The Hindu : Forging units on good wicket

Online edition of India's National Newspaper
Wednesday, Nov 26, 2003

Business

Business

Forging units on good wicket

By Ramnath Subbu

MUMBAI NOV. 25. Bharat Forge's move last week to acquire the world's second largest forging company, CDP of Germany, drove home the point that Indian automobile component manufacturers have finally begun to realise their potential. Today, these manufacturers with technical expertise and scale of operations cater not only to the domestic market but significantly to global players as well.

Exports of forgings and castings are the biggest opportunity for the Indian auto components manufacturers.

Companies such as Bharat Forge, Mico, Motherson Sumi Systems and Sundram Fasteners have also established an export base (current year revenues above Rs. 100 crores) and have tied up with a number of original equipment manufacturers (OEMs) and Tier I (component) suppliers as regular sourcing partners. Sundram Fasteners has announced that it is acquiring the precision forge unit of Dana Spicer Europe in the U.K. Some years ago, SFL had acquired the radiator cap unit of GM and relocated the same to Chennai.

Essentially, Indian auto components industry's strengths lie in castings, forging and low automation-technology based components. The advantages are locally available raw materials, skilled workforce, cheap labour, cheap designing and engineering skills. India's advantage over competitors like Mexico and Brazil is in products where the labour component is greater than 35 per cent of the product cost.

India has a decided advantage over China in value addition in the form of engineering and design services according to Rashi Talwar Bhatia, analyst, Motilal Oswal Securities - Inquire, who added, "China is better at mass production but not in the area of precision manufacturing.'

Further, Ms. Bhatia said, while Delphi, Bosch, Valeo and Denso had units in China, the low labour productivity and low quality standards were the key hindrances to China's growth.

N. Muthuraman, head, corporate ratings, Cris-Infac, said, "It must be understood that in the developed markets, auto component manufacturers have excess, idle capacity. It is in their interest to get out of these operations and source the same products from cheaper markets, where quality is high.''

Significantly, about a dozen multinational auto players have set up their international procurement offices in India including big guns like Ford, DaimlerChrysler, Volvo, Cummins and Caterpillar and they are now sourcing $5-20 million worth of products annually.

It remains to be seen what companies like Bharat Forge would do with their acquired overseas operations. "The advantage enjoyed by Indian auto component manufacturers continues as long as they manufacture in India. However, if they were to operate units acquired overseas, then they are on a level playing field with global component makers and would have to strategise accordingly,'' said Mr. Muthuraman.

At present, global majors are outsourcing only a fraction of their requirements to the Indian auto ancillary sector. "The complete Indian ancillary sector today is not even equivalent to 15 per cent of Delphi in terms of value,'' said Ms. Bhatia adding, "The volumes that successful exporters like Bharat Forge, MICO and Motherson Sumi are witnessing are just the proverbial tip of the iceberg. Volumes, though high for Indian manufacturers, are now inconsequential by global manufacturing standards.''

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