Emergence of India as Small Car Manufacturing Hub Essay

Automotive Industry, globally, as well in India, is one of the key sectors of the economy. Due to its deep forward and backward linkages with several key segments of the economy, automotive industry has a strong multiplier effect and acts as one of the drivers of economic growth. The well-developed Indian automotive industry produces a wide variety of vehicles: passenger cars, light, medium and heavy commercial vehicles, multi-utility vehicles such as jeeps, scooters, motor-cycles, mopeds, three wheelers, tractors and other agricultural equipments etc.The sector has tremendous potential for providing employment. This will increase the present figure of employment in manufacturing sector which presently is quite low at 12% as compared to the countries like Malaysia (50%); Korea (62%) and China (31%). The Indian Automotive Industry started its new journey from 1991 with de-licensing of the sector and subsequent opening up for 100 percent FDI through automatic route.

The surge in number of people with higher purchasing power along with strong growth in economy over a past few years has attracted the major auto manufacturers. The market linked exchange rate and availability of trained manpower at competitive cost has added to the attraction of Indian market. This increasing pull of Indian market on one hand and the near stagnant rate of growth in auto sector in markets of USA, EU and Japan have worked as a push factor for shifting of new capacities and capital in the auto industry to India.

The increasing competition in auto companies has not only resulted in a spurt in choices of Indian consumers at competitive costs, it has also ensured an improvement in productivity by almost 20 percent a year in auto industry, taking it to one of the highest in Indian manufacturing sector Present Scenario By the early 2000s, India started to develop indigenous technologies at par with the international offerings. This was possible because of a large technically trained population and the cost benefit offered by India.This allowed world class automobiles to be manufactured in India at low-cost.

Below are some of the world’s leading car manufacturers in India. Automotive industry of India is now finding increasing recognition worldwide. India is currently the 3rd largest producer of small cars in the world. Supported with policies like India’s Auto Policy of 2002, foreign manufacturers can directly assemble/manufacture cars in India.

While a beginning has been made in export of vehicles, the potential in this area still remains to be fully tapped.Factors that have made India an attractive destination for automotive companies India has slowly emerged as a hot favourite location for Auto Makers. The various factors contributing to this are as follows: * Central proximity along with cheap trained manpower * Cost of steel in India is one of the cheapest in the world * Faster Design to manufacture cycle * 70% of population is less than 35 years old * Rising per capita Income and the changing demographic distribution * Relatively stable economy Favourable exchange rates, low interest rates and concessional duty structure * Large Domestic market and access to West-Asian & African countries * Successful integration of IT expertise into manufacturing * Stronger Intellectual Property rights * Expertise in manufacturing high precision parts with customization at low-medium volumes The Road Ahead India’s automotive market is basking in a 13 percent compound annual growth rate, going from five million vehicles produced in 2002 to 18 million in 2011.India, already the second-largest global market for two-wheelers (2W) and the fourth largest for commercial vehicles (CV), is now poised to rank among the top three global automotive markets in all vehicles, including passenger cars, by 2020. Government Measures In an attempt to make India a manufacturing powerhouse, the government is mulling creation of manufacturing hubs that will offer infrastructure, facilities and incentives to manufacturers. The department of industrial policy and promotion (DIPP) has put on fast track the national manufacturing policy, which seeks to create National Manufacturing and Investment Zones, or NMIZs.Spread over 2,000 hectares, or about 8 sq km, these zones will be in line with the model adopted by China to boost its manufacturing sector. The DIPP is seeking sops such as tax incentives, flexible labour laws, and easier exit norms for foreign investors and refinance facility for overseas debt for these zones.

The government after carrying out a study of the Chinese growth model identified the following as growth drivers for the automotive sector in India: * Creating world class physical infrastructure – road networks, ports, railways and airport * Government esponsiveness to business needs (administration that facilitates business)* Reduction and simplification of direct and indirect taxes * Lowered rate of income tax * 17% uniform VAT, ensuring no cascading taxes or duties * Ensuring no location based tax exemptions and barriers to inter-state movement of goods * Creating flexible and investor friendly labour laws * Companies can retrench labour and pay productivity-based wages * No trade unions in SEZs Employers can prolong work hours due to needs of production or business but work time to be prolonged should not exceed 36 hours a month. * Low interest rates * Availability of reliable and quality power; no need to invest in DG sets * Large capacity additions annually that keep pace with growth * Requirement of minimum investment in industry and R;D. India: World’s Compact Car Hub India is projected to produce 8. 7 million passenger vehicles per year by 2020, with the majority—5. 2 million—expected to be compact cars. This will make India the world’s compact-car hub.The factors that will play a major role in making India a compact car hub are: * Price sensitive users * Taxes are lower * Urban spaces are getting more crowded * Easier to achieve high volumes of production with compact cars Market growth is naturally translating into growth in the automotive component sector, where suppliers are focused on moving into new vehicle segments and manufacturing new, higher-margin products—for example, engine sensors and advanced exhaust after-treatment products such as diesel particulate filters.As global and Indian manufacturers invest in new capacity for new programs, more component suppliers are riding their coattails, anticipating short-term growth while eager to capture longer-term advantage.

Indian auto component suppliers that succeed in grasping this opportunity will do so by growing across three strategic dimensions: * Wider. Diversifying by manufacturing new components for new segments * Deeper. Developing stronger relationships with existing customers * Faster. Acting now to capture the next wave of growth WiderIndian component suppliers generally have deep technological capabilities but are not yet deploying them across the total range of vehicle segments.

For example, 40 to 45 percent of the approximately 110 suppliers studied in recent analysis by AT Kearney, manufacture components for only one segment—two-wheel, commercial, or passenger vehicles—while another 30 to 35 percent focus on just two segments. This stems largely from historic reasons as many suppliers began as ancillaries to original equipment manufacturers (OEMs) and so naturally supply their parent companies.For example, a tier 1 automotive seating supplier manufactures seats and interiors for India’s leading automaker, Maruti Suzuki, but it confines its activities mostly to passenger vehicles when it could diversify horizontally into other segments. (For example, why not build seats and interiors for buses? ) Although some suppliers have started moving into new segments, progress is slow. Indian suppliers that step up their product development capabilities now will have the best chance of capturing this growth opportunity. DeeperAs manufacturers develop large-scale expansion plans for India, the most successful homegrown component suppliers are already busy developing stronger relationships with their existing customers Develop global supply capabilities As more global platforms are introduced in India for the small-and compact-car segments—joining Ford’s Figo and Nissan’s Micra—manufacturers want suppliers that can operate within global supply chains. Increasingly, it will be difficult for OEM procurement teams to get approval for introducing a local supplier without global capabilities.Most Indian component suppliers have not reached this threshold.

Only a small number of them focus on exports or conduct business on a global scale, even as future growth and survival in this market require doing both. Improve product development capabilities Indian suppliers that step up their product development capabilities now will have the best chance of capturing this growth opportunity. While more than 90 percent of Indian suppliers budget about 1 percent for R;D, global manufacturers budget 3 to 10 percent for R;D, depending on the technological intensity of components.The learning curve for Indian component suppliers is likely to be steep and may require technology licensing or small-scale acquisitions to bridge the gaps. Many auto component suppliers in developing markets are ramping up their acquisitions to gain access to more technology across categories. For example, Dynamatic Technologies acquired German component maker Eisenwerke Erla to improve its design and development capabilities in producing complex ferrous castings for engines and turbochargers.

Similarly, chassis maker Wonder Auto Technology acquired airbag manufacturer Jinheng to improve its performance in safety systems. Establish an agile supply chain As growth explodes in the passenger vehicle segment, so does competition for market share. The growth will not be uniform, and we expect high volatility—periods of very high growth followed by tough periods.

This means higher risks for auto component suppliers as they may have to make larger bets (capital investments) to support their customers’ new product launches and capacity additions.Suppliers can reduce their risk by establishing an agile supply chain, and can do so in several ways: * Standardize. Increase commonality in proprietary products.

* Increase flexibility. Develop a manufacturing strategy that can easily shift capacities across models; when adding capacity, think modular. * Share investments.

Reduce investment threats by sharing investments in tooling with manufacturers. Faster With the supply market at an inflection point, the time is ripe for all ould-be participants to act fast to avoid the risk of falling behind. Already, a host of international tier 1 component makers are in India, and those that have not yet entered say they have plans to enter soon; the supply landscape is expected to rapidly evolve over the next three to four years (see figure 6).

As global and Indian manufacturers invest in new capacity for new programs, more component suppliers will have an opportunity to participate in the next wave of growth. ConclusionThe biggest challenges, as discussed, lie in developing new capabilities and convincing existing customers that an Indian supplier is up to the global challenge. Suppliers that diversify into new products and vehicle segments will be less exposed to demand cycles and more able to pursue the next growth wave. Those that are fully prepared for the competitive angst are not only the most likely to survive in the near term, but also the best positioned to thrive in the longer term.

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