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Globalization and Competitiveness of Indian Auto Component Industry

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Globalization is an economic phenomenon, involving the increasing interaction, or integration, of national economic systems through the growth in international trade, investment and capital flows. Globalization has influenced every aspect of human life and it offers certain opportunities and threats to each aspect of business. The Auto industry in India is not un touched by the effects of globalization. The Indian Auto Industry and the Auto component industry is suddenly exposed to the vast international market as an opportunity and to Global competition in large scale. The industry has opportunities in terms of business opportunity worldwide and the threats from Mega suppliers  who are more equipped to compete.

The Auto component Industry in India has come of age and is poised to become a major revenue earner for the country. At this stage when the industry is undergoing restructuring and tierisation it is important to know the strengths and weakness of the Industry and the environment in which it operates. India being a cheap destination for parts, is a favored destinations for multinational to source its parts and achieve overall global competitiveness. The Industry needs to gear itself to take advantage of its strengths and the various opportunities available globally by identifying its weaknesses.

Every industry operates in an environment, which is created by Government policies, the economic and physical infrastructure of the industry. There are few major parties which influence the industry and they are the individual leaders, the Government, Educational institutions, Research bodies and the Industry associations. The industry cannot flourish by sparks of individual effort. If the industry has to achieve a certain objective there has to be an integrated and coordinated multi functional approach.

There are immense opportunities being offered by the global market and there is a need to look inwards and draw up a strategy to exploit the opportunities offered by globalization.

  Evolution of Global Auto Industry

In past 70 years Motorcar has transformed society and personal mobility. In 1890, the average person traveled 13 miles in a year and now an average person travels 13 miles a day. There were 800 cars on the road at the end of 19th century. By 1910 that number increased to almost 460000 with more than 300 cars makers setting up business. Ten year later there were 8 million vehicles on the road. As production grew prices fell. During second world war, the entire industry had embraced the concept of mass production, initiated by Henry ford’s Model T. Growing personal wealth and international trade created new export markets in North America, Japan and Western Europe. After the oil crisis of 1973, manufacturing has been dominated by the production techniques, quality, manufacturing and sales of Japanese manufacturers. By the year 2000 the Industry was producing 59.7 million vehicles annually. In the 1990s and the early years of the new millennium, growing consolidation among car and truck manufacturers has taken place. The environment now has been the key issue in vehicle engineering and production. The cost involved in meeting new environment laws has fuelled a sharp rise on product development spending   Those without the financial muscle have disappeared. The similar fragmented commercial vehicle industry also during 1990 contracted into a handful of global manufacturers.

Contribution of Auto Industry to Society

The scale and manner of transportation of Goods and human beings facilitates the growth of any society.  Without transportation the society would not had grown. Automobile did what Computers are doing today to the society. It’s because of automobiles that the transport of goods was possible from one geographical location to other. It’s because of transportation that exchange of resources has been possible and the world has progressed into a global village. Automotive industry has universally emerged as an important driver in the economy. Although the automotive industry in India is nearly six decades old, until 1982, only three manufacturers - M/s. Hindustan Motors, M/s. Premier Automobiles and M/s. Standard Motors dominated the motorcar sector. Owing to low volumes, and protection by the Government, obsolete technologies were perpetuated and the Indian Auto Industry was out of sync with the world industry.

In 1982, Maruti Udyog Ltd. (MUL) came up as a government initiative in collaboration with Suzuki of Japan to establish volume production of contemporary models. After the lifting of licensing in 1993, 17 new ventures have come up of which 16 are for manufacture of cars. This industry currently accounts for nearly 4% of the GNP and 17% of the indirect tax revenue. The Indian Automobile Industry has been one of the major contributors for Indian economy due to its revenue generation and employment potential.  The Auto industry employs 6 lakh families.  Revenue accurse for Government is over Rs. 25,000 crores.  There are several auto manufacturers with a combined turnover of Rs. 25,000 crores.  Further investments being planned in immediate future shall exceed 20-25000 Crore RS.

Evolution of Indian Auto Component Industry

The Indian Auto component Industry has always been riding over the Indian Automobile industry. The Component industry started out small in the 1940s supplying components to Hindustan Motors and Premier Automobiles. In the 1950s, the arrival of Telco, Bajaj, and Mahindra & Mahindra led to steadily increasing production. In the 1980s with Maruti, the growth suddenly accelerated. Boom time for the auto components industry started with the arrival of India's "people's car" - the Maruti.

 The new car required components that would adhere to its stringent quality standards. It virtually gave birth to a variety of new age auto component manufacturers who manufactured components that combined the best of technology with quality. As Maruti became India's best selling car, the path of Indian auto component industry took an upswing. Export figures also climbed. Low costs of labor and raw material resulted in exports taking a quantum jump.

The influx of foreign auto majors ranging from Mercedes Benz, Ford, General Motors to Daewoo few years ago presented a world of opportunity for the industry. The auto components industry responded with huge capacity expansion and modernization programs.

However, the global auto giants soon realized that the Indian market was not as big as it appeared to be. Their targets went haywire, inventories piled up and bookings were canceled. This also coincided with a general slowdown in the Indian economy in the last one or two years. The auto component industry in India, which is driven by domestic demand, also faced sluggish growth.  However, things have taken a turn for the better. Growth in the commercial vehicle and the passenger car segments has been 20 per cent year on year and 40 per cent year on year respectively from year 2000 onwards

Some Indian companies have used the recession to trim down by cutting costs and improving productivity. Several companies have entered into technological collaboration and equity partnership with world leaders in auto components. They have not only adopted their systems but also their manufacturing and management practices. Strict quality controls, sound technology and high volumes will enable the Indian auto component industry to chart greater progress in the coming future.

The New multinationals that came in India to manufacture and sell in India realized that it was cheaper to manufacture products in India by around 30%. They were exposed to a new idea of exporting back low cost good quality products back to their global factories and thus reduce their overall costs. This resulted into high demand for components and that’s how at last the component industry lost its dependence on the local Automobile manufacturers. The industry is now exposed to a global market, which is 50 times bigger in size.

India’s automotive component industry manufactures the entire range of parts required by the domestic automobile industry and currently employ about 250,000 persons. Auto component manufacturers supply to two kinds of buyers – original equipment manufacturers (OEM) and the replacement market. The replacement market is characterized by the presence of several small-scale suppliers who score over the organized players in terms of excise duty exemptions and lower overheads.

Global Trends and challenges

There is a global overcapacity problem, which is forcing the vehicle industry to restructure. The strategy of the OEMs conditions the whole supply chain. There is a strong trend to increase the outsourcing globally. The Component sector is totally influenced by the vehicle assemblers and the local parts industry is becoming more critical to location decisions of assemblers.

The World trade and investment in automotive and auto parts has become liberalized with Tariffs going down Internationally. MNC assembler source parts from cheapest quality source in any part of the world. Local suppliers are being linked into the global supply chain and they have to compete with regional players. Rapid changes in information and communication technology are reshaping the way auto industry is doing business. The OEM is passing its responsibility of developing manufacturing and assembling sections of vehicles on to the suppliers.

The globalization offers a great opportunity for the Indian Auto component manufacturers. There are certain strengths of the industry that attracts the global buyers and there are certain weaknesses, which can eliminate the local auto parts manufacturers, and the advantage shall go to global manufacturers who shall have local capabilities in India.

Indian Auto Component Industry Summary of strengths

 The auto Component industry in India has the potential of becoming the export driver of the auto industry due to:

A/ Increasing globalization of the auto industry supply chains

B/ Cost advantage in many component groups supported by relatively (compared to other developing markets) well-developed labour skills and engineering base.  To achieve the Auto industry version of 10% share of industrial out put by 2010, the component industry will have to grow at close to 22% over next 12 yrs, with export contributing to 20% of the output. 

The component industry in India has significant cost advantages primarily due to lower labour cost in India. This labour cost advantage translates to overall cost advantage of 20-30% over the counterparts from other developed countries despite lower labour productivity. Since Tier 1 suppliers control the global component industry the cost advantage should be leveraged into attracting these global players to set up manufacturing base in India.  This low cost labour is not a factor for long-term competitiveness, and improvement in scale, quality, technology and investment in critical processes, are necessary to sustain the cost competitiveness

Inspite of several handicaps there are a number of favorable factors, which are

1. Trained and skilled human resources

2. Wide Industry base manufacturing 97% of component required

3. Growing entrepreneurship

4. Growing domestic market

5. Expanding global markets

6. Transnationalisation of world economy

7. Investments by non-resident Indians

8. Economic liberalization

Challenges: -

There are several challenges, which the industry has to overcome at industry level and organizational levels. Few of these have been briefly described here with.

Small in size: -

The Indian auto component industry is wide with over 400 firms in the organized sector, but small in sales turn over which is estimated to be less than Rs. 15000 Crores for the organized sector. This sector is the fastest growing sector in Auto industry growing at the rate of 28%. The industry also exports close to RS 180 Crores at around 12% of combined sales.  It is currently a Small and fragmented industry by global standards.

Inferior Quality: -

Based on interviews in the component industry Sources: JICA Mining and industrial development studies department of Japan Quality focus required Quality up gradation presents the most important challenge for Indian component suppliers. The Industry association ACMA reports that over 170 of its members have already received ISO9000 certification and 23 have received QS9000 certification. There are examples of Indian suppliers becoming single source global suppliers for leading OEMS (GM and Ford), and also becoming global leaders with Sundaram Clayton receiving the Demming award. However statistics do not represent the overall quality problems, which plague the industry, driven by historically protected markets. An A.T, Kearney survey found that defect rates in India are in the range of 1000-2000 ppm against Japanese average of 100-200 ppm. 

Rejected parts per million (PPM)

The chart above gives a comparison of rejection level with other countries. An A.T.Kearney survey, found defect rates in India, even among the better suppliers in the range of 1000-2000 ppm against the Japanese average of 100-200 PPM. In the past few years, as competitive influence have increased, Indian suppliers have sought to improve their quality standards. This trend needs to be reinforced if Indian players wish to become competitive global exporters. ACMA suggests that the Indian component manufacturers must change from percentage rejection rates to PPM.

Lower labour productivity: -

The advantage of low cost labour is negated due to lower productivity level of Indian work force. Indian Labour productivity is lower relative to the rest of the world

Fig: - Average sales per employee in US$(000s)

As illustrated in the graph above The Japanese employee is ten times more productive than the Indian counterparts. Indian labour productivity is below its neighboring Asian countries and that is why some Indian OEMS are planning to start manufacturing in countries like Thailand.

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