The Challenges to China and India as the New and Potential Car Producer in Automotive Industry Within Asia Countries

7/30/2019 The Challenges to China and India as the New and Potential Car Producer in Automotive Industry Within Asia Cou

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The Challenges to China andIndia as the New Potential CarProducer in Automotive Industrywithin Asia Countries

Ivyanno Utama Canny & Aaron Albert Samosir

Report at: Swiss German University

Faculty of Business Administration

Subject: Economic Corporate

Lecturer: Rudy Tobing, S.E., MBA


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The Challenges to China and India as the New Potential Car Producer inAutomotive Industry within Asia Countries Page 1 of 26

Economic Corporation Ivyanno Utama Canny & Aaron Albert Samosir

TABLE OF CONTENTS

CHAPTER 1 INTRODUCTION TO WORLD AUTOMOTIVE INDUSTRY. 1.1 Worldwide Production... 1.2 Consumption Trends.... 1.3 World Motor Vehicle Production....

2223

CHAPTER 2 AUTOMOITVE INDUSTRY IN INDIA & CHINA2.1 History of Automotive Industry in India2.2 History of Automotive Industry in China

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CHAPTER 3 CHALLENGES IN THE INDIAN AUTOMOTIVE INDUSTRY3.1 Composition of Costs and Productivity Factors

3.2 Infrastructure Factors3.2 Human Resource Development

1616

1820

CHAPTER 4 CHALLENGES IN THE CHINA AUTOMOTIVE INDUSTRY. 22

CHAPTER 5 CONCLUSION 24


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CHAPTER 1

INTRODUCTION TO WORLD AUTOMOTIVE INDUSTRY

The automotive industry designs, develops, manufactures, markets, and sells motor

vehicles, and is one of the world's most important economic sectors by revenue. The

term automotive industry usually does not include industries dedicated to automobiles

after delivery to the customer, such as repair shops and motor fuel filling stations.

1.1.1 Worldwide Production

In 2007, worldwide production reached a peak of 73.3 million new motor vehicles1. In

2009, production dropped 13.5 percent to 61 million. Sales in the U.S. dropped 21.2

percent to 10.4 million units; sales in the European Union (supported by scrapping

incentives in many markets) dropped 1.3 percent to 14.1 million units. China became

the world's largest motorvehicle market, by both sales and production. Sales in China

rose 45 percent in 2009 to 13.6 million units2.

1.2 Consumption Trends

About 250 million vehicles are in use in the United States. Around the world, there

were about 806 million cars and light trucks on the road in 2007, consuming over 260

billion gallons of gasoline and diesel fuel yearly. In the opinion of some, urban

transport systems based around the car have proved unsustainable, consuming

excessive energy, affecting the health of populations, and delivering a declining level

of service despite increasing investments. Many of these negative impacts fall

1 Reference: Production Statistics". OICA.2 Cars Sales Around The World In 2009: Mostly Down. The Truth About Cars.


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disproportionately on those social groups who are also least likely to own and drive

cars. The sustainable transport movement focuses on solutions to these problems.

The Detroit branch of Boston Consulting Group predicts that, by 2014, onethird of

world demand will be in the four BRIC markets (Brazil, Russia, India and China). Other

potentially powerful automotive markets are Iran and Indonesia.

1.3 World Motor Vehicle Production

Global Production of Motorvehicles by Year

Year Production Change

1997 52,987,0001998 57,987,000 2.70%1999 56,258,892 2.98%2000 58,374,162 3.80%2001 56,304,925 3.50%2002 58,994,318 4.80%

2003 60,663,225 2.80%2004 64,496,220 6.30%2005 66,482,439 3.10%2006 69,222,975 4.10%2007 73,266,061 5.80%2008 70,520,493 3.70%2009 60,986,985 13.50%


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Global Production of Motorvehicles by Country


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CHAPTER 2

AUTOMOTIVE INDUSTRY IN INDIA & CHINA

2.1 History of Automotive Industry in India

Following economic linearization in Indonesia in 1991, the Indian automotive industry

has demonstrated sustained growth as a result of increased competitiveness and

relaxed restrictions. Several Indian automobile manufacturers such as Tata Motors,

Maruti Suzuki and Mahindra and Mahindra, expanded their domestic and

international operations. India's robust economic growth led to the further expansion

of its domestic automobile market, which has attracted significant Indiaspecific

investment by multinational automobile manufacturers. In February 2009, monthly

sales of passenger cars in India exceeded 100,000 units and have since grown rapidly

to a record monthly high of 182,992 units in October 2009. From 2003 to 2010, car

sales in India have progressed at a CAGR of 13.7%, and with only 1% of Indian

households owning a car in 2009 (whereas this figure reaches 80% in Switzerland for

example) this progression is unlikely to stop in the coming decade. Congestion of

Indian roads, more than market demand, will likely be the limiting factor.

The first car ran on India's roads in 1897. Until the 1930s, cars were imported directly.

Embryonic automotive industry emerged in India in the 1940s. Following the

independence, in 1947, the Government In India and the private sector launched

efforts to create an automotive component manufacturing industry to supply to the

automobile industry. However, the growth was relatively slow in the 1950s and 1960s


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due to nationalization and the license raj, which hampered the Indian private sector.

After 1970, the automotive industry started to grow, but tractors, commercial

vehicles and scooters mainly drove the growth. Cars were still a major luxury.

Japanese manufacturers entered the Indian market ultimately leading to the

establishment of Maruti Udyog. A number of foreign firms initiated joint ventures

with Indian companies.

In the 1980s, a number of Japanese manufacturers launched joint ventures for

building motorcycles and light commercial vehicles. It was at this time that the Indian

government chose Suzuki for its joint venture to manufacture small cars. Following

the economic linearization in 1991 and the gradual weakening of the license raj, a

number of Indian and multinational car companies launched operations. Since then,

automotive component and automobile manufacturing growth has accelerated to

meet domestic and export demands.

Automotive Industry in India Today

The Automotive industry in India is one of the largest in the world and one of the

fastest growing globally. India manufactures over 11 million 2 and 4wheeled vehicles

and exports about 1.5 million every year. It is the world's second largest manufacturer

of motorcycles, with annual sales exceeding 8.5 million in 2009. India's passenger car

and commercial vehicle manufacturing industry is the seventh largest in the world3

with an annual production of more than 2.6 million units in 2009. In 2009, India

emerged as Asia's fourth largest exporter of passengers cars, behind Japan, South

3 Reference: Production Statistics". OICA.


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Korea and Thailand. According to the Society of Indian Automobile Manufacturers,

annual car sales are projected to increase up to 5 million vehicles by 2015 and more

than 9 million by 2020.

As of 2009, India is home to 40 million passenger vehicles and more than 2.6 million

cars were sold in India in 2009 (an increase of 26%), making the country the second

fastest growing automobile market in the world 4. By 2050, the country is expected to

top the world in car volumes with approximately 611 million vehicles on the nations

roads. A major chunk of India's car manufacturing industry is based in and around the

city of Chennai, also known as the "Detroitof India" with the Indian city accounting

for 60 per cent of the country's automotive exports. Gurgaon and Manesar near New

Delhi are hubs where all of the Maruti Suzuki cars in India are manufactured. The

Chakan corridor near Pune, Maharashtra is another vehicular production hub with

General Motors, Volkswagen/Skoda, Mahindra and Mahindra in the process of setting

up or already set up facilities. Halol in Gujarat, Auragabad in Maharashtra, Kolkatta in

West Bengal are some of the other automotive manufacturing regions around the

country.

4 Reference: Gulati, Nikhil (20100909). India Car Sales Touch Record Higher.


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Production Statistic

The production of automobiles has greatly increased in the last decade. It passed the

1 million mark during 20032004 and has more than doubled since.

In 2015, it is expected that 3 million cars will be sold in India. Tyre makers are

spending $3 billion to build capacity to produce 106 million tyres/year.

Indiamade Cars

1. Tata Motors

Tata Motors is Indias largest automobile company, with consolidated revenues of

USD 20 billion in 200910. It is the leader in Commercial Vehicles and among the

top three in passenger vehicles. Tata Motors has products in the compact, midsize

car and utility vehicle segments. The company is the world's fourth largest truck

manufacturer, the world's second largest bus manufacturer, and employs 24,000

workers. Since first rolled out in 1954, Tata Motors has produced and sold over 4

million vehicles in India.


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Tata Motors has auto manufacturing and assembly plants in Jamshedpur,

Pantnagar, Lucknow, Ahmedabad, Sanand, Dharwad and Pune in India, as well as

in Argentina, South Africa and Thailand.

One of the most TATA popular car: TATA Nano

2. Mahindra and Mahindra

Mahindra & Mahindra Limited is part of the Indian Industrial Conglomerate

Mahindra Group based in Mumbai. The company was set up in 1945 in Ludhiana

as Mahindra & Mohammed by brothers K.C. Mahindra and J.C. Mahindra along

with Malik Ghulem Mohhamed. After India gained independence and Pakistan

was formed; Malik Ghulam Mohammed moved to Pakistan where he became the


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nation's first finance minister. Now, with the Mahindra brothers as the whole sole

of the company, its name was changed to Mahindra & Mahindra in 1948.

Mahinda and Mahinda Cars: Scorpio

The other Indiamade car brands, such as Chinarka Motors, Hindustan Motors & San

Motors.

2.2 History of Automotive Industry in China

1928 1949

Zhang Xueliang founded his arsenal to make one truck calledMing Sheng in 1931

Another general, Yang Hucheng, patronized the inventor Thang Zongming to make

a new type of mobile energized by Charcoal.


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1949 1980

1956: The first modern automobile factory First Automobile Works began

production.

March 10, 1958: The first 2ton light duty truck (NJ130), which was based on

Russian GAZ51, was produced in Nanjing. The truck was named Yuejin (meaning

"leap forward") by China's First Ministry of Industrial Machinery.

June 1958: Nanjing Automobile Works, previously a vehicleservicing unit of the

Army, was established. The truck production continued until the last truck (NJ134)

rolled off the assembly line on July 9, 1987. Cumulative production was 161,988

units (including models NJ130, NJ230, NJ135 and NJ134).

Late 1950s to 1960s: Several automobile factories were set up in Nanjing (today is

Nanjing Automobile (group) corporation), Shanghai (today is Shanghai Automotive

Industry Corporation), Jinan (evolving into China National Heavy Duty Truck

Group), and Beijing (today is Beijing Automotive Holding Industry.

1980s

The passenger car industry was a minor part of vehicle production during the first

three decades of Chinas socialist economy. As late as 1985, the country produced a

total of only 5,200 cars. As domestic production could not meet demand, import

totals rose dramatically, despite a 260 per cent import duty on foreign vehicles. The

country spent some $3 billion to import more than 350,000 vehicles (including

106,000 cars and 111,000 trucks) in 1985 alone. Three taxi companies in particular

thirsted for Japanese cars, such as Toyota Crowns and Nissan Bluebirds.


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Chinas answer to the import binge was to sign a series of jointventure passenger car

production agreements. In 1983, American Motor Corporations (AMC, later acquired

by Chryslers Corporation) signed a 20year contract to produce their Jeepmodel

vehicles in Beijing. The following year, Germanys Volkswagen signed a 25year

contract to make passenger cars in Shanghai, and Frances Peugeot agreed to another

passenger car project to make vehicles in the prosperous southern city of Guangzhou.

After 1990

Several enterprises entered the automobile industry since 1994. Some of them are

originated from defense industry, such as Changan Motors, Changhe, and Hafei

Motors; some were developed from old stateowned companies, such as BYD Auto,

Brilliance China Auto, Chery Automobile, and Chengfeng Automobile. Others are

privateowned companies, such as Geely Automobile, Great Wall Motors.

Automotive Industry in China Today

Since November 2009, China is the largest auto market in the world. China's

automobile industry has been in rapid development since the early 1990s. In 2009,

China produced 13.79 million units of automobile, of which 8 million units were

passenger cars (sedans, sportutility vehicle (SUV), multipurpose vehicle (MVP) and

crossovers), and 3.41 million units were commercial vehicles (buses, trucks, and

tractors).

Of the automobiles produced, 44.3% are local brands (BYD, Lifan, Changan (Chana),

Geely, Chery, Hafei, Jianghuai (JAC), Great Wall, Roewe, Martin Motors, etc.), the rest

being produced by joint ventures with foreign carmakers such as Volkswagen, General


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Motors, Huyndai, Nissan, Honda, Toyota etc. Most of the cars manufactured in China

are sold within China, with only 369,600 cars being exported in 2009.

China's annual automobile production capacity first exceeded one million in 1992. By

2000, China was producing over two million vehicles. After China's entry into the

World Trade Organization (WTO) in 2001, the development of the automobile market

further accelerated. Between 2002 and 2007, China's national automobile market

grew by an average 21 percent, or one million vehicles yearonyear. In 2006, Chinas

vehicle production capacity successively exceeded six, then seven million, and in

2007, China produced over eight million automobiles. In 2009, 13.759 million motor

vehicles were manufactured in China, surpassing Japan as the largest automobile

maker in the world.

Production Statistic


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Chinamade Cars

1. Chery Automobile

Cherry Automobile it is owned by the local government of Wuhu, Anhui Provinces

but is scheduled to be Privatized In 2009 Chery produced 508,500 units of

automobile. Of the 500,000 Chery vehicles sold in 2009, 409,300 units were

sedans. It is the largest independent Chinese auto manufacturer and one of the

fastest growing automakers in the world.

Chery Riich M1EV

2. Chang'an Motors

Born in 1862, Changan was a pioneer of Chinas modern industry. To date,

Changan has a history of over a century. Its one of the first-class enterprises of

Chinese auto industry.


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With solid production strength, Changan has four major production bases in

Chongqing, Hebei, Jiangsu, and Jiangxi Province across China, including 11

complete vehicle plants and 2 engine plants, with the annual yearly capacity of 1.5

million vehicles and 1.5 million engines. Changan also has six production bases in

Asia, America, Africa and Europe. A three-country-five-place researching and

developing pattern is formed in China, Italy and Japan, including a series engine

platform ranging from 0.8L to 2.5L. The automobile product list covers both

passenger cars and commercial vehicles. Our automobile brand sale is among the

top 20 around the world and top 4 in Chinese automobile industry. In 2009, the

brand value of Changan was RMB 21.619 billion Yuan.

Changan Alsvin


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CHAPTER 3

CHALLENGES IN THE INDIAN AUTOMOTIVE INDUSTRY

Costs, infrastructure and human resource development are the underlying concerns in

the automotive industry and manufacturers are being challenged on these counts. Labor

costs are rising and economies of infrastructural improvements are not being realized

efficiently. Companies are searching for technological advancements that can help

contain costs of production and help in using resources efficiently to increase overall

productivity.

3.1 Composition of Costs and Productivity Factors

Raw material costs are by far the single largest costs where steel and rubber constitute

the two main materials used by manufacturers. However, the variation in cost of raw

materials is not as much as that in cost of labor. Further, labor costs constitute a much

higher share of the total cost in the automotive industry in American and West European

countries compared to India. In addition to the absolute costs involved in the automotive

industry, the tax structure also plays an important role. India has higher indirect taxes

compared to some of the other countries in Asia, which reduces the cost advantages it

has. A cost comparison study between Indian and Chinese automotive manufacturing

companies revealed that the cost to manufacture a passenger vehicle in China is 23

percent lower than it is in India with the main difference being higher taxes and their

cascading impact in India, rather than cost of raw materials or labor costs.


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Advantage of low labor costs in India

Low labor costs and easy availability of management and engineering skills is one of the

prime advantages of manufacturing in India. Among the costs incurred to manufacture

automotive products, it is the cost of labor that foreign companies can cut most easily by

manufacturing in India. The cost per hour in India is only between 7 and 10 per cent of

the cost of labor in the developed countries. However it needs to be assessed if India can

maintain the cost advantage.

Low employee welfare leading to reduction in labor productivity

There is a significant increase in the number of contract workers being used in the

automotive industry, which helps to keep labor costs low, but this practice of hiring labor

under contract also leads to exploitation in many cases. Thus, there is need for labour

reforms aimed at increasing the welfare of workers. Manufacturing companies are being

encouraged to retain and employ more permanent workers, which will lead to higher

levels of productivity.

A survey conducted by Indian Council for Research on International Economic

Relations (ICRIER) found that the muchneeded labour reforms would increase the level

of productivity as reforms induce workers to work more efficiently. The survey found that

between 10 and 30 per cent of the total production workers in the automotive industry

are employed on contract basis. Further, wages paid to temporary workers are on an

average only 25 to 50 per cent of wages paid to permanent workers.


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Technological advancements leading to cost reductions

Manufacturers are looking for ways to contain costs. With decreasing cost of technology,

manufacturers are exploring ways to develop low cost automation and use it to reduce

labor costs. Regarding efficiency in production, according toan econometric analysis

conducted by ICRIER, it has been found that increase in foreign participation is directly

correlated with higher technical efficiency. Thus, the government is inducing more foreign

participation, so that technologically advanced products can be developed at lower costs

overall.

3.2 Infrastructure Factors

Continued investment in infrastructure is essential for India to be able to realize the

targets set in the AMP. There are inadequate ports, insufficient feeder rail lines to the

ports, and bad roads. Despite the bottlenecks in this regard there are companies that

have made the most out of the existing infrastructure. For instance, Hyundai has setup its

factory very strategically near the port in Chennai and has built a supply chain hub around

surrounding areas. It has now become the second largest passenger car manufacturer in

India after entering the Indian market in 1998.

Roads

With respect to roads, the Golden Quadrilateral, a corridor connecting the four metro

cities of India, New Delhi in the North, Mumbai in the West, Chennai in the South and

Kolkata in the East spanning 6 500 kilometers is being built. The GOI has also launched a

program for the construction of 66 500 kilometers of national highways of which 50 000

kilometers is expected to be completed by 2015. With better road infrastructure,


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significant growth is expected in the automotive industry. For instance, better roads are

leading to greater demand for multiaxle vehicles.

Railways

The Ministry of Railways is in the process of developing freight corridors in Railways.

Drawn on similar lines of highway projects linking east with west and north with south,

the ministry is planning for an eastwest corridor and a northsouth corridor. Connectivity

between rails and ports (both dry and sea ports) is essential and a blueprint for railway

development is being prepared.

Ports

For India to develop into a global automotive hub, port development is imperative.

Specialized port infrastructure for handling vehicle exports is being developed especially

near the main automotive clusters near Mumbai and Pune in the West, Chennai in the

South, and Kolkata in the East. Two new deep ports are being developed that have special

emphasis on the automotive industry. One is in Dhamra in the state of Orissa (East India),

which will be completed by 2010, and the second is in Sutrapada in the state of Gujarat

(West India).

Power

The high cost and relatively lower quality of power in many parts of India is also an issue

highlighted by many manufacturers. Many companies face fluctuations in supply of

power and power outages that in turn affect the quality of production. The average

manufacturer in India loses 8.4 per cent in sales due to power cuts as opposed to less


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than 2 per cent in China and Brazil. It is estimated that the power outages alone cost India

1 per cent of GDP.40 Several companies are willing to pay more for power in return for

consistent and good quality of power. The Eleventh FiveYear Plan of India 20072012,

issued by the Planning Commission of India, has set ambitious targets to generate and

distribute more and better quality power.

3.3 Human Resource Development

Skill shortages and skill mismatches may emerge as a constraint to achieve the growth

targets set in the AMP. Thus one of the main areas of focus cited by the Ministry of Heavy

Industries and Public Enterprises is to develop advanced capabilities in the workforce. A

large workforce consisting of both skilled and unskilled workers will be required to sustain

the increased level of production. The challenge is to ensure that the demandsupply gap

does not arise either in quantitative or in qualitative terms.

The employment generated can be divided into direct and indirect employment. While

direct employment is employment by way of workers being engaged in the production of

automobiles and automotive components, indirect employment is generated in feeder

and supplier industries in the areas of finance, insurance, mechanics and aftersales

personnel for semiskilled and unskilled workers in rural and semiurban areas. According

to the AMP, it is estimated that the automotive industry would require the following:

Management and General: 28 per cent or 7 million

Skilled workers: 62 per cent or 15.5 million

Unskilled workers: 10 per cent or 2.5 million


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The need for toplevel engineering and managerial manpower is being met by the Indian

Institutes of Technology and Indian Institutes of Management. However more such

institutes are required to impart high quality technical education to the workforce.

Although there are several engineering institutes all over India, there is a growing need

for more engineering institutes. The GOI has begun to take some initiatives in this regard.

The National Automotive Institute is being set up that will serve as a knowledge bank for

the automotive industry, conduct market research and analysis and develop training

modules. The plan is to establish the institute in all the major clusters in India, so that the

institute can benefit from active participation from automotive companies in those

clusters.


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CHAPTER 4

CHALLENGES IN THE CHINA AUTOMOTIVE INDUSTRY

The global financial crisis and weaker demand for Chinese exports in international

markets have started to impact heavily on the Chinese economy, including its automotive

sector. In the final months of 2008, after almost six years of 20 percent or more annual

growth, vehicle sales were flat or slightly negative a shock for an industry that invested

heavily on the expectation of continuing growth5.

The Chinese automotive industry faces several key challenges:

Slowing economic growth, falling real estate prices and a plunge in the stock market

have made Chinese consumers more cautious in their spending. Vehicle sales, after

jumping from 2.1 million in 2000 to 8.9 million in 2007, are slowing. In 2008, overall

volume growth was 6.7 percent compared to the previous year, according to the

China Association of Automotive. Manufacturers with a total 9.4 million units being

sold; this equates to a growth rate 15 percent below that of 2007.

The second half of 2008 was much slower than the first half, and in December alone,

passenger vehicle sales were down 8 percent yearonyear, while commercial vehicle

sales dropped a worrying 23 percent. This is a strong indication of the impact that the

current economic crisis is having on the overall business environment.

5 KPMG China


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Chinese auto exports, mostly to developing countries, are starting to slow. China sold

34,100 motor vehicle overseas in November 2008, down 13.54 percent from the

previous month and 32.83 percent in comparison with 2007

Declining sales, a lack of cash and tight financing are all starting to place severe

pressure on suppliers, vehicle financing companies and dealerships. According to the

Deputy Secretary General of the China Automobile Dealers Association, a

considerable proportion of auto dealers are running at a loss, and only 20 percent of

them may be making profits.


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CHAPTER 5

CONCLUSION

Rising growth in the Chinese and Indian automotive markets will drive the global auto

industry back on track after two years of slump in sales, says the global automotive

body, International Organization of Motor Vehicle Manufacturers (OICA). While China

will see a growth of 24 percent to 17 million vehicles in this fiscal, India, second in the

global league, will follow its neighbor and might as well churn out well over three

million vehicles in this calendar year, thus posting a healthy grow of around 22

percent over the previous years' performance.

International Organization of Motor Vehicle Manufacturers (OICA), the global

watchdog of the automotive horizon, which has cohesive focus on passenger cars and

commercial vehicles, says in its latest findings that two of the Asian powerhouses,

China and India will bring back the growth momentum of global auto business, when

the auto industry was struggling with global slowdown and withdrawal of scrap age

laws. According to OICA's study, China is estimated to grow by 24 percent to 17

million vehicles including cars, trucks and buses in this calendar year, while its

neighbor India will also scale the three millionvehicle marks and the growth of both

these countries together will help the recovery of the global market this year. The

global body follows a calendar year unlike India's AprilMarch ending fiscal year and

so the year 2010 might as well see a record production of 74 million cars and

commercial vehicles.


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What is more, the if the proof of the food is in eating, then the trend is quite

perceptible now what with the global auto industry posting 42 percent growth for the

first six months of this year, mostly driven by burgeoning demand from India and

China, coupled with a flat growth in other bigger markets including Brazil and North

Korea. While China has registered a phenomenal growth, India is not far behind.

The global recession has plummeted the auto industry into a negative territory as the

markets across the world dipped four percent to 70.5 million units in 2008 and further

went into recess 12.5 percent to 61.7 million last year. Of course, the worst affected

countries were the US and Japan, once the largest vehicle manufacturers before China

superceded them in 2009 that fell 34 percent and 31 percent respectively in the same

year over the previous year.


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REFERENCES

Websites

1. http://www.globalchana.com/index.html

2. http://en.wikipedia.org/wiki/Mahindra_%26_Mahindra_Limited

3. http://automotivehorizon.sulekha.com/chinaindiaglobalgrowthdriversfor

automotive_10_2010_postedby_jayashankarmenon

4. http://en.wikipedia.org/wiki/Tata_Motors

5. http://www.slideshare.net/wrusso1011/chinaautoindustryopportunities

challenges

6. http://en.wikipedia.org/wiki/Automobile_industry_in_China

Documents

The Challenges to China and India as the New and Potential Car Producer in Automotive Industry Within Asia Countries