Auto majors eyeing India as strategic sourcing location, says Srivats Ram

‘Cost differential is no longer sole criterion in the evaluation; conversations are taking place over billions of dollars worth of outsourcing’

Global auto majors are looking at markets that offer scale and are eyeing India as a source for components, Srivats Ram, MD, Wheels India Ltd., said in an interview. “Recently, some of them have even set targets for India sourcing and hence there clearly is an opportunity for Indian manufacturers,” he added.

The cost differential was no more the sole criterion in the evaluation, he observed, adding that that was the difference between now and earlier instances when India was considered as a sourcing location. “For a long time, global players had looked at India from a price discovery process and whether India was price competitive. The cost differential is not huge now (because of the common commodity prices globally), except where there is a high proportion of labour involved in which case there is a big arbitrage,” he explained.

Global auto firms were now looking at India “with a lot more seriousness as a strategic sourcing destination”, he noted. “The conversation rate currently is higher. The belief in Indian companies and their reliability to deliver is much higher and the genuineness of buyers to do business with Indian manufacturers is a lot more now.” Though he did not give any estimates by the auto industry on the size of potential orders, he said, “These could run into billions of dollars.”

Existing suppliers to original equipment manufacturers and customers were the firms which had increased the size of their business engagements, based on track record. Without naming companies, he said such suppliers had “bagged new orders as a reward for their past performance. It is a big endorsement for Indian manufacturers as they have earned the additional business through high quality performance in the past.”

The challenge, now, was not so much the opportunity but the risk appetite that Indian companies would need to take advantage of the trend. “Global auto companies are throwing huge numbers at Indian firms and orders can be large. To meet these orders arising out of the India sourcing strategy, Indian firms have to make large investments, say, of ₹200 crore or ₹400 crore for just one customer. While the opportunity is big, the question is on making that big capital investment for a customer and whether Indian firms have the risk appetite to invest big – like the Chinese did years ago – and give themselves the chance to grow their business, especially in a scenario where the interest rates are high and there is talk of a global slowdown.”

The other challenge is rising talk of a global slowdown or even recession in some parts of the world. “There is pent-up demand and back orders in the auto space. But risk in the environment is high because of the recession and the high interest costs, and those need to be considered before making big investments. Things are relatively good for India. The Indian economy is in a better space even if the growth is likely to be lesser next year.”

On the growth of commercial vehicle (CV) sales after a prolonged lull, he said: “CV sector revival has not taken off in the way it usually does after a down cycle. There has been a squeeze on the transport operators in terms of their margins due to higher interest rates and higher fuel costs.”