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Auto part cos tap new sectors to drive growth

The uptick in the auto segment may be back, but global slowdown has taught auto component firms one key lesson — the need to spread risks and not put all eggs in one basket. If in the past, tier I and II suppliers were gung-ho about the export market, scores of auto component companies have now started seriously evaluating diversification opportunities.

Those having made a headway include Bharat Forge, Sundram Fasteners, Wheels India, Shriram Pistons, Lucas TVS, Autotech Industries, India Pistons, Super Auto Forge, Susira, the Mahindras, the Tata Group, Lakshmi Precision Tools, Caparo Fasteners, Sterling Tools, Caparo Engineering and Maini.

While India enjoys a cost-advantage in casting and forging as manufacturing costs in India are 25-30% lower than western countries, component makers are diversifying into non-core businesses in a bid to insulate them from cyclical nature of auto business. It helps them to utilise idle capacity and distribution channels.

Many industries like aviation, defence, power and petroleum have synergy with the automotive sector in terms of manufacturing and engineering expertise, industry experts say. "These are new growth opportunities, which can be done without substantial investments,” said Ashok Taneja, MD, Shriram Pistons, which has keen interest in the aviation sector.

Global aviation companies, such as Boeing and Airbus, have been trying to increase their footprint by sourcing more components from India. Recently, Ian Thomas, president, Boeing India, was quoted as saying: "We are looking at partnerships with various Indian companies for different aircraft components.” In the next 3-5 years, the infrastructure sector is looking at investments of more than $500 billion.

A PriceWaterhouseCoopers report on aerospace and defence cites auto part makers planning to enter aircraft component production, particularly in precision engineering, machining, aircraft lighting, tyre manufacture and transmission components. The south is gearing up for a stellar role in the space.

"Deming prize gives a credibility for prospective partners and customers. However, in India (and maybe most places) these segments have lot of other drivers to succeed. Some of these may be difficult for many south-based companies,” observed Rane group chairman L Ganesh, even while acknowledging defence to be "certainly” an area of interest for the group. On whether auto component companies are looking at spreading their risks post-slowdown by tapping business opportunities in non-auto areas, he said: "It was a response to slowdown. However, with recent recovery, the intensity may reduce a bit.” He further added: "We are seeing it more as a new opportunity opening up in India. We are looking at opportunities where synergy exists.” But, Mr Rane is yet to finalise any project.

Also, margins are higher by 10-15% in areas like defence, aviation and infrastructure, which will help bottomlines of the component companies. As in the developed markets, the automotive business is cyclical in nature and it becomes imperative for component companies to derisk themselves by tapping the various sunrise sectors, said Abdul Majeed, auto practice leader, PwC.

India Pistons group technology director R Mahadevan concurs. Despite the cyclical nature of the vehicular segment, it contributes 65-70% of the company's revenues. The off-highway (OH) business contribution ranges from 25-30%. Now, with focus on non-auto business opportunities, India Pistons estimates 5% of the 25% OH business to come from the Railways. It is also in the process of acquiring AS certification to spur its aerospace business, that is still in an exploratory stage.

"We are looking at upgrading our facilities to perform non-destructive tests and use appropriate technologies and raw materials (oxides),” he said, noting that aerospace business required better quality standards than what auto component firms are accustomed to. The scope of piston technology is expanded by the use of cam-shafts, controls, pistons and rings, valves and turbo chargers in non-auto product segment. "The margins are more in this category as making parts for the defence industry is a per piece game unlike the volume aspect of the auto component business,” Mr Mahadevan noted.

Wheels India (WIL) too has diversified into making steel structure parts for power plants by setting up a plant near Pune. Bhel, Trichy ED, AV Krishnan said WIL has become one of the major away centre fabrication units (ACF) supplying 1,000 tonnes per month.

Super Auto Forge is another such auto component firm that has forayed into hi-end fixtures for petroleum and refinery industries. "We are engaged with leading power infrastructure players like Siemens and ABB in this regard. We produce turn parts (forged) for this sector and also components for power and heavy electrical segments,” its MD S Seetharaman told ET, adding the company is one year away from commercialising opportunities. Estimating auto parts business to drive 30% of its revenue, he said a strategic business unit has been set up for this purpose. After it began focusing on non-auto parts business in 2008-09, it has deployed nearly 40-50 of its people to work over the next two years for a smooth implementation phase.

Also, Tamil Nadu government's incentives for power generation too has acted as a catalyst. "Apart from setting up captive power plants, auto component firms realise it is not viable to achieve scale of economies by setting up 0.5 mw plants. So, by banking the surplus power with the grid, they actually gain,” Mr Mahadevan told ET.

Interestingly, even with domestic and the export markets growing at 10-15%, auto component majors have started increasing their dependence on some of the sunrise segments. These companies were affected in the global downturn, due to their dependence on a single OEM. However, a word of caution from industry experts: "Component companies need to look at their core strength and then diversify accordingly.”

Lucas TVS joint MD Arvind Balaji termed aerospace as the most logical diversification for established auto component companies. Apart from expertise, it is the effort to attain quality standards required by the sector in which the southern players seem to hold a distinct edge.



Source : The Economic Times