Growth through in­no­va­tion and com­pet­i­tive­ness

The Pak Banker - - OPINION - Ra­jat Dhawan

THE vi­brant au­to­mo­tive in­dus­try in In­dia pro­duced over 25 mil­lion ve­hi­cles (two-wheel­ers, three­wheel­ers and four-wheel­ers) in 2015, of which nearly three mil­lion were ex­ported. The bedrock for this large-scale pro­duc­tion has been the au­to­mo­tive com­po­nents sup­pli­ers that now rep­re­sent over 5% of the man­u­fac­tur­ing gross do­mes­tic prod­uct (GDP) of In­dia and em­ploy over one mil­lion peo­ple.

Not­with­stand­ing the re­cent slow­down in the key au­to­mo­tive mar­ket seg­ments in In­dia, the auto com­po­nents sec­tor has the unique op­por­tu­nity to sus­tain its growth tra­jec­tory by rapidly grow­ing its ex­port foot­print while scal­ing its ca­pac­ity to serve the do­mes­tic mar­ket that will re­turn to its grow­ing ways. How­ever, achiev­ing this will re­quire the au­to­mo­tive com­po­nents mak­ers to fur­ther raise their com­pet­i­tive­ness and drive vig­or­ous in­no­va­tion in prod­ucts and pro­cesses.

Strong per­for­mance, sig­nif­i­cant growth po­ten­tial Over the last decade, the au­to­mo­tive com­po­nents in­dus­try has scaled three times to $40 bil­lion in 2015 while ex­ports have grown even faster to $11 bil­lion. This has been driven by strong growth in the do­mes­tic mar­ket and in­creas­ing glob­al­i­sa­tion (in­clud­ing ex­ports) of sev­eral In­dian sup­pli­ers. How­ever, there is room for growth-In­dian ex­ports still form only 1% of global au­to­mo­tive com­po­nents ex­ports. In­deed, the in­dus­try has the po­ten­tial to grow five-fold from $40 bil­lion in 2015 to $180-200 bil­lion in size by 2026, and could reach 10% of In­dia's man­u­fac­tur­ing GDP. To achieve this po­ten­tial, the au­to­mo­tive com­po­nents in­dus­try will need to at­tract $80-100 bil­lion worth of in­vest­ments and en­sure skill de­vel­op­ment of the ex­ist­ing tal­ent pool. By 2026, the In­dian auto com­po­nents in­dus­try could ma­ture into be­ing the 'fru­gal in­no­va­tor' for the world, pro­pel the ' Make in In­dia' move­ment by be­ing known for 'qual­ity in In­dia', and wit­ness many global MNC (multi­na­tional cor­po­ra­tion) com­po­nent sup­pli­ers ' man­u­fac­tur­ing in In­dia for the world'.

Rais­ing com­pet­i­tive­ness and driv­ing in­no­va­tion In­dia's man­u­fac­tur­ing sec­tor is still not op­er­at­ing at its po­ten­tial. Across two key mea­sures of the share of man­u­fac­tur­ing in GDP (In­dia at 13%, China at 33%) and share of ex­ports in man­u­fac­tur­ing (In­dia at 23%, China at 40%), there is sig­nif­i­cant room for growth. The au­to­mo­tive com­po­nents sec­tor could be­come one of the torch-bear­ers of the 'Make in In­dia' cam­paign by rais­ing its com­pet­i­tive­ness and driv­ing vig­or­ous in­no­va­tion.

One of the key mea­sures that sig­nals com­pet­i­tive­ness of a com­pany or a sec­tor is the eco­nomic profit it is able to gen­er­ate. Eco­nomic profit is a mea­sure of the sur­plus a com­pany has gen­er­ated af­ter re­pay­ing its cost of cap­i­tal, and cap­tures well the dual aspects of a com­pany's strength in the mar­ket and that of its op­er­a­tions. Across 2007-2014, among the top 100 au­to­mo­tive com­po­nents sup­pli­ers in In­dia, only one-third of the com­pa­nies gen­er­ated eco­nomic profit. In fact, the au­to­mo­tive com­po­nents sec­tor lies in the 'mid zone' of eco­nomic profit gen­er­a­tion when com­pared to other sec­tors of the In­dian man­u­fac­tur­ing sec­tor in gen­eral.

In­dian au­to­mo­tive com­po­nents play­ers need to gen­er­ate sub­stan­tially greater eco­nomic profit to match peers from China, Ger­many, US and South Korea. Th­ese coun­tries with high eco­nomic profit gen­er­a­tion sig­nal their higher com­pet­i­tive­ness that en­abled them to at­tract over two-thirds of global in­vest­ments in the last five years.

Rais­ing com­pet­i­tive­ness will need growth in scale of the au­to­mo­tive sup­pli­ers across the tiers in In­dia, and pur­su­ing the next wave of cost ex­cel­lence. A re­lent­less fo­cus on im­prov­ing qual­ity ca­pa­bil­ity of tier-2 and tier-3 sup­pli­ers will need to be fa­cil­i­tated by the tier-1 and ve­hi­cle mak­ers them­selves. Em­brac­ing ad­vances in dig­i­tal man­u­fac­tur­ing to trans­form pro­duc­tiv­ity and qual­ity will also of­fer gains. Driv­ing in­no­va­tion will in­volve sup­pli­ers col­lab­o­rat­ing with the ve­hi­cle mak­ers to de­sign and de­velop new com­po­nents and sys­tems at uniquely lower price points, in turn en­abling ve­hi­cle mak­ers to en­rich ve­hi­cles with greater func­tion­al­ity.

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