Auto & Auto Ancillary
Driving the Auto Ancillary Industry
Gearing up with the right IT solutions will provide the required thrust for companies to hit the big league, says a study by Wipro Technologies done for Project Vikas.
The Indian auto ancillary industry is at the cusp of a new growth trajectory. Though currently a minuscule contributor to the global industry which is worth trillions of dollars, over the past few years, the Indian players have developed and displayed their strengths in the technical and high-end activities. With cost arbitrage and technological advantages, the industry is all set to grow its revenues. However, competition from countries like China might disrupt the industry growth in the long run.
Auto component SMEs are among the fastest growing companies in India. They are key contributors to the total production of auto components and also have a significant share in the exports of the industry. As part of a highly fragmented industry, these companies mostly are part of the unorganised sector. A few of the suppliers to OEMs are medium scale enterprises.
India holds huge potential in the automobile sector including the automobile component sector owing to its technological, cost and manpower advantage. India also has a well-developed and globally competitive auto ancillary industry and established automobile testing and R&D centers. The country enjoys a natural advantage and is among the lowest cost producers of steel in the world. India enjoys a cost advantage with regard to castings and forgings as well. The manufacturing costs in India are 25 to 30 percent lower than its western counterparts. India's competitive advantage does not come from costs alone, but from its full service supply capability.
The industry is undergoing a major restructuring and many existing companies are expected to move up in the value chain to a higher tier. Nevertheless, sustenance and survival still remain issues of concern for these companies as they will have to absorb global best practices in this competitive environment.
While the Indian market remained relatively insulated earlier, the liberalisation of this sector and the entry of several foreign auto majors integrated the country, to an extent, into the global market for auto and auto components. Successive governments have reduced custom duties over the years. However, they remain high by international standards. Further, certain segments are characterised by an inverted duty structure.
Going Global: What Stops Us?
The last decade has seen the Indian industry gain maturity and confidence. This industry is counted amongst the larger contributors to India's economic development. However there are a few issues which restrain India from attaining the status of other global players.
Not enough economies of scale: Despite being around 60 years old, the domestic auto industry lags behind other countries like South Korea, Brazil and Mexico in terms of production and sales. This makes it difficult for companies to invest extensively in R&D, a key competitive tool in the global market.
Competitive threats: Countries like China and Thailand might put a spanner in the domestic industry's wheels as they are capable of beating India at its own game, that of low cost.
Trade agreements: 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.
Higher tariffs:Tariffs contribute about 10% more to the cost of cars in India compared to China. The other major cost factor is import duty on raw materials. However, both these will be withdrawn for ‘export only’ units. A similar statement holds for components with about 13-14% out of the 18-19% difference in costs coming from duties and taxes. The primary cost differential between the two countries is due to country-specific costs, such as taxes, duties and government policy. Firm specific costs, such as labor, engineering and logistics are marginally higher in India.
Resistance to IT:When it comes to the adoption of IT, countries like China use computers for accounting functions. Most of the suppliers carry out their accounting functions in full-fledged ERP systems. There is a potential readiness to process computer to computer material from customers implying customer order management to an extent is automated. But modes of receiving orders still are through paper or fax. However, it is generally seen that as the business grows, the resistance to adoption of IT keeps decreasing.
Critical Success Factors
· Management vision (global outlook): Progressive thought process, global exposure, exposure to latest management tools and techniques, management practices, and a vision to become a significant player in the global industry.
· Supply chain robustness: Robustness of business processes and current performance on supply chain KPIs (key performance indicators), targets set for future, and a key strategy implementation roadmap.
· Quality systems: Accreditation to QS-9000/ISO 9001:2001/ISO 14000 systems.
· Cultural fit: Present organization culture and ability to integrate with sourcing companies.
· Investment capabilities: Past investment records and ability to source cheaper funds.
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· Logistics connectivity of manufacturing plants: Connectivity of roads to plant location(s) and proximity to ports.
· Special focus on upgrading design capabilities: Mindset and ability to invest in design capabilities.
Addressing the Pain Points
The auto ancillary industry is fraught with many uncertainties in the daily functioning of business. Let’s look at some of common pain areas and see how they can be addressed.
· Uncertain demand from the customer.
· Less time for quoting and no standard software for product costing.
· Urgent requirement from customer makes difficult to manage the order.
· Material tracking.
· Suppliers are not capable of giving better support.
· High inventory and inventory variation.
· Vehicle tracking.
· Document control system.
· High manpower turn-over.
· Changes in the raw material prices, rate of interest, taxation structures.
Most of these issues can easily be handled with the right IT adoption. A robust, yet flexible ERP (enterprise resource planning) solution will help an auto ancillary SME handle all these problems with ease. From managing the orders and sales forecast to handling the manpower issues, from accounting to managing the inventory, a good ERP system can help the business run smoothly. To ensure better support from the suppliers, companies can opt for supplier relationship management systems as well. Design software can aid in deploying global standards for design, as well as shorten the trial time and thus save costs immensely. Tier-1 SMEs can also go for more solutions like RFID (radio frequency identification) for materials tracking and GPS (global positioning systems) for tracking vehicles.The study by Wipro has found that Tier I and Tier II companies use ERP solutions to a large extent, and most of them have it custom made to suit their business. Why are bespoke solutions widely used? This is because they are offered at a significantly cheaper cost when compared to a standard ERP solution. The solution providers build in only the required functionality based on the size of the company and scale of operations. They also deliver a long-term annual maintenance contract at low costs.
IT Solutions that Scale Up
This means that if the company scales up and grows rapidly, the solution is not likely to keep pace with it. Adding new capabilities and modules, then turns out to be a tedious and expensive affair. And if the growth of the company warrants a change in platform, the ERP system can usually not be ported to the new platform. In effect, companies, while get a cost advantage in the short term, ready themselves for expensive IT overhauls a few years down the line.
Tier II and III companies, which are yet to take the ERP route should consider a hosted software solution model. Organisations then don’t have to worry about the initial investment, as that is borne by the hosting service provider. They just have to pay a transaction-based usage fee. They also don’t need to invest in the application infrastructure upgradation and adherence to industry best practices. So the Total Cost of Ownership (TCO) of implementing a hosted application is less. This model will also assist them in faster implementation and ramp-up to enable productive use of applications. There will be lower maintenance requirements in terms of manpower and the setup required to perform system maintenance.
Adapted from the Auto Clusters ICT Diagnostic study, conducted by Wipro Technologies under Project Vikas
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