India’s automotive market has flourished as India’s economy has expanded and incomes have risen; domestic manufacturers have benefited but there has also been substantial inward investment as manufacturers have sought to serve rising demand and use India as low-cost global hub. But there are strategic issues head. The local industry’s two major trade associations recently convened to consider the development challenges facing the Indian auto industry. Deepesh Rathore and Tilak Swarup report.
The vehicle manufacturers’ perspective – SIAM
The apex body of the vehicle manufacturing industry – Society of Indian Automobile Manufacturers (SIAM) – presented a white paper relating to automobile product development, innovation and internationalisation. However, the white paper was general in reach and acted only as a thought provoking broad and conceptual survey rather than providing a specific strategic direction.
It started with stating the factors required for successful product development and the effects of internationalisation. It highlighted the chief emerging policies in India and in similar economies, which will affect the product choice in the automobile industry. It ended with suggestions for India in product development, innovations and more possibilities for the industry in the future.
It was suggested that Indian automobile manufacturers focus on product development as an important part of their strategy though the specifics might differ from case to case. Here, while the international players have the product development capability, domestic Indian players are seen as being at a nascent stage in product development terms. How they handle product development will have a long term pay-off for them, SIAM said. They must organise a competent product development team and processes for continuously incorporating customer trends in future programs. New products will have to be designed considering an evolving and globalising automotive industry and the emerging trade and environmental regimes.
India’s car industry will attract greater attention with the ongoing globalisation of the industry which will, in turn, make it more competitive. The product development will likely be more India-specific with a move away from a ‘global vehicle’, so that attributes like affordability and fuel efficiency are primary elements. But, these characteristics will have to be built-in with high quality, as the global exposure of Indian customers will continue to rise fast.
To achieve these objectives vehicle manufacturers might consider building design and manufacturing capabilities in India and integrating them with their facilities in other countries. The advantages are more suitable products for local customers and a steady flow of skills from one transplant to the other throughout the company.
Indian vehicle manufacturers have limited experience in product development and developing good in-house capabilities might take rather long, and it might be strategic to strike alliances with design houses and specialist engineering firms to hasten their product development cycle.
Much of the OEMs’ future success depends on the competence and support of the domestic supplier industry which has to broaden and deepen its design and innovation skills to match international levels. The industry also has huge scope to enhance its manufacturing efficiencies along the entire supply chain from product design and manufacturing processes.
Once the Indian automotive Industry is able to understand its customer and has component design, cost, delivery and quality at international levels, then there is the potential to at least tap markets with similar characteristic to India and which are also posting high growth or forecast to. Therefore, the emerging economies are a natural option for export volume growth for any Indian manufacturer, rather than the developed economy where competition is more intense and product attributes different from those applying in India.
The study suggests targeting the mass volume market of the lower middle class in India and other emerging markets. The specific aim is to reduce the ‘mobility divide’ or the ease of access to mobility amongst different strata of the population. The typical vehicle would be low price, low emission and fuel efficient and positioned between two-wheelers and entry-level passenger cars. This segment would focus on the segment which is ready to upgrade from two-wheelers to four-wheelers but is unable to choose from the current set of offerings in the market.
In an Indian context, Tata Motors’ Ace Mini truck and the impending ‘1 Lakh Car’ (€2,000) cater to that market group. Another option recommended is a cheap people carrier in the rural sector which in a small bus format would provide service to population usually with difficult access to mechanised transport.
The final suggestion for automotive firms was to be part of public transport management systems because at some time, some aspects of the system can be integrated into the design of the vehicles and the companies can broaden their products to services that ease mobility in general. In India, congestion management in large cities will be of great importance. It will be of relevance to automobile manufacturers because of the potential to improve the efficiency of road infrastructure which will finally help in maintaining sales of their primary product, automobiles.
On inadequate road infrastructure, there are diminishing marginal returns to owning a vehicle along with a limited ability of the public sector to design transport systems and congestion management, emerging as an opportunity for both public and private benefit.
The automotive components perspective – Acma
The 45th Annual session of the Automotive Components Manufacturers Association of India was based on ‘turning vision into reality’, a vision stated in the 2004 session, and a vision presented by management consultant McKinsey of India’s automotive components exports reaching a level of US$25 billion per annum by 2015.
In this session, the discussion centred upon how that export goal could be achieved. First the current statistics of the automotive component industry were shown followed by growth needed to reach the envisioned figure. To reap the global opportunity, the Indian auto industry needed to consider global trends and future challenges influencing the supplier industry globally.
A major chunk of future Indian components exports would be channelled to the outsourcing of parts supply by global automotive firms. Another opportunity arising for the industry is as a knowledge partner providing R&D services based on India’s huge pool of engineers and English-speaking employees.
The Indian automotive component industry’s output for the financial year 2004-05 was estimated at US$8.7billion, which is 30% growth year-on-year. Forecasts to the end of the decade are pegged at US$18.65billion and in 2015 the opportunity for the industry is forecast to be in the range of US$33billion to US$40billion at a CAGR of 16.48%.
In the same timeframe exports will take an increasing share of the parts industry’s output increasingly larger role in the industry. In 2004-2005 the total exports were US$1.4billion but targeted to grow to US$5.91billion by 2009-2010. The possible level of exports by 2015 as pinned by ACMA is US$20 to US$25billion which requires a CAGR of 33.4%.
Hence exports can potentially contribute to approximately 60% of component production by 2015 compared to 16.1% currently.
This potential vision is based on the following global outsourcing opportunity facing India which ACMA wants realised. The conference is the ‘beginning of the global march.’
The growth will accrue in the future from various emerging trends in the context of certain major challenges. As more production bases are established in Asia, India has an opportunity to exploit these bases for global sourcing. While excess global capacity remains a challenge the dismantling of global trade barriers will lead to consolidation and enhancement in ‘value of content’. Component exports will rise per platform on a global basis since the number of platforms globally will reduce.
On the other hand, with increasing modularisation there will be rationalisation in logistics. As the ball has been set rolling for cheap outsourcing of parts from low-cost countries, there will be a snowballing effect from global OEMs and Large Tier-1 suppliers to buy from such countries.
Already there is a sizeable list of global players outsourcing from India:
While clinching lucrative outsourcing opportunities there will be new hurdles ahead for the industry. The chief focus of future legislation is likely to generate a thrust towards R&D for safety, emission and noise, all with a customer focus. There are of course risks involved in global business with respect to investments in R&D, testing and equipment and the incidence of warrantees and liabilities being shifted on to suppliers.
For the Indian automotive suppliers to make profits in such a business structure, the costs have to be squeezed down by lower investments, modular design and construction, sourcing globally, lean and flexible manufactures processes, fast product development and supplying to high volume platforms. A combination of these factors with focus, design, development, marketing and services while procuring at low costs will aid future profits.
Apart from being a sourcing base, India has a global opportunity as a knowledge partner. India’s competence to provide the global market with R&D and engineering services is met by its educated and English-speaking manpower. The size of this pool can be judged by the 1,203 engineering degree colleges, 1,195 engineering diploma institutes, 1,006 colleges for computer applications, 930 management institutes and 254 national universities.
India is continuously building capabilities in providing engineering solutions and is thus increasingly indigenising processes. Current capabilities like analysis & simulation, engineering animations, modelling & drafting and tooling design & manufacturing are being enhanced in value by linking a products’ manufacturing stages and processes including its gauges, jigs and fixtures, inspection documents by employing high-end CAD/CAM and CPC softwares. This capability is being tapped by large automotive companies such as Delphi, Lear, Ford, Visteon, GM, Caterpillar, Johnson Controls and Valeo who have established local R&D centres.
To conclude, the Indian automotive industry is at an inflection point. Last year’s vision 2015 and this year’s round up on how to achieve it set out the challenges ahead. While there is much entrepreneurship and innovation required to grow the sector, there are policy issues at the government level which slow down implementation and finally make the industry handicapped. This includes infrastructure hurdles slowing delivery time, labour laws and IP rights.
Deepesh Rathore and Tilak Swarup