This document provides an insight into the global automotive component industry

1. Automotive Components Industry
January 2010
By: Rahul Razdan rahulrazdan86@gmail.com
Ravneet Sahi ravneet.sahi@gmail.com
1
Rahul Razdan | rahulrazdan86@gmail.com

2. Agenda
1. Market Scenario – The impact of auto crisis
2. Braving the crisis – Cost Saving / Cash flow measures
3. Growth Strategy for markets – India, China and Europe are different
3.1 Europe
3.2 India
3.3 China
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3. Market Scenario – The impact of auto crisis
Automotive value chain – Components manufacturers focus on
design to delivery as per the requirements of OEMs
Finance Cost targets
Revenue
Equipment Manufacturing management
Account
and IT
Marketing, Product
Sales and Production OEM Development
service demand
Orders SCM
and Manufacturing Financial
Retail and sales support incentives Designs
Purchasing feasibility
Modules
Distributors and parts
Accessories
Vehicles
Dealers Suppliers
Vehicle
Consumers service Tier I
Suppliers
Financing Credit &
Payments Leasing
Tier 2 Tier 3
Sourcing
Source: Adapted from Capgemini Consulting; McKinsey
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4. Market Scenario – The impact of auto crisis
Auto component manufacturer have to deal with toppling revenues
and reduced orders due a sharp decline in vehicle demands
The economic downturn has lead to Global trade and logistical activity has
1 drop in consumer sentiment decreased
Sales of cars in Europe and the US has Truck have seen a drastic decrease in
fallen in 2008 and it expected to decrease
• In developed markets, volumes have further in 2009
2 declined by as much as 25-35% • Dramatic and quick collapse of truck
sales worldwide (up to -60%-70%)
• Decreased top-line and order books
• Risk of clients failure
3 • Cash payment uncertainty
Source: Roland Berger; Auto Focus Asia
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5. Agenda
1. Market Scenario – The impact of auto crisis
2. Braving the crisis – Cost / Cash Saving measures
3. Growth Strategy for markets – India, China and Europe are different
3.1 Europe
3.2 India
3.3 China
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6. Braving the crisis – Cost / Cash Saving measures
Quick hit measures can provide immediate cash saving, and long
term savings to be brought in by structural changes
100% 4,143 Structural cost
(in INR Cr)
transformation
Savings
80%
Cost heads
60% Variable cost Systemic
reduction savings
Structural
40% savings
7% 15%
20%
296 Quick hits
0%
Timeline
Revenue Costs EBIDTA Target…
Identification of
Attack variable costs
cost reduction Re-structure fixed cost heads
heads
objectives
• Increase EBIDTA to • Reduction of non-operating/ • Closure of loss making plants/ adjustment of
pre-2008 levels ancillary expenses production footprint
• Spend on variable cost • Temporary production stops • SG&A headcount reduction Reach
heads wisely and plan • Reduction of purchasing costs • Pay-cuts to employees by 20% Target
fixed expenses (re-negotiations) • Reduction of R&D expenses EBITDA
strategically • Putting Manpower to • Reduction of indirect plant personnel margins
• Create a 8% alternate industries to ensure • Financial restructuring
improvement in optimum utilization • Reduction of CAPEX to the minimum
EBIDTA margin to 15%
Source: Roland Berger
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7. Braving the crisis – Cost / Cash Saving measures
With pointed and well directed cost reduction measures the
company can increase the %EBITDA to optimum levels
Learning from Auto Component Manufacturers Initaitives
• Bharat Forge is planning to reduce to • SONA Group redesigned some of the
D INR ~200 Cr. From working capital products which has resulted in 8%
O
M
which gives INR ~20 Cr of interest decrease in through process
E saving improvements and value engineering
S • No Capital Expenditures in FY 2010 • Product redesign capabilities will
T • Emphasis on improving operational extensively be used in future at
I
C efficiencies such as Yield, Scrap SONA, to products at lower costs than
reduction and energy cost the ones developed in Japan or Europe
F • Delphi has Closure of 10 plants (mainly
• Faurecia has closed plants in Germany
O Europe) announced
R • Also the company is targeting a EUR
• The company has also identified 400
I 200 m improvement in working capital
E employee redundancies in Germany
requirement
G
N
Source: Live Mint; Economic times; Roland Berger
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8. Agenda
1. Market Scenario – The impact of auto crisis
2. Braving the crisis – Cost Saving / Cash flow measures
3. Growth Strategy for markets – India, China and Europe are different
3.1 Europe
3.2 India
3.3 China
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9. Growth Strategy for markets – India, China and Europe are different
The impact of the crisis is deeper on the European auto industry,
whereas China and India still exhibit growth
New passenger car registrations August YTD 2009 vs. 2008 (in’000)
Europe China India
37% 10%
10,414 6,226
8.1% 915
830
4,550
9,566
2008 2009 2008 2009 2008 2009
Source: SIAM; Roland Berger; Association des Constructeurs Européens d'Automobiles
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10. Agenda
1. Market Scenario – The impact of auto crisis
2. Braving the crisis – Cost Saving / Cash flow measures
3. Growth Strategy for markets – India, China and Europe are different
3.1 Europe
3.2 India
3.3 China
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11. Growth Strategy for markets – Europe
The European Auto industry reach the 2008 sales levels only after
2012, while the scrappage scheme may bring short-term comfort
Europe Light vehicles sales (in m Units) Scrappage Schemes
20
18.6 19.0 17.5 • Scrappage schemes have been
18
16.8 introduced in almost all major
16 markets
15.1
14 13.8 • Offered bonus: Germany 2,500
13.1
12 EUR, UK 2,000 GBP, Italy 1,500 EUR
• Total government budgets: Germany
10
EUR 5 bn, UK GBP 300 m
2006 2007 2008 2009e 2010e 2011e 2012e
• European market has seen a very down ward pressure on the sales volume leading to a
decrease in the order books of the auto-component manufacturers
• Sales would have been even lower if it had not been for the Scrappage Schemes introduced in
the EU region
• It will take more than 3 years for the demand to revive
Source: Datamonitor; CBI Market Information Database; Roland Berger
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12. Growth Strategy for markets – Europe
The initiatives of operations restructuring in Europe can sustain
business in the short run and reap benefits by 2014
2014
1. Retaining capacity to
2012
harness when the
demand revives
3. Diversification into
2011 Infrastructure and
Lifting & Material
handling equipments
2010
2. Saving cash by
operating at low 4. Expansion into
volumes Other European
markets
Source: Datamonitor; CBI Market Information Database; Roland Berger
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13. Agenda
1. Market Scenario – The impact of auto crisis
2. Braving the crisis – Cost Saving / Cash flow measures
3. Growth Strategy for markets – India, China and Europe are different
3.1 Europe
3.2 India
3.3 China
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14. Growth Strategy for markets – India
Favorable policies and cost arbitrage will buoy auto component
sourcing to India
Force 1 – Export potential and
proximity to markets: Force 2 - It is a proven base for cost
• Total value of exports by 2015 expected to
effective manufacturing:
reach US$ 8–10 b for vehicles and US$ 20–
• India is cost competitiveness in terms of
25 b for components
labour and raw material
• Proximity to other Asian economies and
• Manufacturing costs in India are 25-30%
emerging markets like Africa
lower than the western countries
• Shipments to Europe cheaper than those
from Brazil and Thailand
Auto component market in India to
grow ten times by 2015
Force 3 - Investment Commission has
Force 4 - Margin pressures faced by
set a target of attracting foreign
auto manufacturers in developed
investment:
markets:
• Target foreign investment of USD 15 b by
• OEMs and Tier I suppliers in developed
2015
markets facing intense cost pressures
• Increase India's share in the global auto
• Souring from Asian markets to stay cost
components market from the existing 0.9%
competitive
to 2.5% by 2015
Source: IBEF
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15. Growth Strategy for markets – India
Indian auto industry - the growth presents scope for calculated
measures to gain market share in the future
Indian auto component industry turnover (USD b) Foreign Companies sourcing from India
2003-04 1.27 Manufacturer Worth
2004-05 1.69 Market to grow Volkswagen AG 1 billion Euros
CAGR
2005-06 2.47 10 times in the Renault- Nissan 300 million Euros
29.94%
2006-07 2.87 next 7 years Fiat USD Four million
2007-08 3.62 Ford Motors USD 150 million
2015 (e) 33-40 Daimler Chrysler USD 125 million
BMW AG NA
0.0 10.0 20.0 30.0 40.0
• Indian auto component industry is well positioned to capitalise on the growth in outsourcing to
low cost countries
– Exports are expected to contribute to USD 20-25 B in 2015 to Auto component Industry
market (~60%)
• Tap into component exports pie by leveraging the foreign market reach through recent
acquisitions
• Diversify into non-auto components business to increase the revenues and diversify
Source: A. T. Kearney; IBEF; ACMA
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16. Agenda
1. Market Scenario – The impact of auto crisis
2. Braving the crisis – Cost Saving / Cash flow measures
3. Growth Strategy for markets – India, China and Europe are different
3.1 Europe
3.2 India
3.3 China
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17. Growth Strategy for markets – China
China Automobile market is expected grow due to strong domestic
consumption and governments recent stimulus packages
China vehicles production (in m Units)
15% 9.0
• Chinese auto-component is
23% 5.1 expected to grow to USD 115.6 b
4.2 • The market is expected to grow
2.5 3.1
2.2 at a stable rate of 18% per
annum
2003 2004 2005 2006 2007 2011e
China Automotive Stimulus Packages
• Subsidies to rural residents to trade in old cars for new
RMB 5 Million worth
ones
of subsidies
• Lowering fuel retail prices
• For research into:
RMB 10 Million
– Vehicle safety
worth of subsidies
– Alternate energy
Source: A. T. Kearney; KPMG
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18. Growth Strategy for markets – China
China has a cost advantage when compared to Brazil, Thailand and
India
Country Annual lending rate Country Labour cost (USD/hour)
India 10-11% India 0.75
Brazil 13-14% Brazil 4.3
China 5-6% China 0.75
Thailand 7-8% Thailand 0.8
Country Power Cost per kwh (USD)
India 0.14
Brazil 0.05
• China is competent with the other
economies on low cost labor front
China 0.03 • With India it has a overall cost
Thailand 0.11 advantage of ~9%, due to lower
power and funds costs
Source: A. T. Kearney; IBEF
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19. Growth Strategy for markets – China
A manufacturer can enter/ accessthe Chinese market using a three-
pronged strategy
Strategy for China
Serve the growing automobile market Realize the Chinese cost savings in
in China manufacturing components
• Tap the two-wheeler customer base • Enter into China through the route
of Engines engineering in China, e.g. of Joint venture . Eg. Bharat Forge
Loncin Group and FAW
• Enter into China by directly investing
Sourcing the components from the and setting up a company , Eg.
Chinese markets Sundaram Fasteners
• Set-up Purchase office in China to
source low cost components
Source: A. T. Kearney; IBEF
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20. THANK YOU
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