Best Practices Of Automotive Suppliers In India, 2021

August 2021 Living with volatility: Survival, revival and growth Best practices of automotive suppliers in IndiaForeword The second wave of the COVID-19 pandemic has been one of the most challenging humanitarian crises ever. Economies and industry supply chains across the globe witnessed severe disruptions and the Indian automotive industry was no exception. The vehicle industry in India witnessed two successive years of de-growth – of 14.6% in FY20 and thereafter, of 13.6% in FY21. A sluggish economy accompanied by a cyclical downturn in several segments had adversely impacted the industry. The pandemic further posed a number of challenges to the overall economy. The auto component industry, in tandem with the vehicle industry, reported a subdued performance in FY21, with de-growth of 3% over the previous year, registering a turnover of INR 3.4 lakh crore (USD 45.9 billion).The automotive value chain faced significant disruptions in FY21 with operations being adversely impacted by the first and second wave of COVID-19.Despite such a volatile environment, the industry displayed great resolve. The automotive component industry supported OEMs well by ensuring a smooth ramp-up and business Deepak Jain continuity. President, ACMA Although the market is witnessing some recovery, the ongoing semiconductor shortage, rise in commodity prices and fear of a third COVID wave continue to add to the uncertainty in the industry. Whilst volatility is the new normal, as the various states of ourcountry unlock, the industry needs to introspect and reflect on how it can not only survive the challenges of today and tomorrow, butalso focus on future prospects and harness newer business opportunities that an ever-changing business environment throws at us. It is in this context that we have themed ourannual session as ‘Living with volatility: Survival, revival and growth’. ACMA, along with PwC, has conducted a study to understand the best practices that the Indian automotive industry is adopting to live with volatility and chart out its future. I would like to sincerely thank all the participating business leaders across various segments of the automotive industry fortaking time out to share their perspectives.I hope you find this report both insightful and relevant, and welcome any suggestions that you may have. PwC| ACMA| Living with volatility: Survival, revival and growth 2Message from PwC Indian automotive industry: On the path to recovery despite volatility Just when a rapid recovery seemed imminent in the last financial quarter of FY21, the second wave of the COVID-19 pandemic struck. Demand is expected to see a sharp recovery starting Q2 FY22, with the upcoming festive season expected to usher in a full revival. However, supply side challenges – particularly the global semiconductor shortage that is expected to continue through the rest of this financial year – will moderate the recovery process. ACMA and PwC conducted a joint study to understand best practices of the Indian automotive industry in the face of volatility. In the past, we have seen cycles of demand growth and troughs in distinct years. Going forward, PwC expects the three states of ‘survival, revival and growth’ to coexist in different parts of the industry value chain at the same time. Our study evaluates some of the strategies that leading companies in the automotive supplier community are adopting to survive, revive and be ready for future growth. KavanMukhtyar Automotive suppliers will need to change their operating model in order to be agile, flexible and customer focused, and succeed in the Partner and Leader –Automotive new normal. Our study shows that companies with robust financial management capabilities and a focus on growing value added per PwC India employee and strong alliances with suppliers and customers will emerge successful. Attracting and retaining top talent, building and nurturing a core leadership, and separating ownership from company management are some of the other best practices that will help companies thrive amid volatility. The future is exciting, but also full of challenges. The automotive industry is expected to undergo a major transformation in the coming decade. It is imperative that incumbent players seize the opportunity, innovate, collaborate, and capitalise on the big changes that are now underway. It is time to embrace the change and accelerate into the new future. PwC| ACMA| Living with volatility: Survival, revival and growth 3Businesses are adapting to volatility and uncertainty as a way of life. Which sectors have taken the hardest hit? HospitalityandLeisure 86% Uncertainty is impacting various sectors HigherEducation 83% of the economy. Organisations in these sectors experienced ‘negative’ and ‘significant negative’ impact: The pandemic has further aggravated Industrial Manufacturing and Automotive 80% pre-existing challenges. FinancialServices 76% ConsumerMarkets 72% The ever-widening range of crises continues Technology, Media and Telecommunications 61% to test even the strongest organisations. GovernmentandPublicServices 77% Energy,UtilitiesandResources 76% HealthIndustries 65% Source:PwC’sGlobalCrisisSurvey2021 PwC| ACMA| Living with volatility: Survival, revival and growth 4Changing paradigm in the automotive industry: From stability to volatility Over the last decade, market volatility has become more frequent and is likely to intensify in the future due to various factors 40% 25000 30% 20000 20% 15000 10% 10000 0% 5000 -10% -20% 0 PwC| ACMA| Living with volatility: Survival, revival and growth 80-7002 90-8002 01-9002 11-0102 21-1102 31-2102 41-3102 51-4102 61-5102 71-6102 81-7102 91-8102 02-9102 12-0202 The increased frequency of external shocks has had a negative effect on vehicle sales: • While India’s real GDP has grown consistently at around 6% and consumer spending has multiplied by four times in the last 13 years, automotive industry growth rates have been fluctuating. Global events Domestic events • This can be attributed to a market driven by both domestic and global events. Consumer spending Brexit Industry 4.0 Global Fed rate hikes Quantitative easing tapering BS3 • Crises impacted consumer sentiment as well as the financial position of large OEMs. They also accelerated customer shifts, requiring large capital expenditure (CAPEX) spends by OEMs. NBFC crisis BS4 Real GDP growth • Supply chain uncertainties have increased due to Chip shortage trade volatility, raw material availability and so on. Domestic • Rapid upgrades in emission norms with reduced CAFÉ norms GST BS6 intervals between successive norms have led to Turkey contagion NCAP high CAPEX for OEMs, and the price increase has IBC US–China trade war been passed on to customers. COVID-19 US mortgage crisis Demonetisation Trump tariff • Upgrades to the national policy framework and fragility of non-banking financial companies (NBFCs) have further contributed to increased volatility. Automobile production growth Auto companies turnover growth Real GDP growth Consumer spending (INR billion) Source: SIAM, World Bank, PwC analysis BS: Bharat Stage; CAFÉ: Corporate Average Fuel Economy; GST: Goods and Services Tax; NBFC: Non-banking financial company; NCAP: New Car Assessment Programme; IBC: Indian Bankruptcy Code 5Convergence of six key factors driving volatility in the Indian automotive industry; it will continue Uncertainty and volatility are now the new normal. beyond the pandemic Tariffs, trade wars and economic uncertainty will continue to have an 1 2 3 impact next year and beyond. Meanwhile, the underpinnings of the Geopolitical issues Stricter regulations Business model shifts business model that has sustained the automotive industry for more than 100 • Multilateral to bilateral (free • BS4 6, CAFÉ • Connected, Autonomous, Shared trade agreements [FTAs], etc.) • NCAP for safety and Electric (CASE) disruption years are undergoing some of the biggest • Nationalism, protectionism: e.g. • Product recall, Real Driving • Shift to becoming mobility solution changes the model has seen since its China+1 Emissions (RDE) providers inception. 4 5 6 Shifting consumer Supply chain bottlenecks Technology changes preferences • Disruptions (chip shortage) • Connected services (5G) • Online sales, direct to • Currency volatility • Speed of computing consumer (D2C) • Localisation focus • Digital transformation • Both inter-segment and intra- segment shift • Pre-owned vehicles PwC| ACMA| Living with volatility: Survival, revival and growth 6With 10+ policies in the pipeline, the Indian auto regulatory Implications of recent regulations for automotive industry players environment will continue to be dynamic – with demand 1. Compliance burden: A dynamic policy and regulatory landscape has revival, green economy, sustainability and safety as key themes increased the compliance burden (e.g.CAFÉ norms). Policy interventions at various stages of evaluation by the Government of India Impact on vehicle sales 2. Price increases: Regulatory updates such as BS6, upfront Reduction of GST from 28% to a lower rate (18% proposed at September 2020 SIAM conclave) Low High payment of insurance and enhanced safety needs have increased vehicle prices by around Incentive-based vehicle scrappage policy announced for implementation from 2023–24 Low High 15%. 3. CAPEX commitment: Policy shifts Promotion of Auto Champions (production-linked incentives) Low High towards EVs, etc., result in CAPEX for OEMs and suppliers, in addition Reversal of road tax increase in key states (Madhya Pradesh, Rajasthan, Kerala, Bihar, etc.) Low High to recent CAPEX. 4. Increased accountability: Government interest subvention scheme rolled out through public sector banks Low High Regulatory updates reinforcing accountability of faults on manufacturers are in the works; CAFÉ norms Low High component makers will accordingly need to step up their quality focus Real Driving Emissions (RDE) under consideration Low High (e.g.product recall policies under discussion). Establishment of a product recall mechanism Low High Prominent policy themes Strict enforcement of overloading restrictions on commercial vehicles Low High Green economy Sustainability Categorisation of automobile dealers as MSMEs to avail COVID-19 stimulus packages Low High Removal of mandatory third-party insurance for three and five years Low High Demand revival Safety Source: SIAM 60th Annual Conclave 2020 white paper, PwC analysis PwC| ACMA| Living with volatility: Survival, revival and growth 7On the global geopolitical front, trade uncertainties between Key highlights from the US– China trade scenario (2018) major automotive markets will continue to pose challenges • Uncertainties over trade tariffs impacted three of the largest auto for your purchase decisions markets in the world (the US, EU and China) starting 2018. Case in point: EU passenger car international trade uncertainties • While tariffs first started between the @US_government due to US–China tariffs | 2018 US and China, the EU was soon @EU25% punitive tariffspossible#tradewar apprised of the possibility of tariffs through a tweet by the US 41.6 billon 0.6 billion Government. Exports to the US Imports from China • Several luxury car brands (such as the BMW X series and Audi Q5) are 6.0 billion exported from the US to the EU and 24.9 billion China. Imports from the US Exports to China • Components worth USD 3.7 billion BMW X-Series EU passenger cars (USD billion) manufactured by Indian suppliers were exported to the US in 2018. Outercircle: Exports Audi Q5 Innercircle: Imports US tariffs applied exclusively to Chinese tariffs applied exclusively Chinese goods: USD 250 billion to US goods: USD 110 billion How has the rise of protectionism resulted in uncertain cost scenarios and the rise of ‘just in case’ supply? Automakers are building supply Redundancies have had a volume The capacity expansion plans of The supply ecosystem must grow in Declining goods trade and redundancies due to punitive and impact on suppliers as OEMs try to several OEMs hinge on FTAs such conjunction with OEMs’ location increasing services trade shift the unpredictable tariff regimes (e.g. balance costs and availability with that they can export as well as serve preferences. focus away from the auto sector. China+1 strategy) suppliers. local markets. Vietnam, Thailand, Indonesia and India are key locations waiting to finalise FTAs with the EU and US. Source: UN Comtrade, Ministry of Commerce (GoI), US Government Twitter handle, PwC analysis PwC| ACMA| Living with volatility: Survival, revival and growth 8Global events such as the recent semiconductor shortage have led to long-term supply chain volatility The semiconductor shortage will continue. The consumer electronics sector has made bookings for around 18 months in advance Impact of semiconductor volume losses (in thousand units, global) compared to two to three months by auto. Confirmed Expected development –Strategy head, leading Indian passenger vehicle brand What has happened -114 -342 -164 -476 • In response to the drop in sales -146 and production in early 2020, -14 vehicle OEMs cancelled parts of -354 -48 Compared to 2008–9, India’s auto sector has their contracted purchases of Q3 2021 increased its global trade activity by ~2.5x. -503 semiconductors. Thus, the impact of global events on India’s auto -365 • Due to complementary factors supply chain has become more pronounced. impacting the -140 -384 telecommunications and consumer product industries, -167 Trade volume of auto components (in USD billion) the demand for chips -192 Q1 2021 skyrocketed later in 2020. -293 • OEMs have been managing the 13.8 shortage of chips and connected Imports 8.2 Q2 2021 supply parts by prioritising the production of profitable and high- Europe North America China Japan/Korea Rest of the world demand vehicles. 13.3 Source: IHS February 2021 release, PwC Autofacts Exports 5.1 2020–21 2008–09 Source: Ministry of Commerce (GoI), ACMA, PwC analysis PwC| ACMA| Living with volatility: Survival, revival and growth 9Industry players must find a solution to this shortage, Which consumer technologies are driving a change in consumer especially when electronic content in cars of the future preferences and thus higher ‘electronification’? is pegged at >40% 7 consumer technologies of the future Transition to ~4 km 38x jump 5G 5G networks and cloud average length of electrical in data consumption in the last 5 computing wiring in a modern car years –it’s evident that customer communication protocols will make data and connectivity needs will a host of connectivity features extend to their vehicles viable, thereby signalling Consumerisation of artificial impending disruption intelligence Subscription video on demand Implications of increasing electronic content for vehicles (SVOD) and its network effects • Electronic control units (ECUs)/data concentrator units Cloud gaming and (DCUs) will become a new market segment to support Human-machine high-power computing needs within a vehicle. gamification Infotainment interfaces • Vehicle sensors, ECUs, wiring harnesses and other similar hardware components will become increasingly Digital health, wellness commoditised. Advanced driver Connectivity, and wellbeing • Automotive sensors will have high processing assistant systems computing, cloud- capabilities. (ADAS) based enablement • Data storage, privacy and security will be key Augmented reality differentiators. Sources: Auto Service Professional, Mobile Broadband India Traffic Index, PwC analysis Personal robots PwC| ACMA| Living with volatility: Survival, revival and growth 10The future of mobility will be characterised by CASE CASE disruption Theincreasing proliferation of business and operating disruption, leading to a significant shift in industry models requires players to re-evaluate theirCASE strategies with a view on available technology, value profit and revenue pools for traditional industry players pool sizes and unit economics. It is estimated that traditional profit share from supplier business shall nearly halve from 71% to 41%.* Business + customer shifts 1. Connected: Behind the first peak of expectations with most value expected in B2B applications (e.g.fleet Hydro- Discrete and Ownership only Fuel efficient Product + service management) mechanical unconnected 2. Electric: While BEV use cases are approaching the plateau stage, fuel cell use cases have not yet peaked 3. Automated: Higher value expectations in L4 goods transport than in private passenger transport Usership and Emission efficient ‘Electronified’ Connected and safe + Experience 4. Shared: Micro-mobility with high value expectation – sharing on par with ride hailing *These numbers indicate the shift in the global profit pool. Connected Autonomous Shared Electric • Vehicle-centric and • Automated driving will • Shared mobility • Battery electric Global beyond-vehicle B2C not arrive with a big models are expected vehicles (BEVs) are services are expected bang: Useful functions to account for 15–24% expectedto see the to grow from USD8 and features to pave of vehicle-based highest growth, with a billion to USD 66 the way for L4. mobility by 2030. ~23% CAGR till 2027. billion by 2035. • L1/L2 autonomous • Micro-mobility start- • Strong growth is • 75% of connected car vehicles are expected upsare gaining expected in the city India features in Indian to hit Indian roads by increasing acceptance speed e-two-wheeler markets are related to 2027. OEMs would in India. segment. 25 OEMs are vehicle, mobility and adopt a tiered approach retailing e-two-wheelers security management. for Indian markets. in India. Source: PwC Strategy& 2020 Digital Auto Report,Fortune Business Insights, PwC research and analysis PwC| ACMA| Living with volatility: Survival, revival and growth 11EV adoption would play out across multiple scenarios in India – driven by cost economics, ‘localised’ shared mobility, availability of infrastructure and state-level EV policies Different scenarios: EV strategy and mobility adoption Localised Import dependent • Cost of ownership and acquisition favourable • EV fleets take to the roads • Government and private operated EVs • Inter-city rides • Private buyers prefer EV over IC PwC| ACMA| Living with volatility: Survival, revival and growth desaercnI etavirp gnirudnE ytilibom derahs egasu Imperatives for component suppliers for EVs vs mobility Mass, cost and mobility driven Selective, subsidies driven • Cost economics not favourable, except 1. Electric vehicle (EV) skateboards are getting EV subsidies widely popular with different automakers; OEMs • Government-driven subsidised transport and component makers are looking to applications of EV collaborate to bring down development costs and build capabilities. 2. The high-voltage (HV) architecture comprises different components and presents a wide Selective, cost driven Selective, environment- range of opportunities for suppliers. • Cost of acquisition favourable but consciousness driven 3. Players who can collaborate and champion ownership cost and maintenance not the required capabilities (technical and non- • Cost economics not favourable favourable technical), weave them into various EV • Shared mobility not a favourable option • Shared mobility not a favourable option to business models (product sales, charging • EV demand will be driven by environment- choose services, other monetisation avenues) will be conscious and prestige-seeking customer • IC demand is replaced by EV demand in well positioned for the future. segments the case for private buyers 12While volatility will be a major factor, CEOs are positive of growth Forces stemming from a dynamic regulatory environment, new business and operating models, supply chain disruptions and shifts in customer preferences have made living with volatility the new normal. However, companies are hopeful of growth in this environment of opportunity. PPwwCC|| AACCMMAA|| LLiivviinngg wwiitthh vvoollaattiilliittyy:: SSuurrvviivvaall,, rreevviivvaall aanndd ggrroowwtthh 13An improved outlook A record share of CEOs believe global economic growth When asked about their outlook on the global will improve in 2021 economy, 88% of India CEOs say they believe it will improve during the next 12 months. Overall, 76% of global CEOs say they believe it will improve during the next 12 months. That’s nearly 20 Question: Do you believe global economic growth will improve, stay the same or percentage points greater than the previous record decline over the next 12 months? high for optimism in all the years we have been asking this question. It also marks a significant rebound from our 2020 survey (conducted in the autumn of 2019), when just 22% of CEOs expected improved growth. 15% 18% 22% 27% 29% 37% Little could anyone have known that the coronavirus 44% 42% would strike, causing global GDP to contract by 57% 34% 24% 3.5% in 2020 –marking its worst performance since 76% the Great Depression. In the wake of such a 52% decline, some bounceback seems inevitable. And 49% it’s already underway in China and elsewhere. 53% 28% 44% 49% 53% 48% 36% 10% 28% 29% 23% 88 17% 17% 14% % 7% 5% of India CEOs 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Decline Stay the same Improve are confident about global economic growth improving over the next 12 months, while 70% Source: PwC 24th Annual Global CEO Survey are confident about their own revenue growth in the same period. Source: PwC 24th Annual Global CEO Survey PwC| ACMA| Living with volatility: Survival, revival and growth 14Our view is that three states will coexist in the context of any organisation: Survival, revival and growth From gradual or sequential to coexistence of all 3 states Survival: Utilise scenario planning to build what-if Growth plans – a. Build business forecasts for each possible scenario by considering the most relevant assumptions for base inputs to the forecasting models. Survival Revival b. Lay down a plan of action for each possible scenario and communicate the same to stakeholders. Revival Revival: The resurgent part of business – a. Gear up for rebound by ensuring adequate resource allocation for quick scale-up of assets. Growth b. Evaluate restarting of halted projects to deliver future growth. Growth: Those who invest in growth during crises will Survival come out stronger and be in a better position to handle the ongoing volatility. PwC| ACMA| Living with volatility: Survival, revival and growth 15Thus, automotive suppliers will need to change their operating model in order to be agile, flexible and Planning for growth is not new, but what’s new is that volatility implies a trade-off customer focused, and succeed in this environment. situation between investing for the future vis-à-vis staying afloat – which is further accentuated with the market disruption impacting management decisions. Let’s look at some of the best practices being followed in this new normal. -CEO, leading tier-1 supplier PPwwCC|| AACCMMAA|| LLiivviinngg wwiitthh vvoollaattiilliittyy:: SSuurrvviivvaall,, rreevviivvaall aanndd ggrroowwtthh 16Survival Revival Growth Survival: Planning for what-if scenarios and reacting to the plan Business continuity capabilities will be the We believe that the two key elements for survival in this environment have been purchase criteria for OEMs. Suppliers need redefined – financial prudence and risk and crisis management. to plan for resilience. They should not be spread across too thinly and instead have strong linkages with their own tier-2 suppliers to support and build their capabilities. Premium will be paid for companies that can handle volatility better along with more robust risk management. –CXO of a leading automotive OEM Financial prudence Risk and crisis Break-even point management (BEP) reduction Workforce Supplier Customer enablement relationships intimacy PwC| ACMA| Living with volatility: Survival, revival and growth 17Survival Revival Growth Key elements of the survival framework Financial prudence Risk and crisis management BEP reduction Real-time finance and critical ratio Finance costs, term loans pay off and Reducing fixed costs, revisiting leases for monitoring workforce migration facilities and asset sharing Real-time monitoring of critical financial ratios and cash Firms must maintain a financial risk register that is While fixed-cost cutting programmes must be run, firms heads is imperative and will remain areas of concern. evaluated at high frequency. Custom dashboards can be must also monetise non-core assets and explore Finance functions across organisations must become prepared for tracking key risk metrics with risk-level innovative ways of asset sharing to achieve break-even more efficient to drive value. thresholds. reduction. Best practice #1 Best practice #2 Best practice #3 An MSME analysed its cash flow to discover the A piston manufacturer used a financial risk dashboard An auto-electronics manufacturer decided to revisit its presence of manageable working capital due to variable with a built-in escalation workflow. On the basis ofthe contracts and review the expenditure on non-core assets. cost reduction from low demand. The firm decided to pay thresholds defined, escalations were sent to essential It renegotiated its leases to obtain more favourable off short-term high-interest loans instead of building cash stakeholders in time to review key metrics and control the pricing and tenures. Additionally, it decided to reduce reserves. Hence, the MSME preferred clearing debts that possibilities of incurring financial losses. spending on non-core assets such as vehicles awarded would constrain cash flow in the future. to employees by increasing the duration of vehicle retention. Source: PwC analysis PwC| ACMA| Living with volatility: Survival, revival and growth 18Survival Revival Growth Key elements of the survival framework Workforce enablement Supplier relationships Customer intimacy Virtual work and vaccination drives Tier-N supplier viability, import Programme management efficacy and across plants dependencies and chip shortage profitability of programmes Employers must go the extra mile to enable employee A firm’s relationship with its suppliers must change from Customer sentiment must be captured continuously in a comfort and wellness in these challenging times which being transactional to one of heightened cooperation dynamic environment. This will require collating frequently disrupt daily life. since strong ecosystems are needed to survive in the information across customer touchpoints. prevalent scenario. A European automaker had to shut its factories in Europe Best practice #4 due to strict COVID-19 norms. The OEM’s business team Best practice #5 At the onset of the second wave of infections, workers identified the models preferred by truck drivers across were apprehensive that the hardships they faced during Factories faced a severe labour crunch one month into European and North American markets at the onset of the the first wave would be repeated. Several manufacturers the pandemic due to reverse migration. One of India’s pandemic. This quick diagnosis allowed the OEM to came together to provide their workers with mattresses, largest OEMs sent its workers to tier-1 supplier factories ensure the supply of the preferred model to multiple food, water and sanitary items for workers so that they to plug gaps in workforce availability. countries while manufacturing of other models was could be housed within factory premises for an extended deprioritised. period of time. Source: PwC analysis PwC| ACMA| Living with volatility: Survival, revival and growth 19Survival Revival Growth Best practice #6 Real-time finance as a business partner For agility in risk management and identification of growth opportunities Finance is a science and should not be seen as an ownership function. We must A leading glass manufacturer started looking at its finance function in a highly strategic manner –delivering value through invest in independent and professionally insights underpinned by efficient processes. Out of the approximately 30 key performance indicators (KPIs) tracked by the qualified teams. finance team, 8 were viewed as ‘critical’. Alarms and triggers were set up for various ratios to anticipate the financial implications of various scenarios. The finance team was tasked with ‘thinking ahead’ and taking proactiveaction to avoid a –Promoter of a leading electronics and crisis, resulting in them operating based on real-time finance information. Early warning systems and several lines of electrical supplier defence were also put in place to minimise any losses. This is also our view of the future state of sustainable finance and risk management. Another leading electronics player used a similar approach to uncover business opportunities through scenario planning for short-and long-term risks. This led to a diversification opportunity in the form of oxygen sensors for the supplier. A sustainable finance function must Traditional model Sustainable future state be viewed in a highly strategic manner – delivering value through Strategy insights underpinned by efficient Strategy and insights and insights processes. Reporting and Reporting and core business Workforce transformation core business Move up the value chain Transaction Transaction processing processing Source: PwC analysis PwC| ACMA| Living with volatility: Survival, revival and growth 20Survival Revival Growth Best practice #7 Co-opetition and collaboration For crisis management and improving customer intimacy This pandemic has made the industry more collaborative. The industry has really come The automotive industry has come together during the pandemic and various initiatives are being taken to manage crises, together and there’s never been so much giving a new meaning to collaborative working. During the pandemic, a leading engine component manufacturer dialogue between all the players. collaborated with its competitor –to the extent of sharing confidential proprietary designs –to serve customers and fulfil order obligations. The spirit of collaboration was mutual, and the competitor adhered to the manufacturer’s request by –ACMA-PwC report on India’s providing access to its factory premises and shared assets for prototype testing. automotive component industry: Post A leading passenger vehicle (PV) manufacturer articulated that co-operation will also witness ‘reversal of the past’ through COVID-19 outlook, December 2020 initiatives such as factory-in-factory (FIF). While operating models are yet to evolve (e.g.OEM owned and supplier operated), a shared/asset-light approach would mean better control over costs. Leading PV OEM ort W upp or kf kforce s or c e s u W or Customer-centric p p ort co-opetition Shared proprietary designs Access to the competitor's facility Shared assets for proto testing Supplier 1 Supplier 2 PwC| ACMA| Living with volatility: Survival, revival and growth 21Survival Revival Growth Revival: What we need to achieve readiness for scale 90% More than of India CEOs are willing to invest more in digital transformation and leadership development. Fast-track Talent Manufacturing Changes to long-term investments over the digital agenda management resilience the next three years due to COVID-19 Digital transformation 68% 25% Leadership and talent 45% 45% development De-risked and agile Enhance capabilities Imbibe best Initiatives to realise cost supply chain practices 55% 32% efficiencies Cyber security 50% 30% R&D and new product innovation 37% 42% Strongly agree Agree We see ‘digital’ as the step towards revival. We accelerated our digital agenda by five–six years. We also carved out a new role and onboarded a global chief technology officer Source: PwC India’s 24th Annual CEO Survey (CTO) to drive innovation.” –Promoter of a leading supplier PwC| ACMA| Living with volatility: Survival, revival and growth 22Survival Revival Growth Key elements of the revival framework Fast-track the digital agenda Talent management Manufacturing resilience Automation, digital operations and product Value added per employee, Stabilise – ramp up or down as per mix for CASE disruption motivation, retention and leadership supply-demand scenarios Best practice #8 The new realities of remote work, inflation concernsand Firms must have a hawk-eyed view of both supply and business disruptors require rewiring of HR policies to demand given the inaccuracy of traditional predictive With fast-evolving business conditions and disruption in maintain employee motivation. models in the prevalent business scenario. Leading business models, manufacturers must accelerate their indicators must be identified as well. pace of digital adoption. Key business enablers such as Best practice #9 analytics dashboards, remote work and customer Best practice #10 preferences are optimally executed through digital An electronic components manufacturer has decided to platforms. Their key motto must be digital for products, include stock options for its employees as well as An OEM of tractors is tracking rainfall and harvest quality enterprise and customers. increase the component of performance-based pay for in Rajasthan’s individual villages to determine demand. compensation, restructuring and balancing costs with This focus has allowed it to maintain optimum stock at productivity. micro-market levels and provide improved services to customers. Source: PwC analysis PwC| ACMA| Living with volatility: Survival, revival and growth 23Survival Revival Growth Key elements of the revival framework De-risked and agile supply chain Enhance capabilities Imbibe best practices Alternative supply base and FIF Reskilling and redefining strategic Joint venture (JV) partners and OEM positioning communities Frequent supply disruptions require firms to develop a ‘risk inventory’, thereby driving up holdingcosts. Identification of bottleneck capabilities, multiskilling of Manufacturers must create forums and participate in However, firms must utilise other de-risking measures workers and in-house critical capabilities will help exchanging ideas and cross-industry best practices. such as network optimisation, manufacturing footprint manufacturers avoid frequent disruption and gain a decisions and dual sourcing. competitive edge in the market. Best practice #13 Best practice #11 A leading global OEM’s suppliers housed in a COVID- Best practice #12 A supplier for a leading automotive OEM was affected region of the EU were facing severe cost manufacturing two different parts in different Indian A large supplier of PV components identified welding as a challenges to keep factories operational. The OEM states. As soon as a lockdown was announced in one of bottleneck operation to produce critical parts. The developed an FIF concept to help its suppliers reduce the states, the supplier moved swiftly to set up limited supplier trained its workers from other non-bottleneck fixed cost. The concept involved the supporting capacities for manufacturing both the parts in both the stations to execute welding operations. This initiative manufacturer setting up its factory within the factory factories. The move ensured continued operations for the allowed the supplier to remain functional with minimal premises of the principal manufacturer. The setup OEM. disruptions during worker shortages. resulted in dedicated supply, quasi just-in-time (JIT) advantages as well as indirect tax benefits. Source: PwC analysis PwC| ACMA| Living with volatility: Survival, revival and growth 24Best practice #14 Economic value added per employee as a key metric For evaluating the automotive component portfolio As business complexities increase, attractingtop talent is a key success factor towards driving growth.One of the leading glass suppliers believes that pay in the automotive sector is not commensurate with that in other sectors and hence retaining top talent becomes tougher. The promoter of the company believes in generating wealth for the top 2–3% talent, as income is not enough to retain this layer. Organisationsmust invest in building capabilities that pave the way for a clear growth journey and create wealth for this group through stockoptions, etc. This is the core team of culture carriers.The big middle layer’s compensation, on the other hand, should be linked to net productivity gains. With respect to the bottom layer, the company is opting for digitisationto achieve greater efficiency as well as a talent refresh in lower-end work. Aspects of workforce strategy that will impact an organisation's competitiveness Our focus on productivity through 42% automation, tech Our focus on health and wellbeing of our 35% workforce Our focus on skills and adaptibility in our 33% people 33% Our focus on pipeline of leaders for tomorrow 32% Our approach to performance management 28% Our workforce culture and behaviour 20% Our focus on diversity and inclusion 20% The pay, incentives and benefits we provide 18% Our use of worforce data and analysis Our workforce engagement and 18% communication Source: PwC India’s 24th Annual CEO Survey PwC| ACMA| Living with volatility: Survival, revival and growth ytiroirp hgiH ytiroirp diM ytiroirp woL Survival Revival Growth “Generating wealth for the top 2–3% of your talent is not enough. For example, stock options could be one method to reward top talent. Such practices are uncommon in the automotive sector.” –Promoter of a leading glass manufacturer As business complexities increase in the automotive industry, attracting, retaining and growing top Top performers and talent will be a key factor for Wealth creation culture carriers success. The ‘big’ Productivity-linked middle layer compensation Non-critical Talent refresh and functions automation 25Survival Revival Growth Best practice #15 Anticipate trends in customer demand People were spending more time at home To diversify and reduce exposure to demand volatility, especially for tier-2++ cities during the onset of the pandemic. The US gardening equipment market is an attractive A piston manufacturing MSME is of the opinion that the biggest challenges faced by such enterprises are managing finance adjacent market for our products. We used cost and demand volatility. The company took several measures such as paying off term loans and availing Government the pandemic to effectively accelerate our schemes to reduce financing cost. product development and prototyping efforts. During this period of muted demand in the auto segment, the company decided to accelerate the development of a new product for gardening applications. It housed a small team inside the factory premises and developed a prototype within seven to eight –Promoter of a piston weeks. As the market reopened, the company catered to a different segment of high-speed garden and lawnmower engines. manufacturer (MSME) The company expanded into a new market with a fresh segment as a part of its diversification strategy. From being a 100% domestic auto sector player, the company now has >45% export-driven sales and the top-line profile is diversified with 50–60% revenue from non-auto business. This is a leading example of a company simultaneously protecting its business from the risk of demand volatility and turning it into an opportunity by expanding into an adjacent market. India This map is not to scale. It is an indicative outline intended for general reference use only. The accuracy of this product is dependent upon the source data and therefore absolute accuracy for navigation or legal purposes cannot be guaranteed. PwC| ACMA| Living with volatility: Survival, revival and growth 26Survival Revival Growth Growth: Opportunities as we recover from crises Promoter-driven companies should become more professionalised. They should empower their top leadership to take decisions. Centralised decision making will become difficult with increasing business complexities. CASE New disruption markets –Chief purchase officer of a leading OEM Innovation Managing management trade-offs Growth will come on the back of knowledge arbitrage. The more complex process- and product-related problems you solve, the better is your hedge against operating risks of losing business. –MD and CEO of an electrical power train systems supplier PPwwCC|| AACCMMAA|| LLiivviinngg wwiitthh vvoollaattiilliittyy:: SSuurrvviivvaall,, rreevviivvaall aanndd ggrroowwtthh 27Survival Revival Growth Key elements of the growth framework CASE disruption New markets Innovation management Managing trade-offs Lightweighting and Exports and aftermarkets Open innovation with start- Future manufacturing localisation ups and corporate venture footprint and portfolio capitals (VCs) decisions This disruption has led to several new In the environment of disruption in the entrants as well as players diversifying auto sector, firms must continuously Co-creation and venture funds allow With heightened disruption and into market adjacencies. evaluate new markets. The search for manufacturers to assess, build and scale fast-changing consumer new markets shall encompass new Best practice #16 new solutions quickly and cost effectively. preferences, companies must products, geographies and segments. In today’s business environment, time-to- continuously evaluate trade-offs to A leading global technology player has Best practice #17 market can be detrimental to a firm’s arrive at future product categories entered the auto market to become a key success. as well as product portfolios. competitor in the autonomous vehicles A global tyre brand that is currently Frequent evaluation of trade-offs A global tyre manufacturer has instituted and ADAS space. The firm’s ADAS manufacturing tyres for four-wheelers is requires identified leaders within an open innovation programme to solutions are currently being sold in the expanding its portfolio of market an organisation to be empowered develop digital tyre solutions for mobility EU, North America and India. segments and entering the market for to make these decisions. players. Several new digital solutions two-wheelers. The firm started its journey by assessing the value-chain capabilities requiring cross-industry expertise are Best practice #18 being developed within the innovation it needs to play and win in the two- A large forging player forayed into ecosystem of the firm. wheeler tyre segment. the aluminium die casting space as the segment offered it a complementary product market and helped it double down on the two-wheeler segment. Source: PwC analysis PwC| ACMA| Living with volatility: Survival, revival and growth 28Survival Revival Growth Best practice #19 Scenario planning for future manufacturing footprint We need a war chest (reserves) to deal with Footprint optimisation in line with growth options and scenarios volatility. It can get pretty risky if you have a highly leveraged position with low margins A leading manufacturer of anti-vibration products has plans of diversifying into electronic components over the next decade. and no appetite for investment. As per the company’s view, the current manufacturing location and partner ecosystem doesn’t augur well for its long-term vision. Future product mix, proximity to electronics suppliers and requisite skills availability are the factors that prompted the –Promoter of a leading electronics company to re-evaluate its manufacturing footprint across India. The company went well beyond just location assessment and electrical supplier and evaluated the possible bottom-line scenarios and risks involved corresponding to the growth expectations, thus building shareholder confidence. EBITDA (%) in long-term growth –various manufacturing scenarios (illustrative) B Baseline 1 Scenario –1 2 Scenario –2 Scenarios B 1 2 Never miss out on investment opportunities 21% 20% Revenue 2 with confirmed customers. Believe in India’s 1 Material cost growth story. 18% 18% Workforce cost –blue collar Workforce cost –white collar –CXO of leading automotive supplier B 10% Power and fuel 4% 4% Welfare expenses 3% Factory lease rent 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Carriage outward -5% Admin and other expenses Expat cost Source: PwC analysis PwC| ACMA| Living with volatility: Survival, revival and growth 29Survival Revival Growth Best practice #20 Open innovation Investing in start-ups is a good idea, but Collaborate with start-ups and find agile and nimble ways of engagement one needs a different mindset to be able to do this. • ACMA is working on building a start-up platform. -ACMA-PwC report on India’s • It aims to understand, develop information about, and assess the start-up ecosystem relevant to auto and mobility automotive component industry: Post players. COVID-19 outlook, December 2020 • It plans tobuild a vibrant communitywith regular engagements, knowledge-sharing sessions and innovation competitions. A recent ACMA-PwC study revealed that 85% of suppliers have not Changing customer New business actively engaged with start-ups yet, needs models but feel the need to do so. Mentors Ownership to Automated, usership connected, electric and shared (ACES) vehicles impact Investor/corporate support Incubators and accelerators New genre of New ways of Evolving competition working marketplace Start-ups Tech players Digital and remote Product to service Infrastructure support Government support Academia PwC| ACMA| Living with volatility: Survival, revival and growth 30Financial prudence Real-time finance as a business partner PwC| ACMA| Living with volatility: Survival, revival and growth 31 lavivruS laviveR htworG Summary 1 Reduce leverage and finance cost burden, and target fixed-cost items 2 Financial risk dashboard with built-in thresholds and escalations Risk and crisis management 20 3 Revisit contracts and monitor expenditure on non-core assets Break-even point (BEP) reduction 4 Prioritise worker wellbeing through the provision of essentials inside a factory best practices followed Workforce enablement 5 OEM sharing workforce with tier-1 suppliers by leading industry Supplier relationships players to navigate 6 volatility Customer intimacy 7 Coopetition and collaboration 8 Digital organisation –digital for product, enterprise and customer Fast-track the digital agenda 9 Stock options for top performers, emphasis on productivity-linked compensation Talent management 10 Micro-market focus for demand assessment Manufacturing resilience 11 Capacity/resource redistribution 12 Cross-skilling of critical resources (e.g.welders) De-risked and agile supply chains 13 Asset sharing (e.g.FIF) Enhance capabilities 14 Economic value added per employee as a key metric Imbibe best practices 15 Anticipate shifting trends in customer demand CASE disruption 16 Semiconductor player in the auto/ADAS market –new ‘genre of competition’ 17 Forging player ‘acquiring’ capabilities in aluminium die casting (growth area) New markets 18 Segment-specific capabilities applied to other segments (e.g.PV to two-wheeler) Innovation management 19 Trade-off –scenario planning for future manufacturing footprint Managing trade-offs 20 Innovation programmes and collaboration with start-ups PwC| ACMA| Living with volatility: Survival, revival and growthThe road to SAFNET • Online sales and direct-to- S consumer (D2C) Strong To bear shocks and unpredictable events • CAFÉ • Pre-owned vehicles • China+1 A Agile To respond to a change in situation promptly • Product recall • Revenue and profit pools shift –CASE • Populism disruption F Flexible To scale up or scale down depending on market requirements • Segment shift • Misinformation • Chip shortage N To hedge the risk of volatility through strategic alliances with customers Networked as well as suppliers • Agile and asset- light channels E • 5G A team that is passionate and resourceful is necessary to excel amid Enthusiastic volatility • Currency volatility T Technology enabled To enhance value creation by increasing productivity Source: PwC analysis PwC| ACMA| Living with volatility: Survival, revival and growth 32PwC’s framework for the automotive industry: Automotive component suppliers will need to deal with volatility by Navigating volatility transforming their organisations. ACMA and PwC’s study helps us in analysing the top-performing companies and their S –Strong: Build on your organisation’s strength to absorb shocks and be prepared for unpredictable events. best practices to adapt to volatility. We A –Agile: Modify processes, cultures and mindsets to speedily adapt to changes. have also examined some of the global F –Flexible: Create the necessary flexibility within your manufacturing, supply and distribution chain as well as the best practices in the automotive industry organisation to quickly scale up or down, depending on evolving demand peaks and troughs. for dealing with uncertainties. N –Networked: Successful automotive component suppliers will enhance their competitiveness through the strength of their network with strategic alliance partners, including customers, tier-2 and 3 suppliers, and the broader ecosystem of PwC recommends a holistic service providers. transformation framework in order to E –Enthusiastic: Some of the best companies in the automotive component supplier industry have nurtured the passion survive, revive and grow amid volatility. and enthusiasm of their employees to protect themselves from an unpredictable environment. Cohesive teams with high We suggest that automotive component levels of motivation and a focus to succeed have done exceedingly well under adverse circumstances. suppliers transform themselves to create T –Technology enabled: Component suppliers that are technology enabled will have an edge over teams that resist a ‘SAFNET’. change as complexities keep growing in the automotive industry. Being enabled on both the operating technology (OT) andinformation technology (IT) front is a foundational element to navigate volatility. PPwwCC|| AACCMMAA|| LLiivviinngg wwiitthh vvoollaattiilliittyy:: SSuurrvviivvaall,, rreevviivvaall aanndd ggrroowwtthh 33The role of SAFNET in navigating volatility Strong Agile Flexible 1.Strong to bear shocks and unpredictable events 2.Agile so that changing situations can be responded to 3.Flexible so that you can scale up ordown depending on promptly market requirements Leading automotive component companies are revisiting the financial principles on which they operate. They are Frequent changes in the market situation due to Top-performing companies have built flexibility into their evaluating the performance of their businesses in a zero- regulations and alterations in business models and manufacturing design. The core principle is to proactively revenue scenario. They are examining the fixed expenses competitive action require a rapid response from work towards a multi-skilled workforce. Manufacturing under the assumption that cash inflow would benegligible automotive component suppliers. Best-in-class assets should be flexible with the ability to easily switch or close to zero. Leading companies hope to build reserves companies excel in taking fast decisions based on the capacity with changes in the product mix. Also, building a capable of covering at least six months of expenses during availability of accurate information and insights. dependable set of supplier partners is a crucial element the zero-revenue period. Such a war chest will provide the Organisation structure is also a crucial determinant of the to build flexibility and adapt to volatile demand. required financial strength to endure a crisis. speed of decision making. Multiple layers in an Maintaining the right balance of permanent and contract organisation mean that the top leadership receives workforce is another critical lever that delivers flexibility Automotive component categories that are commoditised delayed information, resulting in slower decision making. for automotive component suppliers. operate with wafer-thin margins and high levels of debt This gets further complicated as information needs to equity. Stakeholders in such companies must recognise pass through various tiers of leadership and the that their survival would be at risk if they do not address execution is time-consuming as the actions trickle down their high-cost structure or low-price realisation. Such at a slower pace through multiple layers. companies should take a deeper look at their viability in this volatile environment. They must ask themselves the Many of the automotive component companies in India fundamental question about whether they should continue are legacy organisations that have existed for decades. to be in this business unless they can improve their margins through better price realisationandcost reduction, or review their technology to improve productivity. PwC| ACMA| Living with volatility: Survival, revival and growth 34The role of SAFNET in navigating volatility Technology Networked Enthusiastic enabled 4. Networked to hedge the risk of volatility through strategic 5. Enthusiastic team that is passionate and resourceful is 6.Technology enabled to enhance value creation by alliances with customers as well as suppliers necessary to excel amid volatility increasing productivity Volatility puts the weakest link in the manufacturing chain Implementing out-of-the-box solutions while operating Technology-led automotive component companies are under tremendous strain. Best performing automotive under several constraints and high levels of stress is the ones that are best performing financially with high component companies have realisedthe power of building a necessary to excel during volatility. The COVID-19 valuation in stock markets as well. As the degree of network of trusted customers and partners that deliver in pandemic proved that automotive component suppliers complexities increases, automotive OEMs will harmony with each other. Strategic partnerships with with motivated teams displayed a lot of tenacity to find increasingly rely on tier-1 suppliers to be their technology customers are the best option available to counter the creative solutions to deliver amidst the lockdown. partners. Companies that invest in both operating and adverse impact of volatility. Tier-1 suppliers must focus on information technologies will deliver enhanced value strengthening their network of tier-2 and 3 suppliers. A Building trust and connecting with employees, continuing creation and productivity. Companies that operate in low- strong network also helps companies in reducing their with ongoing communication and aligning with common margin commodities need to focus on technology-led cost break-even points and ensures the flexibility to scale up or goals are the key factors to ensure your team’s best leadership. down, depending on the demand trends. performance. Building a well-trained and talented core leadership team ensures that the organisationadheres to the right cultural values and behaviours. An enthusiastic and motivated workforce can deliver spectacular results amidst volatility. PwC| ACMA| Living with volatility: Survival, revival and growth 35The road ahead: Growth with volatility – are you ready for the transformation? • The Indian automotive and component industry is expected to continue to see a sharp recovery over FY22–FY23. Over the next decade, the industry is likely to continue on a healthy growth trajectory. However, growth will continue to be accompanied by high-frequency volatility. • Automotive suppliers in India should try and embrace this volatility and accept these changes as the new normal. • The PwC-ACMA study shows that the leading automotive component companies in India are thriving in the volatile environment by adopting best practices that can be summarised through the SAFNET framework. • Automotive component suppliers should do a detailed self- assessment on how they perform on the SAFNET framework. • Suppliers would need to set clear improvement goals to make their organisation Strong-Agile-Flexible-Networked-Enthusiastic- Technology enabled. • Companies should form cross-functional teams focusing on the three states of survival, revival and growth. Organisations should align themselves with these design principles in order to prepare for the transformation ahead. PPwwCC|| AACCMMAA|| LLiivviinngg wwiitthh vvoollaattiilliittyy:: SSuurrvviivvaall,, rreevviivvaall aanndd ggrroowwtthh 36Authors Acknowledgements Kavan Mukhtyar PwC conducted in-depth discussions with automotive CxOs as part of this study. We thank the Partner and Leader –Automotive following leaders for their contribution: PwC India kavan.mukhtyar@pwc.com Amit Dakshini Swapnil Gosavi Deepak Jain Sunil Arora Director, Automotive Management Consulting Head Strategy and Business Chairman and MD MD PwC India Development, PVBU Lumax Industries Abilities India Pistons & Rings amit.dakshini@pwc.com Tata Motors Somnath Chatterjee Swithun Manoharan Harish Lakshman Sunjay Kapur Associate Director, Automotive Senior Vice President Vice Chairman Chairman Management Consulting TAFE Rane Group Sona Comstar PwC India somnath.chatterjee@pwc.com Vinod Sahay Ramesh Gehaney Vivek Singh Chief Purchase Officer –Auto & Farm Executive Director and COO MD and Group CEO Manan Tolat Sectors Endurance Group Sona Comstar Associate Director Mahindra & Mahindra PwC India manan.tolat@pwc.com Ashok Taneja Sanjay Labroo Vinnie Mehta MD and Chief Mentor MD and CEO Director General Akhilesh Oberoi Shriram Pistons & Rings Asahi India Glass ACMA Senior Consultant PwC India akhilesh.oberoi@pwc.com Sushil Rajput Deputy Director (Government Affairs & Public Policy), ACMA PwC| ACMA| Living with volatility: Survival, revival and growth 37About ACMA The Automotive Components Manufacturers Associations of India (ACMA) is the apex body representing the interest of the auto components manufacturing industry in India. Set up in 1959, the body represents over 850 component manufacturers in India, with a combined turnover of over USD 46 billion in 2020-21. ACMA member companies contribute over 85% of the total auto component output in the country. In the domestic market, companies supply components to vehicle manufacturers as original equipment, to tier-one suppliers, to state transport undertakings, defense establishments, railways the replacement market. A variety of components are being exported to OEM’s and after-markets worldwide. ACMA’s active involvement in trade promotion, technology up-gradation, quality enhancement and collection and dissemination of information has made it a vital catalyst for the component industry’s development. ACMA has signed over 30 MoUswith its counterparts across the globe for promoting exports and international linkages. ACMA is represented on a number of panels, committees and councils of the Government of India and at the Sates through which it helps in the formulation of policies for the component Sector. ACMA is an ISO 9001:2015 Certified Association. 38About PwC At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 155 countries withover 284,000 peoplewho are committed to delivering quality in advisory, assurance and tax services. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. 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