Accelerating exports and globalising the Indian … SIAM_Plenary_Sept 12_Final.pdf · Accelerating...
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Accelerating exports and globalising the Indian automotive industry
SIAM Annual Convention
12 September, 2014
CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited
McKinsey & Company | 1
Accelerating exports and globalising the Indian auto industry
Vision for a globalised industry Case for action
Assessing India's competitiveness Making it a reality
McKinsey & Company | 2
SOURCE: IHS data; McKinsey analysis
Automotive export volumes have recovered post-2008 crisis
Global automotive exports (US$ billion)
41%
41%
34%
35%
1 Including 3-wheelers
624436
637 670
179170
109
170
815
2007
21
15
2011
2013
20 21
561
827
2009
870
2-wheelers Commercial vehicle
Passenger vehicle1
Share of exports in production
McKinsey & Company | 3
New supply and demand regions for automotive exports are emerging
SOURCE: IHS data; McKinsey analysis
1 Excluding China and Japan
- -
2007–13 CAGR
(%)
2007–13 delta in
trade value (US$ bn)
Change in exports
Change in imports
Change in trade flows
46 1
Gained volumes Lost volumes
Japan
Europe
ME
North America
20 4
Asia1 18 6
Latin America
CEE
17 8
13 5
India 4 28
“Near-shoring” (for North America and Western Europe)
-16 -3
-4 -0.5
-4 -8
Western Europe CEE
China
Asia1
33 28
19 8
ME 18 7
North America 17 2
Latin America 12 6
Growth in luxury cars
Growing import destination Demand bounce-back
-54 -3
-7 -5
McKinsey & Company | 4
Significant opportunity for India through achieving scale in automotive exports
SOURCE: Comtrade data; McKinsey analysis
Export value (US$ bn)
-
Indian automotive exports are getting to scale in 2-wheelers … India’s share in global automotive exports (percent; 2013)
1.6 8.0 2-wheelers
5.6 0.8
Cars (including 3-wheelers)
1.3 0.7 Commercial vehicles
… but are still sub-scale compared to key exporting industries India’s share in global exports (percent; 2013)
49 22 IT services
13 3.0 Chemical
12 2.4 Pharma
1.1 Auto-component
10
1.0 Automotive 8.5
McKinsey & Company | 5
Cars
2-wheelers
Commercial
vehicles
3-wheelers
MNC OEMs
Indian OEMs
Component suppliers
Government
Global foot- print by Indian OEMs
Vehicle exports from India
Excludes revenues from global assets of Indian OEMs1
Our vision for a globalised Indian auto industry is all encompassing
India has >3% share in automotive imports in 2013 New countries to increase export to by 2026
Indian OEMs have local manufacturing/ assembly unit in 2013 New manufacturing/assembly set-ups by 2026
SOURCE: McKinsey analysis
1 Global assets that are predominantly serving global markets (e.g., JLR – Tata Motors)
McKinsey & Company | 6
This vision promises to transform the industry 2013
2026
SOURCE: McKinsey analysis
1 Higher than target global average share of exports from India (i.e., 3%) by 2026
Export volumes: 3 mn to 10 mn (million units)
2-wheelers Cars 3-wheelers
Commercial vehicles
2
6-7
0.6 2-2.5
0.3 0.6
2x
4x
3x
0.1 0.3-0.5
4x
Truly global footprint
Sizeable1 importing countries
Overseas assembly units
Brand value of Indian automotive OEMs (US$ billion)
15
45
11 25
7
25
Significant forex pay-off and job creation
Export forex (US$ billion)
Export-linked jobs (US$ million)
Export-linked investment (US$ bn)
8.5
45 0.8
2.8
3 18
McKinsey & Company | 7
Case for action for Indian and MNC OEMs
SOURCE: OEM interviews; www.brandirectory.com; McKinsey analysis
Indian OEMs
De-risk volatility in the domestic market
Build global brands
Move up on technology and quality learning curve
Maximise value of domestic vehicle programmes
MNC OEMs
Create a natural hedge for currency risk
Use India as a production hub for global platforms
Top-up export volumes to help unlock business cases
McKinsey & Company | 8
Pay-offs for the Indian economy
SOURCE: OEM interviews; McKinsey analysis
Job creation
Additional 2 million export-linked jobs over the next decade
Forex income
US$45 billion annual forex income by 2026 (currently US$8.5 billion; Mexico already generates US$50 billion)
Strengthen “Make in India” brand
Similar to South Korea moving up the manufacturing exports curve, led by the automotive sector
New investment
Attract US$15 billion new investment linked to automotive exports over the next decade
“Make in India”
“Automotive is the industry of industries”
– Peter Drucker
McKinsey & Company | 9
Several auto exporting countries are building strong positions
Total auto exports US$ bn, 2013 Cars CV 2-wheelers
Share in global exports (percent, 2013)
Growth CAGR (2009–13)
>25%
10–25%
0–10%
High share; high growth
SOURCE: Comtrade data; McKinsey analysis
0
0
28.2
0.1
8.0
6.9
0.8
1.0
4.8
6.6
0.7
1.0
2.5
0.7
4.7
5.4
1.9
10.3 51 Mexico
8 India
19 Thailand
12 Turkey
47 South Korea
22 China
McKinsey & Company | 10
We assess India’s auto export competitiveness on a set of 8 success factors
SOURCE: McKinsey analysis
Industry ecosystem
Productivity adjusted labour costs 1
Availability of skilled resources and talent 2
State of development of auto components industry
3
Maturity and quality of automotive manufacturing and engineering
4
Government/regulatory support
Foreign trade agreements in key target markets
5
Quality of infrastructure and logistics costs 6
Export incentives and targeted financial support (e.g., export credit)
7
Domestic segment scale and enabling product regulations
8
Highly export-
competitive auto
industry
McKinsey & Company | 11
Indian industry ecosystem emerges as a strength
SOURCE: McKinsey analysis; WIS; World Bank reports; press search; EIU; IHS database
Competitiveness evaluation framework
Industry eco-system
Govern-ment support
State of development of auto components industry
Availability of skilled resources and talent
Export incentives and targeted financial support (e.g., export credit)
Quality of infrastructure and logistics costs
Productivity adjusted labour costs
Maturity and quality of automotive manufacturing and engineering
Foreign trade agreements in key target markets
Domestic segment scale and enabling product regulations
1
2
3
4
5
6
7
8
1 2 3 4 5
Ranking (5 = Most competitive)
Mexico China Thailand
India South Korea
Turkey
Indicative assessment
McKinsey & Company | 12
Voice of the Indian auto industry echoes the need for targeted government support
SOURCE: OEM survey results
OEM SURVEY
Key enablers that will propel Indian auto exports
Rank order of enablers India has to offer (percent of responses)
1
2
3
4
85
75
65
50
Domestic segment scale
Capability of auto component suppliers
Reliable, high quality products at right cost Skilled manpower and talent availability
Key asks from the government
Rank order of interventions sought from government (percent of responses)
1
2
3
4
5
Stronger export incentives (e.g., duty draw-back schemes)
Sign FTAs with high potential markets
Improve infrastructure (ports, highways, rail facilities)
Simplify export process (less documentation, customs)
Targeted G2G intervention to promote Indian products
45
40
80
55
65
McKinsey & Company | 13
Making it a reality – both government and OEMs have to drive collaborative action
SOURCE: McKinsey analysis
OEM actions to make export business cases work
Government–OEM action to create a winning environment
+
High OEM aspirations
Tailored products
Optimal supplier and manufac-turing confi-guration
Smart distribu-tion reach
Strong and locally relevant brand
Enabling partnerships/M&A
Preferential duty arrangements in target markets
Product market regulations to grow domestic scale
“Make in India” brand
Infra- structure
Govern- ment
Industry OEMs
Focus of this effort
McKinsey & Company | 14
5 examples of decisive government policies and OEM action spurring automotive exports
SOURCE: Press search; McKinsey analysis
Thailand: Created export-oriented hubs 1
▪ Government implemented favourable policies to attract Japanese OEMs for serving huge domestic demand for pick-ups
▪ Developed Samutpakarn cluster, Ranyong industrial port
Mexico: Spearheaded favourable trade agreements 2
▪ Negotiated 47 free trade agreements across the world
China: Direct financial incentives for exports 3
▪ Full refund of VAT on exported vehicles ▪ Banks provide export buyers’ credit to importer to support export of
Chinese cars Eastern Europe: Availability of skilled workers 4
▪ Pro-active government initiatives towards skill-building ▪ Cheaper (but equally qualified labour) than in Western Europe
South Korea: Proactively changed the quality perception of
“Made in Korea” 5
▪ OEMs launched aggressive marketing campaign (e.g., 10 year/10,000 km warranty scheme) to improve perception of quality
▪ OEMs recruited European designers to revamp designs for their passenger vehicles
McKinsey & Company | 15
What can government do? What can OEMs do?
Growing automotive exports from India – six potential accelerators (1/3)
SOURCE: OEM interviews; McKinsey analysis
▪ Create consistency in domestic regulations for OEMs to grow scale
–Engines and fuel technology
–Emissions and safety
–Consumption taxes
▪ Set up trade intelligence units (e.g., JETRO of Japan) to
–Proactively regulate monitoring and response
▪ Invest in product development to meet global emissions and safety requirements
▪ Invest in tailoring to consumer preferences in target markets
▪ Hire best design talent globally to upgrade design capabilities
Become “the global production hub” for select product segments 1
B, A segment cars
Commuter bikes
MUVs
Pick-up trucks
3W
Fully-built buses
a
b
c
d
e
Create a “level playing field” in top-10 export markets 2
Africa: Algeria, Egypt, South Africa
LatAm: Mexico, Chile, Colombia, Philippines
Asia: Indonesia, Sri Lanka, Bangladesh
▪ Strike FTA agreements with ~10 target countries (currently in place for 1/10)
▪ Include target countries in focused market scheme (currently 4/10)
▪ Restore duty draw-back incentives for commercial vehicles to 5.5%
a
c
b
▪ Build awareness in foreign governments and consumers towards discouraging demand for used vehicles (e.g., in Bangladesh and Sri Lanka)
d
McKinsey & Company | 16
B, A segment cars and UVs have significant domestic scale and large export demand
India has the opportunity to “own” the segments of strengths – Passenger cars example
SOURCE: SIAM data; IHS Global Insight; McKinsey analysis
2013
OEMs are establishing ‘Made in India’ position
Become “the global production hub”
1
2020 (E)
2020 (E) India demand World
import
2927
12
27 3243
3639
21
19B
C
UV
D & above
A
1
5
4 4 1
▪ UV: Mahindra XUV/ Scorpio; Renault Duster, Ford EcoSport
▪ B-segment –Hatch – Suzuki
SWIFT; Hyundai i20; VW Polo
–Sedan – VM Vento; Nissan Sunny
▪ A-segment: Hyundai i10; Suzuki A-Star
McKinsey & Company | 17
Thailand
South Korea
Turkey
China
India
Potential to set up FTAs
1 Algeria, Egypt, South Africa, Mexico, Chile, Colombia, Philippines, Indonesia, Sri Lanka, Bangladesh
India lags other exporting nations on FTAs with major markets
2
Create “level playing field”
20
19
21
21
24
17 Mexico
Average duty paid for exporting to top-10 markets1
FTA exists for automotive
SOURCE: OEM interviews; SIAM; McKinsey analysis
Egypt South Africa Chile
Colom-bia
Mexico
Philip- pines
Indo- nesia
McKinsey & Company | 18
What can government do?
What can OEMs do?
Growing automotive exports from India – six potential accelerators (2/3)
Drive B2G/G2G interventions to own high potential export corridors
3
Africa, SAARC by creating transit systems (opens markets for fully built buses, trucks, commuter bikes and cars)
▪ Collaborate with foreign governments in their strategic programmes (e.g., urban transit system)
▪ Leverage cooperation schemes (e.g., infrastructure development in target countries) to promote usage of Indian auto products
a b
Leverage partnerships/M&A to establish local manufacturing and distribution in select markets
4
▪ Be on the lookout for M&A and partnership opportunities
–Accelerate business build-up
▪ Invite strong component suppliers
–Globalise footprint at new locations
▪ Create trade support cells in select Indian embassies
–Help Indian OEMs in finding partners and investment opportunities
–Help Indian OEMs set up local plants
a b
c
Brazil
Russia
Eastern European nations
Nigeria
SOURCE: OEM interviews; McKinsey analysis
McKinsey & Company | 19
What can government do? What can OEMs do?
Growing automotive exports from India – six potential accelerators (3/3)
Upgrade and enhance export infrastructure 5
Plant-to-port logistics
Port infrastructure
▪ Co-invest with port operators to build dedicated port facilities, e.g.,
– Storage space near port
– Dedicated rakes infrastructure
c ▪ Undertake efficiency improve-ment initiatives for government owned ports
– Enhance parking capacity by 5x
– Reduce turnaround time from 4 days to <2 days
▪ Encourage auto OEMs’ investment in building and owning rakes infrastructure
a
b
Crystallise a common brand positioning for “Made in India” 6
Good quality and high value
Fuel efficient and environment friendly
▪ Help crystallise a clear positioning for auto products made in India (similar to “Incredible India” in Tourism)
a ▪ Ensure world-class quality standards in products
▪ Emphasise “Made in India” brand through joint representations at marquee industry events (e.g., Geneva; Frankfurt IAA)
b
c
SOURCE: OEM interviews; McKinsey analysis
McKinsey & Company | 20
We see the journey to globalisation over the next decade in two horizons (1/2)
SOURCE: OEM interviews; McKinsey analysis
Horizon 1 Growing exports in India-like markets (2014–2020)
Horizon 2 Scaling to full potential through deep local presence (2020–2026)
Horizon 3 Build position in the triad markets (2026 onwards)
Target markets
▪ Large and growing demand for products that are already at scale in India
▪ No requirement for manufacturing localisation
▪ Africa: Algeria, South Africa, Egypt
▪ Asia: Indonesia, Philippines, Sri Lanka, Bangladesh
▪ Latin America: Mexico, Chile, Colombia
Target products
▪ Already at scale in India
▪ Aligned to demand in regulations in target markets
▪ A and B segment cars; commuter bikes; MUVs; pick-up trucks; 3-wheelers; fully built buses
Criteria for horizon 1 Focus areas
McKinsey & Company | 21
We see the journey to globalisation over the next decade in two horizons (2/2)
SOURCE: OEM interviews; McKinsey analysis
Horizon 1 Growing exports in India-like markets (2014–2020)
Horizon 2 Scaling to full potential through deep local presence (2020–2026)
Horizon 3 Build position in the triad markets (2026 onwards)
Target markets
▪ Relatively stringent technology and quality requirements
▪ Demand for high value-for-money vehicles
▪ South East Asia: Thailand, Australia, Malaysia, Vietnam
▪ Middle East: Saudi Arabia, UAE, Qatar ▪ Latin America: Brazil, Peru, Ecuador ▪ Eastern Europe: Czech Republic,
Romania, Hungary, Slovakia, Poland, Russia
Target products
▪ Expected to achieve scale in Indian market over next 5 years
▪ Require strong design, technology and quality capabilities (& perception)
▪ B&C segment cars; luxury sedans; high-end premium bikes; SUVs
Criteria for horizon 2 Focus areas
McKinsey & Company | 22
In summary, by 2026 Indian auto industry can achieve ...
Total automotive exports
10 mn units
Share in global auto-motive trade
3%
Forex income from exports
$45 bn
Brand value of Indian OEMs
$25 bn
Additional investment in the economy
$15 bn
Incremental export-linked jobs
2 mn
McKinsey & Company | 23
ADDITIONAL SLIDES
McKinsey & Company | 24
Potential to reach US$45 billion automotive exports by 2026; 2 million additional export-linked jobs
SOURCE: McKinsey analysis
1 0.6 million cars + 0.3 million 3-wheelers 2 1.1 million cars + -.5 million 3-wheelers 3 2.1 million cars + 0.6 million 3-wheelers
Automotive exports (US$ billion)
1.0 Share in global exports (percent)
1.7
3.0
2.8 Export-linked jobs (million)
1.6 0.8
8.5
20.0
45.0
2013 2020 (end of horizon 1)
2026 (end of horizon 2)
1.5 1.5
5.5 14.0
2.0 4.0
34.0
4.0 7.0
2-wheelers
Commercial vehicles Cars and 3-wheelers
2
0.1
0.91
4.2
0.2
1.62
7
0.3
2.73
3 mn unit
s
10 mn
units
6 mn unit
s
xx No. of units (million)
2 mn incremen-tal jobs
McKinsey & Company | 25
Summary
ASSESSING INDIA'S COMPETITIVENESS
▪ Industry ecosystem is getting competitive and ready
▪ Enhanced government support could unlock higher growth
MAKING IT A REALITY
▪ Six potential accelerator initiatives driven through government and industry collaboration could help capture the potential
VISION FOR A GLOBALISED INDUSTRY
▪ Export ~10 million units by 2026 (~3 million units today); US$45 billion in exports; ~2 million additional jobs
▪ Grow footprint to 45 countries CASE FOR ACTION
▪ All stakeholders – MNC and Indian OEMs, components suppliers, and government – stand to benefit
▪ Limited window of opportunity to serve newly emerging importing markets
McKinsey & Company | 26
Split of car sales by country of manufacturing
Not moving now will risk losing attractive markets to the competition – Chile example
SOURCE: Asociación Nacional Automotriz de Chile
45% 39%
19%
12%
8%
14% 14%
9%
11%
7% 18%
South Korea
China
Japan
Mexico
India
Others
4%
2009 2012
Factors boosting Chinese car exports to Chile
China signed FTA with Chile in 2006 with 0% import duty (6% for India)
1
18+ Chinese brands providing boost to “Made in China” brand (2 from India)
2
Chinese OEMs set up Chile-China Auto Trade Associ-ation for import, distribution, sales of Chinese brands (no such collaboration for OEMs from India)
3