Steering Indian Automobile Industry

Towards Globalization

O
strong cost engineering thus global

ver the past industry per

five

years cent.

Indian

auto

has been growing at 15 It has built a foundation for low manufacturing and competitiveness attracting original many equipment

manufacturers Honda, BMW, Nissan, opportunity across the value chain.

(OEMs) like GM, Toyota, etc., to leverage the India

Auto component industry has also grown both domestic as well as on the export front. Its strength in technology intensive parts is making India a component sourcing hub for most global OEMs. Indian auto component companies are gaining scale and technology through organic and inorganic expansion to meet the huge outsourcing opportunity. community. Thus this automobile industry is becoming one of the leading export hubs for the global automotive

Automobile Export Trends Indias automobile exports have been growing at a compound average growth rate (CAGR) of over 40 per cent per annum for the past five years. These exports grew by a phenomenal 336.7 per cent in unit terms from 184,680 in 2001-02 to 806,495 in 2005-06 (Figure 1). Data

released by the Society for Indian Automobiles Manufacturers (SIAM) show Indias domestic auto sales grew 70.50 per cent from 5,225,788 units in 2001-02 to 8,910,224 units in 200506. The comparison shows that auto exports grew at 28.1 per cent as compared to domestic sales growth rate of 12.82 per cent in 2005-06 (Figure 2). India is a major hub for the export of auto components. Its CAGR has been 22 per cent per annum for the past five years. Exports of auto components grew from $0.57 billion in 200102 to $1.60 billion in 2005-06, registering an increase of 180.70 per cent. On domestic front, production value of auto components increased from $4.4 billion in 200102 to $10 billion in 2005-06, registering an increase of 127.27 per cent (Figure 3). Figure 1
AUTOMOBILE EXPORT TRENDS The Passenger Car Market (2001-02 to 2005-06)
900000 800000 700000 600000 500000 400000 300000 200000 100000 0 M&HCVs 2001-02 2002-03 2003-04 2004-05 2005-06 4824 5638 8188 13474 14096 LCVs 7046 6617 9244 16466 26485 Total CVs 11870 12255 17432 29940 40581 Passeng Utility ers Cars Vehicles 49273 70263 125320 160670 170193 3077 1177 3049 4505 4486 MPVs 815 565 922 1227 1093 Total Total Passeng Three Grand Motorcycl Two Scooters Mopeds es Wheelers Total er Wheelers Vehicles 53165 28332 56880 18971 104183 15462 184680 72005 129291 166402 175772 32566 53687 60699 83873 123725 187287 277123 386202 23391 24078 28585 43181 179682 265052 366407 513256 43366 68144 66795 76885 307308 479919 629544 806495

(In Nos)

Source: SIAM, New Delhi

Figure 2
AUTOMOBILE PRODUCTION, EXPORTS AND DOMESTIC SALES (2001-02 to 2005-06) Auto Pie Grows (In Nos.)
12000000

10000000

8000000

6000000

4000000

2000000

0 Exports Production Domestic Sales

2001-02 184680 5316302 5225788

2002-03 307308 6279967 5941535

2003-04 479919 7243564 6810537

2004-05 629544 8467853 7897629

2005-06 806494 9735216 8910224

Source: SIAM, New Delhi

Figure 3 SIGNIFICANT GROWTH EXPERIENCED IN THE AUTO COMPONENT INDUSTRY IN BOTH DOMESTIC AND EXPORT MARKETS

Domestic Market
12 Production value ($Bn) 8.7 6.7 3.9 4.4 5.4 10

Export Markets
1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1.6 1.4 1 0.62 0.76 0.57

8 6 4 2 0

Export value ($Bn)

10

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Source: Auto Components Manufactures Association, New Delhi

India as a hub for automobile industry and Made in India brand have made significant inroads in the global car markets. Multinational car manufacturers are using their Indian

facilities to cater to the international markets. The growing presence of Indian cars worldwide is clearly visible from the fact that 1,48,781 units were exported in the first nine months (April-December) of the current financial year 2006-07, a 13.97 per cent increase over the corresponding period of 2005. There is consensus that about 2.9 million vehicles could be exported from India by 2010 and could be doubled over the next 4-5 years. According to McKinsey, the Indian ancillary has the potential to achieve exports of $25 billion (Rs. 115,750 crore) over the next decade. The industry is likely to witness a CAGR of 30 per cent in the next five to six years aided by Greenfield projects and expansion of existing facilities by players in India as well as global ones. Globalising Indian Auto Industry Indian auto industry has established one of the largest export hubs for most of the global players. Several global automotive players have moved their R&D to India outsourcing research and design elements of the automotive products. R&D expenses as a percentage of net sales was 0.78 per cent in auto components in 2004-05. Also India scores over other countries like China and Thailand and has gained acceptance of global OEMs on account of its quality, design and engineering capabilities and large pool of low cost, technically skilled and English speaking engineers. Many Indian firms are working on at least $300-million worth of automotive engineering design services (AEDS) projects and expected to be a-billion industry by 2010. The AEDS industry currently employs 12,000 people and is expected to grow over 30 per cent annually within 3-4 years. Potential savings from outsourcing/off shoring AEDS could range from 15 per cent to 45 per cent. Four different types of players are offering these services: Captive Centres of global OEMs (GM, Ford, Bosch, Delphi, etc.) IT Services companies (Infosys, Wipro, TCS, Satyam, etc.) Design Houses (Dilip Chhabria Designs, Geometric Software, Infension Technologies, Neilsoft, etc.) Subsidiary of Indian Auto Companies (Mahindra & Mahindra, Eicher, TVS, etc.)

The nature of projects is limited largely to CAD/CAM and modelling and analysis but eventually Indian companies could designing the entire concept with sketches and detailed depiction of all vehicle features. The changing scenario of the Indian auto industry in the context of facing challenges and availing of opportunities in the global markets concerted efforts are needed to create a significance place in the increased integrated value chain across the geographical reasons. The auto industry urgently is to be expanded in regard to increase investment and local resources to match potential. Significant capital is required for capacity expansion and fuelling acquisitions. Investments should be made in both OEM and auto components businesses so as to create a low cost model capital and operations profitable at low scale. Technology and Branding are important for the Indian auto Industry. There is a significant gap between Indian firms and leading global OEMs. One of the key imperatives for Indian auto companies would be to increase spending on R&D and Brand building to remain competitive on a global basis. This is driven by shorter product life cycles and increasing number of variants combined with the need to strengthen brands in the highly competitive overseas markets. Acquisitions & JV Abroad Indian companies' overseas acquisitions have been driven by their desire to be among the largest and least-cost producers, their quest for technology and a search for new markets. In July 2006, in order to establish a presence in mainland Europe, Amtek Auto, a manufacturer of automotive components such as engines, transmission and suspension parts, assemblies and systems, bought 70 per cent stake in Zelter GmbH, one of the three largest manufacturers of turbochargers housing in the world, for an enterprise value of euro 28 million. Following the acquisition of South Koreas Daewoo Commercial Vehicle Co. in March 2004 by Tata Motors for $102 million and Bharat Forges acquisition of German firm Carl Dan Pedinghaus GmbH for euro 29 million, Mahindra & Mahindra, through its subsidiary agreed to acquire 67.9 per cent stake in Jeco Holding AG, one of the top five forging companies in Germany, for euro 140 million and subsidiary of Scholz AG. gears and piston heads. Jeco Holding AG, which focuses on the truck, bus and trailer market, makes gearboxes, engine and axle pans, hubs,

GLOBAL ACQUISITIONS Acquired By Bharat Forge Bharat Forge Bharat Forge Bharat Forge Sundaram Fasteners Sundaram Fasteners Sundaram Fasteners Amtek Group Amtek Group Amtek Group Tata Auto Comp UCAL Fuel Systems Sona Systems Source: fe Motobahn, The Financial Express, 9 September 2006. After acquisitions, joint ventured (JV) with foreign companies abroad are gaining momentum. Many automobile giants like Tata Motors, Ashok Leyland, Mahindra & Mahindra, etc., have ventured into JV abroad. Illustrating few JVs abroad are: Ashok Leyland has established subsidiary company in Ras Al Khaimah, UAE for setting up a bus body assembly plant to cater to the Middle East and neighbouring markets. This unit would start operations as a bus body assembly using Ashok Leyland chassis and bus body kits sent from India. The annual capacity is for 1,000 buses of international styling, manufacturing and quality. Tata Motors would enter in Pakistan through its subsidiary Tata Daweoo Commercial Vehicle with the commissioning of a new truck and bus assembly unit in Karachi. Auto Mission Plan There is a vision statement, By 2016 India will emerge as the destination of choice in Asia for the design and manufacture of automobiles and automotive components. The Indian automotive sector will contribute in a significant manner to Indias Gross Domestic Product and employment opportunities. Koyo Target Imatra Kilsta AB, Sweden Federal Forge, US CDP Aluminiumtechnik Carl Dan Peddighous 76% JV with Bleisthal Produktions GmbH, Germany Precision Forging unit of Dana Spicer, UK Unit of Textron Deutschland Beteilingungs Zelter, Germany Sigma Cast, UK GWK, UK Wundsch Weidinge, Germany Amtec Precision Products Inc, USA Steering 21% in Fuji Autotech France 11.9 NA 157.5 NA 42.0 NA 126.0 27.7 Value (Rs. cr) 261.0 41.0 35.4 157.5 20.0

This vision is reflected in the Auto Mission Plan (AMP) 2006-2016 envisaging to double the sectors contribution to GDP to 10 per cent and providing additional employment to 25 million people by 2016 with a road map to attract $40 billion investment and sectoral out put of $145 billion with estimated exports of automobiles and components accounting for US$35-40 billion. New investment plans announced by auto giants, like the Rs. 3,000 crore projects by Maruti, a $1.5 billion Suzuki-Nissan Plant, adds credibility to the new AMP to raise the industry turnover from the current $34 billion to $1,22,159 billion by 2016, and to boost exports to $35 billion. The additional $35-40 billion of investment is needed to come from both existing players and new foreign investors. Among other things, the AMP proposes Income-Tax holiday for all manufacturers making an investment of more than Rs. 500 crore in a project. The plan also seeks one-stop clearance for FDI proposals including local clearances and tax deductions of 100 per cent on export profits. AMP also seeks 50 per cent deduction on foreign exchange earnings by companies and concessions on import duty for machinery used to set up new plants. The AMP was prepared by the Ministry of Heavy Industries and Auto Industry Associations jointly so as to address the challenges and opportunities in the global markets. The future challenges for the Indian automobiles industry in achieving the targets defined in the AMP would primarily consist of developing a supply base in terms of technical and human capabilities, achieving economics of scale and lowering manufacturing cost. At the same, there is a need to stimulate domestic demand and exploiting export and global business opportunities. Indian automotive industry is in the midst of a major structural transformation in todays globalised world. System Supply of integrated components and sub-systems is becoming the order of the day. Most of the SSI units manufacturing smaller individual components are on their way to become Tier 2 and Tier 3 suppliers, while the larger companies including most MNCs are being transformed into Tier 1 companies, which purchase from Tier 2 & 3, and sell to the auto manufacturers. World over, giants majors have consolidated to elevate technology, enlarge product range, access new markets, cut costs and in graft versatility. They have resorted to common platforms, modular assemblies and systems integration by component suppliers and ECommerce.

India has the potential to be a global automotive power. However, concerted efforts will be required to take auto manufacturing to a self-sustaining level where they shall have volumes, generate requisite technology and meet evolving emission requirements. Volume is important for any manufacturing enterprise. However, it is more important for automobile sector, both for the manufacture of vehicles as well as auto components. Lack of volume will not only inhibit efficient manufacture but also R&D and introduction of new models. The investment and fiscal policies should create an environment for volume production and indigenous capability for innovation for small cars and auto components. Auto components manufacturers have been slowly gaining global recognition and maintaining a certain level of exports. This would require three pronged marketing strategy: exports through OEMs for their global sourcing requirements, export to Tier 1 manufacturers as a part of their international supply chain and direct exports to aftermarket. The main challenges are lower volumelow scale, fragmentation, inadequate R&D/technology support, lower productivity levels, limited resources for international marketing and establishment of an efficient supply chain.

Madanlal Indian Institute of Foreign Trade (IIFT), B-21, Qutab Institutional Area, New Delhi - 110016.