Global automobile exports excluding 3Ws, were valued at US$ 1.0T in 2019 registering a CAGR of 3.7% during 2015-19 while India’s automobile exports stood at US$ 10.9B in 2019 and grew at CAGR 5.2% during the same period. PVs were the largest segment in global Automobile exports comprising 75% followed by CVs at 14%. The growth was in part driven by increasingly conducive Government policies. Also, India is the fifth largest 4W market and largest two-wheeler market in the world. 

In 2019, global Auto components exports were valued at US$ 406B and had registered degrowth at CAGR 2% over 2015-19. Indian auto components exports grew at a CAGR 5.7% during the same period and were valued at US$ 6.5B in 2019 despite degrowth at the global level.

India’s share in global Automotive exports was 1.2% in 2019, up 10bps compared to 2015. Europe is the leading auto exporter in the world with a share of around 50%, followed by Asia at 24% and North America at 21%.

Exhibit 1: Indian auto exports have grown at a 1.5X growth rate of global average in the last five years

Indian automotive exports scenario: Gaining share on the global stage 

The Indian Automobile market is characterized by strong local players across categories. E.g. Hero MotoCorp, TVS, and Bajaj in 2W; Maruti Suzuki, TATA motors, and M&M in 4Ws and TATA Motors, M&M, Ashok Leyland, and Eicher Motors in CVs. There is also a strong presence of global giants like Ford, Toyota, Honda, Hyundai, Renault, Nissan, Kia, and Volkswagen. Localization levels across segments have crossed 90%. In 2W and Tractors, localization is upwards of 95%.

Busy Automotive clusters across India drive the industry — especially the three major clusters of Mumbai–Pune–Nasik–Aurangabad in the West, Chennai–Hyderabad, Bangalore–Hosur in the South, and Delhi–Gurgaon–Faridabad in the North, as well as upcoming areas like Sri City, Anantapur, and Sanand.

Personal vehicles' share in Indian Automobile exports was 62% compared to 75% global average. Germany and China were the largest global exporters with a combined share of 32%. However, it is interesting to note that Indian PV market is dominated by Maruti Suzuki which has 51% market share, however, PV exports were led by Foreign OEMs Hyundai and Ford which contributed close to 45% to total PV exports which reiterates India’s fit to be an attractive manufacturing and exporting hub. Top destinations for PVs were Mexico with 19% and the USA at 16% share.

Two-wheelers contributed 19% to overall Automobile exports. In the domestic market, two-wheelers contribute nearly 80% to India’s Automobile sales by volume. China remains the biggest two-wheeler exporter with a share of 26% while Germany is a distant second at 9% share and India ranks fourth at 7% to the global two-wheeler exports. Bajaj Auto was the top 2W exporter amounting to 51% share of Indian exports. Top export destinations vary by vehicle category and are focused on underdeveloped/developing economies. Top destinations for two-wheeler were Nigeria at 15%, Colombia at 11%, and Bangladesh at 9%.

Commercial vehicles' share of Indian Automobile exports was 10%. In global CV exports, Mexico and the USA are the largest exporters with a combined 30% share. Indian CVs recorded the highest growth among vehicle exports growing at a CAGR of 12%. Bangladesh at 18% and Indonesia at 16% were the top export destinations for CVs and TATA Motors was the largest exporter with a 53% share in CV exports.

Auto components exports in India were valued at US$ 6.5B in 2019, registering a CAGR of 5.7% during 2015-19 while the global Auto components export market registered degrowth at CAGR 2% during the same period. Consequently, India’s share in global Auto component exports increased from 1.2% in 2015 to 1.6% in 2019.

US$ 2.6B of Auto component exports were classified under the residual category. Of the remaining US$ 3.9B, engines were the largest contributors at 19% followed by brakes at 13%. Steering parts exports registered record growth, the category zoomed 5.2x between 2015 and 2019 and were valued at US$ 20M. This proves the fact that new categories are also being seeded while the growth in traditional auto exports has remained strong. High growth was also recorded in the drive-axles category which grew at a CAGR of 24% during 2015-19 and was valued at US$ 40M in 2019 followed by brakes and clutches which grew at a CAGR of 18% during the same period. In contrast to vehicle exports, auto component exports were largely headed to developed economies such as the USA, Europe, and Japan. Turkey, Brazil, and Mexico were also major destinations.

Exhibit 3: Developing countries are top importers of Indian auto exports

In a world where supply chain security, and not just costs determine the location, India emerges as an attractive destination to become a manufacturing destination. Players across industries are restructuring global supply chains to reduce dependence on China in the post-COVID world. Manufacturing companies are increasingly adopting China+1 strategy.

India’s ease of doing business rank improved from 142 in 2014 to 63 in 2019. In this light, the Auto sector is one of the crucial ones contributing 7.5% to national GDP and 49% to the manufacturing GDP of the country. India’s Logistics Performance Rank (LPI) also improved from 54 in 2014 to 44 in 2018 driven by improvement in road and port infrastructure projects such as Sagar Mala and the dedicated freight corridor as well as increased digitalization leading to efficiencies in port and fleet management. Both these improvements in addition to India’s rank in Customs Category within LPI, that improved from 64 in 2014 to 40 in 2018.

For manufacturers, India provides access to one of the largest and growing Automobile markets in the world. India’s focus to emerge as a leading player in the Automotive industry is strongly reflected in its policies. India allows FDI up to 100% for Automobile and Auto component manufacturers under the automatic route. ‘Make in India’ initiative provided various benefits for Automotive manufacturers e.g. a weighted tax deduction of 150% of in-house R&D expenditure and a 2% benefit was extended towards vehicle exports. States are also offering additional incentives to attract investments in manufacturing. Andhra Pradesh offers a capital subsidy of 50% for infrastructure in Auto clusters and financial assistance of up to 75% for obtaining patent registration.

In addition to access to low-cost labor, cost-competitive managerial and technical talent, and conducive Government policies, India is determined to set world-class standards for Auto manufacturing by narrowing the gap particularly in terms of safety standards and emission norms which will create opportunities to boost exports to developed economies. E.g. recently implemented BS-VI norm in April 2020 has set Indian emission standards at par with EURO emission standards. All in all, India is set to emerge as a leading Automotive manufacturing hub of the world.

Indian domestic and exports market will provide immense opportunities to those who take the bold step today. The leading Automotive companies willing to move to India need to answer the following three questions to themselves:

• Do you understand the nuances of operating in the Indian market including supply and demand drivers?
• Are you aware of business implications and complexity in moving your manufacturing away from the current location? What are the key risks?
• Have you taken concrete steps to strategize? Have you geared up your operations to serve the consumers of the future in the ever-competitive automotive market?