The recession may have receded. The growth impetus of 2008 is yet to return. Anxiously awaited, most automakers are busy meeting the rising demand that started in late 2009. The rising demand for automobiles, according to a industry source, has given rise to cautious optimism. Product lifecycle is decreasing and this was more prominent during the recession as automakers introduced new models and facelifted ones to ensure maximum footfalls. As sales picked up, post recession and thanks to the rebates announced by the government, automakers had little choice but to ramp up. This ramp up, opines an analyst, has led to supply side constraints and a build up of cautious optimism at the supplier end. Especially after the amount of suffering the industry went through during the recession. Many developed markets of Europe and US, which are also the prime export markets for Indian automakers and suppliers are yet to recover from the slowdown.

This has had an impact on margins. Sales as well as margins have been shrinking. New orders for suppliers are hard to come by, and even if they do, the size is nowhere as good as it was before the recession. In the domestic market, the ramp up to meet rising demand has led automakers to ask their suppliers to quickly increase the rate of manufacture. Many automakers are however said to decline to give a solid assurance in terms of volumes and are rather keen to share a part of the income. Quite logical it may be on the part of an automaker, the result is a supplier network that is not feeling very reassuring. A supplier to a leading automaker, on condition of anonymity, informed APF that his clients were asking him to invest in order to cater to their new programmes and rise in demand for existing models. They were also seeking to lower costs. When asked for assurances, they say that they will share a certain portion of the revenue. They however express their inability to give assurances.

High aspirational investment the automobile is. There are others who invest in an automobile to drive business. In either case, the intention is the same, to be assured of quality, pricing and service backup. When the momentum picked up post recession, demand for some models reached a high in little time. This brought about waiting periods and supply side constraints into clear view. The chain of supply side constraints often leads to suppliers says an industry expert. This, he adds, is because ramp up calls for considerable investment. It however has to be justifiable in the long term. And that is where suppliers have come to exercise cautious optimism.

With almost all the automakers present in India, many have chose to invest heavily anticipating a steady growth over long term. Many European markets have shown near saturation levels and North American markets are yet to emerge over the shadow of recession. Automakers like Toyota may have crimped upon new programmes and construction of new plants the world over, in India they have continued to invest. Honda has also announced big plans. Nissan just kicked-off the production of its small car Micra from its Greenfield plant, which it has built in partnership with its alliance partner Renault. These developments for suppliers are quite re-assuring but shrinking margins continues to be a worrying factor for many.

Said an auto supplier while speaking to APF: ramp up is welcome and calls for quick influx of money, and at a time when finance is hard to come by. Many suppliers continue to be family owned or privately owned. The need for funds gives rise to a dilemma of whether they should go public. Lack of assurance makes it hard to take a decision. At the other end are rising labour costs. Cost reductions, at the other end, and which would come with infrastructure improvements are painfully slow in materializing, cautions an industry expert. India may be at the bottom of the cost curve right now, but this will change. HR is going to be a restraint. Attrition rate will continue to rise, which would lead to loss of talent. The auto industry is under increasing cost pressures relating to raw materials and some other costs (including growing pension and healthcare costs in developed economies). Consumers, at the other end, have begun to demand vehicles with a lower "total cost of ownership". The result has been shrinking margins for many auto businesses, large and small, and including the suppliers.

Not quite keen to come up in the open and speak about cautious optimism and the serious challenges placed by automakers as well as raw material suppliers, most auto suppliers have come to bank upon what they have learned over the years. They are banking upon innovating new ways of manufacture and cost reductions. There are some, who have diversified into other sectors, and have ceased to cater to the auto industry at least for the time being. While automakers have found a way of dealing with cost pressures by reducing the number of vehicle platforms and increasing the number of models per platform, suppliers have been dealing with cost pressures by increasing automation and embracing new manufacturing techniques.

According to sources at Kuka (India), automation in the auto industry is on the rise. To achieve extraordinary efficiency, auto suppliers are more than willing to invest in new, sophisticated machines and equipment. Though all this is subject to return on investments and assurances, the fact that the US $ 40 billion growth by 2016, projected by ACMA before the recession came, may be hard to reach. While automation and new, sophisticated machines may boost efficiency several times, infrastructural issues continue to be a hurdle for suppliers. While speaking to APF, a senior executive of a global tier supplier recently pointed out that India has a strong local supplier base. This makes it tough for foreign suppliers to penetrate. True it may be, but is the emphasis on R&D as strong as that placed by global suppliers? Many Indian suppliers have started investing in R&D. There are however many others who have failed to promote their R&D the way they should have. Spend on R&D is often a small portion of the revenue, often to a tune of 2 to 5%. Most R&D efforts merely concentrate on reverse engineering. Industry experts draw attention towards the “Shanzhai” phenomenon practised in China. They call it innovative, considering the fact that the “Shanzhai” phenomenon helps reach-the-market faster and enables more risk taking. No longer about low-cost fake products, the “Shanzhai” phenomenon is today about how one type of company achieves success without following conventional wisdom and develops competitive advantage through innovation. From an intellectual rights point of view, however, this phenomenon means piracy.

While many agree about R&D rising beyond mere instruments of reverse engineering, the way ahead could be had by a mechanism that enables better sharing of expertise and knowledge between local suppliers. Acquisitions is also seen upon a way to gain knowledge and business space. Many suppliers have acquired businesses abroad. These verticals have added to their knowledge base, including R&D. Interestingly, a number of suppliers like Bharat Forge and M&M's Systech have been able to pool knowledge from their foreign acquisitions, according to industry experts. Many suppliers have also decided to part with acquisitions that have failed to take off. This is part of the learning curve. Those acquisitions that have done well have added to the bottom line of the suppliers. Many of these were wisely executed acquisitions, related to the core competence of the acquiring company.

In the case of overseas acquisition, the slow down in respective markets has put greater demands on the acquiring companies. Many have chosen to siphon off a portion of production to their facilities in India to lower costs. However rising costs at home are fast eroding this advantage. No longer as good as it once was, the very prospect of acquisition is also subject to much cautious optimism, claim industry experts. He adds that costs in India will continue to rise. There are various other issues like infrastructure and attrition. Growth will however continue to pour in and volumes will have to be built rapidly to keep costs down. A look at the operating strategies in China will explain how volumes help costs. It is therefore only a matter of time when the industry will shed away the last trace of cautious optimism to fully embrace growth!