Archive for February, 2007


Dtd: 22nd Feb 07

Indian Auto Ancillary

Key Positives

Huge potential: Global auto components market is worth over US$ 1 trillion and, considering India’s market size, which is just 0.8% of the total market size, there exists tremendous growth opportunity for the domestic auto players to exploit. Having said that, the benefits will vary for Indian companies. We believe that players that have demonstrated their technical competence and have developed necessary scale are likely to benefit from global outsourcing opportunities. To give an example, around 75% of the total exports were to original equipment manufacturers (OEM) or TIER-1 players in 2006 as compared to around 35% in early 1990s.

More than cost arbitrage: Due to cost related pressures on global auto players and Tier-1 suppliers, a lot of them have started outsourcing components from low cost countries like India, China and some of the Latin American and ASEAN countries. However, the technical capabilities of the Indian players have given them the edge in high precision and critical activities. The industry, which exported components worth over US$ 1.8 bn in 2005, is projected to grow at an impressive CAGR of 34% between 2005 and 2014. It is expected that the total exports will touch US$ 25 bn by 2014.

Learning from the MNCs: The entry of global players such as Ford, GM, Toyota and Honda into the Indian market has allowed the Indian manufacturers to work with these players on global production, quality and delivery systems. It has also helped the global players to see for themselves the evolution of many auto components manufacturers and they are therefore now entrusting them (Indian companies) with more work.

IT advantage: Thanks to the country’s IT advantage, the industry is capable of becoming a full-fledged service provider (research, design, development, testing) to global OEMs and thus score over other low cost countries like China. This, combined with low cost quality manpower strengthens our stand in the global arena.

Key Negatives

Lacking economies of scale: Despite being around 60 years old, the domestic auto ancillary industry is even behind countries like South Korea, Brazil and Mexico in terms of production and sales, thus depriving it the benefit of economies of scale. This makes it difficult for companies to invest extensively in R&D and development, a key competitive tool in the global market. Apart from this, the industry is highly fragmented, which also restricts the Indian players to develop scale (except for few players). Currently there are around 500 players (organised sector), which when compared to the total turnover of the industry indicates the fragmented nature of the same.

Competitive threats: Though Indian players have demonstrated their technical competencies, countries like China can spring in surprises in the long run considering the fact that with global auto players increasing their presence in China, the next logical step would be to rise up the value chain (high end auto ancillaries).

Increasing FTA: The growing number of FTAs (Free Trade Agreements) that are being signed by India with ASEAN countries is likely to hurt the domestic players as they pay a relatively higher excise duty of around 25% as compared to 1%-10% being paid by their ASEAN counterparts.


Dtd: 22nd Feb ‘07


Key Positives

  • Huge outsourcing potential: Offshoring has been well and truly accepted as a major strategic decision that can enhance the competitive advantages of global corporations. The value proposition of offshore development has been proved beyond doubt and as an industry, offshoring is still very much in the growth phase. Even among the global 1000 companies, the offshoring penetration levels are not that high. This is a significant point, since these are companies with IT budgets in the range of US$ 500 m to over US$ 1 bn. The global market share of Indian companies is also miniscule. Thus, these pointers are clear indications that there is plenty of room for the Indian software industry to grow, given the immense and untapped potential. Offshore outsourcing to India offers considerable economical benefits for those who are prepared to exploit the advantages of outsourcing.
  • Moving up the value chain: Indian software companies are consistently broadening their portfolio of offerings and moving fast up the value chain. Given that traditional services, such as application development and maintenance (ADM), are getting commoditised, it is imperative for these companies to move higher up the value chain into areas like consulting, package implementation and systems integration. Not only will this help Indian companies get higher billing rates from their clients, it will also give them an opportunity to work closely with the top managements of client companies.
  • Other positives: Among other positive factors for the Indian software industry, the major ones are large availability of talented manpower, cost advantage and geographical advantages (time-zone advantages). The companies involved in IT outsourcing in India provide high quality work, meeting international standards and complying with the ISO & SEI-CMM standards. Three out of every four SEI-CMM 5 companies worldwide are located in India.

Key Negatives

  • High reliance on the US markets: The US market’s share in India’s software and services exports is fairly high, at around 60% to 65%. Even though it has come down a little during the last year but such a large degree of dependence on a single geographical location spells high risk for the Indian software sector. Over that, the backlash in the US against outsourcing of jobs to low-cost countries like India has raised some medium-term concerns for Indian software companies.
  • Decreasing competitive advantages: Increasing competition from global technology majors has not only threatened the Indian IT industry’s cost leadership, Indian software companies have also been made to face intense competition for talent. All these pressures mean flat billing rates and higher employee costs going forward. This is likely to affect margins and, consequently, the profitability of Indian companies. The BPO service providers have achieved maturity in practices like relationship management and knowledge management. They need to diversify to employee engagement, process improvement, recruitment, migration planning and workforce management. If this is not done, the IT companies could find maintaining the current client satisfaction level as challenging
  • High rates of attrition: High attrition, especially in the middle and senior positions, continue to damage the performance of Indian software companies to a certain extent. The average industry rate is around 18% which when compared to other industries is on the higher side. The companies, in a bid to overcome high attrition rates, are recruiting science graduates and training them, which means higher training cost and loss of billable hours. Apart from competition for talent from MNC technology majors, internal factors like job dissatisfaction and higher aspirations (in case of BPO companies) have led to such high attrition rates in the Indian software sector