pre maruti ---------The period prior to the entry ofMaruti Udhyog Ltd.

was characterized by small nu mber of auto majors, like Hindustan Motors, Premier Automobiles, Telco, Bajaj, M ahindra & Mahindra, low technology and assured business for most of the auto-com ponen manufacturers. post maruti ----------In the 1980~with Maruti, the growth suddenly accelerated. Boom time for the auto -components industry startecr withthe arrival of India's 'people's car' - the Ma ruti. The new car required components that would adhere to its stringent quality stand ards. It virtually gave birth to a variety of new age auto component manufacturers who co mbined the best of technology with quality. As Maruti became India's best sellin g car, the path of Indian auto component industry took an upswing. Export figure s also climbed. Low costs of labour and raw material resulted in exports taking a quantum jump. post liberalization ------------------The influx of foreign auto majors ranging from Mercedes Benz, Ford, General Moto rs to Daewoo few years ago presented a world of opportunity for the industry. The auto -components industry responded with huge capacity expansion and modemisation programmes. recent times ------------However, the global auto giants soon realized that the Indian market was not as big as it appeared to be. Their targets went haywire, inventories piled up and bookings we re cancelled. This also coincided with a general slowdown in the Indian economy in the last one or two years. The auto-bomponentindustry in India, which is driv enby domestic demand, also faced sluggish growth. However, things have taken a t urn for the better. Growth in the commercial vehicle and the passenger car segme nts has been 20 per cent year on year and 40 per cent year on year respectively from the year 2000 onwards. Several companies have entered into technological collaboration and equity partn ership with world "leaders in auto-components. They have not only adopted their systems but also their manufacturing and management practices; Strict quality controls, sound technolog y and high volumes will enable the Indian auto component industry to chart greater progress in the near future.The new multinationals that came in India to manufacture and sell in India realized that it was cheaper by 30 per cent to manufacture produc ts in India.The industry is now exposed to a global market, which is 50 times bi gger in size. ================================================================================ ========= International environment

global trends and challenges ----------------------------The world trade and investment in automotive and auto parts has become liberaliz ed with tariffs going down internationally.MNC assemblers can source cheaper par ts from any part of the world.Local suppliers are being linked into the global s upply chain and they have to compete with regional players. Rapid changes in inf ormation 3;ndcommunication technology are reshaping the way auto industry is doi ng business. The OEM is'passing its responsibility of developing manufacturing a nd assembling sections of vehicles on to the suppliers. OPPORTUNITIES FROM GLOBALIZATION -------------------------------From being in the wilderness barely three years ago, to striking out abroad and now acquiring operating units, a major transformation appears to be under way in the auto comp onent industry. Major overseas acquisitions have been undertaken by the Indian c ompanies. Three driving factors for these acquisitions can be sited. These are m entioned below: Firstly, having established a reasonable domestic presence, big Indian component makers are now looking for an international presence. Secondly,having mprovedtheirproductiv ity,qualityand reliability,Indiancompaniesfeelmore confident to go abroad. Final ly, aiding this are the investment friendly policies of the government that has made a hassle-free environment possible for overseas acquisitions. benefits form overseas acquisition ---------------------------------In the early 1990s,auto components industry tried to step into the international market in a substantial way. The exports rose from Rs 4 billion in 1990-1991 to about Rs 9 billion in 1995-1996. This represented an annual growth exceeding 17 per cent. The exports crossed the Rs 10 billion mark in the following year. It r ose to.Rs 14 billion in 1998-1999 and to about Rs 17billion in 1999-2000. Such e fforts will open up the original equipment (OE) market abroad for Indian acquire rs.'through the overseas company that we acquire customers are acquired'. The In dian company can hope to supply these customers other products not produced by t he overseas company.The Indian auto component industry has some way to go yet in terms of best manufacturing practices, quality consciousness and strict adheren ce to delivery schedules. Indian companies have to concentrate on these aspects seriously to succeed in the global market. ================================================================================ =========== domestc environment ------------------The begi.nning of the Nineties saw a boom in the automotive sector as internatio nal automotive companies entered the country and set up a manufacturing base. Co mpanies such as Ford G . I" Ch 1 D F . d d . . , eneral otors, " aim er- rys er, aewoo, Iat an Hyun aI radIcally altered the options ava ilabl h k h . eta consumers m t e auto mar et. T ese compames looked forward to not only sellin g their C " . . '. ars In I~dI~, but also as a b~se for th~ rest of ~sIa and possIbly the MIddle East as w ell. This sudden

rise ~nthe manu~actunng capacIty of ve~1Cleshas also s~en the need for increased supply of high qualIty automobIle components, presentIng an opportumty for Indian manufacturers . This in turn led to collaborations and tie-ups in the auto components industries as well. With global auto-producers entering the Indian market, the annual growth rate du ring 19931996 periods was of the order of 25 per cent. The market euphoria led to setting up of newer production capacities. The hi-growth was not sustained and the industry went int o a slide since 1997. In 1996-1997, the organized industry's turnover was estimated at Rs 114billion. It increased to Rs 120 billion in 1997-1998 indicating a growth rate of about 5 per cent. The growth rate was estimated at 5.4 per cent during 1998-1999 with the turnover to uching Rs. 130 billion. In 1999-2000 the turnover crossed the level of Rs 163 bi llion. The decade 1990-2000 clocked an annual growth rate of 18.4per cent. The t urnover for 2000-2001 has been placed at around Rs. 170billion, resulting in a m odest growth of about 4 per cent. Global players like Suzuki, Ford Motor, Daewoo and Hyundai, have promoted manufa cturing capabilities either on their own, or through joint ventures with Indian component manufacturers to meet their requirements. These include arrangements with establ ished manu~acturers having foreign collaborations. Some global companies are kno wn to have entered into contractual arrangements with domestic suppliers, who im port components from abroad.This helps the vehicle producers to achieve the requ ired indigenization levels without actually producing these in India. future ------With less than 1 per cent share in the global trade, India has a lot more potent ial to emerge as a supply base. Several global auto players, like Ford have embarked on projec ts to source their globalcomponent requirement from India. Consolidation is taki ng place among the auto majors all overthe world. This trend will defmitely come to India. There is over-capacity in the market because of large number of playe rs. So the consolidation phase is round the comer. Product quality continues to be a major problem and the industry will not only n eed business process re-engineering and newer technology standards but it will also have to i nvest heavily in R&D. An ACMA-McKinsey study is reported to have found that the rejection rate (from OEMs) is as high as ten times the world average. Even among the better suppliers, defe ct rates are in the range of 1,000-2,000 parts per million (ppm) against the Jap anese average of 100-200 ppm. Quality upgradation, therefore, presents the most important challenge for the Indian component suppliers. Moreover, the auto component suppliers have to gear themselves to become systems suppliers, with capacity to design and develop larger parts. The Indian automobile componen ts industry has, no doubt, significant cost advantages, primarily due to lower labour cost ( about one-twentieth of Japanese cost). The large labour cost advantage translate s into an overall cost advantage of 20-30 per cent over the Japanese producers, despite low labour productivity.

strengths and challenges ------------------------The Indian auto componentindustry is large,withover 400 firms in the organizedse ctor,but small in sales turn over, which is estimated to be less than Rs 15,000 crore for the organized sector. some of the strengths of the industry for becoming the export driver of the auto industry: .Increasing globalization of the auto industry supply chains; . Cost advantage in many component groups supported by relatively (compared to o ther developing markets) well-developed labour skills and engineering base. To achiev e the auto industry version of 10 per cent share of industrial out put by 2010, the co mponent industry will have to grow by to 22 per cent over next 12 years, with export con tributing to 20 per cent of the output; . India's automotive components industry is the most lucrative sector for foreig n direct investments. Hundreds of collaborations foreign direct investments have been mad e in recent years and there is tremendous potential for more. Markets are huge and gr owing .both within India and overseas; Automotiveproducts ma(h~in India have huge over seas markets, in addition to the domestic market. India being a cheap destination for parts, is a favoured destinations fo r multinationals to source its parts and achieve overall global competitiveness. The component industry in India has significant cost advantages primarily due to low labour cost in India. This labour cost advantage translates to overall cost advantage o f 20-30 per cent over the counterparts from other developed countries. despite l ower labour productivity. chalenges -------Quality up gradation: most important challenge for indaian auto component suppli ers -----The Industry association ACMA reports that over 170 of its members have already received ISO 9060 certification and 23 have received QS 9000 certification.Figure 12.1 gives a comparison of rejection level with other countries.An A T. Kearney survey foun d that defect rates in India are in the range of 1000-2000 ppm against Japanese average of 100-200 ppm. Rejected parts per million (PPM). The AT. Kearney survey , found high defect rates in India, even among the better suppliers in the range of 1000-2000 ppm against the Japanese average of 100-200 ppm.This trend needs t o be reinforced if Indian players wish to become competitive global exporters. A CMA suggests that the Indian component manufacturers must change from percentage rejection rates to ppm. labour prouctivity: ----As illustrated in Figure 12.2, the Japanese employee is ten times more productiv e than the

Indian counterparts. Indian labour productivity is below its neighbouring Asian countries and that is why some Indian OEMs are planning to start manufacturing i n countries like Thailand. The advantage of low cost labour is negated due to lower productivity level of I ndian workforce. Indian labour productivity is lower, relative to the rest of the worl d. interst rates for working capital ------------India has one of the highest interest rates for capital and working capital. The se can range from 12 per cent to 18 per cent and higher. Most of the Indian companies work fo r financial institution. Whereas, in countries like USA, Europe, funds are available at onethird the cost. This makes a huge impact on the company. Though the financial in stitutions are flushed with funds,more funds are available for investment in non -performing assets. The financial institutions should work out means to channeli se foreign funds at a lower rate of interest for Indian companies transportation cost ----The cost to transport parts within the country is steep due to high cost of fuel , and poor turn around of vehicles. The cost to export can be around 5 to 25 per cent depending on the commodity. Ports in India are inefficient and ship turn a round at times is higher than international standards.A finished product takes a dditional week to leave the Indian shores, due to various documentation and othe r port formalities. A container load may cost 3,000 US $ to USA. It is inefficie nt for individual suppliers to export small container loads. uncertainities in logistics ----The uncertainties in logistics, prevent Indian companies to supply just in time. In order to make up for the environmental inefficiencies, warehousing has to be organized wh ich can cost three to four per cent depending on the countries. present taxation structure -----the present structure of multiple and cascading taxation presents,an obstacle fo r systems procurement and discourages the tiering of the supply chain. Consequen tly, Indian firms suffer from an inherent disadvantage compared to global compet ition that has additional income advantage of tiering. According to A.T. Kearney survey, over 20-30 per cent of all parts were uneconomically sourced, due to ce ntral sales tax distortions, which have no MODVATrelief. Indeed the Vat system a s adopted by many European nations will open vast opportunities for competitive sourcing and tiering in component Industry. cost and quality of raw materials ---------------Raw materials like steel, polymers, castings, etc. are at times 20 per cent to 5 0 per cent more expensive than other countries and the quality of these raw mate rials also are not comparable to international standards. Steel is the major raw material used for automotive applications and the same is increasing every quar ter. Government may have to think of reducing the import duties, in order to bri ng in competition for local manufacturers. firm level ---

At the firm level, it has been found that the evelopment, human resource management, use of information , strategic management and exploration of future business ive in anticipating the future and died their rocess.

firms lack in areas like product d systems in all aspects of business trends. Many firms were not proact natural death in the tierization p

Government regulations/policies and the impact on auto components industry -------------------------------------------------------------------------Auto policy announced by the government in 2002 has opened the automobile sector to 100 per cent Foreign Direct Investment and removed the minimum capital investment norm f or fresh entrants. This has benefitted the manufacturers who are planning to enter the In dian market particularly in the burgeoning motorcycle market. The policy measurs has taken t he following measures: 1)care has been taken to ensure that the Indian industry is ready to face the international challenges both in terms of the competition from the internati onal players as well as the international regulations that it needs to follow. 2)The new policy has taken into account the need to address emerging problems an d make the auto sectorWTO compatible 3)The policy is also in favour of providing excise duty concessions to envisage India becoming a major hub for the manufacture of small cars and a global suppli er of components. 4)The policy also includes incentives to facilitate R&D. the auto component industry has been seen to have a multiplier effect and genera te a large nUmberof employment opportunities. government planning and strategies for developing the industry ----------------------------------The governmenthas planned (or an automatic approval for foreign equity investmen t to the extent upto 100per cent of manufacture of automobiles and component. The import tariff will be fIXed the government in a manner so as to facilitate d evelopment of manufacturing capabilities as posed to mere assembly without givin g undue protection; ensure balanced transition to open trade; :omoteincreased co mpetition in the market and enlarge purchase options to the Indian customer. The government will review the automotive tariff structure periodically to encou rage demand, promomote the growth of the industry and prevent India from becoming a dumping g round for temational rejects. Appropriate measures including anti-dumping duties will be put in place to check dumping and unfair trade practices. In respect of auto components, government w ill give adequate accommodation to the indigenous industry to attain global stan dards. The government shall promote Research and Development in automotive industry by strengthlllg

the efforts of industry in this direction by providing suitable fiscal and finan cial incentives. The automotiveand oil industry have to heave together to constantlyful fill envi ronmentimperatives. The government will continue to promote the use of low emission fuel auto techno logy and Couragethe use of short chain hydrocarbons along with other auto fuels of the qu ality necessary meet the vehicular emissions norms. ===============================porters five forces:============================= ======== High Rivalry among existing competitors limits the profitability of an industry. The degree to whichrivalry drives down the profits in an industry depends on: a)Intensity with which companies compete. b)Basis on which they compete. In an auto component part industry, degree of rivalry is quite high as: 1)There are number of players in the industry and market is fragmented and each player attemptsto attain a larger market share thereby disrupting the market. 2)Fixed costs are high, raising the breakeven volumes and thus the rivalry 3)Overcapacity, large corporate stakes and high exit barriers also contribute to increased competition 4)With the advent of internet, information complexity has increased which has fu rther intensifiedthe competition. 5)There are few companies with distinct brand identity and the product different iation as well asthe switching costs for the customer is low. All the above factors increase the degree of rivalry in the industry and lower i ts attractiveness. Force2: The Threat of Entry New entrants to an industry bring new capacity and a desire to gain market share that puts pressureon prices, costs, and the rate of investment necessary to com pete. The threat of entry thus, put capon profit potential of an industry. For an auto component industry, the threat of entry of new players is low mainly due to thefollowing reasons: 1)Economies of Scale and proprietary learning curve of existing players, most of the players in theindustry have grown with the growth of automobile industry an d has presence in the industrysince many years. 2)Large capital investments are required in the industry which increases the ent ry barrier for anew player.

3)The strategic partnerships between the customers i.e. the automobile manufactu rers andexisting players also reduces the threat of entry. 4)The partnerships for and ease of access to distribution and necessary inputs b y the incumbentsalso deters the entry of a new player in the industry. 5)The concerns for safety and environment and importance of the industry for the economy of thenation calls for increased role of government in the industry and also increases the entrybarriers due to standards and policy adopted by the gov ernments of various nations. Force3: The Threat of Substitutes A substitute performs the same or a similar function as an industry?s product b y a different means. The auto component industry is historically well placed in this context as there are a few substitutes for the parts manufactured but with the advent of internet and fast changing technology. The market structure for the auto parts industry can be divided into the two cat egories namely the Original Equipment manufacturers which normally service the O riginal manufacturers of the automobile manufacturers and then there are the aft ermarket segments which pose as a substitute to the OEs. Force 4: Bargaining Power of Buyers Buyers are powerful if they have negotiating leverage relative to industry parti cipants, especially if they are price sensitive, using their clout primarily to pressurise price reduction thus influencing theappropriation of the value create d by an industry. Auto component industry faces high bargaining power of their customers mainly du e tofollowing reasons: 1)There are few automobile companies and thus buyer?s market is highly concentra ted whichincreases their power to negotiate. 2)The customers which are automobile companies in this case have large horizonta l scope, hugebrand identities of the likes of GM, Toyota etc and large geographi cal scope; they are bulkbuyers and thus have an upper hand on the component supp liers. 3)Though the substitutes are limited, the fragmented nature of industry and pres ence of largenumber of players lowers the switching cost of the buyer. 4)The increased presence of internet has reduced the effect of geographic bounda ries and easedthe process of information gathering for the buyer and hence has h elped in increasing theirbargaining power. 5)The government policies on safety, environment, licensing, FDI etc and high an d fluctuating oilprices put pressure on buyer?s profit which force them to have more negotiations with theirsuppliers.

6)Factors such as Pull-through, price sensitivity etc are high for the buyers an d thus theirbargaining power increases. 7)The product differentiation offered by the industry is low and the customers h ave the scale andexpertise to backward integrate (most of the big buyers already have their auto componentmanufacturing units).Thus, the industry faces high bar gaining power of their customers. Force 5: Bargaining Power of Suppliers Powerful Suppliers capture more of the value for themselves by charging higher p rices, limitingquality or services, or shifting costs to industry participants a nd can reduce the profitability of theindustry that is unable to pass the cost.F or the auto component industry the major raw material used is carbon and steel. The suppliers poselittle threat of forward integration. Also the suppliers produ cts are not differentiated thereby reducingthe bargaining power of the suppliers .The above framework of industry analysis is extended by collaborating the criti cal role of thecomplementors in the Value Net as shown below: