Inside India

Indians view their automotive future

Bruce M Belzowski, Allan Henderson and Penny Koppinger

This is the second part of major findings of the report brought out by the Automotive Analysis Division at the University of Michigan Transportation Research Institute (UMTRIAAD) along with the IBM Institute of Business Value after interviewing 29 Indian automotive executives and experts from government, industry, and academia on a wide-ranging issues including India's future market and industry structure, relationships between domestic auto companies and their foreign joint venture (JV) partners, as well as the challenges in the areas of infrastructure, air quality, and oil security. This report covers the major findings of the study with regard to India's production capabilities.

India's production capabilities

The combination of great optimism mixed with significant challenges that characterizes India's automotive market also extends to its production capabilities.

India's automotive production has experienced tremendous growth since the start of the millennium. Total vehicle production is up about 80 per cent since 2001, although as Figure-1 shows, the bulk of production is still two-wheeled vehicles. The Indian auto components industry has also grown fast, as Figure-2 shows. Overall, the automotive industry in India has come a long way in a short time.

But India faces big challenges if it is to meet its goal of becoming a world-class automotive production centre.

 
India's production levels for four-wheelers are still small compared to other countries. India today produces only 10 per cent of the number of four-wheel vehicles produced in North America or Europe, and 30 per cent of those produced in China.

India is currently a much more significant player in two-wheelers - manufacturing nearly 20 per cent of world production, and trailing only China, which produces nearly 50 per cent.

 
More than 40 manufacturers produce vehicles in India today, including manufacturers of trucks and commercial vehicles. About 500 major component manufacturers account for more than 85 per cent of the country's component production (the remainder is produced by another 5,000 minor component manufacturers). As Figure-3 suggests, India's automotive industry includes established international companies competing against domestic Indian companies, as well as JVs between global companies and Indian firms.

 
The most significant responses from our interviews about production capabilities centred on four areas:

▪	Concerns about India's Labour pool
▪	India's JV experience
▪	Developing India's own R&D capability
▪	India's supply base.

 
Concerns about India's labour pool

One of India's well-known strengths is its large, low-cost labour pool. But the executives we interviewed are troubled by a shortage of skilled labour, as well as by inflexible labour regulations and the threat of rising wages.

Skills are limited

Several interviewed executives noted the quality and quantity of skilled labour as problematic, especially the lack of engineers. One executive explains that "Graduates are not capable. They need a complete training process." According to another, "The number of available people (trained engineers) is much less than the demand." Another interviewee commented that "Every kid from college has four job offers. They want a 15 per cent raise in one year, or they think they need to join another company. There are not enough people to do the job." However, one executive takes a longer view, saying that the "skills issue will ease over the next ten years," indicating that the ongoing government and industry actions to provide supplemental training and new education centres will make an impact.

Executives also report that labour churn, where employees move to rival firms for better compensation or conditions, is a growing problem. One says, "In the auto industry, job changes occur frequently, with about a 20 per cent attrition rate... 40 to 45 per cent in certain cases."

Labour regulations present hurdles

Our interviewees view India's Labour laws as a hindrance to future growth and investment. One executive suggests, "Indian labour is overprotected. It is not a flexible system." Another says, "Labour laws are strict and inflexible. It is hard to right-size a company." This situation has led to a practice of employing a small group of core employees and a larger number of temporary workers who can easily be let go. Executives generally look to the government to fix this problem, but they recognize, as one interviewee remarked, that "it will take a long time to reform because this is a democratic country."

Wages may become a problem

Several executives note that wage growth might start to price India out of the market. As one interviewee explains, "India is a low-cost labour country, but wages are rising. Ten years down the line India's wage structure will be similar to that of the West. Wages have risen about 20 per cent in the last couple of years." Because our interviewees think these labour problems can be overcome, they are still optimistic about India's ability to become a global player.

India's JV experience

Global automotive companies are attracted to India because of its skilled workforce, its low wages, and its growing domestic market for powered vehicles. Before recent legislative changes were enacted, the only way for a global automotive company, such as GM, Toyota or Delphi, to operate in India was through a JV with an Indian company.

We asked industry executives whether collaboration between international and domestic partners has been successful. They view India's JV collaborations as successful in some areas, but not in other key areas (see Figure-4). Manufacturing, purchasing, and product adaptation are considered the most successful JV collaboration areas.

 
How successful is collaboration?

The major problem area seems to be in research and development (R&D). As the figure shows, R&D is the only collaboration score from our interviews that is less than neutral. Interviewees seem to think foreign companies are withholding important knowledge and technology. These results parallel those of our previous "Inside China" study, Indian executives agree that for JVs to work well there needs to be equality in the relationship, For example, one partner's strength in finances and technology can complement the other partner's strength in understanding the market.

On the whole, our interviewees seem satisfied with how the JV collaborations are progressing. This may be because JVs are no longer required for global companies to operate in India, so the ones that are still operating are doing so because the two partners continue to work well together. Or, possibly, the Indians are just realistic about the inherent conflicts of JVs.

Protection of intellectual property is an advantage

One of the reasons for the satisfaction with JVs may also be the almost unanimously positive report executives give to India's protection of intellectual property (IP). In India, IP is, on the whole, respected, and lawful rights are enforced. Major violators of IP rights are prosecuted. Our interviewees feel that India understands the value of IP and honours it by paying royalties or licensing fees, and they believe that this is an advantage India has over China.

Sumi Motherson - A strategy based on JVs

The Sumi Motherson Group, a maker of wiring harnesses, wires, and plastic components among other products, is an Indian automotive supplier with an urge to partner. Sumi Motherson bills itself as a JV specialist, "providing customized integrated solutions combining multiple technologies supported by our global partners." Here is a short list of what the company is collaborating on with its strategic business partners:

▪	Fuses, with Wilhelm Pudenz GmbH and Wickmann Werke GmbH
▪	Rear vision systems, with Schefenacker AG
▪	Sunroofs, with Webasto AG
▪	Air compressors, with Anest lwata Corporation
▪	Cutting tools, with Sumitomo Electric Industries
▪	Precision machining, with Reiner Prazision GmbH
▪	Industrial robots" with Yaskawa Electric Corporation
▪	Automotive manufacturing engineering, with Automotive Engineering Services Co.

 
Views about the future of JVs vary

Interviewee responses about the future of JVs in the Indian automotive industry were extremely diverse, from predictions of JVs growing in number, predictions of JVs shrinking in number, and predictions about shifting relationships within the partnerships.

Developing India's own R&D capabilities

India's ability to perform its own automotive R&D is perceived as a gap between India's domestic companies and the international automotive companies they compete with, especially in the areas of powertrain and alternative fuels. Indian executives report that this gap is large and may take more than five years to overcome.

The cost of running full-scale R&D programs is beyond the grasp of some Indian original equipment manufacturers (OEMs) and many suppliers. Also many Indian OEMs and suppliers have relied on their foreign partners for technology for so long that they have not developed their own competencies.

An Indian company has two primary choices for getting into the automotive R&D game: develop its own R&D technical expertise slowly over time, or partner with companies that already have the expertise and quickly learn from them.

Executives are divided about JVs and R&D

The executives we interviewed are almost evenly divided between those who think Indian companies will continue to use JVs to gain access to technology and those who think Indian companies will develop in-house R&D capabilities. Some assert that Indian companies today lack the R&D capability to create their own automotive technologies (especially in some important areas like powertrains).

Through JVs, they are in effect buying technology to get them into the game faster. But others believe that buying technology via JVs is too expensive, and indicate that some Indian companies are already developing their own R&D competencies. One executive suggests that Indian companies will continue to manufacture the technology originated by others but then adapt it to their own products.

Government is supporting Indian R&D

The Indian government is supporting the National Automotive Testing and R&D Infrastructure Project (NATRIP) to encourage growth of the auto industry in India. NATRIP is a partnership among the national government, several state governments, and the Indian automotive industry to create a state-of-the-art testing, validation, and R&D infrastructure. The government is funding the construction of six major facilities throughout the country expressly for this purpose. The project aims to create core global competencies in the automotive sector.

Strengthening India's supply base

Executives we interviewed are concerned about whether India's automotive suppliers are developing rapidly enough to go beyond India's own market and meet the needs of the global market. If India is to compete with established global manufacturers and suppliers on the world stage, then it needs to get on par with those competitors in terms of scale, quality, and delivery capability. Right now India is still catching up to the global multinationals.

India serves as Volvo's sourcing hub

Volvo now considers India a sourcing hub for automotive components, joining others including General Motors, Toyota, Hyundai, and Fiat that source automotive parts from India. And because of low cost and an available talent pool, Volvo has also decided that India will be a sourcing hub for its worldwide operations, with plans to increase its R&D, engineering design activities, and IT services sourcing from India. The company plans to increase the headcount at its engineering design office in India from about 80 to nearly 200.

Key implications for India's production capabilities

India's automotive industry is traveling up the same maturity curve as other nations have traveled, but at a faster pace. Some important areas need close attention:

▪	India needs to strengthen its own R&D Ctipability. India’s automotive industry success, so far, has largely been in manufacturing. But to be a global player, it must be considered an innovative designer in the automotive industry. This is a tall order since the automotive industry today is very complex, with myriad sophisticated technologies used in the manufacturing of vehicles and in the products themselves.
▪	The supplier base needs to get stronger. Many of India's major suppliers have world-class capabilities, but the Indian automotive industry needs to develop the capabilities of its entire supplier base to support improved quality and low-cost delivery throughout the supply chain.
▪	Costs need to be contained. India's path to the world stage has been through low-cost production. And India will need that advantage for some time to come. However, wages are slowly starting to rise, as are infrastructure costs like electricity and shipping.
▪	Labour and skills could be a surprise constraint. Despite its reputation for low-cost skilled labour, India's automotive industry is starting to suffer from undersupply of key skills, attrition, and churn. Labour laws and regulations seem to be hampering business, and although the government is aware of the problems, labour reforms may evolve slower than needed.

 
Executives report that today's focus for the supply base is delivering world-class-quality components, improving global just-in-time (JIT) delivery, and bolstering its ability to create new designs. Suppliers also need the financial strength to compete globally (for example to survive a potential global recall). Many global suppliers have invested in developing their local supplier base in India – exposing them to global requirements and standards.

Overall, India includes many excellent suppliers; however it still needs to develop the capabilities of its entire supply base, especially lower-tier suppliers, to be globally competitive.

 
Executives believe the future focus for India's suppliers should be keeping costs low, increasing quality levels, and increasing the number of skilled employees. A friendly business environment, especially intellectual property protection, is also seen as very important. Another future focus area for suppliers is moving further up the product chain to position themselves for long-term success. Figure-5 shows the segmentation of today's automotive component parts. Executives report that suppliers need to move upward from simple components, to more complex components, and finally to whole modules or systems.