Is it Rough Weather For Chinese Auto Parts?

Increased volumes and investments in the auto sector has apparently given the auto ancillary sector a phenomenal boost, previously put off by poor demand and increased working capital cycles.

Riding on the back of rising sales and increased demand for their products, the fortunes of the auto ancillary sector seems to be bright. In the recent past, the sector was under serious trouble with high inventories, low demand and thin margins. Though exports continue to plummet the revival of the demand in the domestic markets has come as a saving grace for the sector. If the sales of last nine months are taken into account then moving forward, autoexportluzern the domestic demand will be quite robust in the future.

Acceleration in domestic demand

The domestic auto sector has been witnessing a 20 percent annual jump. The sale of medium and heavy commercial vehicle space was more during this period. Almost 24,000 units of M&HCV were sold during 2009, almost three fold rise in comparison to the corresponding period a year ago.

In December 2009, sales were the highest in the last 21 months. The commercial vehicle (CV) apparently is said to be the principal contributor to the revenues of top auto component players. Bharat Forge is said to earn almost 60 percent of its revenue from the CV realm. With the economy in the revival mode and about 9 percent of growth recorded on annual basis, it is being estimated that the CV segment will be registering a double-digit growth in 2010-11.

The domestic sales of passenger vehicles also climbed up considerably almost by 26 percent to 1.5 million units as compared to 2008-09. Auto component companies like Amtek auto that generates 2/3 of the revenues from passenger vehicles segment seem to be enjoying good returns. Likewise, Rico Auto will be getting 33 percent sales growth this year. While demand for ancillary companies emanate from the existing markets, however, investments by Indian and multinational companies is also putting the industry on fast-track, which will eventually lead to more opportunities for the supplier.

Setting up of Greenfield units in India

The auto component sector of India has grown considerably about 17 percent year-on-year basis and at present it is pegged at $21 billion. In the upcoming years, the sector is projected to grow almost by 28 percent and is expected to touch $27 billion in 2011-12. Investments have also grown by the rate 16 percent annually. High demand and low penetration in the country has encouraged many multinational companies and even local companies to start Greenfield units in India, in an attempt to cater to the requirements of the small car segment.

Reading the rising potential of the market MNCs such as Ford, Nissan, Renault, Volkswagen, General Motors and Toyota are also enhancing the existing capacities, and even setting up new units to the tune of $4 billion. In fact Nissan and Volkswagen are even planning to source auto components from Indian for their global operations as well. Auto components companies like Rico Auto, Apollo Tyres and Sona Koyo are also escalating and building up new capacities.

Moreover to steer clear of exchange rate fluctuations companies are also looking forward to source as much as possible from the local markets. Case in point being: Maruti Suzuki. Maruti Suzuki sources almost 80 percent of its products from the domestic product. Though the domestic market is showing robust growth, however the scenario is not the same in the export market.

Exports plummet

Almost 2/3 of the revenues come from the US and European Markets, which are going through a severe recessionary crises. Exports revenues have said to have grown just 5 percent to $3.8 billion. Commercial vehicles and off-roaders sales never picked up in the overseas market. Bharat Forge, Rane Engines and Wheels India are apparently bearing the brunt of the slowdown. And according to the industry sources the situation could worsen once the government pulls back scrappage incentives available to customers in March this year. Most industry sources concur that revival of demand in the US and European markets are imperative for the exports to climb in the future. Bharat Forge at present operates its overseas plants at about 40-45 percent capacity.

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