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 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 components industry which has shown remarkable success over the last two decades. The chapter will build on two distinct but inter-dependent parts: a historical analytical part (drawing mostly on existing literature) to understand the genesis and development path of the industry through the changes in policies/institutions; and an econometric analysis of quantitative and qualitative

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 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 preindependence period till date shows distinct phases. It all started in 1940s for the first embryonic automotive industry to emerge in the pre-independent India. 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 kickstarted 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 19952000, 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 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, to a 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 199293 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 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 car segment, 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

Source:ACMA,India

Fig 1a: Automobile Production in India: 1971 2003

Source: Own construction using SIAM and ACMA data

Fig 1b: Vehicle Production: Industry Gross Turnover

Source: Own construction using SIAM and ACMA data

Fig 2: Vehicle Production: The 4-wheeler Segment

Source: Own construction using SIAM and ACMA data

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

Total 2/3 Wheelers -0.136 0.151 0.162 0.194 0.227 0.284 0.282 0.321 0.337

Cars 1971-72 --

Jeeps/ M & MUV -0.011 0.013 0.012 0.010 0.007 0.008 0.009 0.012 0.013 HCVs --

LCVs Tractors --0.018 0.022 0.023 0.031 0.033 0.033 0.041 0.055 0.062

Total 4 Wheelers -0.109 0.111 0.123 0.112 0.106 0.125 0.126 0.159 0.167

All vehicles -0.245 0.263 0.285 0.307 0.332 0.408 0.408 0.480 0.504

1972-73 0.040 1973-74 0.037 1974-75 0.042 1975-76 0.031 1976-77 0.022 1977-78 0.036 1978-79 0.034 1979-80 0.033 1980-81 0.033

0.033 0.008 0.031 0.009 0.034 0.011 0.035 0.006 0.037 0.007 0.039 0.008 0.033 0.008 0.047 0.013 0.043 0.016

1981-82 0.031 1982-83 0.042 1983-84 0.044 1984-85 0.047 1985-86 0.076 1986-87 0.103 1987-88 0.126 1988-89 0.152 1989-90 0.166 1990-91 0.179 1991-92 0.182 1992-93 0.166 1993-94 0.163 1994-95 0.208 1995-96 0.264 1996-97 0.348 1997-98 0.408 1998-99 0.401 1999-00 0.390 2000-01 0.574 2001-02 0.507 2002-03 0.500

0.016 0.018 0.020 0.022 0.023 0.028 0.029 0.032 0.036 0.044 0.037 0.032 0.039 0.049 0.050 0.068 0.135 0.135 0.113 0.124 0.126 0.066

0.054 0.020 0.066 0.027 0.061 0.027 0.061 0.029 0.063 0.033 0.064 0.037 0.060 0.039 0.065 0.045 0.070 0.046 0.077 0.048 0.087 0.058 0.090 0.054 0.075 0.053 0.066 0.075 0.102 0.093 0.130 0.129 0.152 0.085 0.096 0.065 0.080 0.055 0.114 0.061 0.088 0.064 0.097 0.066

0.070 0.082 0.063 0.074 0.082 0.073 0.079 0.089 0.107 0.118 0.139 0.148 0.148 0.138 0.163 0.191 0.226 0.256 0.254 0.257 0.231 0.106

0.191 0.236 0.214 0.233 0.277 0.305 0.333 0.383 0.425 0.466 0.502 0.489 0.479 0.536 0.672 0.866 1.005 0.953 0.893 1.131 1.017 0.834

0.467 0.572 0.664 0.818 0.941 1.241 1.449 1.498 1.716 1.815 1.910 1.683 1.569 1.847 2.324 2.820 3.202 3.308 3.584 3.984 3.961 4.484

0.659 0.808 0.878 1.051 1.219 1.546 1.782 1.881 2.141 2.282 2.412 2.172 2.047 2.383 2.996 3.686 4.207 4.260 4.477 5.115 4.978 5.318

Compound Annual Growth Rates, CAGR (%) 1972-81 -2.33 1982-91 15.65 1992-01 11.79 Total period 8.91 3.39 7.66 14.85 6.66 4.99 10.37 2.72 -0.15 4.25 7.91 1.76 8.02 14.74 5.34 4.56 6.20 5.77 7.84 7.59 7.26 13.15 12.82 8.94 12.60 10.39 11.56 8.65 11.06

Source: Constructed from Facts and Figures: 2000-2001, ACMA, India.

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 2and 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 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)

Source: Own construction using SIAM and ACMA data

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 4wheeler category. The share of various segments in total production of vehicles in recent years is presented in Table 2.

Fig 4: Market Share of Various Segments of Automobiles

Source: Own construction based on SIAM data

Table 2: Share of Segments in Total Vehicle Production (in Mn)

Commercial Vehicles (CVs) 2000-01 2001-02 2002-03 2003-04 2004-05 0.16 0.16 0.20 0.28 0.35 Passenger Vehicles (PVs) 0.64 0.67 0.72 0.99 1.21

Two Wheelers 3.76 4.27 5.08 5.62 6.53

Three Wheelers 0.20 0.21 0.28 0.36 0.37

Grand Total 4.76 5.32 6.28 7.24 8.46

Source: Compiled from SIAM data

Automotive industry of India also started exporting slowly after the liberalization. Here again, MUL and TELCO have been the leading exporters,v accounting 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 registereda 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

Source: Own construction based on ACMA data

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 themiddle-sized passenger car segment.vii This resulted in many joint ventures and foreign collaborations in the industry. The distinct changes in the industry are also partly led by the ongoing trend of mergers and acquisitions as strategies of major automotive manufacturers to consolidate their competitive edge in the world market. As can be observed, most of the major global producers of automobiles have made their presence in the Indian market. The largest number of joint ventures has come from Japan and more than 50 percent of the joint ventures are in the manufacture of passenger cars.

Thus, starting from pre-independence era of as early as 1930s, the Indian automotive industry has marched a long way a journey which was in most part beset with inward trade orientations prompting large regulations and restrictions. As a result, the industry became one of the least innovative slots till 1980s till MUL began its operations. The turn around came up in the following years mainly due to the liberal policies undertaken to boost the economy. The growth of the automotive industry is much more apparent in segments such as passenger cars, and recently, in the 2- and 3- wheelers. The technological sophistication of the industry has also picked up after India adhered to the global environmental norms regarding emission standards as well as quality certifications. The upward trend in exports also reflects the changing nature of technological sophistication of the Indian automotive sector. The structural and technological changes in the automotive industry also have multiple trickle-down effects on its allied components segment as the latter is inextricably linked to the former in thevalue chain.viii The intricate nature of 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 the industry have grown remarkably; the average annual growth of total exports is around 15 percent between 1991 and 2002. We describe these trends in seriatim:

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 20012002, 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 of the total firms in the organized sector began production only after 1980 the time partial decontrol was introduced.
(a) Trends in

production: To

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-added in 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).

Fig 6: Investment in Auto Components Industry

Source: Own construction from ACMA data

Table 3: Growth of Auto Components production in India

Engine Parts

Drive & Transmission Parts 11.30 14.31 21.12 28.91 25.32 7.77 11.13 2.61 43.06 15.04 21.23

Suspension & Braking Parts 22.16 8.10 14.91 26.02 31.95 21.20 -0.18 6.37 9.04 -2.43 21.92

Electrical Parts

EquipTotal ment 13.00 18.06 53.25 21.29 44.45 28.93 -1.05 17.59 18.57 15.61 19.89 19.02 20.52 20.84 27.19 29.75 23.65 4.73 7.72 22.99 5.30 18.47

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 CAGR(19612001) CAGR(19912001)

20.73 19.01 18.20 22.94 22.19 27.26 0.70 2.75 21.43 -9.79 16.97

19.76 35.99 17.69 44.13 32.07 20.36 -3.79 4.33 18.50 -7.07 17.32

14.86

20.69

13.63

19.75

27.22

19.81

Source: Own calculation based on ACMA data

Fig 7: Component-wise Production Trend

Source: Own construction from ACMA data

(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.x During the fiscal year 2004, the industry achieved a milestone ofUS$ 1 billion worth of exports.xi Going 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 did grow by 1990s, a bulk of the exporters largely catered to the low-value added 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 trade balance is observed since last two years.

Table 4: Growth Rate of Exports and Imports

Exports Years 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Average annual growth rate OECD -0.91 24.10 8.96 17.82 15.03 10.37 28.02 -5.44 12.34 15.25 6.51 37.00 10.62 15.46 6.78 NonOECD 26.44 9.01 16.91 35.10 10.92 33.06 27.96 17.50 1.94 -1.43 16.96 62.80 -3.87 24.26 17.15 Imports World 8.82 17.86 12.00 24.72 -3.81 11.28 27.99 8.23 5.61 -6.62 13.40 54.54 0.24 21.51 12.29 World 6.13 30.59 -50.32 23.87 -0.99 27.45 43.89 33.26 -39.94 -36.74 38.97 -23.59 -11.92 -12.14 2.04

Source: Own calculation from UN COMTRADE databasexiii

Fig 8a: Export - Import Trends

Source: Own calculation from UN COMTRADE database

Fig 8b: Direction of Exports

Source: Own calculation from UN COMTRADE database

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 the OECD block (Figure 8b). But as the impact of liberalization started to flourish, the direction of the exports reversed after 1994; exports to OECD countries have been growing significantly. Currently, of the total auto component exports, developed markets such as the US and Europe together account for about 56 percent, Asia accounts for 27 percent 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. 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. This brought about a large inflow of FDI into the sector. This was primarily due to the follow sourcing strategies of the global manufacturers present in India who encouraged their group companies or suppliers to create manufacturing base in India, often in the form of joint ventures with Indian suppliers. xiv Thus, entry of global OEMs and demand for high quality/technology components encouraged Indian auto component companies to enter into several foreign collaborations. At present, there are over 450 collaborations with foreign partners from around the world (see Table 5). Of this, about 64

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 international quality standards. A majority of ACMA members have already secured ISO 9001 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
Technical Financial Technical and Financial Joint Venture Total

No. of Collaborations
299 105 50 14 469 Note:Total number of firms is 365

% of the total
63.75 22.39 10.66 2.99 100

Source: Own calculation from ACMAs 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 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 auto component units. As a result auto component firms are being increasingly called upon to make these innovations by enhancing their process/product quality and operational excellence.

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6. DCosta, A. P. (1995): The restructuring of the Indian automobile industry: Indian state and Japanese capital, World Development, 23 (3): 485502. 7. DCosta, A. P. (1998): An alternative model of development? Co-operation and flexible industrial practices in India, Journal of International Development, 10: 301321. 8. DCosta, A. P. (2004): Flexible practices for mass production goals: Economic governance in 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: An interpretative survey of recent research. World Bank, Washington, DC. 10. Dahlman,C.J., and Westphal L.E. (1981), The Meaning of Technological Mastery in Relation to Transfer of Technology, The Annals of The American Academy of Political and Social Science,Vol.458. Nov. 1981, 12-26. 11. Enos, J L and Park, W-H (1988), The Adoption and Diffusion of ImportedTechnology: The Case of Korea, Croom Helm, London. 12. Enos, J.L. 1962. Invention and innovation in the petroleum refining industry. In National Bureau 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: Globalization and 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 with particular reference to technological capability, University Press Ltd, Dhaka. 16. Huq, M M (1996b), The Role of the State in Technology Promotion in Developing Countries: 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 in Bangladesh, 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: NorthSouth 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 the Indian 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.8192.

23. Kim and Lau, (1994): The sources of economic growth of the East Asian newly industrialized countries. Journal of Japanese and International Economics 8 3, 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 by India, Macmillan, London. 26. Lall, S (1992), Technological Capabilities and Industrialisation, World Development (Vol 20, 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. 29. Nelson, 30. Okada, R.R. A. and H. Pack (1999): The and Asian miracle and modern Linkages growth under theory, The Economic Journal, 109, 416-436. (2004): Skills Development Interfirm Learning Globalization: Lessons from the Indian Automobile Industry, World Development Vol. 32 (7):pp. 12651288. 31. Pack, H. and L. E. Westphal (1986) Industrial strategy and technological change: theory versus reality, Journal of Development Economics, 22(1), pp.87-128. 32. Parhi, M. (2006), Dynamics of New Technology Diffusion: A Study of the Indian Automotive Netherlands. 33. Smith, Adam (1776), The wealth of Nations: New York: Modern Library, 1937; First published 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 Acquisition of Technological Capability, in Nathan Rosenberg and Claudio Frischtak eds. International Technology Transfer. New York: Praeger. Industry. Ph.D Dissertation, UNU-MERIT, Maastricht University, The

---------------------i

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

ii

Source: 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).

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

xiAccording

to a recent study by Frost and Sullivan, exports are expected to grow at a compound annual growth rate of 21.5

percent 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), existing 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 5005000 PPM (parts per million) in most of the Indian companies while it is 10 to 20 PPM in Japan, and 50 to 100 PPM in the US (Source: Quoted from the Interview with ACMA Chairman, Northern Region).

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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