Capability gap among MSME suppliers could slow India’s automotive technology shift: Study

India’s automotive component industry could have as much as ₹39,000 crore of working capital tied up in inventory due to operational inefficiencies, according to a new study by Vector Consulting Group. The study also points to a major gap between the capabilities needed for the next phase of automotive technology and those currently available among MSME suppliers.

The findings were published in Vector Consulting Group’s white paper, The Broken Flywheel, launched at the 66th Annual Session of the Automotive Component Manufacturers Association of India (ACMA) in New Delhi.

MSMEs face capability gap in emerging technologies

The Indian automotive industry is moving towards technologies such as electric vehicles, hybrids, hydrogen, fuel cells and autonomous driving. This transition is expected to require higher investment in areas such as research and development, new materials, engineering and workforce training.

MSME suppliers are an important part of this ecosystem, accounting for around 80% of auto component manufacturers in India. However, 95% of industry leaders surveyed by Vector said MSMEs are not investing quickly enough in the capabilities needed for future growth.

The study found a significant gap in several technology-related areas. While all respondents considered systems integration and product development important for future competitiveness, only 14% estimated that MSMEs currently have these capabilities.

Embedded software was considered important by 81% of respondents, but only around 10% believed MSMEs currently have the required capability. Advanced engineering was considered important by all respondents, while only 38% estimated that current capabilities among MSMEs were at developing-to-mature levels.

Existing capacity not being fully utilised

The study also highlighted a capacity issue despite existing manufacturing infrastructure. Plants across the sector operate at an average utilisation of 75-85%, but 91% of respondents still identified capacity as a considerable challenge. According to the study, frequent changeovers, quality losses, rework and inefficient material movement reduce the amount of productive capacity available to suppliers.

Up to ₹39,000 crore of working capital could be released

Vector estimates that inventory across India's automotive component industry stands at around ₹98,000 crore. Based on its implementation experience, the consulting firm said companies using consumption-based replenishment methods typically reduce inventory by 30-40%.

If similar reductions were achieved across the industry, the study estimates that ₹29,000-39,000 crore of working capital could potentially be released. Of this, around ₹4,000-5,600 crore could come from the MSME segment.

Productivity gains could add to MSME turnover

The study estimates that automotive component MSMEs generate annual turnover of around ₹2.4-2.9 lakh crore. A 30% improvement in productivity across this base could potentially support an additional ₹74,000-88,000 crore in annual turnover. After accounting for material costs, Vector estimates an incremental value pool of around ₹29,000-44,000 crore.

The report recommends using improvements in operational efficiency and supplier economics to create funds for investment in technology, engineering and product development.

Industry-wide effort needed to build capabilities

It also calls for greater participation from OEMs, Tier-1 and Tier-2 suppliers, technology companies and industry institutions to help build capabilities across the automotive supply chain.

Vector said the ability of the supplier base to upgrade its capabilities will become increasingly important as a larger share of vehicle value moves towards batteries, power electronics, embedded software and integrated electronic systems.

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