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Accelerating exports and globalising the Indian automotive industry

SIAM Annual Convention

12 September, 2014

CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited

McKinsey & Company | 1

Accelerating exports and globalising the Indian auto industry

Vision for a globalised industry Case for action

Assessing India's competitiveness Making it a reality


SOURCE: IHS data; McKinsey analysis

Automotive export volumes have recovered post-2008 crisis

Global automotive exports (US$ billion)

41%

41%

34%

35%

1 Including 3-wheelers

624436

637 670

179170

109

170

815

2007

21

15

2011

2013

20 21

561

827

2009

870

2-wheelers Commercial vehicle

Passenger vehicle1

Share of exports in production


New supply and demand regions for automotive exports are emerging

SOURCE: IHS data; McKinsey analysis

1 Excluding China and Japan

- -

2007–13 CAGR

(%)

2007–13 delta in

trade value (US$ bn)

Change in exports

Change in imports

Change in trade flows

46 1

Gained volumes Lost volumes

Japan

Europe

ME

North America

20 4

Asia1 18 6

Latin America

CEE

17 8

13 5

India 4 28

“Near-shoring” (for North America and Western Europe)

-16 -3

-4 -0.5

-4 -8

Western Europe CEE

China

Asia1

33 28

19 8

ME 18 7

North America 17 2

Latin America 12 6

Growth in luxury cars

Growing import destination Demand bounce-back

-54 -3

-7 -5


Significant opportunity for India through achieving scale in automotive exports

SOURCE: Comtrade data; McKinsey analysis

Export value (US$ bn)

-

Indian automotive exports are getting to scale in 2-wheelers … India’s share in global automotive exports (percent; 2013)

1.6 8.0 2-wheelers

5.6 0.8

Cars (including 3-wheelers)

1.3 0.7 Commercial vehicles

… but are still sub-scale compared to key exporting industries India’s share in global exports (percent; 2013)

49 22 IT services

13 3.0 Chemical

12 2.4 Pharma

1.1 Auto-component

10

1.0 Automotive 8.5


Cars

2-wheelers

Commercial

vehicles

3-wheelers

MNC OEMs

Indian OEMs

Component suppliers

Government

Global footprint by Indian OEMs

Vehicle exports from India

Excludes revenues from global assets of Indian OEMs1

Our vision for a globalised Indian auto industry is all encompassing

India has >3% share in automotive imports in 2013 New countries to increase export to by 2026

Indian OEMs have local manufacturing/ assembly unit in 2013 New manufacturing/assembly set-ups by 2026

SOURCE: McKinsey analysis

1 Global assets that are predominantly serving global markets (e.g., JLR – Tata Motors)


This vision promises to transform the industry 2013

2026


1 Higher than target global average share of exports from India (i.e., 3%) by 2026

Export volumes: 3 mn to 10 mn (million units)

2-wheelers Cars 3-wheelers

Commercial vehicles

2

6-7

0.6 2-2.5

0.3 0.6

2x

4x

3x

0.1 0.3-0.5

4x

Truly global footprint

Sizeable1 importing countries

Overseas assembly units

Brand value of Indian automotive OEMs (US$ billion)

15

45

11 25

7

25

Significant forex pay-off and job creation

Export forex (US$ billion)

Export-linked jobs (US$ million)

Export-linked investment (US$ bn)

8.5

45 0.8

2.8

3 18


Case for action for Indian and MNC OEMs

SOURCE: OEM interviews; www.brandirectory.com; McKinsey analysis

Indian OEMs

De-risk volatility in the domestic market

Build global brands

Move up on technology and quality learning curve

Maximise value of domestic vehicle programmes

MNC OEMs

Create a natural hedge for currency risk

Use India as a production hub for global platforms

Top-up export volumes to help unlock business cases

http://www.brandirectory.com/


Pay-offs for the Indian economy

SOURCE: OEM interviews; McKinsey analysis

Job creation

Additional 2 million export-linked jobs over the next decade

Forex income

US$45 billion annual forex income by 2026 (currently US$8.5 billion; Mexico already generates US$50 billion)

Strengthen “Make in India” brand

Similar to South Korea moving up the manufacturing exports curve, led by the automotive sector

New investment

Attract US$15 billion new investment linked to automotive exports over the next decade

“Make in India”

“Automotive is the industry of industries”

– Peter Drucker


Several auto exporting countries are building strong positions

Total auto exports US$ bn, 2013 Cars CV 2-wheelers

Share in global exports (percent, 2013)

Growth CAGR (2009–13)

>25%

10–25%

0–10%

High share; high growth

SOURCE: Comtrade data; McKinsey analysis

0

0

28.2

0.1

8.0

6.9

0.8

1.0

4.8

6.6

0.7

1.0

2.5

0.7

4.7

5.4

1.9

10.3 51 Mexico

8 India

19 Thailand

12 Turkey

47 South Korea

22 China


We assess India’s auto export competitiveness on a set of 8 success factors


Industry ecosystem

Productivity adjusted labour costs 1

Availability of skilled resources and talent 2

State of development of auto components industry

3

Maturity and quality of automotive manufacturing and engineering

4

Government/regulatory support

Foreign trade agreements in key target markets

5

Quality of infrastructure and logistics costs 6

Export incentives and targeted financial support (e.g., export credit)

7

Domestic segment scale and enabling product regulations

8

Highly export-

competitive auto

industry


Indian industry ecosystem emerges as a strength

SOURCE: McKinsey analysis; WIS; World Bank reports; press search; EIU; IHS database

Competitiveness evaluation framework

Industry eco-system

Govern-ment support

State of development of auto components industry

Availability of skilled resources and talent

Export incentives and targeted financial support (e.g., export credit)

Quality of infrastructure and logistics costs

Productivity adjusted labour costs

Maturity and quality of automotive manufacturing and engineering

Foreign trade agreements in key target markets

Domestic segment scale and enabling product regulations

1

2

3

4

5

6

7

8

1 2 3 4 5

Ranking (5 = Most competitive)

Mexico China Thailand

India South Korea

Turkey

Indicative assessment


Voice of the Indian auto industry echoes the need for targeted government support

SOURCE: OEM survey results

OEM SURVEY

Key enablers that will propel Indian auto exports

Rank order of enablers India has to offer (percent of responses)

1

2

3

4

85

75

65

50

Domestic segment scale

Capability of auto component suppliers

Reliable, high quality products at right cost Skilled manpower and talent availability

Key asks from the government

Rank order of interventions sought from government (percent of responses)

1

2

3

4

5

Stronger export incentives (e.g., duty draw-back schemes)

Sign FTAs with high potential markets

Improve infrastructure (ports, highways, rail facilities)

Simplify export process (less documentation, customs)

Targeted G2G intervention to promote Indian products

45

40

80

55

65


Making it a reality – both government and OEMs have to drive collaborative action


OEM actions to make export business cases work

Government–OEM action to create a winning environment

+

High OEM aspirations

Tailored products

Optimal supplier and manufac-turing confi-guration

Smart distribu-tion reach

Strong and locally relevant brand

Enabling partnerships/M&A

Preferential duty arrangements in target markets

Product market regulations to grow domestic scale

“Make in India” brand

Infra- structure

Govern- ment

Industry OEMs

Focus of this effort


5 examples of decisive government policies and OEM action spurring automotive exports

SOURCE: Press search; McKinsey analysis

Thailand: Created export-oriented hubs 1

▪ Government implemented favourable policies to attract Japanese OEMs for serving huge domestic demand for pick-ups

▪ Developed Samutpakarn cluster, Ranyong industrial port

Mexico: Spearheaded favourable trade agreements 2

▪ Negotiated 47 free trade agreements across the world

China: Direct financial incentives for exports 3

▪ Full refund of VAT on exported vehicles ▪ Banks provide export buyers’ credit to importer to support export of

Chinese cars Eastern Europe: Availability of skilled workers 4

▪ Pro-active government initiatives towards skill-building ▪ Cheaper (but equally qualified labour) than in Western Europe

South Korea: Proactively changed the quality perception of

“Made in Korea” 5

▪ OEMs launched aggressive marketing campaign (e.g., 10 year/10,000 km warranty scheme) to improve perception of quality

▪ OEMs recruited European designers to revamp designs for their passenger vehicles


What can government do? What can OEMs do?

Growing automotive exports from India – six potential accelerators (1/3)


▪ Create consistency in domestic regulations for OEMs to grow scale

–Engines and fuel technology

–Emissions and safety

–Consumption taxes

▪ Set up trade intelligence units (e.g., JETRO of Japan) to

–Proactively regulate monitoring and response

▪ Invest in product development to meet global emissions and safety requirements

▪ Invest in tailoring to consumer preferences in target markets

▪ Hire best design talent globally to upgrade design capabilities

Become “the global production hub” for select product segments 1

B, A segment cars

Commuter bikes

MUVs

Pick-up trucks

3W

Fully-built buses

a

b

c

d

e

Create a “level playing field” in top-10 export markets 2

Africa: Algeria, Egypt, South Africa

LatAm: Mexico, Chile, Colombia, Philippines

Asia: Indonesia, Sri Lanka, Bangladesh

▪ Strike FTA agreements with ~10 target countries (currently in place for 1/10)

▪ Include target countries in focused market scheme (currently 4/10)

▪ Restore duty draw-back incentives for commercial vehicles to 5.5%

a

c

b

▪ Build awareness in foreign governments and consumers towards discouraging demand for used vehicles (e.g., in Bangladesh and Sri Lanka)

d


B, A segment cars and UVs have significant domestic scale and large export demand

India has the opportunity to “own” the segments of strengths – Passenger cars example

SOURCE: SIAM data; IHS Global Insight; McKinsey analysis

2013

OEMs are establishing ‘Made in India’ position

Become “the global production hub”

1

2020 (E)

2020 (E) India demand World

import

2927

12

27 3243

3639

21

19B

C

UV

D & above

A

1

5

4 4 1

▪ UV: Mahindra XUV/ Scorpio; Renault Duster, Ford EcoSport

▪ B-segment –Hatch – Suzuki

SWIFT; Hyundai i20; VW Polo

–Sedan – VM Vento; Nissan Sunny

▪ A-segment: Hyundai i10; Suzuki A-Star


Thailand

South Korea

Turkey

China

India

Potential to set up FTAs

1 Algeria, Egypt, South Africa, Mexico, Chile, Colombia, Philippines, Indonesia, Sri Lanka, Bangladesh

India lags other exporting nations on FTAs with major markets

2

Create “level playing field”

20

19

21

21

24

17 Mexico

Average duty paid for exporting to top-10 markets1

FTA exists for automotive

SOURCE: OEM interviews; SIAM; McKinsey analysis

Egypt South Africa Chile

Colom-bia

Mexico

Philip- pines

Indo- nesia


What can government do?

What can OEMs do?


Drive B2G/G2G interventions to own high potential export corridors

3

Africa, SAARC by creating transit systems (opens markets for fully built buses, trucks, commuter bikes and cars)

▪ Collaborate with foreign governments in their strategic programmes (e.g., urban transit system)

▪ Leverage cooperation schemes (e.g., infrastructure development in target countries) to promote usage of Indian auto products

a b

Leverage partnerships/M&A to establish local manufacturing and distribution in select markets

4

▪ Be on the lookout for M&A and partnership opportunities

–Accelerate business build-up

▪ Invite strong component suppliers

–Globalise footprint at new locations

▪ Create trade support cells in select Indian embassies

–Help Indian OEMs in finding partners and investment opportunities

–Help Indian OEMs set up local plants

a b

c

Brazil

Russia

Eastern European nations

Nigeria



What can government do? What can OEMs do?


Upgrade and enhance export infrastructure 5

Plant-to-port logistics

Port infrastructure

▪ Co-invest with port operators to build dedicated port facilities, e.g.,

– Storage space near port

– Dedicated rakes infrastructure

c ▪ Undertake efficiency improve-ment initiatives for government owned ports

– Enhance parking capacity by 5x

– Reduce turnaround time from 4 days to <2 days

▪ Encourage auto OEMs’ investment in building and owning rakes infrastructure

a

b

Crystallise a common brand positioning for “Made in India” 6

Good quality and high value

Fuel efficient and environment friendly

▪ Help crystallise a clear positioning for auto products made in India (similar to “Incredible India” in Tourism)

a ▪ Ensure world-class quality standards in products

▪ Emphasise “Made in India” brand through joint representations at marquee industry events (e.g., Geneva; Frankfurt IAA)

b

c



We see the journey to globalisation over the next decade in two horizons (1/2)


Horizon 1 Growing exports in India-like markets (2014–2020)

Horizon 2 Scaling to full potential through deep local presence (2020–2026)

Horizon 3 Build position in the triad markets (2026 onwards)

Target markets

▪ Large and growing demand for products that are already at scale in India

▪ No requirement for manufacturing localisation

▪ Africa: Algeria, South Africa, Egypt

▪ Asia: Indonesia, Philippines, Sri Lanka, Bangladesh

▪ Latin America: Mexico, Chile, Colombia

Target products

▪ Already at scale in India

▪ Aligned to demand in regulations in target markets

▪ A and B segment cars; commuter bikes; MUVs; pick-up trucks; 3-wheelers; fully built buses

Criteria for horizon 1 Focus areas


We see the journey to globalisation over the next decade in two horizons (2/2)


Horizon 1 Growing exports in India-like markets (2014–2020)

Horizon 2 Scaling to full potential through deep local presence (2020–2026)

Horizon 3 Build position in the triad markets (2026 onwards)

Target markets

▪ Relatively stringent technology and quality requirements

▪ Demand for high value-for-money vehicles

▪ South East Asia: Thailand, Australia, Malaysia, Vietnam

▪ Middle East: Saudi Arabia, UAE, Qatar ▪ Latin America: Brazil, Peru, Ecuador ▪ Eastern Europe: Czech Republic,

Romania, Hungary, Slovakia, Poland, Russia

Target products

▪ Expected to achieve scale in Indian market over next 5 years

▪ Require strong design, technology and quality capabilities (& perception)

▪ B&C segment cars; luxury sedans; high-end premium bikes; SUVs

Criteria for horizon 2 Focus areas


In summary, by 2026 Indian auto industry can achieve ...

Total automotive exports

10 mn units

Share in global auto-motive trade

3%

Forex income from exports

$45 bn

Brand value of Indian OEMs

$25 bn

Additional investment in the economy

$15 bn

Incremental export-linked jobs

2 mn


ADDITIONAL SLIDES


Potential to reach US$45 billion automotive exports by 2026; 2 million additional export-linked jobs


1 0.6 million cars + 0.3 million 3-wheelers 2 1.1 million cars + -.5 million 3-wheelers 3 2.1 million cars + 0.6 million 3-wheelers

Automotive exports (US$ billion)

1.0 Share in global exports (percent)

1.7

3.0

2.8 Export-linked jobs (million)

1.6 0.8

8.5

20.0

45.0

2013 2020 (end of horizon 1)

2026 (end of horizon 2)

1.5 1.5

5.5 14.0

2.0 4.0

34.0

4.0 7.0

2-wheelers

Commercial vehicles Cars and 3-wheelers

2

0.1

0.91

4.2

0.2

1.62

7

0.3

2.73

3 mn unit

s

10 mn

units

6 mn unit

s

xx No. of units (million)

2 mn incremen-tal jobs


Summary

ASSESSING INDIA'S COMPETITIVENESS

▪ Industry ecosystem is getting competitive and ready

▪ Enhanced government support could unlock higher growth

MAKING IT A REALITY

▪ Six potential accelerator initiatives driven through government and industry collaboration could help capture the potential

VISION FOR A GLOBALISED INDUSTRY

▪ Export ~10 million units by 2026 (~3 million units today); US$45 billion in exports; ~2 million additional jobs

▪ Grow footprint to 45 countries CASE FOR ACTION

▪ All stakeholders – MNC and Indian OEMs, components suppliers, and government – stand to benefit

▪ Limited window of opportunity to serve newly emerging importing markets


Split of car sales by country of manufacturing

Not moving now will risk losing attractive markets to the competition – Chile example

SOURCE: Asociación Nacional Automotriz de Chile

45% 39%

19%

12%

8%

14% 14%

9%

11%

7% 18%

South Korea

China

Japan

Mexico

India

Others

4%

2009 2012

Factors boosting Chinese car exports to Chile

China signed FTA with Chile in 2006 with 0% import duty (6% for India)

1

18+ Chinese brands providing boost to “Made in China” brand (2 from India)

2

Chinese OEMs set up Chile-China Auto Trade Associ-ation for import, distribution, sales of Chinese brands (no such collaboration for OEMs from India)

3

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