India’s Auto Parts Story Is Changing | The Daily Brief #372

Summary

In this episode of The Daily Brief, Axara explores two major stories. The first delves into the rapid growth of India's auto ancillary sector, driven by shifts like the China Plus One strategy, premiumization, and the challenges posed by the rise of electric vehicles. The second story analyzes Shiprocket's journey from a logistics aggregator to a full-fledged e-commerce platform, highlighting its growth, customer acquisition strategy, and the hurdles of balancing its core business with emerging ventures. Both industries face significant risks, but are navigating these challenges in distinct ways to capture growth and stay competitive.

Takeaways

• 😀 India’s auto ancillary industry experienced a record 33% growth in FY22-23, reaching ₹5.59 lakh crore, driven by both domestic demand and international exports.
• 😀 The China-plus-one strategy has significantly benefited India's auto parts industry, with exports rising, especially to the US, Europe, and Asia, turning India’s trade deficit into a surplus.
• 😀 Indian auto ancillaries are increasingly shifting from basic, low-margin products to higher-value, feature-rich components, fueled by consumer demand for premium cars.
• 😀 Companies like Uno Minda, Sona CommStar, and Lumax Auto have successfully moved up the value chain, offering more advanced products like LED setups, cockpits, and advanced gear systems.
• 😀 Many Indian suppliers are developing their own intellectual property (IP) for auto parts, reducing reliance on foreign designs and even acquiring patents for premium technologies.
• 😀 The rise of electric vehicles (EVs) is both an opportunity and a threat for Indian auto ancillaries, as EVs require fewer mechanical parts, but offer new markets for electronics and specialized components.
• 😀 Companies like Sona Comstar and Uno Minda are quickly pivoting to EV-specific components, such as e-axles and hub motors, with Sona even innovating in rare-earth-free motor technology.
• 😀 Vertical integration is becoming more important in the EV space, as companies like BYD manufacture most of their components in-house to drive down costs, a shift that could impact India’s ancillary suppliers.
• 😀 Indian auto ancillaries are diversifying to hedge against risks, with companies expanding into different segments like defense, healthcare, and varying vehicle categories (PVs and CVs).
• 😀 Shiprocket, a logistics and e-commerce enablement platform, is attempting to move from being a logistics aggregator to a more comprehensive platform that handles end-to-end e-commerce services for small businesses.
• 😀 While Shiprocket’s core logistics business is profitable and growing, its emerging services (like warehousing, marketing, and credit) are currently loss-making, raising questions about its platform strategy’s sustainability.

Q & A

What has driven the rapid growth of India’s auto ancillary industry in recent years?

The growth has been fueled by the China-plus-one strategy, rising exports, domestic premiumization of vehicles, and a shift toward higher-value components and intellectual property development.

How has the China-plus-one strategy impacted Indian auto component manufacturers?

Global automakers have diversified away from China due to trade tensions and supply-chain disruptions, increasing demand for Indian suppliers thanks to competitive labor costs, a strong domestic market, and an established manufacturing ecosystem.

What is meant by 'premiumization' in the Indian auto market?

Premiumization refers to Indian consumers demanding more advanced features—such as ADAS, infotainment systems, and high-tech interiors—pushing suppliers to produce higher-value, higher-margin components.

How are EVs reshaping the auto ancillary landscape?

EVs use fewer mechanical parts and far more electronics, threatening traditional ICE-focused product lines. At the same time, they create opportunities for electronics, driveline components, motors, and battery-related technologies.

What risks do Indian ancillaries face due to the global shift toward EVs?

Key risks include obsolescence of ICE-based products, increased reliance on China for EV components and batteries, and the possibility of automakers shifting toward vertical integration to cut costs.

Why is vertical integration more viable in EVs than in ICE vehicles?

EVs have fewer parts, and batteries alone make up around 40% of costs. Controlling battery production and core EV components gives automakers significant cost advantages, making in-house manufacturing more practical.

What diversification strategies are Indian auto ancillary firms using?

They diversify across customer types, geographies, product categories (ICE and EV), and even industries like defense and healthcare. They also hedge between passenger vehicles, commercial vehicles, two-wheelers, and four-wheelers.

How does Shiprocket position itself in the Indian e-commerce ecosystem?

Shiprocket markets itself as an operating-system-like layer for businesses, connecting merchants to logistics, warehousing, payments, credit, marketing, and other backend services—not just a logistics aggregator.

What are Shiprocket’s main revenue streams?

Its revenue comes from two categories: the core shipping business (around four-fifths of revenue and profitable) and emerging business lines such as warehousing, inventory management, advertising, and credit (currently loss-making).

Why does Shiprocket want to evolve from a logistics aggregator into a full platform?

Logistics aggregation has thin margins, low entry barriers, and high vendor dependency. To achieve higher revenue per merchant, long-term defensibility, and growth potential, Shiprocket aims to cross-sell value-added services and increase customer stickiness.

What major risks does Shiprocket face in its current business model?

Risks include strong bargaining power of logistics partners, low switching costs for merchants, competition from vendors who could build better software interfaces, and large financial losses in emerging service lines.

What is the biggest growth opportunity Shiprocket is targeting?

Cross-border shipping for MSMEs, which Shiprocket estimates could reach ₹5 lakh crore. However, it involves high operational complexity involving global logistics, customs processes, regulations, and handling returns.

Why does Shiprocket need a 'big win' according to the analysis?

Although its core business is profitable, the company’s long-term valuation and sustainability depend on successfully scaling a high-margin platform business. Past missteps, such as overpaying for acquisitions, add pressure to deliver a major strategic success.

What industry-wide challenge do logistics aggregators like Shiprocket face?

They must balance paying vendors enough to retain them while keeping prices low for merchants. If either side feels value is being extracted unfairly, they may switch providers, threatening the aggregator’s role.