Only 30-40% of EV Supply Chain Localized: ICRA

Investment Information and Credit Rating Agency, ICRA found that at present, only 30-40% of the EV supply chain is localized. There has been substantial localization in traction motors, control units, and battery management systems over the years, while battery cells, which constitute 35-40% of a vehicle’s cost, are still entirely imported. The relatively low localization level gives rise to manufacturing opportunities for domestic auto component suppliers.

ICRA also mentioned, “The disruption along the Red Sea route has resulted in a surge in ocean freight rates by 2-3 times in CY2024 compared to CY2023. Any further sharp and sustained increase in ocean freight rates could also have a bearing on margins for auto component suppliers having significant exports/imports. ICRA estimates the auto component industry to incur a capex of Rs. 25,000-30,000 crore in FY2026 towards capacity expansion, localization/capability development, and technological advancement (including EVs), among others.”

EV Localized Supply Chain

Providing more details, Vinutaa S, Vice President and Sector Head of Corporate Ratings at ICRA Limited said: “The domestic auto component industry is in a transitory phase with automotive players increasingly focusing on sustainability, innovation, and global competitiveness. Demand from domestic original equipment manufacturers (OEMs), which constitutes over half of the industry revenues, is estimated to grow by 7-9% in FY2025 and 8-10% in FY2026. Part of the growth would stem from the premiumization of components and higher value addition. Replacement demand is expected to grow by 5-7% in FY2025 and 7-9% in FY2026, driven by growth in vehicle fleet, higher average age of vehicles, increased used car purchases, preventive maintenance, and expansion of the organized spare parts sector.”

The report added, “Exports, contributing nearly 30% to industry revenues, may be affected by sluggish vehicle registration growth in target markets. However, rising supplies to new platforms due to vendor diversification by global OEMs and Tier-1 suppliers, along with greater value addition from increased outsourcing, support Indian auto component suppliers.”

Electric Vehicle (EV)-Linked Opportunities

Indian players could find opportunities in metal castings and forgings as European Union (EU) plants close due to viability concerns. Aging vehicles and increased used vehicle sales in global markets would aid replacement segment exports. The impact of potential import tariffs on Indian auto component exports remains a key factor to watch. Electric vehicle (EV)-linked opportunities, premiumization of vehicles, focus on localization, and regulatory changes would support growth for auto component suppliers over the medium to long term.

On investments by auto component suppliers, Vinutaa added, “ICRA’s interaction with large auto component suppliers indicates that the industry is estimated to spend Rs. 15,000-20,000 crore in FY2025 and another Rs. 25,000-30,000 crore in FY2026. The incremental investments would be made towards new products, product development for committed platforms, and development of advanced technology and EV components, apart from capex for capacity enhancements and upcoming regulatory changes. R&D spending remains low at 1-3% of operating income, significantly below global counterparts. ICRA expects auto ancillaries’ capex to hover around 7-8% of operating income over the medium term, with the PLI scheme also contributing to incremental capex towards advanced technology and EV components.”

Most ICRA-rated auto ancillary players hold investment-grade ratings, with upgrades significantly outpacing downgrades over the last 2-3 years, reflecting an improved credit profile. ICRA expects sectoral liquidity and coverage metrics to remain strong, supported by healthy accruals and minimal reliance on additional debt.