Indian Automotive Industry

8/3/2019 Indian Automotive Industry

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Indian Automotive Industry: Innovation andGrowth

Mamata Parhi

In the early 21st century, with the original four Asian Tigers at or near to fully

developed status, attention has increasingly shifted to other Asian economies

such as China and India, which are experiencing rapid economic transformation

at the present time and are thus leading a sort of redistribution of the epicenter

of global innovative activities. Not only so, it is also being widely contended that

these emerging new economies that have already shown capacities to alter the

balance of the international division of labour in their favour i.e. demonstrated

capabilities which might drastically change the world‟s technological map. The

apparent tendency is conjectured to have risen from some substantial amount of

cumulative deepening and technological upgrading of the enterprises (at least in

some industries, if not all) within these economies.

India initiated economic reforms, beginning in the 1980‟s, which became

comprehensive in the early 1990‟s. The reforms included significant

liberalizations of the external control regime, opening up for increased imports

and for foreign investments. The manufacturing industry has evolved; being

chiseled by India‟s liberalizing trade and investment regimes on the one hand,

and the structural readjustments from within (propelled mostly by the changes

in global industry), on the other. Several authors have documented the

technological learning processes in Indian firms in a spectrum of industries

(e.g., Kale and Little (2007) in pharmaceuticals, Arthreye (2005) in software

industry, Parhi (2006) in the automotive industry).

The broad aim of this section is to discuss the changing forms of innovation in

Indian automotive firms over the last few years. Starting with a broader

contextual view of the automotive sector, to give a flavour of the general

industrial environment, we will analyze the specific case of auto components

industry which has shown remarkable success over the last two decades. The

chapter will build on two distinct but inter-dependent parts: a historical

analytical part (drawing mostly on existing literature) to understand the genesis

and development path of the industry through the changes in

policies/institutions; and an econometric analysis of quantitative and qualitative

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http://dpp.open.ac.uk/people/Kale.html



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data to understand the nature and extent of capability building processes at the

firm level in the automotive industry.

The plan for this section is as follows. In the next sub-section I present the

general industrial and economic environment of automotive industry byproviding its evolutionary pattern since independence and presenting how

technological capability of this industry has evolved through various decades. I

also discuss general industry trends in this sub-section. Data, methodology,

empirical model and results are discussed in following sub-section. Finally, the

last sub-section summarizes the main findings and provides policy perspectives

of the results.

Evolution of the Indian Automotive Industry: From Statics to Dynamics

This sub-section presents an evolutionary analysis of Indian automotive

industry‟s growth over the four decades since independence. The evolution of

India‟s automotive industry from a fairly static/slow-paced growth (from 1940s

till 1980s) to the recent impressive showing of dynamism owes formidable

precedence to history. If one fishes through the not-so yet impressive

documentation of Indian automotive industries‟ wholesome development since

independence in 1947, one would most certainly huddle with either political

surmise of industrial developments or a development (or sometimes industrial)

economists explanation of the industry‟s evolutionary characters. So far, most of

the prologues on India‟s automotive industry‟s development story have been

written by economists with industry as specialization or by development thinkers

with a political economy bent of mind. I do not have specific preference for

either as I would choose to borrow the economic historian‟s eye and combine

both political and economic/industrial development policy angle to describe

Indian automotive industry‟s growth trajectory.

As will become clear from the ensuing discussions, India‟s industrial

development is characterized by more complex processes than one can find in

other transition economies and industrialized nations. If one keenly observes the

differences in industrial development of some transition economies (for instance,

Republic of Korea) with India, among many distinct observations (e.g., a clear

and favorable state patronage to liberalization at the initial phase of

development), an interesting aspect would emerge, which to my knowledge has

flayed the probing eyes of industrial economists or political scientists. The state

of development and its sustainability in any economy is contingent upon the

stock and accumulation of human capital. The number of educated people

among young generations during 1960s and 1970s could make the key



difference between the paces of industrial development in the comparable

nations. This may appear anecdotal, but it has interesting political economy

evolutionary outcome which I believe has shaped the economic and industrial

policies in the next decades.

Chronology and typology of India’s automotive growth

Indian automotive industry‟s building up characteristics from the pre-

independence period till date shows distinct phases. It all started in 1940s for

the first embryonic automotive industry to emerge in the pre-independent

India. Almost after a decade and a half since then, leading entrepreneurs and

the government in the independent India have extended efforts to create a

manufacturing industry to supply the automotive industry with components

in 1953. This was the beginning of the take-off phase of Indian economy. In

the next three decades, the growth in the automotive industry did not really

kick-start as the national economic growth was constantly following the

Hindu rate of growth – an annual growth that stagnated between 3.5 percent

over 1950-1980. Despite the sluggish growth of the economy during that

time, the automotive industry began to witness a relatively fast growth

during 1970-1980 mainly due to the leading production role of Telso, Ashok

Leylands, Mahindra & Mahindra, Hindustan Motors, Premier Automobiles, and

Bajaj Auto. Having experienced several decades of colonial power, openness

to risk of admission in the global automotive production were severely

checked by the Indian government by introducing several licenses, trade

restrictions and barriers. However, the growing demand for more cars since

1980s has changed the whole growth scenario. During 1980-1985 the first

major change was sighted as Japanese manufacturers began to build car and

commercial vehicle factories in India in partnership with Indian firms. At the

same time, component manufacturers also entered the joint-venture scenario

with European and US firms.

From the mid period of phase 3 and the beginning of phase 4 of economic

reforms (that is during 1985-1990) the industry marked the entry of Maruti

Udyog into the production of passenger car segment as persistent high

import tariffs were relaxed to a great extent, and with lesser import cost

adding to the overhead production cost, higher productions were possible

leading to the start of growing exports. This period (the phase 4 of economic

reforms: 1988-2006) registered the triumph of liberalization which kick-

started the much awaited reform for the automotive sector paving the way

for the firms which were genuinely waiting for join-ventures, private



investment with duty-free technology transfer indirectly through FDI and

directly by importing the new technologies. It is during 1990-1995, Hero

Honda emerged as a major operator in the motorcycle market while Maruti

Udyog established itself as the leading passenger car maker. During 1995-

2000, leading international car makers entered the Indian market, a trendthat continues to accelerate till this date. During this time advanced

technology was introduced to meet competitive pressures, and

environmental and safety imperatives. The automobile companies started

investing in service network to support maintenance of on-road vehicles and

auto financing started emerging as an important driver for demand.

Since 2000, significant trade and investment restrictions were removed to

speed up the momentum of liberalization of the automotive industry.

Indigenous production of cars started since then with an eye to the domesticand international market needs. Increasing efficiency was achieved with

growing investment in research and development while satisfying the

strictest environmental standards. As a result, an influx of overseas

technology know-how has improved the impetus for improvements in quality

and productivity, to a point where many global companies now view India

more favorably than China as a source point for components. It seems that

global Tier 1s are increasingly confident about India's ability to build more

complex parts, and are relocating more complicated systems work to India

rather than simply building basic parts there.

Growth Dynamics of Automotive Segment: Past and Recent Trends

The automobile industry in India has long been recognized as a core

manufacturing sector with the potential to drive national economic growth

and foster the development of technological capabilities through its powerful

backward and forward linkages, and the localization of high value added

manufacturing processes within domestic economies (Humphrey, 2000;

Shapiro, 1994). In recent years, for instance, the contribution of the

automotive industry to GDP has risen noticeably - from 2.77 percent in 1992-

93 to 4 percent in 2003-2004.i

The automotive industry in India comprises of all vehicles, including 2-3

wheelers, passenger cars and multi-utility vehicles, light and heavy

commercial vehicles, and agricultural tractors and other earth moving

machineries, besides the component segment for all these categories (see

GenreChart for the various types of vehicles produced in India). The vehicles

segment and the allied components segment are sometimes alternatively

http://www.nistads.res.in/indiasnt2008/t4industry/t4ind12.html#_edn1






termed as automotive industry. The industry is characterized by a very high

percentage (about 80%) of 2-3 wheelers production. To mention, India ranks

as the largest manufacturer of motorcycles and second largest in

manufacturing of scooters in the world.ii In tractor manufacturing also India

is the second largest producer in the world.

It was noted in the preceding section that the auto industry witnessed a

radical transformation in terms of competition with de-licensing and

liberalization in the 1990s. Following this, two major developments took

place. First, there was an upsurge in the volumes of vehicles produced. And

secondly, there was a flux of entry of global auto manufacturers into India

and in some cases, also along with their parts suppliers.iii The major

contributions came from the passenger car segment, followed by the Multi

Utility Vehicles (MUVs). As a result, the 4-wheeler segment (includingtractors), for the first time, crossed the million marks in 1996-97, registering

a growth of about 12.2 percent in the 1990-97 period (Intecos-cier, 2001).

The 2- and 3- wheeler segments also showed good performance during the

same period with a growth rate of nearly 9 percent (Intecos-cier, 2001).

Some of the more recent trends of production are presented in the Figure 1a,

which depicts that starting from a meagre 0.5 million (in number) in 1970s,

the total production of vehicles has gone up to as high as 6.5 million in 2002.

The production accelerated after 1980s when partial decontrol wasintroduced. The result is notable – from a modest 1 million during 1980s it

became three fold in 1991. The effect of complete decontrol took time to

exert an all round impact on the economy as it shows there was a short

recessionary period 1991–1994, after which there was sign of revival.

Towards 1998-99, the industry again showed an upward trend reaching a

record high in 2002. The production of vehicles in terms of value also shows

a positive growth in the more recent periods (see Figure 1 b).

Genre of Indian Automotive Industry










Source:ACMA,India

Fig 1a: Automobile Production in India: 1971 – 2003

http://www.acmainfo.com/






Source: Own construction using SIAM and ACMA data

Fig 1b: Vehicle Production: Industry Gross Turnover


http://www.siamindia.com/


















Fig 2: Vehicle Production: The 4-wheeler Segment


Table 1: Production Trend of Automotive Segments (Mln No.)

Cars Jeeps/

MUV

M &

HCVs LCVs Tractors

Total 4

Wheelers

Total

2/3

Wheelers

All

vehicles

1971-72 -- -- -- -- -- -- -- --

1972-73 0.040 0.011 0.033 0.008 0.018 0.109 0.136 0.245

1973-74 0.037 0.013 0.031 0.009 0.022 0.111 0.151 0.263

1974-75 0.042 0.012 0.034 0.011 0.023 0.123 0.162 0.285

1975-76 0.031 0.010 0.035 0.006 0.031 0.112 0.194 0.307

1976-77 0.022 0.007 0.037 0.007 0.033 0.106 0.227 0.332

1977-78 0.036 0.008 0.039 0.008 0.033 0.125 0.284 0.408

1978-79 0.034 0.009 0.033 0.008 0.041 0.126 0.282 0.408

1979-80 0.033 0.012 0.047 0.013 0.055 0.159 0.321 0.480

1980-81 0.033 0.013 0.043 0.016 0.062 0.167 0.337 0.504











1981-82 0.031 0.016 0.054 0.020 0.070 0.191 0.467 0.659

1982-83 0.042 0.018 0.066 0.027 0.082 0.236 0.572 0.808

1983-84 0.044 0.020 0.061 0.027 0.063 0.214 0.664 0.878

1984-85 0.047 0.022 0.061 0.029 0.074 0.233 0.818 1.051

1985-86 0.076 0.023 0.063 0.033 0.082 0.277 0.941 1.219

1986-87 0.103 0.028 0.064 0.037 0.073 0.305 1.241 1.546

1987-88 0.126 0.029 0.060 0.039 0.079 0.333 1.449 1.782

1988-89 0.152 0.032 0.065 0.045 0.089 0.383 1.498 1.881

1989-90 0.166 0.036 0.070 0.046 0.107 0.425 1.716 2.141

1990-91 0.179 0.044 0.077 0.048 0.118 0.466 1.815 2.282

1991-92 0.182 0.037 0.087 0.058 0.139 0.502 1.910 2.412

1992-93 0.166 0.032 0.090 0.054 0.148 0.489 1.683 2.172

1993-94 0.163 0.039 0.075 0.053 0.148 0.479 1.569 2.047

1994-95 0.208 0.049 0.066 0.075 0.138 0.536 1.847 2.383

1995-96 0.264 0.050 0.102 0.093 0.163 0.672 2.324 2.996

1996-97 0.348 0.068 0.130 0.129 0.191 0.866 2.820 3.686

1997-98 0.408 0.135 0.152 0.085 0.226 1.005 3.202 4.207

1998-99 0.401 0.135 0.096 0.065 0.256 0.953 3.308 4.260

1999-00 0.390 0.113 0.080 0.055 0.254 0.893 3.584 4.477

2000-01 0.574 0.124 0.114 0.061 0.257 1.131 3.984 5.115

2001-02 0.507 0.126 0.088 0.064 0.231 1.017 3.961 4.978

2002-03 0.500 0.066 0.097 0.066 0.106 0.834 4.484 5.318

Compound Annual Growth Rates, CAGR (%)

1972-81 -2.33 3.39 4.99 10.37 14.74 5.77 13.15 10.39

1982-91 15.65 7.66 2.72 7.91 5.34 7.84 12.82 11.56

1992-01 11.79 14.85 -0.15 1.76 4.56 7.59 8.94 8.65

Total

period 8.91 6.66 4.25 8.02 6.20 7.26 12.60 11.06

Source: Constructed from “Facts and Figures: 2000-2001”, ACMA, India.

Particularly, there has been a considerable growth in the passenger car

segment in comparison to the MUVs / jeeps during the same period as shownin Figure 2. Combining with the information from preceding paragraph it is







evident that the major contribution to the growth of the total volume is from

the car segment. This segment registered a consistent growth while others

suffered a decline in production in the recent years. However, following an

overall up-trend in the economy towards 1998-99, the industry showed signs

of revival and as a result, in the year 2000, the production in the non-tractorsegments of the auto industry recorded a growth rate of 15 percent. In

1998-99, the industry produced a total of 4.5 million vehicles (including 2-

and 3- wheelers), and reached a turnover of Rupees 420 billion (equivalent

to US$ 104 billion), thus making India as the fifth largest auto producer

among emerging markets (ACMA, 2001).iv With continuous policy support

and rapid expansion of the domestic market, the competitiveness in the

industry intensified thus fuelling a high growth rate (with a CAGR of 12

percent, see Table 1) in the nineties. The detailed production trend for the

last 3 decades is presented in Table 1.

The notable performance of MUL in the industry contributed significantly to the

growth and dynamism of the industry. With the establishment of India‟s first

modern assembly plant, MUL initially started producing small passenger cars

that were fuel-efficient and cheaper (about 21 percent) than the existing

domestic cars (Humphrey et al., 1998). In fact MUL dominated the domestic

passenger car market (with a market share of about 83 percent) till 1996-97

and moved into the production of middle-sized cars in the 1990s. The domestic

market continued to expand markedly and the competition within the industryintensified with the growth of middle class consumers, and diversified consumer

preferences (D‟Costa, 1995, 1998; Okada, 2004). In the same period other

domestic car producers also diversified their product ranges. For instance,

TELCO, which had traditionally accounted for about 70 percent of the commercial

vehicle market (Kathuria, 1996), started to produce multi-utility vehicles and

small passenger cars in the 1990s.

The increase in the production volumes in the automotive industry was in fact

led by the growing domestic demand for the vehicles. This is very much distinctif we look at the trend of automobile sales in India in the post liberalization

period (see Figure 3 for the domestic sales of major vehicle categories). There

was an annual compound growth rate of about 9 percent in the sale of all

vehicles in the period 1995-2003 (see Table 1 for the respective figures for

different segments of the vehicles).Notably, the demand for 2-3 wheelers

overtook that for the 4 wheelers segment.










Fig 3: Domestic Vehicle Sales after 1991(In numbers)


As shown in both production and the sales figures, the automotive sector in

recent years is led by the 2/3-wheeler segment in India. This is also captured by

the relative market share of various segments of the industry as shown in Figure

4. The 2-wheeler segment dominates the market with more than two third of the

share followed by a moderate share of the passenger car segment in the 4-

wheeler category. The share of various segments in total production of vehicles

in recent years is presented in Table 2.











Fig 4: Market Share of Various Segments of Automobiles

Source: Own construction based on SIAM data

Table 2: Share of Segments in Total Vehicle Production (in Mn)

Commercial

Vehicles

(CVs)

Passenger

Vehicles

(PVs)

Two

Wheelers

Three

Wheelers

Grand

Total

2000-01 0.16 0.64 3.76 0.20 4.76

2001-02 0.16 0.67 4.27 0.21 5.32

2002-03 0.20 0.72 5.08 0.28 6.28

2003-04 0.28 0.99 5.62 0.36 7.24

2004-05 0.35 1.21 6.53 0.37 8.46

Source: Compiled from SIAM data

Automotive industry of India also started exporting slowly after the

liberalization. Here again, MUL and TELCO have been the leadingexporters,v accounting for 95 percent and 86 percent of passenger cars and















commercial vehicle exports respectively in later 1990s (Okada, 2004). The

automobile industry along with the component industry has significantly

raised their exports only in more recent years. In fact, the volume of exports

was very small and had shown a downward trend in the later part of nineties

(Okada, 2004). Afterwards, the trend started to reverse, however. Forexample, during the year 2002-03 the export of automobile industry had

registereda growth rate of 65.35 percent.vi The dominance of the 2 wheelers

is also apparent in the export figures. As mentioned before, passenger cars

and the 2-3 wheelers segments have accounted for the most in the

production and domestic sales of vehicles. Their performance is also

noticeable in the export figures of recent years (Figure 5). However, it is

argued by many (see e.g., Okada, 2004) that the expanded domestic

market, rather than the increase in exports propelled the rising trend of the

automotive industry.

Fig 5: Automotive Export Trends

Source: Own construction based on ACMA data











The relaxation of trade restrictions on foreign direct investment in the auto

industry, liberalization and the consequent positive signs of a buoyant industry

(mainly due to a growing market) drew keen interests from many international

firms. Several leading multinational companies entered into the Indian market.

By the late nineties the international majors had started their operation inthemiddle-sized passenger car segment.vii This resulted in many joint ventures

and foreign collaborations in the industry. The distinct changes in the

industry are also partly led by the ongoing trend of mergers and acquisitions

as strategies of major automotive manufacturers to consolidate their

competitive edge in the world market. As can be observed, most of the major

global producers of automobiles have made their presence in the Indian

market. The largest number of joint ventures has come from Japan and more

than 50 percent of the joint ventures are in the manufacture of passenger

cars.

Thus, starting from pre-independence era of as early as 1930s, the Indian

automotive industry has marched a long way – a journey which was in most

part beset with inward trade orientations prompting large regulations and

restrictions. As a result, the industry became one of the least innovative slots

till 1980s till MUL began its operations. The turn around came up in the

following years mainly due to the liberal policies undertaken to boost the

economy. The growth of the automotive industry is much more apparent in

segments such as passenger cars, and recently, in the 2- and 3- wheelers.The technological sophistication of the industry has also picked up after India

adhered to the global environmental norms regarding emission standards as

well as quality certifications. The upward trend in exports also reflects the

changing nature of technological sophistication of the Indian automotive

sector.

The structural and technological changes in the automotive industry also

have multiple trickle-down effects on its allied components segment as the

latter is inextricably linked to the former in thevalue chain.

viii

The intricatenature of automotive industry‟s intra-sector relationships due to its tiered

structure, and the dynamics of international automotive market

developments make it hard to disentangle the effects of the changes in both

the sectors.ix However, it is possible to identify the emerging trends in the

auto component firms by looking at the changes in some of the aggregate

features of these firms. In the following section we try to evaluate the

structure of this branch of the automotive industry in a greater detail and

examine its trends and dynamic potentials over time.














Auto Component Industry: Recent Performance Indicators

The transition of the automotive industry to a relatively „high-value‟ industry

towards the 1990s has significantly affected the structure of the auto component

sector too. With liberalization fast generating momentum in the economy, urban

income growth has also experienced a turnaround leading to high demand

growth for 2-3 wheelers and 4-wheelers. Consequent upon this, as we

elaborated before, there has been rapid growth of the vehicle production in the

recent years. Not surprisingly, component industry also grew by more than 20%

on the average per annum during 1991-2001. Also, the total exports of the

industry have grown remarkably; the average annual growth of total exports is

around 15 percent between 1991 and 2002. We describe these trends in

seriatim:

(a) Trends in production: To cater to the existing and new vehicle

manufacturers‟ requirements a continuous expansion of the automotive

components sector has been occurring after 1980s. With the opening up of the economy and a renewed optimism of market growth prospects inspired

higher investment and output in this sector. In 1996-97, the investment in

the component sector marked a little above 1500 million dollar but in 2001-

2002, the investment rose to 2300 million dollar which is a remarkable

growth of 30% in over five years (Figure 6), notwithstanding the existing

structural bottlenecks like poor road infrastructure. The fact that gradual

liberalization set the pace for higher investment in this sector can also be

seen while observing the commencement of production of the companies.

Interestingly, about 60 percent of the total firms in the organized sectorbegan production only after 1980 – the time partial decontrol was

introduced.

The total production of auto components has been increasing in about 19

percent per annum since 1960s. However, the gross output in value terms

was quite miniscule till mid seventies and picked up only after 80‟s. This is

true at the various components levels as well. As can be gleaned from Figure

7, the volume of production was almost negligible in the 1960s. It is only

since 1975, a respectable production started (Figure 7) and in the

subsequent years the total auto component production has grown almost



exponentially. Following the high growth of total production is the growth of

engine parts and drive transmission and steering parts. All through the

period, engine parts, being high value-added in its nature, has been

contributing the most to the total production. A closer look at the trends

however reveals that a short recessionary period occurred in 1997-1999during which the production growth was almost negligible, most of the

segments even experiencing negative growths (Table 3). Overall, the post

liberalization period induced a CAGR of about 20 percent, which is slightly

more than the CAGR of the entire span (1961-2001).

Fig 6: Investment in Auto Components Industry

Source: Own construction from ACMA data







Table 3: Growth of Auto Components production in India

Engine

Parts

Drive &

Transmission

Parts

Suspension

& Braking

Parts

Electrical

Parts

Equip-

ment

Total

1991-92 20.73 11.30 22.16 19.76 13.00 19.02

1992-93 19.01 14.31 8.10 35.99 18.06 20.52

1993-94 18.20 21.12 14.91 17.69 53.25 20.84

1994-95 22.94 28.91 26.02 44.13 21.29 27.19

1995-96 22.19 25.32 31.95 32.07 44.45 29.75

1996-97 27.26 7.77 21.20 20.36 28.93 23.65

1997-98 0.70 11.13 -0.18 -3.79 -1.05 4.73

1998-99 2.75 2.61 6.37 4.33 17.59 7.72

1999-00 21.43 43.06 9.04 18.50 18.57 22.99

2000-01 -9.79 15.04 -2.43 -7.07 15.61 5.30

CAGR (1961-

2001) 16.97

21.23

21.92

17.32

19.89

18.47

CAGR (1991-

2001) 14.86 20.69 13.63 19.75 27.22 19.81

Source: Own calculation based on ACMA data







Fig 7: Component-wise Production Trend

Source: Own construction from ACMA data

(b) Trends in Exports and Imports: The auto components industry is growing

not only in the domestic market but is also making inroads in the export

markets. Despite the relatively small share of in the world exports, the industry

has been managing to tot up the numbers in recent years. Exports of autocomponents from India have grown at a compounded growth rate of 19 per cent

over the past six years.x During the fiscal year 2004, the industry achieved a

milestone ofUS$ 1 billion worth of exports.xi Going by the current trends, the

auto component industry is observed to export more than 10 percent of its

output every year (ACMA, India).xii Figures 8(a,b) below, present the

performance of the component sector in terms of trade. Though the exports did

grow by 1990s, a bulk of the exporters largely catered to the low-value added

„after market‟ demand abroad rather than high-quality OEM supplies till late

(Okada, 2004). The OEM exports increased more gradually towards the end of that decade.























The appreciable rise of value of exports in recent years (Figure 8a), like

many other sectors of the economy, doubtlessly owes to the outcome of

liberalization. Over the past 15 years, the exports in this sector have been

growing steadily at about 12 per cent per annum (Table 4). However, the

growth rate of imports has been a meagre 2 percent over the span of adecade and half. The year-to-year imports have been also quite fluctuating

as can be observed from Table 4. In fact, due to the inward orientation of the

automotive industry, imports had always been low in the industry.

Interestingly, for the first time, a positive trade balance is observed since last

two years.

Table 4: Growth Rate of Exports and Imports

Years

Exports Imports

OECD Non-

OECD World World

1989 -0.91 26.44 8.82 6.13

1990 24.10 9.01 17.86 30.59

1991

8.96

16.91

12.00

-50.32

1992 17.82 35.10 24.72 23.87

1993 15.03 10.92 -3.81 -0.99

1994 10.37 33.06 11.28 27.45

1995 28.02 27.96 27.99 43.89

1996 -5.44 17.50 8.23 33.26

1997 12.34 1.94 5.61 -39.94

1998 15.25 -1.43 -6.62 -36.74

1999 6.51 16.96 13.40 38.97

2000 37.00 62.80 54.54 -23.59

2001 10.62 -3.87 0.24 -11.92

2002 15.46 24.26 21.51 -12.14

Average annual

growth rate 6.78 17.15 12.29 2.04

Source: Own calculation from UN COMTRADE databasexiii

http://comtrade.un.org/









Fig 8a: Export - Import Trends

Source: Own calculation from UN COMTRADE database

Fig 8b: Direction of Exports

Source: Own calculation from UN COMTRADE database











The direction of component export of the developing countries, i.e., whether

they are exporting more to the developed or developing nations, is an important

indicator of the competitiveness of the industry in the world market. Generally,exports of components mainly to the OECD countries would indicate

technologically superior products, which cope up with international competition.

India‟s auto component exports have marked a global presence over the recent

years. For instance, before 1993, the share of exports going to the non-OECD

countries was higher than that for the OECD block (Figure 8b). But as the impact

of liberalization started to flourish, the direction of the exports reversed after

1994; exports to OECD countries have been growing significantly. Currently, of

the total auto component exports, developed markets such as the US and

Europe together account for about 56 percent, Asia accounts for 27 percent andAfrica accounts for 11 percent of the export earnings (ACMA, 2004).

The rising exports in India was also partly led by the over capacity in the

domestic market that resulted from the sudden influx of FDI in 1990s.

However, the focus on export markets opened up many avenues and

challenges alike. While with growing exports, Indian companies gained

increasing stakes in the global sourcing, at the same time they became

aware of their technological capabilities in the „global industry‟ (Okada,

2004). The stiff competition thus forced the firms to upgrade their quality inorder to sustain competition and improve their standing in the international

and domestic market.

(c) Inflow of foreign direct investment (FDI) and rise in foreign

collaborations:Endowed with the potential of low-cost manufacturing along

with high engineering skills workforce, India edges over other developing

countries with respect to component manufacturing. Many international

component manufacturers such as Delphi, Lucas-TVS, and Denso followed

their customers (global car manufacturers) and started their manufacturing

in India. This brought about a large inflow of FDI into the sector. This was

primarily due to the „follow sourcing‟ strategies of the global manufacturers

present in India who encouraged their group companies or suppliers to

create manufacturing base in India, often in the form of joint ventures with

Indian suppliers. xiv

Thus, entry of global OEMs and demand for high quality/technology

components encouraged Indian auto component companies to enter into

several foreign collaborations. At present, there are over 450 collaborations

with foreign partners from around the world (see Table 5). Of this, about 64

http://www.oecd.org/home/0,2987,en_2649_201185_1_1_1_1_1,00.html





















percent are technical collaborations and another 11 percent are both

technical and financial tie-ups. With the growing pace of economic reforms,

collaborations are on the rise, which promises a better prospect as more

foreign firms are showing increasing interest in the investment in Indian

automotive sector.

This clearly puts pressures on the domestic supplier industry to raise the

technology standards and upgrade their dynamic capabilities (Okada, 2004).

With an outward look of the component manufacturers (increasing exports,

more so to the western destinations), and the competitive pressures from

the international firms both in the export market and domestic market (from

firms who began manufacturing in India or has collaborated with other Indian

suppliers), the component industry was aware that it had to upgrade the

process and product qualities in order to sustain and gain world-class status.Many substantive component manufacturers have endeavoured to secure

international quality standards. A majority of ACMA members have

already secured ISO 9001 certifications and a sizeable portion have got QS

9000 certification.xv Some of the auto components firms in India have

achieved a great deal of success in terms of engineering capabilities and

adaptation to the local requirements through local design.xvi

Table 5: Foreign Collaborations of Indian Auto Component Companies

Nature of

Collaboration No. of Collaborations % of the total

Technical 299 63.75

Financial 105 22.39

Technical and

Financial 50 10.66

Joint Venture 14 2.99

Total 469 100

Note:Total number of firms is 365

Source: Own calculation from ACMA‟ s “Facts and Figures: 2000-2001”



















To summarize, the Indian automotive industry has been experiencing

remarkable developments with maximum growth in the passenger cars and

two-wheelers segments. Most importantly, the component industry has

grown faster in the post-liberalization period. As the industry grew, following

the global trend, the Indian automotive industry is gradually becoming tieredwhere the assemblers are sourcing mostly from the first-tier suppliers that in

turn have vendors in lower tiers. This has given rise to assemblers

consolidating their suppliers in order to make their production process leaner.

By the end of the decade of liberalization, the two major auto assemblers in

India (MUL and TELCO) had streamlined most of their first-tier

suppliers.xvii Moreover, the increasing trend of sourcing many integrated

assemblies rather than components which put the large and competent

component suppliers next to the assemblers while the technologically weaker

firms were relegated to lower rungs of the value chain. Thus a clearhierarchical structure started emerging in the industry with more pressure on

the lower-tier firms to climb up the value chain through technological

upgrading.

Entry of a number of global assemblers and large component producers has

also immensely shaped the dynamics of the industry in India. They are

setting stringent operational requirements in terms of cost, quality, delivery

and flexibility for their suppliers. In addition, they are also introducing new

technology – more composite parts needing new capabilities to producethem. Notably, the focus of the innovations has been more on process

changes while the locus of these changes have shifted from the assembling

units to auto component units. As a result auto component firms are being

increasingly called upon to make these innovations by enhancing their

process/product quality and operational excellence.

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----------------------

i Source: Annual report, Department of Heavy Industry, Government of India.

ii Source: “Indian automotive industry: Current Status”, 2004 (ACMA, India).

http://www.foreignaffairs.com/articles/50550/paul-krugman/the-myth-of-asias-miracle



http://www.stata.com/



http://www.globalvaluechains.org/publications/

http://www.globalvaluechains.org/publications/





iiiIn fact, the rapid growth in 1994-96 period attracted international producers to make their bases in India. Some of the

important entries included Suzuki, Honda, Mitsubishi and Toyota of Japan; General Motors and Ford of US; Mercedes Benz,

BMW, Opel and Volkswagen of Germany; Peugeot of France; Fiat of Italy and Hyundai and Daewoo of South Korea.

iv The countries ahead of India during the year were Korea, Brazil, Mexico and China.

v It may be noted here that TELCO has been exporting over 15 percent of its output (mostly commercial vehicles such as trucks)

to a large number of countries much before the liberalization started (Lall, 1987) while MUL’s export was mainly pushed by the

government in order to promote innovation (Okada, 2004).

viSource: Annual Report, Department of Heavy Industry, Government of India, (www.indiainbusiness.nic.in).

viiIn fact, as studies have pointed out the influx of international car manufacturers created serious problems of over capacity in

the car segment while the commercial vehicle segment became highly fragmented (D’Costa, 1998).

viiiThe automotive industry is pyramidical in structure with the auto assemblers at the top and a tiered auto component firms

down the structure. The tierisation in the azuto component industry is at three levels. On the first rung are those manufacturers

who supply directly to the automaker. This is followed by the second rung that comprises of component manufacturers who

supply to the first tier; this is followed by the third rung that supplies to the second tier.

ixThe relationship between the automotive firms and component manufacturers in India is also significantly affected by the

general changes in the global auto industry value chains. However a detailed discussion on it is beyond the scope of our study.

For a succinct account of the relevant issues, see Humphrey and Memodovic (2003).

xhttp://www.ibef.org/industry

xi According to a recent study by Frost and Sullivan, exports are expected to grow at a compound annual growth rate of 21.5

percent to touch $2.57 billion by the year 2009 as outsourcing from the country is fast catching up.

xiiPrincipal export items include replacement parts, tractor parts, motorcycle parts, piston rings, gaskets, engine valves, fuel

pump nozzles, fuel injection parts, filter & filter elements, radiators, gears, leaf springs, brake assemblies & bearings, clutch

facings, head lamps, auto bulbs & halogen bulbs, spark plugs and body parts.

xiiiUN COMTRADE (United Nations Commodity Trade Statistics Database) contains trade data (imports, exports and re-

exports) from countries world-wide. For each country annual data can be retrieved by commodity and trading partner.

Commodity is defined by either standard international trade classification (SITC) codes. The data used in our analysis refers to

the SITC Revision 3 data for category 7843 (Other parts, motor vehicles). For more details

see http://unstats.un.org/unsd/comtrade/.

xiv However, the impact of this strategy is sometimes not clear for the domestic suppliers as many studies have documented how

such strategies of the global auto-makers limit the ability of domestic suppliers—often small and medium firms to penetrate the

tight and increasingly closed global supply networks of the multinationals that are locating in their regions (Barnes and

Kaplinsky, 2000, Humphrey, 2000). These studies argue that as global auto assemblers that are locating in developing

http://www.ibef.org/industry



http://unstats.un.org/unsd/comtrade/

http://unstats.un.org/unsd/comtrade/




countries rely overwhelmingly on “follow sourcing” as a procurement strategy (or on a small elite of local suppliers), existing

supplier networks in these countries can become progressively undermined and marginalized (Humphrey, 2000).

xv About 81% of member firms of the Automotive Component Manufacturers Association has the ISO 9000 certification, nearly

half have the QS 9000 certification and a growing number (10%) have the ISO 14000 certification (Tiwari, 2003).

xviFor instance, Sundaram Fasteners (a firm in Tamil Nadu, South India), has become a global suppler to General Motors.

Moreover, over the past two years, 7 Indian component manufacturers have won the coveted Deming Prize, one of the highest

awards on TQM (Total Quality Management) in the world (ACMA, 2004). Similar other such success stories have been seen in

the industry in recent years suggesting the growing technological sophistication of firms. However, even though such islands of

excellence have often been noticed, the industry as a whole has a long way to go given the demands of OEMs in the developed

nations for better quality. For instance, the current level of defect rate of components remains somewhere in the range of 500-

5000 PPM (parts per million) in most of the Indian companies while it is 10 to 20 PPM in Japan, and 50 to 100 PPM in the US

(Source: Quoted from the Interview with ACMA Chairman, Northern Region).

xviiFor instance, studies note that MUL consolidated its supplier base from 404 to about 300 first-tier suppliers in a period of

just two years in late nineties while TELCO followed the suit by reducing the number of suppliers from 1200 to about 500 in

1997 (Okada, 2004).

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