India is emerging as an important low-cost outsourcing hub for a number of industries including automotive. But there are advantages and disadvantages with India as a manufacturing location, viewed in global terms. Deepesh Rathore and Tilak Swarup take a look at the issues facing India’s developing automotive industry as the country attempts to attract more Foreign Direct Investment (FDI).
The new century is turning out to be an extremely competitive era for the modern automobile industry. Automotive profit margins are under pressure across the globe and efficient manufacturing processes are no longer sufficient to maintain economic well-being. In today’s scenario, plants’ operational efficiencies will increasingly be scrutinised by manufacturers and factors such as plant location, production planning and logistics will rise in importance.
With traditional automotive markets such as the US, Japan and Europe reaching or nearing saturation levels, the next stage of major automotive growth is likely to come from emerging markets like China, India, Eastern Europe and Africa. The large volumes offered by these new developing markets mean that manufacturers have established new production facilities in these regions. Developing markets are mostly characterised by a relatively low level of industrial activity, high populations, lower wages, low gross national product and consequently a low per capita income.
The developing nature of these markets means that these regions offer lower costs of production than developed countries. Low costs of manufacturing and high population levels are the core reasons why China has developed as a manufacturing base so far.
India as a developing market offers similar low cost manufacturing advantages. The country has already become a hub of activity for Information Technology and Business Process Outsourcing, mainly in the services sector and ITES. But there is more to the Indian story. A look at the Indian case reveals that the country offers certain inherent advantages that even China does not offer.
The Indian case: strengths
- India presents a good blend of low labour costs and high skill levels. Thus, more labour intensive operations get the maximum advantage.
- Local suppliers have achieved high quality levels so that any manufacturer can source components from Indian local suppliers. Quality certification is not uncommon and there are five component manufacturers who have won the prestigious Deming award.
- The Indian government is ready to issue incentives for any company ready to set up an export-oriented unit in India.
- The last few years have seen more investment in infrastructure. This is expected to gather momentum in the future.
- Domestic demand is high and growing steadily thanks to an expanding economy. There is substantial local demand for many products.
- Indian companies are said to respect Intellectual Property Rights – IPRs – better than Chinese companies (so, no Chery QQs to be found here).
- Engineering skills, especially in the IT sector are exceptionally high. As an added bonus, Indians speak and understand English with ease, unlike their Chinese counterparts.
- A fully owned subsidiary is allowed in India so that the international player can have complete control over operations.
Some global manufacturers have identified these advantages and are already using India as an outsourcing hub for automotive components, services and even complete vehicles. A brief look at history reveals that this phenomenon is not exactly new. Suzuki has long been using India as a supply base for the European market Alto. The Maruti-Suzuki plant in Gurgaon supplies the present generation Alto, also sold in the Indian market. Interestingly, the Indian market gets the present generation Alto (sold as the Alto) as well as the last generation Alto (sold locally as the Zen) and even the first generation Alto of the early 80s (sold in India as the Maruti 800).
Many other companies who have been using India as a production base for vehicles, systems and components have replicated the above mentioned Suzuki example.
The Indian case: some success stories
- Hyundai has decided to make its Indian operations its global small car hub. Consequently, global requirements for Hyundai Santro/Atos Prime are supplied by Indian operations only. From the Dodge Atos in Mexico to the Hyundai Atos in Europe, all Hyundai Santro derivatives (except the ones made by Inokom in Malaysia) now come from the Indian operations of Hyundai.
- The City Rover is manufactured in India by Tata Motors. The Indian company will supply 100,000 City Rovers over the next five years to the British company. Depending on the response that the City Rover receives (described as ‘optimistic’ by MG Rover management), both companies may collaborate in joint product development in the future.
- Indian two-wheeler major Kinetic Engineering has taken over European scooter manufacturer Italjet. All Italjet production has been transferred to India to take advantage of the Indian low cost manufacturing base.
- Another European scooter manufacturer Aprilia has outsourced the design and development of its next models to the Indian two-wheeler manufacturer Hero Motors. Aprilia is counting on the low cost of design and development costs in India.
- Honda Motorcycles and Scooters India designed and now manufactures the Lead scooter for the European market.
- Dana Corporation recently signed a technical joint venture with QH Talbros. The Indian company will supply key suspension and steering components to Dana’s clients in the Indian sub-continent, South-East Asia and even Eastern European locations. Apart from typical Indian low cost manufacturing, what attracted Dana to QH Talbros and India was the country’s geographical location.
- Volvo Truck has been outsourcing a range of components for its commercial vehicles to Indian companies.
- DaimlerChrysler has exported automotive components worth INR 4 billion last year. The company has an even more ambitious target this year.
- The General Motors research centre in Bangalore is seeing an influx of jobs, mostly white-collar jobs being shifted from US to India.
- Toyota Kirloskar Auto Parts (TAKP) will supply manual transmissions, forgings and some other vital parts for Toyota‘s IMV programme.
- Ford India supplies the bodyshells of the Ikon (three box Fiesta) to Ford’s plants in South Africa and Mexico.
- Renault Agriculture outsources production of 60bhp tractors to Sonalika Tractors in India. Renault Agriculture has a long-term understanding with Sonalika Group and holds 20-percent stake in the joint venture company International Tractors
- Recently Powertrain Ltd signed an agreement with another Sonalika Group company International Cars and Motors Ltd to manufacture the Land Rover L-series diesel engines (now licensed to Powertrain) in India. The engine manufactured in India will be in CRDi form with the Indian plant manufacturing 50,000 units per annum. While half of this output is planned to be used for the company’s Utility Vehicle under development (a project in which MG Rover is a partner), the rest is expected to be exported back to Powertrain in the form of components.
- French baby-replica car manufacturer De la Chapelle is looking at India as a production base for manufacturing Quadricyles (microcars), most of which will be shipped back to Europe.
However, not all is as attractive as it seems and if the above-mentioned cases appear very few in number and sometimes small in terms of the financial sums involved, there are reasons for that. India also presents a number of shortcomings that are often attributed to the (only) limited success that India has been able to achieve in its role as an outsourcing hub for automotive industrial output.
The Indian case: major shortcomings
- Things move slowly in India, often when regulations, the government and bureaucracy are involved. Bribery and corruption are not uncommon and often companies have to bend rules to get past red tape. Consequently, we advise foreign investors to ensure that the Indian partner (if any) has strong political links and knows his way around the corridors of power. Alternatively, (and if you are going alone) hire a top-notch law firm and some political lobbyists for your case. Some state governments, like in the US, will be ready to offer you incentives but how you approach them is important.
- Infrastructure is a problem in India and is likely to remain so for some years in spite of the actions taken by government in the recent past. As R Puri, the CEO of Lear India puts it: “Manufacturing is not IT, which can be done with a few desktops and a high speed Internet line in a cyber park. Manufacturing requires movement of goods, efficient ports and a good infrastructure backbone, which, is lacking in India.” The typical Indian port’s turnaround time is 2-3 days, many times higher than any efficient global port like Singapore or Rotterdam.
- One of the reasons why India has not been able to attract its fair share of automotive investment is because of the geographical proximity to China and to a lesser extent, Thailand. A global manufacturer is most likely to already have a manufacturing presence in China, thus establishing a new one in India to service global markets will make little sense.
- Again, manufacturing for exports is feasible only when there is a high domestic demand for the product. So, as B V R Subbu, President of Hyundai India points out, “It makes a lot of sense in exporting the Santro because we sell the same in India in good numbers, but exporting something like the Elantra from India will be out of question.” Unfortunately, the Indian market is dominated by small cars with three main models already being shipped to Europe. So there is little scope, right now, for another model to be exported from India. In the near future, one can expect the next Hyundai Santro replacement and the next Suzuki Alto to come from India.
Last year the Indian automotive industry grew at over 20 percent, a good growth rate but not so very attractive when compared to China, which doubled its output. But Indian companies have better reputations in terms of quality and professionalism and respecting IPRs. In view of this it will be interesting to see how the Indian automotive industry can progress and come out of its northern neighbour’s shadow.
Deepesh Rathore / Tilak Swarup