Is India Set to Become a Global Base for Automotive Manufacturing and Services?

KPMG Survey 2007

During 2006 and 2007, KPMG in India has been talking to senior industry professionals, many of whom are increasingly upbeat about India's global potential. Some believe that India should be able to build a range of world-class auto businesses in the next ten years. But even as optimism grows some key concerns are becoming more pressing. KPMG has found that senior auto executives are also concerned about India's eroding cost advantage and the increasing challenges of rewarding and retaining talent, about the pace of consolidation in the component sector, and about the challenge companies face in building Indian auto brands.

The Indian automotive industry is worth around USD 34 billion a year and contributes about 5 per cent of India's gross domestic product (GDP). It produces over 1.5 million vehicles and employs - directly and indirectly - in excess of 13 million people.

The auto business is vital for India. But what are this industry's prospects in the context of a global auto industry that is worth around USD 1,129.8 trillion? The sector has been growing fast; around 17 per cent annually over the last five years (and faster still in some sectors, such as components). However, can it make the transition to becoming a significant contributor in the global auto industry? Does India have the talent, the technology and the global reach to become a significant exporter of auto services and products?

This report is intended to address these questions, using original survey data and extensive contacts with senior automotive strategists and managers from India and beyond.

The report uses proprietary and public domain secondary sources. It also includes extensive first hand interviews with some of India's most senior decision makers in the automotive industry.

KPMG interviewed 40 chief executive officers (CEOs) and other senior officers from different segments of the Indian Automotive industry. The mix of companies selected for the study included Indian-origin and multinational companies (MNCs) operating in India. The sample was chosen to ensure a balanced spread across sizes and segments of the auto value chain. (Figure 1)

 
Growth In Perspective

India is growing faster than most economic projections. The economy has experienced consistent growth of over eight per cent in the last four years, and has achieved growth of around nine per cent in 2007. (Figure 2)

 
In contrast to sharp growth rate fluctuations in agriculture, overall manufacturing and services growth rates have both been consistently strong expanding at more than seven per cent growth rate over the last three years. (Figure 3)

 
Most of the automotive sector growth appears to be domestically driven. International sales of services, components and finished vehicles have increased. However, the main drivers of growth are increasing disposable income and willingness to spend in a billion-citizen economy where vehicle use is still very low by global standards. As a result, the Indian automotive market is now poised to become one of the fastest growing in the world. (Figure 4)

 
The growing propensity of Indians to consume marks a transformation of the Indian economy. At one end of the income spectrum, a large proportion of Indians are emerging out of poverty, At the other end, middle class incomes are rising fast. Furthermore, households are increasingly disposed to spend those incomes on status and mobility purchases, including automobiles. Consumption has been aided by increased availability of financing - most goods considered luxuries even a decade ago are becoming common household items today. (Figure 5)

 
Will this growth record be maintained or even exceeded over the next 10 years, and will the Indian automotive sector come to play a significant global role? Some foresee Indian automotive companies reproducing the Success of the Indian information technology sector, which has emerged as a leading supplier of low-cost, high-quality information technology (IT) services to the world. Some also believe that India will provide a new global export base for existing automotive manufacturers and suppliers. But to achieve this, India has to compete with locations like China, Brazil and Eastern Europe. Has India got what it takes? To answer these questions, KPMG in India produced a series of propositions about the Indian auto sector in the coming five years and tested them against objective market data and the subjective views of senior industry professionals. We proposed scenarios designed to evoke views both about the pace of internationalisation of the Indian auto sector, and about the growth prospects for the domestic market:

1	International: Cost will continue to be the key competitive advantage for India. Whether India will maintain its cost advantage, and whether its competitiveness would change or remain founded on labor cost.
2	International: India will emerge as a key source of Research & Development (R&D) and engineering services for the global automotive industry. Whether India's auto services sector could reproduce the international success of Indian IT.
3	International: India will emerge as a leading exporter in the small car segment. Whether India could make the world's small cars in volume, and where the main markets for such production would be.
4	International: The top five Indian vehicle manufacturers will gain an increasing proportion of revenue from international sales. Whether Indian automakers would get their main sales growth at home or abroad in the next five years.
5	International: At least one Indian auto component maker will emerge as a global business in the world top 20 component makers. Whether India's component makers could break free from the limitations of small scale and local customer bases.
6	International: Indian auto component makers will increasingly grow by international acquisitions. Whether India's component makers were capable of managing the risk of international acquisitions.
7	Domestic: The Indian market will remain dominated by small cars. Whether significant numbers of Indian consumers were ready to move up to larger, more powerful vehicles.
8	Domestic: A significant percentage of vehicles in the Indian market will run on alternative fuels. Whether India would be able to profit from the worldwide surge of interest in vehicles that run on alternative fuels.
9	Domestic: Commercial vehicle replacement will boom. Whether changes in regulation and distribution networks will accelerate commercial vehicle sales.

 
Overall, auto executives were exceptionally optimistic about the prospects for domestic growth, and cautiously optimistic about the development of India as a global auto-manufacturing hub. Fur example, when asked about prospects for India's emergence as a global supplier of R&D and engineering services, a large proportion of respondents felt that competitive wage costs and talent availability would help to drive strong growth. When asked about domestic demand, the overwhelming majority felt that increasing incomes would drive very strong demand for small cars, although there were concerns about increasing competition from China when it came to small car exports. Many executives felt that continued international mergers and acquisitions would support increasing international sales.

However, amid the optimism there are acute concerns. Many executives believe that India's cost advantage is eroding fast. Some are concerned that India's fragmented component industry needs to do more to consolidate in order to achieve critical mass. Almost without exception, executives express concerns that Indian auto manufacturers face a very steep brand building challenge.

India is becoming a multi-layered automotive market. Income growth, infrastructure improvement and the growth of organized retail markets and consumerism are helping to drive growth in the domestic market: a market in which several indigenous manufacturers already have many decades of auto manufacturing experience. There is also a powerful trend of internationalization. The domestic passenger car market is now contested hotly by the full range of international manufacturers while Indian vehicle makers and component companies increasingly see then selves as global providers of vehicles, parts and auto engineering services.