indian automobiles

8/4/2019 Indian Automobiles

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India, Science and Technology: 2008

S&T and Industry

Indian Automotive Industry: Innovation and

Growth

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 worlds 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 1980s, which became

comprehensive in the early 1990s. The reforms included significant

liberalizations of the external control regime, opening up for increased imports
mailto:[email protected]:[email protected]:[email protected]


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and for foreign investments. The manufacturing industry has evolved; being

chiseled by Indias 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 componentsindustry 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

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 by

providing 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

industrys growth over the four decades since independence. The evolution of

Indias automotive industry from a fairly static/slow-paced growth (from 1940s
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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 industrys evolutionary characters. So far, most of

the prologues on Indias automotive industrys 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 historians eye and combine

both political and economic/industrial development policy angle to describe

Indian automotive industrys growth trajectory.

As will become clear from the ensuing discussions, Indias 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

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 Indias automotive growth

Indian automotive industrys 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.


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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 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 trend that continues to accelerate till this date.

During this time advanced technology was introduced to meet competitive


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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 domestic and

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, toa 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
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components segment are sometimes alternatively 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 carsegment, followed by the Multi Utility Vehicles (MUVs). As a result, the 4-

wheeler segment (including tractors), 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 was introduced. 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 19911994, 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
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Fig 1a: Automobile Production in India: 1971 2003

Source: Own construction usingSIAMandACMAdata
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Fig 1b: Vehicle Production: Industry Gross Turnover



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Fig 2: Vehicle Production: The 4-wheeler Segment


Table 1: Production Trend of Automotive Segments (Mln No.)

CarsJeeps/

MUV

M &

HCVsLCVs 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


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Particularly, there has been a considerable growth in the passenger car segment

in comparison to the MUVs / jeeps during the same period as shown in Figure 2.

Combining with the information from preceding paragraph it is 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-tractor segments 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 Indias 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 industry

intensified with the growth of middle class consumers, and diversified consumer

preferences (DCosta, 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 distinct

if we look at the trend of automobile sales in India in the post liberalization
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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.

Fig 3: Domestic Vehicle Sales after 1991(In numbers)


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 onSIAMdata

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 fromSIAMdata
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Automotive industry of India also started exporting slowly after the liberalization.

Here again, MUL and TELCO have been the leading exporters,vaccounting for 95

percent and 86 percent of passenger cars and 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. For example, during the year 2002-03 the export of

automobile industry had registered a 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
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Source: Own construction based onACMAdata

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 in the

middle-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 technologicalsophistication 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 the value chain.viii The intricate nature of
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automotive industrys 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.

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 theindustry 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
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of the total firms in the organized sector began 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 80s. 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 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-addedin 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

1997-1999 during 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).


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Fig 6: Investment in Auto Components Industry

Source: Own construction fromACMAdata

Table 3: Growth of Auto Components production in India

Engine

Parts

Drive &

Transmission

Parts

Suspension

& Braking

Parts

Electrical

Parts

Equip-

ment

Total

1991-

9220.73 11.30 22.16 19.76 13.00 19.02

1992-

9319.01 14.31 8.10 35.99 18.06 20.52

1993-

9418.20 21.12 14.91 17.69 53.25 20.84

1994- 22.94 28.91 26.02 44.13 21.29 27.19


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95

1995-

9622.19 25.32 31.95 32.07 44.45 29.75

1996-

9727.26 7.77 21.20 20.36 28.93 23.65

1997-

980.70 11.13 -0.18 -3.79 -1.05 4.73

1998-

992.75 2.61 6.37 4.33 17.59 7.72

1999-

0021.43 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 onACMAdata


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Fig 7: Component-wise Production Trend

Source: Own construction fromACMAdata

(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 auto

components from India have grown at a compounded growth rate of 19 per cent

over the past six years.xDuring the fiscal year 2004, the industry achieved a

milestone of US$ 1 billion worth of exports.xiGoing 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 didgrow by 1990s, a bulk of the exporters largely catered to the low-value added
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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.

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 a decade 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 tradebalance is observed since last two years.

Table 4: Growth Rate of Exports and Imports

Years

Exports Imports

OECDNon-

OECDWorld 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 -11.922002 15.46 24.26 21.51 -12.14


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Average

annual

growth rate

6.78 17.15 12.29 2.04

Source: Own calculation fromUN COMTRADEdatabasexiii

Fig 8a: Export - Import Trends

Source: Own calculation fromUN COMTRADEdatabase
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Fig 8b: Direction of Exports

Source: Own calculation fromUN COMTRADEdatabase

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.

Indias 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 theOECDblock (Figure 8b). But as the impact

of liberalization started to flourish, the direction of the exports reversed after

1994; exports to OECDcountries 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 and

Africa 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.
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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 in order 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. Thisbrought 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 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 internationalquality standards. A majority ofACMAmembers have already secured ISO 9001
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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

Financial50 10.66

Joint Venture 14 2.99

Total 469 100

Note:Total number of firms is 365

Source: Own calculation fromACMAs Facts and Figures: 2000-2001

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 tiered where 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
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assemblers while the technologically weaker firms were relegated to lower rungs

of the value chain. Thus a clear hierarchical 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 produce them.

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 autocomponent 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 theautomobile components sector in South Africa?, Competition and Change, 4 (2): 211-243.

5. Bell, R.M.; Pavitt, K. 1993. Technological accumulation and industrial growth: Contrastsbetween developed and developing countries. Industrial and Corporate Change, 2(2).

6. DCosta, A. P. (1995): The restructuring of the Indian automobile industry: Indian stateand Japanese capital, World Development, 23 (3): 485502.

7. DCosta, A. P. (1998): An alternative model of development? Co-operation and flexibleindustrial practices in India,Journal of International Development, 10: 301321.

8. DCosta, A. P. (2004): Flexible practices for mass production goals: Economic governancein the Indian automobile industry, Industrial and Corporate Change, 13 (2): 336-367.

9. Dahlman, C.J.; Westphal, L.E. 1981. Technological effort in industrial development: Aninterpretative survey of recent research. World Bank, Washington, DC.

10.Dahlman,C.J., and Westphal L.E. (1981), The Meaning of Technological Mastery inRelation to Transfer of Technology, The Annals of The American Academy of Political and

Social Science,Vol.458. Nov. 1981, 12-26.
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11.Enos, J L and Park, W-H (1988), The Adoption and Diffusion of ImportedTechnology: TheCase of Korea, Croom Helm, London.

12.Enos, J.L. 1962. Invention and innovation in the petroleum refining industry. In NationalBureau of Economic Research, ed., The rate and direction of inventive activity: Economic

and social factors. Princeton University Press, Princeton, NJ, USA.

13.Humphrey, J. (2000): Assembler-Supplier Relations in the Auto-Industry: Globalizationand National Development, Competition and Change 4 (3): 245-272.

14.Humphrey, J., Lecler, Y., Salerno, M. (eds)(2000), Global Strategies and Local Realities:The Auto industry in Emerging Markets, Macmillan, Basingstoke, et St Martin's Press, New

York.

15.Huq, M M (1993), Machinery Manufacturing in Bangladesh: an industry study withparticular reference to technological capability, University Press Ltd, Dhaka.

16.Huq, M M (1996b), The Role of the State in Technology Promotion in DevelopingCountries: An Agenda for the Maghreb in G Zawdie and A Djeflat, Technology and

Transition: The Maghreb at the Crossroads, Frank Cass, London.

17.Huq, M M and Islam, K M N (1992), Choice of Technology: Fertilizer Manufacture inBangladesh, University Press Ltd., Dhaka. (An article, Transfer of Technology to Less

Developed Countries: A Case Study of the Fertiliser Industry in Bangladesh, based on the

study was published in M Huq, et al (eds), Science, Technology and Development: North-

South Co-operation, Frank Cass, London 1991.)

18.INTECOS-CIER (2001):Automobile Industry: 2001 and Beyond, New Delhi, India.19.Kale, D. and Little, S. (2007) 'From Imitation to Innovation: The Evolution of R&D

Capabilities and Learning Processes in the Indian Pharmaceutical Industry', Technology

Analysis and Strategic Management, Vol.19, Issue 5, pp. 589-609

20.Kathuria, S. (1996): Competing Through Technology and Manufacturing: A Study of theIndian Commercial Vehicles Industry, OUP, New Delhi, India.

21.Katz, J M (1987), Technology Generation in Latin American Manufacturing Industries,Macmillan, London.

22.Katz, J M (1993), Market Failure and Technology Policy. CEPAL Review. August, pp.81-92.

23.Kim and Lau, (1994): The sources of economic growth of the East Asian newlyindustrialized countries.Journal of Japanese and International Economics

83, pp. 6278.

24.Krugman, P. (1994): The Myth of Asias Miracle, Foreign Affairs; Nov/Dec 1994; Vol.73,Iss. 6; pg. 62-79.

25.Lall, S (1987), Learning to Industrialise: The Acquisition of Technological Capability byIndia, Macmillan, London.

26.Lall, S (1992), Technological Capabilities and Industrialisation, World Development(Vol20, No 2).

27.Kim, L. (1990), Korea: The Acquisition of Technology in H Soesastro and M Pangestu(eds), op cit.

28.Kim, L (1980), Stages of Development of Industrial Technology in a Developing Country:A Model, Research Policy, Vol. 9, pp.254-277.
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29.Nelson, R.R. and H. Pack (1999): The Asian miracle and modern growth theory, TheEconomic Journal, 109, 416-436.

30.Okada, A. (2004): Skills Development and Interfirm Learning Linkages underGlobalization: Lessons from the Indian Automobile Industry, World DevelopmentVol. 32

(7):pp. 12651288.

31.Pack, H. and L. E. Westphal (1986) Industrial strategy and technological change: theoryversus reality,Journal of Development Economics, 22(1), pp.87-128.

32.Parhi, M. (2006), Dynamics of New Technology Diffusion: A Study of the IndianAutomotive Industry. Ph.D Dissertation, UNU-MERIT, Maastricht University, The

Netherlands.

33.Smith, Adam (1776), The wealth of Nations: New York: Modern Library, 1937; Firstpublished in 1776.

34.STATA(Version 10) (2008): Statistical Analysis Software. Stata Corporation, USA.35.Tewari, M. (2003): Foreign direct investment and the transformation of Tamil Nadus

automotive supply base, Sector Studies, Global Value Chains Initiative,

(http://www.globalvaluechains.org/publications/).

36.Westphal, Larry E., Linsu Kim and Carl Dahlman. 1985. Reflections on Koreas Acquisitionof Technological Capability, in Nathan Rosenberg and Claudio Frischtak eds. International

Technology Transfer. New York: Praeger.

----------------------

iSource: Annual report, Department of Heavy Industry, Government of India.

iiSource: Indian automotive industry: Current Status, 2004 (ACMA, India).

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.ivThe countries ahead of India during the year were Korea, Brazil, Mexico and China.

vIt 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 MULs 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).
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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 (DCosta, 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 21.5percent 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/.

xivHowever, 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 suppliersoften 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

countries rely overwhelmingly on follow sourcing as a procurement strategy (or on a small elite of local suppliers), existi ng

supplier networks in these countries can become progressively undermined and marginalized (Humphrey, 2000).

xvAbout 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 100PPM in the US (Source: Quoted from the Interview with ACMA Chairman, Northern Region).
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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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