August 13, 2005

Analysing the auto component industry

I have been studying the Indian auto component industry for the last few days. The industry appears to have a good future ahead (whether there are some good stocks at good valuation is something i need to check).
The auto industry has two main channel - OEM and After sales. The industry has been restricted mainly to the domestic industry in the past and was thus tied to the fortune of the domestic auto industry (which in turn is cyclical).

A few changes have happened which have opened up the export market to this industry
- Recognition of India for its technical manpower. This is crucial especially in auto which involves a lot of R&D and design for new components at the higher end of the value chain
- Low cost labor
- Opening up of the Auto sector by the Indian government, due to which the global majors such as ford, GM etc setup shop in India and started sourcing from local suppliers. This helped in improving the competitiveness of the Indian auto component makers
- increase in scale of the domestic auto component makers and foray into the export market
Industry landscape

Some of the key firms in the industry in terms of their size are
- Bharat forge
- Motherson Sumi
- Exide
- Sundaram fastners

Porter’s 5 factor analysis
Barriers to entry
- Technology: several auto components have a high technology component and can be produced by only those companies which have access to the technology or have developed it themselves. As a result most of the auto makers specialize in specific components
- Economies of scale
- Brand is crucial, more so in the Spares market (and as a result a distribution network too)
- Customer relationship in the form of long term contracts
Rivalry among firms
Rivalry among firms would be high in Spares market, but lesser in the export markets wherein the norm is long term contract. In addition the industry has high technology component and hence the industry does not deal in completely commodity product. However competition could be from other firms from other countries in a similar product line
Supplier power should be low as the key raw material is steel which in itself is a commodity

Buyer power is high especially for the OEM market and with high competition between auto makers there should be a constant pricing pressure on the auto component makers going forward

I would consider the threat of substitute product as low

The key success factors for the industry going forward should
- Continued investment into technology/ process to build barriers to competition and provide a cost and quality advantage to the customer
- Pursuit of economies of scale to be cost competitive. It should be in both production and in R&D
- Developing strong customer relationship through quality and reliable supply

Key risks
- Pricing would remain under pressure going forward
- Inability to meet the supply schedules of the customer
- Development of alternative outsourcing locations

The industry is into a growth phase. However the market also seems to have recognized that and most of the companies seem to be fairly valued.

1 comment:

rajourigardener said...

Hi ?

I think, along with wat you said, there were few more structural changes that have led to boom in the autosec-

1) Efficient capital utilisation by auto cos - Over period of last 4-5 years, if you see, auto-cos have tried to make their supply chains leaner and meaner. They have sucked the last penny of capital from it, by deploying concepts like JIT, Kaizen, etc. Many of the cos are today working at low/negative working capital. This ineffect has improved RoC and RoE to an unprecedented levels.

My interactions with Autocos leave me with no doubt about their operational proficiency - which I think was FORCED upon them by Japs. But - all said and done - with the lalla-mindset promotors, many are apathetic towards shareholder value, which might hamper affinity of capital required for their future well-being. Secondly, most of these companies are family owned, and now in the hands of second-gen guys - how well these 2g guys are able to bring professionalism to the companies, need to be seen!

2) Problems at GM/Ford -Its one of the major reasons of moving work from West to East. Visteron and Delphi are unable to reduce the costs to the level, where GM/ford can expect to be compititive. Also, the hugh pension liabilities are a big burden on them. which is forcing them to reduce the operating costs and shift the base. I would not be surprised if in 10years this base further moves on from India to countries like Africa, etc. Infact, few years back groups like ACS (Anand Group) used to shift plants from West to India - now, its shifting few from India to Thailand, etc. As Friedman says, with world getting flatter, this change would be more pronounced in the years to come.