Indian Automotive Industry: Innovation and GrowthMamata ParhiIn 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 ofcumulative deepening and technological upgrading of the enterprises (at least in some industries, if not all) within these economies.India initi ated 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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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
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.
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
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.
References
1. ACMA (2001): Buyers Guide, New Delhi, India.
2. ACMA (2004): Facts and Figures: Automotive Industry of India, 2002-03, New Delhi, India.
3. Athreye, S. (2005), “The Indian Software industry and its evolving service
capability”; Industrial and Corporate Change, Vol. 14(3), 393-418.
4. Barnes, J. and R. Kaplinsky (2000): “Globalisation and trade policy reform: Whither the
automobile components sector in South Africa?”, Competition and Change, 4 (2): 211-243.
5. Bell, R.M.; Pavitt, K. 1993. Technological accumulation and industrial growth: Contrasts
between developed and developing countries. Industrial and Corporate Change, 2(2).