Sector Analysis (Automobile Sector) - July'21

AUTOMOBILE INDUSTRY

SECTORAL ANALYSIS

July'21 Edition Inside this Issue: Revenue & Cost Drivers

Competitive Landscape

Covid Impact

Emerging Trends

EDITOR'S NOTE

Aditya Agarwal

Satyam Goyal

Anurag Kumar Thakur

Saurabh Aggarwal

Automobile is among the core sectors of the Indian economy and, to an extent, serves as a pacesetter for its current state. A portentous decline in commercial-vehicle (CV) sales forebode the impending economic issues in 2012 and then again in 2019, while a precipitous rise in the segments like passenger-vehicle (PV) and two-wheeler (2W) sales was an omen for good economic news in 2010.

In the Indian manufacturing sector, transport equipment counts for 10-12% of the gross value added (GVA). Any weakening in that area significantly impacts India’s economic prospects negatively. Employment is also hit hard when automobile sales fall, as the strategic sector provides 38 million jobs (directly and indirectly) while also stimulating job creation in other dependent/related industries.

Avni Dhingra

Sanyam Jain

Suraj Agarwal

Vidhi Mundra

Though the Indian automotive industry has faced many speed-breakers, including the distressing COVID-19 pandemic, the growth potential it possesses is clear. The sector is predicted to generate 66 million new jobs within India by 2026 as companies increase production and recent developments in technology like Electric Vehicle is widely adopted across the country.

In this analysis, we examine the current state of the automotive sector and try to identify necessities and drivers for success, given the strategic importance of the sector and as the major players in India move to capture new opportunities in the wake of impending expansion.

TEAM CONQUEST

INTRODUCTION Automobile Industry consists of a broad range of organizations and companies with the critical objective of designing, developing, marketing, manufacturing, and selling motor vehicles. The automotive industry makes a vital part of the world's economic sectors by revenue Automobiles, however, are not entirely included in the industry. The industry also does not include companies or organizations dedicated to the maintenance of automobiles such as fuel filling stations and automobile service and repair shops.

The industry consists of producers, however not limited to original equipment manufacturers (OEMs). The original equipment manufacturers consist of light trucks, cars, heavy equipment, heavy trucks, and motorbike manufacturers. Another category in the original equipment manufacturers includes; wholesalers and automotive suppliers, distributors, dealers, and importers.

1 2 3 4 5

REVENUE DRIVERS Rising family income India's per capita annual income grew at pace of 8.6% YoY to Rs. 1,12,835 in FY18 from Rs. 1,03,870 in FY17.

The growing domestic income will result in making the motor vehicles more affordable.

Demographics Indian has one of the youngest population globally with 50%+ population below the age of 25 years and 65%+ below the age of 35. As the younger population starts moving towards bigger financial goals, it can lead to higher ownership of personal vehicles.

Lower Car Penetration As of 2018, India had about 120 vehicles per 1000 people out of which, there were only 19 cars per 1000. This ratio is expected to rise to almost 300 per 1000 over the next 10 years. Also, around 60% of the mobility demand in India was served by public transportation modes like buses and metros and non-motorized transport modes (walking and cycling) hence the potential for the market to grow is very high

Finance Accessibility All nationalized banks, scheduled banks and NBFCs offer financing options to customers for vehicle purchase at competitive rates. Roughly 70% to 75% of new vehicle purchases are done through external financing options.

Government Regulations The Government has various schemes to support the sector and put in place the regulations for foreign investments and import-export. These details are covered in detail in a separate section in this report

1 2 3 4 5

COST DRIVERS Raw Materials Making a vehicle involves a lot of raw materials such as aluminium, glass, steel, as well as various petroleum-based products such as plastics, rubber and special fibers. Moreover, the total number of parts installed in a car can range anywhere from 20,000 to 30,000 per vehicle

Research & Development Research and development initiatives, both private and governmental aim at improving the various offerings within the automobile industry. Most automobile companies have dedicated R&D teams which solely focus on designing commercially viable technologies and design updates to differentiate in the automobile market. With the fast-evolving market and new trends pushing the market towards innovative offerings, R&D plays a crucial role in improving the market penetration and revenues. Eg: the Mahinda Research Valley is one of the best automobile R&D facilities in India, situated in Chennai.

Wages Similar to the raw material requirement, the manufacturing setup also requires an extensive assembly line.

Despite significant progress in automation, a major chunk of the assembly line, quality control etc depends on human effort. Thus wages still forms a significant portion of the costs of an automobile company.

Selling & Distribution Expenses Automobiles are slow-moving consumer goods and a general automobile sales channel consists of authorized dealerships, warehouses, and repair stations. Setting up and maintaining such an extensive channel may result in significant costs for the company. Despite adopting franchising as a viable option for dealerships, S&D expenses still comprise a major chunk of the total cost.

Other Expenses Other expenses such as administrative costs, utilities etc comprise another significant chunk of unavoidable costs

PORTER FIVE FORCES

India is 4th largest Automobile market in the world After witnessing a setback in May’21 there was sales recovery in June’21 as lockdown restrictions eased Two-wheelers and passenger vehicles dominate the market and account for 81% and 13% of total unit sales respectively India has significant cost advantage. Firms in India save 10-25% on opertions as compared to Europe and Latin America The sector is expected to reach 250-280 billion dollars by 2026 with help of government support through initiatives like Make in India and Automotive Mission 2026

COMPETITIVE LANDSCAPE Reasons for Hero MotoCorp being market leader (35% market share) in two-wheeler segment Variety – It offers large variety of products to attract people from all age groups Variable price range – It provides quality bokes at different prices. It offers Hero Pleasure in lower range and also offers Hero ZMR in upper range category Quality – It offers extended warranties & assurances of free services and quality checks Customer Service – It provides excellent aftersale services. A large number of service centres are spread across the country.

Reasons for Tata Motors being a market leader (43% market share) in the commercial vehicle segment ·Various product launches ·Cost reduction ·Sales management

Reasons for Maruti Suzuki being a market leader (+40% market share) in passenger vehicle segment Selection of country and niche market – Its target market is the middle & upper middle class which constitute a major part of the population.

This market is price sensitive and the company offers comfortable cars at low prices.

Connectivity of service centers – The number of services centers of Maruti Suzuki is more than the combined service centers of its competitors Variety – Variety of products are offered within a vast price range Merger – Merger with Suzuki power train India Limited who is the major supplier of diesel engines made the company cost-effective Debt-free company which reduces its financial cost substantially as compared to its competitor

SUPPLY CHAIN Supply Chains can be aptly defined as a “network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer”. Thus, it is the sum total of efforts put in integrating a network of diverse firms and coordination as regards material, information, and monetary flows. For the automotive industry, the two topmost supply chain goals have seen a paradigm shift. Earlier priorities of how to reduce operating costs and inventory levels have paved the way for concerns regarding how to improve customer experience and the speed of delivering products to markets.

The automotive supply chain responsible for manufacturing trucks cars, and other vehicles is among the most complex in the world and is now getting more global, second only to the electronics sector for the spread of manufacturers, suppliers, and third parties around the world. The complexity of the automotive supply chain may be measured from the fact that a typical vehicle contains approximately 20,000 components with about 1000 subassemblies or modules. Globalization is also a factor that adds some unique complexity to the automotive supply chain.

Automotive supply-chains include managing all sorts of business activities to relationships between the distribution, sales channel, sales, warehousing, manufacturing, after-sales, transportation, and suppliers, and related functions & facilities (direct or indirect) in the flow of transformation of goods and services from the raw materials stage (metal steel, plastics) to the sub-assembly modules (components, parts) and to the finished products and deliver them to the end-user – the customer.

Internal logistics focus on the relationships that link procurement, inventory control, transportation with information systems, production, planning, inspection, and delivering the goods in a really seamless manner.Each member of the automobile supply chain is connected to other parts of the supply chain by the flow of materials, orders, and money and coordinated by the flow of information. Any change in the transmission link of the chain is likely to create waves of influence that propagate throughout the supply system. Subsequently, agility and flexibility factors are considered as the new major differentiator in a strong automotive competitive setting. Flexibility is essential at many different levels in a firm of the supply chain, including: The ability to modify the aggregate output based on the fluctuation in demand The ability to alter the product varieties that can be produced The number and speed with new products can be introduced The ease of inculcating modifications in products The functional and operational ability to adjust and deploy the resources to match requirements.

Major Segments: Component Industry: Automotive components are at the centre stage of the growth of India’s automobile industry. The necessary environment for the automobile industry mostly comprises of the abilities of the Indian automobile ancillary industry to scale up itself rapidly in terms of investment and also technology enhancements to keep pace with the global landscape of the automotive manufacturing industry. The Auto-components industry in India has experienced healthy growth over the past few years. It expanded by a CAGR of 6 percent over FY-16 to FY-20 to reach USD 49.3 billion in FY-20. The industry now accounts for 2.3 percent of country’s Gross Domestic Product (GDP) and employs about 1.5 million people, either directly or indirectly China accounts for about 27% of India’s automotive component import alone. This is followed by South Korea at 13% and Germany and 12% respectively.

Automotive Logistics: Logistics outsourcing in the automotive industry has been, until recently, limited to engaging with stand-alone transportation and warehousing service providers for the inbound and outbound movement of the materials and products. But with the evolving needs, A whole range of new value-added services – such as labeling, packaging, systems support and inventory management etc are now offered by several big integrated Third-Party Logistics Companies (3PLs) The economies of scale has caused in enterprise-wide technology platforms bring together company-wide data and work to remove the old functional systems with new cross-functional supply-chain organizations, among them are Mahindra Logistics and TVS Supply Chain Solutions.

IMPACT OF GLOBAL CHIP SHORTAGE

The Covid-19 pandemic had hit the automobile sector hard, driving the auto demand to significant lows in 2020. Just as the sector was recovering from the extended lockdown in 2020, a global shortage of semiconductor chips is spelling fresh trouble for the global and Indian automobile industry.

Use of Semiconductor chips: Semiconductor chips are very important components in automobiles since they are used to run multiple operating systems and monitor engine and driving performance, air-conditioning and even entertainment systems. Because cars today are increasingly becoming computers on wheels with elements such as heads-up displays, autonomous driving aids, sensors, cell phone and communication integration, and high-performance elements. All these systems use semiconductor chips. Further, vehicle electrification, intelligent driver and safety assistance features and sophisticated telematics, all require semiconductor chips.

Major reasons for the chip shortages are: Covid-19 pandemic – Because the pandemic forced offices to move to a work from home regimen, the demand for electronic appliances such as laptops, tablets, smartphones and webcams rose significantly leading to higher demand for semiconductor chips. Moreover, the pandemic also affected the supply chains significantly leading to a much larger demand-supply gap US-China Trade complications – In 2020, the US government placed certain restrictions on Semiconductor Manufacturing International Corporation (SMIC) which is China’s biggest chip manufacturer. These restrictions significantly affected SMIC’s ability to enter into new contracts with American companies. This forced companies to look for alternate suppliers such as Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung.

However, these companies were already producing at installed capacity thus widening the demand-supply gap

Drought in Taiwan – In 2021, Taiwan experienced one of its worst droughts which lead to raw material problems for chip manufacturers since the chip manufacturing process required large amounts of ultra-pure water for cleaning factories

Impact of the chip shortage: Globally, major automobile manufacturers such as Toyota, Ford, Volkswagen, General Motors and Ford had to cut down production and even halt production for a few weeks because of the chip shortage. Further, if this shortage continues for the next few months, it can potentially derail the sector’s recovery from the Covid-19 demand shock.

Among Indian manufacturers, we have seen production cuts from almost all manufacturers as they struggle to reestablish stable supply chains for semiconductor chips. Recently, on 06 July 2021, we saw Tata Motors shares hitting the 10% lower circuit before recovering. This was driven by an estimated 50% decline in production for Jaguar Land Rover (JLR) in the September quarter as the automobile maker struggles to make alternative arrangements.

According to the official JLR statement, the broader underlying structural capacity issues will only be resolved as supplier investments in new capacities come online over the next 12 to 18 months and so we expect some level of shortages to continue through to the end of the year and beyond.

INTEGRAL PART OF A CAR

GOVERNMENT POLICIES

Draft National Automotive Policy The policy estimates to scale up exports to 35-40% of the overall output making India a major automotive hub in the world.

Rollout CAFÉ (Corporate Average Fuel Efficiency) norms till 2025 Adopt a long-term roadmap for emission standards beyond BSVI and complement the same with the global standards by 2028

FAME India Scheme II Phase The Fame India Scheme II is proposed for faster adoption of electric mobility and growth of electric and hybrid technology to improve the eco-system in the country FAME-II scheme was approved with a fund requirement of USD1.39 Bn for FY20-22 Supply Orders were issued for 350 Electric Buses (300 e-buses for Delhi and 50 e-buses for the State of Gujarat)

Automotive Mission Plan 2016-26 The Plan outlines the trajectory of growth of the automotive ecosystem in India The industry has the potential to generate USD300 Bn revenue and 65mn additional jobs by 2026, 12% contribution to GDP The plan also foresees India to be the first in the world in the production/sale of small cars, two-wheelers, three-wheelers, tractors and buses; and third in passenger vehicles and heavy trucks.

GOVERNMENT POLICIES

National Electric Mobility Mission Plan 2020 (NEMMP) The NEMMP initiative has been taken up to encourage consistent, affordable and competent xEVs The aim is to have 6 Mn electric & hybrid vehicles per year on the road by 2020 under NEMMP 2020 India is expected to emerge as a leader in the twowheeler and four-wheeler xEV market in the world by 2020. The total xEV sales projected as 6-7 Mn units

Production Linked Incentive (PLI) Enhancing India’s Manufacturing Capabilities and Enhancing Exports –Atmanirbhar Bharat with a scheme outlay of INR 57,042 Cr Incentives are provided under the scheme to only those companies which cross the threshold level in terms of incremental sale of Manufactured Goods and Incremental investment over the base year

EMERGING TRENDS 01

Autonomous Vehicles (AV)

Autonomous vehicles, often known as self-driving vehicles, aim to reduce the need for human drivers and appear to be on the verge of revolutionising ordinary transportation. AV fleets aim to improve public transit safety by expanding the scope of last-mile deliveries, reducing downtime, and reducing downtime. By minimising accidents caused by driver fatigue or negligence, for example. Drivers and passengers in India account for roughly 12% of global road fatalities, with over 80% of incidents including some form of driver mistake. Autonomous vehicles (AVs) have can alleviate traffic congestion while also increasing safety and fuel efficiency. Advanced recognition technologies, such as AIenhanced computer vision, are used by AVs to detect obstructions along the road.

02

Connectivity

Vehicles now have a tamper-proof digital identification that distinguishes them from the rest of the network. This makes it simple to track vehicle data for a variety of applications, including insurance, driver safety, predictive maintenance, and fleet management. Vehicle data sharing benefits not only the individual customer, but the entire mobility ecosystem.

V2x Network A British startup has developed a vehicle-to-everything (V2X) platform for autonomous transactions that combines geo-networking and caching to enable real-time communication with low latency. The platform is built on distributed ledger technology (DLTs) and is extremely scalable.

To improve security, the business leverages enterprise-grade encryption to give individuals control over their data.

03

Electrification

The depletion of fossil fuel supplies and the environmental damage caused by their use necessitates the promotion of electric vehicles (EVs).

EVs must overcome difficulties such as high prices, weak batteries, insufficient charging infrastructure, fleet electrification, and powering renewable energy-based charging networks in order to achieve increased adoption.

CharegX ChargeX, a German business, offers a modular electric vehicle charging technology that turns parking spaces into charging stations. Aqueduct, the startup's platform, is simple to set up, has four charging modules with a total capacity of 22kW, gives monthly reports, and requires a Type 2 charging cable.

04

Shared Mobility

As a result of linked automobiles, new business models that focus on shared mobility have emerged . This makes mobility-as-a-service (MaaS) possible while also discouraging the use of underutilised automobiles.

Such solutions address a city's or a company's needs without adding additional vehicles, lowering fleet wait times and pollution from gasoline or diesel vehicles.

Launch Mobility Launch Mobility, a firm established in the United States, creates a platform for a variety of shared mobility solutions. Free-floating or station-based car sharing, sophisticated shuttle services, shared dockless scooters, keyless rental programmes, and peer-to-peer shared mobility are all available through the LM Mission ControlTM platform. Business users may manage their fleets using the LM Mission ControlTM dashboard.

05

Artificial Intelligence

Artificial intelligence technologies like ML, Deep learning and computer vision are used in robotic automation in the automotive sector. These help self-driving cars navigate, manage fleets, and aid drivers in improving safety while also improving services like vehicle inspection and insurance.

AI also has uses in the automotive industry, where it helps save costs by speeding up production.

RevitsOne RevitsOne, an Indian startup, provides AI-powered fleet management software for fleets of all sizes. The vehicle management system of the startup gives data on speed, operating vitals, and health. Voicera ID, a voice-based virtual assistant that helps drivers keep track of the information they require, is beneficial to drivers.

06

Big Data & Data Analytics

Advanced data analytics informs many decisions throughout the lifecycle of a vehicle in the age of big data. Vehicle data enables predictive maintenance, informs fleet management, and alerts concerned authorities in the event of an accident. Furthermore, customer automotive data is used to boost sales, improve supply networks, and improve product design.

Procon Analytics Procon Analytics, a firm established in the United States, uses big data to provide an automotive loan solution. The technology takes and analyses millions of data points in real time, allowing lenders to assess and decrease risk in real time. This enables Buy Here Pay Here (BHPH) businesses to grow and give loans to high-risk customers. This also includes software for fleet and asset tracking, as well as networked vehicles.

07

Human Machine Interface

To drive automobiles, human-machine interfaces (HMI) use voice-based or haptic input. These broaden the range of how and what components of a car can be controlled by users. As a result, such user interfaces make driving safer and more pleasurable. Smart virtual assistants are another type of HMI that aid drivers and riders in interacting with automobiles and other service providers.

Awayr Awayr is a startup established in the United States that creates humanmachine interfaces for automobiles, unmanned aerial vehicles (UAVs), and robots. The firm collaborates with vehicle original equipment manufacturers (OEMs) to shorten HMI development cycles and improve interface safety. Awayr also creates solutions for managing driver attention in unusual scenarios, such as driverless vehicles that may require human intervention on occasion.

08

Blockchain

The automotive sector uses blockchain in a variety of ways. These include shared mobility solutions such as ride-hailing, urban transit, and delivery, as well as exchanging vehicle data through a secure network for connectivity. It is useful for validating the spare parts supply chain or ensuring that raw materials and spare parts are acquired exclusively from legal and reliable sources.

Cube Intelligence Cube Intelligence, a British business, is working on a blockchain-based security framework for self-driving cars. Hash codes are used by the startup's technology to prevent malicious assaults or hacking attempts on autonomous and connected vehicles. The technology collects data on mobility and emissions in real time. It provides AVs with ride-hailing and valet parking services, as well as parking management system

09

Additive Manufacturing

The car sector benefits from 3D printing in three ways. For starters, it allows for rapid prototyping using 3D printed models, which speeds up the design and testing portions of the manufacturing process. Second, it enables manufacturers to print spare parts that are specific to their needs. Finally, additive manufacturing of composite materials results in lighter, stronger, and more lasting vehicle parts.

9T Labs 9T Labs, a Swiss firm, uses additive manufacturing to make carbon composites for the automotive industry. Fibrify, the startup's design software, uses additive fusion technology to optimise fibre placement and automate equipment manufacture in order to mass-produce carbon fibre items. 3D printed composites are less expensive, lighter, dimensionally stable, corrosion-resistant, and have higher strength and stiffness.

FOCUS OF THE FUTURE AUTO MAKERS Customer Automotive sector leaders have long acknowledged the necessity of understanding and meeting target market requirements. A Tesla driver in high quality is searching for an experience different from Prius or an F-150 driver. Determining who your customers are and the types of vehicles and experiences they want are essential to automotive manufacturers.

Customer interactions with car manufacturers have a direct impact on customer experience as well, so auto industry companies are also looking for ways to enhance these commitments, including the use of artificial intelligence (AI), chatbots, and augmented reality to provide customers with comfort, personalization, and service they are looking to offer.

Building an Ecosystem One of the main elements in the evolving car business is the formation of partnerships to shift from "car maker" to "mobility enterprise." Some car manufacturers work with towns, hotels, or transport companies to ensure mobility. Subjects like the fleet operators in the mining business are partnered with other industries.

Automotive makers will also require partners to support them when new business models become available. For those who accept the subscription model, a coordinated team of dealers, technicians, and insurance and assistance providers may need to be set up.

The technology will enable these companies to develop linked ecosystems that provide real-time data access, coordinate and optimize production with suppliers and partners.

Manufacturing Expenses Although the automotive industry needs to develop in a new way to stay competitive, companies may not lose sight of the need to continue to give importance to manufacturing excellence. Car manufacturers should always find ways to enhance their processes, preserve the visibility of their supplier chain and meet particular requirements of each customer, serving "one segment." Aircar manufacturers are given the agility, automation, and efficiency needed for new needs, including co-bots, IA, ARs, and conversational user interfaces (UIs).

To attract and keep engineering talent also a state-of-the-art production company is crucial. A more automated 'smart' company may also enhance the workplace, boost creativity, increase staff satisfaction, and improve efficiency and production.

COVID IMPACT

Did Covid-19 Defuel the Automobile Sector?

The global pandemic caused by Covid-19 arrived at a time when the automotive industry and the Indian economy as a whole were hoping for recovery. The passenger vehicles sales in India dipped by 78 percent, suffering estimated losses of more than Rs. 2,300 crores ($ 315.09 million) daily during the lockdown between April 2020 and June 2020, As the country went into lockdown, it sent shockwaves across the manufacturing sector, resulting in shutting down production activities at original equipment manufacturers (OEM). It also caused massive disruption in the entire value chain of all major industries across India and hence negatively impacted the production of auto spare parts in micro, small and medium-sized industries. Adding to the trouble was reducing consumer demand for passenger vehicles, which contributed to a significant loss in revenue & severe liquidity crunch in the sector.

As per the report by the Society of Indian Automobile Manufacturers, the sector registered overall negative growth in sales of all vehicle categories for FY21 (2.24 percent fall in sales of passenger vehicles, 13.19 percent decline in sales of two-wheelers, 20.77 percent decline in sales of commercial vehicles, and 66.06 percent fall in sales of three-wheelers).

As the manufacturers moved towards production cuts due to a slump in demand, it also caused a negative impact on employment growth. According to the Parliamentary Panel report, the assessed job loss in the Indian automobile sector stood at around 0.35 million. The largest car manufacturer Maruti-Suzuki laid off around 6 percent of its temporary workforce, following the drop in sales.

The automobile sector, which contributed more than 7 percent to India’s GDP, faced a severe contraction, with some auto manufacturers facing a year-on-year decline of more than 30 percent in recent months.

Despite the ongoing uncertainties of COVID-19, the Indian automobile sector seems to be rapidly overcoming most of its challenges, and many are now in the rear-view mirror. The sector also benefits from the new tailwinds, such as rebalancing in the global supply chain, government initiatives to increase exports, and technology disruptions creating white spaces. These drivers will help create opportunities at all levels of the automotive value chain.

ROAD AHEAD

The automobile industry benefits from a variety of variables, including low-cost trained labor, strong R&D centers, and low-cost steel production.

The industry also offers excellent investment prospects as well as direct and indirect employment to skilled and unskilled workers.

After recovering from the ravages of the COVID19 pandemic, the Indian auto sector is predicted to rise rapidly in 2021-22.

Electric cars, particularly two-wheelers, are expected to sell well in 2021-22.

Between 2020 and 2027, the electric vehicle market is predicted to increase at a CAGR of 44 percent, with annual sales reaching 6.34 million units by 2027.

By 2030, the electric vehicle sector will have created five crore direct and indirect jobs.

In 2030, a $50 billion market for EV financing has been identified—roughly 80% of the current size of India's retail car loan business, which is worth $60 billion today.

In FY22, India's passenger vehicle sector is predicted to rise by 22 percent to 25 percent.

Follow us at: Website: www.iimshillong.ac.in/student-life/student-clubs/conquest/ Instagram: https://instagram.com/conquest.iims?igshid=dcu3kj4nxh3v Facebook: https://www.facebook.com/ConQuest.IIMS/ LinkedIn: https://www.linkedin.com/in/conquestiims

Write to us at: conquest@iimshillong.ac.in

All rights reserved with ConQuest