The Hindu Business Line : `Auto components sector needs structural changes to face competition'

WHILE the auto component sector has the potential to become a global outsourcing hub and repeat the success story of the IT industry, a lot of structural changes are needed for that to happen, according to Mr S. Viji, Joint Managing Director, Brakes India Ltd, Chennai.

The industry should be given a level playing field if it has to face up to competition from Thailand, with which India has signed an FTA (free trade agreement), he said.

In an interview to Business Line, Mr Viji said, "The opportunity is there (for the Indian auto component industry to replicate the IT industry's success story). But to make it a success, a lot of things have to happen - from the Government, from the industry, from individual players and from the associations."

He said a McKinseystudy shows that there is potential to increase the business from the current level of $6-7 billion (Rs 26,700-32,000 crore) to about $40 billion (Rs 1,78,700 crore) by 2015.

The auto components exports have the potential to go up from the of $1-1.5 billion currently to $23 billion during this period.

Listing things that need to take place, Mr Viji said the value added tax (VAT) regime should be introduced by the Government.

He said under the FTA, an importer from Thailand gets steel at a cheaper price from India than an Indian company procuring steel from within the country.

While imports did not suffer from ST (sales tax), local sales are subjected to ST. Both the Central and State taxes should be rebated to make the domestic industry on par with imports.

Mr Viji said that an ICRA study of India and Thailand showed that in terms of technical domain knowledge and manufacturing excellence, India is ahead of Thailand.

But in terms of cost, the country lags behind due to import tariff, taxes and high cost of power.

If these issues are addressed, it will provide a level playing field to the domestic manufacturers vis-à-vis importers. Mr Viji said the threat from Thailand was due to the fact that a lot of Japanese companies such as Toyota and Honda have developed a large vendor base there.

Nearly 80 per cent of the output is for exports and the domestic market in Thailand is not substantial.

The units in Thailand have tremendous surplus capacity, which could be used for exporting to India, which is a big market. While for India, Thailand is not a big market.

On the size of investment needed, he said that for every Rs 1,000 crore turnover, the investment needed is in the region of Rs 600-700 crore.

The auto component industry has grown at the rate of 10 to 15 per cent a year, which is higher than the overall growth of the manufacturing sector.

After the recession during 1997-1999, the industry has been doing well in the last three years.

Asked whether the growth was sustainable, Mr Viji said one should look at the growth of the automotive industry segment-wise.

The fortunes of commercial vehicles and tractors are cyclical, whereas the passenger car and utility vehicle sectors are on a growth path, which may not be a linear growth but a step growth depending on economic conditions and GDP growth.

Given the tremendous growth witnessed by commercial vehicles in the past three years, Mr Viji said he expected cyclical downturn in the near future and "when it happens is anybody's guess."