04 Aug 15 Rising localization by Luxury Car makers
The Indian automotive industry is expected to see substantial growth in the next decade, despite near-term concerns. With a vehicular penetration of only 15 cars per thousand persons, India is one of the most promising auto markets in the world. Rising working middle class population, growing disposable income and poor public transport will continue to drive growth for the industry. Consequently, Indian and global auto OEMs are increasing investments.
In the interim, capacity has run ahead of demand. Recent macroeconomic problems like poor market sentiment, high interest rates, and higher taxes have depressed demand. Further, intense competition costlier imports and price sensitive customers – are forcing even high-end auto makers like Mercedes and BMW to indigenize their sourcing.
Every OEM has gone through a similar cycle, starting with Maruti Suzuki in the 80s. Increasing vendor maturity and availability of skilled labor at reasonable costs, have led to localization as well as exports.
Level of localization
BMW recently signed deals with 7 domestic component manufacturers, namely Force Motors for engine and gear boxes, ZF-Hero for axles, Draexl Maier for door panels and wiring harnesses, Tenneco for exhaust systems, Lear India for seats, Valeo and Mahle Behr for heating, ventilating, air-conditioning and cooling modules, raising the level of localization to ~50%. This can help BMW achieve price advantage in the luxury car industry in India, ahead of Audi India and Mercedes-Benz India. We understand that Mercedes too is looking to increase its level of localization to ~60% at its Chakan plant.
This new phase of localization offers huge potential opportunities for auto component manufacturers. Increased demand by the luxury car makers implies greater demand for higher value parts. The luxury car market is also expected to grow at an above average rate of ~23% to reach about 100,000 units of sales by 2020. Relationships with international OEMs could also lead to export opportunities in future.