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MSc in International Business 2

Scope oI Small and Medium
Enterprises Engaged in Auto
Component ManuIacturing in India

Ankur Aggarwal

2008

A Dissertation presented in part consideration for the degree of MSc in
International Business Management


ACKNOWLEDGMENT

I would like to take this opportunity to pay my gratitude to Iew people who were closely
associated with my dissertation throughout. Firstly, I would like to thank Dr.
Ramakrishnan Ramanathan, my academic supervisor, whose insightIul comments and
path direction has greatly enhanced the value that I put in my dissertation which
otherwise would have not been possible His valuable words will surely be a great help in
my proIessional liIe as well.

I would also like to acknowledge the invaluable help that I received Irom my lecturers
during past one year which helped me in my dissertation as well. I also would like to
thank the University authorities Ior providing excellent inIrastructure such as world class
library with excellent collection oI books, providing access to valuable journals, and IT
Iacilities. I truly Ieel privileged to be part oI this University.

Finally, I want to acknowledge the encouragement and support oI my parents without
which it would not be possible to be part oI this reputed International University. It`s
truly just beyond dissertation. I am grateIul to them Ior every bit oI contribution in
helping me shape up my dreams.


ABSTRACT

The paper analyses the state oI Small and Medium Enterprises (SME) engaged in Auto
component manuIacturing in India. It studies the past and present oI this industrial
segment and tries to predict the Iuture prospects oI the industry. The objective oI the
research is to analyze the perIormance oI small and medium enterprises engaged in Auto
Component manuIacturing and to evaluate available opportunities and challenges Ior
them in India

The literature review describes the overall Chinese economy and Iactors aIIecting its
growth whether positively or negative. For this purpose oI research, qualitative research
methodology has been chosen. The researcher has taken interviews in order to understand
and satisIy the aims and objectives oI this research. The results Irom the interviews have
been discussed and analyzed by dividing them into various themes based on the literature
review. Lastly, the concluding thoughts oI this study discuss the limitations and
recommendations.


DECLARATION

I Ankur Aggarwal declare that this dissertation is my own original work, conducted under
the supervision oI Dr Ramakrishnan Ramanathan It is submitted Ior the degree oI Master
oI Science in International Business at Nottingham University Business School at
University oI Nottingham. No part oI this research has been submitted in the past, or is
being submitted, Ior a degree or examination at any other University.

September 2008


TABLE OF CONTENTS

ACKNOWLEDGMENT..................................................................................................... 3
ABSTRACT ........................................................................................................................ 4
DECLARATION ................................................................................................................ 5
INTRODUCTION .............................................................................................................. 8
1.1 Background and Statement oI the Problem ................................................................ 10
1.2 Purpose and Research Questions ................................................................................ 12
1.2.1 Purpose ................................................................................................................. 12
1.2.2 Research Questions .............................................................................................. 12
1.3 DeIinition oI Terms..................................................................................................... 13
1.3.1 Production ............................................................................................................ 13
1.3.2 Consumption ........................................................................................................ 13
1.3.3 Economy .............................................................................................................. 14
1.3.4 Policies ................................................................................................................. 14
1.3.5 Regulations .......................................................................................................... 14
1.3.6 Economic Growth ................................................................................................ 15
1.3.7 Economic ReIorms............................................................................................... 15
1.3.8 Outsourcing .......................................................................................................... 16
1.3.9 Comparative Advantage....................................................................................... 16
LITERATURE REVIEW ................................................................................................. 17
2.1 Auto Industry in India ................................................................................................. 21
2.2 Regional Distribution oI SME .................................................................................... 23
2.2.1 Chennai Auto Cluster ........................................................................................... 26
2.2.2 Pune Auto Cluster ................................................................................................ 30
2.2.3 Delhi/Gurgaon Auto Cluster ................................................................................ 31
2.2.4 Pithampur Auto Cluster (Madhya Pradesh) ......................................................... 33
2.2.5 Andhra Pradesh Auto Cluster .............................................................................. 34
2.3 Scope oI SME Engaged In Auto Component ManuIacturing .................................... 34
2.4 Investments Priorities.................................................................................................. 44
2.5 Competitiveness .......................................................................................................... 46
2.6 Cost and Quality. ........................................................................................................ 47
2.7 Summary ..................................................................................................................... 47
METHODOLOGY ........................................................................................................... 49
3.1 Introduction ................................................................................................................. 49
3.2 Research Objective and Question ............................................................................... 50
3.3 Research Method ........................................................................................................ 51
3.4 Qualitative Vs Quantitative......................................................................................... 51
3.5 Data Collection ........................................................................................................... 53
3.6 Primary Data ............................................................................................................... 54
3.7 Sampling ..................................................................................................................... 56


3.8 Secondary Data ........................................................................................................... 58
3.9 Data Analysis .............................................................................................................. 60
3.10 Ethical Considerations .............................................................................................. 62
3.11 Limitations oI Research ............................................................................................ 63
3.12 Summary ................................................................................................................... 64
FINDING AND ANALYSES .......................................................................................... 66
DISCUSSION ................................................................................................................... 68
5.1 SWOT ......................................................................................................................... 68
5.2 Internal Factors ........................................................................................................... 71
5.3 External Factors .......................................................................................................... 74
5.3.1 The Existence oI Trade Networks........................................................................ 76
5.3.2 The Existence oI EIIective Sanctions and Trust .................................................. 76
5.4 Summary ..................................................................................................................... 80
CONCLUSION ................................................................................................................. 82
6.1 Key Findings ............................................................................................................... 82
6.2 Recommendations ....................................................................................................... 84
REFERENCES ................................................................................................................. 85

LIST OF TABLES & FIGURES

Table 1. Definition of MSM Enterprises ........................................................................... 18
Table 2. Statistics on Indian SME Growth Rate ............................................................... 20
Table 3. Presence of Japanese and other OEMs, MNCs in India .................................... 22
Table 4. Region wise clusters and presence of OEMs and SMEs .................................... 25
Table 5. Chennai Auto Cluster Component Manufacturers .......................................... 28
Table 6. Percentage Share of Different Components ....................................................... 29
Table 7. Assistance to small Scale Sector bv Foreign, Public sector Unit Banks and
Private Banks (NBC ) .................................................................................................... 36
Table 8. Competitiveness of SMEs ................................................................................... 42
Table 9. SWOT Analvsis of Indian SMEs ......................................................................... 70
Figure 1. Factors Affecting SME Competitiveness 44

Figure 2. Framework to Support SME Development 73


CHAPTER 1
INTRODUCTION

India is one oI the Iastest growing economies oI the world. With China it has transIormed
the image oI Asian economies and is playing greater role in world aIIairs. The ever-
increasing GDP and strong economic policies have put India on a Iast track to
development. India is transIorming itselI Irom an agrarian society to an industrial
economy. AIter its independence in 1947 and opening oI its economy in early 1990`s
India has shown the growth rates that has made the world to sit up and take notice.
According to a recent survey by McKinsey and the ConIederation oI Indian Industry
(CII),world investors and corporate Irom the Iirst world economies now look India as key
location Ior running there worldwide operations. The role oI SMEs is becoming
increasingly crucial Ior meeting the growing demand oI both domestic and overseas Iirms
operating in India. Small and Medium enterprises (SMEs) are today recognized as a
priority sector Ior development in most countries. In India, the small-scale sector
accounts Ior 95 oI the industrial units, providing 40 value addition in the
manuIacturing sector. SMEs contribute 6.29 to the Indian Gross Domestic Product

Liberalisation and the WTO agreement saw boundaries between nations disappearing and
along with it, increasing product diversity, decreasing product liIe cycles and shiIting cost


patterns. These changes are driving Iirms to compete on several dimensions such as
design, manuIacturing, distribution, communication, sales and others. The auto
component industry is the core segment oI the Indian economy. AIter liberalisation, many
global automobile manuIacturers have set up base in India. With the entry oI Ioreign
companies and the increase oI vendors in the market, the bargaining power oI buyers
(vehicle manuIacturers) has increased and buyers evaluate vendors continuously on the
basis oI the inIrastructure and competencies. At the same time manuIacturers are also
being pressurised by their customers to reduce rejection rate (in terms oI deIects part-per-
million or PPM), increase the warranty period and improve R&D Iacilities. Auto
component makers are also Iacing a challenge Irom the unorganised sector in the
replacement market segment. In this liberalised market scenario, Indian SMEs in the
auto component sector have several opportunities.

Increased globalisation demands customisation oI products to Iit disparate international
market conditions thus making the ability to produce variety essential. In the coming
years, Iirms are going to Iace even tougher competition Ior survival. Success or Iailure
will depend on their ability to capture or control scarce resources. A manuIacturing Iirm
able to quickly deliver any number oI competitively priced, high quality, customized
products right on time will be considered competitive because it will be able to compete
on competitive priorities such as Iast delivery, high quality, low price, volume and
product Ilexibility(Singh et al 2004). Countries such as Turkey, China, Taiwan and


Malaysia are considering India as a source oI technology and investment, and Japan and
Europe are increasingly shiIting their labour intensive work to low cost sites like India
and China. The US automotive industry has unanimously voted India as the most
preIerred destination Ior oIIshoring engineering and technical jobs (Singh et al 2004)
Due to its high growth potential the report tends to study the Iuture, past and present oI
this industry. It begins with outlining the research questions and then presenting a
comprehensive literature review about the problem. In the next section the methodology
adopted to carry out the research is described. The next section contains the key Iindings
and analyses the author has gathered Irom the interviews that were conducted with the
managers and owners oI Auto component units. This is Iollowed by the discussion on the
new Iindings and there interrelation with the existing literature. The report concludes by
proing a sound conclusion and giving recommendations about the practices that the
SME`s should Iollow in order to improve their competitiveness.

1.1 Background and Statement of the Problem

The Country has been witnessing the transIormation Irom a centrally planned and
highly directed economy to a market Iriendly economy and in pockets to e- economy .But
the growth oriented structural changes engineered through the economic reIorm agenda
are yet to cover the small and medium enterprises (SME). Small and Medium Enterprises
(SMEs) are today recognized as a priority in almost all countries. It is estimated that halI


to two -third oI businesses , all over the world are SMEs . They comprise a widely
divergent spectrum oI establishments, engaged in economic activities ranging Irom
engaged in economic Irom micro and rural enterprise to modern industrial units using
sophisticated technologies. Such enterprises exist in the Iorm oI Iactories , workshops,
trading and service organizations. Ownership patterns range Irom proprietorship and
partnership to companies and co-operatives. Due to their contribution to their respective
national economies, the importance and emphasis on SMEs has been accentuated in the
minds oI policy makers planners and the industry in the recent past . This is a
consequence oI the recognition that the shiIt Irom agrarian to industrial and to post
industrial knowledge based societies shall not be through the large industrial houses but
through individual and small initiatives by visionaries the SMEs.

However, there is need to establish more clearly through extensive research the present
status and Iuture prospects oI India SMEs . specially those engaged in Auto component
manuIacturing. The researcher will establish the strengths weakness, opportunities, best
practices and the parameters that are required Ior this sector in order to be successIul


1.2 Purpose and Research Questions

1.2.1 Purpose
The purpose oI this study is to analyze the past present and Iuture oI Indian SMEs
concentrating on Auto component manuIacturing units. The author intends study the
perIormance oI small and medium enterprises engaged in Auto Component
manuIacturing and to evaluate available opportunities and challenges Ior them in India.

1.2.2 Research Questions
To respond to the study purpose, the researcher seeks to answer the Iollowing Iour
research questions:
To identiIy, analyze and evaluate perIormance oI SME`s engaged in Auto
Component manuIacturing in India Irom past to present
To analyze opportunities available in this industry in India.
To analyze challenges in this industry in India
Understand the reasons Ior losses and closure oI many SME`s
To study the Iuture prospects oI Auto component manuIacturing SMEs


1.3 Definition of Terms

1.3.1 Production
The act oI manuIacturing goods Ior consumption, where inputs are converted into
outputs. Production is an economic process that uses resources to create a commodity
suitable Ior exchange through manuIacturing, storing, shipping, and packaging (Simpson,
1978, p.19). Production as a process is measured as a rate oI output per period and has
three aspects oI the process namely the quantity oI the commodity produced, the Iorm oI
the good created and the temporal and spatial distribution oI the commodity produced
(O`Connor, 1997, p.19).

1.3.2 Consumption
This reIers to the utilization oI economic goods to satisIy needs or in manuIacturing.
Consumption is expenditure during a particular period on goods and services used in
satisIaction oI needs and wants (Simpson, 1978, p.19). Consumption is the process by
which the substance oI a thing is completely destroyed, and/or incorporated or
transIormed into something else (Schwager and Turner, 1995, p.307).


1.3.3 Economy
Economy reIers to the management oI domestic aIIairs by the government through
regulation oI household matters especially concerning expense or disbursement
(Simpson, 1978, p.3). Further, it may reIer to the orderly arrangement and management
oI the internal aIIairs oI a state or any establishment kept up by production and
consumption. Economy is also the system oI rules and regulations by which anything is
managed through an orderly system oI regulating the distribution and uses oI parts,
conceived as the result oI wise and economical adaptation in the author (Wilk and
Cliggett, 2007, p.34).

1.3.4 Policies
A policy is deIined as a deliberate plan oI action to guide decisions and achieve rational
outcome in the government, public sector, or private sector (McConnell et al, 2004,
p.372). Policies are procedures developed and implemented by a government regarding
the goal oI mitigating climate change using technologies and measures (Birkland, 2005,
p.139).

1.3.5 Regulations
Regulations are legal restrictions disseminated by the government in authority, in order to


produce outcomes that might otherwise occur, produce, or prevent outcomes in diIIerent
places to what might otherwise occur, or produce or prevent outcomes in diIIerent
timescales than would otherwise occur (McConnell et al, 2004, p.372). Regulations
include attempts to control market entries, prices, wage, employment oI certain people in
certain industries, and standards oI production oI goods (Bidgoli, 2004, p.354).

1.3. Economic Crowth
Economic growth reIers to the increase in value oI the goods and services produced by an
economy measured as the percentage rate increase in real gross domestic product. It is a
positive change in the level oI production oI goods and services by a country over a
certain period (World Bank, 1997). Nominal growth reIers to economic growth including
inIlation, while real growth is nominal growth minus inIlation. The precedent Ior
economic growth is technological innovation and positive external Iorces (Namboodiri,
1996, p.274).

1.3.7 Economic Reforms
This reIers to revising and rationalizing oI economic policies in order to bring them more
in line with the 21st century (Kueh and Bridges, 1997, p.29). In the economic reIorms,
governments aspire to revise the existing policies as a way oI increasing production and
consumption as a strategy to realize economic growth (World Bank, 1997).


1.3.8 Outsourcing
Outsourcing reIers to a process oI subcontracting manuIacturing processes such as
product design or manuIacturing to a third party company (Barrar and Gervais, 2007,
p.1). The reasons Ior outsourcing is to lower company costs, redirect or conserve energy
directed at the competencies oI a particular business or to make more eIIicient use oI
land, capital, technology and resources (Gupta, 2008). This trend gained popularity
among the businesses in the 1980s. It involves the transIer oI day to day and/or
management execution oI an entire business Iunction to an external service provider.

1.3.9 Comparative Advantage
Comparative advantage reIers to the ability oI a business entity to engage in production at
a lower opportunity cost than another entity. It is useIul in determining what should be
produced and what should be acquired through trade (Gupta, 2008). The basic concept in
comparative advantage is that a company or country should specialize in producing and
exporting only those goods and services, which it can produce more eIIiciently than other
goods and services (Wood, 1995, p.113). It results Irom diIIerent endowments oI the
Iactors oI production, entrepreneurial skill, power resources, and technology, leading to
the premises that Iree trade is beneIicial to all countries because each gain iI it specializes
according to its comparative advantage (Morton and Goodman, 2005, p.335).


CHAPTER 2
LITERATURE REVIEW

According to Reserve bank oI India(2006), the Central bank oI India Small and Medium
Enterprises can be deIines as
'SMEs are defined as enterprises with investment ranging from Rs. 2.5 million to Rs. 10
million and manpower ranging from 25 persons to around 400 persons. Enterprises with
capital up to Rs. 10 million are treated as small scale industries (SSIs), and those with
capital over Rs. 10 million and up to 100 million as medium enterprises`.

Various other deIinitions have also been proposed by the central government Irom time
to time to enhance the competitiveness and sustainability. According to a recent revision
oI the SME act to Micro, Small and Medium Enterprises (MSME) Development Act
2006 Iirms will now be categorized as micro small and medium units.(Table 1) Those
enterprises that are engaged in production will be called micro iI there investment in plant
and machinery does not exceed 2.5 million rupees. Small enterprises will henceIorth be
the units with investment in plant and machinery in the range oI 2.5 million rupees to 50
million rupees and medium enterprises with an investment oI at least 50 million but not
exceeding 100 million rupees.( Rodriguez 2007)


Types of Enterprises
Engaged in
manufacture or
production of goods
Engaged in providing
or rending of services
Investment in plant and
machinery
Investment in
Equipment
Micro enterprise
Does not Exceed Rs. 2.5
Million
Does not exceed Rs. 1
Million
Small Enterprise
More than Rs. 2.5
Million but does not
exceed Rs. 50 Million
More than Rs. 1 Million
but does not exceed 20
million
Medium Enterprise
More than Rs. 50 Million
but does not eceed Rs.
100 Million
More than Rs.20 Million
but does not exceed Rs.
50 Million
Source . Rodrigue: (2007)
Table 1. Definition of MSM Enterprises

However, big businesses are prevalent it is the Small and Medium scale enterprises
(SME`s) that Iorm the backbone oI the industrial revolution in India. The structure oI
SME`s here is similar to the one existing in other Asian economies like China, Indonesia,
Hong- Kong and other Iar Eastern countries. Most oI the enterprises are Iamily owned


and controlled businesses with second or third generation entrepreneurs. With the rise in
number oI working member males in the Iamily, the business tends to split up and this
causes the once strong business enterprise to be Iragmented. This is one oI the key
reasons Ior SME`s not being converted into large organizations and being limited in size.

The Indian market scenario changed drastically aIter the industrial policy oI 1991, which
brought about the abolishment oI licensing requirements, promotion oI exports,
relaxation oI MRTP and the general liberalising oI the economy. The new policy regime
spurred the entry oI a large numbers oI new players into the component industry, almost
all with technical or equity collaborations with a Ioreign company. (Singh et al 2007)
According to Venkataramanaiah and Parashar (2007) Indian SME`s were supposed to be
hit hardest by the opening oI the economy in 1990 because they were not expected to
withstand the onslaught oI the big multinationals. It was expected as the Indian SME`s
are used to strong protectionist regime they would just crumble against the sheer size and
scale oI global competition.

However According to Business World 2005 SME`s are outperIorming the big
corporations by huge margins. The component sector grew Irom 1986-1987 to 1996-1997
at a CAGR oI 26.5 per cent, largely dependent upon the domestic market. Exports, just
about 10 per cent oI total sales, grew at around 11 per cent (Singh et al 2007). According


to Sridharan (2006) currently there are more than 12.34 Million SME units which
contribute more than 6 percent to the Indian GDP. (Table 2)

Year
No. of Units (Million) Production
(Rs.
Million)
Current
Prices
Employement
(Million)
Exports
(Rs. Million) Registered Unregistered Total
2002-03 1.591 9.358 10.949

3,119,930 26.021

860,130
2003-04 1.697 9.698 11.395

3,577,330 27.142

976,440
2004-05 1.753 10.106 11.859

4,182,630 28.257

1,244,170
2005-06 1.871 10.471 12.342

4,762,010 29.491
Growth
() 17.6 11.89 12.72 52.63 13.34 44.65
Source . Partha Sarathi (2007)
Table 2. Statistics on Indian SME Growth Rate


2.1 Auto Industry in India

According to ACMA (2007) reports, India occupies second position in two-wheeler
manuIacturing in the world (with 6.52 million units), Iourth place in passenger car
segment in Asia (with 1,209,654 units), the largest three-wheeler manuIacturer in the
world (with 374,414 units), the IiIth largest commercial vehicle manuIacturer in the
world (with 350,033 units) and the second largest tractor manuIacturer in the world (with
248,976 units) next to China. The automotive market in India is dominated by two
wheelers and passenger cars, which together produce nearly 8 million vehicles and
account Ior over 90 per cent oI the total automotive market. The 18 per cent average
annual growth rate is among the highest in the world (second only to China). Passenger
car sales are expected to reach 4 million by 2015. Two wheeler sales are expected to
exceed the 10 million mark in the next Iew years (ACMA Annual Report 2007). The
world major OEMs such as GM, Ford and Toyota have identiIied India as one oI the
eight low cost countries (LCCs) to source auto components worth US$375 billion. Thus
India`s share, in theory, translates to US$47 billion. In practical terms McKinsey and
ACMA (Automotive Component ManuIactures Association oI India) have predicted that
India`s auto component exports will reach US$20 billion by 2015. The projected CAGR
Ior passenger car, MUVs and overall is 10 per cent, 4 per cent and 9 per cent,
respectively, whereas projected CAGR Ior two wheeler segment is around 16 per cent.


Auto component CAGR was around 20 per cent during 200005, and the projected
CAGR Ior 200514 is 17 per cent. In India, there are many Japanese and domestic
enterprises and MNCs manuIacturing Ior both domestic and overseas markets,(Table 3)
The Japanese market share is more than 80 per cent Ior two wheelers and 50 per cent Ior
passenger cars (ACMA Annual Report 2007). Many Indian OEMs and SMEs in the auto
component sector are Iollowing world class manuIacturing practices such as 5S, Kaizen,
TQM, TPM, six sigma, lean manuIacturing in shop Iloor activities. India is thus
becoming the hub Ior manuIacturing particularly Ior automobiles and auto components
serving the needs oI both domestic and international markets(Venkataramanaiah and
Parashar 2007)

Segment 1apanese Non-1apanese
Two Wheelers Honda, Kawasaki (Bajaj),
Yamaha, Suzuki
TVS (India), Kinetic
(India), LML, (India),
EnIield India
Passenger Cars & SUVs Suzuki, Honda, Toyota,
Mitsubishi
Hyundai (Korea), Tata
(India), Mahindra (India),
Ford (United
States), GM (United States),
Skoda (Germany), Daimler
Chrysler (Germany), Fiat
(Italy)
Table 3. Presence of Japanese and other OEMs, MNCs in India

However According to Singh et al (2007) the Indian auto industry is still in its nascent
stage. It is very small by global standards and heavily depends on Ioreign sources oI
technology. India`s component industry is smaller than the annual turnover oI a number


oI global component manuIacturers (Visteon had global revenue oI US$20 billion in
2002). ThereIore, barring a Iew, most auto component units can be categorized as small
and medium enterprises (SMEs) and are consequently dependent on other Iirms and
institutions Ior their growth or even survival (Chaturvedi, 2003). Historically, Indian
vendors have worked in a 'build to print mode, i.e. domestic manuIacturers give them
the drawings and speciIications Ior the parts. But over the last Iive years, global
automakers have been giving responsibilities Ior research, design, development, testing,
validation, and integration to vendors. They want Iull service suppliers (FSS) at lowest
cost in place oI mere manuIacturers. For example, OEMs that have been buying Irom
Bharat Forge are now entrusting it with the task oI designing critical engine components
(Business World, 2003). In addition, major India-based automobile manuIacturers such
as Maruti Udyog Ltd have adopted worldwide procurement, which means sourcing
components Irom the best and cheapest supplier globally. Indian auto component Iirms
must develop Iorward strategies with these challenges in mind.
2.2 Regional Distribution of SME

'According UNIDO (2005), there are around 400 industrial clusters and more than 3,000
rural and artisan clusters in India. The clusters are based on important industry groups:
machinery and parts manuIacture (15 per cent); textile (11 per cent) and chemical
industry (10 per cent). In terms oI regional spread oI clusters, the highest concentration is


in Western India (42 per cent), Iollowed by northern India (38 per cent), Southern India
(11 per cent) and eastern India (9 per cent). The concentration oI clusters in western and
northern India can be attributed to the Iact that these areas are rich in entrepreneurial
talent and are industrially well developed. Moreover, they are agriculturally developed;
and they provide a rich market base Ior the consumption oI goods produced in the SSI
sector. Location-wise distribution oI clusters produces Iour categories: metropolitan. city-
based clusters; city-based clusters; town-based clusters and small town/rural area-based
clusters. It is Iound that 80 per cent oI the clusters are located either in cities or towns.
Only 9.4 per cent (or 13 out oI the 138 clusters) are based in rural or small towns. SMEs
and SSIs are more dominant around these areas than in other areas. The details oI OEMs
in these areas are shown in Table 4. It is also important to note that these regions not only
have good support Irom OEMs and other large SMEs, but they also have good support

Sl
No
Cluster
(Region)
OEMs SMEs Turnover
( Rs. Cr.)
Employment
(Nos.)
1 Gurgaon/Delhi
(North)
Honda, Yamaha, Suzuki,
Eicher, Swaraj, LML
20 large
and 500
SMEs
3500 75000


2 Chennai
(South)
Hyundai,Ford, Volvo,
BMW, Toyota, EnIield,
Ashok Leyland, Hindustan
Motors, TVS, Mitsubishi,
TAFE
15 Large
and 340
SME
3300 48000
3 Calcutta (East) Tata Motors, Hindustan
Motors
5 Large
and 100
SMEs
500 20000
4 Pune (West) GM, Fiat, Soda, Mahindra,
Force, Bajaj, Tata, Man,
Eicher, Kinetic, Renault,
Daimler Chrysler
15Large
and 350
SMEs
3000 45000
5 Pithampur
(Central)
Hindustan Motors, Eicher,
L & T Case, Kinetic, Force,
Kirloskar Pumps
10 Large
and 300
SMEs
2500 45000
Source. Feedback Consultants (2005), Jenkat and Parashar (2006).
Table 4. Region wise clusters and presence of OEMs and SMEs

Irom local institutes and R & D organisations (Henry, Brown and DeIillippi 2000;
Kharbanda 2002; Rocha and Sternberg 2005)


2.2.1 Chennai Auto Cluster
The Chennai auto cluster in Tamil Nadu is one oI the Iast growing and most successIul
clusters in India. It is at the IoreIront oI the automotive and auto ancillary sectors, and has
earned a reputation Ior its industrial culture. The Tamil Nadu State has a B to B`
environment, producing everything Irom bicycles to battle tanks. Tamil Nadu accounts
Ior 21 per cent oI passenger cars, 33 per cent oI commercial vehicles and 35 per cent oI
automobile components produced in India. Indeed, Chennai is known as the Detroit oI
India`. Over 100 large companies in the auto and ancillary industry are based in the State,
maintaining highest production norms by implementing internationally recognised quality
standards such as TPM and TQM. Some oI them, like the TVS Group, have also been
recognized Ior their manuIacturing excellence and given the prestigious Deming Award.
Chennai has been the destination oI choice Ior international automotive giants such as
Ford, Mitsubishi motors, Hyundai, Visteon, etc. and home to the internationally
acclaimed TVS Group, Rane Group, Ashok Leyland, India Pistons and Amalgamations
Group which started their businesses in Chennai, beIore going on to become world
leaders in their own Iields. The success oI these industries is hardly surprising,
considering that Tamil Nadu stands Iirst in India in terms oI supply oI manpower with
skills in areas such as automobile and production, electrical engineering, CAD/CAM etc.
The vision oI Chennai auto cluster is to become a global source Ior auto component
supplies` (Chennai Auto Cluster Annual Report 2006; Venkat and Parashar 2006).


Chennai provides an excellent manuIacturing base Ior the auto component Industry.
Presently, it hosts more than 100 key players in the auto component industry. Chennai is
home to world-class automobile companies such as Hyundai Motor India Ltd, Ford India
Ltd, Ashok Lyland, TVS Motors, Hindustan Motors, TAFE, etc. Table 5 shows the
number oI Iirms under the Iour categories oI the Chennai auto cluster. It is Iound that
most oI the Iirms in the Chennai Cluster are small suppliers; Tier 2 or Tier 3 suppliers;
and replacement and small job-shops. Some oI the major component manuIacturers in the
Chennai auto cluster include Autolec Industries, Axles India Ltd, Brakes India Ltd,
Engine Valves Ltd, India Pistons Ltd, Lucas-TVS, Rane group oI industries, Rane TRW
Steering Systems, Sundaram Brake Linings Ltd, Sundaram-Clayton Ltd Sundaram
Fasteners Ltd, Tube Investments oI India Ltd., etc. (Sivalingam and Bhaskaran 2004).
Tamil Nadu`s component industry oIIers high levels oI expertise by global automotive
standards, with high machine tool capability and capable component industry and with
most oI the inputs produced locally. Chennai`s component production capacity share in
India is shown in Table 6. Tamil Nadu`s component companies are well versed with most
global automotive standards. Most component suppliers have ISO 9000; more than 50 per
cent are ISO certiIied and more than 26 per cent are QS certiIied. Chennai has emerged
as the next big opportunity in global trade and has evolved as a manuIacturing hub
particularly Ior auto components. OI late, Chennai is attracting many semiconductor
manuIacturers. The Andhra Pradesh Government is also establishing its state oI the art
Iacility near Chennai on an area oI 16,000 acres (Financial Express, 5 May 2005).


Moreover, the local industry has a very strong links with local technical and business
schools in the State (Venkataramanaiah and Parashar 2007).

Chennai has two distinct auto clusters located at Maraimalai Nagar and Sriperembudur.
Maraimalai Nagar is located 40 km Irom Chennai City on the national highway and is
well connected by both road and rail transport and has easy access to the Chennai
International Airport and Seaport, where Mahindra World City, Ford India and large
number oI automotive ancillary units are located. There is little trade union activity; there
is adequate supply oI trained and skilled manpower and a large number oI educational
and technical institutions. Sriperembudur is located on another national highway
(Bangalore Highway), and is around 45km Irom Chennai City where Hyundai Motors
India has a large number oI auto and auto ancillary units with good access to skilled and
trained manpower.

S.No. Category No of Firms
1 Medium and Large Enterprises 40
2 Tier 2/ Tier 3 Suppliers 200
3 Small Suppliers 200
4 Replacement and Small Job Shops 1000 plus
Source. Chennai auto cluster annual report (2006).
Table 5. Chennai Auto Cluster Component Manufacturers


Category Share () Typical Components Covered
1 Above 50 Inlet and exhaust valves, valve guides, valve
tappets, Iuel pumps (petrol), oil pump assembly,
thermostat, timing chair, water pump assembly,
starter motors, alternators, camshaIts, oil seals,
brake linings, wiper motors, air brake assembly,
engines etc
2 30 - 50 Fuel pump Nozzle holders, voltage regulations,
Flywheel Magnetos, Steering gears
(mechanical & power), wheel Rims, Electric
horns, Dashboard instruments.
3 10 - 30 Fuel pump Nozzle & elements, delivery valves,
crankshaIts, bi-metal bearings, Fuel injection
Pumps, Radiators, Clutch plates, clutch
assembly, shock absorbers, Automotive tyres,
automotive seats
4 Less than 10 Comes Irom 7 diIIerent items which are not
covered above
Source. Chennai auto cluster annual report (2006).
Table 6. Percentage Share of Different Components


More than 1,000 small Iirms have hitherto beneIited Irom the various activities oI the
cluster. This clearly shows the potential Ior growth in SMEs through appropriate cluster
initiatives Irom government and other agencies like educational institutions and
proIessional bodies

2.2.2 Pune Auto Cluster
The Pune auto cluster is located in the industrially developed State oI Maharashtra.
Maharashtra accounts Ior nearly 38 per cent oI the country`s output oI automobiles by
value and market share. Pune is home to OEMs such as Bajaj Auto, Bajaj Tempo,
Daimler-Chrysler, Fiat India, Kinetic, Piaggio and Tata Motors. Business turnover with
respect to OEMs in this region was around Rs. 165,000 million in 200304. Around 20
per cent oI the component manuIacturers are in Pune and some oI the major players are
Bharat Forge, Carraro, Harita Grammar, Jay Hind industries, Kirloskar group, Minda
Instruments, Spaco Carburetors, Wheels India and Tata automotive component group
companies. The Pune Auto Cluster is the Iirst oI its kind in India. Sectors planned Ior the
cluster include auto electronics, CAD/CAM and rubber/polymer and plastics. The cluster
receives support Irom the local Muncipal Corporation; the local Chamber oI Commerce;
automotive component manuIacturers; trade associations; engineering colleges; research
institutes; banks; Iinancial institutions (FIs) and government agencies. The Government
oI India is investing Rs. 12,000 million Ior setting up two testing Iacilities Ior


automobiles at Pune in Maharashtra and Gurgaon in Haryana. A company called Auto
Cluster Development and Research Institute, which is a co-operative industrial research
body, was set up in April 2004 to provide product testing Iacilities that would help
Iacilitate growth oI the auto sector in the world market. The Government has also
introduced provisions Ior the Central Motor Vehicles Rules; the Bureau oI Indian
Standards; and Ior saIety regulations that conIorm to global standards. Further, testing
and certiIication Iacilities need to be revised and strengthened in accordance with saIety
standards oI global order. The Pune auto cluster has a well diversiIied and highly
productive industrial base and a positive work culture including Franchise oI Mumbai
Dabbawallahs. It also has a strong HRD inIrastructure, including more than 100 colleges
and institutions oI higher learning, a large number oI ITIs providing shop-Iloor skills and
many IT companies providing a sound knowledge base.

2.2.3 Delhi/Curgaon Auto Cluster
The Gurgaon auto cluster came into being as a result oI the initiative oI the Maruti Udyog
Ltd (MUL) to set up a plant in 1983 at Gurgaon to manuIacture Iuel-eIIicient passenger
cars. MUL switched rapidly Irom reliance on imported components to sourcing Irom
local vendors to ensure that quality standards were met within reasonable cost
parameters. This was a strategy that contributed to the emergence into prominence oI the
Indian component industry over a period oI 20 years. The ConIederation oI Indian


Industry (CII) has established an SME centre in the Region to enhance the
competitiveness small Iirms through the provision oI advisory services in the Iiled oI
total quality management (TQM), energy management (EM) and total cost management
(TCM). The Centre`s quest Ior becoming a one stop- shop Ior SMEs in the region is
supplemented by training programs, missions to share best practices and seminars to
showcase the latest developments in technology. The Gurgaon cluster, the second
comprehensive cluster model aIter Mohali, kick started with the launch oI the SME
Centre. Whereas the Mohali cluster is a heterogeneous cluster representing various
sectors oI industry, the cluster members in Gurgaon are Irom the auto components sector,
many oI them 2nd and 3rd tier suppliers to major auto OEMs in the region. The cluster
companies reported huge beneIits in production, sales, manuIacturing expenses and
inventory. Through continuous guidance, they have been able to reduce their energy and
power costs. This reIlects in their reduced monthly bills. The exercise has led the
companies to realize tremendous improvements, reducing waste in production processes
and deIects in Iinal products. These companies have also been able to increase their
inventory turns ratio (ITR) substantially, thus retrieving huge Iloor space Ior productive
use and reducing their demand Ior working capital. In terms oI intangible gains, the
companies have reported substantial improvement in work culture and employee
involvement. Awareness levels oI employees have increased, absenteeism has decreased,
resulting in a marked eIIect on customer satisIaction and productivity improvement.


2.2.4 Pithampur Auto Cluster (Madhya Pradesh)
The Pithampur auto cluster, which was initiated in 2004, is located in Madhya Pradesh,
which is a central State in India near Indore. Pithampur is an industrial capital oI the State
with more than 500 SMEs covering both manuIacturing and service activities. Some oI
the OEMs in automobile sector are Hindustan Motors, Bajaj Force motors; Kinetic, L&T
CASE, Eicher Motors ltd., Kirloskar pumps etc. An exclusive centre Ior innovation and
entrepreneurship (CIE) has been established to serve the needs oI local SMEs in the area
oI management and other allied areas. The Government oI India has contributed
approximately Rs. 500 million Ior the Pithampur auto cluster (PAC). The State and
central governments have taken initiatives, such as inIrastructure development through
publicprivate- partnership (PPP), to equip SMEs Ior global competition (Venkat and
Parashar 2006). Other initiatives include: the phasing out oI vehicle duty cuts; special
promotion Ior exports; small car projects; Iree trade agreements (FTAs) with ASEAN
countries and developed countries; tie-up with marketing; technical and business schools
in the country and outside agencies; contract manuIacturing through auto cluster projects;
hassle Iree loans/Iinancing through banks Ior SMEs and revision oI industrial promotion
policies.


2.2.5 Andhra Pradesh Auto Cluster
Andhra Pradesh (AP) State has Iour major clusters covering Hyderabad, Karimnagar,
Warangal, Tirupati, Visakhapatnam, Vijayawada, Anantpur and Nellore. In addition,
Tada, a bordering area close to Chennai, is being developed as a modern state-oI-the-art
Iacility catering Ior the needs oI both domestic and international customers. This Iacility
was created to enhance the beneIits to companies and the regional economy deriving
Irom the cluster system, as in the case oI the Chennai cluster. It has, Ior instance, helped
in the creation oI employment Ior more than 1 million people in the State (Venkat and
Parashar 2006)

2.3 Scope of SME Engaged In Auto Component Manufacturing

The SME`s oI post 1990 era are emerging as successIul enterprises. Indian Auto
component manuIacturers are now supplying parts to both national and international
OEMs (original equipment manuIacturers) which include Ford, General Motors, Honda,
Audi, Fiat, Daimler Chrysler and Fiat. (Venkataramanaiah and Parashar 2007). Auto
component manuIacturers like Delphi, Visteon, Caterpillar and Cummins have now
started outsourcing components Irom many SMEs in India who cater to not only high
quality but also provide competitive prices.


Though many oI these units are on the way to success there are certain problems that are
inherent in this line oI trade. The major being the unIriendly nature oI capital market.
(Venkataramanaiah and Parashar 2007), although the Iuture prospects oI the growth
potential in these units have won them sympathies oI various banks (Table 7) , Iinancial
institutions(FI`s), state Iinancial organisation and Iinancial institutions.(Business World,
2007).

Indian auto component makers Iace competition Irom China and Thailand. China has
larger economies oI scale and lower labor costs in some areas, as compared to India. To
improve their competitiveness in the global market, Indian Iirms need an eIIective
strategy. According to Stalk (1992), competitive strategy needs to be built on the
transIormation oI business processes into strategic capabilities` that consistently provide
superior value to the customer. Schoemaker (1992) advocates that a Iirm should link its
strategic vision to it`s core capabilities` relating to critical business Iunctions. The Iirm
should generate broad scenarios oI possible Iutures and relate them to its strategic market
segments.


Bank Category 2004 2005 2006 Average
Foreign Banks 10.1 10.2 9.6 9.97
PSU Banks 10.4 9.45 8.11 9.32
Pvt. Banks 7.3 5.4 4.2 5.63
Overall Avg. 9.27 8.35 7.3
Source. Report of Trend and Progress of Banking in India
Table 7. Assistance to small Scale Sector bv Foreign, Public sector Unit Banks and
Private Banks (NBC )

Historically, vendors have worked in a build-to-print mode with domestic manuIacturers
giving them the drawings and speciIications Ior the parts. But over the last Iive years,
global automakers have been passing on the responsibilities oI research, design,
development, testing, validation, and integration to vendors. They no longer want mere
manuIacturers; they want Iull service suppliers (FSS) in addition to lower cost. A Iirm
must think and act as a global company and position itselI in a Iavorable market.
Competing and surviving in the markets oI developed countries Iorces Iirms to
continually improve and excel in every phase oI their activities. In addition, a global
presence allows stable development and sales revenue Ior a Iirm in spite oI industrial
Iluctuations in single branches, markets or countries. Dependence on a single country`s
environment makes a Iirm vulnerable to Iluctuations in business cost and labor
availability, competitive hostility, government laws and the political environment in that


country. Furthermore, in today`s global markets, it is critical Ior a Iirm to develop
international alliances such as majority owned joint ventures, and to cooperate with other
Iirms.

These alliances provide sharing oI product, manuIacturing technology, marketing and
R&D know how and resources. In addition, through alliances and collaborations, new
product design and development and manuIacturing capabilities are internalized. This
strategic trend oI collaboration and overseas expansion is being observed in the Indian
auto component sector as well. Some leading auto component Iirms such as Amtek Auto,
Bharat Forge, Sundram Fasteners and Sona Koyo Steering Systems have gone in Ior
overseas expansion, and Rico Auto is trying to build an interesting model i.e. building
design expertise inhouse and outsourcing manuIacturing Irom China. It is interesting to
note that Bharat Forge`s exports surged aIter it acquired Coxtal Forgings, a small UK
based Iirm. There is also a need Ior seamless integration oI white-collar and shop Iloor
workers, as well as eIIective integration oI vendors` IT systems with customers` in order
to be proactive to changing demand. However, a study conducted by ConIederation oI
Indian Industries (CII) shows that Indian SMEs are still reluctant to invest in extensive IT
applications in various processes oI the value chain.

The relationship between the business environment and an organisation`s operations
strategy determines the perIormance oI the Iirm. Williams et al. (1995) identiIied a


signiIicant relationship between manuIacturing strategy and Iirm perIormance. ThereIore
to survive in this new competitive age, Iirms will have to develop suitable strategies Ior
cost reduction, quality improvement, making new investments and developing
appropriate competencies. Due to the dynamic nature oI markets, strategies will have to
be dynamic and change over time. Singh et al. (2006) have observed that SMEs should be
Ilexible in developing their strategies. Chou and Hsu (2005) have suggested that by
developing industry portals, SMEs can aggregate Ilexibility and agility, despite their lack
oI resources. A signiIicant task oI corporate strategy is to identiIy and explore core
competencies that must be added. Otherwise current competencies can become obsolete
and begin to Iunction as core rigidities. A more natural and IruitIul approach is thereIore
to think oI knowledge and skills required by a company in order to maintain or improve
its competitiveness. Chaston et al. (2001) have observed that the areas oI competence
concerned with new product development, human resource management practices,
organizational productivity, the management oI quality and management oI inIormation
are extremely crucial in terms oI inIluencing growth rates. They also observed that Iirms
which have adopted a higher level learning orientation can be expected to exhibit
statistically signiIicant higher competencies across the areas oI measuring customer
expectations, identiIying quality variance, implementing quality improvements, using
inIormation to optimize inIormation, identiIying market changes and using IT to acquire
data. ( Singh et al 2007). According to Singh et al ( 2007) SMEs oIten act as component
manuIacturers Ior larger companies where they operate in the 'make to order or rather


the 'engineer to order approach that imposes rigid constraints on meeting changes in
requirements at short notice (Little and Lee, 1999). SMEs oIten are oriented towards
serving local niches or developing relatively narrow specializations (Urbonavicius,
2005). SigniIicant barriers to competitiveness Ior SMEs are inadequate technologies as
well as inadequate in-house human expertise and poor Iinancial resources. Resource
scarcity can impact on the ability oI smaller Iirms to enter export markets and to deploy
expensive soItware such as ERP systems (Xiong et al., 2006).

There has been extensive research on the competitiveness oI SMEs based on various
parametres . The table below presents the Iramework adopted by various authors.

S.No Competitiveness connotations Researchers
1 Superior manuIacturing perIormance leads to
competitiveness
Leachman et al. (2005)
2 Firm`s competitiveness is dependent on its ability
to provide goods and services more eIIiciently than
others involved in the market place
Ajitabh and Momaya
(2004)
3 Competitiveness comes through a process by which
one entity strives to outperIorm another through the
use oI various resources and capabilities
Hitt et al. (2001)


4 Competitiveness is a concept comprising oI the
potential, the process and the perIormance
Economic Times (2001)
5 Competitiveness is a combination oI assets and
processes, where assets are inherited or created and
processes transIorm assets to achieve economic
gains Irom sales to customers
DISR et al. (2001)
6 To be competitive, several Iactors must exist: the
desire to win, commitment or perseverance and the
availability oI certain resources
Khalil (2000)
7 Competitiveness is deIined in terms oI 'helping
business to win, 'price, product range and quality
and 'distribution and marketing
Dou and Hardwick (1998)
8 Competitiveness reIers to the relative position oI an
organization against its competitors
Cho and Moon (1998)
9 Competitiveness involves diIIerent attributes like
comparative advantage and/price competitiveness
perspective, strategic and management perspective,
as well as historical and socio-cultural perspectives
Waheeduzzaman and Ryans
(1996)
10 Competitiveness is the ability oI the organization to
stay in business and to protect the organization`s
Pace and Stephan (1996)


investments, to earn a return on those investments
and to ensure jobs Ior the Iuture
11 Competitiveness is the ability to increase market
share, proIit and growth in value added and to stay
competitive Ior a long duration
Ramasamy (1995)
12 Competitiveness is the ability to persuade
customers to choose their oIIering over alternatives
nd ability to improve cost process capabilities
Chaharbaghi and Feurer
(1994)
13 Competitiveness arises or results Irom Iirm-speciIic
initiatives like: better management, leveraging and
stretching oI resources
Hamel and Prahalad (1993)
14 Competitive priorities can be used as measures oI
competitiveness (external) and competence
(internal). Both are considered two sides oI same
coin
Corbett and Wassenhove
(1993)
15 Ability to design, produce and /or market products
or services superior to those oIIered by
competitors, considering the price and non-price
qualities
Cruz (1992)
16 Competitiveness is synonymous with productivity Porter (1990)


and is assumed to capture quality Ieature as well as
eIIiciency Ieature
17 Competitiveness is the ability to raise income as
rapidly as competitors and to make investments
necessary to keep up with them in the Iuture
Scott (1989)
18 Firm, industry or nation with the highest
productivity could be seen as the most competitive
McKee and Sessions-
Robinson (1989)
19 Competitiveness is a race in which the participants
are trying to get ahead, and the ability to stay in the
lead is crucial Iactor
Georgiou (1986)
20 Competitiveness is a Iunction oI the Iirm`s industry
mastery, its cost superiority, and the political-
economic environment around it, implying a need
Ior both external and internal considerations oI
competitiveness
Oral (1986)
21 Competitiveness is perIormance relative to
competitors in terms oI dimensions such as quality,
speed, delivery, responsiveness and prices
Turnbull and Cunningham
(1981)
Source. Singh et al 2007
Table 8. Competitiveness of SMEs


According to a research conducted by Singh et al (2007), Ior auto component sector, lack
oI growth-conducive environment, raising Iunds Irom market and shortage oI technical
manpower are observed as the most severe constraints. In creating a growth-conducive
environment, government policies play an important role. Government policies have
played a Iacilitative role in countries like Japan, South Korea, Taiwan etc. (Wang and
Tsai, 1995). In India, some initiatives such as raising oI the investment limit Ior small
scale auto component sector and some others Irom 10 million to 50 million Rs, raising oI
loan limit and subsidies Ior technology updating (The Economic Times, 2005),
improvement in inIrastructure, transparency and accountability oI administrative systems
are being taken but still lot oI eIIorts are needed Irom the government to make Indian
organizations competitive in the global market

According to Singh et al (2007) an eIIective strategy must take into account the
distinctive competencies oI a Iirm that will give it a competitive advantage over its
competitors. In the present scenario oI global competition, eIIective strategies Ior making
investments, Ior developing competencies over time and strategies Ior reducing cost and
improving quality are very important.


Source. Jenkataramanaiah and Parashar (2007)
Figure 1. Factors Affecting SME Competitiveness

2.4 Investments Priorities

The image oI the 'Iactory oI the Iuture is associated with advanced technologies
enabling production oI a variety oI high quality products at low costs, delivered to the
customers without delay. To achieve these goals, technological innovations are
necessary. Technological innovations may involve several orientations such as: design-
based, manuIacturing-based and administration-based orientations. These are intended to
improve product quality and process eIIiciency through a better design, better control,
improved logistics, quicker and more eIIective communication. Other studies (Lal, 2004;
Hodgkinson and McPhee, 2002) have Iound that users oI advanced e-business technology
perIorm better than non-users in export markets. According to Mosey (2005), SMEs can


compete with their larger rivals by developing new products using novel and oIten
simpler technologies.

According to a study carried out by Fletcher and Hardill (1995), a stronger orientation oI
French Iirms towards human resource management (HRM) practices and investment in
new technology was a key reason Ior their better sales growth as compared to their
counterparts in the UK. It is also commonly reported that the quality and consistency oI
the manuIacturing perIormance oI SMEs can be improved as a consequence oI the use oI
the most appropriate inIormation technology (IT) tools without any major changes in
business practices, manuIacturing operations or production Iacilities. InIormation and
communication technologies are indispensable to the operation oI the core routines oI
organizations (Hicks et al., 2006). For making investment in inIormation and
communication technologies, SMEs should seek accredited advisors to ensure success
(Morgan et al., 2006). For the auto component sector, the automation oI processes,
market research and welIare oI employees were major areas oI priority Ior investment
over the past three years. In next three years, automation oI processes continues to be a
top priority Ior investment Ior the auto component sector. In addition to this, market
research and training oI employees will be other areas oI priority Ior investment. Singh et
al (2007) have also Iound out that Ior the auto component sector, investment in
advertisement continues to be the lowest priority. A typical industry in India spends less
than 0.6 per cent, on average, oI its turnover on R&D as against the world average oI 2.5


per cent (Garg et al., 2003). However some oI the leading Indian auto component
manuIacturers such as Sona Koyo Steering system, Bharat Forge etc. are planning to
increase R&D investment Irom 1 per cent to 3 per cent oI their turnover in the coming
years (Times oI India, 2004).

2.5 Competitiveness

According to Prahalad and Hamel (1990), the core competencies oI the organization are
built on intangible assets that cannot be easily imitated by competitors and are the source
oI the company`s ability to deliver unique value to its customers, and allow the company
to be Ilexible in terms oI markets and products. Lei et al. (1999) have expressed the view
that in tomorrow`s business world, success will be critically inIluenced by the degree to
which Iirms utilize new knowledge to support innovation. In past three years, the sector
had given maximum Iocus Ior developing competency in area oI using customers to
deIine quality standards. In addition to this, identiIication oI market changes and
optimization oI work environment were other major areas oI competencies development
in past three years. In Iuture, identiIication oI market changes will become the top
priority in place oI using customer to deIine quality standards. This change is being
observed due to Iast changing market Ior automobiles in India. In addition to this, use oI
inIormation to optimize decisions and new products development will be the other areas


oI competencies development. Most oI the areas oI competency development except
'identiIication oI niches have a signiIicantly higher Iocus than 'moderate level.

2.6 Cost and Quality.

Markland et al. (1995) have observed that Ior European and US manuIacturing
executives, quality is the most important competitive priority. Lau (2002) has also Iound
higher quality and lower cost as top ranking competitive Iactors among US electronics
and computer industries. According to Fleury and Fleury (2003), Ior operational
excellence, organisations should optimize the quality/price ratio. In reducing cost, the
auto component sector Iocuses on strategies Ior reducing rejection/rework Iollowed by
improvement oI maintenance and process capability. For improving product quality,
reduction oI rejection/rework continues to be the top strategy along with improvement oI
process capability, product design and maintenance.

2.7 Summary

This section has tried to probe the literature on the status oI Indian auto manuIacturing
SMEs and predict their Iuture. The various parameters Ior improving the competitiveness


oI SMEs are outlines and their Iuture prospects are discussed. The section has also tried
to Iind out what re the current problems that are being Iaced by Indian SMEs.

The next section will outline the methodology to conduct the research and subsequent
chapters will discuss and provide the research outcomes oI how to improve th
competitiveness oI these small and Medium enterprises.


CHAPTER 3
METHUDULUCY

3.1 Introduction

'Research is something that people undertake in order to Iind out things in a
systematic way, thereby increasing their knowledge (Saunders et al, 2007, p.5).
Methodology provides the necessary Iramework Ior successIully conducting the research
as it provides guide lines rather than explanation on how research should be conducted. It
is an approach towards any question, which guides the researcher towards its answer.
(Remenyi & Williams 1995). This chapter describes the type oI methodology used Ior
conducting the research. It also explains the reason Ior adopting the method describing its
advantages over other methods. According to Miles and Huberman (1994), to ensure a
high quality consistent and the logical Ilow oI inIormation, it is very important Ior a
researcher to be attentive about the suitability and the limitation oI the method. Research
methodology is a technique to systematically and scientiIically solve the research
questions. It is study oI various processes and steps involved by the researcher in
studying the research in order to IulIill the aims and objectives oI the research. It is
extremely important Ior a researcher to be completely Iamiliarized by the research


methods and techniques with methodology. 'Researchers not only need to know how to
develop certain indices and tests, how to calculate the mean, the mode, the median or the
standard deviation or the chi square, how to apply particular research techniques, but they
also need to know, which oI these methods or techniques, are relevant and which are not,
and what would they mean and indicate and why (Kothari 1990). The various aspects
and the speciIic details oI the research methodology are described in detail in the various
sections.

3.2 Research Objective and Question

The main objective oI the research is to study the current scenario oI the SMEs engaged
in Auto part manuIacturing in India. The research has tried to outline the problems that
they Iace and what is Iuture scenario Ior these units. Very little research has been done on
Indian SMEs engaged in this particular Iield. The dissertation will try to explain the
present, past and Iuture scenarios oI one oI the major industrial segments in India.

An in depth research was carried out on locally established small and medium scale
enterprises engaged in auto component manuIacturing to get inside view oI the scenario
and construct a bigger picture.


3.3 Research Method

According to Silverman (2005), to obtain the more valid results, selection oI the
appropriate methodology is highly important. Qualitative research emphasizes on the
validity oI multiple meaning structures and holistic analysis where as quantitative
research places stress on the criteria oI reliability and statistical compartmentalization.
(Burns, 2000) Both oI these methods comprise a variety oI approaches, which are
determined by the kinds oI data being collected. It is essential Ior a researcher to know
the suitability and the limitation oI the method so as to ensure a high quality consistent
and the logical Ilow oI inIormation. (Miles & Huberman, 1994)

3.4 Qualitative Vs Quantitative

'Qualitative research means any kind oI research that produces Iindings not arrived by
the means oI quantiIication. It can be reIer to research about person`s lives, stories,
behaviour, but also about organisational Iunctioning, social movements, and behaviour
but also about organisational Iunctioning, social movement, or interactional relationships.
Some oI the data may be quantiIied as the census data but the analysis itselI is a
qualitative one (Strauss & Corbin 1990 pp 17). This type oI research is applicable to
both descriptive and inductive Iorm oI research whereas quantitative researches make an


extensive use oI the available literature so as to carry out a detail research on the
concerned area. While according to the Marshall and Rossman (1995), quantitative
methods are more suitable Ior the application in veriIication or conIormation oI theories.
These theories mathematically or statistically presents the research Iindings concisely and
systematically (Patton, 2002). As this research will make extensive use oI the available
literature on auto industry in India and is a descriptive type oI research where there is no
mathematics involved, qualitative research is preIerred over quantitative

Quantitative research can be considered more reliable as the research is done through
objective methods rather than inIerring subjectively through indication or perception.
This method simpliIies all the data Ior its easier analysis (Easterby et. al., 2001).
Qualitative research being Ilexible and small scale in nature can be carried out more
conveniently. It provides a greater insight to the research as the results are more
substantial and Iull oI ideas. Qualitative research concentrates on what` and why`
people think in a particular manner towards a subject (Ruyter and Scholl, 1998). This
kind oI research is interpretive in nature and gives an opportunity to the researcher oI
being closely related to the research subject.

Analysing both the approaches oI quantitative and qualitative research and considering
them with the research topic and aim oI the investigation, a qualitative approach has been
undertaken.


The reason Ior choosing qualitative method instead oI quantitative method is justiIied in
the words oI Strauss and Corbin (1998, p11) as they claimed that qualitative research
'can reIer to research about the persons` lives, lived experiences, behaviors, emotions
and Ieelings as well as about organizational Iunctioning, social movements, cultural
phenomenon and interactions between nations. One oI the main inIluential causes Ior
adopting qualitative research was to answer the research question in depth and to gather
the inIormation Irom the managers; this was done with the help oI interviews, which
allowed the Ilexibility in the collection oI data which was not possible in the case oI
quantitative research. 'The Ilexibility and openness oI qualitative research allows access
to some unexpected issues and areas which might not be visible at the time oI planning
the research or Iraming the research questions (Creswell, 1994)

3.5 Data Collection

In this research, combination oI both Primary and Secondary sources are used to achieve
the aims and objectives oI this research. According to Kumar 1996, sometimes the
required inIormation is already available or present in the various sources and one only
need to extract relevant inIormation Irom them. But sometimes inIormation must be
collected or gathered Iirsthand so as to Iill up the gaps in the researches` conducted so


Iar. But none oI the two methods Ior inIormation gathering are 100 reliable and
accurate and each methods have their plus and minuses (Kumar 1996). Accuracy and
relevance oI the inIormation collected Iorms the basis oI choice oI method oI data
collection. (Abramson & Abramson 1999)

3.6 Primary Data

The main tool Ior primary data collection that was employed was interviews. It allowed
the Ilexibility in data collection which was not possible in the case oI quantitative
research. 'The Ilexibility and openness oI qualitative research allows access to some
unexpected issues and areas which might not be visible at the time oI planning the
research or Iraming the research questions. (Creswell, 1994). 'A qualitative research
interview is an interview whose purpose is to gather descriptions oI the liIe world oI the
interviewee with respect to interpretation oI the meaning oI the described phenomenon.
(Kvale, 1983) Interviews are best and the most powerIul way to understand our Iellow
human beings. (Fontana and Frey, 2003,).

The interview is the most common methods oI data collection in qualitative research. The
aim oI the qualitative research interview is to study the research topic Irom the
perspective oI the interviewee and at the same time to understand the reasons Ior their


perspectives. This Iorm oI research method oIIers the principles oI Ilexibility and
negotiability to researchers, who, need to collect various types oI data in a very short
period oI time. (Cassell & Symon, 2004) Interview is conducted 'to Iind out what is on
someone`s mind.We interview people to Iind out Irom them those things we cannot
directly observe. (Patton, 1990) Interview is considered as the most appropriate method
oI data collection which allows the researcher to change the method and rate at which the
interview is conducted to obtain the best response. Moreover, it is a very suitable way oI
collecting the opinions and inIormation oI people that is essential Ior the research.
(Hannabuss, 1996)

There are many Iormats oI interviews which range Irom Iully structured interviews at one
end to unstructured interviews at the other end. Structure interviews are characterized by
a Iixed set oI questions asked in a set sequence. The subjects in this Iorm oI interviews
Ieel constrained as they are not able to give inIormation which they Ieel is important. The
inIormation gathered by such interviews is easily quantiIiable, provides comparability oI
questions across respondents and makes certain that the necessary topics are included.
Whereas, in unstructured interviews, researcher has a number oI topics to cover but there
is no Iixed set and sequence oI questions. The interview develops as a result oI the
exchange between the interviewer and the subject. This Iormat allows subject to say as
much as they want. (Breakwell, Hammond, & FiIe-Schaw, 2000)


This research has adopted semi-structured interviews Ior data collection. In semi-
structured Iormat, researchers view people as experiential experts on a topic under
research. This Iormat improves the sensitive and empathic Iacets oI the Iindings,
Iundamental to human to human relationship oI interviews. (Denzin, 2000) Moreover,
data collection can be enriched by building upon some unexpected, interesting responses
emerged during the interviews. (Breakwell, Hammond, & FiIe-Schaw, 2000)

The reliability oI the research is dependent upon accurate and complete responses oI the
subjects. It is important to develop a coherent and appropriate set oI questions and to
make sure that subjects understand the questions. (Breakwell, Hammond, & FiIe-Schaw,
2000) This would result in consistency oI the responses and hence would enhance the
reliability oI the data. In this research, the interviews were conducted over the phone as
long distance between the researcher and the subject was an important Iactor. The nature
and aim oI the interview was made clear to the subjects beIore the actual interviews. The
interviews were semi structured and it allowed participants to respond the way that they
preIerred.

3.7 Sampling
A sample represents a large group oI the entire population, Ior any questionnaires or
interviews; samples are used rather than the population because it is not possible to gather


data Irom the entire population. The basic purpose oI sampling is that 'by selecting some
oI the elements in the population, we may draw the conclusions about the entire
population (Cooper and Schindler 2006 , p.179). According to Flick (2002, p.61) in an
interview, sampling is an important part as it helps in deciding who to interview which is
the vital in obtaining the result oI the research. It also helps in deciding which interviews
should be Iurther studied, i.e. 'transcribed and interpreted. Sampling becomes important
because it is low on cost, data can be collected at the Iast pace and it gives accuracy in
result (Cooper and Schindler 2006, p.129).

Sampling can be classiIied into two ways: non probability and probability. Non
probability sampling relies on the personal judgment oI the researcher rather than chance
to select sample elements. It includes, convenience sampling, purposive sampling, quota
sampling and snowball sampling. 'In probability sampling, sampling units are selected
by chance. It includes, simple random sampling, systematic sampling, stratiIied
sampling and cluster sampling For this, particular research, purposive sampling is used
because this enables the researcher to use the judgment in order to select the cases that
enables the researcher to ask the research question and meet the objectives (Saunders et
al, 2007, p.230).

In a research where the interviews are semi structured and in depth, the sample size is
usually low. The answers obtained through interviews are diverse as well as Iully


detailed. Hence it is not appropriate to take a big sample size as they have to be studied in
Iull detail as the data gathered would be huge. It is unIeasible and too expensive to collect
data Irom every single person in a given population and hence a sample oI the population
should be selected completely justiIying the population.

In this research the numbers oI respondents decided Ior the survey were 15 owners oI
Small and medium enterprises. Interviews were conducted with them in order to get their
perspective on the related issue. Respondents were chosen Irom the Delhi/ Gurgaon
cluster and consisted both successIul and struggling units.. Out oI these 3 were chosen by
analyzing their proIiles and reIerences by OEM.

3.8 Secondary Data

Secondary research helps in gathering already discovered inIormation on a particular
topic and designing the primary research accordingly. Hence it gives a starting point Ior
carrying on the primary research by suggesting research methods, research hypothesis
and insights through already present data. Other than this secondary research is the least
expensive and time consuming Ior the researcher. SatisIying inIormation can be gathered
in budget and time constraints (Stewart & Kamins, 1993). The convenience oI carrying


out the research according to ones preIerence also makes secondary research a preIerred
Iorm oI research.

Secondary research has its own set oI disadvantages even. The aim oI Iitting in a
particular data deliberately or unintentionally, Ior the purpose oI research might give bias
results. Hence when data is misinterpreted it gives conIlicting conclusions and hence the
whole research becomes invalid. Secondary data being old might lose its value in today`s
circumstances (Stewart & Kamins, 1993). And most importantly the gathered inIormation
might not be directly relevant to the study and the required inIormation is unavailable or
inaccessible.

However secondary research provides a basic ground work Ior the primary research and
helps channeling the researcher to its target. Hence both primary and secondary research
was employed.

Secondary research was conducted by using literary journals, books, articles Irom
internet and various research sites on the internet. Majority oI the data was accessed over
the internet or by books Irom the library. The unorganized segment oI SMEs being dealt
with in this study does not have their reports published online nor were they easy to
obtain in printed Iorm. There is no previous research available on the unorganized Auto


Component segment oI India hence a general overview oI diIIerent industries was
considered and compared with.

3.9 Data Analysis

Data analysis is an important part oI any research. It is an iterative process which starts
beIore the completion oI data collection. It sums up the total data that is gathered and the
results present the most important parts oI the research. Qualitative data analysis begins
with the identiIication oI the key themes and the subjects that connect the concept to the
data. (CoIIey & Atkinson, 1996) SimpliIication or reduction process is used to condense
the bulk data into small and manageable parts by making categories within them to make
them easy to analyze. In this research, all the interviews were recorded and then
transcribed into the text. An interim case summary was maintained to ensure that the data
collected was relevant which would lead to useIul Iindings. The data gathered by the
interviews were condensed. This allowed the removal oI any recall bias. The data was
Iurther examined and was then reduced by splitting into various themes, sentences,
phrases and patterns. The data within and across the categories was compared to look Ior
variations and nuances in meanings. The data was analyzed with the goal to integrate the
themes and concepts into a theory that oIIered an accurate, detailed but subtle account oI
the researched arena.


Second analysis perIormed was SWOT analysis. SWOT stands Ior Strengths,
Weaknesses, Opportunities and Threats. It is the simple` and easy to understand`
analytical technique in which internal and the external environment oI the organization is
analyzed so as to identiIy its internal strengths. Discovering and identiIying new
strengths will make an organization able oI taking advantages oI the various external
opportunities` and help them to avoid various threats while considering their weakness.
(Panagiotou 2003 & Balamuralikrishna & Dugger 1995) It is the most straightIorward
analysis which involves other people`s perspectives and in turn beneIits Irom it. It
encourages people associated with the organization to think and consider about the key
points oI their organization`s environment and helps them managing it. (Hill &
Westbrook 1997 & Panagiotou 2003) Every organization Iaces with a dynamic
environment which includes a number oI internal and external Iorces. These Iorces aIIect
the perIormance oI the organization in both positive and negative ways and thus it is
essential Ior an organization to identiIy these Iorces to Iacilitate the development oI the
strategic planning system. Thus by knowing the diIIerent positives and negatives
associated with the organization, one can get good insights about the whole structure oI
the company and thus managers by gaining this knowledge can take necessary actions
accordingly. ThereIore a company should make an eIIort to identiIy the strengths and its
Iuture objectives and should try to minimize its weaknesses. But Ior the complete
progress and success, a company should try to capitalize on the opportunities and


consider threats Irom the outside environment associated with the company. Thus to
identiIy the strengths, weaknesses, opportunities and threats associated with the company
on the basis oI the study is known as SWOT analysis. (Houben et al 1999). For this
research SWOT analysis is used to identiIy strengths, weaknesses, opportunities and
threats associated with the Auto industry in India.. An idea regarding the Iuture
opportunities and threats oI the industry would give an approximation about the Iuture oI
the industry.

3.10 Ethical Considerations

In order to ensure conIidentiality and anonymity the researcher sent each participant a
consent Iorm that outlined that the researcher will honor their conIidentiality and
anonymity and utilize the data gather Ior the study purpose only. II the participant were
comIortable with the consent Iorm, they signed it and sent it back to the researcher
thereby agreeing to the terms. Secondly, the researcher copied all the data collected onto
a personal computer and made copies onto compact discs; all these had a password
protection to ensure that the data was saIe. To ensure the data was saIe only the
researcher had access to the recorded data, both in the disks and the personal computer


3.11 Limitations of Research

Every research has some limitations, which makes it less reliable. Even this research has
several limitations which make it diIIicult arrive at the clear and accurate conclusion.
While conducting the interview, open-ended Iormat oI questions were used. The
researcher received lot oI irrelevant data which was not needed and respondent went oII-
track. While, the secondary data was used in this research, there was the possibility oI the
misinterpretation oI the data while reanalyzing. As stated by Corti and Thompson (2004),
the misinterpretation oI data can be the result oI the Iear oI the selective and opportunistic
interpretation in reanalysis. The misinterpretation oI data can occur because oI the large
period oI time and progress in intellectual understanding.
Qualitative research requires skilled researchers Ior the data collection. As, in this study
the researcher was novice and had no experience in conducting the interviews. There is
the possibility, that the result might not be the same iI it is conducted by the skilled
researcher.

The unavailability oI industry and specially the small and medium segment speciIic
inIormation Iorced to drawing some general conclusions. Though the sample was Irom
the particular segment, lack oI literature Iorced to draw some general conclusions.


Another main limitation oI this research could be the problem oI the bias. Though, the
interview was conducted only aIter the approval was taken by the interviewees, there is
the possibility that they would have not revealed all the issues that were required Ior this
research, or, would have Iramed them as they wanted them. As Bell (1999) suggested
that, 'interview is a highly subjective technique and thereIore there is always the danger
oI bias. Similarly, the researcher may perceive what the study wants to communicate.
ThereIore, the data gathered may not be reliable

This dissertation aims at collecting data various SMEs using qualitative research method.
The Iindings obtained Irom the use oI qualitative research are not necessarily repeatable
since they reIlect reality at the time/situation they were collected, which are subject to
change. (Saunders, Lewis, & Thornhill, 2007)

3.12 Summary

In this chapter, the methodology used in this dissertation has been discussed. First, the
diIIerences between diIIerent research methods have been presented Iollowed by the
justiIication oI the selection oI qualitative method Ior data collection. The primary data
has been collected with the use oI semi structured interviews. The research involves the
use oI purposive sampling technique. Then, the diIIerent stages oI both the interviews are


discussed Iollowed by data analysis technique. The ethical aspect oI the research is also
discussed At last, the possible limitations oI the research carried are explored. The
research Iindings will be presented and discussed in the next chapter.


CHAPTER 4
FINDING AND ANALYSES

This section outlines the data gathered by the researcher while conducting the interviews
oI owners and managers oI various auto component manuIacturing SMEs in India. Due to
conIidentiality issues the names oI the respondents are not being disclosed and will
reIerred to as interviewees. The researcher has conducted a 45 minute open ended semi
structured interview to get the inside perspective oI the practical issues and the solutions
relating to this segment oI industries.

Most oI the interviewees agreed with the Iact that the scope and Iuture prospects oI the
industry is very bright and through proper planning the SMEs can become large scale
industrial units. All the SMEs that were interviewed were Iamily run businesses. All the
interviewees were against the idea oI hiring proIessional managers to run their business
and were almost adamant on the Iact oI not selling their running business to lucrative
buying options.

Everybody agreed to the Iact that government is draIting policies to promote the growth
oI SMEs but also added that it is not suIIicient. When probed there was a unanimous
Ieeling oI want oI a more conducive environment and policies Irom the government.


There was a Ieeling oI shortage oI capital and majority oI the interviewees expressed that
it is diIIicult Ior them to secure loans Irom Iinancial institutions at competitive interest
rates.

Leaving aside one or two SMEs none oI the units invested in R & D and had uneducated
but skilled workmen guiding its operations. The owners oI the units seldom had technical
knowledge themselves and were not educated in this Iield. They were running their
business based on thumb rules and their business judgments.

Since most oI the respondents were parts oI the supply chain oI some bigger
organizations , they did not spend much on marketing , baring aside one or two units
which sold the components in the spare part market under their own brand name. Even
the marketing expense Ior these units was minimal. On the issue oI clusters and inIormal
agreements , every single SME overwhelmingly supported it and stressed it being a
backbone oI the SME in India. One went to the extent oI quoting that the SMEs can`t
exist without being present in clusters. Due to small requirements oI raw material, cheap
transportation the units were oIten Iound to club or pool their resources and achieve the
economies oI scale.


CHAPTER 5
DISCUSSION

5.1 SWOT

The Iactors that account Ior the strengths and opportunities oI Indian SMEs include their
high contribution to domestic production; the signiIicance oI their export earnings; the
low threshold in their investment requirements; their operational Ilexibility and location
non-speciIicity; their low import content; their ability to develop and use appropriate
indigenous technologies and their contribution to import substitution. As part oI the
policy drive to support SMEs, the Government is currently trying to legislate that public
sector units buy a minimum oI 20 per cent oI their requirements Irom SMEs, and
particularly Irom SMEs run by women as entrepreneurs. A SWOT Analysis with respect
to Indian SMEs is done. It is apparent Irom this analysis that Indian SMEs are having
reasonably good opportunities to grow Iast and become sustainable.

However, there are Iew weaknesses and threats that would need to be addressed
immediately. In a recent study oI SMEs, Sridharan (2006) noted that the top 20 per cent
oI the registered SMEs could be comIortably plugged into the supply chain systems oI
large organizations. On the other hand, the Iuture oI the bottom 20 per cent oI the


registered SMEs is uncertain due to the erosion oI their market share, and the middle 60
per cent are not able align themselves with the supply chain systems, though there is
strong demand Irom customers. The top 20 per cent oI SMEs are mainly Irom auto
industry, and these are Iacing diIIerent problems such as Iunding, product quality and
labor problems. A major diIIiculty oI the SME sector is that it is highly diIIerentiated
with slender local power base. SMEs have to struggle to achieve economies oI scale, to
specialize and to access credit, inIormation, technology and markets. They have to
contend with shortages in the supply oI skilled/technical manpower, Iinancial and market
challenges, technological obsolescence and operational and growth problems. In both
industrialized and developing countries there is increasing awareness that isolation is one
oI the key obstacles in the way oI SMEs competitiveness (RosenIield 1997; Porter 1998;
Nadvi and Schmitz 1999; Henry, Brown and DeIillippi 2000; Sivalingam and Bhaskaran
2004) The government is supporting SMEs through appropriate schemes Ior coping with
the obsolescence problem, thereby creating a better competitive advantage. One oI the
major challenges Iacing governments at national and state levels is designing
institutional, organisational and regulatory Irameworks in the area oI industrial promotion
policy and implementation. Government and private agencies are helping SMEs in
restructuring their organisations in the areas such as human resources, Iinance,
operations, marketing, etc. to catch up with the growing global competition and market
opportunities.


Strengths Weaknesses
SelI reliance
ManuIacturing Ilexibility
Abundance oI raw material production
Design expertise
Availability oI cheap labour
Growing economy and domestic
market
Progressive reIorms
Highly Iragmented
High cost oI input material
Lower productivity
Declining segment
Technological obsolescence
Non-participants in trade
agreements
Opportunities Threats
End oI quota regime
ShiIt in domestic market
Increased disposable income
Emerging economy and expansion
StiII competition Irom
developing countries;
especially China
Pricing pressure
Locational disadvantage
International labour and
enviromental laws
Table 9. SWOT Analvsis of Indian SMEs


According to Albaladejo & Schmitz (2001 ) understanding SME behaviour is not an easy
task. Their economic perIormance can be hampered or Iostered by many diIIerent Iactors.
Some are internal to the enterprises, while others belong to the economic and social
environment in which they operate. Some are generic to all SMEs while others are sector
speciIic. Some Iactors seem to have a more immediate impact on enterprise output, while
others have time lags. 'Some can be directly targeted through government intervention,
while others are more eIIectively promoted through market channels.

5.2 Internal Factors

The Iramework (Iigure 2) distinguishes between those Iactors that are internal and
external to the enterprises. The large circle in the centre oI the diagram captures the key
internal requisites and processes that might lead to increased output and innovation in
enterprises. These inputs are oIten called 'technological capabilities, and they are
deIined as the knowledge, skills and eIIorts required Ior Iirms to bring about an
indigenous process oI technological development. This can occur by increasing
eIIiciency in production activities (production capabilities), Ior instance through quality
controls, production scheduling and preventing maintenance. A more advanced
technological development is making major improvements to established technologies, or
creating new ones (innovation capabilities). Such capability acquisition cannot be taken
Ior granted. It oIten requires purposive and cumulative eIIorts aimed at assimilating and


modiIying existing technologies, adapting them to local conditions. This is especially the
case in developing countries since major innovations are still concentrated in
technologically advanced countries. The eIIectiveness oI these integral eIIorts that lead to
in-Iirm technological learning is assumed to depend on two main Iactors. First, the
educational background and prior working experience oI the Iounder/manager; and
second, the skills and working conditions (including remuneration levels, job security,
etc.) oI the workIorce, with the Iormer aIIecting the latter.

According to Trulsson, (1999) the most technologically advanced, productive and
competitive SMEs are those run by well-educated entrepreneurs They came Irom Iamilies
where there was a prior record oI enterprising activity, and had been employed beIore
venturing into their own business. International exposure was also an important Iactor:
many entrepreneurs had spent more than 6 months abroad, either studying or working Ior
Ioreign companies. Entrepreneurs oI these well perIorming companies acknowledged the
importance oI creating good jobs Ior skilled people. They paid higher salaries and spent
more resources on training than the other companies. Labor turnover was relatively
lower. This study clearly shows the positive link between internal technological
capabilities and increased productivity and innovation, as shown in our analytical
Iramework.


Figure 2. Framework to Support SME Development


Marketing capabilities are required to make the product available and attractive to the
buyer. They include activities concerned with establishing a marketing channel Irom the
Iactory to the buyer (direct sales or intermediaries), organising the logistics (concerned
with mode and speed oI transport), promotion (advertising, branding) and aIter-sales
service. These activities have received less attention by researchers and policy makers
than those concerned with improving products and production processes. The neglect oI
marketing has, however, begun to be rectiIied (Lall 1991, Humphrey & Schmitz 2000).
There is now a clear recognition that breaking into distant markets, especially export
markets, represents a discontinuous step. This is most clearly expressed by Roberts and
Tybout (1995), who suggest that the critical barriers to entering export markets are the
sunk cost oI gathering inIormation on Ioreign markets, establishing marketing channels
and deIining products suitable Ior the new market.

5.3 External Factors

The importance oI building up internal technological and marketing capabilities to
compete with more original, Iashionable and quality products is widely acknowledged.
Building up those capabilities requires eIIorts and investment inside the Iirm. However,
this is a very costly and risky process especially when SMEs are leIt on their own. This
situation is even tougher in developing countries, where the regulatory and policy


environment oIten constrains SMEs in attracting the capital required Ior subsequent
technological learning.
According to Albaladejo & Schmitz (2001 ) research has shown that capability building
and competitiveness also depend on Iactors external to the Iirm. As shown in Iigure 2,
this external context is given Iirst by the type oI network or cluster, which the Iirms
belong to. It is now well recognized that the lonely` enterprise is doomed and the quality
oI the relationships with other producers, suppliers and customers is critical Ior learning
and competing, as expressed in the term collective eIIiciency` (Schmitz 1995). The
second set oI external Iactors concerns institutional support. This is the determinant with
which this report is primarily concerned. It includes the regulatory and policy
environment provided by the state and the range oI support services provided by public
agencies and/or private organizations. The diagram helps to put institutional support in its
place. Policies and support services are just one set oI Iactors, which determine the
competitiveness oI enterprises. This is worth keeping in mind because the role oI
government policy and support services is oIten exaggerated.

Clustering Iacilitates the mobilisation oI Iinancial and human resources, it breaks down
investment into small riskable steps, the enterprise oI one creates a Ioothold Ior the other,
ladders are constructed which enable small enterprise to climb up and grow. It is a
process in which enterprises create Ior each other - oIten unwillingly, sometimes
intentionally - possibilities Ior accumulating capital and skill.


5.3.1 1he Existence of 1rade Aetworks.
Clusters that are limited to local markets are likely to experience involutionary rather
than evolutionary growth. Clustering tends to attract traders but one cannot simply
assume that eIIective trade links to larger (usually distant) markets exist.

5.3.2 1he Existence of Effective Sanctions and 1rust.
Sanctions and trust are important both within clusters and their trading connections
(Humphrey and Schmitz, 1998; Knorringa, 1996; Mead, 1984; Nadvi, 1999). Where
sanctions and trust are missing, a production system requiring deepening specialisation
and interdependence oI Iormally independent Iirms is unlikely to develop. McCormick
(1998) stresses that contract enIorcement and economic co-operation are oIten hampered
by institutional Iailures. . According to Brautigam (1997), the socio-cultural networks oI
entrepreneurs reduced transaction costs, enhanced trust and were, thus, critical to the
cluster`s success. Lack oI trust also brings discontinuities in the learning process.
According to Knorringa (1996) distrust between producers and traders, due to existing
socio-cultural barriers, can hamper the process oI local learning and retard a cluster`s
technological development.

In summary, clusters and networks constitute the immediate external context in which
SMEs operate. The beneIits oI clustering are widely acknowledged: the spatial and sect


oral concentration oI Iirms generates externalities, Iavors inter-Iirm co-operation and
constitutes a niche Ior eIIective policy support. Clustering can be particularly signiIicant
India because it Iacilitates growth in small and risk able steps. Small amounts oI capital,
skills and entrepreneurial talent can be made to count. It was emphasized however that
clusters only experience industrial growth where eIIective trade networks connect them
to sizeable markets and where trust sustains inter-Iirm relations. The main advantages oI
clusters can be outlined as.
Clusters can help SMEs to improve their inter-Iirm relations and competitiveness by
Iacilitating provision oI incentives;
Clusters are diIIicult to create unless they are inIrastructure-based and conducive
inIrastructure is provided.
A structured approach is an essential Ieature Ior cluster intervention;
Both SMEs and OEMs should go together to make the intervention successIul;
The product/component that the cluster produces should be viable to manuIacture and
market under prevailing market conditions. This means that a cluster with positive market
scenario can revive itselI Irom maturity stage into growth stage;
In the Indian case, where inIrastructure and provision oI Iinance is still largely provided
and regulated through the government, the involvement oI government institutions will
not only be necessary but also has to be innovative to cater to the speciIic needs oI SMEs
or cluster members;


The intervention mechanism Ior each cluster needs to be tailor-made to ensure its
success

As Iar as institutional support is concerned, SMEs can beneIit Irom two types oI support
On the one hand, there is the government`s role in creating an enabling regulatory and
policy environment. On the other, there is direct support through private and public
agencies that provide Iinancial assistance and technical services to SMEs. It is generally
accepted that the government`s most important task is to provide an enabling regulatorv
and policv framework. Such a Iramework should contain:
A stable Iiscal and monetary policy setting with reasonable interest rates, a system
oI Iinancial markets that provides incentives to save, and mechanisms to channel
savings into investments. For instance, a lower tax rate on initial proIits allows
Iirms to retain some earnings and to increase investment as appropriate.
Policies that minimize the costs oI business licensing and registering while
saIeguarding public interests.
Policies that Iacilitate business transactions such as inIrastructure development.
An appropriate political or consensual environment requires a government`s
mediating role in involving the main interest groups in the process oI industrial
restructuring to discuss problems, to reach commonly agreed action plans and to
implement policy recommendations. An inter-institution networking approach


creates an atmosphere oI trust among the interest groups (including SME
representatives).

The determinants oI SME competitiveness also include direct intervention, which are
usually subdivided into (a) Iinancial assistance, and (b) non-Iinancial services. Financing
constraints limit the investment capacity oI SMEs and hence hamper their growth.

Financial SME support it mainly reIers to subsidies, credits and soIt loan guarantee
schemes provided by commercial and development banks. NGO credit has increased in
the past years given the Iact that SMEs in India do not seem to have beneIited Irom bank
lending. In general terms it appears that lending to SMEs is seen as a high-risk business
since most oI these enterprises lack collateral. The problem does not seem to be the lack
oI Iunds but rather how to make them accessible to SMEs. Available Iunds oIten get
diverted to the larger enterprises and only an insigniIicant number oI SMEs seems able to
attract bank Iinancing (UN, 1993). Many development agencies seek to boost
technological capabilities and competitiveness oI SMEs through non-financial services.
They broadly cover two areas:
Services concerned with improving production and innovation capabilities, such
as counseling on production lay-outs, quality standards and maintenance;
provision oI inIormation Ior technology development, launching co-operative


joint operations oI large-scale and expensive equipment; testing oI raw materials
and training oI entrepreneurs and workers.
Services concerned with developing commercial/marketing activities in Iirms,
such as marketing training, inIormation gathering, business linkages and
cooperative sales initiatives. They can be delivered through public service centres
or through the business environment (commercial channels). Most service
providers charge a price or a perIormance-based commission. Although they oIten
provide services tailored to the needs oI their clients, their aIIordability by the
poorest businesses is still questionable. In recent times, services provided by and
channeled through private enterprises have attracted the attention oI donor
agencies, though the role oI the latter is controversial as they can generate market
distortions.

5.4 Summary

To sum up, this section has presented an analytical Iramework depicting the main
elements aIIecting SME. Although internal eIIorts oIten lead to increased output, they are
seen as uncertain, costly and risky processes, which SMEs cannot always aIIord. In the
SME spectrum, external elements can thereIore play a major role. On the one hand,
clustering and networking have shown to help enterprises in reaping economies oI scale


through collective eIIiciency. On the other, institutional support can provide a
conductive environment in which business can Ilourish. General support comprises
policies aIIecting businesses regardless oI size while SME support includes speciIic
policies concerned with the main bottlenecks Iaced by SMEs


CHAPTER 6
CONCLUSION

The study sought to analyze the current scope oI the SMEs engaged in Auto component
manuIacturing in India. It discusses the past, present and Iuture oI such units. The study
has tried to outline how to improve the SME perIormance by answering the Iollowing
research questions.
To identiIy, analyze and evaluate perIormance oI SME`s engaged in Auto
Component manuIacturing in India Irom past to present
To analyze opportunities available in this industry in India.
To analyze challenges in this industry in India
Understand the reasons Ior losses and closure oI many SME`s
To study the Iuture prospects oI Auto component manuIacturing SMEs

6.1 Key Findings

The key Iindings oI the research are as Iollows:
The researcher has Iound that the although the Indian SME was expected to be
doomed aIter the 1990 economic reIorms , it is perIorming well and there are
good Iuture prospects Ior the industry.


The perIormance oI SMEs can be increased to a large extent by providing good
regulatory environment and more government support.
The SMEs beneIit to a large extent Irom clusters and reap beneIits Irom each
other`s support.
The study shows that that external Iactors such as inter-Iirm co-operation and
institutional support can play a key role in helping SMEs to build up the internal
capabilities to compete in regional and global markets
The lack oI Iunctional and reliable basic physical and IT inIrastructure has indeed
weighed against the competitiveness oI Indian SMEs.
Cost, quality and delivery time are the main pressures on the auto component
sector.
Lack oI a growth-conducive environment, raising Iunds Irom market and
shortage oI technical manpower are major constraints.
Use oI customer to deIine quality standards, identiIication oI market changes and
optimization oI working environment are the main areas oI competency
development.
Reduction oI rejection/rework, improvements in maintenance and process
capability are the main strategies adopted by Indian organizations to address
improvements in cost and quality.


6.2 Recommendations

In order to improve its competitiveness SMEs need to invest more in R& D
activities
The SMEs will perIorm better iI the person running the unit is qualiIied and well
educated and runs the business in a proIessional manner.
React to the needs oI their customers, but also act as 'industry leaders
encouraging 'best practices
Adopt a collective and participatory approach Iocusing on the needs oI groups oI
enterprises rather than individual Iirms
Interact with other institutions providing services Ior SMEs to co-ordinate support
eIIorts
Put science on the shop Iloor and encourage in-Iirm R&D activities to move
towards more innovative and higher value-added products.
Provide marketing inIormation and encourage marketing research


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Figure 1. Factors Affecting SME Competitiveness 44

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