by Ketan Salhotra
The history of the Indian auto component industry can be traced from the early 1980s onwards. The foundation of the industry was laid when early starters like Motherson Group, JBM Group, Amtek Group and Sona Group began supplying auto parts to Maruti Suzuki which was planning to launch the iconic “Maruti 800” at that time. The industry has come a long way since then, with substantial improvements in manufacturing capabilities, quality and adoption of global industry practices, especially over last three and a half decades.
Today, the auto component makers in India not only supply to the global and domestic OEMs in India, but also export to the global OEMs (including the luxury car makers like Mercedes, Audi and BMW) for their global operations. Many auto suppliers have also set up bases outside India, and revenues from overseas markets for some of these players is even more than their domestic revenues. In their move towards diversification, some auto component makers in the country have also started manufacturing for other verticals- notably Aerospace, Defence and Railways.
The Global Commercial Aerospace industry is estimated at over USD 320 bn in 2015 and is expected to grow at CAGR ~3% over the next 5 years, as per various public sources. In particular, the demand for new commercial aircrafts production over the next 20 years (FY14-FY34) is estimated at over 34,000 aircrafts, driven by the rise in passenger traffic, to and from emerging markets. As per International Air Transport Association (IATA) data, India had the fastest growing domestic passenger traffic in 2015 with 19% growth (~80 million passengers). This growth is double compared to China’s (10%) growth and more than three times as compared to the United States’ (5%) growth during the same period.
This industry has evolved over the last three decades in terms of product performance, high usage of technologies and significant reduction in time-to-market. Aircraft OEMs and Tier-I suppliers source more than 70% of their systems and component requirements from the US and European suppliers. However, with increasing competition they are looking to drive down costs by sourcing from low cost, yet high quality manufacturing countries like China and India. Most of the aircraft OEMs, engine OEMs and Tier-I suppliers have already established base in India and are developing the supply chain for their global requirements.
Presence of Top Global Aircraft and Engine OEMs in India
Despite the industry’s tremendous potential, Indian players currently have nascent presence in the global aerospace supply chain. A majority of the existing Indian players in the aerospace industry are Tier-III suppliers limited to domains of manufacturing, engineering and R&D services. Barring a few, the remaining players have limited scale and supply few non-critical components to one or two global Tier-I/ Tier-II suppliers. There are a lot of specialized processes in aerospace manufacturing for which the expertise is still not available within the country.
There are ample reasons and opportunities for Auto Component manufacturers in the country to engage with the rapidly growing aerospace manufacturing industry. Aerospace and Defence is one of the key focus sectors under the union government’s “Make in India” initiative. State governments in Karnataka, Andhra Pradesh, Telangana, Gujarat etc. have also come up with or are in the process of coming up with specific policies for promoting the Aerospace and Defence sectors in their respective states. There are also many “Offset Opportunities” that arise from aircraft (both military and commercial) purchases of the Indian Government. Besides mitigating the risk of automotive industry cyclicality, the aerospace sector possibly offers better margins compared to the automotive sector. Best practices in production controls, international exposure and professional systems and processes are some of the key strengths which can be leveraged by domestic component manufacturers in supplying to the global aerospace sector.
But transitioning from auto component manufacturing to aerospace manufacturing has to be accompanied with a complete change in the business mind-set of the promoters as it is a different ball game altogether. Some of the processes might be similar but are much more demanding in aerospace with higher level of sophistication and risk involved. Major differences between manufacturing for the Automotive and Aerospace industry include:
• Unlike auto components, the production volumes involved are much lower and there are more product varieties and specifications involved. A single machine can be configured in aerospace manufacturing to produce multiple parts. But due to complexities, material and specification requirements of parts, different type of machines are required. Establishing as an aerospace supplier requires large amount of capital investment.
• Due to low volumes and many varieties of parts involved, there is also a requirement for large and very skilled manpower.
• Unavailability of Aerospace grade materials in the country leads to heavy dependence on imports. This exposes aerospace suppliers to exchange rate fluctuations, especially if they have limited exports.
• The selection criteria for parts in the aerospace industry involve rigorous assessments on various parameters (including process control and material handling procedures) and adherence to very strict tolerance levels. It typically takes 4-5 years for a new aerospace supplier of parts to start getting orders after passing various tests and assessments. Hence, payback period for the aerospace industry is much higher than the auto components industry.
• A huge penalty is liable on the aerospace suppliers in case of a product failure, which is much more stringent as compared to the automotive industry. One product failure will ensure that the aerospace supplier may never get another chance with the customer again.
As per Mr Deepak Pinto, Managing Director of a leading Bengaluru-based aerospace machining company- Zenith Precision Private Limited “The Aerospace industry has a strong certification and compliance requirement, with special emphasis on part creation history and part validation records. As a result, the aerospace component manufacturing business demands time and focus on quality to scale up. There is no way to achieve overnight success in this industry”.
The Tata Group, the Mahindra Group and Bharat Forge are examples of large Indian auto/ auto component groups which have ventured into aerospace manufacturing in the past. For instance, Bharat Forge began its foray into the aerospace sector in 2014 by entering into a long term partnership with France-based Safran Group for supplying critical forged and machined components to Safran’s affiliates globally. As per Bharat Forge press release dated October 13, 2014, both companies worked on a demonstrator phase for initial trial production of critical forgings over 18 months before the partnership was formalized. Currently, Bharat Forge supplies forged components for airframe, structural and engine parts to global clients. It has recently won orders for engine parts from Rolls Royce and 777X titanium forging contract from Boeing.
On a concluding note, auto component manufacturers based in India with their affordable and quality-centric manufacturing capabilities make ideal candidates as partners for global aerospace OEMs and Tier-I suppliers. This will further cement the path towards building an indigenous aerospace ecosystem in support of Make in India. But due to different industry dynamics, manufacturers should be ready to invest in the sector for a long haul and not expect immediate returns. A technological collaboration or joint venture with a global Aerospace major is possibly a good starting point for an Indian auto supplier looking to take-off towards the aviation sector.