Indian component industry concerned about Yuan devaluation

The recent devaluation of the Chinese Yuan poses significant impact for the Indian auto-component industry which is in a wait-and-watch mode to figure out how the macro-economic trends affect the domestic industry here.

As per a latest report by rating agency ICRA, the Indian auto component industry at $38.5 billion is a fraction of the Chinese auto component industry ($400 billion). China also remains a very large exporter of auto components with exports of $100 billion in 2014, ICRA said

More significantly, China accounts for about 23 per cent of total auto component imports to India and this share has consistently increased over the past three years whereas exports to China (from India) have remained stagnant.

As a result, the Automotive Component Manufacturers' Association of India (ACMA) feels that the impact could come primarily in three areas. V Mehta, director general of ACMA said that one impact could come in the area of original equipment manufacturers (OEMs) who might think of switching to Chinese suppliers in the medium term if the prices are very competitive. "Secondly, our export competitiveness would also take a hit vis-a-vis Chinese competition. However, with the rupee depreciating against the dollar, one has to wait to understand the impact on the overall value chain," he said adding that the most significant impact, however, was likely on the aftermarket segment which already sees a lot of imports from China.

The aftermarket segment is a price sensitive one and cheaper Chinese imports can eat into the market share of smaller component makers. A handful of component makers from Rajkot, an established component hub comprising SMEs, shared the same concern.

The Indian automotive industry imports multiple products from China namely bearings, axle beams, knuckles, glass, wheel rims, steering products, rubber components, and electronic chips to name a few.

ICRA said, "Considering cheaper and local raw material availability (as against imported raw material for India), lower financing cost and economies of scale, imports from China are priced-on an average 20-25 per cent cheaper than Indian components, posing a serious threat to domestic auto ancillaries."

During FY15, India imported auto components worth $3.17 billion from China, as against $ 344 million exports to China. Consequently, India's trade deficit with China has widened from $ 1.03 billion in FY10 to $ 2.83 billion in FY15.

Leading vendors like clutch maker Setco Automotive, however, feel that in case of proprietary components, the OEMs are unlikely to make a switch to Chinese counterparts very easily. "For proprietary components which have design specification OEMs would stick to their original vendors. However, the aftermarket segment is more vulnerable," said Udit Seth, executive director of Setco Automotive.

ICRA, however, said that "While in the past, several major Indian OEMs have sourced components from China (wheel rims, steering components, axle beams), over the past three year, this trend has fallen due to increase in landed cost of these Chinese components; the current Yuan devaluation could lead to a product specific re-look at these cost dynamics to some extent. Given the presence of localisation/sourcing centres in China, the continued devaluation of Yuan could lead to global OEMs continue using China as a sourcing point for India, instead of developing local Indian suppliers." OEM demand accounts for nearly 54 per cent of the Indian auto-component demand.

Coming to segments like tyres, China has traditionally dominated as the source market for tyre imports in India, largely for the replacement market.ICRA highlighted that during the past year, import of Chinese tyres into the Indian replacement market has increased sharply by 56 per cent and by a further 58 per cent during Q1FY16.

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