Pestel Analysis Of The Auto Ancillary Industry Economics Essay

Auto ancillary industry is an important segment of the economy in any country. The Indian auto industry has the potential to emerge as one of the largest in the world. Presently, India is

The largest two wheeler manufacturer in the world.

The largest three wheeler market in the world.

Second largest two wheeler market in the world.

The fourth largest commercial vehicle market in the world.

Auto ancillary company comprises of

OEM (original equipment manufacturers).

Replacement Market.

The automotive sector in India contributes to 5% of the nation’s GDP. This envisages the

Auto ancillary sector “output reaching a level of $145 billion accounting for more than 10% of the GDP” by 2016.

PESTEL ANALYSIS

There are many factors Consists of internal environment and external environment will affect the decisions of the managers of any organisation. This analysis is essential for all organization before beginning its marketing process.

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Investments in Industry

Foreign Investments:

India enjoys a cost advantage with respect to casting and forging as manufacturing costs in India are 25 to 30 per cent lower than their western counterparts. Seeing the growing popularity of India in the automotive component sector, the Investment Commission has set a target of attracting foreign investment worth US$ 5 billion for the next seven years to increase India’s share in the global auto components market from the existing 0.9 per cent to 2.5 per cent by 2015.

· French tyre major, Michelin, has gained clearance from the Foreign Investment Promotion Board (FIPB) for its US$

2.26 billion Foreign direct investment (FDI) proposal to set up a manufacturing facility in Tamil Nadu.

· Ford motor car is investing about 500$ million (Rs. 2,445 cores) to double capacity at its India plant, which will

Become a strategic global production hub.

· Bosch will continue to maintain its focus in India in spite of global recession as it is planning to set up manufacturing units for electronic control units (ECU) by investing US$ 26.76 million.

· Renault in association with Nissan is to source USD 440 million worth of auto components from India in the coming years.

· Italian car manufacturer Fiat is planning to increase sourcing to USD 330 million by 2010 and make India its global sourcing centre.

· Volkswagen has set target to capture 8-10 percent of market share in the passenger car segment in India by 2014 with a series of launches and by doubling the number of dealers.

Domestic Investments:

The market is so large and diverse that a large number of players can be absorbed to accommodate buyer needs. The

Sector not only has global players looking to invest and expand but leading domestic component companies are also pumping in huge sums into expanding operations. Indian tyre makers are rolling out investment plans worth US$ 1.24 billion, due to the rising popularity of radial tyres in the commercial vehicles segment.

Some other investments include:

· Hero Motors will invest US$ 19.84 million in association with Austrian firm BRP Power train for manufacturing

Automotive transmissions in India.

· Indian arm of Swedish automotive component maker SKF is investing US$ 30 million in new ball bearings

manufacturing plant at Haridwar.

· Mahindra & Mahindra will invest approx US$ 400 million for setting up an integrated auto facility in

Tiruvannamalai(Chennai).

· an auto park is coming up near Hyderabad with investments worth over US$ 409.30 million from around 34

automotive ancillary units.

A lower labour cost gives Indian auto ancillary companies an absolute cost advantage. ACMA numbers suggest that wage cost accounts for 3% to 15% of revenues for Indian manufacturers as compared to 20% to 40% for US players. Historically,

India’s strength in exports lies in forgings, castings and plastics. But this is changing with more component manufactures investing in up gradation of technology in recent years.

DEMAND SUPPLY SCENARIO

Demand – supply scenario

Demand is generated from two segments namely OEMs and replacement markets.

The volume of demand varies by product segments.

The replacement market has 45 percent of its sales coming from unorganized players.

There are no regulatory standards prevailing in the market.

The level of technology is not sophisticated in the replacement market.

The replacement market is a safe bet even when the economy faces a slowdown. Hence, it looked as an area of focus by major players of the auto component industry.

The margins in the replacement market are generally higher because of low cost operations and counterfeit sales.

Success in the organized market depends on the presence of an established brand name and a wide distribution network.

Unorganized sector enjoys huge advantages over the organized players in terms of excise duty exemptions and lower overheads.

The suppliers to OEMs have to adhere to requirements of high quality, tight delivery schedules and lower margins.

Duty structure & Regulations

Government Policies:

Reduction in excise duties in select segment of automobiles.

Extension of tax holiday for 100 per cent export oriented units (EOU) until 2010-11 will benefit only players with established EOUs.

Scheme to provide enhanced Export Credit and Guarantee Corporation (ECGC) cover at 95 per cent has been extended up to March 2010. This scheme will assist players to mitigate risk of payment defaults in the export market.

Automatic approval for foreign equity investment up to 100 per cent of manufacture of automobiles and components is permitted.

The automobile industry has been delicensed.

There are no restraints on import of components.

Free Trade Agreements:

The growing number of FTAs (Free Trade Agreements) that are being signed by India with countries like Thailand, Singapore, China etc is likely to hurt the domestic players as they pay a relatively higher duty of around 25% as compared to 1%-10% being paid by its Asian counterparts.

P- POLITICAL FACTOR

Political factors the most important influence on the regulation of any business.

How stable is the political environment

Influence the Government Policy / Law on your business

Government’s position on Marketing Ethics

Government’s policy on the economy

Government’s view on culture under religion

Political System is responsible for Law Making.

Immediate laws which affect any business in general are Central Excise, Sales Tax/ VAT, Corporate Income Tax, Personal Income Tax & Service Tax

Controls if any on Marketing Strategies

Like Marketing / Advertising of Cigarettes, Tobacco, Alcohol etc.

Government Policies on the Economy

Role of Public Sector

Role of Private Sector

Role of Joint Sector

E- ECONOMIC FACTOR

Inflation

Employment

Disposable income

Business cycles

Energy availability and cost

Government outlook towards

Bank Financing

Interest Rates

Exchange Rate Mechanism

Incentives for Exports

Restrictions for Imports

Inflation

Labour Policies

Level of Government Spending

Avenues for Capital Creation

Size of the Capital Market

Role of the Regulator

Type of the Instruments

Nature of the Investors

Business Cycles

Monsoon

Energy Availability

Cost of Energy

S- SOCIO CULTURAL FACTOR

Demographics

Distribution of income

Social mobility

Lifestyle changes

Consumerism

Levels of education

Demographics & Distribution of Income

Division of population – Male / Female

Age Group of the Population

Disposable Family Income

Disposable Income in the hands of the different Age Groups

Education Level of the Age Groups

Life Style Changes & Consumerism

Attitude to living

Different Age Groups

In tune with available disposable income

Thrust on taking care of present needs by spending than saving for the future.

Joint living and nuclear families

Availability of various media tools

Reach of the media to the population

T- TECHNOLOGICAL FACTOR

New discoveries and innovations

Speed of technology transfer

Rates of obsolescence

Internet

Advantage of Technology

In terms of Economies of Scale

E- ENVIRONMENTAL

Environmental factors include the weather and climate change. Changes in temperature can impact on many industries including farming, tourism and insurance. With major climate changes occurring due to global warming and with greater environmental awareness this external factor is becoming a significant issue for firms to consider. The growing desire to protect the environment is having an impact on many industries such as the travel and transportation industries (for example, more taxes being placed on air travel and the success of hybrid cars) and the general move towards more environmentally friendly products and processes is affecting demand patterns and creating business opportunities

L- LEGAL

Discrimination law

Consumer law

Antitrust law

Employment law

Health and safety law

CONCLUSION

The auto ancillary industry is in the growth phase. As, the auto sector grows, the auto ancillary sector also grows. The industry is graduating towards the world-class technology by implementing TQM, TPM and Six-Sigma. India is becoming the global manufacturing hub for the small cars. European companies are expressing interest in India for sourcing their needs. Many other companies are looking to consolidate their global operations; India is now a supplier of high value and critical automobile components to global auto makers such as General Motors, Toyota, Ford and Volkswagen. India is expected to soon become a destination for sourcing the auto components. The Automotive Mission Plan 2016, states to increase the turnover to $145 billion and increase the export revenue to $35 million by 2016 and also to provide employment to 25 million people.

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With investments around US$ 15 billion slated for the sector over the next few years, the prospects for India’s auto market are bright. The results for the month of November and December’2009 of the auto sector and the improved sentiments have already resulted in the BSE Auto Index outperforming the Sensex over the last one year. Therefore, the auto component industry is expected to grow in the near future.

SUBMITTED BY: PANKAJ KUMAR YADAV