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UNDERSTANDING The Automotive Supply Chains

Vijayendra Acharya
22nd Dec, 2020
Vijayendra Acharya
Senior Consultant

Among the most impactful of modern manufacturing industries, the Automotive sector has been historically always in the forefront. It ushered in the United States to the top league of manufacturing economies of the world in what was seen as an unprecedented GDP accelerator, The automotive industry has, besides, made a lasting impact in creating an entire industrial and technological ecosystem of its own. However in the onset of new millennium, it is in Asia, most notably India, that the automotive industry has hogged the limelight of global attention and emerged to be a top contender for hosting the automotive industry and its market demand. India is already the fourth largest auto market in 2019, displacing Germany with about 3.99 million units sold in the passenger and commercial vehicles categories.(IBEF Report)

The auto-components industry now accounts for 2.3% of India’s Gross Domestic Product (GDP) and employs as many as 1.5 million people, directly and indirectly

India is expected to further displace Japan as the third largest auto market by 2021 The two wheelers segment dominates the market in terms of volume owing to a growing middle class and a young population. Moreover, the growing interest of the companies in exploring the vast hinterlands of rural markets further aided the growth of the sector. India is also a prominent auto exporter and has strong export growth expectations for the near future. In addition, several initiatives by the Government of India (GoI) and major automobile players in the Indian market is expected to make India a veritable leader in the two-wheeler and four-wheeler market in the world by 2020.

Automotive Component Industry

Automotive ancilliarization is at the heart of the growth of the automotive industry in India. The necessary ecosystem for the automotive industry largely consists of the capabilities of the Indian automotive ancillary industry to rapidly scale up itself both in terms of investment and technology upgradation to keep pace with the global automotive manufacturing industry. The Indian auto-components industry too has experienced healthy growth over the last few years. The auto-components industry expanded by a CAGR of 6% over FY16 to FY20 to reach US$ 49.3 billion in FY20. The auto-components industry now accounts for 2.3% of India’s Gross Domestic Product (GDP) and employs as many as 1.5 million people, directly and indirectly.  The industry structure can be broadly classified into organised and unorganised sectors, the latter dominating in terms of number of units, while the former constitutes the Tier 1 supplier to the Automotive manufacturing industry..

The organised sector caters to original equipment manufacturers (OEMs) and consist of high-value precision instruments, while the unorganised sector comprises low-value short cycle products and caters mostly to the aftermarket segment The Indian automobile component industry’s revenue stood at US$ 49.3 billion in FY19, up from US$ 35 billion in FY14. Export of auto components grew at a CAGR of 7.6% to reach Rs. 102,623 crore (US$ 14.5 billion) during the same time. As per Automobile Component Manufacturers Association (ACMA), auto components export from India is expected to reach US$ 80 billion by 2026. The Indian auto industry is expected to reach US$ 200 billion in revenue by 2026 making it the third largest in the world by 2025. Indian auto-component makers are well positioned to benefit from the globalisation of the sector.

The new economies of scale has resulted in enterprise-wide technology platforms bring together company-wide data and beginning to remove the old functional silos with new cross-functional supply chain organizations

The Automotive Logistics – An Overview

Logistics outsourcing, in the automotive industry has been conventionally (until quite recently) limited to engaging with stand-alone transportation and warehousing service providers for the outbound and inbound movement of their products and materials. The gradual increase in emphasis on improved operational efficiency, just-in-time inventory practices and long-term supply contracting systems have slowly transformed the working of logistics and supply chain management and their outsourcing practices. A whole range of new value-added services – such as packaging, labeling, systems support and inventory management etc are now on offer by several large integrated 3PLs. In the last two decades in particular, the scaled up presence of the Japanese and European firms in the automotive as well in some key component industry increasing sophistication in the demand for a wide range of automotive parts, the quality and stringent inventory requirements and overall sophistication in the global logistics and supply chains, have seen a sea change. The new economies of scale has resulted in enterprise-wide technology platforms bring together company-wide data and beginning to remove the old functional silos with new cross-functional supply chain organizations, among them Mahindra Logistics, TVS Supply Chain Solutions, TKM Global, TCI Supply Chain Solutions, TML Distribution Company Ltd etc.,

Auto Parts Logistics

“A single car has about 30,000 individual parts, counting every part, down to the smallest of screws that go in on the car assembly line” (Toyota). These mostly comprise hundreds of mechanical, electrical, electronic sub-assemblies, that are outsourced from several hundreds of component manufacturers/suppliers from across the country and globe, in what amounts to one of the most sophisticated supply chain network operations. Large global OEMs like Toyota, Hyundai, Renault, including Indian auto majors like Maruti, Mahindra & Mahindra, TVS  Motors, Bajaj etc that have in the last decade or so, moved up the value chain in a big way. Trends such as the high turnaround of car models, fast changing end-user features, rapid-fire changes in automotive design, its powertrain (engine) and fuel systems translate into constant renewal and refurbishment of the supply chains that connect manufacturers with their supplier/vendor networks. For instance, China currently ranks as India’s largest supply source for automotive components. In fact, China alone accounts for about 27 percent of India’s automotive component import. This is followed by South Korea and Germany at 13 percent and 12 percent, respectively. Concurrently, the automotive component\ supply chains of Indian automotive industry now spans many countries in the world and need to be managed over vast geographies.

Both these supply chains encompass different levels of market risk, financial exposure, working capital requirements in maintaining the necessary inventory levels

The automotive parts supply chain thus, actually operates here as one of the several layers in the working of the automotive supply chain. In terms of complexity and market valuation, it however constitutes for the bulk of automotive supply chain operations The component supplier universe comprises of a variety of players from OEMs own captive manufacturing units, contract manufacturer’s who work under production and supply agreements with the OEMs, independent suppliers who may nevertheless be part of a OEMs vendor network that meet latter’s quality and other technical specification standards. The industry structure of the auto components in India is highly skewed with smaller number of large organised players well integrated into the OEM value chain, while large majority of auto component manufacturers are in the SME segment and the unorganised sectors, mainly catering to the aftermarket demand, channeled through large number of stockists and dealers..

Dissecting the Automotive Supply Chains

Significantly, the automotive spare parts logistics and SCM  is segmented in terms of inbound supply chains that connect to the automotive OEMs and OEM’s outbound B2C supply of spares/parts to the Aftermarket segment, where the parts are continuously replaced as part of regular maintenance, repair and refurbishment services, under warranty services. Auto component manufacturer’s supply chains thus encompass both B2B and B2C channels of market distribution. Both these supply chains encompass different levels of market risk, financial exposure, working capital requirements in maintaining the necessary inventory levels.The aftermarket automotive parts market is a highly fragmented one with several hundreds of stockists and dealers on the fray.  The high degree of unpredictability and difficulty in forecasting demand for parts results in overall structural weakness of the auto component industry in attracting fresh investment and growth.  

From automotive manufacturer’s point of view too, there are challenges of managing an on-site parts logistics and SCM operations to continuously feeding the assembly lines, with the completion of its procurement cycle The in-bound and on-site supply chain management is actually a seamless activity that needs to be closely coordinated and synchronized to keep up with not only continuity in inventory flow to the assembly-line operations but also do so on just-in-time basis, keeping the inventory cost at the lowest. The disruption of even a single important just-in-time component here can slow down or logjam the manufacturing process. This calls for a high level of synchronized SCM planning and a dynamic inventory replenishment strategy to be in place.

It is at this point in the automotive value chain that new integrated automotive logistics and SCM solution providers have stepped in with an their suite of services and turnkey implementation of their solutions. Logistics and supply chain solutions partnership with the OEMs and other manufacturers is actually set to evolve into new modalities of partnership contract and service agreements. While the OEMs seek to thus, completely move out of the supply chain management, automotive logistics majors will step in a big way and take on new functional roles such as inventory planning, production scheduling, warehousing, etc.

The automotive manufacturers are increasingly turning towards new business models for engaging with the integrated logistics and SCM partners, who can act as one-stop solution for virtual ownership and management of the entire train of inbound and outbound logistics and supply chain management

For the OEMs and other manufacturers, the post-production phase currently presents yet another unique challenge, in what is known as the finished automotive logistics, engagIng with the multi-modal logistics services like road hauliers, railways and shipping (car carriers vessels) services for domestic market as well as exports. Bulk of the domestic finished automotive logistics for meeting domestic demand is carriedby road snd a small share also by Railways. The road transportation of vehicles has already reached a certain saturation and there is much justification for railways to step in to fill the gap, as domestic vehicle demand is growing relentlessly. Recently, even inland waterway vessels have been used to transport vehicles. The seaports of Chennai, Mumbai and Mundra which handle large volumes of automotive export have large cross-docking yards for parking large numbers of export vehicles.

Future of Automotive Logistics

With the automotive manufacturing increasingly becoming automation-driven, involving robotic manufacturing and assembly operation, the automotive manufacturers are increasingly turning towards new business models for engaging with the integrated logistics and SCM partners, who can act as one-stop solution for virtual ownership and management of the entire train of inbound and outbound logistics and supply chain management, including on-site in-plant logistics, warehousing and distribution activities. There are a few companies which use the Lead Logistics Partnership (LLP) model for meeting all of their logistics and SCM needs. For example – Ford India, which was previously using the 3PL outsourcing model, is now opting for the LLP with Penske Logistics. Ford Motors is likewise in a LLP agreement with DHL Supply Chain for their European operations. TCI SCS is one of the largest Indian LLP service providers, with a client list that includes names like Toyota, General Motors, Tata Motors, Maruti Suzuki and two-wheeler manufacturers like Bajaj Auto and Hero Motocorp. TVS SCS works closely with some of the largest vehicle manufacturers and Tier 1 suppliers throughout the world. LLP actually acts as a template for collaborative manufacturing, with the LLP taking care of not only physical movement of materials but the entire sequencing of Supply chain iteration, such as managing spare parts distribution, point of use feeding, value-add assembly, kitting, and sequencing etc. Presently, aspirant SCS providers like TVS SCS are catering to not only automotives but a whole spectrum of industries that need integrated supply chain solutions. As LLP concept catches on more automotive OEMs and as the complexity of supply chain increases we could see the emergence of pure play Automotive LLPs taking on the collaborative business space in a big way as the automotive OEMs deepen their vertical focus on R&D, non-polluting engine drives and propulsion fuels, other powertrain and dashboard innovations that transform the concept of vehicle use in future. ♦♦♦♦♦

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