The domestic volumes of all segments declined steeply in FY21. (The fall for cars was 2.2% from FY20 and 19.7% from FY19; for two-wheelers, 13.2% from FY20 and 28.6% from FY19; for three-wheelers, 66.1% from FY20 and 69.2% from FY19; and for commercial vehicles, 20.8% from FY20 and 43.6% from FY19).
This has created an immediate push to embrace efficiencies and cost reduction measures to improve the financial health of the companies. But such measures should be accompanied by new schemes to lure more and more buyers into replacing or buying their first vehicles and by gearing up for the important opportunities and trends across the automotive value chain.
Enter uncharted areas, segments
Early response to these shall ensure market prominence, cost savings in the long run and also possibly open up hitherto uncharted customer and geographical segments like modular product development, electric vehicle components, connected vehicles, electronics opportunity, agency sales model, used cars, aftermarket, vehicle scrappage, and shifting demand and supply centers. .
Modular product development: It is well known that the majority of the cost of a vehicle is fixed in the product development stages. However, with the shortening lifecycles coupled with the need to have multiple powertrain options as well as diminishing volumes per platform, modularity in product development is gaining paramount importance.
Modularity helps reduce the product development cost of new models by 20%-30%, and the product development time by 25-30%. Alongside this, the electrification of the powertrain increases the importance of having modular electric platforms that can be re-configured to create portfolio-wide EV offerings. Modularity is not just a product design attribute but also requires changing the organisation into a modular structure to make the transition successful.
Electric vehicle components: Electrification has been a topic of interest for several years but with the gain in speed especially in the 2W and 3W segments, the market for EV components is set to see a leap. On the one hand the battery space is set to become a USD 3 billion to USD 3.2 billion opportunity by 2030 and on the other, the electric powertrain components such as motor, converter, on-board charger etc. are set to add another USD 2.5 billion to USD 3 billion in the same time frame.
The routes to gain expertise in the field range from localised development to technology partnerships and acquisitions. Startups here could hold the key to a swift entry into this space for the Indian auto component makers and OEMs. The recent developments in this space including the notable tie-ups such as Hero-Gogoro or the entry of players such as Tesla and Ola Electric have added new vigour to the sector. Alongside this, the realignment of global supply chains on account of the Covid 19 pandemic have also created the opportunity for India to emerge as a hub for manufacture of EV powertrain components.
Connected vehicles: The urge to remain connected has seen a steady increase and the pandemic has only increased our propensity to stay digitally connected. Added to this is the high smartphone penetration in India. On the back of these trends, the Indian connected car market is expected to reach USD 18 billion – USD 22 billion by 2030 including hardware, software and some services. The connected car market is rapidly evolving from elementary offerings such as vehicle tracking, towards much more advanced features such as driving behaviour analysis, regional language support as well as over-the-air software updates in 4G/5G.
There is, therefore, a need to develop software solutions that are the most suited for Indian conditions e.g. voice recognition software capable of working with different accents, vehicle security systems software that can integrate with the law enforcement and are robust with respect to cybersecurity and privacy aspects. Such solutions should also be able to work as per the available connectivity infrastructure, and to integrate with the backend services including the proposed emergency response systems, etc. OEMs could create differentiated offerings for different user segments especially in the mass market. They are expected to emerge as one of the key success factors for vehicles in the next 4-5 years.
Electronics opportunity: While several electric vehicle components would use power electronics and the connected vehicle hardware will also hinge on it, the usage is also expected to go up on account of upcoming regulations such as the use of Advanced Driver Assist Systems (ADAS) and other safety regulations. The resultant automotive electronics market is expected to reach USD 8 billion –USD 10 billion in the next 5 years with safety and ADAS systems making the bulk of the market followed by infotainment, body electronics and power train components.
In terms of electronic components, microcontrollers are expected to make up more than a quarter of the market followed by actuators, processors and sensors. At present, the Indian auto component industry has not developed large-scale electronics manufacturing in the country. However, the rapidly growing market offers an opportunity for incumbent auto component players to forge technology tie-ups and localise manufacturing of some key electronics components.
Agency sales model: The dealer fraternity has been one of the worst affected during the current pandemic and the stress was visible even in FY20 on account of the slowdown in the industry. This has led to working capital drying up with dealers on account of the large inventory present with them as well as the costs of manpower, rents, etc. There have been interventions by OEMs at several stages such as supporting the rental outflow through purchase of real estate and then leasing it out to dealers. This has also brought to light the need for a hybrid (online plus offline) model popularly known as the Agency Sales Model. In this, the OEM sells directly to the customer with the role of dealers changing to delivery and service representatives.
Estimates suggest that the model could translate into 9%-12 % reduction in selling costs for the mass market OEMs in India. There are certainly financial and customer access benefits in the model. However, the roll-out must be piloted in a region and meticulous planning and execution is needed to ensure smooth change in management and the eventual success of the model.
There is also a need to evaluate the business case as per the current network strength and sales levels of the OEM as well as the investments for developing new competencies and technology systems for the successful implementation of this model.
Used cars: The used car market has been a silver lining in times of the pandemic and the expectations are that it would almost quadruple over the next decade to touch almost USD 90 billion – USD 100 billion. The organized segment in the market is still less than a quarter and, therefore, there is immense potential for independent organised players as well as OEMs to gain a larger share of the pie in this fast growth segment. For OEMs, as is well known, it also is a good avenue to retain customers as well as to switch competing brand customers to their own. In addition, it also gives the much needed cushion to dealerships. A better resale value for cars maintained by the authorised service centres would also drive consumers to stick to such workshops for repairs and services.
Aftermarket: The increase in the Indian automotive industry parc could yield a substantial aftermarket opportunity. The existing retention in the OE channel for cars more than 3 years old ranges between 30% and 35%. As a result, opportunity for the independent aftermarket is increasing rapidly and would reach over USD 10 billion by 2030. Given the fragmented and unorganized nature of the independent aftermarket, players would do well by entering this space and capturing some part of the pie. Alongside this, new OEMs who do not have a pan India service network could also leverage the independent aftermarket players to provide after sales service and spares to the customer across the country by leveraging the presence of organized independent aftermarket players and this would further add to the market potential.
Vehicle Scrappage: There is a fast emerging opportunity in vehicle scrappage and India is expected to have about 22.5 million vehicles reaching their end of life by 2025. Of these 18 million would be two-wheelers, about 3 million personal vehicles and about 1.2 million commercial vehicles. These vehicles could generate 5 million tonnes of steel scrap, 1.2 million tonnes of aluminum, and about 0.2 million tonnes of copper. Since a large part of the ferrous scrap is imported, it could ensure forex savings and the scrappage centers could help generate additional revenues for the industry.
OEMs teaming up with players setting up recycling centres could help ensure sufficient feedstock for the scrappage centres and also help the OEMs meet end of life of vehicle commitments. In addition, recycling facilities set up directly or through tie-ups by OEMs, with the right incentives for consumers, could help draw customers for repurchases or also migrate competitor customers to their brand.
Shifting demand and supply centers: Several factors have influenced the growth of supply centres for the automotive industry ranging from demand proximity, economic incentives, raw materials to availability of good energy and transportation infrastructure, etc. Shifts in age and income demographics on account of trends such as remote working, rising income levels in the hitherto less developed states as well as the emergence of supply chain resilience as a global concern area in the face of the pandemic could fuel the setting up of alternative demand and supply centres in future.
There has been a shift in wealth from developed to developing nations since a few decades with India and China combined contributing to 25% of the global GDP by PPP in 2020. A microcosm of the same would also play out within the boundaries of the country and even the sub-continent. Rise of states like Tamil Nadu to 2nd rank (in FY 20 and FY21) from 5th (in FY02) in the list of Indian states with highest GDP is one such example. The future operations and sales footprints as well as the portfolio decisions should take cognizance of this trend.
The bottom line
The industry players must be prepared to capitalise on these opportunity areas. Since the dynamic business environment can accelerate or decelerate the adoption of the trends by a few years, it is also vital to have a constant monitoring of the weak signals that could foretell the various scenarios that could play out.
While the current pandemic has certainly led to financial distress for the automotive industry, the foresight of leaders in preparing for these next set of opportunities will surely help the industry to climb out of the abyss.
(Note: Ashim Sharma is Partner and Group Head at NRI Consulting & Solutions. NRI’s Aashutosh Sinha, Yogesh Shivani (Senior Managers), and Adnan & Rajarshi Mukerjee (Managers) made significant contributions to this study.)
DISCLAIMER: The views expressed are solely of the author and ETAuto.com does not necessarily subscribe to it. ETAuto.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.