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Globalization
and Competitiveness of Indian Auto Component Industry
Page 1 of 3
Globalization is an economic phenomenon, involving the
increasing interaction, or integration, of national economic
systems through the growth in international trade, investment
and capital flows. Globalization has influenced every aspect
of human life and it offers certain opportunities and threats
to each aspect of business. The Auto industry in India is not
un touched by the effects of globalization. The Indian Auto
Industry and the Auto component industry is suddenly exposed
to the vast international market as an opportunity and to
Global competition in large scale. The industry has
opportunities in terms of business opportunity worldwide and
the threats from Mega suppliers who are more equipped to
compete.
The Auto
component Industry in India has come of age and is poised to
become a major revenue earner for the country. At this stage
when the industry is undergoing restructuring and tierisation
it is important to know the strengths and weakness of the
Industry and the environment in which it operates. India being
a cheap destination for parts, is a favored destinations for
multinational to source its parts and achieve overall global
competitiveness. The Industry needs to gear itself to take
advantage of its strengths and the various opportunities
available globally by identifying its weaknesses.
Every
industry operates in an environment, which is created by
Government policies, the economic and physical infrastructure
of the industry. There are few major parties which influence
the industry and they are the individual leaders, the
Government, Educational institutions, Research bodies and the
Industry associations. The industry cannot flourish by sparks
of individual effort. If the industry has to achieve a certain
objective there has to be an integrated and coordinated multi
functional approach.
There are
immense opportunities being offered by the global market and
there is a need to look inwards and draw up a strategy to
exploit the opportunities offered by globalization.
Evolution of Global Auto
Industry
In past 70 years Motorcar has
transformed society and personal mobility. In 1890, the
average person traveled 13 miles in a year and now an average
person travels 13 miles a day. There were 800 cars on the road
at the end of 19th century. By 1910 that number
increased to almost 460000 with more than 300 cars makers
setting up business. Ten year later there were 8 million
vehicles on the road. As production grew prices fell. During
second world war, the entire industry had embraced the concept
of mass production, initiated by Henry ford’s Model T. Growing
personal wealth and international trade created new export
markets in North America, Japan and Western Europe. After the
oil crisis of 1973, manufacturing has been dominated by the
production techniques, quality, manufacturing and sales of
Japanese manufacturers. By the year 2000 the Industry was
producing 59.7 million vehicles annually. In the 1990s and the
early years of the new millennium, growing consolidation among
car and truck manufacturers has taken place. The environment
now has been the key issue in vehicle engineering and
production. The cost involved in meeting new environment laws
has fuelled a sharp rise on product development spending
Those without the financial muscle have disappeared. The
similar fragmented commercial vehicle industry also during
1990 contracted into a handful of global manufacturers.
Contribution of Auto
Industry to Society
The scale and manner of transportation of Goods
and human beings facilitates the growth of any society.
Without transportation the society would not had grown.
Automobile did what Computers are doing today to the society.
It’s because of automobiles that the transport of goods was
possible from one geographical location to other. It’s because
of transportation that exchange of resources has been possible
and the world has progressed into a global village. Automotive
industry has universally emerged as an important driver in the
economy. Although the automotive industry in India is nearly
six decades old, until 1982, only three manufacturers - M/s.
Hindustan Motors, M/s. Premier Automobiles and M/s. Standard
Motors dominated the motorcar sector. Owing to low volumes,
and protection by the Government, obsolete technologies were
perpetuated and the Indian Auto Industry was out of sync with
the world industry.
In 1982, Maruti Udyog Ltd. (MUL) came up as a government
initiative in collaboration with Suzuki of Japan to establish
volume production of contemporary models. After the lifting of
licensing in 1993, 17 new ventures have come up of which 16
are for manufacture of cars. This industry currently accounts
for nearly 4% of the GNP and 17% of the indirect tax revenue.
The Indian Automobile Industry has been one of the major
contributors for Indian economy due to its revenue generation
and employment potential. The Auto industry employs 6 lakh
families. Revenue accurse for Government is over Rs. 25,000
crores. There are several auto manufacturers with a combined
turnover of Rs. 25,000 crores. Further investments being
planned in immediate future shall exceed 20-25000 Crore RS.
Evolution
of Indian Auto Component Industry
The Indian
Auto component Industry has always been riding over the Indian
Automobile industry. The Component industry started out small
in the 1940s supplying components to Hindustan Motors and
Premier Automobiles. In the 1950s, the arrival of Telco, Bajaj,
and Mahindra & Mahindra led to steadily increasing production.
In the 1980s with Maruti, the growth suddenly accelerated.
Boom time for the auto components industry started with the
arrival of India's "people's car" - the Maruti.
The new car
required components that would adhere to its stringent quality
standards. It virtually gave birth to a variety of new age
auto component manufacturers who manufactured components that
combined the best of technology with quality. As Maruti became
India's best selling car, the path of Indian auto component
industry took an upswing. Export figures also climbed. Low
costs of labor and raw material resulted in exports taking a
quantum jump.
The influx
of foreign auto majors ranging from Mercedes Benz, Ford,
General Motors to Daewoo few years ago presented a world of
opportunity for the industry. The auto components industry
responded with huge capacity expansion and modernization
programs.
However, the
global auto giants soon realized that the Indian market was
not as big as it appeared to be. Their targets went haywire,
inventories piled up and bookings were canceled. This also
coincided with a general slowdown in the Indian economy in the
last one or two years. The auto component industry in India,
which is driven by domestic demand, also faced sluggish
growth. However, things have taken a turn for the better.
Growth in the commercial vehicle and the passenger car
segments has been 20 per cent year on year and 40 per cent
year on year respectively from year 2000 onwards
Some Indian companies have
used the recession to trim down by cutting costs and improving
productivity. Several companies have entered into
technological collaboration and equity partnership with world
leaders in auto components. They have not only adopted their
systems but also their manufacturing and management practices.
Strict quality controls, sound technology and high volumes
will enable the Indian auto component industry to chart
greater progress in the coming future.
The New multinationals that came in India to
manufacture and sell in India realized that it was cheaper to
manufacture products in India by around 30%. They were exposed
to a new idea of exporting back low cost good quality products
back to their global factories and thus reduce their overall
costs. This resulted into high demand for components and
that’s how at last the component industry lost its dependence
on the local Automobile manufacturers. The industry is now
exposed to a global market, which is 50 times bigger in size.
India’s automotive component industry
manufactures the entire range of parts required by the
domestic automobile industry and currently employ about
250,000 persons. Auto component manufacturers supply to two
kinds of buyers – original equipment manufacturers (OEM) and
the replacement market. The replacement market is
characterized by the presence of several small-scale suppliers
who score over the organized players in terms of excise duty
exemptions and lower overheads.
Global Trends and challenges
There is a global
overcapacity problem, which is forcing the vehicle industry to
restructure. The strategy of the OEMs conditions the whole
supply chain. There is a strong trend to increase the
outsourcing globally. The Component sector is totally
influenced by the vehicle assemblers and the local parts
industry is becoming more critical to location decisions of
assemblers.
The World trade and investment in automotive
and auto parts has become liberalized with Tariffs going down
Internationally. MNC assembler source parts from cheapest
quality source in any part of the world. Local suppliers are
being linked into the global supply chain and they have to
compete with regional players. Rapid changes in information
and communication technology are reshaping the way auto
industry is doing business. The OEM is passing its
responsibility of developing manufacturing and assembling
sections of vehicles on to the suppliers.
The globalization offers a great opportunity
for the Indian Auto component manufacturers. There are certain
strengths of the industry that attracts the global buyers and
there are certain weaknesses, which can eliminate the local
auto parts manufacturers, and the advantage shall go to global
manufacturers who shall have local capabilities in India.
Indian Auto Component Industry Summary of
strengths
The auto Component industry in India has the
potential of becoming the export driver of the auto industry
due to:
A/ Increasing globalization of the auto
industry supply chains
B/ Cost advantage in many component groups
supported by relatively (compared to other developing markets)
well-developed labour skills and engineering base. To achieve
the Auto industry version of 10% share of industrial out put
by 2010, the component industry will have to grow at close to
22% over next 12 yrs, with export contributing to 20% of the
output.
The component industry in India has significant
cost advantages primarily due to lower labour cost in India.
This labour cost advantage translates to overall cost
advantage of 20-30% over the counterparts from other developed
countries despite lower labour productivity. Since Tier 1
suppliers control the global component industry the cost
advantage should be leveraged into attracting these global
players to set up manufacturing base in India. This low cost
labour is not a factor for long-term competitiveness, and
improvement in scale, quality, technology and investment in
critical processes, are necessary to sustain the cost
competitiveness
Inspite of several handicaps there are a number
of favorable factors, which are
1. Trained and skilled human resources
2. Wide Industry base manufacturing 97% of
component required
3. Growing entrepreneurship
4. Growing domestic market
5. Expanding global markets
6. Transnationalisation of world economy
7. Investments by non-resident Indians
8. Economic liberalization
Challenges: -
There
are several challenges, which the industry has to overcome at
industry level and organizational levels. Few of these have
been briefly described here with.
Small in size: -
The Indian auto component industry is wide with
over 400 firms in the organized sector, but small in sales
turn over which is estimated to be less than Rs. 15000 Crores
for the organized sector. This sector is the fastest growing
sector in Auto industry growing at the rate of 28%. The
industry also exports close to RS 180 Crores at around 12% of
combined sales. It is currently a Small and fragmented
industry by global standards.
Inferior Quality: -
Based on interviews in the component industry
Sources: JICA Mining and industrial development studies
department of Japan Quality focus required Quality up
gradation presents the most important challenge for Indian
component suppliers. The Industry association ACMA reports
that over 170 of its members have already received ISO9000
certification and 23 have received QS9000 certification. There
are examples of Indian suppliers becoming single source global
suppliers for leading OEMS (GM and Ford), and also becoming
global leaders with Sundaram Clayton receiving the Demming
award. However statistics do not represent the overall quality
problems, which plague the industry, driven by historically
protected markets. An A.T, Kearney survey found that defect
rates in India are in the range of 1000-2000 ppm against
Japanese average of 100-200 ppm.
Rejected parts per million
(PPM)
The chart
above gives a comparison of rejection level with other
countries. An A.T.Kearney survey, found defect rates in
India,
even among the better suppliers in the range of 1000-2000 ppm
against the Japanese average of 100-200 PPM. In the past few
years, as competitive influence have increased, Indian
suppliers have sought to improve their quality standards. This
trend needs to be reinforced if Indian players wish to become
competitive global exporters. ACMA suggests that the Indian
component manufacturers must change from percentage rejection
rates to PPM.
Lower
labour productivity: -
The
advantage of low cost labour is negated due to lower
productivity level of Indian work force. Indian Labour
productivity is lower relative to the rest of the world
Fig: - Average sales per
employee in US$(000s)
As illustrated in the graph
above The Japanese employee is ten times more productive than
the Indian counterparts. Indian labour productivity is below
its neighboring Asian countries and that is why some Indian
OEMS are planning to start manufacturing in countries like
Thailand.
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