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Indian Automotive Industry: Innovation andGrowth
Mamata Parhi
In the early 21st century, with the original four Asian Tigers at or near to fully
developed status, attention has increasingly shifted to other Asian economies
such as China and India, which are experiencing rapid economic transformation
at the present time and are thus leading a sort of redistribution of the epicenter
of global innovative activities. Not only so, it is also being widely contended that
these emerging new economies that have already shown capacities to alter the
balance of the international division of labour in their favour i.e. demonstrated
capabilities which might drastically change the world‟s technological map. The
apparent tendency is conjectured to have risen from some substantial amount of
cumulative deepening and technological upgrading of the enterprises (at least in
some industries, if not all) within these economies.
India initiated economic reforms, beginning in the 1980‟s, which became
comprehensive in the early 1990‟s. The reforms included significant
liberalizations of the external control regime, opening up for increased imports
and for foreign investments. The manufacturing industry has evolved; being
chiseled by India‟s liberalizing trade and investment regimes on the one hand,
and the structural readjustments from within (propelled mostly by the changes
in global industry), on the other. Several authors have documented the
technological learning processes in Indian firms in a spectrum of industries
(e.g., Kale and Little (2007) in pharmaceuticals, Arthreye (2005) in software
industry, Parhi (2006) in the automotive industry).
The broad aim of this section is to discuss the changing forms of innovation in
Indian automotive firms over the last few years. Starting with a broader
contextual view of the automotive sector, to give a flavour of the general
industrial environment, we will analyze the specific case of auto components
industry which has shown remarkable success over the last two decades. The
chapter will build on two distinct but inter-dependent parts: a historical
analytical part (drawing mostly on existing literature) to understand the genesis
and development path of the industry through the changes in
policies/institutions; and an econometric analysis of quantitative and qualitative
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data to understand the nature and extent of capability building processes at the
firm level in the automotive industry.
The plan for this section is as follows. In the next sub-section I present the
general industrial and economic environment of automotive industry byproviding its evolutionary pattern since independence and presenting how
technological capability of this industry has evolved through various decades. I
also discuss general industry trends in this sub-section. Data, methodology,
empirical model and results are discussed in following sub-section. Finally, the
last sub-section summarizes the main findings and provides policy perspectives
of the results.
Evolution of the Indian Automotive Industry: From Statics to Dynamics
This sub-section presents an evolutionary analysis of Indian automotive
industry‟s growth over the four decades since independence. The evolution of
India‟s automotive industry from a fairly static/slow-paced growth (from 1940s
till 1980s) to the recent impressive showing of dynamism owes formidable
precedence to history. If one fishes through the not-so yet impressive
documentation of Indian automotive industries‟ wholesome development since
independence in 1947, one would most certainly huddle with either political
surmise of industrial developments or a development (or sometimes industrial)
economists explanation of the industry‟s evolutionary characters. So far, most of
the prologues on India‟s automotive industry‟s development story have been
written by economists with industry as specialization or by development thinkers
with a political economy bent of mind. I do not have specific preference for
either as I would choose to borrow the economic historian‟s eye and combine
both political and economic/industrial development policy angle to describe
Indian automotive industry‟s growth trajectory.
As will become clear from the ensuing discussions, India‟s industrial
development is characterized by more complex processes than one can find in
other transition economies and industrialized nations. If one keenly observes the
differences in industrial development of some transition economies (for instance,
Republic of Korea) with India, among many distinct observations (e.g., a clear
and favorable state patronage to liberalization at the initial phase of
development), an interesting aspect would emerge, which to my knowledge has
flayed the probing eyes of industrial economists or political scientists. The state
of development and its sustainability in any economy is contingent upon the
stock and accumulation of human capital. The number of educated people
among young generations during 1960s and 1970s could make the key
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difference between the paces of industrial development in the comparable
nations. This may appear anecdotal, but it has interesting political economy
evolutionary outcome which I believe has shaped the economic and industrial
policies in the next decades.
Chronology and typology of India’s automotive growth
Indian automotive industry‟s building up characteristics from the pre-
independence period till date shows distinct phases. It all started in 1940s for
the first embryonic automotive industry to emerge in the pre-independent
India. Almost after a decade and a half since then, leading entrepreneurs and
the government in the independent India have extended efforts to create a
manufacturing industry to supply the automotive industry with components
in 1953. This was the beginning of the take-off phase of Indian economy. In
the next three decades, the growth in the automotive industry did not really
kick-start as the national economic growth was constantly following the
Hindu rate of growth – an annual growth that stagnated between 3.5 percent
over 1950-1980. Despite the sluggish growth of the economy during that
time, the automotive industry began to witness a relatively fast growth
during 1970-1980 mainly due to the leading production role of Telso, Ashok
Leylands, Mahindra & Mahindra, Hindustan Motors, Premier Automobiles, and
Bajaj Auto. Having experienced several decades of colonial power, openness
to risk of admission in the global automotive production were severely
checked by the Indian government by introducing several licenses, trade
restrictions and barriers. However, the growing demand for more cars since
1980s has changed the whole growth scenario. During 1980-1985 the first
major change was sighted as Japanese manufacturers began to build car and
commercial vehicle factories in India in partnership with Indian firms. At the
same time, component manufacturers also entered the joint-venture scenario
with European and US firms.
From the mid period of phase 3 and the beginning of phase 4 of economic
reforms (that is during 1985-1990) the industry marked the entry of Maruti
Udyog into the production of passenger car segment as persistent high
import tariffs were relaxed to a great extent, and with lesser import cost
adding to the overhead production cost, higher productions were possible
leading to the start of growing exports. This period (the phase 4 of economic
reforms: 1988-2006) registered the triumph of liberalization which kick-
started the much awaited reform for the automotive sector paving the way
for the firms which were genuinely waiting for join-ventures, private
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investment with duty-free technology transfer indirectly through FDI and
directly by importing the new technologies. It is during 1990-1995, Hero
Honda emerged as a major operator in the motorcycle market while Maruti
Udyog established itself as the leading passenger car maker. During 1995-
2000, leading international car makers entered the Indian market, a trendthat continues to accelerate till this date. During this time advanced
technology was introduced to meet competitive pressures, and
environmental and safety imperatives. The automobile companies started
investing in service network to support maintenance of on-road vehicles and
auto financing started emerging as an important driver for demand.
Since 2000, significant trade and investment restrictions were removed to
speed up the momentum of liberalization of the automotive industry.
Indigenous production of cars started since then with an eye to the domesticand international market needs. Increasing efficiency was achieved with
growing investment in research and development while satisfying the
strictest environmental standards. As a result, an influx of overseas
technology know-how has improved the impetus for improvements in quality
and productivity, to a point where many global companies now view India
more favorably than China as a source point for components. It seems that
global Tier 1s are increasingly confident about India's ability to build more
complex parts, and are relocating more complicated systems work to India
rather than simply building basic parts there.
Growth Dynamics of Automotive Segment: Past and Recent Trends
The automobile industry in India has long been recognized as a core
manufacturing sector with the potential to drive national economic growth
and foster the development of technological capabilities through its powerful
backward and forward linkages, and the localization of high value added
manufacturing processes within domestic economies (Humphrey, 2000;
Shapiro, 1994). In recent years, for instance, the contribution of the
automotive industry to GDP has risen noticeably - from 2.77 percent in 1992-
93 to 4 percent in 2003-2004.i
The automotive industry in India comprises of all vehicles, including 2-3
wheelers, passenger cars and multi-utility vehicles, light and heavy
commercial vehicles, and agricultural tractors and other earth moving
machineries, besides the component segment for all these categories (see
GenreChart for the various types of vehicles produced in India). The vehicles
segment and the allied components segment are sometimes alternatively
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termed as automotive industry. The industry is characterized by a very high
percentage (about 80%) of 2-3 wheelers production. To mention, India ranks
as the largest manufacturer of motorcycles and second largest in
manufacturing of scooters in the world.ii In tractor manufacturing also India
is the second largest producer in the world.
It was noted in the preceding section that the auto industry witnessed a
radical transformation in terms of competition with de-licensing and
liberalization in the 1990s. Following this, two major developments took
place. First, there was an upsurge in the volumes of vehicles produced. And
secondly, there was a flux of entry of global auto manufacturers into India
and in some cases, also along with their parts suppliers.iii The major
contributions came from the passenger car segment, followed by the Multi
Utility Vehicles (MUVs). As a result, the 4-wheeler segment (includingtractors), for the first time, crossed the million marks in 1996-97, registering
a growth of about 12.2 percent in the 1990-97 period (Intecos-cier, 2001).
The 2- and 3- wheeler segments also showed good performance during the
same period with a growth rate of nearly 9 percent (Intecos-cier, 2001).
Some of the more recent trends of production are presented in the Figure 1a,
which depicts that starting from a meagre 0.5 million (in number) in 1970s,
the total production of vehicles has gone up to as high as 6.5 million in 2002.
The production accelerated after 1980s when partial decontrol wasintroduced. The result is notable – from a modest 1 million during 1980s it
became three fold in 1991. The effect of complete decontrol took time to
exert an all round impact on the economy as it shows there was a short
recessionary period 1991–1994, after which there was sign of revival.
Towards 1998-99, the industry again showed an upward trend reaching a
record high in 2002. The production of vehicles in terms of value also shows
a positive growth in the more recent periods (see Figure 1 b).
Genre of Indian Automotive Industry
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Source:ACMA,India
Fig 1a: Automobile Production in India: 1971 – 2003
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Source: Own construction using SIAM and ACMA data
Fig 1b: Vehicle Production: Industry Gross Turnover
Source: Own construction using SIAM and ACMA data
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Fig 2: Vehicle Production: The 4-wheeler Segment
Source: Own construction using SIAM and ACMA data
Table 1: Production Trend of Automotive Segments (Mln No.)
Cars Jeeps/
MUV
M &
HCVs LCVs Tractors
Total 4
Wheelers
Total
2/3
Wheelers
All
vehicles
1971-72 -- -- -- -- -- -- -- --
1972-73 0.040 0.011 0.033 0.008 0.018 0.109 0.136 0.245
1973-74 0.037 0.013 0.031 0.009 0.022 0.111 0.151 0.263
1974-75 0.042 0.012 0.034 0.011 0.023 0.123 0.162 0.285
1975-76 0.031 0.010 0.035 0.006 0.031 0.112 0.194 0.307
1976-77 0.022 0.007 0.037 0.007 0.033 0.106 0.227 0.332
1977-78 0.036 0.008 0.039 0.008 0.033 0.125 0.284 0.408
1978-79 0.034 0.009 0.033 0.008 0.041 0.126 0.282 0.408
1979-80 0.033 0.012 0.047 0.013 0.055 0.159 0.321 0.480
1980-81 0.033 0.013 0.043 0.016 0.062 0.167 0.337 0.504
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1981-82 0.031 0.016 0.054 0.020 0.070 0.191 0.467 0.659
1982-83 0.042 0.018 0.066 0.027 0.082 0.236 0.572 0.808
1983-84 0.044 0.020 0.061 0.027 0.063 0.214 0.664 0.878
1984-85 0.047 0.022 0.061 0.029 0.074 0.233 0.818 1.051
1985-86 0.076 0.023 0.063 0.033 0.082 0.277 0.941 1.219
1986-87 0.103 0.028 0.064 0.037 0.073 0.305 1.241 1.546
1987-88 0.126 0.029 0.060 0.039 0.079 0.333 1.449 1.782
1988-89 0.152 0.032 0.065 0.045 0.089 0.383 1.498 1.881
1989-90 0.166 0.036 0.070 0.046 0.107 0.425 1.716 2.141
1990-91 0.179 0.044 0.077 0.048 0.118 0.466 1.815 2.282
1991-92 0.182 0.037 0.087 0.058 0.139 0.502 1.910 2.412
1992-93 0.166 0.032 0.090 0.054 0.148 0.489 1.683 2.172
1993-94 0.163 0.039 0.075 0.053 0.148 0.479 1.569 2.047
1994-95 0.208 0.049 0.066 0.075 0.138 0.536 1.847 2.383
1995-96 0.264 0.050 0.102 0.093 0.163 0.672 2.324 2.996
1996-97 0.348 0.068 0.130 0.129 0.191 0.866 2.820 3.686
1997-98 0.408 0.135 0.152 0.085 0.226 1.005 3.202 4.207
1998-99 0.401 0.135 0.096 0.065 0.256 0.953 3.308 4.260
1999-00 0.390 0.113 0.080 0.055 0.254 0.893 3.584 4.477
2000-01 0.574 0.124 0.114 0.061 0.257 1.131 3.984 5.115
2001-02 0.507 0.126 0.088 0.064 0.231 1.017 3.961 4.978
2002-03 0.500 0.066 0.097 0.066 0.106 0.834 4.484 5.318
Compound Annual Growth Rates, CAGR (%)
1972-81 -2.33 3.39 4.99 10.37 14.74 5.77 13.15 10.39
1982-91 15.65 7.66 2.72 7.91 5.34 7.84 12.82 11.56
1992-01 11.79 14.85 -0.15 1.76 4.56 7.59 8.94 8.65
Total
period 8.91 6.66 4.25 8.02 6.20 7.26 12.60 11.06
Source: Constructed from “Facts and Figures: 2000-2001”, ACMA, India.
Particularly, there has been a considerable growth in the passenger car
segment in comparison to the MUVs / jeeps during the same period as shownin Figure 2. Combining with the information from preceding paragraph it is
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evident that the major contribution to the growth of the total volume is from
the car segment. This segment registered a consistent growth while others
suffered a decline in production in the recent years. However, following an
overall up-trend in the economy towards 1998-99, the industry showed signs
of revival and as a result, in the year 2000, the production in the non-tractorsegments of the auto industry recorded a growth rate of 15 percent. In
1998-99, the industry produced a total of 4.5 million vehicles (including 2-
and 3- wheelers), and reached a turnover of Rupees 420 billion (equivalent
to US$ 104 billion), thus making India as the fifth largest auto producer
among emerging markets (ACMA, 2001).iv With continuous policy support
and rapid expansion of the domestic market, the competitiveness in the
industry intensified thus fuelling a high growth rate (with a CAGR of 12
percent, see Table 1) in the nineties. The detailed production trend for the
last 3 decades is presented in Table 1.
The notable performance of MUL in the industry contributed significantly to the
growth and dynamism of the industry. With the establishment of India‟s first
modern assembly plant, MUL initially started producing small passenger cars
that were fuel-efficient and cheaper (about 21 percent) than the existing
domestic cars (Humphrey et al., 1998). In fact MUL dominated the domestic
passenger car market (with a market share of about 83 percent) till 1996-97
and moved into the production of middle-sized cars in the 1990s. The domestic
market continued to expand markedly and the competition within the industryintensified with the growth of middle class consumers, and diversified consumer
preferences (D‟Costa, 1995, 1998; Okada, 2004). In the same period other
domestic car producers also diversified their product ranges. For instance,
TELCO, which had traditionally accounted for about 70 percent of the commercial
vehicle market (Kathuria, 1996), started to produce multi-utility vehicles and
small passenger cars in the 1990s.
The increase in the production volumes in the automotive industry was in fact
led by the growing domestic demand for the vehicles. This is very much distinctif we look at the trend of automobile sales in India in the post liberalization
period (see Figure 3 for the domestic sales of major vehicle categories). There
was an annual compound growth rate of about 9 percent in the sale of all
vehicles in the period 1995-2003 (see Table 1 for the respective figures for
different segments of the vehicles).Notably, the demand for 2-3 wheelers
overtook that for the 4 wheelers segment.
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Fig 3: Domestic Vehicle Sales after 1991(In numbers)
Source: Own construction using SIAM and ACMA data
As shown in both production and the sales figures, the automotive sector in
recent years is led by the 2/3-wheeler segment in India. This is also captured by
the relative market share of various segments of the industry as shown in Figure
4. The 2-wheeler segment dominates the market with more than two third of the
share followed by a moderate share of the passenger car segment in the 4-
wheeler category. The share of various segments in total production of vehicles
in recent years is presented in Table 2.
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Fig 4: Market Share of Various Segments of Automobiles
Source: Own construction based on SIAM data
Table 2: Share of Segments in Total Vehicle Production (in Mn)
Commercial
Vehicles
(CVs)
Passenger
Vehicles
(PVs)
Two
Wheelers
Three
Wheelers
Grand
Total
2000-01 0.16 0.64 3.76 0.20 4.76
2001-02 0.16 0.67 4.27 0.21 5.32
2002-03 0.20 0.72 5.08 0.28 6.28
2003-04 0.28 0.99 5.62 0.36 7.24
2004-05 0.35 1.21 6.53 0.37 8.46
Source: Compiled from SIAM data
Automotive industry of India also started exporting slowly after the
liberalization. Here again, MUL and TELCO have been the leadingexporters,v accounting for 95 percent and 86 percent of passenger cars and
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commercial vehicle exports respectively in later 1990s (Okada, 2004). The
automobile industry along with the component industry has significantly
raised their exports only in more recent years. In fact, the volume of exports
was very small and had shown a downward trend in the later part of nineties
(Okada, 2004). Afterwards, the trend started to reverse, however. Forexample, during the year 2002-03 the export of automobile industry had
registereda growth rate of 65.35 percent.vi The dominance of the 2 wheelers
is also apparent in the export figures. As mentioned before, passenger cars
and the 2-3 wheelers segments have accounted for the most in the
production and domestic sales of vehicles. Their performance is also
noticeable in the export figures of recent years (Figure 5). However, it is
argued by many (see e.g., Okada, 2004) that the expanded domestic
market, rather than the increase in exports propelled the rising trend of the
automotive industry.
Fig 5: Automotive Export Trends
Source: Own construction based on ACMA data
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The relaxation of trade restrictions on foreign direct investment in the auto
industry, liberalization and the consequent positive signs of a buoyant industry
(mainly due to a growing market) drew keen interests from many international
firms. Several leading multinational companies entered into the Indian market.
By the late nineties the international majors had started their operation inthemiddle-sized passenger car segment.vii This resulted in many joint ventures
and foreign collaborations in the industry. The distinct changes in the
industry are also partly led by the ongoing trend of mergers and acquisitions
as strategies of major automotive manufacturers to consolidate their
competitive edge in the world market. As can be observed, most of the major
global producers of automobiles have made their presence in the Indian
market. The largest number of joint ventures has come from Japan and more
than 50 percent of the joint ventures are in the manufacture of passenger
cars.
Thus, starting from pre-independence era of as early as 1930s, the Indian
automotive industry has marched a long way – a journey which was in most
part beset with inward trade orientations prompting large regulations and
restrictions. As a result, the industry became one of the least innovative slots
till 1980s till MUL began its operations. The turn around came up in the
following years mainly due to the liberal policies undertaken to boost the
economy. The growth of the automotive industry is much more apparent in
segments such as passenger cars, and recently, in the 2- and 3- wheelers.The technological sophistication of the industry has also picked up after India
adhered to the global environmental norms regarding emission standards as
well as quality certifications. The upward trend in exports also reflects the
changing nature of technological sophistication of the Indian automotive
sector.
The structural and technological changes in the automotive industry also
have multiple trickle-down effects on its allied components segment as the
latter is inextricably linked to the former in thevalue chain.
viii
The intricatenature of automotive industry‟s intra-sector relationships due to its tiered
structure, and the dynamics of international automotive market
developments make it hard to disentangle the effects of the changes in both
the sectors.ix However, it is possible to identify the emerging trends in the
auto component firms by looking at the changes in some of the aggregate
features of these firms. In the following section we try to evaluate the
structure of this branch of the automotive industry in a greater detail and
examine its trends and dynamic potentials over time.
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Auto Component Industry: Recent Performance Indicators
The transition of the automotive industry to a relatively „high-value‟ industry
towards the 1990s has significantly affected the structure of the auto component
sector too. With liberalization fast generating momentum in the economy, urban
income growth has also experienced a turnaround leading to high demand
growth for 2-3 wheelers and 4-wheelers. Consequent upon this, as we
elaborated before, there has been rapid growth of the vehicle production in the
recent years. Not surprisingly, component industry also grew by more than 20%
on the average per annum during 1991-2001. Also, the total exports of the
industry have grown remarkably; the average annual growth of total exports is
around 15 percent between 1991 and 2002. We describe these trends in
seriatim:
(a) Trends in production: To cater to the existing and new vehicle
manufacturers‟ requirements a continuous expansion of the automotive
components sector has been occurring after 1980s. With the opening up of the economy and a renewed optimism of market growth prospects inspired
higher investment and output in this sector. In 1996-97, the investment in
the component sector marked a little above 1500 million dollar but in 2001-
2002, the investment rose to 2300 million dollar which is a remarkable
growth of 30% in over five years (Figure 6), notwithstanding the existing
structural bottlenecks like poor road infrastructure. The fact that gradual
liberalization set the pace for higher investment in this sector can also be
seen while observing the commencement of production of the companies.
Interestingly, about 60 percent of the total firms in the organized sectorbegan production only after 1980 – the time partial decontrol was
introduced.
The total production of auto components has been increasing in about 19
percent per annum since 1960s. However, the gross output in value terms
was quite miniscule till mid seventies and picked up only after 80‟s. This is
true at the various components levels as well. As can be gleaned from Figure
7, the volume of production was almost negligible in the 1960s. It is only
since 1975, a respectable production started (Figure 7) and in the
subsequent years the total auto component production has grown almost
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exponentially. Following the high growth of total production is the growth of
engine parts and drive transmission and steering parts. All through the
period, engine parts, being high value-added in its nature, has been
contributing the most to the total production. A closer look at the trends
however reveals that a short recessionary period occurred in 1997-1999during which the production growth was almost negligible, most of the
segments even experiencing negative growths (Table 3). Overall, the post
liberalization period induced a CAGR of about 20 percent, which is slightly
more than the CAGR of the entire span (1961-2001).
Fig 6: Investment in Auto Components Industry
Source: Own construction from ACMA data
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Table 3: Growth of Auto Components production in India
Engine
Parts
Drive &
Transmission
Parts
Suspension
& Braking
Parts
Electrical
Parts
Equip-
ment
Total
1991-92 20.73 11.30 22.16 19.76 13.00 19.02
1992-93 19.01 14.31 8.10 35.99 18.06 20.52
1993-94 18.20 21.12 14.91 17.69 53.25 20.84
1994-95 22.94 28.91 26.02 44.13 21.29 27.19
1995-96 22.19 25.32 31.95 32.07 44.45 29.75
1996-97 27.26 7.77 21.20 20.36 28.93 23.65
1997-98 0.70 11.13 -0.18 -3.79 -1.05 4.73
1998-99 2.75 2.61 6.37 4.33 17.59 7.72
1999-00 21.43 43.06 9.04 18.50 18.57 22.99
2000-01 -9.79 15.04 -2.43 -7.07 15.61 5.30
CAGR (1961-
2001) 16.97
21.23
21.92
17.32
19.89
18.47
CAGR (1991-
2001) 14.86 20.69 13.63 19.75 27.22 19.81
Source: Own calculation based on ACMA data
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Fig 7: Component-wise Production Trend
Source: Own construction from ACMA data
(b) Trends in Exports and Imports: The auto components industry is growing
not only in the domestic market but is also making inroads in the export
markets. Despite the relatively small share of in the world exports, the industry
has been managing to tot up the numbers in recent years. Exports of autocomponents from India have grown at a compounded growth rate of 19 per cent
over the past six years.x During the fiscal year 2004, the industry achieved a
milestone ofUS$ 1 billion worth of exports.xi Going by the current trends, the
auto component industry is observed to export more than 10 percent of its
output every year (ACMA, India).xii Figures 8(a,b) below, present the
performance of the component sector in terms of trade. Though the exports did
grow by 1990s, a bulk of the exporters largely catered to the low-value added
„after market‟ demand abroad rather than high-quality OEM supplies till late
(Okada, 2004). The OEM exports increased more gradually towards the end of that decade.
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The appreciable rise of value of exports in recent years (Figure 8a), like
many other sectors of the economy, doubtlessly owes to the outcome of
liberalization. Over the past 15 years, the exports in this sector have been
growing steadily at about 12 per cent per annum (Table 4). However, the
growth rate of imports has been a meagre 2 percent over the span of adecade and half. The year-to-year imports have been also quite fluctuating
as can be observed from Table 4. In fact, due to the inward orientation of the
automotive industry, imports had always been low in the industry.
Interestingly, for the first time, a positive trade balance is observed since last
two years.
Table 4: Growth Rate of Exports and Imports
Years
Exports Imports
OECD Non-
OECD World World
1989 -0.91 26.44 8.82 6.13
1990 24.10 9.01 17.86 30.59
1991
8.96
16.91
12.00
-50.32
1992 17.82 35.10 24.72 23.87
1993 15.03 10.92 -3.81 -0.99
1994 10.37 33.06 11.28 27.45
1995 28.02 27.96 27.99 43.89
1996 -5.44 17.50 8.23 33.26
1997 12.34 1.94 5.61 -39.94
1998 15.25 -1.43 -6.62 -36.74
1999 6.51 16.96 13.40 38.97
2000 37.00 62.80 54.54 -23.59
2001 10.62 -3.87 0.24 -11.92
2002 15.46 24.26 21.51 -12.14
Average annual
growth rate 6.78 17.15 12.29 2.04
Source: Own calculation from UN COMTRADE databasexiii
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Fig 8a: Export - Import Trends
Source: Own calculation from UN COMTRADE database
Fig 8b: Direction of Exports
Source: Own calculation from UN COMTRADE database
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The direction of component export of the developing countries, i.e., whether
they are exporting more to the developed or developing nations, is an important
indicator of the competitiveness of the industry in the world market. Generally,exports of components mainly to the OECD countries would indicate
technologically superior products, which cope up with international competition.
India‟s auto component exports have marked a global presence over the recent
years. For instance, before 1993, the share of exports going to the non-OECD
countries was higher than that for the OECD block (Figure 8b). But as the impact
of liberalization started to flourish, the direction of the exports reversed after
1994; exports to OECD countries have been growing significantly. Currently, of
the total auto component exports, developed markets such as the US and
Europe together account for about 56 percent, Asia accounts for 27 percent andAfrica accounts for 11 percent of the export earnings (ACMA, 2004).
The rising exports in India was also partly led by the over capacity in the
domestic market that resulted from the sudden influx of FDI in 1990s.
However, the focus on export markets opened up many avenues and
challenges alike. While with growing exports, Indian companies gained
increasing stakes in the global sourcing, at the same time they became
aware of their technological capabilities in the „global industry‟ (Okada,
2004). The stiff competition thus forced the firms to upgrade their quality inorder to sustain competition and improve their standing in the international
and domestic market.
(c) Inflow of foreign direct investment (FDI) and rise in foreign
collaborations:Endowed with the potential of low-cost manufacturing along
with high engineering skills workforce, India edges over other developing
countries with respect to component manufacturing. Many international
component manufacturers such as Delphi, Lucas-TVS, and Denso followed
their customers (global car manufacturers) and started their manufacturing
in India. This brought about a large inflow of FDI into the sector. This was
primarily due to the „follow sourcing‟ strategies of the global manufacturers
present in India who encouraged their group companies or suppliers to
create manufacturing base in India, often in the form of joint ventures with
Indian suppliers. xiv
Thus, entry of global OEMs and demand for high quality/technology
components encouraged Indian auto component companies to enter into
several foreign collaborations. At present, there are over 450 collaborations
with foreign partners from around the world (see Table 5). Of this, about 64
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percent are technical collaborations and another 11 percent are both
technical and financial tie-ups. With the growing pace of economic reforms,
collaborations are on the rise, which promises a better prospect as more
foreign firms are showing increasing interest in the investment in Indian
automotive sector.
This clearly puts pressures on the domestic supplier industry to raise the
technology standards and upgrade their dynamic capabilities (Okada, 2004).
With an outward look of the component manufacturers (increasing exports,
more so to the western destinations), and the competitive pressures from
the international firms both in the export market and domestic market (from
firms who began manufacturing in India or has collaborated with other Indian
suppliers), the component industry was aware that it had to upgrade the
process and product qualities in order to sustain and gain world-class status.Many substantive component manufacturers have endeavoured to secure
international quality standards. A majority of ACMA members have
already secured ISO 9001 certifications and a sizeable portion have got QS
9000 certification.xv Some of the auto components firms in India have
achieved a great deal of success in terms of engineering capabilities and
adaptation to the local requirements through local design.xvi
Table 5: Foreign Collaborations of Indian Auto Component Companies
Nature of
Collaboration No. of Collaborations % of the total
Technical 299 63.75
Financial 105 22.39
Technical and
Financial 50 10.66
Joint Venture 14 2.99
Total 469 100
Note:Total number of firms is 365
Source: Own calculation from ACMA‟ s “Facts and Figures: 2000-2001”
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To summarize, the Indian automotive industry has been experiencing
remarkable developments with maximum growth in the passenger cars and
two-wheelers segments. Most importantly, the component industry has
grown faster in the post-liberalization period. As the industry grew, following
the global trend, the Indian automotive industry is gradually becoming tieredwhere the assemblers are sourcing mostly from the first-tier suppliers that in
turn have vendors in lower tiers. This has given rise to assemblers
consolidating their suppliers in order to make their production process leaner.
By the end of the decade of liberalization, the two major auto assemblers in
India (MUL and TELCO) had streamlined most of their first-tier
suppliers.xvii Moreover, the increasing trend of sourcing many integrated
assemblies rather than components which put the large and competent
component suppliers next to the assemblers while the technologically weaker
firms were relegated to lower rungs of the value chain. Thus a clearhierarchical structure started emerging in the industry with more pressure on
the lower-tier firms to climb up the value chain through technological
upgrading.
Entry of a number of global assemblers and large component producers has
also immensely shaped the dynamics of the industry in India. They are
setting stringent operational requirements in terms of cost, quality, delivery
and flexibility for their suppliers. In addition, they are also introducing new
technology – more composite parts needing new capabilities to producethem. Notably, the focus of the innovations has been more on process
changes while the locus of these changes have shifted from the assembling
units to auto component units. As a result auto component firms are being
increasingly called upon to make these innovations by enhancing their
process/product quality and operational excellence.
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----------------------
i Source: Annual report, Department of Heavy Industry, Government of India.
ii Source: “Indian automotive industry: Current Status”, 2004 (ACMA, India).
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iiiIn fact, the rapid growth in 1994-96 period attracted international producers to make their bases in India. Some of the
important entries included Suzuki, Honda, Mitsubishi and Toyota of Japan; General Motors and Ford of US; Mercedes Benz,
BMW, Opel and Volkswagen of Germany; Peugeot of France; Fiat of Italy and Hyundai and Daewoo of South Korea.
iv The countries ahead of India during the year were Korea, Brazil, Mexico and China.
v It may be noted here that TELCO has been exporting over 15 percent of its output (mostly commercial vehicles such as trucks)
to a large number of countries much before the liberalization started (Lall, 1987) while MUL’s export was mainly pushed by the
government in order to promote innovation (Okada, 2004).
viSource: Annual Report, Department of Heavy Industry, Government of India, (www.indiainbusiness.nic.in).
viiIn fact, as studies have pointed out the influx of international car manufacturers created serious problems of over capacity in
the car segment while the commercial vehicle segment became highly fragmented (D’Costa, 1998).
viiiThe automotive industry is pyramidical in structure with the auto assemblers at the top and a tiered auto component firms
down the structure. The tierisation in the azuto component industry is at three levels. On the first rung are those manufacturers
who supply directly to the automaker. This is followed by the second rung that comprises of component manufacturers who
supply to the first tier; this is followed by the third rung that supplies to the second tier.
ixThe relationship between the automotive firms and component manufacturers in India is also significantly affected by the
general changes in the global auto industry value chains. However a detailed discussion on it is beyond the scope of our study.
For a succinct account of the relevant issues, see Humphrey and Memodovic (2003).
xhttp://www.ibef.org/industry
xi According to a recent study by Frost and Sullivan, exports are expected to grow at a compound annual growth rate of 21.5
percent to touch $2.57 billion by the year 2009 as outsourcing from the country is fast catching up.
xiiPrincipal export items include replacement parts, tractor parts, motorcycle parts, piston rings, gaskets, engine valves, fuel
pump nozzles, fuel injection parts, filter & filter elements, radiators, gears, leaf springs, brake assemblies & bearings, clutch
facings, head lamps, auto bulbs & halogen bulbs, spark plugs and body parts.
xiiiUN COMTRADE (United Nations Commodity Trade Statistics Database) contains trade data (imports, exports and re-
exports) from countries world-wide. For each country annual data can be retrieved by commodity and trading partner.
Commodity is defined by either standard international trade classification (SITC) codes. The data used in our analysis refers to
the SITC Revision 3 data for category 7843 (Other parts, motor vehicles). For more details
see http://unstats.un.org/unsd/comtrade/.
xiv However, the impact of this strategy is sometimes not clear for the domestic suppliers as many studies have documented how
such strategies of the global auto-makers limit the ability of domestic suppliers—often small and medium firms to penetrate the
tight and increasingly closed global supply networks of the multinationals that are locating in their regions (Barnes and
Kaplinsky, 2000, Humphrey, 2000). These studies argue that as global auto assemblers that are locating in developing
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countries rely overwhelmingly on “follow sourcing” as a procurement strategy (or on a small elite of local suppliers), existing
supplier networks in these countries can become progressively undermined and marginalized (Humphrey, 2000).
xv About 81% of member firms of the Automotive Component Manufacturers Association has the ISO 9000 certification, nearly
half have the QS 9000 certification and a growing number (10%) have the ISO 14000 certification (Tiwari, 2003).
xviFor instance, Sundaram Fasteners (a firm in Tamil Nadu, South India), has become a global suppler to General Motors.
Moreover, over the past two years, 7 Indian component manufacturers have won the coveted Deming Prize, one of the highest
awards on TQM (Total Quality Management) in the world (ACMA, 2004). Similar other such success stories have been seen in
the industry in recent years suggesting the growing technological sophistication of firms. However, even though such islands of
excellence have often been noticed, the industry as a whole has a long way to go given the demands of OEMs in the developed
nations for better quality. For instance, the current level of defect rate of components remains somewhere in the range of 500-
5000 PPM (parts per million) in most of the Indian companies while it is 10 to 20 PPM in Japan, and 50 to 100 PPM in the US
(Source: Quoted from the Interview with ACMA Chairman, Northern Region).
xviiFor instance, studies note that MUL consolidated its supplier base from 404 to about 300 first-tier suppliers in a period of
just two years in late nineties while TELCO followed the suit by reducing the number of suppliers from 1200 to about 500 in
1997 (Okada, 2004).
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