Addressing Structural Bottlenecks Key To Exports Boom

BMI View : While Indian auto exports have grown spectacularly in the past few years, absolute volumes are still low, a phenomenon we believe infrastructure bottlenecks are responsible for. In our opinion, some critical areas that need investment are additional dedicated ro-ro facilities, ancillary port services and robust road and rail infrastructure, which will improve the connectivity between vehicle production facilities and ports.

It has been BMI's long-held view that India can be an Asian auto exports hub in its own right given its inherent advantages of skilled labour and low-cost manufacturing. Furthermore, we have highlighted for some time that it is imperative for carmakers to boost their exports in the current environment of depressed domestic sales so as to give some respite to their falling earnings and take advantage of the weaker Indian rupee at the same time.

It is also in the government's interest to ensure trade remains vibrant in the auto sector given India's recent economic woes as well as its stubbornly high current account deficit, which has made foreign investors nervous about investing in the country. However, structural bottlenecks have continued to plague exporters and in this piece we examine the necessary improvements required to attract more export-oriented investment in the sector.

Infrastructure Bottlenecks Evident
India - Individual Automobile Segment Exports, Units (LHS); Total Exports, Units (RHS)

Addressing Structural Bottlenecks Key To Exports Boom

BMI View : While Indian auto exports have grown spectacularly in the past few years, absolute volumes are still low, a phenomenon we believe infrastructure bottlenecks are responsible for. In our opinion, some critical areas that need investment are additional dedicated ro-ro facilities, ancillary port services and robust road and rail infrastructure, which will improve the connectivity between vehicle production facilities and ports.

It has been BMI's long-held view that India can be an Asian auto exports hub in its own right given its inherent advantages of skilled labour and low-cost manufacturing. Furthermore, we have highlighted for some time that it is imperative for carmakers to boost their exports in the current environment of depressed domestic sales so as to give some respite to their falling earnings and take advantage of the weaker Indian rupee at the same time.

It is also in the government's interest to ensure trade remains vibrant in the auto sector given India's recent economic woes as well as its stubbornly high current account deficit, which has made foreign investors nervous about investing in the country. However, structural bottlenecks have continued to plague exporters and in this piece we examine the necessary improvements required to attract more export-oriented investment in the sector.

Infrastructure Constrains Export Sector

When including the two and three-wheeler categories, total export units have grown at a remarkable compounded annual growth rate of 24.0% over the FY2005/06 (April-March) to FY2012/13 period. However, exports dipped for the first time in FY2012/13, after rising in every other fiscal year in this period.

To be sure, a sharp fall in three-wheeler exports was one of the factors resulting in the decline in total exports. Sri Lanka imposed large tariff increases on Indian imports in FY2012/13 ( see 'Sri Lankan Tariffs A Huge Blow To Indian Autos', December 14), hurting firms such as Bajaj Auto, for whom Sri Lanka forms one of its biggest export destinations. Indeed, the higher tariffs saw Bajaj's total three-wheeler exports fall 19% in FY2012/13.

Infrastructure Bottlenecks Evident
India - Individual Automobile Segment Exports, Units (LHS); Total Exports, Units (RHS)

That said, the absence of material export growth in any of the other segments does point towards India's infrastructure bottlenecks. Furthermore, absolute export volumes are clearly under-performing regional neighbours. To put it into perspective, India's passenger and commercial vehicle exports of 630,000 units in FY2012/13 were eclipsed by the one million vehicles shipped in 2012 from Thailand - South East Asia's leading export hub. India's congested roads and overstretched ports have resulted in the failure to capitalise fully on its export potential.

Ennore Port Expansion Spells Positive News

The recent announcement by Ennore Port that it will double its annual car storage capacity from 10,000 units currently will provide a big boost to local manufacturers. After signing a 10-year deal with Renault-Nissan in July 2013, the port is now in talks with Ford Motor for another long-term agreement. We believe firms such as Ford, which have production based in Chennai, will greatly benefit from Ennore Port's expansion due to Chennai's close proximity to Ennore.

Additionally, carmakers manufacturing in other parts of India can also benefit from Ennore Port's upgrade. Honda Car India, which has a facility in the Greater Noida region and until recently had been exporting from Mumbai Port, is now exporting from Ennore due to Mumbai port's poor services. Despite incurring extra inland logistics costs of about US$250 per vehicle to bring the cars to Ennore, and paying higher port fees compared with Mumbai Port, Honda reportedly prefers the more efficient port services at Ennore.

Investment in Ancillary Port Services Equally Crucial

Currently, there are very few dedicated roll-on roll-off (ro-ro) terminals in India and we believe the government needs to construct more of them throughout the country. Japan, South Korea, China and Thailand, all have multiple dedicated ro-ro facilities.

Furthermore, Honda's decision highlights to us the importance of investing in ancillary port services. Multi-storey car parks and staging areas adjacent to ro-ro berths reduce congestion. Also, the investment in technology such as advanced IT software to track vehicles and CCTV cameras to beef up security will be key to making Indian ports' world-class.

Road And Rail Infrastructure Also Plays A Part

That said, in the absence of sufficient vehicle export volumes, dedicated ro-ro terminals can only operate bulk cargo. Therefore, we believe the government needs to play a part to ensure there is proper road or rail infrastructure from original equipment manufacturers' production facilities to ports. Better inter-modal connectivity would ensure vehicle exports remain cost-effective and timely. Also, carmakers would be incentivised to increase domestic production for export purposes. In the absence of strong support from land freight, additional ro-ro terminals may become white elephants, as manufacturers struggle to transport their cars to ports.

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