Determinants of Competitiveness of the Indian Auto Industry
Foreword
Though not to the same extent as the telecom sector, the automobile and auto-component
industry has also emerged as one of the recent success stories. As in all other countries,
the Indian automobile industry is one of the key drivers of industrial growth and
employment which will further gain in importance in the coming years. Its recent record
of rapid output growth, productivity improvements and expanding share in global
markets has perhaps not been so well documented. This study fills that gap. The study
will help us understand how the industry’s success is quite directly linked to the trade and
industrial policy reforms initiated in the early 1990s. More importantly, the study will
identify the critical constraints that prevent the industry from further expansion in the
global share and emerge as one of the major production and export hubs in the coming
years.
This analysis is based on a comprehensive review of secondary literature and an
extensive fieldwork which covered the major automobile assemblers and auto-component
manufacturers across all the three tiers so as to cover the largest and the smallest
component producers. This has allowed us to make some specific policy
recommendations which have been discussed with the industry representatives more than
once. Theses recommendations, if accepted and implemented, could contribute to India’s
emergence as one of the major automobile producing economies in the world. Given our
domestic demand and the entrepreneurial talent, this would be a natural outcome.
The study has been supported by the National Manufacturing Competitiveness Council
(NMCC) and the Automobile Component Manufacturers Association (ACMA). Their
support was not limited only to the financial resources they provided. We were fortunate
to interact with NMCC on a regular basis and get their inputs for required mid-course
changes. ACMA was very forthcoming with all the secondary data and support for the
fieldwork undertaken. Its elder sister association, the Society of Indian Automobile
Manufacturers (SIAM) also helped with data, advice and spirited arguments which have
helped to sharpen and correct the focus of some of our recommendations. I am indeed
grateful to NMCC and ACMA for their generous support, involvement and for the inputs
of their members in the study.
Given the importance of the automobile industry for the progress of the manufacturing
sector and indeed for the Indian economy, ICRIER will continue its work in this area.
This study should, therefore, be seen also as a first phase of an ongoing enquiry. We are
hopeful that the recommendations included here will merit the attention of both the
government and the industry.
Executive Summary
1. This study analyses the determinants of competitiveness in the Indian auto industry.
It is based on a field survey and a quantitative analysis of secondary data. The field
survey covers 45 firms all over India, of which 31 are auto-component firms and 14
are Original Equipment Manufacturers (OEMs).
2. From 2001-02 to 2005-06, the Indian automobile sector has grown at an average
annual rate of over 18 per cent in terms of value of output at constant 1993-94
prices and the auto-component sector has grown at about 26 per cent. During the
same period, in terms of domestic sales in numbers, two-wheelers have grown at
over 13 per cent per annum; three-wheelers at more than 15 per cent commercial
vehicles at about 25 per cent per annum and the number of passenger vehicles by 17
per cent per annum.
3. Vehicle exports at constant 1993-94 prices have grown at an average annual rate of
more than 55 per cent from 2001-02 to 2005-06, while auto-component exports
have grown at 21 per cent. Two-wheeler exports have seen an annual average
growth rate of 27 per cent; passenger car exports have grown at 80 per cent; and
commercial vehicles at about 55 per cent.
4. The effective rate of protection on automobiles is much higher than on components.
For example, during 2006-07, while nominal custom duties were 60 per cent for
automobiles (other than commercial vehicles), 12.5 per cent for commercial
vehicles and 12.5 per cent for auto-components, effective rates of protection were
183.5 per cent, 12.5 per cent and 10.1 per cent, respectively.
5. With the higher countervailing duty and other cesses/levies, the effective rate of
protection for automobile sector would be even higher.
6. This differential rate of effective protection distorts resource allocation and
investment pattern in the industry.
7. The auto-component sector has much higher employment-generation potential and
export-intensity than the auto assembly segment of the sector. The component
manufacturers are now globally competitive and are also maintaining reasonable
profitability levels despite a tariff protection of only 7.5 per cent.
8. The import tariff for the assembled vehicles is 60 per cent. Given the low level of
protection both for the auto components and CKD/SKD kits, this clearly reflects a
policy bias in favour of auto assemblers.
9. The reduction in import duties on assembled units may be undertaken in a phased
manner and after ensuring that Indian automobile companies get comparable access
to ASEAN and Chinese markets.
10. The anti-dumping mechanism should be strengthened to prevent the dumping of
vehicles in the Indian market.
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11. The government must also ensure that the large infrastructure deficit faced by this
important sector is addressed urgently so that any adverse impact of macroeconomic
policies is avoided. These are important steps if import duty structure is
to be rationalized.
12. Materials cost is the major component in production cost and its share is increasing.
Policy measures to reduce domestic indirect taxes on all inputs for the auto industry
would be a welcome step to enhance competitiveness. The Chinese auto industry
faces a flat 17 per cent indirect tax incidence, so our aim should be to reach that
level.
13. Significant scaling up is required at all levels in the Indian auto-component sector
so that economies of scale are gained and cost of production reduced.
14. One of the major constraints for the smaller auto-component manufacturers in
increasing their scales of production is lack of credit availability at interest rates
comparable to other countries. This is also confirmed by our econometric analysis.
15. R&D expenditure as a share of turnover is low in the Indian auto-component sector
ranging between 0 and 1.5 per cent while it is 0.5-3 per cent for the automobile
sector. In fact, most of the smaller auto-component firms and a few of the bigger
ones do not have an R&D facility. Policy intervention is urgently needed to improve
the R&D activities in the Indian auto industry. Since fiscal incentives are not
working, a scheme of special credit for R&D would be useful to induce the R&D
activities.
16. India’s current levels of tariff on capital goods are higher than those in the ASEAN
and China. Thus, these tariffs should be brought down further to enhance
competitiveness.
17. The Indian auto industry does not possess good design facilities. The Government
needs to significantly strengthen non-proprietary R&D and design capacity that has
strong connections with research institutes like IITs. This could be used by all the
players in the industry to develop new models, reduce material costs and become
more competitive.
18. Skill shortages and skill mismatches have emerged as a major constraint. To
address this critical concern, the proposed National Auto Institute1 should be
quickly established with active participation of private industry players.
19. There is a significant and increasing use to contract workers in the industry. Labour
reforms, aimed at more flexibility, are widely considered among the industrialists as
an essential step. This will encourage firms to employ and retain more permanent
workers and improve learning and raise productivity levels.
1 National level Automotive Institute for training on automobile has been proposed in Automotive Mission
Plan. This should preferably be established in all major auto hubs in India. In addition to regular longterm
courses such as diplomas and degrees, it should also provide short-term specialised training
programmes for personnel already working in the auto industry.
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20. It is important to recognize that labour reforms are expected to increase overall
employment in the auto sector and will also help firms in the organised sector to
scale up.
21. The unorganised sector contributes 30 per cent to total employment, 15 per cent to
fixed assets and only 1.5 per cent to output in auto industry in India. This sector has
much lower capital and labour productivity than the organised sector. The share of
power/fuel cost in total costs are much higher in the unorganised sector. Hence,
policy measures are required to incentivise these smaller firms to use power and
fuel more efficiently, by adopting better technologies and taking steps to minimise
wastage.
22. In the econometric analysis, foreign equity participation is found to be correlated
with technical efficiency. Therefore, both centre and state governments should
create a conducive environment for attracting more FDI.
23. The trend of mid-sized vehicles capturing a large market share is expected to
continue in the foreseeable future.
24. A detailed roadmap for strict implementation of emission standards that are
harmonised across states should be drawn up. This could go a long way in ensuring
that the entire automotive supply chain upgrades quality and technology.
25. While the implementation of VAT is a positive step, remaining differential in
indirect taxes should be eliminated by moving to the GST. The currently prevalent
region-specific fiscal concessions are creating the unsustainable locational
distortions in the industry.
26. So far, India’s FTA with Thailand has resulted in a net trade gain for India. The
government must, however, ensure comparable, if not preferential, market access to
domestic firms in partner countries, especially in the Asia-Pacific region, while
negotiating FTAs.
27. The principles pertaining to the rules of origin have to be strictly implemented.
1. Literature Review
1.1 Introduction
The automobile sector is a key player in the global and Indian economy. The global
motor vehicle industry (four-wheelers) contributes 5 per cent directly to the total
manufacturing employment, 12.9 per cent to the total manufacturing production value
and 8.3 per cent to the total industrial investment. It also contributes US$560 billion to
the public revenue of different countries, in terms of taxes on fuel, circulation, sales and
registration. The annual turnover of the global auto industry is around US$5.09 trillion,
which is equivalent to the sixth largest economy in the world (Organisation Internationale
des Constructeurs d'Automobiles, 2006). In addition, the auto industry is linked with
several other sectors in the economy and hence its indirect contribution is much higher
than this. All over the world it has been treated as a leading economic sector because of
its extensive economic linkages.
India’s manufacture of 7.9 million vehicles, including 1.3 million passenger cars,
amounted to 2.4 per cent and 7 per cent, respectively, of global production in number.
The auto-components manufacturing sector is another key player in the Indian
automotive industry. Exports from India in this sector rose from US$1.0 billion in 2003-
04 to US$1.8 billion in 2005-06, contributing 1 per cent to the world trade in autocomponents
in current USD.
In India, the automobile industry provides direct employment to about 5 lakh persons. It
contributes 4.7 per cent to India’s GDP and 19 per cent to India’s indirect tax revenue.
Till early 1980s, there were very few players in the Indian auto sector, which was
suffering from low volumes of production, obsolete and substandard technologies. With
de-licensing in the 1980s and opening up of this sector to FDI in 1993, the sector has
grown rapidly due to the entry of global players.
A rapidly growing middle class, rising per capita incomes and relatively easier
availability of finance have been driving the vehicle demand in India, which in turn, has
prompted the government to invest at unprecedented levels in roads infrastructure,
including projects such as Golden Quadrilateral and North-East-South-West Corridor
with feeder roads.2 The Reserve Bank of India’s (RBI) Annual Policy Statement
documents an annual growth of 37.9 per cent in credit flow to vehicles industry in 2006.3
Given that passenger car penetration rate is just about 8.5 vehicles per thousand, which is
among the lowest in the world, there is a huge potential demand for automobiles in the
country.
* We are grateful to Dr. Rajiv Kumar, Director & CE, ICRIER, Dr. Ramesh Chandra, Professor, ICRIER
and Ms. Nisha Taneja, Senior Fellow, ICRIER, for their valuable comments and suggestions. The usual
disclaimer applies.
2 However, the road infrastructure still remains much below global standards.
3 Although credit availability may have boosted vehicle demand, the recent monetary tightening and hike
in interest rates may adversely affect vehicle demand.
2
There are two distinct sets of players in the Indian auto industry: Automobile component
manufacturers and the vehicle manufacturers, which are also referred to as Original
Equipment Manufacturers (OEMs). While the former set is engaged in manufacturing
parts, components, bodies and chassis involved in automobile manufacturing, the latter is
engaged in assembling of all these components into an automobile.4
The Indian automotive component manufacturing sector consists of 500 firms in the
organised sector and around 31,000 enterprises in the unorganised sector. In the domestic
market, the firms in this sector supply components to vehicle manufacturers, other
component suppliers, state transport undertakings, defence establishments, railways and
even replacement market. A variety of components are exported to OEMs abroad and
after-markets worldwide.
The automobile manufacturing sector, which involves assembling the automobile
components, comprises two-wheelers, three-wheelers, four-wheelers, passenger cars,
light commercial vehicles (LCVs), heavy trucks and buses/coaches. In India, mopeds,
scooters and motorcycles constitute the two-wheeler industry, in the increasing order of
market share. In 2005-06, the Indian auto sector had produced over 7.6 million twowheelers
and 1.3 million passenger cars and utility vehicles.
India is a global major in the two-wheeler industry producing motorcycles, scooters and
mopeds principally of engine capacities below 200 cc. It is the second largest producer of
two-wheelers and 13th largest producer of passenger cars in the world. Tata figures
among the ten largest global manufacturers of LCVs, heavy trucks, buses and coaches,
while it is among the top 25 in passenger car manufacturing.
The two-wheeler industry in India has grown at a compounded annual growth rate of
more than 10 per cent (in number) during the last five years and has also witnessed a shift
in the demand mix, with sales of motorcycles showing an increasing trend. Indian twowheelers
comply with some of the most stringent emission and fuel efficiency standards
worldwide. The passenger car segment has been growing at a rapid pace -- from over
6,50,000 vehicles sold during 2001 to over a million vehicles sold during 2004-05,
showing an annual growth rate of 17.36 per cent.
With this general introduction, Section 1.2 presents a review of recent literature on the
Indian auto industry and appraises it critically. Section 1.3 attempts to identify the gaps in
the literature and highlights the contributions of this study.
1.2 Literature Review
As noted by NMCC (2006), competitiveness of manufacturing sector is a very broad
multi-dimensional concept that embraces numerous aspects such as price, quality,
productivity, efficiency and macro-economic environment. The OECD definition of
competitiveness, which is most widely quoted, also considers employment and
4 However, many OEMs also provide or upgrade technologies of auto-component manufacturers to build
up supply chain.
3
sustainability, while being exposed to international competition, as features pertaining to
competitiveness. There are numerous studies on auto industry in India, published by
industry associations, consultancy organisations, research bodies and peer-reviewed
journals. In this section, various studies on the Indian auto industry are reviewed, under
different heads pertaining to competitiveness, namely, global comparisons, policy
environment and evolution of the Indian auto industry, productivity, aspects related to
supply-chain and industrial structure and technology and other aspects.
1.2.1 Global Comparisons
The Investment Information and Credit Rating Agency of India (ICRA, 2003) studies the
competitiveness of the Indian auto industry, by global comparisons of macroenvironment,
policies and cost structure. This has a detailed account on the evolution of
the global auto industry. The United States was the first major player from 1900 to 1960,
after which Japan took its place as the cost-efficient leader. Cost efficiency being the only
real means in as mature an industry as automobiles to retain or improve market share,
global auto manufacturers have been sourcing from the developing countries. India and
China have emerged as favourite destinations for the first-tier OEMs since late 1980s.
There are only a few dominant Indian OEMs, while the number of OEMs is very large in
China (122 car manufacturers and 120 motorcycle manufacturers).
According to this study, the major advantage of the Indian economy is educated and
skilled workforce with knowledge of English. Our disadvantages include poor
infrastructure, complicated tax structure, inflexible labour laws, inter-state policy
differences and inconsistencies. The drivers of Chinese economic growth are FDI, labour
productivity growth, which was 1.5 times higher than that in India in the last decade, and
domestic demand. Fiscal pressure is mounting on the Chinese government, while India is
in a better state. Based on comparisons of cost composition to pinpoint the areas in which
the Indian auto industry is at a disadvantage, this study recommends a VAT regime,
speedy procedures, imports duty cuts on raw materials, common testing and design
facility, labour reforms, upgradation of design and engineering capabilities and brand
building.
ICRA (2004a) analyses the implications of the India-ASEAN5 Free Trade Agreements for
the Indian automotive industry. ASEAN economies are globally more integrated than
India. The current size of Indian and ASEAN market for automobiles is more or less the
same but the Indian market has a larger growth potential than the ASEAN market due to
the low level of penetration. The labour cost is low in India but the stringent labour
regulations erode this advantage. The level of infrastructure is better in India than
Indonesia and the Philippines but worse than that in other ASEAN countries. The
financial and banking sector is better in India than in the ASEAN countries. The study
notes that there is a huge excess capacity in ASEAN countries, in comparison with that in
India, which will help them to tackle the excess demand that may arise in future. The
study finds a 20-30 per cent cost disadvantage for Indian companies on account of
taxation and infrastructure and 5-20 per cent labour cost advantage over comparable
5 Association of South East Asian Nations.
4
ASEAN-member-based companies. Similar findings are noted in a study by the
Automotive Component Manufacturers Association of India (ACMA, 2004), particularly
in comparison with Thailand.
ICRA (2004b) analyses the impact of Preferential Trade Agreement (PTA) with
MERCOSUR6 on the automobile sector in India. This study finds a significant threat of
imports in sub-compact and compact cars and certain auto-components. There is huge
excess capacity and intense competition in MERCOSUR countries, propelling them to
look for export opportunities. This is true especially of Brazil, which has a welldeveloped
auto-component sector with huge economies of scale. Further, weak currency
in all MERCOSUR countries provides a natural tariff barrier. In addition, MERCOSUR
countries have an equitable arrangement within themselves to have a balanced trade, with
fair level of exports and imports. The Indian auto industry could gain from this PTA with
MERCOSUR only if it is assured of the balanced trade, as MERCOSUR countries
practise among themselves.
ICRA (2005) studies the possible impact of FTA with South Africa on the Indian
automobile industry. The study finds that there are a few policies in South Africa that
indirectly subsidise the auto industry, unlike India, in terms of financial grants. Hence it
is suggested that India could minimise losses only if it goes for inclusion of certain autocomponents,
which involve huge logistic costs of imports, creating a natural protection
(for example, stampings, glass, seats, plastics and tyres) and those in which India enjoys
economies of scale and is cost-competitive (e.g. castings and forgings) in this FTA. If
South Africa is ready to discontinue the schemes such as Motor Industry Development
Programme (MIDP), India could include all automotive components in this FTA. There
should be a minimum local content of 60 per cent and the agreement should not be tradebalancing
as India will not gain much in that case.
1.2.2 Policy Environment and Evolution of Indian Auto Industry
In this section, studies on the policy environment pertaining to the Indian auto industry
and its evolution over the years have been reviewed.
Pingle (2000) reviews the policy framework of India’s automobile industry and its impact
on its growth. While the ties between bureaucrats and the managers of state-owned
enterprises played a positive role especially since the late 1980s, ties between politicians
and industrialists and between politicians and labour leaders have impeded the growth.
The first phase of 1940s and 1950s was characterised by socialist ideology and vested
interests, resulting in protection to the domestic auto industry and entry barriers for
foreign firms. There was a good relationship between politicians and industrialists in this
phase, but bureaucrats played little role. Development of ancillaries segment as
recommended by the L.K. Jha Committee report in 1960 was a major event that took
place towards the end of this phase. During the second phase of rules, regulations and
politics, many political developments and economic problems affected the auto industry,
especially passenger cars segment, in the 1960s and 1970s. Though politicians picked
6 Southern Common Market, which comprises Latin American countries.
5
winners and losers mainly by licensing production, this situation changed with oil crises
and other related political and macro-economic constraints.
The third phase starting in the early 1980s was characterised by delicensing, liberalisation
and opening up of FDI in the auto sector. These policies resulted in the establishment of
new LCV manufacturers (for example, Swaraj Mazda, DCM Toyota) and passenger car
manufacturers.7 All these developments led to structural changes in the Indian auto
industry. Pingle argues that state intervention and ownership need not imply poor results
and performance, as demonstrated by Maruti Udyog Limited (MUL). Further, the noncontractual
relations between bureaucrats and MUL dictated most of the policies in the
1980s, which were biased towards passenger cars and MUL in particular.
However, D’Costa (2002) argues that MUL’s success is not particularly attributable to
the support from bureaucrats. Rather, any firm that is as good as MUL in terms of scale
economies, first-comer advantage, affordability, product novelty, consumer choice,
financing schemes and extensive servicing networks would have performed as well, even
in the absence of bureaucratic support. D’Costa has other criticisms about Pingle (2000).
The major shortcoming of Pingle’s study is that it ignores the issues related to sectorspecific
technologies and regional differences across the country.
Piplai (2001) examines the effects of liberalisation on the Indian vehicle industry, in
terms of production, marketing, export, technology tie-up, product upgradation and
profitability. Till the 1940s, the Indian auto industry was non-existent, since automobile
were imported from General Motors and Ford. In early 1940s, Hindustan Motors and
Premier Auto started, by importing know-how from General Motors and Fiat
respectively. Since the 1950s, a few other companies entered the market for two-wheelers
and commercial vehicles. However, most of them either imported or indigenously
produced auto-components, till the mid-1950s, when India had launched import
substitution programme, thereby resulting in a distinctly separate auto-component sector.
Due to the high degree of regulation and protection in the 1970s and 1980s, the reforms
in the early 1990s had led to a boom in the auto industry till 1996, but the response of the
industry in terms of massive expansion of capacities and entry of multinationals led to an
acute over-capacity. Intense competition had led to price wars and aggressive cost-cutting
measures including layoffs and large-scale retrenchment. While Indian companies started
focusing on the price-sensitive commercially used vehicles, foreign companies continued
utilizing their expertise on technology-intensive vehicles for individual and corporate
uses. Thus, Piplai concludes that vehicle industry has not gained much from the reforms,
other than being thrusted upon a high degree of unsustainable competition.
In August 2006, a Draft of Automotive Mission Plan Statement prepared in consultation
with the industry was released by the Ministry of Heavy Industries and Public
7 Maruti Udyog Limited (MUL) was the only new entrant in passenger car segment from 1982 to 1993,
after which foreign firms such as Hyundai, Honda, Toyota, etc., started entering. This was despite the
fact that many CV manufacturers had entered in early 1980s. Pingle takes this as an evidence for the fact
that the relationship between bureaucrats and managers in MUL played a role in protecting MUL.
6
Enterprises. This was finally released as a report in December 2006. This document
draws an action plan to take the turnover of the automotive industry in India to US$145
billion by 2016, accounting for more than 10 per cent of the GDP and providing
additional employment to 25 million people, by 2016. A special emphasis is laid on small
cars, MUVs, two-wheelers and auto-components. Measures suggested include setting up
of a National Auto Institute, streamlining government/educational/research institutions to
the needs of the auto industry, upgrading infrastructure, considering changes in duty
structure and fiscal incentives for R&D. Similarly, NMCC (2006), which lays down a
national strategy for manufacturing, recognises the importance of the Indian automobile
and auto-component industry, particularly the latter, as a competitive knowledge-based
industry with immense employment generation potential.
McKinsey (2005) predicts the growth potential of India-based automotive component
manufacturing at around 500 per cent, from 2005 to 2015. This report describes the
initiatives required from industry players, the Government and the ACMA to capture this
potential. This study was based on interviews and workshops with 20 suppliers and 7
OEMs and survey with ACMA members. Increase in cost pressures on OEMs in
developed countries, coupled with the emergence of skilled, cost-competitive suppliers in
Low Cost Countries (LCCs), is likely to facilitate further acceleration of sourcing of
automotive components from LCCs. The analysis identifies strong engineering skills and
an emerging culture of cost-competitiveness as the major strengths of the Indian autocomponent
sector, while its weaknesses include slow growth in domestic demand and
structural disadvantages such as power tariffs and indirect taxes.
The policy recommendations of this study include VAT implementation, lower indirect
taxes, power reforms, tax benefits linked to export earnings, duty-cut for raw material
imports, R&D incentives for a longer period, establishment of auto parks, benefits for
export-seeking investments, human resources development and modernisation fund for
new investments in auto clusters. Industry players have been advised to improve their
operational performance, determine their strategic posture as one among those identified
in the study, improve capabilities in line with their posture and invest very rapidly in a
planned manner. ACMA needs to promote India as a brand, enable sourcing from India
by global customers and promote the quality and productivity efforts of the autocomponent
firms in India.
ACMA (2006) notes that India’s joining the WP (Working Party) 29: 1998 Agreement
for global harmonisation of automotive standards, coupled with the funding of National
Automotive Testing and Research Infrastructure Project (NATRIP) by the Government of
India, has increased prospects of the Indian auto industry rising up to global standards in
the near future, in all aspects.
Narayanan (1998) analyses the effects of deregulation policy on technology acquisition
and competitiveness in the Indian automobile industry during the 1980s and finds that
competitiveness has depended on the ability to build technological advantages, even in an
era of capacity-licensing. In a liberalised regime, this would depend on firms’ ability to
bring about technological changes, as inferred from the behaviour of new firms in the
7
sample considered. Further, vertical integration could score over subcontracting in a
liberal regime. This is probably because of the entry of new foreign firms that produce
technologically superior and guaranteed quality vehicles and choose to produce most of
the components in-house.8 Narayanan (2004) analyses the determinants of growth of
Indian automobile firms during three different policy regimes, namely, licensing (1980-
81 to 1984-85), deregulation (1985-86 to 1990-91) and liberalisation (1991-92 to 1995-
96). Unlike the prediction by Narayanan (1998), this study finds that vertical integration
is detrimental for growth in a liberalised regime as it potentially limits diversification.
Narayanan (2006) also finds that vertical integration plays a positive role in a regulated
regime, while it is not conducive for export competitiveness in a liberal regime.
Kathuria (1995) notes that the time-bound indigenization programme for commercial
vehicles in the 1980s facilitated the upgradation of vendor skills and modifying vehicles
to suit local conditions, which demand functional efficiency, overloading capabilities,
fuel economy, frequent changes in speed and easy repair and maintenance. Kathuria also
mentions that the choice between vertical integration and subcontracting crucially
depends on the policy regime: In a liberal regime, vertical integration may not work.
1.2.3 Productivity
Sharma (2006) analyses the performance of the Indian auto industry with respect to the
productivity growth. Partial and total factor productivity of the Indian automobile
industry have been calculated for the period from 1990-91 to 2003-04, using the Divisia-
Tornquist index for the estimation of the total factor productivity growth. The author
finds that the domestic auto industry has registered a negative and insignificant
productivity growth during the last one and a half decade. Among the partial factor
productivity indices only labour productivity has seen a significant improvement, while
the productivity of other three inputs (capital, energy and materials) haven’t shown any
significant improvement. Labour productivity has increased mainly due to the increase in
the capital intensity, which has grown at a rate of 0.14 per cent per annum from 1990-91
to 2003-04.
1.2.4 Aspects Related to Supply Chain and Industrial Structure
In this section, the studies that examine the aspects pertaining to local and global auto
supply chains as well as the structure of the Indian auto industry are reviewed.
Humphrey (1999) compares the impact of globalisation on supply chain networks in the
auto industry in Brazil and India. According to Humphrey, global auto industry hubs
were situated in three regions, namely, North America, Western Europe and Japan. Brazil
and India are examples of the countries which could develop the indigenous auto industry
despite not being situated very close to any of these regions. Hence, Humphrey compares
the auto industries in these two countries. This study considers auto industry as a
8 However, as Narayanan (2004) notes, vertical integration was gradually replaced by subcontracting,
because Indian auto-component sector could emerge as a competitive sector after the entry of foreign
firms.
8
producer-driven commodity chain, wherein global auto assemblers control the entire
supply chain from components to dealerships.
While the global auto assembly majors used to produce 60-70 per cent of the value inhouse
till the 1980s, various phenomenal developments have started taking place since
the 1980s, such as the emergence of independent dealers and rise of catalogue suppliers
who supply their standard and indigenously designed components/modules to many
assemblers. Brazil and India had liberalised auto investments and tariff structure since
1990. Prior to 1991, India had a much more protectionist regime than Brazil, in terms of
licensing and quantitative restrictions on both imports and domestic production. Inflows
of auto FDI occurred in both the countries since the mid-1990s. Further, Brazil and India
have emerged as preferred suppliers for global auto assemblers. When the global auto
assemblers entered India and Brazil, the phenomenon of ‘follow-source’9 was also
happening. Now, there are parallel global networks of both assemblers and Tier-1
suppliers. Even Indian component suppliers have opportunities to enter the global auto
supply chains, mainly in low technology products made to detailed drawings but the
space for domestic industry is diminishing. With the global centralization of product
engineering, skill requirements are likely to be immense in process engineering,
particularly in assemblers and Tier-1 component manufacturers.
Sutton (2000) compares the auto-component supply chains in India and China, based on
field surveys. In both these countries, the supply chain has developed very rapidly at the
level of car makers and Tier-1 suppliers, with quality levels close to world standards,
largely driven by the entry of multinational car makers. But, the Tier-2 suppliers are still
not up to the global standards. The domestic content requirements, based on the infant
industry argument, have helped the international car makers in enhancing the production
capabilities of the domestic players effectively, as shown by increases in auto-component
exports from India and China. Of the top ten exporting firms in India and China, five and
six are domestic ones, respectively. Enhanced supply-chain capabilities have benefited
the domestic auto-makers as well, such as Mahindra and Mahindra in India, who have
been able to capture a sizeable market share with their indigenously designed and
assembled MUV.
Some leading component producers in China and India strategically use highly capitalintensive
techniques such as robotics, occasionally, despite the low wages, mainly on
account of their concerns to achieve high levels of quality. This in combination with
employing high-quality workforce even at shop floor is another strategic choice of a few
leading firms in India, to promote exports. Many Tier-1 firms follow the standard
Japanese work practices to improve quality and minimise costs. Interactions between carmakers
and component suppliers have also helped the latter improve quality.
Addressing a larger question of the impact of Foreign Direct Investment (FDI) on the
domestic industry and economy, Tewari (2000) studies the automotive supply chain of
9 When global auto majors invest in India, their preferred suppliers elsewhere in the world are also
encouraged entering India as the wholly-owned subsidiaries of these suppliers. This phenomenon is
called ‘follow-source’.
9
Tamil Nadu, based on field surveys. Studies such as Humphrey (1999) show that entry of
global auto majors in India and Brazil have impeded domestic firms, because of ‘followsource’,
while this study shows evidence for the fact that medium-sized firms, which
entered in the mid-1990s in Tamil Nadu have formed networks with smaller domestic
suppliers and helped them upgrade their technologies. These medium-sized suppliers
require more support from the government, since they play a crucial role in facilitating
the development of the domestic auto industry. Joint ventures and technical tie-ups with
overseas suppliers have been the strategies that were followed by well-performing autocomponent
manufacturers, long before the global auto majors entered India. These
relationships and the entry of foreign OEMs not only promote employment and income,
but also diffusion of technologies and knowledge to the entire supply chain, including
smaller firms.
Veloso and Kumar (2002) provide an overview of the major trends taking place in the
global automotive industry, emphasising on the Asian market. Consumer preferences,
government regulations and intense competition have been driving the firms towards new
technologies, modernisation, research and changes in design and production. Market
saturation in Triad regions (the United States, Western Europe and Japan) and rapid
emergence of markets in Asia have led to increasing diversity in market needs. As a
result, there are many models and segments coming up rapidly.
Auto majors have started adopting a global perspective and reorganising their vehicle
portfolio around product platforms, modules and systems. They are also minimising the
number of suppliers, by opting for bigger ones, based on cost and quality
competitiveness, R&D capacity and proximity to development centres. Mergers and
acquisitions are taking place for consolidation. Suppliers have been taking new roles, as
systems integrators, global standardiser-systems manufacturers, component specialists
and raw material suppliers. These roles are based on their focus, market presence, critical
capabilities and types of components and systems.
The automobile industry in India had been facing the problem of overcapacity by 2000
and the auto-component sector was not so developed as to be able to deliver products of
world-class quality. Chinese tariff and quota policies, coupled with local content
regulations protect the auto industry in China immensely. However, the Chinese auto
industry suffers from fragmentation, lower quality, lack of technological upgradation and
managerial skills. Consolidation and liberalisation that are happening recently in China
are expected to promote its auto industry. Auto industries in the ASEAN and Korea have
recovered quickly from the Asian crisis of 1998. This report concludes with some aspects
that any study on auto sector should focus on, such as evaluation of the capabilities of
auto-component supply chain – both large and small suppliers, strategies of OEMs, cost,
delivery, dependability, quality, product development, process development, flexibility,
facilities/equipment, technology, process, workforce and organisation, logistics and
supply chain, research and engineering and interfaces.
ACMA (2006) presents the recent trends in the Indian auto industry as a whole and their
implications for automotive supply chain in India. The market-oriented growth and
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growing automobile industry in India have ensured bright prospects for the Indian autocomponent
sector, which is vibrant and competitive. Huge future growth potential of the
automobile industry and increased access to consumer finance may lead India to a place
among the top five automotive economies by 2025. Most of the ACMA members have at
least one standards certification. They are embracing world-class modern shop-floor
practices. The auto-component sector has been showing high rates of growth of
production and exports, with a comprehensive production range, transforming as an
attractive OEMs Tier-1 supplier. Many leading OEMs and Tier-1 companies have plans
of sourcing from Indian auto-component manufacturers, who are scaling up, establishing
partnerships in India and abroad, acquiring foreign companies and establishing greenfield
investments overseas.
Proficiency in understanding technical drawings, understanding of different global
standards, appropriate automation, flexibility in small-batch production and use of
Information Technology (IT) for design, development and simulation are some of the
growing capabilities among Indian auto-component manufacturers. India is expected to
emerge as the next big automotive R&D base, given its IT capabilities coupled with
automotive domain knowledge and shifting of automotive design centres to India, by
global MNCs, as it is a potentially excellent base for prototyping, testing, validating and
producing auto-components.
1.2.5 Technology and Other Aspects
Kathuria (1996) analyses the Commercial Vehicles (CV) industry in India in a detailed
manner, dwelling on the concepts of vertical integration and subcontracting, production
technology and technological change. After an overview of the global auto industry,
Kathuria traces the developments in the Indian auto industry from the 1950s to 1991. To
evaluate the competitiveness of Indian commercial vehicles manufacturers in the
domestic market, growth trends, structural trends, market shares, profitability,
productivity ratios, prices, quality, dealer network and performance are analysed. Macro
and micro performance of India’s vehicle exports with major markets and Indian vehicle
characteristics have been outlined, along with an analysis of global demand patterns.
Domestic resource costs and global comparison of prices, credit and service are the other
international trade-related aspects analysed in this study. On vertical integration, the
analysis leads to the conclusion that the Indian CV industry needs to learn from the
international experience to get into subcontracting and buying-in. Lack of scales and high
inventories had impeded the competitiveness of Indian CV firms in the 1980s.
R&D capabilities and new product ranges were the result of the challenges arising from
time-bound indigenisation programme, but still Indian technology frontier remained far
below global levels. Further, different firms have followed very different strategies and
hence the impacts on their technological capabilities were also very different. However,
success of Indian firms despite such a wide range of strategies is partly due to the
protection available to them in the domestic market. Kathuria concludes that the Indian
auto industry in general, and CV industry in particular, have a lot to learn from the global
auto industry, in terms of best-practice technology and vertical integration and supplier
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relationship. The study rightly predicted that the industry would see heightened activity
and recommended that the government should ensure that the domestic firms do not lose
out because of the unrestricted entry of highly competitive foreign firms.
Narayanan (1998) finds that during the 1980s, technology acquisition through imports of
technology and in-house R&D efforts explains much of differences in competitiveness, as
measured by changes in market share, at the firm level, in the Indian automobile industry.
Based on an econometric analysis, which considers technology acquisition, skill intensity,
component imports, firm size, product differentiation, age and vertical integration as the
determinants of competitiveness, Narayanan finds that competitiveness has depended on
the ability to build technological advantages, even in an era of capacity licensing. This is
facilitated by complementing imported technology with in-house R&D efforts.
Narayanan (2004) uses two-way fixed effects estimation of the firm growth as a function
of variables capturing technology, such as R&D expenditure as a proportion of sales,
foreign equity participation and import of capital goods. Role of technology depends on
the technological regime in which the firm operates. In a licensed regime, firms with
foreign equity grow faster because of better access to resources and technology. In a
deregulated regime, import of capital goods has been the technology-related variable that
triggered growth. In a liberal regime, growth is positively influenced by the intra-firm
technology transfer.
Narayanan (2006) analyses the determinants of export intensity of Indian automobile
firms using a Tobit model, taking the variables discussed in Narayanan (1998) and
Narayanan (2004) as the determinants. This study is based on the premises that there is a
systematic difference in the characteristics and performance between the firms that export
and those which sell in the domestic market, mainly in terms of technology acquisition,
which in turn depends on the policy regime. Technology acquisition, firm size, vertical
integration, capital intensity, imports of components and policy regime are found to be
the main determinants of export competitiveness, by this analysis.
The studies reviewed so far were of a wide range in terms of objectives, methodologies
used and conclusions arrived at. Some of them aim at studying very specific aspects of
the Indian auto industry such as global comparisons to examine the implications of FTAs,
productivity, technology and supply chain, while others dwell on more general aspects
such as strategies, competitiveness, evolution of the industry, structure of the industry and
policy aspects pertaining to the Indian auto industry. These studies are based on field
surveys, interviews, secondary data sources, econometric analysis and descriptive
analysis. Their conclusions vary widely on specifics, but there is almost a consensus that
the Indian auto industry has a bright future due to various factors considered, except
Piplai (2001), who argues that the competition in the auto industry in India is highly
unsustainable.
The studies by ICRA, ACMA and McKinsey, which focus on global comparisons and
policy environment of the auto industry, are based on quite realistic and practical
approach, but lack analytical and quantitative rigour. When looked from a neutral
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perspective, it clearly emerges that most of the findings of these studies seek some degree
of protection for the auto-component sector. They are justified in some ways because of
the immense protection offered to the auto-component sectors in the competing countries.
However, a more analytical and quantitative approach is required to arrive at concrete
conclusions on protection, because tariff barriers will be removed at some point of time in
future and the industry needs to gear up to face the free trade regime.
Narayanan (1998, 2004 and 2006) studies the issues related to technology in the Indian
automobile industry econometrically. These papers are based on sound econometric
theories and the results have been critically analysed based on evolutionary theoretical
framework. However, these studies suffer from a few common problems. First, the
dataset used, which is CMIE Prowess database, does not cover all the major players in the
automobile industry, including Toyota. Hence, this study could have been supplemented
by an analysis on the major companies that have been left out, through field surveys,
interviews or annual reports. Secondly, considering automobile industry in isolation is not
sufficient, since the auto-component sector in India has been playing a key role in the
automobile industry, throughout the period considered in these papers.
Thirdly, vertical integration is proxied by the share of value-added in total sales, in these
papers. This may not be sufficient because vertical integration and sub-contracting are too
complex to be captured by a single variable based on value-added. Value-added could be
high, as a share of output, despite the absence of vertical integration, because of the fact
that several activities other than component-manufacturing such as painting, assembly
and welding take place within the assemblers’ factories. Further, the conclusion by
Narayanan (1998), that vertical integration is a preferred strategy in a liberal regime,
based on the premises that foreign firms, which enter in this regime, produce technologyintensive
and high-quality products, for which they need to produce components inhouse,
is likely to be misleading. This is because of the fact that these foreign firms have
imported the components and have not produced them in-house for this purpose.
Piplai (2001) studies the policy environment and its impact on the Indian automobile
industry. While Piplai appears to be justified in saying that there has been excess capacity
in the auto industry and the auto majors are facing difficulties in aggressively marketing
their products, it is probably not correct to conclude, as he has done, that the current
levels of competition resulting from liberalisation are unsustainable. As noted in the
introduction, car penetration levels are very low in India and hence the future potential
for demand is very high. This would ensure that competition is quite sustainable as there
will be enough consumers, given the rapid economic growth that is taking place.
The quantitative analysis of productivity indices is quite rigorous in Sharma (2006), but
this study suffers from some major inadequacies that include absence of analysis of
disaggregate data and lack of consistency with the reality. For example, the conclusion
that there has been no significant improvement in productivity of materials and energy in
recent years is incorrect, since the reality is that owing to cost pressures, firms have been
increasing their productivity with respect to these inputs.