It is reported that many Indian auto component companies, who have idle capacity and are battling low margins following the slowdown, are shifting part of their production facilities toward making products for the more lucrative aerospace and defense sectors.
Companies doing this shift in the production portfolio include large names such as Bharat Forge, Amtek Auto, TATA Automobile, Lumax Auto, Mahindra Systech, the JBM group and Sundram Fasteners which together account for more than half of the total revenue generated by the auto component industry. According to persons familiar with the development, the move is aimed primarily at improving margins which have shrunk to about 5%, the lowest the sector has seen in the past eight years. Compared to this margins in the aerospace and defense sectors are pegged at more than 15%, prompting these companies to make the shift. Also, with auto sales slipping in the last few months, most auto component players have spare capacity.
Mr Arvind Dham chairman of Amtek Auto said that “Margins are far higher (in aerospace) and the existing capacity and the same components, such as forgings and aluminium castings can be used for developing defense and aerospace components.” He added that “Getting into defense and aerospace segments is a natural diversification for us.” The trend is significant as Indian auto component industry was till last year the fastest growing among most sectors with the maximum number of deals via mergers and acquisitions that catapulted Indian companies into the global league. The slowdown in the INR 50,000 crore auto component industry led many firms to cut production as auto makers battled delayed purchase decisions. According to various component industry associations, the Indian component industry grew by about 3% in the just-concluded fiscal year, in stark contrast to 2007-08 when the industry grew 22% with revenue of about USD 18 billion.