India’s automotive suppliers are being asked to build software, systems and advanced engineering skills at the same time that vehicle makers are adding electric, hybrid and driver-assistance technology. A new Vector Consulting Group study says many small and medium-sized component makers are not upgrading fast enough for that shift. The Indian auto component MSME technology gap is becoming a business risk because more vehicle value is moving into electronics and software.

The findings come from Vector’s white paper, The Broken Flywheel: Building a Future-Ready Automotive Supply Ecosystem. Autocar Professional reported that 95% of the industry leaders surveyed believe MSME suppliers are not investing quickly enough in capabilities needed for future growth. Small and medium-sized businesses account for about 80% of India’s auto-component manufacturers, so a weakness in this part of the chain can affect far more than individual suppliers.

The study looked at a limited group rather than the whole industry. Vector gathered views from 21 senior executives at automotive MSMEs during July and August 2026 and also spoke with senior leaders from Tier 1 and Tier 2 suppliers. The results are a directional warning, not a national census. Companies differ sharply by product, customer, plant size and access to capital, so the percentages should not be treated as a score for every MSME.

Even with that qualification, the capability numbers show where the concern sits. All respondents considered systems integration and product development important for future competitiveness, but only 14% estimated that MSMEs currently have those capabilities. Embedded software was considered important by 81%, while only about 10% believed the required capability was available. Advanced engineering was also judged important by all respondents, although just 38% rated current MSME capability at developing-to-mature levels.

These skills matter because a component is no longer always a stand-alone mechanical part. A battery-management system has to work with cells, sensors, thermal controls and vehicle software. A driver-assistance feature needs hardware, code, calibration, testing and a clear response when conditions fall outside its operating design. Suppliers that can connect those pieces can take part in higher-value programmes; those that only manufacture to an existing drawing may have fewer options as platforms change.

Vector also describes a capacity paradox. Plants in the study were running at average utilisation levels of 75% to 85%, yet 91% of respondents still called capacity a considerable challenge. Frequent changeovers, quality losses, rework and inefficient material movement can leave installed equipment available on paper but reduce the output that a factory can reliably deliver. In that setting, adding machinery alone may not solve the problem.

The report estimates that India’s auto-component industry has around ₹98,000 crore tied up in inventory. Based on Vector’s implementation experience, consumption-based replenishment can reduce inventory by 30% to 40% in companies that adopt it. Applied across the sector, the firm says ₹29,000 crore to ₹39,000 crore could potentially be released, including ₹4,000 crore to ₹5,600 crore from the MSME ecosystem. Those are potential estimates, not cash already recovered.

Vector estimates that automotive-component MSMEs generate roughly ₹2.4 lakh crore to ₹2.9 lakh crore in annual turnover. A 30% productivity improvement across that base could support an illustrative ₹74,000 crore to ₹88,000 crore in additional turnover, with a smaller value pool after material costs. The figures show why operational improvement is being presented as a way to fund engineering upgrades instead of treating software investment as a separate expense.

The practical challenge is deciding where to invest first. An MSME may need production-flow work, better quality data, embedded-software hiring, testing equipment or a partnership with a vehicle maker. OEMs, Tier 1 suppliers, technology firms and training institutions also have a role in spreading capability through the chain. The study offers a warning and a possible route forward, but the next proof will be measurable improvements in product approvals, delivery reliability and locally developed technology.