From Import Substitution to Integration into Global Production Networks: The Case of the Indian Automobile Industry

By Athukorala, Prema-Chandra; Veeramani, C. | Asian Development Review, September 2019 | Go to article overview

From Import Substitution to Integration into Global Production Networks: The Case of the Indian Automobile Industry


Athukorala, Prema-Chandra, Veeramani, C., Asian Development Review


I.Introduction

The global landscape of the automobile industry has been in a process of notable transformation over the past 3 decades. Until about the late 1980s, automobile production remained heavily concentrated in the United States, Japan, and Western Europe (known as the "triad"). While the leading automakers headquartered in the triad had assembly plants in many developing countries, most of these plants served domestic markets under heavy tariff protection. Since then the industry has become increasingly globalized, driven by a combination of technological advances in the industry, changes in global demand patterns, and widespread trade and investment reforms in the developing world (Shapiro 1994, Humphrey and Memedovic 2003, Klier and Rubenstein 2008, Bailey et al. 2010, Kierzkowski 2011, Amighini and Gorgoni 2014, Traub-Merz 2017).1 On the supply side, production standards have become increasingly universal, accompanied by a palpable shift in production process from generic to modular technology. Consequently, parts and components production has grown rapidly to cater to multiple assemblers. On the demand side, growth prospects for vehicle sales are increasingly promising in emerging market economies, whereas the principal automobile markets in the triad have been rapidly approaching a point of saturation in recent years. These structural changes in the global automobile industry have led automakers to set up new assembly bases in countries with large domestic markets to serve regional markets. With this regional focus, carmakers tend to consolidate their assembly facilities within a region and decide which models to produce at which locations (country), at what prices and quality standards, and for which markets (either regional or global). The process of trade and investment liberalization across the world has facilitated this global spread, creating costefficient plants aimed at global markets.

This massive transformation in the structure, conduct, and performance of the world automobile industry has opened opportunities for countries in the periphery to join the global automobile production network. However, an important unresolved question is whether the government in these countries should follow the conventional "carrot and stick" (activist) approach to promote export orientation of indigenous industries with significant domestic value added or a "market-conforming" approach in which multinational enterprises (MNEs) play the leading role in integrating domestic industry into global production networks (GPN).

The purpose of this paper is to contribute to this policy debate by examining the emergence of India as a significant production hub within global automobile networks. The Indian automobile industry is an ideal case study of this subject given the government's long history of protecting domestic industry and the significant structural changes following liberalization reforms that were initiated in the early 1990s and gathered momentum from about 2000. For over a half a century from the late 1940s, the Indian automobile industry remained a canonical example of a high-cost industry that evolved and survived under heavy trade protection. However, over the past 2 decades, the industry has shown promising signs of gaining significant capabilities and global competitiveness through integration into GPNs. Most of the world's leading automakers now have well-established production bases in India. According to data reported by the International Organization of Motor Vehicle Manufacturers (OICA), India's ranking among automobile producing countries increased from 16th to 6th between 1999 and 2017, and its share in global passenger car production (in terms of number of cars) increased from 1.3% to 5% (OICA 2017).

A study of the automobile industry is also relevant for the policy debate in India given its contrasting growth experience compared to other major manufacturing industries in the country. …

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