Auto ancillaries: What lies ahead?

Key pre-budget memorandum for 2004-05 from Automotive Component Manufacturers Association of India (ACMA) is as follows::

Setting up of 3 domestic SEZs in the North, West and Southern India clustering around the major automotive manufacturing hubs. There should be exemption from customs duty on inputs, sales tax & excise duty for supplies to units in the SEZ.

All barriers to inter-state trade and commerce should be removed and a uniform national market to be created on the implementation of VAT.

Status quo to be maintained on import tariffs on auto-components so that they would be kept at the current levels of 25% for the next 2-3 years

Benefit of 150% weighted deduction for investment made on R&D maybe extended to auto component manufacturers also, as it has been done in the case of other notified industries.

Reduction in customs duty on metals used by industry. While duty on copper, zinc and lead reduced from 35% to 25%, duty on Aluminium reduced from 25% to 15%.

De-reservation of a number of items in the SSI sector.

Measures to bring in large-scale public investment in infrastructure development and acceleration in the Golden Quadrilateral project.

Additional levy of a cess of 50 paise per liter of diesel and motor spirit, which will contribute Rs 26 bn and help in acceleration of highway development program.

IT companies will continue to enjoy the benefits of 10A/10B benefits even after a change of management.

Reduction in excise duty on cars from 32% to 24% and electric vehicles from 16% to 8%.

Decrease in freight rate on iron and steel by around 5.3%.

Duty on key inputs such as non-alloy steel to be reduced from 15% to 10%. Duty on alloy steel, copper, lead, zinc and base metals also reduced from 20% to 15%.

Consortium of banks formed to ensure speedy conclusion of loan

2% education cess on all taxes.

Cost advantage - Due to cost related pressures on global auto players and Tier 1 suppliers, a lot of them have started outsourcing components from Indian auto ancillary players. The industry, which exported components worth over US$ 1 bn in FY04, is also benefiting from strong domestic sales.

Large untapped market - 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.

Milking the MNC experience - 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 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 competitors like China and Thailand. This combined with low cost quality manpower strengthens our stand in the global arena.

Not enough economies of scale - Despite being around 60 years old, the domestic auto 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.

Competitive threats - Countries like China and Thailand might put a spanner in domestic industry's wheels. While China has huge economies of scale and lower labour cost than India in some areas, Thailand is believed to have excess capacity (legacy of East Asian crisis) and depreciated assets. Therefore, these countries are capable of beating India at its own game, that of low cost.

Trade agreements might hurt - The growing number of FTAs (Free Trade Agreements) that are being signed by India with countries like Thailand, Singapore, China etc is likely to hurt the domestic players as they pay a relatively higher duty of around 25% as compared to 1%-10% being paid by its Asian counterparts.