Current Research: Indian Automotive Components: The Competitive Realities

By Kumar, Anil; Turcq, Dominique et al. | The McKinsey Quarterly, Winter 1996 | Go to article overview

Current Research: Indian Automotive Components: The Competitive Realities


Kumar, Anil, Turcq, Dominique, Mercer, Glen, Narasimhan, Laxman, The McKinsey Quarterly


India's automotive industry is accelerating fast. Triggered by market liberalizations that have kicked off a cycle of investment and growth, car demand this decade has been advancing at 20 percent a year. Provided there is no backsliding by policy makers, the domestic market could support sales of up to one million vehicles a year by the end of the century. Many hold high hopes of India also becoming a significant exporter to other LDC markets.

Not surprisingly, the world's car manufacturers are scurrying to sign up Indian partners. General Motors, Peugeot, and Daewoo, to name but three, have all announced joint ventures.

What has received considerably less international attention, however, is the state of India's automotive components industry. The reality is that although Indian demand for car components is likely to quadruple by the turn of the century, India's components industry faces substantial challenges in supporting that growth.

THE STATE OF PLAY

Protectionism. Protectionism has dealt the Indian automotive components industry a weak hand with which to withstand the competitive onslaught that is about to be unleashed.

Government restrictions aimed at limiting consumption and protecting domestic industry have stifled vehicle demand: total annual revenue from all car component production stands at approximately $2.6 billion, representing just 1 percent of the world components market. From such a small industry base, Indian manufacturers will find it hard to capture the economies of scale necessary to compete regionally, let alone globally.

A high level of industry fragmentation will make competing all the more difficult. As a result of regulations designed to favor smaller enterprises, India's 350 or so major component manufacturers generate average revenue of only $4 million a year. Between them, these 350 manufacturers have 96 percent of the market, leaving thousands of small-scale enterprises sorely exposed in a liberalized market (Exhibit A).

Another legacy of protectionism is India's isolation from the world marketplace, a factor that has discouraged investment and restricted access to the new technologies involved in modern car manufacturing.

Insulated from imports by tariffs as high as 100 percent, Indian components manufacturers have had little incentive either to invest or to cut prices or costs. The result has been low volumes, although at high margins. Foreign manufacturers entering India are bound to use their bargaining power to force these margins lower, which will inevitably further limit Indian suppliers' ability to invest and close the gap with global standards.

Quality and technology. And there's a sizable gap to be bridged. India's car manufacturers have to put up with an average 2,900 faulty parts for every million they receive from suppliers - a rate 10 times worse than that enjoyed by leading Western assemblers [ILLUSTRATION FOR EXHIBIT B OMITTED]. Indian component suppliers themselves have to contend in turn with an astonishingly high 31,500 rejects for every million parts delivered from their own sub-suppliers [ILLUSTRATION FOR EXHIBIT C OMITTED].

These rates handicap even the most efficient factories as sorting, testing, and rework come to dominate and distract from the fundamental business of adding value. Quality will have to improve quickly if Indian manufacturers are not to be squeezed out by more advanced foreign firms seeking to capture the market's growth.

Indian suppliers will also have to make great leaps in technical competency. As domestic demand grows for better-performing cars that meet higher regulatory standards, so too will the technical content of components, particularly electronic applications. This will require whole new sets of skills quite alien to traditional "metal-bending" firms.

Low-cost labor. Despite all these drawbacks, a major reason for Western enthusiasm about India's automotive supply base is its low cost position, seen as largely offsetting any quality or technology shortcomings. …

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