Moving up the value chain critical for auto components industry in the wake of U.S. tariffs: Vector Consulting

As the Indian auto component industry is laden with both sectoral and reciprocal tariffs, the way to go forward for the sector is to move up the value chain and offer unique offerings, instead of just contract manufacturing components designed by others, says Ravindra Patki, managing partner, Vector Consulting Group.

“There are two aspects to this change. Out of the almost $7 billion in exports that the auto component industry does to the U.S., you will see that, in effect, 20-30% is getting affected immediately because of the tariffs,” he tells Fortune India.

Vinnie Mehta, Director General of the industry body Automotive Component Manufacturers Association, highlighted during ACMA’s 65th Annual Session that the Indian automotive component industry exported $6.6 billion worth of components to the U.S. “The $3.5 billion worth of exports come under Section 232, which covers cars and small trucks. That’s at 25% tariffs. The other components, worth $3 billion, for commercial, off-road vehicles, tractors, and construction equipment, are at 50% now,” he was quoted as saying.

The reason, according to Patki, is that the remaining exports can be broadly classified into two categories. The first is the proprietary part, which originates from India and was developed there, requiring significant changes at the recipient’s level. “If you change from an Indian supplier to some other supplier, you have to put in place a lot of things. The second point is that the share of business these Indian suppliers have is 100% full, which will not make it easy for the U.S. counterparts,” he adds.

The remaining 20-30% of the suppliers are making build-to-print parts. The design belongs to the U.S. company; they gave it to the company, which built it and supplied it to them. Now, this same build-to-part, which is manufactured in India, is also available to other suppliers, as these agreements are usually on a share-of-business basis. 

“This is the biggest risk that we currently have. What Indian manufacturers need to do is move up the value chain. Instead of supplying the parts according to someone else’s design, they need to get into the development of parts and offer unique offerings on the parts they have. For the time being, this is a jolt to the overall business. However, going forward, if we need to become resilient to future changes, the key is to move up the value chain and design our own unique offerings,” Patki avers.

To implement this change, a significant amount of product development and technology-related expertise is required, which is currently available in India. The challenge, according to Patki, is to ensure the timely readiness of the products offered by OEMs, and that is where we currently struggle.

“We found that 80% of the OEMs say that their product development is delayed, and the biggest challenge is that, at the juncture at which we are, the technology and the features in the vehicles are changing more rapidly than in the past,” he says. Even the fuel sources are changing more rapidly than they did in the past. “When you developed the Maruti 800, for instance, it had a life cycle of 20 years, whereas today it has a life cycle of two years. In two years, you are supposed to bring a facelift or an upgrade with added features. Sometimes, even less than that, as the cycle is even smaller in EVs.”

The new product development cannot be a 36-month or a 50-month project. It has to be a 12-month or 18-month project. Patki cites the example of BYD, which showed that it is possible to develop cars in 18-24 months. “We, on the other hand, are much behind with our 36 to 60-month product development cycle.” 

This change is crucial for the growth the industry is aiming for, as the government expects OEMs to invest in these technologies. If the product development cycles are longer, then companies invest more money and receive less output, resulting in higher investment for fewer returns. “But if this cycle can be reduced, then with the same or lesser investment, they can get more technologies in their vehicles and do that faster,” he posits.