Indian automotive aftermarket $10 billion market

The Indian automotive aftermarket for parts, currently valued at Rs 19,000 to Rs 24,000 crore, is estimated to reach  Rs 39,000 to Rs 44,000 crore by 2015,” says a CII Report prepared by McKinsey & Company titled: “Opportunities in the Indian Automotive Aftermarket”, released at the CII Auto Serve 2010 Conference here today.  The report observes that the Indian automotive aftermarket, which is growing at 11 per cent per annum, is at an inflection point with: the increase in vehicle parts, more complex parts, price sensitive customers, and expansion of global suppliers in terms of sourcing and distribution presence in India.
The CII Report said that the market demand for parts and services set to double over the next 5 years. Hence, companies across the value chain will require significant additional investments in capital to double their capacity, as well as to enhance their capabilities to produce parts for and service a wider variety and complexity of vehicles.
The Report also observes that since there is a threat of margins coming down with the maturing of the market, the automotive aftermarket players will need to proactively pursue certain initiatives such as evaluating additional ways of capturing value, expanding service networks, developing branded generic parts, integrating forward, and building scale to sustain profitability.
The Report suggested that: the OEMs and OES step up efforts to control parts distribution; the independent garages and multi-brand dealers capitalise on India’s ageing car-parc, and OEMs and distributors develop branded generics to capture the cost advantage in this rapidly growing independent market.
The Report observes: “The aftermarket parts business is highly profitable for OEMs and it is imperative for them to place adequate importance on expanding this business. Given that the aftermarket contributes a modest 24 per cent in revenues to OEMs, but a sizeable 55 per cent to profits, this is a lucrative sector to play in. With independent players actively expanding, there is a need for OEMs to consider various initiatives to attain a tighter control of parts distribution.
Market interviews and analysis indicate that owners of older vehicles often migrate to independent service networks for cheaper and faster service. With OEMs more focussed on vehicles in their warranty period, offering higher levels of service for older cars will be necessary for independent players to attract customers. OEMs and distributors should develop branded generics to capture the cost advantage in this rapidly growing independent market: The Indian market for branded generics is already worth Rs 3,000 crore to Rs 4,000 crore and is set to grow significantly in the next 5 years. Analysis shows that generic brands tend to have much higher margins and are extremely popular among consumers looking for fully functional, yet cheaper alternatives to OE spares, especially in the non-critical product ranges.
OES’s, independent players and distributors should consider partnerships and options for forward integration: Since many key skills and capabilities required for success overlap along the value chain, forward integration offers players the potential to create additional value. While global trends and the complex nature of the Indian market indicate independent distributors are going to remain valuable components of the value chain, it is imperative that they build scale in order to counter the threat of exclusivity from OEMs, OESs and the risk of displacement by logistics providers.
According to the Report, roughly, 30 per cent of the market comprises spurious parts. After making adjustments for the spurious parts market, the manufacturing revenue pool of around INR 10,500 crore is roughly shared by OEMs (39 per cent), OESs (34 per cent) and generic manufacturers (27 per cent). Distributors, who typically enjoy margins of around 15 per cent, have a profit pool of around INR 2,500 crore. Original equipment manufacturer’s sales units and distributors enjoy a slightly higher share of the market at 55 per cent compared to independent distributors at 45 per cent.
The production of parts is split between original equipment manufacturers (OEM), original equipment suppliers (OES) and generic manufacturers. Commercial vehicles (CV), which include multi-axle vehicles, light commercial vehicles (LCVs), buses and trailers account for roughly 22 per cent of this market (INR 4,500 crore to INR 5,500 crore), with Maharashtra, Tamil Nadu, Gujarat and Kerala accounting for over 40 per cent. The car market is estimated at INR 6,000 crore to INR 7,000 crore (34 per cent of the market) with Maharashtra, Andhra Pradesh, Delhi and Tamil Nadu cumulatively accounting for about 40 per cent of the share.