Hyundai has used its Indian plants as a major global export source. Now other manufacturers are following suit, says Mark Bursa
For most high-value consumer goods, the trend over recent years is to shift manufacturing eastwards, where the substantially lower manufacturing costs in countries such as China, Taiwan or Korea more than cancels out the extra logistics costs.
So most laptops, smartphones or flat-screen televisions undertake a tortuous journey from Asian factory to Western consumer, via air freight or shipping. Some of the manufacturing can be contracted out to local firms, keeping down overheads.
You’d think this business model might be attractive to the auto industry too. But the consumer electronics world is fast-moving and lean, whereas the auto industry is tied up in legacy manufacturing that’s socially and politically impossible to dismantle. And cars are safety-critical in a way that no computerised gadget can ever be.
Product quality and durability is far more important to the auto industry, and it’s still clear that Chinese build quality does not yet match the standards of the developed markets. And it’s not as if China has ample spare capacity – most plants have spent the past few years scrambling to keep up with domestic demand.
If China cannot yet become a Global source point, there’s another major emerging market in the east that seems to be able to do this. Hyundai, Nissan and Suzuki all source large numbers of vehicles into Europe from modern, fast-expanding factories in India. And exports, especially of low-cost, entry-level models, is becoming a major plank in most manufacturers’ market strategies for India.
The Indian car market has not developed at the same speed as China. India’s older, labyrinthine cities lack the wide boulevards of the big Chinese cities, hence congestion is bad already. And while there is an emerging middle class in India, there is a lot less demand for cars in the US$7-10,000 price band that is so popular in China.
Indian domestic demand has been fuelled by ultra-low-cost cars. Hence the development of the Tata Nano, a car that really only has appeal in India. But Nano proves that India is becoming established as the global centre of excellence for small cars. And Tata is not alone in nurturing these skills.
Hyundai uses India as the global source point of all small Hyundais. The Korean company opened its first plant, in Chennai, in 1998, and subsequently a second factory has been built alongside the original factory, taking the capacity to 620,000 units. And much of that production is earmarked for export. Chennai is the sole global source point for two important Hyundai small cars – the i10 and i20.
Last year Hyundai India exported 247,000 of these two models around the world, and while the Eurozone crisis will see this figure decline to 225,000 cars in 2011, that is still almost double the 2007 figure of 126,000 – before many European scrappage schemes brought about a hike in Hyundai’s lowest-priced models. Altogether, Hyundai exports to 110 countries for India, and it is the number one car exporter in the country.
And the Hyundai Chennai operation is no “screwdriver assembly” plant, building cars from Korean kits. Far from it – local content is almost 100% following the opening in 2008 of a new engine and transmission plant with a capacity of 570,000 powertrains. Cumulative investment in Chennai to 2013 stands at more than US$1 billion. This is a serious play from a company whose Korean home market is still itself classified as a low-cost market.
Indeed, key rival products to the i10 and i20 such as the Chevrolet Spark and Aveo models are sourced from GM-Daewoo in Korea, while Hyundai’s sister company sources its Picanto and Rio small cars from Korea. The cost advantage is significant for Hyundai – Indian labour costs (Global Production Inc’s 2008 data) were only 18.3% of Korean costs. And Indian labour is significantly cheaper than, say, Slovakian labour, which is roughly half the Korean cost.
Hyundai’s model is being followed by others. Renault-Nissan has made a major play into the Indian market via its major new plant in Chennai. And global exports have been factored in to this plan from day one. Chennai became the source point for the fourth-generation Micra last year, when production of the third-gen hatchback ceased at Sunderland, UK. Nissan also sources its European-market Pixo city car from Maruti Suzuki in India.
The latest K13 Micra was designed from the outset as a car primarily intended for emerging markets – it’s also made in Thailand and China, and only one body style is offered – five-door hatchback. But quality levels have been designed to make it suitable for sale in the West. Altogether, new Micra will be sold in more than 70 markets, and more than 50 countries will receive their Micras from India. A Renault-badged version called Pulse has also been launched, but this is not intended for exports to Europe. Indian-build Pulses are likely to be sold in other Asian markets, though.
Indeed, “regional” exports in Asia and the Middle East are perhaps of greater significance to most manufacturers in India than exports to Europe. India is well-located strategically, with major Pacific Rim and ASEAN markets to the east, and major MidEast states to the west. These markets don’t have the same demands, but a car that is considered mid-sized in India can appeal as a small sedan in the Middle East, for example.
Ford India plans to export Indian-made cars to 50 countries by the end of 2011, up from 32 countries in September 2011. And while this doesn’t include major European markets, it does include some far-flung, smaller countries – Jamaica was a recent addition.
Ford’s most successful export model is the Figo, a heavily restyled version of the previous-generation European Fiesta hatchback. It has sold extremely well in India, and Ford has exported it to major markets such as South Africa, Mexico, Nepal, Iraq, UAE and Bahrain. In addition it is shipped to numerous African nations, including Kenya, Angola, Ghana, Liberia, Malawi, Madagascar, Mauritius, Nigeria, Senegal, Tanzania, Zambia and Zimbabwe.
Honda, too, plans regional exports of the Brio small car. Honda Siel Cars India said it was planning to export the car to Nepal, Bangladesh, Bhutan and Sri Lanka. Honda is increasingly ‘localising’ its Indian operation as it no longer wants to depend solely on Japanese suppliers for some parts. – Brio production at Honda’s plant in Greater Noida will be 90% localised by year-end.
Fiat India Automobile is aiming to increase exports of the Linea four-door “emerging markets” sedan, and has announced that exports of the model from India to Sri Lanka have now started.
And Peugeot, which in September 2011 announced plans to re-enter India in 2014, said it would consider exporting right hand drive cars from India in the future, and exports could account for up to 25% of Indian output. A spokesman told AFP: “For us, India will be a key market. It’s very promising. It will be by 2020 the biggest right-hand drive market in the world and probably the third-biggest market if you take all kinds of vehicles by 2020.”
India offers a well-educated, English-speaking workforce, and a labour cost that while a little higher than China, is still considerably lower than even Central European rates. The growth of major automotive centres around cities such as Chennai has brought about significant increases in supplier quality too. Indian passenger car exports doubled between 2005 and 2009, though this was largely down to Hyundai’s strategy. But as manufacturers grow in India, they will find ready takers for Indian-made cars in many parts of the world.