Study to Size the Counterfeit Market for Auto Components in India

Study to Size the Counterfeit Market for Auto Components in India July 2006 Prepared For: Prepared By: Business & Industrial Division, IMRB International

Report flow • Background of the Study • Need for Research • Definition of Counterfeits • Study Objectives • Research Methodology & Sampling • Approach to determine counterfeit market size in India • Estimation of vehicle population • Total expenditure on servicing • Size of counterfeit component market in India • State transport authorities • Profile of respondents met • Private vehicle owners • Commercial vehicle owners

Report flow (contd….) • Detailed information on vehicle servicing • Amount spent on last service • Choice of service destination • Break-up of amount spent in the last service • Information on channel members met • General profile • Key counterfeit hubs in India • Stocking of counterfeits • Attitude towards auto component replacement • Attitude towards counterfeit components • Annexure

Background • India has been known for its large ‘unorganized’ market which exists across industry segments • A large part of this market caters to not just unbranded but also counterfeit products • Auto components is one such segment where it is estimated that a large proportion of the market is invaded by counterfeit products • Such low quality products have a negative impact on the brand equity of automobile & automotive component manufacturers

Need for Research • Therefore, Indian automobile manufacturers wanted to understand and size the counterfeit market to: • Develop intervention to curb this market • Provide quality products to their consumers • Curb the negative impact on their brands • Curb the revenue losses suffered due to this market • Under the aegis of Society of Indian Automobile Manufacturers (SIAM), automobile majors formed a task force to address this need

Before outlining the methodology used it is imperative to understand how we defined counterfeits for the purpose of this study…

Several products from ‘unorganized’ sector exist in the market today… These are the ones we have focused on for purpose of this research

Research Objectives Primary Objective of the study was to size the counterfeit market for auto components in India

Objectives of the research • Estimate the total repair and servicing aftermarket in India: Authorized Vs other service stations • By vehicle category • Br geographies • By age of the vehicle • Estimate the total market of counterfeit auto components • By vehicle category • Understand the buying behavior of vehicle owners • Reasons for choice of a service station • Number of trips to a service station per annum • Level of influence of the channel member • Brand of auto component purchased most often

Objectives of the research (contd…) • Gain an understanding of the market from the channel members • Motivators for selling counterfeits • Key counterfeit hubs in India • Most counterfeited components • Map the attitude of owners towards vehicle servicing and counterfeit components • Awareness about counterfeit components • Knowledge about the damages caused by such components • Actions to curb this menace • Suggestions and Recommendations • To reduce the menace caused by counterfeit auto components

Research Methodology & Sampling

Key stakeholders covered • Supply side: Automobile and auto-component manufacturers and associations • Demand side: Private and commercial vehicle owners • Private vehicle owners • Two and four-wheeler owners • Commercial vehicle owners • HCV, LCV, Three-wheeler, buses and taxies • Auto component channel members • Distributors • Retailers/Wholesalers • Roadside mechanic • Authorized service stations • Other service stations

Information gathered from each stakeholder Supply Side: • Automobile Component Mfrs • MORTH/RTO/Associations • Registered vehicle population • Volumes & value of auto components in the after market Demand Side: • Private Vehicle Owners • Commercial Vehicle Owners • Components Bought & their details • Purchase Cycle for Parts • Motivators & Barriers to Purchase Counterfeits • Type of brands stocked • Key components being counterfeited • Motivators & Barriers to sell counterfeits Channel: • Distributors, Dealers & Retailers • Mechanics • Service Stations

Therefore, the research methodology involved meeting each of these stakeholders to gauge extent of counterfeiting…

Module I – Supply Side • Desk Research • Collation of information on industry available in public domain like publications, websites etc • Product portfolio of large organized auto component manufacturers • Collation of information on initiatives taken by automobile and auto component manufacturers to curb counterfeit menace • Expert Interviews: Depth Interviews with the following • Associations & Experts like SIAM, ACMA, Ministry of Road Transport & Highways (MORTH) etc • Manufacturers of Automobiles & Auto components • State Transport Authorities

Module I – Sample size covered These interviews helped us understand: • Fast moving & frequently replaced parts • Universe of automobiles (2-wheeler, 4-wheeler etc) • Size of organized auto component market • Expert opinion on size of counterfeit market & its drivers

Module II – Demand Side • In this module, both private and commercial vehicle owners were met across various identified locations mentioned below:-

Module II – Demand Side • Private and commercial vehicle owners were grouped by type of vehicle owned • Face to face structured interviews were conducted with:- • Private Vehicle Drivers & Owners • Cars (Across various segments) • Motorcycles • Scooters • Commercial Vehicle Drivers & Owners • Trucks • Buses • Three Wheelers • Light Commercial Vehicles • Taxis • Four Wheeler

Module II – Demand Side: Segment of Private cars covered during the survey

Sampling for Vehicle Owners – Module II • As service related information was to be gathered only those vehicle owners were met whose vehicles were no longer under original warranty • Thus, interviews were conducted with the following vehicle owners: • Private vehicles >3 years age • Vehicle owner • Vehicle Driver • Commercial Vehicles > 1 years age • Fleet Owners • Vehicle Drivers

Module III – Auto component channel members • The channel members covered during the study are: • Distributor • Wholesaler/Retailer • Authorized service station • Other service station • Roadside mechanics

2321 private vehicle owners were met across 14 cities spread across 11 Indian states Base: 2321 private vehicle owners Distribution of sample by town class Distribution of sample by vehicle ownership • Equal percentage of respondents representing metro and non metro (including Small towns) locations across the country were covered • Over 51% of all private vehicle owners met owned a four-wheeler only as compared to 33% owning only a two-wheeler • Around 16% of the respondents met owned both vehicle types

1089 commercial vehicle owners were met covering over 2390 commercial vehicles of all types Base: 1089 commercial vehicle owners Distribution of sample by town class Distribution of commercial vehicle owners by vehicle type • Over 58% of the commercial vehicle owners were covered in metropolitan cities • About 28% belonged to non-metros • Another 9% belonged to other NM and rest 5% to small towns • Equal representation of owners owning different types of commercial vehicles in the sample covered • HCVs and taxis were further divided into categories based on the axle load and care segment respectively

Broad approach used for determination of counterfeit components market size

Total expenditure on vehicle servicing in India- Private vehicles - Commercial vehicles

Assumptions for calculation of vehicle population • Total number of registered vehicles in India till 2003 were collected from MORTH • Calculation of number of running vehicles • Private 2 wheelers & 4 wheelers • 80% of the vehicles purchased in last 20 years are still running • 10% of the vehicles registered before that are still running • Based on recent data estimates 10% of the 4 wheelers running are taxies (IMRB in-house data) • Almost 34 lakh 4 wheeler purchased in last two years not considered in the calculation • Commercial vehicles • 80% of the vehicles purchased in last 10 years are still running • 10% of the vehicles registered before that are still running • The number of running vehicles thus are…

Estimated number of running vehicles in India - By Geography All Nos in Thousands

Combined after-sales market for repair in India for both private and commercial vehicles is in excess of Rs.26000 crores Total service aftermarket – By vehicle type Private vehicles* = Rs.8542 crores Commercial** vehicles = Rs.17970 crores *Note: Universe estimates for Segment E cars is not available ** Universe estimates of three-wheelers is not available

North, South and Western regions have almost equal share in the total service aftermarket of private vehicles however Eastern region is lagging far behind Total service aftermarket – By geographies Private vehicles = Rs.8542 crores • Only 13% of the total service aftermarket is contributed by the Eastern region • This can be as a result of low automobile sales in the east • Close to 30% of the service aftermarket is contributed by other 3 regions of the country

Around 60% of the total aftermarket service expenditure for private vehicles is on components as compared to 48% in case of commercial vehicles Break-up of aftermarket service – By vehicle ownership Private vehicles = Rs.8542 crores Commercial vehicles = Rs.17970 crores

Break-up of aftermarket service expenditure by vehicle type Private vehicles Commercial vehicles

Thus, combined expenditure on aftermarket component purchase for both private and commercial owners is more than Rs.13500 crores Total expenditure on components – By vehicle type Private vehicles = Rs.5074 crores Commercial vehicles = Rs.8513 crores

At the same time share of authorized stations among private vehicle owners is around 22% as compared to 15% of commercial vehicles Total expenditure on components – By vehicle ownership & service destination Private vehicles = Rs.5074 crores Commercial vehicles = Rs.8513 crores

No major variation across regions for private vehicle owners in choice of service station for component purchase Private vehicles Total expenditure on components – By geography • The share of authorized service stations across regions is in the range of 17% to 27% • Highest share of 27% is in the eastern region • Lowest share of 17% is in the southern region • In the case of northern region it is close to 21% and about 25% in the case of western region

Break-up of component expenditure in authorized vis-à-vis other service stations – By vehicle type Private vehicles Commercial vehicles

Counterfeit auto components market in India- Private vehicles- Commercial vehicles

Definition of counterfeits? • Counterfeit components are the illicit duplicates of genuine components being manufactured by unorganized sector players illegally • Counterfeit manufacturers do not pay any: • Excise duties • Sales tax/VAT • Cater to the after market replacement demand across the country • They infringe the IPR of organized sector component manufacturers • Have limited capital and technological knowledge

Assumptions used for estimation of counterfeit component market • Vehicles going to Authorized service stations buy only genuine components • It is assumed that private vehicles in first three years and commercial vehicles in the first year are under warranty and/or free service contract and hence, usually do not visit unauthorized service station (this was also used as the pre condition for interviewing) • A user with similar running habits and having vehicle of same age would be spending similar amount on maintenance • A user will be purchasing similar brand of auto components each time he visits a service station of his choice

Counterfeit auto components market in India- Private vehicles- Commercial vehicles

Case Study: Counterfeit auto component market size estimation for scooters in India Total expenditure on vehicle repair by private vehicle owners in the last service (normal or accidental) Percentage break-up on Components vs. Servicing % break-up at Unauthorized Service Stations (non OEM approved) vs. Authorized Total number of trips to any service station (Unauthorized or authorized) by vehicle owner per annum Likelihood of buying a genuine component Vs a counterfeit Market Size for Counterfeit = % Vehicles serviced at unauthorized service stations x Average spend on components x Estimated spent on counterfeits x Total number of trips/annum x Vehicle Population

Expenditure per trip on service by scooter owners – Authorized Vs Other service stations Authorized service stations Other service stations Components Rs. 369 Rs. 338 Labour Rs. 154 Rs. 97 Rs. 112 Rs. 125 Consumables Rs. 635 Rs. 542 Source: IMRB research

Percentage of scooter owners visiting Authorized Vs Other service stations Source: IMRB research • In case of scooters, only 10% of the vehicles were taken to company authorized service station in the last service • Highest percentage of 14% being in West followed by 11% in North • Only 4% of the scooter owners in the East took their vehicle to company authorized service station for last repair • Scooter owners preference to other service stations is clearly highlighted by the above figures

Total number of trips to service station in a year - Authorized Vs Other service stations Source: IMRB research Observation: Not only the owner buying components from un-authorized service stations makes additional trips but also spend 3% higher on components in a typical years!

Likelihood of buying a genuine component • Respondent was asked to describe the component fitted in the last service • The following statements were exposed to the respondent:

Weight-age given to each statement in order to determine the market of counterfeit components • Scenario analysis: The following 3 scenarios have been developed based on variation in weight-ages: • Higher estimate • Realistic estimate • Lower estimate

Study to Size the Counterfeit Market for Auto Components in India