Analysis of India's Automobile Industry
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Following India's growing openness, the arrival of new and existing models, easy availability of finance at relatively low rate of interest and price discounts offered by the dealers and manufacturers all have stirred the demand for vehicles and a strong growth of the Indian automobile industry. The data obtained from ministry of commerce and industry, shows high growth obtained since 2001- 02 in automobile production continuing in the first three quarters of the 2004-05. Annual growth was 16.0 per cent in April-December, 2004; the growth rate in 2003-04 was 15.1 per cent The automobile industry grew at a compound annual growth rate (CAGR) of 22 per cent between 1992 and 1997. With investment exceeding Rs. 50,000 crore, the turnover of the automobile industry exceeded Rs. 59,518 crore in 2002-03. Including turnover of the auto-component sector, the automotive industry's turnover, which was above Rs. 84,000 crore in 2002-03, is estimated to have exceeded Rs.1,00,000 crore ( USD 22. 74 billion) in 2003-04. Automobile Dealers Network in India.
In terms of Car dealer networks and authorized service stations, Maruti leads the pack with Dealer networks and workshops across the country. The other leading automobile manufacturers are also trying to cope up and are opening their service stations and dealer workshops in all the metros and major cities of the country. Dealers offer varying kind of discount of finances who in turn pass it on to the customers in the form of reduced interest rates.
Major Manufacturers in Automobile Industry
- Maruti Udyog Ltd.
- General Motors India
- Ford India Ltd.
- Eicher Motors
- Bajaj Auto
- Daewoo Motors India
- Hero Motors
- Hindustan Motors
- Hyundai Motor India Ltd.
- Royal Enfield Motors
- TVS Motors
- DC Designs
- Swaraj Mazda Ltd
Government has liberalized the norms for foreign investment and import of technology and that appears to have benefited the automobile sector. The production of total vehicles increased from 4.2 million in 1998- 99 to 7.3 million in 2003-04. It is likely that the production of such vehicles will exceed 10 million in the next couple of years.
The industry has adopted the global standards and this was manifested in the increasing exports of the sector. After a temporary slump during 1998- 99 and 1999-00, such exports registered robust growth rates of well over 50 per cent in 2002-03 and 2003-04 each to exceed two and- a-half times the export figure for 2001-02.
The Key Factors Behind This Upswing
Sales incentives, introduction of new models as well as variants coupled with easy availability of low cost finance with comfortable repayment options continued to drive demand and sales of automobiles during the first two quarters of the current year. The risk of an increase in the interest rates, the impact of delayed monsoons on rural demand, and increase in the costs of inputs such as steel are the key concerns for the players in the industry.
As the players continue to introduce new models and variants, the competition may intensify further. The ability of the players to contain costs and focus on exports will be critical for the performance of their respective companies.
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 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.
The Investment Information and Credit Rating Agency of India (ICRA, 2003) studies the competitiveness of the Indian auto industry, by global comparisons of macro environment, 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, up gradation 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
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 MERCOSUR 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 well developed 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 auto components, 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 trade balancing as India will not gain much in that case.
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 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 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 auto component 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 auto component 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 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). Un like 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.
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.
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 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' 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 capital intensive 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 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, 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 auto component 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 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 ofproduction 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.
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 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.
SUMMARY OF LITERATURE REVIEW
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 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 technology intensive and high-quality products, for which they need to produce components in house, 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.
Growth and Performance of automobile sector post liberalization regime.
Developing an appropriate public policy towards the industrial sector has been an important task for Indian policy makers for a long time. When India moved away from an inward looking industrialisation strategy to a more ‘open' economy in 1991, industrial firms needed to restructure themselves to retain competitiveness. Much of these restructuring is needed to correct the inefficiencies created by operating in a protected market. The automobile sector has been a major candidate in the industrialisation process since the beginning of planned development. The policy changes were in two doses and took the form of partial de-regulations introduced in 1985 and Liberalization measures launched since 1991. The pre 1985 regime could be described as an era of strict controls and regulations. The initial changes, introduced in 1985, eased the licensing requirements, broad-based the classification of vehicles for issue of licenses, allowed selective expansion of capacity and partially relaxed controls with regard to foreign collaborations, imports of capital goods, raw materials and spares. Though these measures represented a “domestic Liberalization”, the policy environment continued being geared towards imposing trade and investment regulations, constraining the growth of big business houses and regulating exchange rates. It was only after 1991 that notable broad-based changes in policy that had far reaching implications actually came into being. These changes dispensed with the bulk of controls and regulations and for the first time since independence assigned a central role to market forces. This paper analyses the behavior of Indian automobile firms operating under regulated and liberal economic policy regimes. Results from the step-wise discriminant analysis presented in this paper reveal that the conduct and performance of firms in this sector differ significantly between the regulated [1985-86 to 1990-91] and liberal [1991-92 to 1995-96] economic policy regimes with respect to foreign equity participation, in-house R & D efforts,technology imports, capital intensity, advertisement, exports, growth and profits.
Policy Regimes, Firms' Conduct and Performance
The automobile industry in India grew under a highly regulated and protected economic environment over the period 1950 to 1985. Automobile manufacturing firms were subjected to strict product specific and capacity licensing and as a result very few firms dominated all the products. These restrictions provided no motivation or incentive for the firms to bring about technological upgradation. The policy environment during the period 1985-86 to 1990-91 permitted a limited increase in technology inflow through various modes. Inflow of technology from abroad brought about a shift in the technology frontier as well as a change in the technological trajectories in which the firms had been operating. However, partial relaxation of this kind failed to bring about a drastic change in the non-competitive environment in which the firms had been operating for a long time liberalisation of economic policies and the outward orientation introduced since 1991, on the other hand, brought about a dramatic change in this industry. These policy measures considerably transformed the environment in which the firms had been operating. As a consequence, the industry witnessed the entry of new firms and adoption of strategies by the already existing firms to introduce technological change and improve their performance. The new players brought in modern engineering, efficient processes and effective shop-floor layouts. The new manufacturing strategies include breaking up of the plant into modules and cells, reduce the complexity of purchasing logistics, reduction of inventories and product complexity, and creation of simpler processes by encouraging flexibility and teamwork. These firms also make extensive use of CAD/CAM in their plants.
On the whole, Indian Automotive sector grew at a much faster rate in the post 1991 era[14.31 % per annum] when compared to [8.56 % per annum] the period of 1985-91 [Table 1].The growth rate of all the sectors within the 4 wheelers and Commercial vehicles has been in double digit with the LCV sector registering the maximum [of 19.93 % per annum] in terms of the growth rate as well as increase over the earlier period. Medium and Heavy commercial vehicles sector also registered a growth rate of about 11% per annum, which is a 100% increase over the previous period, 1985-86 to 1990-91. In the 4-wheeled drives sector Jeeps [other utility vehicles] experienced the maximum increase in growth [from about 5.57 % per annum to 14.4 % per annum] between the two periods. The Car sector also had an increase of about 2.5 percent in its growth rate over the two periods. This was the only sector which had a double- digit growth rate during the first period [which can be attributed to Maruti] and has improved its performance during the 1990s.
During this growth process, the industry experienced changes in the strategy adopted by many firms in that efforts were made to build up technology acquisition, product quality was improved and in general the industry became more competitive. Economic policy forces have an impact on the extent and direction of technological efforts of firms. While the technological efforts during import substitution era were generally directed at increasing the local content of products, the export-oriented policy induced the firms to direct efforts to reduce costs and improve quality by implementing changes that upgrade the production process. Rao  found that the investment strategies for R & D, plant modernisation and expansion, material and machine tool inputs undertaken by Indian automobile firms are all related to the technological position of the firm on product and process dimension. Narayanan  also found that inter-firm differences in competitiveness in the automobile sector in India, depended on technological trajectory advantages during the licensing regime and on the variables capturing technological paradigm shifts after the introduction of de-regulation policies during the mid 1980s. Before 1983 the passenger Car sector of the Indian automobile industry consisted of only three firms with limited capacity. In 1983, Maruti [which is a joint venture of the Government of India and Suzuki Motors, Japan] entered the industry and dramatically affected the market share of all firms. Maruti enjoyed as much as 50% of the market share during the first period of this study. Later Maruti, with its range of four wheeled vehicles, was able to push up its market share during the 1990s to 60%. Telco, a leading Commercial Vehicle manufacturer in India, also entered the Car segment after 1991 and introduced four wheeled passenger cars that are ideally suited for long distance travel on Indian roads. The entry of Telco virtually decreased the market share of the two formerly leading car manufacturers in India - Hindustan Motor and Premier Automobiles - to single digit. These two firms, Hindustan Motor and Premier Automobiles, continue to struggle for survival in the face of competition that has resulted from the entry of new subsidiaries of the world's leading auto manufacturers: General Motors and Ford Motor Company [from USA], Mercedes Benz [from Germany, Daewoo Corporation [from Korea] and Automobiles Peugeot [from France]. All these firms have entered into the Indian Car segment after this sector was de-licensed in 1993 and their products hit the market in 1996. Recently there are two more entrants in the Car segment - Honda [Japan] and Hyundai [Korea] - which have introduced small sized cars to compete with Suzuki. Market share of Maruti Suzuki has declined from as high as 89% during the early 1990s to 54% by the late 1990s. Telco also introduced a small sized car during 1998, keeping in mind the idiosyncrasies of the Indian market. The Car segment, therefore, has emerged as a leading competitive sector in India during the post Liberalization period.
On the basis of these possible effects of Liberalization on the behavior of firms and drawing upon the empirical knowledge, this study formulates hypotheses [in Section 3] concerning the nature of differences in the behavior of firms across the two policy regimes. The parameters to capture the behavior of firms have been classified into technology acquisition, product improvements through imports of components, vertical integration, product differentiation and performance.
Technology acquisition by a firm can be facilitated through imports [technology transfer from abroad] and in-house R&D efforts. Technology acquisition from abroad consists of technology imports through the market or “arms-length” purchase of technology against lump sum and royalty payments [LR], intra-firm transfer of technology through foreign direct investment (foreign equity participation [FE]) and technology transfer through the supply of machinery and equipment, where the technology is embodied in the imported capital good itself [IMCAP]. An in-house research and development effort of firms [RD] is one of the important methods of location, adaptation, assimilation and development of the imported technology. Following Ansal , Basant  and Narayanan , it could be argued that the technological strategies adopted by a firm could be different during varying policy regimes. The present study examines the role of all the four technological factors identified above during the two policy periods
- Intra-firm Technology Transfer: Restrictions on foreign equity investment and selective permission allocate a limited role for intra-firm transfer of technology. Moreover, since most of the firms during the first period were established with minority foreign equity holding, diffusion of technological knowledge in India could also have been slower. With Liberalization multinational firms could have majority equity holdings and therefore influence management of the firm as well. This ability to influence the management may have led to transfer of design and drawings which accelerated the diffusion of technological knowledge and also enabled such concerns to develop export markets in association with the Indian firms.
- Disembodied Technology Imports: Restrictions on technology collaborations involving heavy lump sum and royalty payments resulted in selective use of imports of disembodied technology during the first period. Liberalization of restrictions on lump sum and royalty payments could have led to an increase in the use of this mode of technology imports. The increasing presence of multinationals and transfer of better quality technology could have also led to an increase in technology [lump sum and royalty] payments.
- In-house R & D Efforts: The absence of competitive pressure and the perpetuation of sellers markets may lead to low R & D activity in firms belonging to a developing country. Limited use of in-house efforts, either for adaptation of imported technology or in locating technology imports could also explain low R & D activity. With a more open policy environment, increasing competition and higher costs of technology imports, firms may realize that to catch up with technological frontier, they need to direct their efforts to build capabilities for technology generation, rather than depend on imports. As a result expenditure on in-house R & D would increase in a liberalized environment. Reddy , on the basis of a survey of 32 R & D units of transnational corporations in India, found evidence suggesting an increasing trend of investments on R & D seeking to develop new products and processes. This, he argued, was facilitated by the availability of trained personnel. Since auto industry has been one of the major beneficiaries of multinational participation during the Liberalization period, it may be appropriate to hypothesis an increasingly important role for R & D intensity
- Technology Interaction: As stated earlier, firms operating in a restrictive regime directed their in-house R & D efforts either to complement imported technology to facilitate technological trajectory shifts or to locate their technology imports. Some firms in the process of diffusion of imported technology, as a result, could have used the interaction between technological imports and in- house efforts. With the entry of leading multinationals and transfer of design and drawings, the technological search activity during the post Liberalization period may have resulted in bringing about cost reduction and technological up gradation of vehicles to face global challenges. This could have been undertaken by developing technological trajectory advantages. The study, therefore, analyses the difference in the role played by technology interaction [between imported technology and in-house R & D] variables over the two policy regimes. The means of all the three interaction variables [FE*RD, LR*RD and IMCAP*RD] are expected to be higher in the second period over the earlier one and emerge as important discriminants.
Imports of Components:
Firms use imported components and parts either as a part of a 'package' in the transfer of technology or due to certain costs and quality advantages. In an era of domestic Liberalization, restricted trade and strict exchange rate control, imports of components were used by some firms as a source of technological up gradation of their product. Higher imports could also be because firms would choose the quicker option of importing the parts and components rather than encouraging parallel technology transfer to component manufacturers as well. With an across the board change in trade policy, devaluation of the currency, move towards tariff controls and more realistic exchange rate, however, dependency on imports of components may actually decline. This is because of the choice between importing at a higher price and domestic procurement. To stay put in competition, firms may use the latter option. The study, therefore, expects a reduction in the dependency on imports of components [IMCOM] between the two policy regimes.
Advertisement is an important aspect of non-price rivalry among firms. The absence of effective competition during the first period could have been a source of low advertisement intensity. The presence of a number of multinationals after the 1991 policy reforms, and the resultant scope for non-price competition may have led to an increase in advertisement expenditures. Dunning  has found an increasing dependency on advertisement for a given rise in multinational participation. Since the automobile industry witnessed entry of a number of multinationals during the post1991 period, it is only appropriate to hypothesis a positive and increased use of advertisement [AD] as a varying strategy over the policy changes.
Following Williamson  it could be argued that vertical integration [VI] takes place in order to economize on transaction costs. The restricted policy environment during the second half of the 1980s would have encouraged firms to depend on the easier options of either importing or procuring required components and parts from the market. Liberalization of economic and trade policies [especially with a more realistic exchange rate] can lead to higher costs of imported components and parts. In addition the emergence of non-price competition may cause firms to produce most of the components and parts themselves to ensure quality and timely delivery. The study, therefore, postulates an increased vertical integration as a strategy by firms operating under a liberalized regime in contrast to their behavior under the earlier policy regime.
The performance of automobile firms operating under partially de-controlled and liberalized regimes has been compared in terms of price-cost margins [PCM], growth [GROWTH] and exports [EX]. Most of the studies linking Liberalization to performance have analyzed the impact of trade Liberalization on productivity and efficiency of firms. Evidence on the relationship between trade Liberalization and firm-level productivity improvements vary across countries and industries [Tybout, 1992].
Competition seeking to maximize profits could be a preferred objective of all firms in the short-run. During the initial period under study, which was characterized by extensive regulations and unfulfilled demand, the price-cost margins of firms would have been quite high. However, introduction of products involving technological up gradation by new firms, could lead to lower profits for older firms. As a result, during the first period, the average profits earned by all firms in this industry could be low. With Liberalization and change in the macro environment, profit margins can be expected to have gone up. This is because most of the firms in all the segments of this industry would have already been established and new firms would not yet have garnered a large market share.
Following Marris , it could be argued that a shift to a higher growth and profit frontier usually takes place with a change in the economic environment in which the firms operate. During the post1985 period, firms in this industry concentrated primarily on creating capacity and obtaining a large market share. With the intense competition that has come to characterize the industry since the 1991 policy changes, firms would have attempted to shift to a higher growth-profit frontier.
Growth through geographical diversification would have been a preferred strategy by firms, either due to insufficient domestic demand or to fulfill the export obligations that the Government has imposed from time to time. During the first period, increased production was basically aimed at catering to the requirements of unfulfilled demand. As a result, barring a few firms, which had been exporting their vehicles for a long time, achieving a high domestic market share was the preferred objective of most of the firms. However, with a more open economic environment and introduction of new technological sophisticated vehicles by both the Indian as well as the multinational firms, there may have been some orientation towards external markets. Further, a fall in the value of Indian rupee would have made Indian vehicles cheaper internationally and could possibly have stimulated exports. The study, therefore, postulates an increased role for exports in the post Liberalization period in contrast to the second half of eighties.
Indian automobile sector - A Booming Market
De-licensing in 1991 has put the Indian automobile industry on a new growth track, attracting foreign auto giants to set up their production facilities in the country to take advantage of various benefits it offers. This took the Indian automobile production from 5.3 Million Units in 2001-02 to 10.8 Million Units in 2007-08. The other reasons attracting global auto manufacturers to India are the country's large middle class population, growing earning power, strong technological capability and availability of trained manpower at competitive prices.
In 2006-07, the Indian automotive industry provided direct employment to more than 300,000 people, exported auto component worth around US$ 2.87 Billion, and contributed 5% to the GDP. Due to this large contribution of the industry in the national economy, the Indian government lifted the requirement of forging joint ventures for foreign companies, which attracted global to the Indian market to establish their plants, resulting in heightened automobile production.
Key Research Highlights
- Passenger car production in India is projected to cross three million units in 2014-15.
- Sales of passenger cars during 2008-09 to 2015-16 are expected to grow at a CAGR of around 10%.
- Export of passenger cars is anticipated to rise more than the domestic sales during 2008-09 to 2015-16.
- Motorcycle sales will perform positively in future, exceeding 10 Million units by 2012-13.
- Value of auto component exports is likely to attain a double digit figure in 2012-13.
- Turnover of the Indian auto component industry is forecasted to surpass US$ 50 Billion in 2014-15.
Auto sector set for a smooth drive
After the strenuous, but fairly good growth of about 14 per cent in the last fiscal, the automobile industry as a whole continues to be on a roll. Buoyed by the cut in excise duties announced in the Budget, and a general improvement in consumer confidence, domestic sales of passenger vehicles rose by 31 per cent during first two months of this fiscal compared to the corresponding previous period. Sales of motorcycles, the largest selling sub-segment of two-wheelers, grew by 6.7 per cent during the same period. And, cumulative sales of the commercial vehicles segment as a whole also went up by about 17 per cent.
Behind cars' rally: The key question is whether the kind of growth rates in the passenger vehicles segment is sustainable. The sharp spike in volumes in April and May has been influenced by a few developments the benefits of which may not be available through the rest of the year. For one, the expected cut in the excise duty on passenger cars and the subsequent 8 per cent reduction effected in the Budget, led to a substantial postponement of purchases by potential buyers. The over 35 per cent rise in car sales during April and May is attributable to this duty cut. On the other hand, the jump in sales could also have been due to customers advancing their purchase decisions before the expected round of price hikes is announced by the car manufacturers. In fact, price hikes, which may be slapped on by car makers as early as next month (Hyundai and Maruti Udyog have already hiked prices of some of their products once this fiscal), can potentially dent the benefit that the excise cut gave away to customers. From the manufacturer's point of view, the increasing cost of inputs, especially sheet metal, could prove to be the reason for a gradual increase in prices.
Utility vehicles on overdrive: Amongst passenger vehicles, the utility vehicles sub-segment is likely to sustain the scorching 23.8 per cent growth witnessed during the first two months of this fiscal. This is compared to a lower 16.5 per cent growth in the previous year. With the launch of a bunch of new upper end sports utility vehicles, such as the Chevrolet Forester, the Suzuki Grand Vitara XL-7, and the soon to be introduced Ford Explorer, this sub-segment will corner more sales volumes later this fiscal.
More models in store: Talking of new product introduction, the small car club could witness a further expansion in terms of number of models available, and in terms of total sales with the planned launch of at least two new cars.
They will include the Opel Corsa Sail from General Motors India and possibly one new top-end small car model each from Maruti Udyog and Hyundai Motor India by early 2004. Further, with the roll out of the Chevrolet Optra also next month, a C+ segment car, GM India alone is likely to inch up the market share ladder.
The export thrust: Apart from the developments in the domestic passenger car market, manufacturers could also get a leg up from the steadily increasing exports of these vehicles, especially in the small car segment. Korean Chaebol Hyundai Motors and Japanese auto giants Toyota Motor Corporation and Suzuki Motor Corporation are already sourcing out of or have indicated their intention to source out of their Indian operations and subsidiaries. The trend of increased exports from India even evident during 2002-03, when the total export of passenger vehicles from the country shot up by about 34 per cent compared to the previous year.
Monsoon drive two-wheelers: The prospects of the other most watched segment of the auto industry — two wheelers — should also improve with the expectations of a near normal monsoon this year. Teetering on the brink of negative growth rates during a few months of 2002, the motorcycles sub-segment has now been drumming up good sales numbers during the last four months. After a growth of over 30 per cent during the year ended March 2003, for the first two months of the current fiscal, motorcycles and step-through recorded a modest 6.7 per cent growth. The practice of price discounts, which had become rampant amongst bike dealers (at the behest of the manufacturers), has been on the decline, indicative of a revival of demand in the segment. Again, the two-wheelers segment as a whole is likely to be positively influenced by the improvement in the economy and new product introductions.
Top gear beckons: Commercial vehicles, widely considered to be the economy's barometer, have had a good start for the year. According to the Society of Indian Automobile Manufacturers (SIAM), the auto industry's growth is likely to be good this fiscal as industrial growth has been projected to grow at eight per cent in 2003-04 compared to the estimated 6 per cent last year. Overall, the auto industry's prospects look bright this year. A good monsoon with widespread precipitation may help automobile manufacturers ease into top gear.
Automobile Sector advertising on TV in the year 2006
37 per cent rise in ad volumes of Automobile sector on TV in 2006 over the previous year.
- Cars/Jeeps garnered half of the ad volumes of Automobile sector on TV in 2006.
- Most of the ads of Automobile sector on Hindi News and Regional GEC.
- Tata Motors topped advertising on TV.
- Cars/Jeeps saw the maximum new brands launched in the year 2006.
- General Motors and TVS Motor had the maximum share of endorsement advertising by Celebrities on TV.
- Automobile sector saw maximum share of endorsement by Aamir Khan in the year 2006.
- Growth in advertising of Automobile Sector on TV in 2006 compared to previous year.
Automobile sector used maximum ad volumes in the fourth quarter across the years 2005-2006 on TV.
Share of sub-categories in Automobile Sector on TV in the year 2006.
- 50 per cent of the ad volumes in Automobile sector were contributed by Cars/Jeeps followed by Motorcycles with 35 per cent share on TV in the year 2006.
- Scooterette and Commercial Vehicles had a share of 7 per cent and 4 per cent of ad volumes respectively.
- Sub-categories in Automobile Sector with the maximum growth in ad volumes on TV in the year 2006 compared to 2005.
Top New Automobile brands launched on TV in year 2006.
- Among the Top 10 new brands on TV in the year 2006, six of them belong to Motorcycles and rest four belong to Cars/Jeeps.
- Tata Indica V2 Xeta Petrol topped among the new Automobile entrants on TV followed by TVS Apache.
Top Advertisers using Celebrities for endorsing their Automobile brands on TV in year 2006.
- Top five advertisers contributed 87% share of advertising endorsed by Celebrities on TV in the year 2006.
- Maximum share of Celebrity endorsed advertising by General Motors and TVS Motor Company.
- Other three Top advertisers are Toyota Kirloskar Motor, Hero Honda Motors and Ford India.
Profession of Celebrities endorsing Automobile brands on TV in year 2006.
- Film Actors (7 are film actors out of 14 celebrities) had the maximum 52 per cent share in
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