US Trade Tariffs To Slow Indian Auto Component Industry Growth

India's automotive component sector is said to experience reduced revenue growth due to newly implemented United States trade tariffs, according to a recent analysis by credit rating agency ICRA. The credit rating agency, as quoted by Express Drives, forecasts industry growth will decelerate to 6-8 per cent in FY2026, down from the previous projection of 8-10 per cent, primarily due to an anticipated mid to high single-digit decline in exports to the US.

Significant Industry Impact

The ICRA report examined 46 auto component manufacturers with combined FY2024 revenues exceeding Rs 3,00,000 crore, representing approximately 50 per cent of the industry's total output. 

The new tariff structure, which imposes a 25 per cent duty on critical components including engines and transmissions effective May 3, 2025, along with similar duties on steel and aluminium beginning March 12, 2025, is expected to add approximately Rs 9,000 crore in supply chain costs.

Indian exporters may need to absorb between 30-50 per cent of these additional costs, potentially resulting in earnings impacts ranging from Rs 2,700 crore to Rs 4,500 crore. This represents approximately 3-6 per cent of the industry's overall operating profits and a more substantial 10-15 per cent for companies focused primarily on exports.

Profitability Margins Under Pressure

ICRA expects operating margins industry-wide to contract by 50-100 basis points to 10.5-11.5 per cent, with export-oriented businesses potentially experiencing more significant declines of 150-250 basis points. Despite these challenges, the agency anticipates stable debt metrics and liquidity positions for most exporters, even considering increased working capital requirements.

The impact is somewhat mitigated by domestic demand, which accounts for over 70 per cent of industry revenues. The United States market represents approximately 8 per cent of FY2024 revenues, despite exhibiting robust 15 per cent compound annual growth rate in exports from FY2020 through FY2024.

Shamsher Dewan, Senior Vice President at ICRA, noted that while suppliers aim to pass on costs, the extent depends on their market position and product complexity. 

Entities with US manufacturing units are insulated, but risks include declining US auto sales and rising Chinese competition in Europe and Asia. A reciprocal 26 per cent Indian tariff on US exports is paused for 90 days, with a 10 per cent duty still applicable. USMCA-exempt products face no tariffs.

The analysis indicates limited near-term risk of losing US customers due to substantial switching costs and lengthy approval processes required for alternative suppliers. Indian component manufacturers might actually benefit from improved cost competitiveness compared to Chinese alternatives over time, with some companies already reporting increased inquiries from American buyers.

Ongoing trade discussions and evolving tariff policies continue to create uncertainty in the market, with potential for additional changes as negotiations progress.