The Indian Automotive Industry

Enhancing innovation capability with external and internal resources Sunil Mani Planning Commission Chair Centre for Development Studies Trivandrum- 695 !! "erala# India $-mail% Mani&'ds(a'(in

Indias automobile market is one of the fastest growing auto markets in the world. It is one of those manufacturing industries which have grown significantly since the liberalisation of Indias economy which began in a haphazard fashion way back in the 1980s. he industry is also known for many innovations. he paper undertakes a detailed survey of the differential performance of domestic and !"#s within the industry with respect to innovations. It then analyses the sources of these innovations in terms of internal and e$ternal sources. he resulting analysis shows that while the domestic firms have relied on internal sources% the !"#s have relied far more heavily on e$ternal sources. he study also contains case studies of seven of the leading domestic firms. Introdu'tion% Indias automotive industry is one of the successful cases of Indias economic liberalisation strategy set into motion since 1991. The industry which was dominated by a few domestic manufacturers was hardly known for any innovations before 1991, but is now one of the fastest growing manufacturing industries not just in India but globally as well. In 2 1 , India has emerged as the second fastest growing car market in the world ne!t only to "hina. #ales of two wheelers crossed 1 million units during the year, a first, with all major two$wheeler manufacturers registering high double digit growth. India in 2 1 is the largest tractor manufacturer, second largest two$wheeler manufacturer, fifth largest commercial vehicle manufacturer and the eleventh largest car manufacturer in the world.

There are many instances of innovations in the industry, the Tatas %ano car being one of the celebrated e!am&les of these innovation efforts. 'll told, it is an industry that is truly successful in introducing a range of new &roducts not just in the domestic market but in the international market as well. In the conte!t, the &ur&ose of this study is to understand the internal and e!ternal sources of information on innovation to the firms within this industry some of which are domestic while others are affiliates of well$known automotive (%"s. The &a&er is structured into four sections. The first section outlines some basic facts about the industry in terms of the number of and si)e distribution of firms, the geogra&hic distribution, &hases in its historical evolution and recent trends in &roduction and e!&orts of
1

vehicles from India. This is followed by section 2, where we analyse the recent trends in innovative efforts in the industry. #ection * decom&oses the sources of information on innovation to internal and e!ternal sources. +inally the , th and concluding section marshals the &oly conclusions emanating from the study. Part !% The Ma'ro Pi'ture i( Development and stru'ture of the industry

The auto industry consists of two se&arate industries- .i/ The automobile industry0 and .ii/ The auto com&onents or &arts industry. The automobile industry in turn has three sub sectors.a/ two$wheelers0 .b/ three$wheelers0 and .c/ four$wheelers .&assenger vehicles and commercial vehicles/. 1esearchers have found it convenient to ma& out the history of the Indian auto industry from 19,2 until now into three &hases. #ee Table 1 for a summary of the three &hasesTa)le !% Three phases in the evolution of India*s Automotive Industry Phases 3hase 1- 19,2$194* 3hase 2- 194*$199* Main features "losed market 5rowth of market domestic su&&ly limited by

6ery few innovations, model, fuel inefficient %umber of firms- 7

outdated

8oint 6enture between 5overnment of India and #u)uki to form (aruti 9dyog %umber of firms- : Industry delicensed in 199* (ajor (%" ;riginal <=ui&ment (anufacturers .;<(#/ commenced assembly in India Im&lementation of the 6alue 'dded Ta! .6'T/ Im&orts allowed from '&ril 2 1

3hase *- 199*$

%umber of firms- >*7

#ource- India ?rand <=uity +und .2 1 /

Trends in produ'tion 3roduction of automobile .in numbers/ has doubled itself .Table 2/ during the &eriod under consideration. 'lthough the rates of growth of out&ut had &lummeted, due essentially to the financial crisis, in 2 4$ 9, it has &icked u& in all categories the very following year and indications are that this high growth rate will be maintained during 2 1 $11 as well. There are two im&ortant findings. +irst, is that two wheelers account for the lions share of &roduction .in numbers/ followed by &assenger vehicles .cars/. #o the driving force behind the s&ectacular growth of the industry is the out&ut of two$wheelers .motor cycles and scooters/ and cars. #econd, is that, over time, India has become a base for e!&orts of automobiles. 'gain most of the e!&orts are accounted for by cars. In fact India has become a base for the manufacture of com&act cars.

Ta)le +% Trends in produ'tion of India*s Automo)ile industry ,in num)ers/

3assenger 6ehicles 2 2 2 2 2 2 2 *$ , ,$ 7 7$ : :$ 2 2$ 4 4$ 9 9$1 9497: 12 942: 1* 9* 17,722* 122274* 14*479* 2*712, 22.2: 4.22 14. 2 17. , *.,* 22.44 5rowth rate .A/ "ommercial 6ehicles 227 , *7*2 * *91 4* 719942 7,9 ,1:42 7::: 4 : 24.: 1 .72 *2.9: 7.74 $2,. 2 *7.92 5rowth rate .A/ Three Bheelers *7:22* *2,,,7 ,*,,2* 77:12: 7 :: 7.12 1:. 2 24. 1 $9.92 $ .2* 2,.7: 5rowth rate .A/ Two Bheelers 7:222,1 :729429 2: 4:92 4,::::: 4 2::41 4,19292 1 712449 1:.1* 1:.72 11.24 $7.2 ,.9 2,.4: 5rowth rate .A/ 5rand Total 22,*7:, 4,:247* 92,*7 * 11 42992 1 47*9* 11122227 1, ,94* 1:.9 17. : 1*.4 $2.11 2.9* 27.2: 5rowth rate .A/

,92 2 :19 9*

#ource- "om&iled from the website of #ociety of Indian 'utomobile (anufacturers, htt&-@@www.siamindia.com@

Trends in $-ports <!&orts too have registered some a&&reciable increases .+igure 1/. ;verall about 11 &er cent of the total out is e!&orted although the e!&ort intensity varies across the various categories ranging from as high as 2, &er cent in the case of three$wheelers to as low as 9 &er cent in the case of commercial vehicles. (uch of the e!&orts, in =uantitative terms, is accounted for by cars and motorcycles reflecting their &ro&ortinate share in domestic &roduction. Bhat is interesting is that India has now

.igure !% Trends in e-ports of automotive from India# +

/-+ !

Sour'e% #ociety of Indian 'utomobile (anufacturers, htt&-@@www.siamindia.com@ become base for the manufacture and e!&orts of com&act cars. Stru'ture of the industry Cere we focus only on the vehicle &roducing sector. This consists of two sets of firms, domestic and affiliates of a large number of (%"s. 'lthough the industry was largely domestic for a long time, (%"s entry to the industry started with the joint venture (aruti #u)ukis &lans to build small com&act cars. 5radually over time, a number of (%"s have established their manufacturing activities in the country. (aruti itself has diluted its domestic e=uity held by the union government in favour of a larger shareholding by its &arent firm. ;ver time and es&ecially since 1991, there has been entry to the industry by a large number of (%"s. (%"s are focusing much more on &assenger cars and motorcycles, while the domestic firms have their &resence across the entire s&ectrum of vehicles. In terms of total sales the industry is roughly divided between the two the segments although on an average over the last decade or so, the domestic firms have a slightly higher share .Table */, as the two large commercial vehicle firms are in the domestic sector.

?ut on the e!&ort front, the foreign firms have not only a higher level but also higher e!&ort intensity as well .on an average two times/. This shows that the (%"s are actually using India as a base for their e!&orts. Ta)le 0% Sales and e-ports of automo)iles% Domesti' 1s M2Cs ,3s in Crores4
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Average Exports of Goods(Rs Crores) Domestic MNC 1077.46 2433.72 1197.82 2501.76 1001.55 2157.87 1001.57 3229.19 1699.89 2428.32 2535.77 3512.2 3483.47 3726.4 4540.04 4192.76 7426.48 4891.48 7593.78 27610.06 7389.76 17246.04 Sales (Rs Crores) Domestic MNC 22298.37 19519.52 21883.20 20993.81 22122.72 19789.59 26227.74 21440.01 34330.25 30308.19 40455.42 39256.1 47276.37 44637.8 61429.95 53514.79 75810.47 55992.37 70464.44 63379.07 89928.63 55402.27 Exports of Goods to Sales (%) Domestic MNC 4.83 12.47 5.47 11.92 4.53 10.90 3.82 15.06 4.95 8.01 6.27 8.95 7.37 8.35 7.39 7.83 9.80 8.74 10.78 43.56 8.22 31.13 6 6! "# "! Ratio of Domestic to MNC Exports Sales 0.44 1.14 0.48 1.04 0.46 1.12 0.31 1.22 0.70 1.13 0.72 1.03 0.93 1.06 1.08 1.15 1.52 1.35 0.28 1.11 0.43 1.62 $ 6! " "%

#ource- "om&iled from "(I< 3rowess Dataset ii( Innovations in the automotive industry

There have been many instances of new &roduct develo&ment in the Indian automotive industry. To name a few The develo&ment of the %ano, the innovative 9#E2,27 car, has showcased Indias ability to innovate and design0 1eva, Indias first electric car, is also an e!am&le in this case0 "om&anies like (F( and the Cero 5rou& are &lanning to develo& electric vehicles0 In the commercial vehicles s&ace, Tata Daewoo, a subsidiary of Tata (otors, has recently develo&ed an G35$based ("6 .,.7 ton/, the %ovus, which conforms to <uro 6 emission norm0. 'shok Geyland has develo&ed Indias first si!$cylinder "%5 engine for buses, which uses the multi&oint fuel injection system and conforms to <uro I6 emission standards 0 and Two$wheeler manufacturers ?ajaj 'uto, Cero Conda and (ahindra are in discussions with <nergtek, a &rovider of absorbed natural gas &roducts, for technology that will enable two$wheelers to run on natural gas instead of gasoline.

The auto industry is one of the largest 1FD s&enders within Indias industrial establishment closely following the leader in this s&here, namely the &harmaceutical industry. #ee Table ,.

Ta)le /% 3elative share of India*s automotive industry in total private se'tor in-house 35D e-penditures ,3s in Crores4 Auto industry as a share of private se'tor industry 19.*2 19.4 14.2, 14.9: 17.: 17. 12. 1:.21

In-6ouse 35D e-penditure 1994$99 1999$ 2 $ 1 2 1$ 2 2 2$ * 2 *$ , 2 ,$ 7 2 7$ : ,2 .:2 ,*1.*2 ,71.9: 724.:1 ,*,.22 7,:.7 4:2.4 1 ,2.2

3ate of gro7th ,84

35D Intensity .42 .2* .22 .41 .22 .4 .99 1. 2

Total private se'tor industry 2122 2124 2,11 2242 2247 *:,* 7 2: :2:4

2.7: ,.22 1:.9: $12.47 27.4, 72.44 21.*2

%ote- 1s 1 core H 1s 1 million. #ource- De&artment of #cience and Technology .2 9/

'lthough the industry consists of domestic and (%"s, most of the new &roduct develo&ment has come from the domestic com&anies. In order to e!amine this further, we analysed the two major costs of develo&ing new technologies- in$house 1FD e!&enditures and cost of &urchasing technology from abroad. The source of data for this e!ercise is the #!I& 'rowess (ataset. Two indicators are develo&ed- .i/ 1FD to sales ratio signifying the research intensity of the sector .Table 7/0 .ii/ 1atio of 1FD e!&enditure to cost of &urchasing technology from abroad signifying relate im&ortance of domestic technology generating efforts .Table :/. These ratios are &resented se&arately for domestic and (%"s.

Ta)le 5% 3esear'h intensity% Domesti' 1s .oreign firms ,1alues are in 3s Crores4 #ource- "om&iled from the 'rowess (atabase
Year R&D Expe'se(Rs Crores) Domestic 146.83 159.31 292.18 364.79 439.92 751.54 900.35 1301.71 1939.72 2663.34 2401.38 MNC 164.56 77.45 62.84 51.47 102.96 123.24 106 103.39 120.6 154.6 210.87 Sales (Rs Crores) Domestic 22298.37 21883.20 22122.72 26227.74 34330.25 40455.42 47276.37 61429.95 75810.47 70464.44 89928.63 MNC 19519.52 20993.81 19789.59 21440.01 30308.19 39256.1 44637.8 53514.79 55992.37 63379.07 55402.27 R&D to Sales (%) Domestic 0.66 0.73 1.32 1.39 1.28 1.86 1.90 2.12 2.56 3.78 2.67 " %2 MNC 0.84 0.37 0.32 0.24 0.34 0.31 0.24 0.19 0.22 0.24 0.38 $ 32 Ratio of Domestic to MNC Sale R&D s 0.89 1.14 2.06 1.04 4.65 1.12 7.09 1.22 4.27 1.13 6.10 1.03 8.49 1.06 12.59 1.15 16.08 1.35 17.23 1.11 11.39 1.62 % 16 " "%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Average

'lthough the 1FD e!&enditures for both the sets of firms have increased, it is the domestic firms that have registered faster growth rates in the absolute levels of intramural 1FD investments, but also in its intensity. In contrast the 1FD intensity of (%"s has hardly shown an increase but just inter$year fluctuations. "onse=uently the main source of technology to the foreign firms is the technical knowhow that they im&ort from their res&ective &arent firms and as such their ratio of in$house 1FD to technology &urchase from abroad .referred to as the average &ro&ensity to adfa&t/ is significantly less than unity in all the years and is also significantly less than that for domestic firms. #ee Table :. Ta)le 6% Average propensity to adapt% .oreign vs Domesti' firms
R&D Expe'ses(Rs Crores) Domestic MNC 146.83 164.56 159.31 77.45 292.18 62.84 364.79 51.47 439.92 102.96 751.54 123.24 900.35 106 1301.71 103.39 1939.72 120.6 2663.34 154.6 2401.38 210.87 (orex spe'di'g ro)alt)*+ec,'ical -'o. ,o. (Rs Crores) Domestic MNC 53.95 164.7 51.66 208.11 63.25 224.68 51.26 330.29 44.69 377.08 114.34 657.86 111.77 879.73 227.03 1134.65 247.89 1258.95 313.61 1554.52 278.75 1488.66 Average prope'sit) to adapt/ R&D to +ec, 0'o. ,o.(%) Domestic MNC 2.72 1.00 3.08 0.37 4.62 0.28 7.12 0.16 9.84 0.27 6.57 0.19 8.06 0.12 5.73 0.09 7.82 0.10 8.49 0.10 8.61 0.14 6 6" $ 16

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Average

#ource- "om&iled from the 'rowess (atabase iii( Sour'e of innovation% Internal vs $-ternal fa'tors
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In other words, while domestic firms have relied much more on internal sources of technology the (%"s have relied more on e!ternal sources. Be now &roceed to elaborate on these internal and e!ternal sources. Internal- in-house 35D efforts- In Tables , and 7, it is already seen that the firms and es&ecially the domestic firms have invested rather robustly in in$house 1FD. These investments have been increasing over time. Indias auto &olicy announced in 2 2had a number of fiscal incentives for domestic 1FD. The main &rovisions of this &olicy dealing with 1FD in the auto industry is summarised in the following ?o! 9o-% In'entives for 35D as proposed in the Auto Poli'y of + +

The 5overnment shall &romote 1esearch F Develo&ment in automotive industry by strengthening the efforts of industry in this direction by &roviding suitable fiscal and financial incentives. The current &olicy allows Beighted Ta! Deduction under I.T. 'ct, 19:1 for s&onsored research and in$house 1FD e!&enditure. This will be im&roved further for research and develo&ment activities of vehicle and com&onent manufacturers from the current level of 127A. In addition, 6ehicle manufacturers will also be considered for a rebate on the a&&licable e!cise duty for every 1A of the gross turnover of the com&any e!&ended during the year on 1esearch and Develo&ment carried either in$house under a distinct dedicated entity, faculty or division within the com&any assessed as com&etent and =ualified for the &ur&ose or in any other 1FD institution in the country. This would include 1 F D leading to ado&tion of low emission technologies and energy saving devices. 5overnment will encourage setting u& of inde&endent auto design firms by &roviding them ta! breaks, concessional duty on &lant@e=ui&ment im&orts and granting automatic a&&roval. 'llocations to automotive cess fund created for 1FD of automotive industry shall be increased and the sco&e of activities covered under it enlarged. #ource- De&artment of Ceavy Industry, (inistry of Ceavy Industries and 3ublic <nter&rises, on htt&-@@dhi.nic.in@auto&olicy.htm.acessed 8anuary 22, 2 11/.

This &olicy was further elaborated in the Indian )uto !ission 'lan*)!'+. '(3.2 :$1:/ is a ten year vision document launched by 5overnment of India in 8anuary, 2 2 with the vision to make India emerge as a destination of choice in the world for design and manufacture of automobiles and auto com&onents with out&ut reaching a level of 9#E 1,7 billion and &roviding additional em&loyment to 27 million &eo&le by 2 1:. The most critical intervention of the government thus far in the automotive sector has come in the form of an ambitious &roject on setting u& world$class automotive testing and 1FD infrastructure in the country in the form of "ational )utomotive esting and ,-( Infrastructure 'ro.ect *") ,I'/. %'T1I31 envisages setting u& of world$class automotive testing and homologation facilities in India with a total investment of 1s 12 billion by 2 11. The &rinci&al facilities will come u& in the three automotive hubs of the country, in the south, the north and the west. #ee +igure 2 for the geogra&hic distribution of the %'T1I3 centres within the country.

#ource- India ?rand <=uity +und .2 1 /, &. ,4 The &roject aims at .i/ creating critically needed automotive testing infrastructure to enable the 5overnment in ushering in global vehicular safety, emission and &erformance standards, .ii/ dee&ening manufacturing in India, &romoting larger value addition leading to significant enhancement of em&loyment &otential and facilitating convergence of Indias strengths in IT and electronics with automotive engineering, .iii/ enhancing Indias considerably low global outreach in this sector by debottlenecking e!&orts0 and .iv/ removing the cri&&ling absence

The source of information on the NATRIP project is ase! on "epartment of #ea$% In!ustr% &2'1'(

1'

of basic &roduct testing, validation and develo&ment infrastructure for automotive industry. The &roject envisages setting u& of the following facilities-$.i/ ' full$fledged testing and homologation centre within the northern hub of automotive industry at (anesar, Caryana. ' full$fledged testing and homologation centre within the southern hub of automotive industry a location near "hennai, Tamil %adu. .iii/ 9&$gradation of e!isting testing and homologation facilities at 'utomotive 1esearch 'ssociation of India .'1'I/, 3une and at 6ehicle 1esearch and Develo&ment <stablishment .61D</, 'hmednagar, (aharashtra. The investment of 1s. 1s 12 billion is &ro&osed to be funded jointly by the 5overnment and the industry based on the following manner-$ A( Plan Support )y the :overnment ?y way of grant - 1s. 4.12 billion ?y way of "ess +unds2 - 1s. 7.1 billion ?y way of loan - 1s. 2.2* billion 9( ;ser Charges to )e paid )y auto industry - 1s. 1.14 billion Total Pro<e't Cost ,A=94 % 3s( !>()illion $-ternal sour'es- 1egarding e!ternal sources, I could identify at least five sources. These are.i/ Gicensing of technologies- .ii/ 8oint 6entures- .iii/ #&illovers from (%"s0 .iv/ (erger and ac=uisition deals0 and .v/ "ertification schemes. ;f these five, it is the (%"s that have been relying, relatively s&eaking, more on licensing of technologies and on joint ventures. The domestic firms, on the contrary, have been using mergers and ac=uisition as a way of securing state$of$the art technologies. #ome of the major ac=uisitions are listed in Table 2. Ta)le >% Ma<or a'?uisitions in the Indian Auto Industry 3e'ent out)ound deals primarily driven )y a'?uisition of te'hnologi'al @no7-ho7 A'?uirer Target Company 3ationale The ac=uisition will &rovide 'mtek with access to 9I$based Tri&le! Ietlon su&erior technology and 'mtek 'uto 5rou& for 9#E *9.9 million e!&and its &recision machining o&erations .%ov 2 2/ The ac=uisition will give the Increased its stake to * A in com&any access to IT(s ?ajaj 'uto 'ustria based IT( 3ower technology and distribution #&orts network across <uro&e .+eb 2 9/ (ahindra and (ahindra Italy$based motor cycle The ac=uisition will &rovide design develo&ing com&any, (F( with access to <ngines <ngineering, for technological e!&ertise to <91 4.7 million widen its engineering and design services and an
2

9nder the 1FD "ess 'ct of 194:, every com&any im&orting technology from abroad has to &ay to the government a cess to the tune of 7 &er cent of the total &ayments for technology. The funds thus accumulated are returned to the industry in the form of grants for financing indigenous 1FD &rojects.

11

Tata (otors

7 .*A stake in %orway$ based (iljo 5renland for I%1 9, million

e!&osure to the international markets .8une 2 4/ The ac=uisition is in line with the com&anys strategy of develo&ing convenient, affordable and sustainable mobility solutions through electric and hybrid vehicles .;ct 2 4/

#ource- <rnst and Joung .2 1 /, &. 2, +urther the com&letion from (%"s has been an im&ortant source of technological im&rovements for the domestic manufacturers. +inally conformity with various international certification schemes have been an im&ortant source of information on innovation for the auto &arts firms es&ecially. iv( Con'lusions

The Indian automotive industry has now emerged as one of the most innovative industries in India. There are many instances of new &roduct develo&ment not just in the auto industry but also in the auto &arts industry. The sales of the industry are almost e=ually divided between the domestic and foreign firms. ;ur analysis of the innovative behaviour of the industry showed that it is the domestic firms that have been more innovative and the main route they have ado&ted for im&roving their res&ective innovative activities can be divided into internal and e!ternal sources. ;f the internal sources, the most im&ortant one is investments in 1FD. These investments have registered some shar& increases during the &eriod under consideration. 5overnment too have encouraged this by offering a number of fiscal incentives. 3eferen'es De&artment of Ceavy Industry .2 1 /, )nnual ,eport /009010, (inistry of Ceavy Industries and 3ublic <nter&rises, %ew Delhi- 5overnment of India. <rnst and Joung .2 1 /# 1evving u&K Indian automotive industry $ a &ers&ective, htt&-@@www.ibef.org@artdis&lay.as&!LcatMidH1*2FartMidH2, :*, .'ccessed on 8anuary * 2 11/ India ?rand <=uity +und .2 1 /, )utomotives0 ) 'resentation,
http)**+++,i ef,or-*!o+n.oa!*Automoti$es/27'111,p!f .'ccessed (arch 4, 2 11/

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Anne-ure !% Aist of Automo)ile .irms in India

#ource- "entre for (onitoring Indian <conomy, 'rowess (ataset

Anne-ure +% Summary Data on $-port# 3esear'h and Import Intensity# +

-+

9 13

#ource- "entre for (onitoring Indian <conomy, 'rowess (ataset

14