Trends and M&A Opportunities: Indian auto-components sector

Introduction

The auto-components sector is one of the most important manufacturing industries in India. The sector covers supply of parts to domestic OEMs, aftermarket and for exports across a broad range of products:

• OEM Supply: This segment involves the direct supply of components to vehicle manufacturers for assembly into new vehicles. It typically accounts for the largest share of the sector's revenue.

  • Engine and Transmission Parts: These are essential components for vehicle propulsion and performance, often constituting a significant portion of the market.

  • Electrical and Electronics Components: This segment is rapidly growing in importance due to the increasing integration of technology, including ADAS modules, infotainment systems, and advanced braking components.

  • Body/Chassis/BiW (Body in White): These include the structural components of the vehicle.

  • Suspension and Braking Systems: Crucial for vehicle safety and performance.

  • Interior and Exterior Components: Covering dashboards, seats, body panels, lighting, etc.

  • Cooling Systems, Rubber Components, Consumables & Misc.

    
    

• Aftermarket: This segment caters to the demand for replacement parts for vehicles already in operation. It is driven by factors like the aging vehicle population and increased vehicle usage.

• Exports: This segment involves the supply of auto components to international markets.

With an annual growth rate of 8.63% over FY16 to FY24, the Indian auto-components sector is expected to grow at 14% CAGR in coming years, growing from USD 74 billion in 2024 to USD 111 billion in 2028. 

In recent years, the sector has witnessed robust growth due to rising demand in 2W and passenger vehicles segments, especially the utility vehicles. Further, the share of high-margin, technology-driven components like ADAS modules, infotainment systems, and advanced braking components has significantly increased, contributing to stable operating margins. This reflects a structural shift in the industry.

Growth Factors of Indian Auto-components sector

• Increasing Global Motor Vehicle Production

• Aging Vehicles and Aftermarket Sales

• Technological Innovation in auto parts manufacturing, including improved materials, precision engineering, and smart technologies (e.g., ADAS, infotainment).

• The accelerating shift towards EVs drives demand for specific EV-related components like batteries, electric motors, power electronics, and battery management systems.

• The rise of e-commerce platforms for auto parts, offering vast selections and competitive pricing, makes purchasing more convenient and broadens the consumer base.

• Growing consumer interest in vehicle customization and upgrades for older cars fuels demand for specialized parts and accessories.

• The advancement of self-driving technology increases demand for specific parts and systems required for autonomous driving capabilities.

Challenges

The automotive industry, and consequently the auto components sector, has been grappling with issues of overproduction and excess inventory, impacting profitability and operational efficiency. This is a recurring challenge that often stems from a mismatch between production targets and actual market demand.

• Global Overproduction and EV Transition: The entire auto industry is struggling with overproduction, reduced demand, and the transformational shift towards hybrid and electric vehicles (EVs). Automakers are producing more cars than they can sell, leading to financial losses, job cuts, and a challenging transition to EVs. Factory utilization rates, a key indicator of profitability, have significantly dropped for most automakers since 2019.

• Regional Impact and Specific Cases: Globally, the average factory utilization rate hovers around the high 50s to low 60s. North American factories are slightly better off at 70%, but they still face challenges. This overproduction is particularly evident in the EV segment, where significant investments have been made, but sales have not met ambitious targets, leaving EV plants operating at much lower capacities compared to internal combustion engine (ICE) plants.

• Inventory Issues: In specific cases, a notable gap between wholesale shipments and retail sales can indicate excess inventory at the dealer level, suggesting overproduction or slower demand conversion.

The presence of overproduction and excess inventory underscores the cyclical nature of the automotive industry and the need for agile supply chain management and demand forecasting within the auto components sector. Typically, the cycles (upcycle or downcycle) last for three years.

Key M&A Drivers for Auto Component Makers

Auto-component manufacturers are increasingly adopting the following strategies to ensure robust growth, optimal capacity utilization and insulating themselves from structural changes in the automobiles industry:

• Technology and Capability Acquisition (Future-proofing)

Increasing shift towards EVs, autonomous vehicles and connected car technologies is forcing companies to aggressively expand their capabilities and expertise into those areas. Firms that possess specialized expertise, patents, and manufacturing capabilities in these areas (e.g., EV battery technology, power electronics, sensors for ADAS, software for infotainment and autonomous systems) have witnessed strategic tie-ups, investments and acquisitions by larger players.

Thus, rather than investing heavily in internal R&D over many years, which can be slow and expensive, acquiring a company with established technology is allowing faster market entry, stronger competitive edge, and filling critical technology gaps. This is especially true for traditional internal combustion engine (ICE) component suppliers looking to transform their portfolios.

• Market Expansion and Geographic Diversification: 

The Indian auto-component makers export 25% plus of their annual production. India is also witnessing localization of advanced components such as automatic transmissions and electric motors – these are being driven by the Government’s Make in India initiative and PLI scheme as well as the China-plus-one trend.

The uncertainties in global economic environment are growing due to increasing trade barriers. Consequently, Indian as well foreign corporates are expanding geographically to de-risk their operations through strategic acquisitions. Acquiring local players provides immediate access to established customer relationships, distribution networks, manufacturing facilities, and a localized understanding of market demands and regulatory landscapes.

• Economies of Scale and Cost Synergies (Consolidation): 

There are some product segments facing declining volumes such as conventional powertrain components. In these segments. ‘last business standing’ strategies are at play. Thus, companies are acquiring or merging with competitors or even suppliers. These moves are geared towards improving pricing power with OEMs and achieving a more robust financial position through synergies in purchasing, production, and overheads.

• Portfolio Diversification and Product Line Expansion: 

Auto-comp makers are expanding their product offerings beyond their core segments.  This is to mitigate risks associated with shifts in OEM demand, technological obsolescence and reduce dependency on single product type / customer. Some are also diversifying into non-auto products and improve capacity utilization. Companies are moving into adjacent product categories, such as aftermarket components, or diversifying into new materials or manufacturing processes.

In the year 2024, many companies largely held off on M&A or made smaller-sized deals, due to volumes dropping approx. 60% in first three quarters. However, capacity expansions and diversification into adjacent product lines continued. There is a growing interest towards joint ventures or alliance arrangements. These allow flexibility to be competitive in times of high uncertainty while requiring lower investment than traditional M&A.

Impact of EV on Auto Components Sector

The EV transition is impacting the auto components sector by way of:

• Displacing ICE-Specific Components: Components unique to internal combustion engine (ICE) vehicles, such as engine blocks, fuel injection systems, exhaust manifolds, and traditional transmissions are facing declining demand. This poses a significant threat to companies heavily reliant on these parts.

• Creating Demand for New EV-Specific Components: EVs require a new set of high-value components, including:

  • Lithium-ion Batteries and Battery Management Systems (BMS): These are core to an EV's performance and cost.

  • Traction Motors and Controllers: The electric powertrain's driving force.

  • Power Electronics: Inverters, converters, and on-board chargers to manage electric flow.

  • Advanced Driver-Assistance Systems (ADAS) and Smart Cockpit Solutions: EVs often integrate more sophisticated electronics, sensors, and software.

    
    

• Shifting Value Composition: The percentage of a vehicle's cost attributed to mechanical parts has decreased, while that of electrical, electronic, and software components has significantly increased.

Impact of Electric Vehicles on M&A in Auto-Components Sector

The transition towards hybrid and fully electric vehicles is fundamentally reshaping M&A

strategies in the auto components sector:

• Swing from ‘scale’ to ‘scope’ deals

Historically, M&A often targeted gaining market share and achieving economies of scale in existing product lines. Now, the emphasis is heavily on "scope" deals: acquiring companies with new capabilities, technologies, and intellectual property crucial for the EV and digital automotive future. This includes targets specializing in EV powertrains, battery technology, power electronics, sensors for ADAS, and automotive software.

• Prominence of joint ventures and partnerships

Given the high capital requirements, technological uncertainties, and rapidly evolving landscape of the EV market, full acquisitions are perceived to be risky. JVs and strategic alliances are becoming the preferred alternatives. They allow companies to:

• Share Investment and Risk: Especially for capital-intensive areas like battery production.

• Accelerate Innovation: By combining complementary expertise.

• Maintain Flexibility: Allowing for scaling back or discontinuing projects if technology paths change.

  
  

• Supply Chain Integration (Vertical Integration): 

In the EV components, companies are endeavoring to gain higher control over their supply chain. This is due volatility in raw material prices and the criticality of certain components (like semiconductors and battery materials). Companies are making upstream integrations into raw material sourcing or expanding downstream such as charging infrastructures. This helps achieve improved quality control, reduced lead times, and better cost management.

• Portfolio Transformation through Divestitures and Acquisitions:

Companies are actively divesting non-core or legacy ICE-dependent assets to free up capital and focus resources on future growth areas. The cash generated from these divestitures is then often reinvested in acquiring “future-ready” businesses.

• Cross-Sector Deals:

The convergence of automotive with technology and software sectors has led to M&A targets extending beyond traditional auto component players to include software firms, AI specialists, and even energy solution providers.

The transition to electric and hybrid vehicles has made M&A a critical tool for survival and growth in the auto-components sector. The boardroom concentration has shifted from getting bigger to now becoming smarter, more agile and strategically well-positioned for the future of mobility.

We at GM Corporate Solutions are actively supporting Indian auto-component manufacturers in their inorganic growth strategy. For details on current opportunities, feel free to contact our team.