FUTURE OF AUTO COMPONENT INDUSTRYBYMR. M. RADHAKRISHNANJT.MANAGING DIRECTORPRESENTATION ONAUTOLINE INDUSTRIES LTD.

PRIMARY GROWTH DEMANDDependant on OEMs

OEM market drivers (for India)Growth in Economic ActivityIncrease in the Personal disposable incomes Growth in Rural EconomyMultiple & easy finance options Decline in tax rates Economic vehicles (Nano effect )

After market Drivers Old vehicle population Life span of components (frequency of replacement). Average value of parts replaced. Share of genuine-branded components in the total aftermarket.

DOMESTIC MARKETGrowth opportunities in terms of volume The domestic market for four wheelers is projected to grow at a compounded annual growth rate of 9% during the next few years. This will provide reasonably good growth opportunities in terms of volume to component manufacturers such as our company with facilities having latest technologies and mass manufacturing facilities.

PRODUCTION OF FOUR WHEELERS PAST AND FUTURE (IN 000S)

INDUSTRY OVERVIEWINDIAN AUTO COMPONENT INDUSTRY The Indian automobile ancillary sector is transforming itself from a low-volume, highly fragmented one into a competitive industry, and backed by competitive strengths, technology and transition up the value chain. Broadly the Indian automotive component industry can be divided into the organized and the unorganized segments. While the forte of the organized sector is the high valued added precision engineering products, the presence of a large unorganized sector is characteristic especially of the lower value-added segments of the industry. In the organized segment, the component manufacturers supply components to at least one of the Original Equipment (Vehicle) Manufacturers (OEMs). Such component manufacturers usually have access to the required technology due to their tie-ups with some of the foreign collaborators or through their links with the automobile manufacturer. There are presently 29 Vehicles Manufacturers (OEMs) in India located at Gurgaon, Pune and Chennai who together manufactured more than 5.2 million vehicles during 2005-06.

Original Equipment Manufacturers of 4-Wheelers In India & Production During 2005-06 American OEMsJapanese/Joint Venture OEMs

Production in 000s Production in 000s Maruti Udyog Ltd 572.10 General Motors India Pvt. Ltd 31.00 Toyota Kirloskar Motor Pvt .Ltd 45.00 Ford India Pvt. Ltd27.00 Honda Siel Cars India Ltd 41.00 Total58.00 Swaraj Mazda Ltd 12.00 KOREAN OEMS Total 670.10 Hyundai Motor India Ltd 260.00

Volvo India Pvt. Ltd Tatra Trucks India LtdOriginal Equipment Manufacturers of 4-Wheelers In India & Production During 2005-06

EUROPEAN OEMS Production in 000s INDIAN OEMS Production in 000s Skoda Auto India Pvt.Ltd 9.80 Tata Motors Ltd 450.00 Daimler Chrysler India Pvt. Ltd1.80 Mahindra & Mahindra Ltd128.00 1.00 Ashok Leyland Ltd65.00 0.10Force Motors Ltd 36.00 Fiat India Pvt.Ltd0.70 Eicher Motors Ltd 24.00 Total 13.40Hindustan Motors Ltd 15.00 Total718.00

Original Equipment Manufacturers of 2-Wheelers in India and production during 2005-06

JAPANESE OEMS Production in 000s Hero Honda Motors Ltd3006 Honda Motorcycles & Scooters 603 Yamaha Motor India Pvt. Ltd 249 Suzuki Motorcycles India Pvt. Ltd 2Total 3860

Original Equipment Manufacturers of 2-Wheelers in India and production during 2005-06

Indian OEMsProduction in 000s Bajaj Auto Ltd 2042 TVS Motors Co .Ltd 1367 LML Ltd 107 Kinetic Engineering Ltd 82 Majestic Auto Ltd 57 Kinetic Motor Co.Ltd 54 Royal Enfield 31 TOTAL3740

The table below shows segment-wise distribution of the auto component Industry www.acmainfo.com.

Organized Component Manufacturers Unorganized Component Manufacturers Year 1999 2006 1999 2006 Share in OE supply market 80% 80% 20% 20% Share in Aftermarket 40% 35% 60% 65%

The table below shows segment-wise distribution of the auto component Industry www.acmainfo.com.

Organized Component ManufacturersUnorganized Component ManufacturersStrengths1.Higher production capacities2. Captive OE market3. Access to technology through tie ups4. Quality standards5. Potential to export6. Improving quality consciousness of end users 1. Low capital investment2. Minimal overheads3. Taxes and levies exemption (violation)4. Poor regulation on sale of spurious parts5. Price sensitivity of market Weaknesses 1. High Investment in plant and machinery2. Higher overheads3. Higher rates of taxes and differential regional tax patterns4. Limited domestic OE volumes 1.Sub normal quality2.Obsolete technology3. Low capital availability4. Restricted growth potential

Despite a relatively small share of Asia in the global pie, India is now amongst one of the most preferred destinations and has come to occupy the image of an exporting hub for most of the major global OEM players. Almost all the big auto manufacturers of the world are either already or are in the process of outsourcing from the country.Hyundai Motors India Export base for small cars Ford Motors India exporting CKDs of Ikon to South Africa and other countries Skoda India Hub for exports of cars to neighboring countries General Motors Global Purchasing Team Volvo Global buying team Delphi International purchase office Renault scouting for truck part suppliers

EXPORT MARKET

Exports of auto components from India have witnessed a CAGR of 20.3% over the last six years. The value of exports which was US$ 300 million in 1997 had grown to over US$ 2000 million in 2006. GEOGRAPHICAL DISTRIBUTION DETAILS OF AUTO COMPONENT EXPORTS FROM INDIA

Continent/Country Percentage share of Total Exports Europe 36.00 USA 26.00 Middle East 10.00 Africa 10.00 Asia 16.00 Oceania 1.60 Others 0.40 Total 100.00

There has also been a qualitative shift in the composition of exports from being predominantly for the aftermarket during the 1990s to the OEM market presently as depicted below:

Market segment Percentage share in Total Exports 19902006OEM 35 75 Aftermarket 65 25 Total 100 100

Global Industry - Major car makers in the world introducing car models simultaneously in different countries of the world - Ripple effect

Under pressure to identify consumers preferences, national biases, Government regulations, new market segments - to gain market share, leading to impetus for Research, Design, innovations and changes in the manufacturing processes. Result Frugal Engineering (Renault Nissan Chairman) India emerging as a base of the entire worlds small car production

Global Trends that will impact the auto component industry in India

Pattern of demand for new cars. - In developed countries, Mature market with stagnant demand (1% growth over last 10 years) - Sales growth from China, India, South America, Eastern Europe (26% growth to go upto 40% by 2010)

Response to increasingly diverse set of customers - Large proliferation of segments & models ( challenges of cross over production from same line). - Plus myriad of features like power steering, power windows, cruise control etc. - No. of vehicle models offered for sale in the US market alone doubled since 1980 to more than 1050 in 2004.

Adopt a global perspective in the operations - Since 1990s, presence of all in virtually every corner of the world. - Especially in Emerging Markets, where all OEMs are fiercely competing for market shares as the market grows. - Leading to simultaneous launch of models in different locations with similar standards. - Replicate Supply Chain structures.Strategies of Global Auto Majors impacting Component Manufacturers:

Reorganization of their vehicle portfolio around product platforms and car modules and systems. - Declining sales per vehicle model, short product life cycle preventing economies of scale in design & manufacturing with adverse impact on cost. - Focusing on common platforms and interchangeable modules leading to faster & lower cost deployment of new solutions across the whole product range, while tailoring vehicles to a multitude of tastes and preferences of consumers in the world. - Design with a common underbody platform adapting body, trim and ride to particular market conditions.

Wave of Consolidation - Perspective of future platform sharing clearly acknowledged in deals such as Daimler acquiring Chrysler, GM Mitsubishi, Nissan Renault, Nissan Renault Mahindra, Nissan Renault- Bajaj Auto (for Joint Manufacturing). - Estimated that within next 5 years, less than 10 independent automakers may survive.

Increased Vendor Responsibilities reaching impressive levels - treated as partners - Passing the responsibility of developing, manufacturing and assembling important sections of the Car on to their Vendors. - Attempting innovative approaches in terms of assembly suppliers assemble a number of modules in the final assembly plant and attach them directly to the vehicle themselves. (V/W & GM projects in Brazil) - ( Drivers Cabin for CVs)

Role of technology in reshaping the industry Extent to which a Design is economical, functional and easy to manufacture impact new cars revenues & costs.Cars are technically complex in that a) fairly deep level of engineering expertise b) a large number of parts must fit together in a precise way i.e. product architecture is integral , rather than modular.

Today most functions in the styling , design &engineering departments are done utilizing computers and math based engineering (as against paper based (draftsmen) ,clay models based processes).Various software tools and processes, such as FEA, CAE and product data management (PDM/PLM) practices are utilized to validate the components to validate the components for -Form, Fit & Function.

Auto Component Industry in a state of Transition and Transformation Indian auto component industry to take advantage of the transition that is taking place internationally and dominate the global supply chain in auto components due to - reasonably priced skilled work force - large population of technology workers - established strengths in I.T. and electronics.

Transformation of global auto component industry structural change from 1,2,3 & 4th tiers to 0.5 tier structure.

New direct suppliers are either specialised in complex systems OR integrators of several simpler systems.

- Systems Integrators Suppliers capable of designing and integrating components, subassemblies and systems into modules. - Global standardizers Systems Manufacturers capable of setting the standard on a global basis for a component or system through design, development and manufacturing of complex systems. - Component specialists - Suppliers capable of designing & manufacturing a specific component or subsystem, for a given car or platform process specialists or product specialists.

INDIAN ADVANTAGE IN DESIGN & DEVELOPMENT In the new paradigm, the design and development capability is a critical success factor.India has emerged as an offshore hub for software services outsourcing.- Design & development and supply of auto components provides a far greater opportunity as Automobile Industry is one of the largest industries in the world. - Leading OEMs have started outsourcing designing work to start- ups such as Virtual E 3D and Ecad in India. - Have set up their own captive development centres in India

Worldwide market for design services pegged at USD 11 billion (Rs. 44,000 Crores) and presently Indias share is a mere 1 percent - Almost all major Auto and auto component companies in India are using 3D software engineering design tools to create designs . - India offers more than 20% cost reduction to any client and hence Global OEMs tempted to outsource to India. - A typical CAD project in the USA will cost about USD 60 per man hour, as against about USD 25 in India. - India is known world over for its expertise in I.T., and has a long history in manufacturing , with strong domestic market.Outsourcing of engineering design services is a Big Opportunity for India.