automotive industry india

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Occasional Paper No. 129

Indian Automotive Industry:

At the Crossroads

EXIMBANK


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EXPORT-IMPORT BANK OF INDIA

OCCASIONAL PAPER NO. 129

INDIAN AUTOMOTIVE INDUSTRY :AT THE CROSSROADS

EXIM Banks Occasional Paper Series is an attempt to disseminate the findings ofresearch studies carried out in the Bank. The results of research studies can interestexporters, policy makers, industrialists, export promotion agencies as well asresearchers. However, views expressed do not necessarily reflect those of theBank. While reasonable care has been taken to ensure authenticity of information anddata, EXIM Bank accepts no responsibility for authenticity, accuracy or completeness ofsuch items.

Export-Import Bank of IndiaPublished by Quest Publications

December 2008


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CONTENTS

Page No.

List of Tables 5

List of Exhibits 7

List of Boxes 11

Executive Summary 13

1. Introduction 39

2. Global Scenario 42

3. Select Trends In Global Automotive Industry 74

4. The Indian Scenario 84

5. Indias Exports of Automobiles & Auto-Components 99

6. Export Competitiveness of Indian Automotive Industry 114

7. Challenges and Strategies 126

Project Team:

Mr. S. Prahalathan, General Manager

Mr. Rahul Mazumdar, Manager


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List of Tables

Table Title Pg. No.No.

1. Leading Countries Investing in Automobile Industry (2007) 48

2. Export of Select Automobiles From USA 51

3. Export of Select Automobiles from Japan 52

4. Export of Select Automobiles from Canada 53

5. Export of Select Automobiles from South Korea 55

6. Export of Select Automobiles from China 56

7. Export of Select Automobiles from Germany 58

8. Export of Select Automobiles from Mexico 60

9. Category-wise Exports of Automobiles in the World 60

10. Category-wise World Export of Auto-Components 66

11. Top Ten Low-Cost Eco-Friendly Cars 75

12. Category-wise Production of Automobiles in India 88

13. Category-wise Sales of Automobiles in India 89

14. Classification of Major Auto-Components Produced in India 95

15. Category-wise Exports of Indian Automobiles 100

16. Export of Select Automobiles in Value-terms from India 101

17. Export of Select Auto-Components in Value-terms from India 107

18. Indicators of Competitiveness of Automobile Exports to Africa 118

19. The African Market for Select Automobiles 118

20. Indicators of Competitiveness of Automobile Exports to 120Latin America

21. The Latin American Market for Select Automobiles 121

22. Indicators of Competitiveness of Automobile Exports to Asia 122

23. The Asian Market for Select Automobiles 123

24. Indicators of Competitiveness of Auto-Components Exports to USA 124

25. Indicators of Competitiveness of Auto-Components Exports 125to Europe

26. Changes in Prices of Select Inputs 126

27. Indias Import and Export of Auto Components 130


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List of Exhibits

Exhibit Title Pg.No. No.

1. Trends Between Indias PFCE and Automobile Sales 412. Product-wise Share in World Production of Automobiles (2007) 44

3. Trends in Global Production of Automobiles 45

4. Percentage Change in Global Automobile Production (2000-2007) 45

5. Country-wise Share in Global Vehicle Production for the Year 2007 46

6. Top Ten Countries Production of Motor Vehicles in 2007 47

7. Share of Countries in Investments made in the 48Automobile Industry (2007)

8. Regionwise Share in World Export of Automotive Products (2007) 499. Productwise Production of Automobiles in USA (2007) 51

10. Productwise Production of Automobiles in Japan (2007) 52

11. Productwise Production of Automobiles in Canada (2007) 54

12. Productwise Production of Automobiles in South Korea (2007) 55

13. Productwise Production of Automobiles in China (2007) 56

14. Productwise Production of Automobiles in Germany (2007) 58

15. Productwise Production of Automobiles in Mexico (2007) 59

16. Export of Tractors in the World HS Code 8701 61

17. Export of Public Transport Type Passenger Vehicles in the World 62HS Code 8702

18. Export of Motor Cars and Motor Vehicles in the World 63HS Code 8703

19. Export of Motor Vehicles for Transport of Goods in the World 63HS Code 8704

20. Export of Special Purpose Motor Vehicles in the World 64HS Code 8705

21. Export of Motorcycles (Including Mopeds) and Cycles in the 64World HS Code 8711

22. Exports of Gear Boxes in the World HS Code 870840 67

23. Exports of Brake Systems and Parts for Motor Vehicles in the 68World HS Code 870839

24. Exports of Road Wheels & Parts & Accessories thereof in the 68World HS Code 870870


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25. Exports of Clutches & Parts Thereof in the World 69

HD Code 87089326. Exports of Non-Driving Axles & Parts Thereof in the World 70

HS Code 870860

27. Exports of Drive Axles in the World HS Code 870850 70

28. Exports of Bumpers and Parts Thereof in the World 71HS Code 870810

29. Exports of Suspension Shock Absorbers in the World 72HS Code 870880

30. Exports of Radiators in the World HS Code 870891 72

31. Category-wise Share in Automobile Production in India (2007-08) 86

32. Production Trend in Indian Automobile Industry 87

33. Trends in Domestic Sales of Vehicles in India 89

34. Trends in Production, Domestic Sales, and Exports of 90Automobiles in India

35. Automobiles Exports as a Percentage of Production in India 91(Volume Terms)

36. Trends in Production, Domestic Sales and Exports of 92

Commercial Vehicles in India37. Trends in Production, Domestic Sales, and Exports of 92

Passenger Vehicles in India

38. Trends in Production, Domestic Sales and Exports of 93Two Wheelers in India

39. Trends in Production, Domestic Sales, and Exports of 93Three Wheelers in India

40. Segment-wise Share in Production of Auto-Components in India 95

41. Turnover of Auto-Components in India 96

42. Investments in the Auto-Components Sector in India 96

43. Trends in Export Orientation of Indian Auto Components Industry 97

44. Export Orientation of the Indian Automobile Sector 99

45. Category-wise Share in Vehicle Exports in India (2007-08) 100

46. Exports of Tractors from India (2007-08) (HS Code 8701) 102

47. Exports of Public-Transport Type passenger Motor Vehicles 102from India (Hs Code 8702) (2007 08)



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48. Exports of Motor Cars & Other Motor Vehicles from India (2007-08) 103

(HS Code 8703)

49. Exports of Motor Vehicles for Transport of Goods from India 104(HS Code 8704) (2007-08)

50. Exports of Special Purpose Motor Vehicles from India 104(HS Code 8705) (2007-08)

51. Motorcycles (Including Mopeds) and Cycles Fitted with an 105Auxiliary Motor, with or without Side-cars from India(HS Code 8711) (2007-08)

52. Trends in Exports of Indian Auto-Components 106

53. Region-wise Break-up of Exports to OEMs and Tier I Suppliers by 106India (2007-08)

54. Export of Bumpers and Parts Thereof by India 108HS Code 870810 (2007-08)

55. Export of Other Parts & Accessories of Bodies by India - 108HS Code 870829 (2007-08)

56. Export of Other Brakes and Servo-Brakes and Parts Thereof 109by India - HS Code 870839 (2007-08)

57. Export of Gear Boxes by India HS Code 870840 (2007-08) 110

58. Export of Drive Axles by India HS Code 870850 110

59. Export of Non drive Axles by India HS Code 870860 111

60. Export of Road Wheels & Parts & Accessories Thereof by India 111HS Code 870870 (2007-08)

61. Export of Radiators by India HS Code 870891 (2007-08) 112

62. Export of Suspension Shock Absorbers by India - 112HS Code 870880 (2007-08)

63. Growth Comparison of the Indian Automobile Industry vis--vis 114

the World

64. Trends in Deployment of Gross Bank Credit to Automotive Sector 129in India

65. Changing Workforce Population Between 2005 and 2025 134


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List of Boxes

Box Title Pg.No. No.

1 Hybrid Vehicles Around Us 772. Future Steel Vehicle Programme 78

3. European Regulatory Framework on Recycling 81

4. Indicators of International Competitiveness 116

5. Hybrid Vehicles 136

6. Kaizen Philosophy 138

7. EU Directive 2000/53/EC on End-of-Life Vehicles 140


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INTRODUCTIONThe automotive industry isincreasingly becoming the cynosureof the manufacturing sector acrossthe globe. The attention andimportance to the automotiveindustry in the economicdevelopment and planning policiesof Government and its agencieshas also witnessed significantuprise. The industry has beenevolving over the years, meeting upwith challenges as diverse astransitions, consolidations and

restructuring, and thereby adaptingto the new market conditions.

In the last few years, the worldautomotive industry has changed itslocational preferences due to variousreasons. Earlier, the automotiveindustry was largely confined to thetriad - North America, Europe andJapan; however, with the emergence

of some vibrant developingeconomies, like Brazil, India andChina, the global automotive industryhas been considering a differentgrowth perspective, and has beenrelocating the operations. Thesegrowing developing economies hasbeen evolving as the manufacturinghub, as also the newfound markets,

for the global majors like Ford,

General Motors, Chrysler, Toyota,Honda, Nissan and BMW, who arecompeting to enhance their marketshare in these markets. Increasinggrowth in GDP and the growing

disposable income has catapultedthese emerging economies asmarket for automotives, while the lowcost of operations and skills in designand R&D made them as destinationsfor investment and manufacturingoperations.

The entry of global auto-majorsinto India has significantly altered the

automobile-manufacturing scenarioin the country. The changes in designand adaptation of internationaltechnologies have enabled theIndian automotive industry tocompete globally, and thus are alsoexposed to global challenges.Alongside the challenges, the trendalso presents a plethora ofopportunities to Indian automotiveindustry, which needs to becapitalized, so as to emerge as asuccessful global player.

GLOBAL SCENARIO

Global Automobile IndustryIn the initial years, most of themanufacturing activities were

concentrated in the USA and in some

EXECUTIVE SUMMARY


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of the European countries. Though,these countries still account for asignificant share in the production,more and more volume of production

comes from other parts of the world,like China, Japan and Korea. Aroundthree-fourths of the global productionis being carried out in top 10producing countries, in 2007. Ofthese, Japan, USA and China,cumulatively constitute over 40% ofglobal production.

The last decade has

experienced a growing level ofmotorization, as reflected by theproduction of automobiles.According to InternationalOrganization of Motor VehicleManufacturers (OICA), in the year2007, the turnover of the worldautomotive industry is estimated tobe Euro 2 trillion, with the production

of 73 million vehicles. TheCompounded Annual Growth Rate(CAGR) of world production ofautomobiles during the period 2000-2007 was a modest 3.82%, while theannual production growth in the year2007 was 5.4%, over the previousyear.

According to OICA, Japan is the

largest producer of cars in the worldfollowed by China, Germany, USA,South Korea and France. India ranks9th in the production of cars in theworld ahead of UK, Canada, Russiaand Mexico. USA is the largestproducer of commercial vehicles;close competitors in production ofcommercial vehicles are China,

Japan, Canada, Thailand andMexico. India ranks 8 th in theproduction of commercial vehiclesand is ahead of countries like Brazil,

Germany, France and Turkey.

As per the statistics collated byWorld Trade Organisation, globalautomotive exports were in the orderof nearly US $ 1.2 trillion in 2007, agrowth of around 17% over theprevious year. The CAGR of worldautomotive exports during theperiods 2000-2007 was around 11%.

Region-wise data on export ofautomotive products indicate thatEurope is the worlds largest exporterin the world, with a share of over55%. In 2000, Europes share inworld exports was about 50%. Theshare of automotive products in EUstotal merchandise exports remainedat over 11% in 2007, without muchchange from the share witnessed inthe year 2000. A large chunk ofexports is intra Europe constituting78% of total in 2007. Asia exportedautomotive products valued ataround US $ 265 billion in 2007.Asias share in world automotiveexports has increased from 19.9%in 2000 to 22% in 2007. The Asianmarket has largely been dominated

by Japan with exports worth US $159 billion in 2007. Though the shareof Japan in world exports have beenaround 13% in 2007, the share hasdecreased from 15.3% witnessed in2000. North Americas export ofautomotive products was worth ataround US $ 220 billion in 2007, witha share of around 19%.


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In terms of imports, EU, as abloc, was one of the largest importersof automotive products in the worldwith a share of almost 46% in the

year 2007, with import in value termsbeing US $ 543 billion. In terms ofindividual countries, USA was thelargest importer with a share ofaround 19%, valued at US$ 221billion, in 2007, followed by Canada,at a distant second position, withimports worth US $ 67 billion, and ashare of 5.6%. Other top importers

of automotive products were Mexico(2.5%), China (2.0%), Australia(1.6%) and Japan (1.3%).

Global Auto-ComponentsIndustry

The trends in auto-componentsindustry are dependent on thetrends in the automobile industry,

as the original equipmentmanufacturers are the principalcustomers for the auto componentsindustry. Though there is areplacement market as well, thetrends in automobiles industry stillinfluences the growth of auto-components industry. Sinceautomobile industry is moreconcentrated in developed parts ofthe world, like US, Europe andJapan, the market for autocomponents is also concentrated inthese countries. It is estimated thatthere are around 2500-3000 tier-Isuppliers in the world, who accountfor more than 80% of the totalvalue of production.

The global auto componentsindustry is in the process ofundergoing a structural change.Industry is being influenced by

strategies of OEMs, globalization,business and technology trends. Inaddition, the auto componentsindustry is faced with rising inputcosts. Hence, there is a shiftoccurring in the industry with moreand more companies moving to lowcost destinations, so as to be costefficient. Due to this trend, countries

like China, India and Thailand standto gain significantly. Several globalplayers have already establishedtheir bases in these countries whilethe local companies are alsoupgrading themselves to face thecompetition.

Auto-component industry is alsowitnessing mergers and acquisition

trends. The large sized companiesare acquiring small sized companiesto grow even bigger as globalpresence is of extreme importancein this industry. There is aconsolidation wave sweeping acrossthe countries; most of the companiesare hiving-off their peripheralbusinesses and concentrating ontheir core business. There is also a

change in trend with more and morecompanies becoming as systemintegrators rather than being meresuppliers.

The size of world autocomponents industry has grown inthe last few years principally due togrowth in automobile market and


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replacement market. However, themajor portion of componentsproduction is meant to cater to thedemand of OEMs and only a small

portion goes towards replacementmarket.

SELECT TRENDS IN GLOBALAUTOMOTIVE INDUSTRY

Addressing the Challenge ofVolatility in Fuel PricesOne of the major challenges of the

world automotive industry is thevolatile oil prices. The year 2008witnessed crude oil pricesbreaching the US $ 140 mark perbarrel, and thereafter slipped belowUS $ 40, in the later part of theyear. The volatility in oil prices doesnot directly affect the growth inautomotive industry; however,

volatility in oil prices is one of theinfluential factors in automobiledemand. In order to address thechallenge of volatility in oil prices,the automotive industry isinnovating new technologies andinventing usage of alternativeenergy. Hydrogen cars, driveneither by a combination of fuel cellsand an electric motor; hybridelectric technology; electric vehicleswith rechargeable batteries; oralternatively, compressed airtechnology to drive the pistons ina specially designed engine, arethought to be replacing fossil fuel-powered motors in the decades tocome.

Emergence of New GenerationAutomobilesInnovation is expected to drive the

automotive industry in future as theproducers are involved indifferentiating their products andservices. There are already growinginterface of electronics and IT in theautomotive functionalities, such asentertainment, navigation andsafety. According to a survey,conducted by IBM across the auto-majors, majority of them felt that

by 2020 the level of innovationwould be greater in software andelectrical systems of automobiles.It is also expected that by 2020 thevehicles may become another nodeon internet, connecting with othervehicles, the transportationinfrastructure, homes andbusinesses. However, there are

challenges associated with thistrend, with regard to consumeracceptance, technologicaldevelopment and adoption ofstandards.

Supply Chain Management inthe World of Global SourcingGlobal auto-component firms aregiving greater level of thrust insupply chain management toaddress the challenge of costpressures. This is particularlyimportant in the context of globalsourcing. Though there is aperceived belief that global sourcinghelps in reduction of cost ofcomponents, there are logistical


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challenges. Thus, it is beingrecognised that collaborationbetween the OEMs and componentproducers are crucial to develop

capabilities and solve thechallenges associated with globaldelivery, especially in the areas ofinventory management, scheduling,and timely delivery. In addition, bothOEMs and suppliers view that thecollaborative efforts in supply chainmanagement enhances thecapacity and performance visibility.

Customer ManagementSystemsEarlier, automotive manufacturershad to get feedback from thecustomers through intermediaries,such as vendors or serviceworkshops. This trend has beenchanging with the introduction ofcustomer management systemsthrough ICT interface. Even vehiclebuyers are also browsing the netto know the features of a newmodel, evaluate them with theexisting models, and compare theprices. IT firms are developingcustomer relationship management(CRM) tools that help themanufacturers to realise and

optimize individual customer value,increase the post-warranty serviceretention, predict model demandand provide supply chain solutions.

Growing Small Car SegmentThe volatility in crude oil priseswitnessed during the year 2008

re-emphasized the need for smalland fuel-efficient vehicles. Some ofthe automobile majors have plansto hike their R & D budget for

designing of small and fuel efficientvehicles. Added to this is the needfor reduction in prices to target themiddle income groups of population/ new buyers, especially indeveloping countries like India,where the vehicle penetration is lowas compared to the population. Anauto research firm CSM Worldwide

Inc. has estimated that globaldemand for small cars would growby 30% per annum to 27 millionvehicles a year by 2013. The fast-growing small cars market hasencouraged several global auto-majors (such as Renault, Toyota,and Nissan) to plan for launch ofsmall cars.

Green MotoringAutomobile manufacturers areincreasing the thrust on fuelefficiency than before; the initiativesare mainly through improvements intechnology and introduction of newfuel variants, thereby reducing toxicemissions. It may be mentionedthat China, the EU, Japan and the

USA have already established fueleconomy rules or agreements ofvarying stringency. The FIAs1

declaration for green motoring hasset a fuel economy target of140 gCO2/km for passenger cars.Such a global fuel economy targetcould be used as an international

1 Fdration Internationale de lAutomobile (FIA)


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benchmark to assess progress inthe fuel efficiency of the global fleetof new motor vehicles. Somecountries are also undertaking

Green Rating of automobiles.

Cross Border M&A DealsThe global automotive industry isincreasingly getting more active incross border mergers andacquisition (M&A) deals. On aglobal basis, the number of cross-border deals has grown in the past

few years, and this trend isexpected to continue after therecovery of economic activity in theworld. The expansion outside thehome markets of some of the majorautomotive companies fromtraditional low-cost countries, suchas China and India, is bringing innew capital and a fresh look atcertain sectors of the automotivemarket. With the recession in theUS market and its consequentimpact in other markets, automotiveassets in developed countries arebecoming attractive to buyers fromemerging economies, as well.

Entry of Private EquityPlayers

The traditional funding model in theautomotive industry is slowly beingreplaced with aggressive fundingstructures. There has been astructural change in the automotiveindustry with the entry of privateequity players in the past.Traditional and family-owned

businesses were taken over by theprivate equity players and hedgefunds, which are expecting moreprofit or investment realization from

the industry. Though the businessactivities of private equity playershave come down, following thefinancial market meltdown, this isexpected to be revived soon, eitherwhen the market sentimentsimprove or once consolidationhappens among the private equityplayers.

Growing Collaboration forTechnology EnhancementTechnology-enhancing collaborationin the automotive sector helps inpreserving design integrity, despiteminor engineering adjustments.There are also softwares /programmes that make the globaldata sharing possible amongdesigners, engineers, suppliers,partners and even customers. Suchbetter and faster integration ofdesign / engineering ideas help innecessary adjustments andadaptations in designs to suit therequirements.

Trendy Cars, Shorter Life-spans

An automobile is a highly-engineered collection of complexcomponents, each of which has itsown lifespan and longevitycharecteristics. While somecomponents require frequentreplacement, others that arerelatively expensive are expected to


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have longer lifespan to justify theeconomics of a vehicle buyer.However, change in fashion anddesign trends may outweigh the

pure economics, which may lead toplanned obsolescence. In the worldof changing fashion trends, automanufacturers are developing newdesigns meeting the changingconsumer preferences. Morefrequently the new models areintroduced, the shorter will be thelife span of the old models.

Preserving Brand IdentityWith growing mergers andtakeovers in automobile industry,players are carefully devisingstrategies to strengthen thebackroom operational synergies, interms of common logistics andsupply chain management, butavoid losing the brand identities. Agroup owning different brandsprefers not to use the sameplatform that has same kind oftechnology, management, anddesigners to preserve the brandidentity. In this sense, theautomobile sector is different frommonolythic branding strategies ofconsumer goods.

Design for RecyclingIt is being increasingly realized thatnatural resources of the earth aredepleting fast. Hence, there is agrowing concern amongstmanufacturers as also theconsumers to conserve theresources; one such way is through

recycling. The automobile industryis one of the pioneers in usage ofrecyclable materials. Also, the risinginput prices are making the

automobile manufacturers to designthe vehicles that can be easilyrecycled.

Emergence of Design StudiosAs efficiency in design andmanufacturing improves, vehiclemanufacturers across the world arefocussing on making models for

niche market, though the salewould be in lower volume. This isin contrast to the earlier strategyof designing models for massconsumption. With the increase innumber of models to be designedand developed, auto majors areoutsourcing the designing jobs toindependent design studios whotake care of the design andexecution of the processmanagement in the value chain.

OutsourcingStiff competition to enhance themarket share forces the OEMs indeveloped countries to outsourcetheir engineering requirements tolow cost countries like India. Global

auto-majors such as GeneralMotors, Ford, Toyota, BMW areincreasingly outsourcing the vehicledesign and engineering services todeveloping countries such as India,either through their captive centersor through third-party vendors. Longterm trends indicate that globalauto-component outsourcing from


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the US is expected to reach US $25 billion by 2015, and India, Chinaand Mexico are likely to benefit themost from such trend. An online

survey conducted by A T Kearney,revealed that around one-fourth ofglobal auto-majors have consideredIndia as a favourable destination forautomobile-engineering outsourcing.

Advanced RFID Practices inAuto ManufacturingRFID has been in use in the

automotive industry for severalyears, though to a limited extent.The trend is changing now withadoption of technology in widevariety of applications, the dominantbeing vehicle entry and security.According to a study by ABIResearch, 40% of new carsmanufactured in North America areequipped with RFID immobilizersand the worldwide revenuegenerated by this application alonewas estimated to be US $ 3.7billion. In addition, RFID solutionsare increasingly being used inautomobile manufacturingprocesses and supply chainapplications.

THE INDIAN SCENARIOIndian automobile and auto-components industry, barringdowntrends in few years, was on agrowth trajectory, aided by robusteconomic activity and infrastructuredevelopment; growing middle-classpopulation with disposable income;

and growing consumer demand.The Indian automobile and autocomponents industry produces awide range of models and products.

The industry has witnessed highsales turnover, in the last few years,and the exports too have surgedover the years. The industry hasalso started establishingmanufacturing and marketing basesabroad. However, the recessionarytrends in world market and financialsector meltdown has affected the

growth trend of the industry during2008-09.

The norms for foreigninvestment and import of technologyhave also been progressivelyliberalized over the years formanufacturing of vehicles, includingpassenger cars, in order to make thissector globally competitive. With the

gradual liberalization of theautomobile sector, since 1991, thenumber of manufacturing facilities inIndia has grown progressively. Atpresent there are about 15manufacturers of passenger cars &multi utility vehicles, around 10manufacturers of commercialvehicles, around 15 manufacturersof 2/3 wheelers, besides 5

manufacturers of engines.It is estimated that the Indian

automotive industry contributes morethan 5% of the national GDP, and taxcontribution of the sector to theexchequer is estimated to be Rs.25,000 crores. The industry providesdirect and indirect employment to


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over 1.3 crore people. The turnoverof the automobile industry wasestimated to be around US $ 35billion and that for componentsindustry was at US $ 18 billion in2007-08. The investment inautomotive industry, comprising ofthe automobile and the autocomponent sectors, which wasestimated to be at Rs. 50,000 crorein 2002-03, has gone upto Rs.80,000 crore by the year 2007-08.With the saturation of traditional

automobile markets, such as EU,USA and Japan, the growthopportunities for emerging marketssuch as India have been increasing.India is aggressively looking forwardto take advantage of its inherentstrengths in automotive design andmanufacturing capabilities andposition itself as an export base for

vehicles as well as components.

Automobile IndustryOver the last few years there hasbeen an increasing trend in theproduction of vehicles, both in valueand quantity terms. The only leanpatch in production was during theyear 2001-02 and recently in 2007-

08, during which the growth inabsolute numbers declinedmarginally. It is estimated that thedecline in production wouldcontinue in the year 2008-09 also.

The volume of production ofIndian automobile industry hasincreased at a CAGR of over 12%

during the period 2000-01 to 2007-08. The production activity is poisedto be on the lines of the economicgrowth in the world and it is likely that

the momentum in production mayslowdown, though India is beingconsidered favourably as anoutsourcing destination.

In the past, keeping in pace withthe growing demand for automobiles,the production has increased overthe years. However, sub-segmentssuch as scooters and mopeds have

witnessed decline in production. Itmay be mentioned that thetechnological advances and changein consumer preferences might bethe possible reasons for the declinein demand for scooters and mopeds,and increase in demand formotorcycles. Commercial vehicleand passenger vehicle production

have seen a significant rise in the lastcouple of years, thus implying growthin these segments.

The two-wheelers segmentconstitutes the lump of the totalproduction of automobiles in thecountry with a production share ofalmost 75% in the year 2007-08,followed by the passenger vehiclessegment, with a share of around16%. The commercial vehiclesconstitute 5%, followed by the three-wheelers at 4%. The growth in twowheelers production has been moreor less consistent amongst allcategories of vehicles. Theproduction of passenger vehiclessegment on the other hand has


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grown slowly, though consistently,perhaps due to the growth in middleclass population in the country,indicating the demand for cars.

There was an increasing trendin the sales of all the category ofautomobiles, in the past, except inthe year 2007-08, wherein a dip insales was witnessed in all categories,except passenger vehicles. Thesales in commercial vehicles havewitnessed a marginal growth, thoughin the later few years the growth ratewas accelerated. The sales of twowheelers have been increasingalmost linearly in the last five years.Though, there has been a robustdemand for two wheelers, especiallyfor motorcycles, both in urban as wellas rural areas, the year 2007-08remained sluggish due to modelfatigue and uninviting rates. The

demand is further sluggish in theyear 2008-09 due to overallslowdown in economic activity andnon-availability of automobilefinance.

India exports almost all types ofvehicles; among the majorcategories of export items, in 2007-08, two wheelers accounted for

around two-third share in totalvehicles exports, in terms of numberof units. Infact, two wheelers have,over the years, been the top mostexport item among the variousautomobile segments, in terms ofnumber of units. Passenger vehicles,three wheelers and commercial

vehicles account for 17.6%, 11.3%and 4.7% share, respectively inIndias total vehicle exports in volumeterms. The export orientation of theindustry has been continuouslygrowing; from a level of 3.5% in2001-02 to over 11% in 2007-08.During the period 2001-02 to 2007-08, the automobile exports from Indiawitnessed a CAGR of over 31%.Nearly half of the two-wheelerexports in 2007-08 were to Asiaregion. While a sizeable volume of

passenger vehicles were exported toEurope, other regions such as Africaand Latin America were also thetarget regions for export ofpassenger vehicles by India.

Following the global financialmeltdown and recessionary trends inworld economy, there has been aslowdown in demand and supply of

vehicles. This has also reflected inthe production, domestic sales andexports of vehicles from India. Duringthe period April-November 2008,though there has been over 6.5%growth in vehicles production (from7.21 million units during April-November 2007 to 7.68 million unitsduring April-November 2008),domestic sales have grown by only

2% (from 6.46 million units duringApril-November 2007 to 6.60 millionunits during April-November 2008).

Auto Components IndustryAccording to Auto ComponentManufacturers Association of India(ACMA), the size of the Indian auto


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components industry is estimated tobe around US $ 18 billion in 2007-08. India is estimated to have thepotential to become one of the top

auto component economies by2020, according to a study by IBM.According to another study, theauto component industry in Indiahas potential to grow at a CAGRof 13% to reach US $ 40 billion by2015. Indias share in world autocomponents would thus grow fromaround 1%, at present, to over

2.5% by 2015. Domestic market isprojected to grow at around 8-10%per annum in the next 10 years.Exports are projected to grow atover 30% per annum in the longterm.

The automotive market in Indiahas grown significantly owing to thegrowth in income and in the living

standards of the middle classpopulation, and a significant increasein their disposable incomes.However, there has been aslowdown in demand for vehicles, in2008-09, which is impacting theauto-component industry adversely.Responding to emerging scenario,Indian auto component sector hasshown great advances in recent

years in terms of quality, spread,absorption of newer technologiesand flexibility. Availability of skilledmanpower, reasonably pricedworkforce, together with thestrengths gained by the country inIT and electronics, have built-up anenvironment for significant leap in theauto component industry.

The turnover of the autocomponent industry, over a period oftime, has grown impressively. Duringthe year 1996-97, the turnover of theindustry was US $ 3.3 billion, whichbreached the US $ 10 billion mark,to reach US $ 12 billion, in 2005-06.In the year 2007-08, the turnover ofthe auto component industry hasreached US $ 18 billion. Indian autocomponent industry has acomprehensive range of productscatering to the market. During the

year 2007-08, engine partsaccounted for the bulk of productionin the Indian auto componentsindustry, followed by transmissionand steering parts. The combinedproduction in these two categorieswas around 50% of the total value ofthe production.

Export growth in Indian auto-

components industry was around25% during the year 2007-08, withvalue of exports being US $ 3.6billion. India is also an importer ofauto-components; according to theMinistry of Heavy Industries,Government of India, the totalimports of auto components by Indiain the year 2006-07 were US $ 3.3

billion (Rs. 14,644 crore).

India has been emerging as asignificant exporter of autocomponents since the last decade.From a level of US $ 330 million in1997-98, exports of auto-components have reached to overUS $ 3.6 billion in 2007-08. Export


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orientation of Indian auto-componentindustry has also increased from alevel of 11% in 1997-98 to over 20%in 2007-08. Export of auto

components have grown at a CAGRof 24% during this period. Indiaexports its auto components toalmost every part of the world, themajor markets being developedcountries such as USA, Germanyand UK. Some of the important Asianmarkets for auto-componentsinclude Bangladesh, Sri Lanka and

Nepal. According to ACMA, theexport potential of auto componentsindustry is expected to post a CAGRof around 24% to reach US $ 20-22billion by 2015.

EXPORT COMPETITIVENESSOF THE INDUSTRY

The year-on-year growth rates in

vehicles production achieved by theIndian automobile industry hasbeen outstanding as compared tothe growth rate achieved by theglobal automobile industry. In theyear 2007, the automobileproduction growth rate in Indiastood at around 14% as comparedto the world production growth rateof 5.4%. Except in the year 2000,

when there was a slump, the Indianautomobile industry has performedbetter than the global average, atthe back of both domestic as wellas global demand.

In the auto-componentssegment, steered by the countryshigh engineering skills, established

production lines, and competitivemanufacturing costs, global automajors are increasingly ramping upthe value of components they sourcefrom India. Over 20 OEMs have setup their International PurchaseOffices (IPOs) in India to source theirglobal component requirements.These include firms like GeneralMotors, Ford Motors, CumminsInternational, Bosch, Volkswagen,BMW, MAN (trucks) and JCB(earthmoving equipment), among

others. This number is expected todouble by the year 2010. The auto-component industry was estimatedto achieve an export level of aroundUS $ 5 billion in 2008-09. However,the slowdown in demand forautomobiles, both in India and in itsexport markets, may downsize theprojections marginally. In such a

scenario, it may be pertinent toanalyse the export competitivenessof India in the international market.In this chapter, an attempt has beenmade to analyse the exportcompetitiveness of India in order toidentify potential markets for Indianautomotive industry in select markets/ regions. The markets / regionsidentified for this purpose were USA

and Europe for auto-components,and developing countries of Africa,Asia and Latin America forautomobiles. The competitiveness ofIndian automotive industry in theidentified markets have beenanalysed using some of thecompetitiveness indicators, such as


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penetration index, contribution index,and specialization index.

Auto-componentsIn the USA market, the penetrationindex for components such asbumpers, drive axles, and radiatorshave grown significantly indicatingrise in share of India in USAs totalimports. The contribution index hasalso increased for bumpersindicating growing share of itsexports in Indias total exports to

USA. As a result of such trends,the specialization index hasincreased significantly for bumpers,drive axles, and steering wheels.While the specialization index hasdecreased significantly for roadwheels and parts, marginal declinehas been witnessed forcomponents such as brakes andparts, non-driving axles and parts,and suspension shock absorbers.

In the European market, thepenetration index has grownsignificantly for auto-componentssuch as bumpers, drive axles,suspension shock absorbers andradiators. The contribution index hasalso increased for bumpers and driveaxles and radiators indicatinggrowing share of its exports in Indiastotal exports to Europe. As a resultof such trends, the specializationindex has increased significantly forbumpers, drive axles, suspensionshock absorbers and radiators.While the specialization index hasdecreased significantly for road

wheels and parts, and parts andaccessories of bodies, marginalincrease has been witnessed forcomponents such as brakes andparts, non-driving axles and parts,suspension shock absorbers, andsteering wheels and parts.

Automobiles

The analysis of international

competitiveness of Indian

automobile sector in Africa market

reveal that the penetration index

has grown over the years, between

2001 and 2006, for sub-segments

such as tractors, motor cars,

transport vehicles for goods, special

purpose vehicles, and chassis fitted

with engines. The growth in

penetration index, however, has not

been much for public transport type

passenger vehicles, while it has

come down for motorcycles. Thecontribution index has also

increased in these sub-categories

(except the public transport type

passenger vehicles, and

motorcycles), indicating growing

share of these categories in Indias

exports to Africa. The share of

import of identified categories of

vehicles in total import of Africa hasalso increased over the years

indicating growing African market.

As a result of these trends, the

specialization index has grown for

all types of vehicles, except public

transport type passenger vehicles

and motorcycles.


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Indias automobile penetration

into the Latin American region isslowly gaining momentum. The

analysis of international

competitiveness of Indianautomobile sector in Latin America

region reveals that the penetrationindex has grown, between 2001 and

2006, for sub-segments such as

tractors, motor cars, and motorcycles. The growth in penetration

index, however, has not been muchfor public transport type passenger

vehicles, and special purpose motorvehicles, while it has come down formotor vehicles for goods transport

and chassis fitted with engines. Thecontribution index has also increased

in the sub-categories wherepenetration index has grown (andvice versa), indicating growing shareof these categories in Indias exports

to Latin America. The share of importof identified categories of vehicles intotal import of Latin America has alsoincreased over the years in most ofthe sub-categories, indicatinggrowing Latin American vehiclesmarket. As a result of these trends,the specialization index has grownfor all types of vehicles, except motor

vehicles for transport of goods,chassis fitted with engines, andmotorcycles.

Indias automobile penetration inthe developing Asian market hasbeen quite modest across all thesegments. This could be seen from

the growing penetration index duringthe analysed period (years 2001 and2006), in almost all segments. Thecontribution index has also grown inall vehicle segments (except motorvehicles for transport of goods, whichhas remained constant), indicatinggrowing share of these vehiclesegments in Indias exports todeveloping Asia. However, the shareof import of identified categories ofvehicles in total import of developingAsia has declined over the analysed

period, in most of the sub-categories,indicating growing manufacturingand self-sufficiency in the region. Inspite of such a trend, thespecialization index has grown for alltypes of vehicles, with somecategories, such as tractors, andchassis fitted with engines, wellpronounced than the others.

CHALLENGES

Rising Input CostsPrices of core inputs in themanufacture of vehicles, like steel,non-ferrous metals and rubber,have grown over the last few years,which in turn has increased theproduction cost of vehicles. Though

the raw material prices have cooledin the last few months, they stillprevail more than the prices thathave prevailed few years ago. Suchcost escalation in input prices hasimpacted the growth of the Indianauto industry.


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Fuel Price VolatilityVolatility in fuel prices affects thegrowth of the automotive industry

all over the world. The effects ofvolatility in fuel prices are multi-pronged. Firstly, the cost of inputsin car manufacturing increases withthe increase in oil prices. Polymers,one of the inputs used inmanufacture of vehicles, is aderivative of crude oil. Bulkcommodities, such as steel andaluminium, are also used in

manufacture of vehicles; thetransportation cost of which isinfluenced by oil prices. Secondly,the oil price has an impact oninflation, affecting the saving anddisposable income of theconsumers, thereby affecting thedemand for automobiles. Thirdly,the fuel price influences the overallrunning cost of the vehicle owners;there could be switch in demandamong the vehicle variants, as alsoresearch in use of alternative fuels.Thus, the volatility in oil pricesaffects the prospects of theindustry.

Slowdown in DemandAs per the RBIs data on sectoral

deployment of gross bank credit,the automotive industry receivedgross bank credit of Rs. 29,152crores in 2007-08, a growth of 39%over the corresponding period ofthe previous year. In addition, credithas been extended to transportoperators and retail consumers

(as vehicle buyers) to support thegrowth of sales by the automotiveindustry. However, the penetrationrate of vehicle ownership in India

(per thousand population) isestimated to be less than 10 for carowners and around 40 for twowheelers. This is low as comparedto the world standards, andindicates the potential demand forautomobiles in the country.Following the recent financial sectorcrisis, the euphoria of easier / better

availability of auto finances in Indiahas declined. The recent trends invehicle sales also corroborate withthis contention. During the periodApril-November 2008, the salesgrowth in passenger vehiclessegment was marginally negative at(-) 0.59% over the correspondingperiod of 2007-08; the growth insales of commercial vehicles wasnegative at around (-) 9.23%.Similarly, three wheelers sales havealso registered a negative growth( 3.37%). The two-wheelerssegment registered a positivegrowth of 3.76% during this period;however, the two wheelers sales inthe month of November 2008witnessed a negative growth

(-14.73%), over the correspondingmonth of 2007.

Slowdown in USANorth America has been atraditional market for the Indianauto component manufacturers withexports to the region accounting for


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around 27% of Indian autocomponent exports. The region isaffected by the global financialcrisis, which led to the slowdown

in demand for vehicles, especiallyin USA. As the global financial crisismakes consumers increasinglyreluctant to part with cash andlenders unwilling to offer credit,carmakers across the world facechallenges in finding buyers to keeptheir production lines running. Itmay be mentioned that industry

wide auto sales in USA in themonth of November 2008 weredown nearly by 37%. In annualizedterms, according to analysts, theUS auto industry recorded sales of10.2 million vehicles in November2008, down from 16.07 millionvehicles sold in the same month oflast year. With the Detroit majorslike, General Motors, Ford and

Chrysler seeking a bailout from theFederal Government, the autocomponent industry in India isfeeling the brunt with slack indemand. An emergency bail-outoffering of US $ 17.4 billion loansto the three auto majors has beenannounced with the condition thatwithin three months restructuring

plans are prepared by them,including cutting down on costs.The restructuring plan and costcutting measures may affect theexport prospects of Indian auto-component firms. The Indian autocomponents sector, which is one ofthe major vendors for the globalauto majors, and to the US in

particular, face the challenges ofslowdown in the US automobilemarket.

Production CutsThe production activity in theautomotive industry is poised to beon the lines of the economic growthin the world and it is likely that themomentum in production mayslowdown in the year 2008-09. Theslowdown in demand for vehicles,both in domestic and export market

has led to the announcement ofproduction cuts by many vehiclemanufacturers. In the month ofNovember 2008 (over the month ofOctober 2008), there has beendecline in production across allsegments. Production of passengervehicles have witnessed a negativegrowth (-8.50%), commercialvehicles production declined by

44.27%, three-wheelers productiondeclined by 5.65%, and twowheelers by 8.79%. Overall, theproduction in November 2008 (overOctober 2008) has come down by9.94% (from 0.95 million units to0.86 million units). Commercialvehicles producer, Ashok Leyland,has reduced its proudction of

vehicles to around 1500 units inNovember 2008 (as compared toan average of 6400 units producedduring April-October 2008). Anothermajor vehicle manufacturer, TataMotors has decided to cutproduction of medium and heavycommercial vehicles by around50%, while its passenger cars


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segment is contemplating aproduction cut; as of now, TataMotors is undertaking partial shut-down to match the production anddemand for passenger cars. In thetwo-wheelers segment also, majorproducers are mulling overproduction cuts to reduce theirinventory levels and match with themarket demand trends. Bajaj autohas already announced a prolongedshut down as part of the exerciseto reduce the inventory levels. Such

trends also affect the marketprospects of Indian auto-componentmanufacturers. Several auto-component units that are cateringto the demand of OEMs in Indiaare also in line with the productioncuts intended by these OEMs.Several auto-componentmanufacturers are scheduling

maintenance holidays to tackle thesituation.

Growing CompetitionCompetition in Indias automobileand auto-parts industry has beengrowing in the recent years. Earlier,the regulatory framework andmarket conditions positioned theIndian OEMs in monopolistic oroligopolistic market structure. Asthe automotive market in India isevolving through the dynamics ofopen market and deregulation,many new players have entered themarket. Since liberalisation, over 20new players entered the market inthe passenger car segment alone.

Though, there has been depletionof market share for Maruti Suzuki,it still dominates the passenger carsegment. In the two-wheelers

segment too, foreign majors havetheir presence through jointventures as also through theirwholly owned subsidiaries. HeroHonda is the largest player in thetwo-wheeler segment, followed byBajaj Auto and TVS Motors.

In the commercial vehiclessegment, though the market is

dominated by home-growncompanies such as Ashok Leylandand Tata Motors, competition isaugmented through the entry offoreign players such as Nissan andVolvo. Indian players are enteringinto joint ventures with thesecompanies to gain access to thetechnological advancement and

design engineering. In the auto-partssegment, though there are vibrantunits producing high-quality productsand supplying to global OEMs, themarket is attracting global playerssuch as Delphi Systems, Visteon,Denso and Bosch, to mention a few.These global majors have beenexpanding their product portfolio andenhancing their production

capacities, thereby increasing thecompetition among domesticplayers.

Changing ConsumerPreferences

There has been continuous changein consumer demand in the motor


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vehicle industry, making thecompanies to focus on innovationcontinuously. With growingpurchasing power among Indianconsumers, the demand for betterand comfort vehicles with greaterefficiency is growing. Intenseindustry competition has led todesign of hybrid vehicles anddevelopment of new vehicleconcepts. Apart from customers,new technology also allows thedesigners to change every aspect

of car design. According to a study2by KPMG, product quality, costreduction, new technologies andenvironmental issues, influencesthe consumer demand for vehiclesand thereby innovation in theautomotive industry.

Chinese Competition

Of late, low-cost imports from Chinathreaten the business prospects ofdomestic auto-componentmanufacturers. According to ACMA,auto-component imports from Chinahave grown rapidly in the last fewyears. From around 3.3% of sharein all component imports in 2003-04, China now accounts for close

to 10%. Significant growth incomponent imports has beencontributed by China in the lastthree years, while Indias exports toChina have stagnated at aroundRs 120-170 crore in the last 5years. Such imports from China

have set new benchmark pricesand the component manufacturersfrom India face challenges in thescenario of rising input prices.

Environmental IssuesThe automobile sector affects theenvironment in multiple ways,starting from the use of materialsthat causes environmentaldegradation, and ending with themanagement of scrap. However, itis estimated that much of the

environmental damage during thelifespan of a car happens duringdriving, and thus is associated withfuel emissions. That is why manycountries are discouraging sale offuel-inefficient cars, as alsopolluting cars, through suitabletaxation policy. It is reported thatChinese Government has increased

sales tax on cars with enginecapacities more than 1 litre, andreduced on cars with enginecapacity of less than 1 litre. EU isproposing to penalize cars that areemitting more than 130 gms of CO2per kilometer.

There are estimates that theautomobile industry accounts for

approximately one-fourth of globalanthropogenic GHG emissions.Therefore, in order to combat theenvironmental challenge, firms (aswell as environmentalists andnational Governments) arefocussing on avoidance of polluting

2 Momentum, KPMGs 2008 Global Auto Executive Survey


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substances in production, inaddition to concentrating on fuelefficiency and emission standards.The industry is also contributing tocombat this challenge byundertaking research in improvingfuel efficiency and reducing CO2emissions. In the EU, an end-of-life of vehicles Directive (2000/53/EC) is in force to prevent pollutingsubstances in manufacture ofvehicles. Also, a dialogue betweenregulators and the automotive

industry in EU inspired a voluntarycommitment for the industry toreduce emissions.

Low R&D OrientationIt is being realized all over the worldthat the competitiveness is notdependent on factors likeavailability of skilled labour, low-cost

operations and infrastructure. Thesustained competitiveness in theautomotive industry comes throughimprovement in productivity, whichcalls for continuous innovation bythe players. However, Indianautomobile companies spend arelatively low amount on R&D; thus,their R&D orientation (R&Dspending as a percentage of totalsales) is low relative to the globalstandards. Developing new designsis an expensive proposition, unlessthe market for the new design ison a global scale. Indian firms aremainly focussing on, and designing

the vehicles for domestic market orfor other developing countrymarkets, but not completly focusingon designing a vehicle for a truly

global market, or to create a nichefor them and compete withinternational brands. Also, theefforts of Indian automobilemanufacturers are mainly orientedtowards value engineering ormodification in the existing modelsto improve performance, and are notfocused on developing new models.

Infrastructure ConstraintsInsufficient road infrastructure andtraffic congestion could be abottleneck in the growth of theautomotive industry. In India,capacity addition in roads has beenlagging behind the traffic growth. Itis reported that China witnessed aphenomenal growth in automotiveindustry due to rapid developmentin road infrastructure. Poor portconnectivity is another bottleneckfaced by the industry, especiallywhen it comes towards exports.The Chennai and Mumbai Portshandle bulk of the vehicle export.In addition to the insufficient port-handling infrastructure, there are

also challenges associated withspace especially for parking andsetting up of repair shops in theport yard. According to acomparative analysis3 on coststructure of Indian automotivesector and that of Malaysia,

3 Working Group on Automotive Industry, Eleventh Five Year Plan, Planning Commission,Government of India.


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Thailand and China, thedeficiencies in logistics andinfrastructure adds about 1.1% to2% in the total cost structure.

Incidence of Levies / DutiesOn vehicle sales, currently taxesare levied at multiple levels at citylevel (octroi), state level (sales tax)and at the central level (excise). Itis estimated that the incidence oflevies and taxes on a vehicleaverages to be around 30% of the

cost of vehicle. The incidence oftaxes increases in cases where theoctroi is also levied. The highincidence of taxes increases thecost of ownership of vehicles,thereby affecting the vehiclepenetration level in India.

Low ICT Interface

The adoption of ICT in the Indianautomotive sector is at low level ascompared to internationalstandards. According to a study4 byNASSCOM, many SME firms in theauto-component sector is facing thechallenges of IT adoption, which isimportant for enhancing theirproductivity and competitiveness,and the growth of the industry.

Human Resources ChallengesOne of the critical enablers for thegrowth in the Indian automobileindustry would be adequateavailability of trained manpower. Itis estimated that the industry wouldrequire large numbers of trained

personnel, if our country has tobecome an auto-manufacturing hubfor the world. Countries in NorthAmerica and Europe, which has

been the hub for automotiveindustries over the years, areincreasingly feeling the pinch of theaging workforce impactingemployment levels from factoryworkers to middle and top-levelmanagement, thereby creating atalent vacuum in the industry. Thiscrunch in manpower in these

economies is slowly luring themuch-required human capital fromIndia. This challenge needs to beaddressed on priority basis so thatthe country does not loose out oncritical talent that may be importantfor positioning India as anautomotive manufacturing hub ofthe world.

STRATEGIES

Tackling the Rising InputCostsThe increase in the cost of crucialraw materials (such as steel,aluminium, rubber) that are used inmanufacture of vehicles hasaffected the margins of the Indian

automotive industry. Though theraw material prices are coolingdown, they are still higher than theprices that prevailed few years ago.In order to tackle this problem ofrising input costs, and to improvemargins and price realisations,players in the automotive industry

4 IT Adoption in the Indian Auto Component Industry


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need to adopt multi-prongedstrategies. These includereallocation of product mix, costreduction through better adoption oflean manufacturing solutions, andrenegotiation with suppliers andvendors. Some automobilemanufacturers have alreadystrengthened their strategy intweaking the product-mix, givinggreater emphasize on productsegments that is expected toprovide better margins.

Strengthening lean manufacturingsolutions would help the Indianautomotive industry to tackle thechallenge of input cost escalations.Some automobile manufacturers inIndia have already establishedprogrammes to avoid wastages inproduction and thereby cut downthe cost of production. Firms alsoneed to renegotiate the prices (for

purchases with the suppliers) andmargins (for sales with the dealers),so that the hike in the end price atthe hands of consumers isminimized due to hike in inputprices.

R&D on Alternate EnergySources and Hybrid Vehicles

The share of automobiles on road,using petroleum products as fuel,has almost remained the same (atover 95%) in the past severaldecades. This is despite the factthat the vehicles on road have beenevolving in every other aspect. Inother words, product developmenthas happened in all other aspects,

except in utilization of alternateenergy sources. The industry,together with the Government, mayprovide greater thrust on

development of products that usesalternate energy sources, and R&Don hybrid vehicles.

Market Presence in AllSegmentsGlobalization is making every playerin the industry to look beyond itsborders. Ironically, in spite of the

increasing number of models beingmanufactured, the PLC of thevehicles are decreasing everyday,thus putting pressure on the playersto find ways to diversify theirproduct offerings. Recently, TataMotors had acquired the Jaguar-Land Rover brands from Fordthereby making an imprint into the

niche segment, eyeing theEuropean and the developedcountry market. This has made theTata Motors a truly global player inthe automobile market with adiversified product offerings,ranging from the entry levelsegment Nano to the much-toutedownership of premier brands, like

Land Rover and Jaguar, thuscatering to all segments of themarket. Market presence andproduct offerings need not be inone category of vehicles (saypassenger cars) alone; it could alsobe across multiple vehiclecategories. Such strategies buildbrands and visibility across


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segments, as also reduce the risksassociated with marketconcentration and economicslowdown to some extent.

Enhancing CompetitivenessCost efficiency is necessary forIndian automobile industry toenhance its global competitiveness.Many global auto-majors, especiallyfrom Japan, have initiated costreduction exercises. Some firmshave also shifted from standard

costing to Kaizencosting and targetcosting. Some of them have evenestablished target-costing officesacross the world and establishedoffice structure for implementingKaizen. Cost containment strategiesmay also include working withsuppliers to reduce the costs intheir processes, implementing low-

cost designs / segments of theproduct, or through reduction ofwastages. Strengthening the lean

manufacturing practices, being

adopted in India as also across theworld, would also help improve

competitiveness of Indian industry.

Such practices show greaterefficiencies in machine utilization,

fewer labour hours per machine,shorter machine setup times and

identification of bottlenecks andcost reduction opportunities swiftly.

Both the automobile and theauto component industry are inter-linked and are dependent on eachother for survival, and hence the hub

and spoke model may be anotherapproach for both of them to containthe cost. In the hub and spoke model,the automobile industry help inestablishment of auto-componentunits around its assembly plants, andhelp them in technologicalimprovement, R&D, andidentification of machineries andequipments. The auto-componentunits concentrate on on-time supplyand servicing of orders and costcontainment in production, and

thereby promote competitive pricingamong the industry players.

Addressing ConsumerPreferencesThe dynamics of Indian automobilemarket is changing with thechanging consumer preferences.For example, earlier, the two-

wheeler segment was dominated byscooter (with a market share of 70-80%), which has been taken overby motorcycles. The change inconsumer preference was mainlydue to fuel efficiency, as alsodesign and technologicalimprovement. Though, the newerversions of scooters (scootyconcept with ignition start) areslowly reviving the market forscooters, the market share may notreach to the previous level.Similarly, consumer preferenceshave changed the demand patternin other vehicle segments too,driven mainly by design andtechnology. Indian auto-majors


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need to address the changingconsumer preferences and suitablymodify the design or technologicalimprovement to augment their

market share.

Collaborative ProductDevelopment (CPD) is beingadopted as a business strategy byglobal automobile majors to addressthe challenge of changing consumerpreferences. Dealers are also needto be roped in the design or productdevelopment process as they areideal gateway agencies between thecustomer and the firm. Hence, astronger relationship is required to beestablished by the vehicle makerswith the dealers. Synergies are to becreated between the vehiclemanufacturers and dealers thoughbetter communication andunderstanding in order to offer not

only enhanced customer services butalso to understand the trends inconsumer preferences.

Environmental ComplianceEnvironmental challenges inautomobile manufacturing does notrelate to emission standards alone.There are also challenges

associated with end-of-life invehicles, especially wastemanagement. Though sufficientsteps are being taken in Indiatowards achieving internationalemission standards, adequate stepsare still required to be taken inenvironmental compliance in vehicle

manufacturing. Significant amountof resources are required asinvestment to undertake R&Dprogrammes to address theseenvironmental challenges.

Enhancing R&D OrientationIndian automotive industry needs todevelop a proactive culture withregard to investments in R&Drather than responsive culture. Thiswould help the industry tounderstand the complexities of

vehicle users and bring in productinnovation through changes indesign and vehicle engineering.The R&D orientation in the Indianauto-component industry is notcomparable with world standards.However, few firms that are havinglarge operations are increasing theirstake in innovation to compete in

the global map.There is also a need to initiate a

programme for research anddevelopment in the Indianautomotive industry, concentratingon development of intelligentvehicles adhering to safetystandards, energy efficiency andemission norms, and alternate fuels.

The programme may also stretchdown to component manufacturerswith active involvement of OEMs.

Infrastructure DevelopmentInfrastructure constraints arecommon to all industry; howeverthere are few specific infrastructure


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constraints affecting the growth ofIndian automotive industry. Poorroad infrastructure and trafficcongestion can be a bottleneck in

the growth of vehicle industry.Therefore, in general, improvementin road infrastructure would helpenhance the demand forautomobiles in India. Secondly,road infrastructure associated withlast-mile port connectivity wouldhelp enhance supply chainmanagement strategies of the

vehicle manufacturers. Moreimportantly, there is a need forbuilding vehicle terminals in Indiafor smoother handling of vehicleexports.

Supply Chain ManagementSupply chain management in theautomotive industry helps in

integration of the partners toimprove operational performance,materials flow and manufacturingflexibility. Implementing supply chainsolutions as one more module afterEnterprise Resource Planning(ERP) is not enough. Theres aneed for enterprise-wide processimprovement. This calls forinculcating mutual respect with thevendors, dealers and consumers.Just-In-Time (JIT) productionprocesses, identification of shortertransportation routes, e-sourcingare some of the supply chainstrategies that may be adopted inlarge scale by the Indianautomotive industry.

Enhancing ICT InterfaceIT sector has a major role to playin development of Indian

automotive industry to achieve itsglobal aspirations throughenhanced productivity and productefficiency. In addition, ICT interfacehelp the manufacturers to interactfrequently with vendors andconsumers also, and leverage theirideas / preferences into vehicledesign. Increased IT adoption in theautomotive industry not only

enhances the competitiveness ofthe industry in the existing markets,but also creates new markets forthe Indian automotive industry.

Human ResourcesDevelopmentThe cost pressure on global automajors, who are mainly present in

developed countries, viz., USA,Europe and Japan, is making theindustry shift to developing nations.In addition, these countries arefacing shortages of skilledmanpower, which is expected togrow multi-fold in the years tocome. India has large humanresource base; however, Indianeeds to enhance the skill-sets that

are required for the industry inorder to become a globalautomotive hub.

The Government and industryneed to come together and addressthe challenges related to skilldevelopment and workforceshortages, both in terms of quantity


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and quality. In this regard, it may bementioned that USA established,over three decades ago, a NationalInstitute for Automotive Service

Excellence, to provide training,testing, and certification of auto-service and repair-professionals toensure continuous availability oftrained technicians for the industry.Government of India, through theAutomotive Mission Plan, hasproposed the setting up of anAutomotive Training Institute to train

people for the automotive industry.The Society for Indian AutomobileManufacturers (SIAM) has plans toset up an online university, first of itskind in Asia, to cater to the educationneeds of the industry. SIAM isassociating with US-based institute,Adayana, who will provide coursecontent and certify these courses.

IN SUMThe global financial meltdown of

the year 2008 has created aprecarious condition across various

sectors, which has forced countriesand industries to take a fresh look

at their future strategies; automotivesector did not remain unscathed

from this turmoil. In the early part

of the year 2008, the rise in crudeoil prices sent shockwaves amongstvarious sectors; the automotivesector was one of them to receiveadverse impact. The financialcrunch, in the later part of the year2008, slowed-down the supply ofcredit and simultaneously increased

the cost of credit, both tocorporates and consumers, andthereby impacted both the supplyand demand for automobiles. It

may be mentioned that the globalas also the Indian automotiveindustry, benefited from the creditflow provided by the banks andfinancial institutions, both atcorporate level and at consumerlevel. The operations of severalglobal auto-majors are affected andthey are seeking bailout plan from

their national governments for theirsurvival. With the governmentinstitutions across the world infusinglarge amount of liquidity into therespective markets, the core issueof credit crunch may slowly beresolved. However, cost associatedpressures may prevail on themargins of the global auto-majors,making them vigorously to focus on

emerging markets, for sourcingcomponents, vehicle design andmanufacturing. It is expected thatthe recessionary trends in theeconomy and the resultant increasein margin pressures would furtherenhance the need for locationalshift in manufacturing ofautomobiles. It is also expected thatthe volume of outsourced jobscoming to India may further rise inthe long term. Such marketopportunities also provide theIndian automotive industry toacquire assets of beleagueredcompanies abroad with a potentialfor turnaround and value creationin the years to come.


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It may be mentioned that theIndian automotive industry holdssignificant scope for expansion, bothin the domestic market, where the

vehicle penetration level is on thelower side as compared to worldaverage, and in the internationalmarket, where India could positionitself as a manufacturing hub. Thecurrent level of share, viz., less than5% of global production and lessthan 1% of global trade, alsocorroborates the potential for

expansion in this industry.At the same time, it should be

recognized that Indias exports ofautomobiles have largely beenconfined to few countries in Asia andAfrica, and to a very limited extent inLatin America. Indian automobilecompanies are required toaccelerate their momentum and

increase their penetration amongother countries in these regions.

Similarly, the auto componentsindustry in India, which is now knownacross the globe for its qualitydeliverables, should try andcapitalize on the European and theUS market either trough the processof acquisitions of firms in these

countries or simultaneously enhancingtheir quality and augmenting thenumber of outsourcing businesses

from these regions. Indian autocomponent industry distinguishesitself with winning more number ofDeming prize and adopting globalquality management procedures,and thereby have an edge over otheremerging economies, like China andThailand.

Indian economy, which benefitsfrom strong fundamentals and soundregulatory framework, is expected togrow at around 7% in the year 2008-09; the economy may rebound oncethe global economy recovers, andthe domestic automotive industrywould simultaneously regain itsgrowth momentum. In the interimperiod, the Indian automobile andcomponent industry needs to lookout for opportunities to cut cost,undertake value engineering andenhance disciplines into the system.

The industry may also use the interimperiod to upgrade the skills of theemployees and enhance the focuson market research, productdevelopment and customerinteractions. An institutionalmechanism, under public-privatepartnership model, may be neededto address such requirements of the

industry in the years of downturn,with the industry having a lead roleto play.


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The automotive industry isincreasingly becoming the cynosureof the manufacturing sector acrossthe globe. Due to its intense forwardand backward linkages with severalkey segments of the economy, theautomotive industry has a strongmultiplier effect and acts as one ofthe key drivers of growth across theglobe. The attention and importanceto the automotive industry in theeconomic development and planningpolicies of Government and itsagencies has also witnessed

significant uprise. The industry hasbeen evolving over the years,meeting up with challenges asdiverse as transitions, consolidationsand restructuring, and therebyadapting to the new marketconditions.

In the last few years, the globalautomotive industry has changed its

locational preferences due to variousreasons. Earlier, the automotiveindustry was largely confined to thetriad - North America, Europe andJapan. However, with the emergenceof some vibrant developingeconomies, like Brazil, India andChina, the global automotive industry

has been considering a different

growth perspective, and has been

relocating the operations. These

growing developing economies have

been evolving as a manufacturinghub, as also the newfound markets,

for the global majors like Ford,

General Motors, Chrysler, Toyota,

Honda, Nissan and BMW, who are

competing to enhance their market

share in these markets. Increasing

growth in GDP and the growing

disposable income has catapulted

these emerging economies as

market for automotives, while the low

cost of operations and skills in design

and R&D made them as destinations

for investment and manufacturing

operations.

The automotive industry is a

major employment generator in

many economies, with millions of

people earning their livelihood, bothdirectly and indirectly. According to

the International Organisation of

Motor Vehicle Manufacturers (OICA),

the current turnover of the

automobile industry is around Euro

2 trillion and is equivalent to the size

of 6th largest economy in the world.

1. INTRODUCTION


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While there has been growthmomentum for the global automotiveindustry in the past, it is also facingchallenges, of late, especially in view

of the increasing cost of productionand slowing down of demand. Theworld automotive industry is alsofaced with the challenge ofundertaking R&D and designing fuel-efficient vehicles in view of volatileoil prices. The environmentalchallenges have also assumedcritical importance to the automotive

industry at the backdrop of climatechange. Companies across theglobe have been committing tocontribute to an integrated approachto a cleaner environment andreduced carbon emissions with moreenvironmentally friendly vehicles. Allsuch challenges have taken theworld automotive industry to a newparadigm.

With cost playing an importantrole in the success of the operationsof the automotive industry, countrieslike India, rich in scientific andengineering skills, and low costoperations, are increasingly gainingimportance for automotiveproduction in the world. The globalautomotive industry is in the verge

of locational shift, not only to cutdown the cost of production, but alsoin exploring new markets indeveloping countries, including India.With the growing shift inmanufacturing of automobile industryto developing countries like India, themanufacturing of auto-components

is also increasingly relocated to thesecountries.

In India, economic liberalization

and foreign investment policiesattracted foreign auto-majors suchas Hyundai, Ford, Toyota andGeneral Motors to set up their basesin India. Smooth policies fortechnology transfer strengthened theindigenous auto-component makersto source the technology andefficiently meet the buying

requirements of multinationalsourcing companies. Themultinational auto-majors startedlooking at India, not only as amanufacturing hub for the vehicles,but also a growth market for vehiclesdemand, and addressed therequirements of price sensitivemarket, through design and productdevelopment.

According to the World Bankdata, India is the fourth largesteconomy in the world, in purchasingpower parity terms. With the increasein Private Final ConsumptionExpenditure (PFCE) in India, thedemand for automobiles too haveincreased, thus ascertaining the fact

that the growth in income levelsincreases the consumption patternin the case of automobiles, amongothers.

Indias growing affluent class,which emphasizes more on qualityand standards, has been facilitatingthe entry of multinational auto-majors


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like BMW, Volkswagen andMercedes to venture into the Indianmarket. The Tata owned Jaguar andLand Rover is also exploring thepossibility of entering into the Indianmarket to cater to the niche segment

in the country.

The entry of global auto-majorsinto India has significantly altered theautomobile-manufacturing scenarioin the country. The changes in designand adaptation of internationaltechnologies have enabled theIndian automotive industry tocompete globally, and thus are alsoexposed to global challenges. Theglobal recessionary trends haveimpacted the global automotivesales, which is also percolating intodeveloping countries like India.Developed countries such as USA,

EU, and Japan are contemplating the

announcement of a bailout package

for the automotive industry, as many

auto-majors are in the verge of

collapse. Australia has already

announced AU $ 6.5 billion bailout

package for the car industry,

including setting up of AU $ 500

million green car innovation fund.

Since many of the auto-majors have

their operations in India, as also they

source significant volume of auto-

components from India, the growth

in the Indian automotive industry is

also likely to be affected, albeit for a

brief period. However, in the longterm, alongside the challenges, there

are also plethora of opportunities,

which need to be capitalized so as

to emerge as a successful global

automotive player.

Exhibit 1:TRENDS BETWEEN INDIAS PFCE AND AUTOMOBILE SALES

SOURCE: CSO, SIAM, EXIM Research


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GLOBAL AUTOMOBILEINDUSTRY

Origin and TrendAutomotive industry is one of themost important and widespreadindustries in the world. The globalautomotive industry has beenevolving through different phasescharacterized by its owndevelopments. Over a period oftime, the industry has witnessedseveral ups and downs, only toemerge stronger and better-

equipped to take on the challenges.

The history of automobilesbegan with the technologicalbreakthrough that occurred inEurope in early 1800s. It was in theyear 1860 when the first practicalinternal combustion engine wasinvented. Later on, gas poweredvehicles were invented, which

dominated the industry.

General Motors, established in1908 in Michigan, USA is almostcompleting a century of operation.Later, it was Henry Ford, who in theyear 1914, endeavored in the massproduction of cars, reducing thecosts of manufacturing. Infact, thesetwo companies are considered to be

the pioneers in the automobileindustry for bringing in innovationand setting high standards in theindustry.

During the early 20th century theindustry made strides forward byemphasizing on car design. Duringthe same time, automobile industrywas seen evolving in other parts ofthe globe as well. The automobileindustry in Japan and in selectEuropean countries, mainlyGermany, France and Italy, also

witnessed significant growth. Thegreat depression of 1930s had anegative bearing on the automobileindustry. Following the greatdepression, the industry was facedwith inadequate capital and loweconomic activity. This period alsosaw a reduction in the number ofmanufacturers. Later, the World WarII (1939-1945) also caused a

negative impact on the industry. Postwar period, the automobileproduction plummeted in almost allparts of the world. Many companiesreduced production of passengercars during the period, and wereinvolved in production of war tanks,military trucks and navigationequipments.

2. GLOBAL SCENARIO


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Automobile productionwitnessed resurgence after the endof World War II. There was a highdemand but the production was not

high enough to meet this demand.Again, the energy crisis had abearing upon the automobileindustry. There was a need to buildfuel-efficient automobiles. Japaneseproducers concentrated on suchevolving needs, and were soon tobecome the leading exporters ofautomobiles to the world market.

Industry developments since1980s focused on global expansionsand setting up of joint ventures innew and emerging markets. At thestart of 21st century, the growthtrends in global manufacturingcontinued to be upwards. The sector,since the beginning of 21st century,has witnessed two major trends. The

first trend is the rapidly growing roleand importance of emergingmarkets. The year 2007 was the autoindustrys sixth consecutive year ofgrowth with the sales reaching 73million units. Faced with thechallenge of reducing cost ofproduction, the global automobileindustry is slowly shifting to low costdestinations, like China and India.

Another emerging trend is the needfor addressing the key societalissues of energy saving andcontrolling carbon-di-oxide emission.Several initiatives have been takenby the industry to address thechallenges associated with carbonemission and fuel efficiency.

Industry GrowthOver the years, the industry hasgrown significantly to become as

one of the well-establishedindustries all over the world. Alongwith the growth in size, the industryhas made technologicaladvancements also. The industryutilizes various moderntechnologies integrated into asystem, to improve the quality ofthe vehicles. These include wideuse of modern chips and

electronics to make the vehiclesmore efficient and competent.

In the initial years, most of themanufacturing activities wereconcentrated in USA and some of theEuropean countries. Though, thesecountries represent a significantshare in the production even now,more and more volume of production

comes from other parts of the world,like China, Japan and Korea. Aroundthree-fourths of the global productionis being carried out in top 10producing countries, in 2007. Ofthese, Japan, USA and China,cumulatively constitute over 40% ofglobal production.

The automobile industry hasalso contributed immensely inproviding employment. Building over70 million vehicles, the worldautomobile industry providesemployment to about 10 millionpeople directly, in making thevehicles and the parts that go intothem. This is over 5% of the worlds


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total manufacturing employment. Itis estimated that each directemployment in this industry supportsat least another 5 indirect jobs in the

community, resulting in more than 50million jobs created by theautomotive industry. These indirectemployment are created in relatedmanufacturing and services sectors.Automobiles are built using thematerials of many sectors, including

steel, iron, aluminum, glass, plastics,electricals, textiles, electronics,rubber and chemicals, thus providingemployment as well as growth to

such diverse range of sectors.

ProductionThe growth in global economy, ingeneral has kept up the pace ofauto industry growth, barringcyclical moderations in growth

5 According to OICA classifications, Passenger cars are motor vehicles with at least four wheels,used for the transport of passengers, and comprising no more than eight seats in addition tothe drivers seat.

Light commercial vehicles are motor vehicles with at least four wheels, used for the carriage

of goods. Mass given in tons (metric tons) is used as a limit between light commercialvehicles and heavy trucks. This limit depends on national and professional definitions andvaries between 3.5 and 7 tons. Minibuses, derived from light commercial vehicles, are usedfor the transport of passengers, comprising more than eight seats in addition to the driversseat and having a maximum mass between 3.5 and 7 tons.

Heavy trucks are vehicles intended for the carriage of goods - maximum authorised mass isover the limit (ranging from 3.5 to 7 tons) of light commercial vehicles. They include tractors,vehicles designed for towing semi-trailers.

Buses and coaches are used for the transport of passengers, comprising more than eightseats in addition to the drivers seat, and having a maximum mass over the limit (rangingfrom 3.5 to 7 tons) of light commercial vehicles.

Exhibit 2:PRODUCT-WISE SHARE IN WORLD PRODUCT

automotive industry india

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