Friday, July 2, 2010

>Auto & Auto Ancillary: The Outsourcing Opportunity

Global OEMs are increasingly sourcing components from cheaper manufacturing destinations and Indian component manufacturers offer a great cost-quality proposition. The global auto components industry is estimated at US$1.2 trillion. An average cost reduction of nearly 25-30%
has attracted several global automobile manufacturers to set up their base. The value in sourcing auto components from India includes low labor cost, raw material availability, technically skilled manpower and quality assurance.

The global auto ancillary industry is expected to reach US$1.9 trillion by 2015, of which around 40% (US$700 billion) is potentially expected to be sourced from low cost countries including India. Launch of new vehicles by global auto majors for both domestic and export market will augur well as localization content is higher at ~75% which helps to control cost and compete with peers.

Current scenario and future prospects for OEMs
The CV industry has positive factors working for it now – increased road activities and infrastructure activities that are boosting demand thus enabling transporters to pass on increasing fuel prices in freight rates. The key indicator of underlying demand in the CV industry, the index of industrial production (IIP), has been improving steadily over the past two quarters, following strong revival in industrial activity. We anticipate CV industry to grow by 14% CAGR over next 3 years and by 17% in FY11.

Natural Rubber prices to remain firm till late 2011…until supply recovers but pricing power to remain in favor of tyre manufacturers.

Buoyant demand from China, India and US for automobiles coupled with drought-like-conditions in major rubber producing countries and rubber trees reaching declinng yield phase, led rubber prices to rise sharply. Apart from the buoyant demand and drought-ridden supply other factors influencing the rubber market included the weakening US dollar, volatility in yen and the increasing crude oil prices.

The existing yielding trees in major producing countries were mostly planted during 1980. Most of the trees planted have reached declining yield phase, thus the age composition of the existing yielding area is unfavorable for yield improvement. However period from 2005 onwards has seen substantial expansion in rubber area and hence net impact of the trees planted during 2005 onwards (less the trees that are needed to be uprooted) are expected to start yielding from 2012 onwards.

To read the full report: AUTO ANCILLARY