>Auto giants scale up ancillary capacity

Small, medium players may go out of business.

In-house auto ancillary units of auto giants might just drive small or even medium-sized auto components manufacturing companies out of business.

According to analysts, auto majors such as Tata Motors and Mahindra and Mahindra (M&M) in the four-wheeler segment and Hero Honda and Bajaj Auto for the two-wheeler segment are depending upon in-house units for component sourcing and are posting better margins.

"These companies are manufacturing 25 per cent of their total component consumption making individual component makers lose business," said an analyst.

Announcing mega expansion plans, car companies are on a spending spree for acquiring land to set up their own manufacturing facilities, they pointed out.

"The small and medium-sized companies which have a relatively small capex compared with bigger players including Bharat Forge, Escorts, Rico and Motor Industries Co (MICO) are feeling the pinch," said a component company executive.

Because of smaller output, these companies have limited resources to expand operations. Many such companies do not even have the exports cushion to tackle domestic sales slump, he added.

According to analysts, the current boom in the auto industry is such that it only those component manufacturing companies which have the adequate capital installed for operations, can survive or those which have initialised a move to expand itself.

Bosch's Indian subsidiary MICO, which has a 58 per cent market share in manufacturing diesel systems, spark plug and tools, announced last month that the company was looking at reducing dependence on local market and thereby increasing its exports.

The company also said that it was investing Rs 1,800 crore in the next one year which would be spent on R&D at their Bangalore's engine and vehicle testing facility. Rico, another component maker, had earlier announced in 2004 that the company would quadruple its production by 2008.

Companies such as Bharat Forge and Escorts have scaled up exports due to better demand. For instance, Bharat Forge, one of the leading forging company and manufacturer of auto components, in the first quarter of the financial year recorded exports at Rs 737 crore or 2.5 times its domestic sales.

Escorts sold nearly 30 per cent its production of shock absorbers overseas in the last financial year with total sales of Rs 200 crore.

However, despite increasing dependence on exports the industry has to still rely on its domestic sales.

One of the primary reasons behind this is because of the availability of low-cost of manpower in India which constitute just 7-8 per cent of the total cost of production compared with 30-40 per cent of cost incurred for overseas production, analysts added.