India is the fifth largest automobile market in the world, and a not-so-named auto component or the automotive aftermarket sector plays an important part in its growth and turnover at large. In recent years, a rapidly-growing middle class and increased purchasing power is driving the vehicle sales, thus, creating immense opportunities for manufacturers and supply chains to put an effective aftermarket sector in the country. Seeing such positive sentiments, auto OEMs are also foraying into the aftermarket segments. After entering the two-wheeler aftermarket segment in 2017, Rico Auto forayed into the four-wheeler aftermarket segment last year. The company did so with 28 products and is targeting for a revenue of ₹ 100 crores by 2020 from the sector.
According to reports, it is anticipated that by 2025, the Indian automotive aftermarket will become the third largest market in the world. As per the report titled “Transformation Shifts in Mobility and Impact on Aftermarket in India” by the Confederation of Indian Industry (CII), the domestic automotive aftermarket has grown at a compounded annual growth rate (CAGR) of 14 per cent in the last five years. It is expected to touch ₹ 75,000 crores by 2020. The report also states that the country’s car market also has the potential to grow to over six million units annually by 2020, up from 3.7 million in 2016. The data collected by the Automotive Component manufacturers Association of India (ACMA) also reports that, of the total Indian aftermarket, the two- and three-wheeler segments account for around ₹ 12,038 crores, while the passenger car segment accounts for around ₹ 18,970 crores, commercial vehicles for around ₹ 19,748 crores and tractors for ₹ 5,342 crores.
What is Aftermarket?
For those who are not familiar with the term “Automotive aftermarket,” it is a secondary market that encompasses all parts and services purchased for vehicles, light or heavy, after original sales have been done. It includes replacement parts, accessories, service repairs, lubricants, appearance products and so on. “When parts supplied by an original equipment manufacturer (OEM) get damaged or worn out, the replaced parts built or manufactured come under the aftermarket category”, Fahad Hazari, Product Lead at Uno Minda Distribution and Services, said when asked about what automotive aftermarket exactly is, while visiting the 4th edition of ACMA Automechanika Show.
In a more elaborate manner, the parts that come into the aftermarket segment include product type – braking (brake pads, hydraulics and hardware, and rotors and drums), steering and suspension (ball joints, tie rods, sway bar links, bushings, bearings/seals and coil springs) hub assemblies (wheel-ends), universal joints (drive lines), gaskets, wipers, filters (air, oil and cabin air), lighting and spark plugs.
The auto component industry, which had an annual turnover of US$ 51.2 billion in 2017-18, is expected to cross US$ 200 billion by 2026. While exports have grown at a CAGR of 11.42 per cent to US$ 13.5 billion, auto components production has seen an increase of 12-14 per cent in 2018-19, due to robust growth in the domestic and export markets. Industry experts believe that the future of the automotive secondary market looks bright amidst all the transformations that the sector is undergoing. Ashish Bhat, Executive Vice President and Head, Digital Factory, Siemens India, shares, “The automotive component industry in India is making significant progress in the adoption of Industry 4.0, and there is great potential to take this sector a step ahead. With digitalisation, manufacturing enterprises, especially the SMEs, can enhance their efficiency to fight scale, reduce cost of production, minimise manufacturing defects and shorten production time. With this, they can not only meet international quality standards but also strengthen their position as competent suppliers for the global market”.
The Evolution of Aftermarket
The Indian auto parts sector contributes 2.3 per cent to the Gross Domestic Product (GDP) and employs as many as 1.5 million people directly and indirectly, constituting a big chunk of SMEs in the sector. The organised sector mainly has OEMs that manufacture high-precision machinery and parts, and the sector is largely made of the unorganised sector, that is, MSMEs that produce low-quality products.
Initially, the aftermarket was small in size. In the 1970s, the industry got initiated with the operations of Maruti Udyog Ltd. And in the 1980s, many new manufacturers emerged in the sector. There are three main automotive aftermarket clusters that have flourished in the past few decades, in the west, north and south regions. These are Mumbai, Pune, Nasik and Aurangabad in the west, Chennai, Bengaluru and Hosur in the south, and New Delhi, Gurugram and Faridabad in the north.
According to CII’s report, the states of Tamil Nadu, Andhra Pradesh, Karnataka and Kerala contribute more than 75 per cent of the total aftermarket potential. Here, sales of auto components owing to increased vehicle ownership (new and used vehicles) in semi-urban and rural markets are driving demand. The report also revealed that the number of vehicles are expected to grow by six to seven per cent this year. This offers a substantial opportunity for independent aftermarket service providers, both existing and new entrants, to grow.
As of now, no specific data has been found for the total number of aftermarket companies functioning in India, but according to the journal Indian Auto component Industry: Challenges Ahead, written by Sachin Borgave and JS Chaudhari, the sector has more than 420 players in the organised sector and more than 10,000 players in the unorganised sector. SMEs are largely based out of tier 2 and 3 cities. Around 390 auto component manufacturers have ISO 9000 certification, while 223 companies have QS-9000.
Thrust to Success
In 2017-18, the total exports value of India’s automotive exports stood at US$ 13.5 billion, while it was US$ 10.9 billion in 2016-17. The growth is being driven by the expanding domestic market and increasing globalisation (including exports) of several Indian suppliers. In the past few years, this sector has gained momentum on investments. As per the Department of Industrial Policy and Promotion (DIPP), the foreign direct investment (FDI) inflow in the period April 2000 to June 2018 was US$ 19.29 billion. In recent developments, giants like Schaeffler India, German Automotive major continental Elgi Equipments and IMI Precision Engineering have all decided to invest in the country.
The budget, too, has given the much-needed attention to the MSME sector by extending incentives. An industry expert opines that increasing the zero tax income limit to ₹ 500,000 will be a shot in the arm for the middle-class, thus boosting market sentiments. “These measures will lead to improved sales of automotive products, especially two-wheelers, farm equipment and entry-level passenger vehicles, which, in turn, will fuel the growth of the domestic auto component industry”, says Ram Venkataramani, President of the Automotive Component Manufacturers Association of India (ACMA).
Digitisation of manufacturing operations and investments in technologies such as PLM, Simulation, etc are set to be crucial differentiators in making companies globally–competitive and catering to the emerging needs of next-generation automobiles in the wake of the E-vehicles revolution and “connected mobility” megatrends.
One crucial step for the segment is technology and innovation. Raj Manek, Executive Director and Board Member of Messe Frankfurt Asia Holding Ltd, opines, “The automotive market is witnessing rapid technological transformations. In tune, regulatory changes in India are also redefining the domestic aftermarket”. Indeed, technology and innovation in the component sector is playing a vital role in the growth of the sector. Today, most companies are looking at tech innovations and product development, which hold the key to tap the biggest growth opportunities in the future.
One such SME company is Turbo Tech Engineers based out of New Delhi, which supplies and manufactures precision-engineered replacement turbocharger components, turbo repair kits and complete VSR-balanced CHRA/core assemblies to the turbo repair sector. Gurinder Singh, its owner, says that today, due to precision engineering his company is the only manufacturer after OEMs in the turbo manufacturing aftermarket segment. “Our factory is the only one after OEMs who are into manufacturing turbochargers and its parts for diesel engines. With the help of precision engineering, our team of technical engineers has changed the designs and technicalities of the products, giving them better and prolonged life”. According to Singh, manufacturing is a task that needs precision and perfection with a blend of modern tech and, thus, only a few players have ventured in this sector. With more innovation, the company has recently forayed into manufacturing of turbochargers for petrol and Euro 6 engines, and is anticipating seeing double–digit growth in its business.
E-commerce has also given a significant boost to the automotive aftermarket. Simply searching for the term ‘auto parts online’ on the Internet opens up a bunch of e-tailing platforms where auto parts are sold via suppliers and manufacturers for B2C and B2B consumers. Most of the registered people on these trading websites are medium and small players, who can have a regional presence through these portals, such as marketplace or third party e-tailers. According to a global report on E-Commerce Automotive Aftermarket scenario conducted by Transparency Market Research, the Asia-Pacific region is expected to dominate the global e-commerce automotive aftermarket by 2025. The Indian government’s initiative Digital India and collaboration between brick-and-mortar stores and E-commerce platform providers is boosting the industry demand globally. While easily availability coupled with cost-saving prices are surging the e-commerce activities. Do-it-yourself is also becoming quite prominent.
India’s aftermarket in the past was focused on cost, but now the sector is focusing on quality of the products and services. However, the sector is complex in many ways and needs to work around the following roadblocks:
- Unorganisedand fragmented operations in the aftermarket makes it highly inefficient and, in many cases, unreliable. This leads to higher costs or higher dissatisfaction among consumers.
- Missing data and information for training and actual repairing and maintenance of vehicles.
- Substandard parts and services impact the safety standards and vehicle fitness, which contributes to road fatalities.
- Poor returns of investments (RoI) from its trade channels due to inefficient inventory and supply chain practices. Theunorganisedmarket only adds further to this weakness of the industry.
During Automechanika show, various stakeholders expressed their views on the challenges they are facing in the sector. G.S. Luthra, An export house owner dealing with wheel assembly parts, believes that we can be ahead of countries like China, but we lack good policy and incentive infrastructure. He explains, “In my opinion, we can be ahead of China, but we lack incentives schemes and government facilities like they do. However, we do export to China but it still low”.
According to a media report, the trade gap is quite wide in the automotive sector. In April-February 2018, China exported auto parts worth US$ 3.95 billion to India, while India exported auto parts worth US$ 295 billion. On this issue, industry sources believe that imports gained momentum because the Rupee was depreciating against the Dollar. Also, the local manufacturers were not able to meet new regulatory norms regarding emissions and safety established in the past few years. The same pattern was studied in the imports of Chinese tyres. In the past five years, imports have gradually increased. In 2013-14, it was ₹ 582.86 crores on value, while in 2017-18 it was ₹ 1,256.85 crores.
Counterfeit, Standardisation and Road safety
According to the data provided by the government, in 2017, only 1.47 lakh people died in road accidents. However, the same year, there was a slight decrease (of 3.27 per cent) in road accidents with 4,64,910 road accidents as compared to 4,80,652 in 2016. Having said that, the lack of mandatory standards and unchecked production and import of counterfeit parts, vehicle safety and road safety are other serious concerns for the sector. Hence, the industry is now putting in demands for the standards of quality of auto parts coming to India especially from China, as usage of spurious or counterfeit parts can be seen especially in the unorganised sector.
According to research, counterfeit components account for 45 per cent of the passenger car aftermarket. However, to minimise the usage of spurious auto parts, ACMA has been working closely with the Road and Highway Ministry to set standards for aftermarket products. The association claims that the penetration of counterfeit products has been reduced from 36 per cent (2010-11) to five per cent (2016-17), which is a great achievement.
The ACMA is driving campaigns such as “ACMA Safer Drives” in the wake of sensitising stakeholders about the menace of counterfeits and substandard components causing road accidents. It provides awareness and education about the use of genuine parts to prevent road accidents through exhibitions like Auto Expo, ACMA Automechanika, Regional Auto Shows, Road Shows and social media as the primary means of communication.
A member of ACMA informs us that ACMA has realised the need for an industry-accepted standard system for parts catalogue that the aftermarket trading partners could use. He says, “This system would enable data consistency at all levels in the demand chain and make the system more transparent and efficient. In this regard, ACMA has supported tech alliance to build the India Parts Catalogue with the data provided by its members. This catalogue will be released during ACMA’s Annual Session, later this year”.
On standardisation account, ACMA has been brainstorming for the two years. Under the supervision of Managing Director of Hella India, Ramashankar Pandey, an aftermarket committee has been formed and a list of at least 25 critical components in the aftermarket segment have been identified for standardisation. “Standardisation will help aftermarket stakeholders to fight against counterfeits and substandard parts and services, and help keep our vehicles fit to drive, safe to drive and avoid accidents due to this cause”, says Pandey.
A minimum standard for the independent aftermarket will help technicians, retailers and distributors to organise themselves and build a progressive digital IT platform and improve customer experience by bringing transparency and providing cost-effective solutions. This will also help consumers make more informed choices between an OEM’s authorised aftermarket and a roadside quick fit workshop on both extremes of service offerings and, hence, will encourage healthy competition to develop the industry further.
Transition Towards Better Powertrains
Right now, the biggest challenge that small and medium businesses face is to adapt themselves according to the changing patterns in the automotive sector, as it is moving towards electric vehicles. In the next few years, Indian roads will see plenty of electric vehicles running around. Experts believe that those into manufacturing engine parts will face maximum heat due to a shift in focus from fuel efficiency and engine management to drive motors and batteries.
Talking about IT and electronic advancing the vehicles, Pandey, Hella India, says, “The next wave of connected and autonomous features are being adopted. However, servicing them in the aftermarket will be more and more challenging by independent aftermarket players in India, mainly due to missing training to technicians for all the latest models in addition to missing information of parts and repair instructions in the public domain”. He adds, though it’s a challenge for small and medium businesses, many startups and Integrated Access Management (IAM) companies are working to solve this problem through their innovative solutions. On-board diagnostics, preventive service forecasts and online trainings through VR/AR are a few areas where we will see innovations in this industry.
Is India Ready for BS VI Standards?
Bharat Stage VI is an emission standard to bring down the emission levels coming out of automobiles. With its effective implementation, India will come at par with European and US cities and automotive markets. The Indian government aims for the implementation to set by 2020; however, taking a leap from BS IV to BS VI will be a challenge for the auto aftermarket. Europe took nine years to complete implementation of the Euro 6 standards.
A major challenge for OEMs and suppliers is the readiness for implementation. Automotive stakeholders together have to work, develop and update electronic control units (ECUs ) and to meet the 2020 deadline. Unlike Euro 6, for implementing BS VI, OEMs have to add on to design elements rather than adding the components. For instance, India has a huge product line (Tata, Mahindra, Maruti) from small passenger cars to trucks and tractors, which varies in design and size. Setting up a Euro 6-compliant diesel particulate filter (DPF) in India will require size change, which may lead to halt in productions and other losses.
Stakeholders have already started working on it, developing the infrastructure and emission control equipment with the help of experts in the field, tweaking ECUs and doing more R&D, but there is still a lot to do. Moreover, ACMA’s study on the aftermarket sector suggests that vehicle prices are bound to go up after the compliance of BS VI standards. “The price increase is expected to be in the range of ₹ 5000 – ₹6000 for two- and three-wheelers. The increase is expected to be around ₹ 20,000 for a petrol engined car, and up to ₹ 1,00,000 for a diesel engined variant. For a commercial vehicle, the cost increase could be as high as ₹ 1,50,000”, the report reveals. In order to supply these upgrades to the market at an affordable premium to the customer, the industry will need to ensure a high degree of localisation, which eventually translates to a growing opportunity for the component manufacturers in India.
Small Businesses Rely on Payments
Although GST compliance has made a huge difference in most industry segments, making the system organised, yet, small and medium stakeholders still have to deal with taxes and payment problems. The industry opines that there is no proper cash flow system at large. SME owners have to wait for payment credits on the same time they are bound to file taxes. A member of ACMA and Promoter of Able Spring Manufacturers in Chennai, Philip Verghese says, “Often payment gets delayed from the customer’s front, and small manufacturers still have to file excise duties as well as GST every month. In this scenario, they have to pay from their pockets, which makes the business operations cumbersome and then it becomes a game of surviving in such a huge market”.
Auto component makers are demanding the government to reduce the GST rates to a flat 18 per cent across all components. This will not only help small and medium business owners but also reduce the sales of spurious spare parts. At present, 18 per cent GST is levied on around 70 per cent of the auto parts, while the remaining 30 per cent auto parts attract 28 per cent GST.
Other than this, price-competition and brand establishment among big brands are other challenges in the sector. A stakeholder from Nagpur Pranjal Jeswani who is a lubricant dealer and wholesaler in the sector talks about the issue. According to him, the oil and lube sector has many brands, which makes the sector competitive and makes it difficult to establish its mark in new regions or markets. He says, “The price becomes so competitive due to multi brand presence, which affects the revenue shares”.
The aftermarket industry size depends largely on current vehicle parts in the country, and it includes not only four-wheelers but also consumer and passenger vehicles, two-wheelers, buses and tractors, too. And the rate of growth of India’s vehicle population is extremely robust. And since the aftermarket is also about after sales service and not only about parts, it needs local supply chains, workmanship and customer handling with a stronghold on the following fields:
- Collaboration to organise data and information with an open source approach to provide parts and repair information to the industry.
- Minimum standardisation for both parts and services.
- Training and online support to technicians.
- More IT innovations and skill management programmes to fulfill the needs of skilled workers.
Due to the unique nature of the aftermarket, it offers a natural advantage to local entrepreneurs to create value and satisfy consumers in their geography. Once the industry can “Organise, Standardise and Digitise” the Indian aftermarket, businesses will be better prepared to gain market share with more local value creation.