Automobile Sector The Indian Scenario
This situation reflected the India of yesteryears. Economic reforms and deregulation have transformed that scene. The automobile industry has written a new inspirational tale. It is a tale of exciting multiplicity, unparalleled growth, and amusing consumer experience – all within a few years. India has already become one of the fastest growing automobile markets in the world. This is a tribute to leaders and managers in the industry and, equally to policy planners. The automobile industry has the opportunity to go beyond this remarkable achievement. It is standing on the doorsteps of a quantum leap.
The Indian people automobile industry is going through a technological change where each firm is engaged in changing its processes and technologies to maintain the competitive advantage and provide customers with the optimized products and services. Starting from the two-wheelers, trucks, and tractors to the multi-utility vehicles, commercial vehicles, and the luxury vehicles, the Indian automobile industry has achieved splendid achievement in the recent years.
On the canvas of the indian people economy, the auto industry maintains a high-flying place. Due to its deep frontward and rearward linkages with several key segments of the economy, the automobile industry has a strong multiplier effect and is capable of being the driver of economic growth. A sound transportation system plays an essential role in the country’s rapid economic and industrial development. The well-developed indian people automotive industry skillfully fulfills this catalytic role by producing a wide variety of vehicles: passenger cars, light, medium and heavy commercial vehicles, multi-utility vehicles such as jeeps, scooters, motorcycles, mopeds, three wheelers, tractors etc.
The automotive sector is one of the core industries of the Indian economy, whose prospect is reflective of the economic resilience of the country. Continuous economic liberalization over the years by the government of India has resulted in making India as one of the prime business destination for many global automotive players. The automotive sector in India is growing at around 18 percent per annum.
“The auto industry is just a multiplier, a driver for employment, for investment, for technology”
The Indian automotive industry started its new journey from 1991 with licensing of the sector and subsequent opening up for 100 per cent FDI through automatic route. Since then almost all the global majors have set up their facilities in India taking the production of a vehicle from 2 million in 1991 to 9.7 million in 2006 (nearly 7 per cent of global automobiles production and 2.4 per cent of four wheeler production).
The cumulative annual growth rate of production of the automotive industry from the year 2000-2001 to 2005-2006 was 17 percent. The cumulative annual growth rate of exports during the period 2000-01 to 2005-06 was 32.92 percent. The production of the automotive industry is expected to achieve a growth rate of over 20 percent in 2006-07 and about 15 percent in 2007-08. The export during the same period is expected to grow by 20 per cent.
The automobile sector has been contributing its share to the shining economic performance of India in the recent years. With the indian people middle class earning higher per capita income, more people are ready to own private vehicles including cars and two-wheelers. Product movements and manned services have boosted the sales of medium and sized commercial vehicles for passenger and goods transport.
Side by side with fresh vehicle sales growth, the automotive components sector has witnessed big growth. The domestic auto components consumption has crossed rupees 9000 crores and an export of one-half size of this figure.
Eye-Catching FDI Destination – INDIA!
India is at the peak of the Foreign Direct Investment wave. FDI flows into India trebled from $6 billion in 2004-05 to $19 billion in 2006-07 and is expected to quadruple to $25 billion in 2007-08. By AT Kearney’s FDI Confidence Index 2006, India is the second most attractive FDI destination after China, pushing the US to the third position. It is commonly believed that soon India will catch up with China. This may also happen as China attempts to cool the economy and it’s protectionism measures that are eclipsing the Middle Kingdom’s attractiveness. With rising wages and high land prices in the eastern regions, China may be losing its edge as a low-cost manufacturing hub. India seems to be a natural choice.
India is up-and-coming a significant manufacturer, especially of electrical and electronic equipment, automobiles and auto parts. During 2000-2005 of the total FDI inflow, electrical and electronic (including computer software) and automobile accounted for 13.7 per cent and 8.4 per cent respectively.
In services sectors, the lead players are the US, Singapore, and the UK. During 2000-2005, the total investment from these three countries accounted for about 40 percent of the FDI in the services sector. In automobiles, the key player is Japan. During 2000-2005, Japan accounted for about 41 percent of the total FDI in the automobile, surpassing all its competitors by a big margin.
India’s vast domestic market and the large pool of technically skilled manpower were the magnetism for the foreign investors. Hitherto, known for knowledge-based industries, India is emerging a powerhouse of conventional manufacturing too. The manufacturing sector in the Index for Industrial Production has grown at an annual rate of over 9 percent over the last three years.
Korean automakers think India is a better destination than China. Though China provides a bigger market for automobiles, India offers a potential for higher growth. Clearly, manufacturing and service-led growth and the increasing consumerization make India one of the most important destinations for FDI.
Automotive Mission Plan 2016
The bumper-to-bumper traffic of global automobile biggies on the passage to India has finally made the government sit up and take notice. In a bid to drive greater investments into the sector, ministry of heavy industries has decided to put together a 10-year mission plan to make India a global hub for automotive industry.
The Government of India is drawing up an Automotive Mission Plan 2016 that aims to make India a global automotive hub. The idea is to draw an innovative plan of action with full participation of the stakeholders and to implement it in mission mode to meet the challenges coming in the way of growth of an industry. Through this Automotive Mission Plan, Government also wants to provide a level playing field to the players in the sector and to lay a predictable future direction of growth to enable the manufacturers in making a more informed investment decision.
Until the mid-1990s, the automobile industry in India consisted of just a handful of local companies with small capacities and obsolete technologies. Nevertheless, after the sector was thrown open to foreign direct investment in 1996, some of the global majors moved in and, by 2002, Hyundai, Honda, Toyota, General Motors, Ford and Mitsubishi set up their manufacturing bases.
Over the past four to five years, the country has seen the launch of several domestic and foreign models of passenger cars, multi-utility vehicles (MUVs), commercial vehicles and two-wheelers and a robust growth in the production of all kinds of vehicles. Moreover, owing to its low-cost, high-quality manufacturing, India has also emerged as a significant outsourcing hub for auto components and auto engineering design, rivaling Thailand. German automaker Volkswagen AG, too, is looking to enter India.
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India is expected to be the small car hub for Japanese major Toyota. The car, a hot hatch like the Swift or Getz is likely to be exported to markets like Brazil and other Asian countries. This global car is crucial for Toyota, which is looking to improve its sales in the BRIC (Brazil, Russia, India, China) markets.
Two multi-national car majors — Suzuki Motor Corporation of Japan and Hyundai Motor Company of Korea — have indicated that their manufacturing facilities will be used as a global source for small cars. The spurt in in-house product development skills and the uniquely high concentration of small cars will influence the country’s ability to become a sourcing hub for sub-compact cars.
A heartening feature of the changing automobile scene in India over the past five years is the newfound success and confidence of domestic manufacturers. They are no longer afraid of competition from the international auto majors.
For instance, today, Tata Motor’s Indigo leads the popular customer category, while its India is neck-to-neck with Hyundai’s Santro in the race for the top slot in the B category. Meanwhile, M&M’s Scorpio has beaten back the challenge from Toyota’s Qualis to lead the SUV segment.
Similarly, a few Indian winners have emerged in the motorbike market — the 150 and 180 cc Pulsar from Bajaj and 110 ccs Victor from the TVS stable. The 93 cc Bike from Bajaj and 110 cc Freedom bike from LML have also emerged as winners.
Evidently, Indian players have learned from past mistakes and developed the skills to build cheaper automobiles using `appropriate’ technologies. TVS, for instance, paid an overseas source $100,000 to fine-tune home-grown engines rather than $1.5 million to import the entire engine. Similarly, M&M adapted available systems and off-the-shelf components from global suppliers to keep costs down and go for aggressive pricing. True, indian people players are still lacking in a scale of operation. While economies of scale no doubt play an important role in the auto sector, a few indian people manufacturers relied on innovation rather than the scale of operation for competitive advantage. For instance, Sundram Fasteners was able to achieve the feat of directly supplying radiator caps to General Motors purely on the strength of innovation in product quality. The domestic tooling industry bagged the order for the Toyota Kirloskar transmission plant in the face of stiff competition from multinational corporations. The cost of the entire job turned out to be only a fraction of the original estimate.
As the automobile industry has matured over the past decade, the auto components industry has also grown at a rapid pace and is fast achieving global competitiveness both in terms of cost and quality.
In fact, industry observers believe that while the automobile market will grow at a measured pace, the components industry is poised for a take-off. For it is among the handful of industries where India has a distinct competitive advantage. International automobile majors, such as Hyundai, Ford, Toyota and GM, which set up their bases in India in the 1990s, persuaded some of their overseas component suppliers to set up manufacturing facilities in India.
Consequently, the value of a cumulative output of the auto components industry rose rapidly to Rs 30,640 crore at end-2003-04 from just Rs 11,475 crore in 1996-97. Foreign companies such as Delphi, which followed General Motors in 1995, and Visteon, that followed Ford Motors in 1998, soon realized the substantial cost advantage of manufacturing components in India.
Finding the cost lower by about 30 per cent, they began exploring the possibility of exporting back these low-cost, high-quality components to their global factories and, thus, reducing their overall costs. Not surprisingly, the industry’s exports registered a more than four-fold jump to Rs 4,800 crore in 2003-04 from just Rs 1,033 crore in 1996-97.
Automobile majors such as Maruti Udyog, Toyota, Hyundai have now finalized their plans to invest in some of the critical auto components. According to the Automotive Component Manufacturers Association of India (ACMA) officials, auto component manufacturers are expected to invest about Rs 10,000 crore over the next five years at the rate of Rs 2,000 crore per annum.
According to analysts, the auto component industry could emerge as the next success story after software, pharmaceuticals, BPO, and textiles. The size of the global auto component industry is estimated at $1 trillion and is set to grow further. Against this backdrop, McKinsey’s latest report has estimated that the sector has the potential of increasing its exports to $25 billion by 2015 from $1.1 billion in 2004.
The threat to the Dream!
India’s expedition to become a global auto manufacturing hub could be seriously challenged by its inability to uphold its low-cost production base. A survey conducted by the research, KMPMG firm reveals that the indian people auto component manufacturers are increasingly becoming skeptical about sustaining the low-cost base as overheads including labor costs and complex tax regime are constantly rising.
The survey said many executives believe that India’s cost advantage is grinding down fast as labor costs are constantly increasing and retaining employees is becoming more and more difficult. Increased presence of global automotive companies in the country was cited as one of the reasons for the high erosion rate.
Indian auto businesses will only flourish if they boost investments in automation. In the longer term, cost advantage will only be retained if indian people capital can be used to develop low-cost automation in manufacturing. This is the way to preserve our low cost.
Global auto majors are also cynical about India’s low-cost manufacturing base. India taxation remains a big disadvantage. This is not about tax rates it is just about unnecessary complexity. But some companies also believe there is scope for reducing the cost of doing business.
In spite of this, there are opportunities to exploit lower costs right across the board. It’s true that labor costs are definitely increasing but they are still five per cent of the total operational costs. The labor costs can be further reduced if companies are successful in bringing down other costs like reducing power costs. The low-cost base can never last long. The company said indian people industry has till now relied on very labor intensive model but it would have to switch to a more capital intensive model now.