India, the world’s third-largest market for automobiles, is anticipated to take the lead in the revival of sales of passenger cars. IMF predicts that the Indian economy will grow at one of the highest rates in the world. Curiously, while COVID-19 has slowed down our progress, it has also encouraged businesses to prioritize supply chain resilience, enabling India to develop into a major manufacturing base. Performance in the auto sector is a good illustration of this. Even if the world economy began to grow in 2022, the industry still faced challenges due to chip scarcity and the influence of geopolitical events on the global supply chain. Despite these obstacles, the Indian auto component industry saw rapid Growth.
India saw a growth rate of 23%, with a turnover of $4.20 lakh crore, contributing 2.3% of India’s GDP, along with the highest-ever trade surplus of $700 million in FY22, increased infrastructure spending, and stronger incentives for domestic manufacturing. India, which is currently the third-largest automotive market, is anticipated to take the lead in the recovery of passenger vehicle sales, which are anticipated to peak by the middle of this decade.
Factors Promoting the Growth of the Indian Auto Component Sector
Current trends, including the electrification of two- and three-wheelers and passenger automobiles, are anticipated to drive market expansion in the future. Due to India’s large proportion of young people and expanding middle class, the two-wheeler category dominates the industry in terms of volume. The demand for commercial cars is being driven by the expansion of e-commerce and the logistics sector. Exports of auto parts increased 43% to $14.1 lakh crore ($19 billion) in FY22, supporting 1.5 million jobs. The industry had a CAGR of 6.35% from FY16 to FY22, according to the Automobile Component Manufacturers Association (ACMA), and was worth $56.50 billion in the most recent financial year.
By 2026, the industry is expected to be worth $200 billion and contribute 5-7% of India’s GDP, with exports of auto components from India expected to reach $30 billion.
Important elements that are fueling the sector’s expansion include:
- A growing number of car component manufacturers are emerging as a result of strong and diverse demand.
- A strong incentive for businesses to produce domestically is the availability of a cost-effective and reliable engineering workforce as well as skilled and semi-skilled labor.
- Easy access to sophisticated and precise engineering.
Supporting India’s EV Expansion in the Auto Component Sector
Without electrifying automobiles, it is impossible to imagine the future of mobility. The demand for electric vehicles both domestically and internationally may be satisfied by the auto component sector (EVs). From the standpoint of global supply, the EV market has opened up opportunities for us, as we have the potential to be one of the largest manufacturers. Investment in the industry is already being drawn in by the EV segment’s impending rise. Research by ACMA-McKinsey predicts that by 2030, EV sales would account for 50% and 70%, respectively, of all new two- and three-wheeled vehicle sales. The rise of EVs in the nation will create new service opportunities and spur financial investments to hasten and support EV adoption. By providing a recharging facility and enabling “battery” or “energy” to be recognized as a service, battery swapping is one such policy that seeks to relieve the space limitation associated with establishing charging stations in urban places. According to estimates, there were 285% more charging stations overall in India in FY22 compared to the previous year. Cohesive government and industry efforts are predicted to hasten the expansion to 400,000 stations by FY26. The primary drivers of the segment’s growth will be battery production and charging.
Additionally, the $3.5 billion Manufacturing Linked Incentive (PLI) program for the automotive industry provides financial incentives of up to 18% to encourage domestic production of automotive components connected to future technologies and draw capital to the value chain of the sector. In order to promote EV adoption through subsidies, the government has also implemented Faster Adoption and Manufacturing of Hybrid & Electric Vehicles in India (FAME). The second phase of the program is currently in action and has a budget of 10,000 crores. It will run for 5 years starting in 2019.
The rate and amount of investment made by OEMs, battery producers, and operators of charging stations, as well as advancements in infrastructure, determine the size of India’s EV market growth. In FY22, the amount invested in EV start-ups reached a new record, rising by nearly 255% to $444 million. More than 500 companies representing every aspect of the EV value chain make up the Indian EV ecosystem, 63% of which are manufacturing-only start-ups.
Laying the Foundation for Newer Technologies
Additionally, exciting prospects for the future of mobility are smart and connected automobiles. The adoption of 5G will change how we use mobility as cutting-edge technology like ADAS find use in the car industry. To encourage innovation, the government ought to fund specialized programs for developing capabilities that are centered on cutting-edge subjects, including a Center of Excellence for Industry 4.0, Artificial Intelligence, Machine Learning, Analytics, and Cybersecurity. This will not only open up the international potential for the Indian component industry. To address the challenge of standardizing safety norms, it is critical to developing design and manufacturing capabilities for connected vehicles, telematics, and autonomous driving.
The Difficulties Anticipated
India has made a major impression since Covid by capitalizing on its diverse industrial capabilities and low-cost manufacturing. However, the industry’s development continues to be hampered by persistent geopolitical headwinds and associated supply chain disruptions. Particularly, supplies across the segments have been delayed as a result of the lack of semiconductors. Manufacturers are finding solutions to the issue in order to maintain a timely delivery schedule and continuous output. Although the issue is now controllable, it is still unclear when the shortage will be resolved.
The large workforce in the Indian auto industry has its advantages but also some disadvantages. The sector is undergoing a transition toward electrification and digitalization. It is therefore critical for OEMs to invest in new technologies, upskill their management and labor force, and push localization by building strategic partnerships and taking advantage of Indian government incentives such as 100% FDI in the EV industry, incubator programs, shared facilities for prototype and small-scale manufacturing, financial support through the Credit Guarantee Scheme for Start-ups (CGSS), tax advantages, and consumer subsidies. To achieve the aspirational objective, private investment from traditional automotive firms and energy industries will be crucial in driving EV demand.
Due to increasing export volumes, India recorded its first trade surplus during FY22, which is very positive for the components sector. Additionally, domestic sales across all industry groups are returning to their pre-pandemic levels. These patterns give us confidence that the Indian auto component market is on a solid growth trajectory. The combined efforts of the government and key business actors have begun to bear fruit, establishing India as a major hub for manufacturing.