The Indian economy is forecast to be one of the world's fastest, according to IMF. Interestingly, while Covid-19 has hindered our growth, it has also encouraged companies to focus on supply chain resilience, allowing India to become a global manufacturing hub. The auto industry's performance illustrates this pretty well. In the year 2022, though the global economy opened, the industry faced headwinds in terms of chip shortage, and geo-political scenarios impacted global supply chain.

Despite the challenges, the Indian auto component industry witnessed rapid growth of 23%, as the turnover of the industry contributed 2.3% of India's GDP at ₹4.20 lakh crore ($56.5 billion) coupled with highest ever trade surplus of $700 million during FY22, increased infrastructure spending and greater incentives for indigenous manufacturing. Today, India is the third largest automotive market and is expected to lead the rebound in passenger vehicle sales likely to peak by the middle of this decade.

Factors contributing to expansion of Indian automotive industry

Future market growth is expected to be driven by current trends including the electrification of two & three-wheelers and passenger cars. The two-wheeler segment dominates the market in terms of volume due to growing middle class and sizeable percentage of India's young population. The rise of e-commerce and logistics industry is driving demand for commercial vehicles. In FY22, exports of auto components went up 43% to ₹1.41 lakh crore ($19 billion) and employed 1.5 million people. As per the Automobile Component Manufacturers Association (ACMA), from FY16 to FY22, the industry grew at a CAGR of 6.35% and was worth $56.50 billion in the last financial year. Auto component exports from India are forecast to reach $30 billion and the industry is estimated to be worth $200 billion contributing 5-7% of India's GDP by 2026.

Key factors which are contributing to the sector's growth:

1. Strong and diversified demand contributing to the emergence of more auto components manufacturers

2. Frugal and robust engineering workforce along with skilled and semi-skilled labour is a huge incentive for companies to manufacture indigenously

3. Accessibility to high-end and precision engineering

Supporting EV growth in India

The future of mobility is unimaginable without the electrification of vehicles. The auto component industry has the potential to meet the domestic and global demand of electric vehicles (EVs). The opportunities that the EV segment has created comes from a global supply perspective where we have the potential to be one of the biggest manufacturers. The imminent growth of the EV segment is already attracting investment in the sector. According to an ACMA-McKinsey report, by 2030, the contribution of EVs in new two-wheeler and three-wheeler vehicle sales will rise to 50% and 70%, respectively.

The growth of EVs in the country will open new avenues of services as well and encourage investments to support and expedite adoption of EVs. Battery swapping is one such policy which intends to alleviate the space limitation associated with installing charging stations in urban locations by offering a recharging facility as well as to enable 'battery' or 'energy' recognised as a service. It is estimated that total number of charging stations in India increased by 285% year on year in FY22; cohesive government-industry efforts are expected to speed the expansion to four hundred thousand stations by FY26. Battery manufacturing and charging will be the biggest facilitator of the segment's growth.

Moreover, the Production Linked Incentive (PLI) programme for the automobile sector (with a $3.5 billion budget) offers financial incentives of up to 18% to stimulate local production of future technology related automotive components and attract capital to the industry's value chain. The Government has also implemented Faster Adoption and Manufacturing of Hybrid & Electric Vehicles in India (FAME) to encourage the adoption of EVs through subsidies. Currently, the phase II of the scheme is under effect for a period of 5 years starting from 2019 with a total budget of ₹10,000 crores.

The scale of India's EV market growth is based on the pace and investment by OEMs, battery manufacturers and charging station operators, as well as improvements in infrastructure. The investment in EV start-ups achieved a new high in FY22, increasing by close to 255% to $444 million. The Indian EV ecosystem consists of more than 500 firms encompassing the entire EV value chain; 63% of which are start-ups entirely focusing on manufacturing.

Paving way for newer technologies

Smart and connected vehicles are also promising prospects for the future of mobility. Adoption of 5G will impact the way we consume mobility as new-age technologies, such as ADAS, find applications in the automotive space. Fostering innovation, the government should invest in dedicated capability building programmes focused on emerging topics, such as a Centre of Excellence for Industry 4.0, Artificial Intelligence, Machine Learning, Analytics, and Cybersecurity. This will not only enable the Indian components industry to mint global opportunities It is crucial to build design and manufacturing capacities for connected vehicles, telematics, and autonomous driving with collective efforts to address the issue of standardising safety protocols.

The challenges ahead

Post-Covid, India has put a strong foot forward playing to its strengths of diversified manufacturing capabilities and low-cost production. However, the continued geopolitical headwinds and related supply chain disruptions still challenge the progress of the industry. Specifically, the semiconductor shortage has resulted in delayed deliveries across the segments. Manufacturers are working around the problem to keep the delivery timeline intact and production steady. While the problem has become manageable, it is still uncertain as to when this shortage will end.

The Indian auto sector employs a huge workforce, which, having its own advantage also comes with a few challenges. The industry is going through a shift towards digitalisation and electrification. It has now become crucial for OEMs to invest in new technologies, upskill their managerial and labour force, and drive localisation by forging strategic partnerships and taking advantage of incentives implemented by the Indian government like 100% FDI in the EV sector, incubator programmes, shared facilities for prototyping and small-scale manufacturing, financial support through the Credit Guarantee Scheme for Start-ups (CGSS), tax breaks, and subsidies for consumers. Private investment by conventional automotive players and oil companies will play a huge role in boosting EV demand to reach the aspirational goal.

During FY22, India achieved a trade surplus for the first time due to high export volumes, which is very encouraging for the components industry. Moreover, domestic sales across the segments of the industry are bouncing back to the pre-pandemic levels. These trends assure us that the Indian auto component industry is set on the trajectory of strong and sustainable growth. The collective effort of the government and the industry players have started to come to fruition, putting India on the world map as the global manufacturing destination.

Views expressed are personal. The author is the president of the Automotive Component Manufacturers Association (ACMA), and chairman, Sona Comstar.

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