Working Paper No. 201

Determinants of Competitiveness of the Indian Auto Industry

Badri Narayanan G. Pankaj Vashisht

January 2008

INDIAN COUNCIL FOR RESEARCH ON INTERNATIONAL ECONOMIC RELATIONS

Contents Foreword............................................................................................................................. i Executive Summary .......................................................................................................... ii 1. Literature Review ..................................................................................................... 1 1.1 Introduction......................................................................................................... 1 1.2 Literature Review................................................................................................ 2 1.2.1 Global Comparisons ................................................................................... 3 1.2.2 Policy Environment and Evolution of Indian Auto Industry....................... 4 1.2.3 Productivity................................................................................................. 7 1.2.4 Aspects Related to Supply Chain and Industrial Structure......................... 7 1.2.5 Technology and Other Aspects ................................................................. 10 1.3 Contributions of the Study ................................................................................ 13 Supply Side Features of Indian Auto Sector ........................................................ 14 2.1 Organised Auto Sector in India......................................................................... 14 2.2 Unorganised Auto Sector in India..................................................................... 22 2.3 Conclusions...................................................................................................... 26 Aspects related to Domestic Demand.................................................................... 28 3.1 Sales of Automobiles ........................................................................................ 28 3.2 Price Indices of Automobiles............................................................................ 35 3.3 Conclusions....................................................................................................... 37 India’s Trade in Automobile and Components.................................................... 38 4.1 Exports from India ............................................................................................ 38 4.2 Imports to India................................................................................................. 44 4.3 Conclusions....................................................................................................... 49 Global Comparisons ............................................................................................... 50 5.1 Production ......................................................................................................... 50 5.2 Export Performance of Selected Countries....................................................... 53 5.3 Tariff Structure.................................................................................................. 56 5.4 Free Trade Agreements: The case of Indo-Thai FTA....................................... 56 5.5 Conclusions....................................................................................................... 59 Field Survey............................................................................................................. 60 6.1 Objectives ......................................................................................................... 60 6.2 Market Structure and Competitiveness............................................................. 60 6.2.1 Market Structure ...................................................................................... 60 6.2.2 Aspects of Competitiveness ...................................................................... 61 6.3 Employment-related Aspects ............................................................................ 64 6.4 Capacity Utilisation .......................................................................................... 66 6.5 Aspects Related to Supply Chain...................................................................... 67 6.6 Production-related Constraints.......................................................................... 69 6.6.1 Transport Infrastructure ........................................................................... 69 6.6.2 Power ........................................................................................................ 70

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6.6.3 Labour....................................................................................................... 70 6.6.4 Materials ................................................................................................... 70 6.6.5 Taxation and Incentives ............................................................................ 70 6.6.6 Environment.............................................................................................. 71 6.6.7 Other Constraints...................................................................................... 71 6.7 Strategies of Different Firms ........................................................................... 71 6.7.1 Strategies of OEMs ................................................................................... 71 6.7.2 Strategies of Auto-component Firms ........................................................ 72 6.8 Policy Measures ................................................................................................ 73 6.9 Conclusions....................................................................................................... 74 7. Policy Framework Surrounding the Indian Auto Sector.................................... 76 7.1 Evolution of the Policy Framework.................................................................. 76 7.2 Emission and Safety Standards......................................................................... 79 7.3 Inter-State Differences in Policies .................................................................... 80 7.3.1 Tax Policies...................................................................................................... 80 7.3.2 Subsidies .......................................................................................................... 80 7.3.3 Other Provisions .............................................................................................. 81 7.4 Conclusions....................................................................................................... 81 Impact of Fiscal and Trade Policies on the Indian Auto Sector ......................... 82 8.1 Excise and Customs Duties............................................................................... 82 8.2 Effective Rates of Protection ........................................................................... 84 8.3 Conclusions....................................................................................................... 86 Econometric Analysis: Policies and Strategies..................................................... 87 9.1 Technical Efficiency and its Determinants: Stochastic Frontier Analysis........ 87 9.2 Determinants of Cost Competitiveness: Panel Data Analysis .......................... 89 9.3 Determinants of Market Shares ........................................................................ 91 9.4 Implications for Policies and Strategies............................................................ 93

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10. Policy Recommendations...................................................................................... 102 References...................................................................................................................... 106 Appendix 1: Supply Side Features .............................................................................. 109 Appendix 2: India’s Trade of Auto Products ............................................................. 125 Appendix 3: Field Survey............................................................................................. 131 Appendix 4: Econometric Analysis ............................................................................. 140

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List of Tables Table 2.1.1: Recent Annual Average Growth Rates in Indian Auto Industry .................. 15 Table 2.1.2: Comparison of Growth Rates in Emoluments and Labour Productivity...... 16 Table 2.1.3: Import Content of Indian Auto Industry....................................................... 21 Table 2.2.1: Annual Average Growth Rates in Unorganised Auto Sector: 1994-95 to 2000-01 .......................................................................................................... 23 Table 2.2.2: Performance of Unorganised Auto Sector.................................................... 23 Table 2.2.3: Comparison of Organised and Unorganised Auto Sectors ........................... 24 Table 2.2.4: Comparison of Growth rates of Organised and Unorganised Sectors: 1994-95 to 2005-06...................................................................................................... 25 Table 3.1.1: Growth Rates in Auto Sales (in %, based on Number of Vehicles sold) ..... 31 Table 4.1.1: Growth Rates of Aggregate Auto Exports (in %, based on value in Rs. lakh at constant prices, base 1993-94)................................................................... 39 Table 4.1.2: Growth Rates of Exports of Different Vehicle Segments (in %, based on value in Rs. lakh at constant prices, base 1993-94) ....................................... 39 Table 4.1.3: Growth Rates of Exports of Different Auto-component Categories (in %, based on value in Rs. lakh at constant prices, base 1993-94)........................ 40 Table 4.1.4: Growth Rates of Region-wise Auto Exports (in %, based on value in Rs. lakh at constant prices, base 1993-94)................................................................... 42 Table 4.1.5 : Growth Rates of Region-wise Vehicle Exports (in %, based on value in Rs. lakh at constant prices, base 1993-94) ........................................................... 42 Table 4.1.6: Growth Rates of Region-wise Auto-Component Exports (in %, based on value in Rs. lakh at constant prices, base 1993-94) ....................................... 43 Table 4.2.1: Growth Rates in Imports of Vehicles and Components (in %, based on value in Rs. lakh at constant prices, base 1993-94)................................................. 45 Table 4.2.2: Segment-wise Growth Rates in Imports of Vehicles (in %, based on value in Rs. lakh at constant prices, base 1993-94)..................................................... 45 Table 4.2.3: Category-wise Growth Rates in Imports of Auto-components (in %, based on value in Rs. lakh at constant prices, base 1993-94) ....................................... 46 Table 4.2.4: Growth Rates of Region-wise Auto-component Imports to India (in %, based on value in Rs. lakhs at constant prices, base 1993-94). ............................... 48 Table 5.1.1: Region-wise Production of Motor Vehicles (in Number) ............................ 50 Table 5.1.2: Region-wise Production of Passenger Cars.................................................. 51 Table 5.1.3: Region-wise Production of Buses and Coaches ........................................... 52 Table 5.1.4: Region-wise Production of Light Commercial Vehicles.............................. 52 Table 5.1.5: Region-wise Production of Heavy Trucks.................................................... 53 Table 5.3.1: Comparison of Tariff Structure of Auto Products in Different Countries (2004-05). ...................................................................................................... 56 Table 5.4.1: Indo-Thai Trade in Auto-Components in the recent years (in Rs. lakh, Current Prices). .............................................................................................. 57 Table 5.4. 2: Vehicle Possession in Different Countries .................................................. 59 Table 6.2.1: Cost Composition of Firms Covered in the Survey...................................... 64 Table 6.3.1: Aspects Related to Employment................................................................... 66 Table 8.1.1: Recent Trends in Tariff Structure in Indian Auto Industry .......................... 84 Table 8.2.1: Effective Rates of Protection in percentage.................................................. 85

Table 9.1.1: Determinants of Technical Inefficiency in Indian Automobile Firms.......... 95 Table 9.1.2: Determinants of Technical Inefficiency in Indian Auto-component Firms.. 96 Table 9.2.1: Determinants of Cost Competitiveness of Automobile Firms...................... 97 Table 9.2.2: Determinants of Cost Competitiveness of Auto-component Firms.............. 98 Table 9.3.1: Determinants of Market Shares of Automobile Firms ................................. 99 Table 9.3.2: Determinants of Market Shares of Auto-component Firms ....................... 100 Table 9.3.3: Other Determinants of Market Shares of Auto-component Firms ............. 101

List of Figures Figure 2.1.1: Market Concentration (HHI) in Indian Auto Industry ................................ 15 Figure 2.1.2: Labour Intensity in Indian Auto Industry (number of employees per Rs. crore of output at constant 1993-94 prices) ................................................... 16 Figure 2.1.3: Composition of Input Cost: Manufacture of ............................................... 17 Figure 2.1.4: Composition of Input Cost: Manufacture of ............................................... 17 Figure 2.1.5: Composition of Input Cost: Manufacture of Bodies, Parts & ..................... 18 Figure 2.1.6: Capacity Utilisation in Indian Automobile Industry ................................... 18 Figure 2.1.7: Role of Foreign Equity Participation in Indian Auto Industry (2000-01 to 2005-06)......................................................................................................... 20 Figure 2.1.8: Export Intensity in Indian Auto Industry .................................................... 22 Figure 2.2.1: Comparison of Cost structure in Organised and Unorganised Auto Sectors ....................................................................................................................... 25 Figure 3.1.1: Domestic Sales of Automobiles (Number) ................................................. 28 Figure 3.1.2: Domestic Sales of Passenger Vehicles (Number) ....................................... 29 Figure 3.1.3: Domestic Sales of Commercial Vehicles (Number) ................................... 29 Figure 3.1.4: Domestic Sales of Two-Wheelers (Number) .............................................. 30 Figure 3.1.5: Sales of Scooters in terms of ....................................................................... 32 Figure 3.1.6: Sales of Motorcycles in terms of ................................................................. 32 Figure 3.1.7: Sales of Motorcycles in terms of ................................................................. 32 Figure 3.1.8: Sales of Motorcycles in terms of ................................................................. 33 Figure 3.1.9: Sales of Mopeds (Engine Capacity Emoluments per Worker Capital Intensity Capital Productivity Labour Productivity Total Factor Productivity 1973-74 to 1980-81 4W 2.4 10.22 -7.77 1.65 -1.91 2/3W 2.66 11.99 -1.33 0.43 -1.42 Total 2.53 11.11 -4.55 1.04 -1.67 1981-82 to 1990-91 4W 3.13 8.31 -0.59 7.74 1.05 2/3W 3.28 10.97 -1.13 9.72 1.13 Total 3.21 9.64 -0.86 8.73 1.09 1991-92 to 2005-06 4W 2.27 9.91 -1.06 8.75 0.47 2/3W 3.87 5.77 4.09 10.11 1.84 Total 3.07 7.84 1.52 9.43 1.16

Source: Calculations from Annual Survey of Industries (2000-01 to 2003-04), SIAM and ACMA Statistics Notes: 1. Emoluments is in Rs. crore at constant 1993-94 prices 2. Labour productivity is the ratio of output in Rs. crore at constant 1993-94 prices to employment 3. Capital intensity is the ratio of capital Rs. crore at constant 1993-94 prices to employment 4. Capital productivity is the ratio of output to capital, both in Rs. crore at constant 1993-94 prices 5. Total Factor Productivity is measured by translog index, explained in Appendix 1 6. ‘2/3W’ stands for ‘Manufacture of Two-/Three-Wheelers and Their Accessories’ and ‘4W’ stands for ‘Manufacture of Four-Wheelers and Their Accessories’

Figure A1.2.19 shows the trends in profit rate in the Indian auto sector. For automobiles, the profit rates have been fairly stable till the mid-1990s, after which they declined gradually to zero in 2000. Since then, the profit rates have been on the rise in this sector. Two-wheeler and three-wheeler manufacturers had been facing declining profit rates till 1990, when they had suffered heavy losses, after which the profit rates were on the rise, except for a short slump in the late 1990s. Figure A1.2.19: Profit Rates in Indian Auto Industry
20 15 10 5 0 -5 -10

Source: Calculations from Annual Survey of Industries (1979-80 to 2003-04), Annual Reports of Auto Companies and our Field Survey Note: Ratio of profits to value of output, in constant 1993-94 prices

19 79 -8 0 19 81 -8 2 19 83 -8 4 19 85 -8 6 19 87 -8 8 19 89 -9 0 19 91 -9 2 19 93 -9 4 19 95 -9 6 19 97 -9 8 19 99 -0 0 20 01 -0 2 20 03 -0 4 20 05 -0 6
Automobiles & accessories 2 / 3 Wheelers & Accessories

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Analysis Based on Prowess Data Table A1.2.3 shows the segment-wise profitability of the Indian auto industry and compares it with some other industrial sectors. It can be seen that the passenger car and two- wheeler segments are not only the most profitable segments of the Indian auto industry but their profitability is also higher than the profitability of many other industrial sectors of India. In contrast, the profitability of commercial vehicles segment is much lower95. Interestingly, despite the tariff reforms, the auto ancillaries segment has maintained a healthy profit rate, which indicates the growing competitiveness of this sector. Table A1.2.3: Profitability* of selected Indian industries
Industry 2004-05 2005-06 2006-07 Machine tools 4.73 14.09 9.28 Generators, transformers & switchgears 7.14 8.84 9.07 Passenger cars & multi utility vehicles$ 6.07 7.26 8.95 Material handling equipments 7.26 8.14 8.86 Industrial machinery 5.44 8.29 8.80 Electronics -1.52 -0.35 8.35 @ Two-Wheelers 9.05 9.92 8.10 Food & beverages 5.61 5.42 7.94 Automobile ancillaries 7.40 6.60 7.19 Air-conditioners & refrigerators -5.48 2.44 7.11 Textiles 0.14 3.77 5.62 Industrial furnaces 6.02 3.37 5.54 Chemicals 4.65 4.36 5.46 Commercial vehicles# 5.48 6.34 5.30 Wires & cables -6.96 5.04 5.15 Dry cells & storage batteries 4.66 6.61 4.32 Misc. electrical machinery -7.93 0.34 3.09 Domestic electrical appliances -0.29 3.10 2.67 Source: CMIE, Prowess. Note: The industries are ranked according to their profitability in 2006-07. * Profitability is defined as profit after tax as ratio of sales. # Tata motors is included in commercial vehicle manufacturers not in passenger vehicle manufacturers. @ Combined profitability of top four two wheelers, which account for more than 90 per cent market. Share. $ Combined profitability of five major passenger cars and utility manufacturers, which accounts for more than 85 per cent of market share.

Based on our calculations from the annual reports of different companies, Table A1.2.4 shows that growth rates of sales in value terms (current prices) have been very impressive for most of the two-/three-wheeler manufacturers in the recent years. Maharashtra
95

It is worth to mention that the profitability of Tata motors is significantly higher than the other commercial vehicle manufacturers. It may be because of its presence in passenger car segment, which is more profitable as compared to commercial vehicle segment. 119

Scooters, Kinetic Group and LML are the only players that have seen a persistent decline in turnover in the recent years.96 Majestic and Atul Auto have been growing tremendously, while the bigger players, namely, TVS, Hero Honda and Bajaj have been growing at reasonably high rates. However, all companies except Hero Honda and VCCL have seen lower growth in sales, output and capital during 1996-2005, than that during 1988-95. There are many instances of negative growth in the smaller companies. The growth rates in production for these companies are more or less in tandem with those in sales. However, inventories have also been growing at rates comparable to those of sales and production for almost all players, excluding LML and Majestic. Growth in emoluments has been rather modest, except for a few companies in a few years, in comparison with the growth rates of sales and output. Nevertheless, there are a fewer instances where emoluments have declined, than those where with sales and production have declined. As explained in another context in this section below, this indicates the stringency of labour regulations. Dramatic growth of R&D expenses can be seen in a few years for Maharashtra Scooters, Atul Auto, Bajaj and Majestic Auto, but all companies including these have seen a decline in R&D expenses in many years. Huge investments have come in this segment in the 1990s and there is a rising trend in investment in the recent years in most companies. Though the growth trends in R&D expenses show a lot of dynamics, the actual share of R&D in the turnovers of different companies has not been rising very dramatically, with exceptions. From less than 0.5 per cent in 1988-89, Bajaj and LML have increased their R&D shares to 1 per cent. Hero Honda has raised its R&D share from 0 per cent in 198889 to about 2 per cent in 2005-06. Kinetic Engineering has had the all-time high shares of R&D expenditure from 1993-94 to 1995-96, the peak being over 3.5 per cent in 1994-95. Export shares in turnover have been the highest for Majestic Auto for the past two decades, varying between 5 and 33 per cent. Kinetic Engineering is also more exportoriented than many other players in a few years, including the latest one – 2005-06. Kinetic Motor, LML and Bajaj have been 5-12 per cent export-oriented in most of these two decades. TVS and Hero Honda had export shares of 2-7 per cent in this period. Other players had negligible export shares. Hero Honda, Bajaj and Maharashtra Scooters have profit rates of 10-15 per cent in most of the period between 1988-89 and 2005-06. LML, Majestic Auto and Kinetic group have faced losses for many years in this period, while TVS has been earning 0-5 per cent profits since the early 1990s, after suffering losses for two years before this.

96

Inferences on Auto Companies are made from both Table A1.2.1 and the annual growth rates, which are not reported in this report, owing to space constraint. 120

Table A1.2.4: Average Annual Growth Rates (%) in Major Two-/Three-Wheeler Companies Name of the Company Atul Auto Bajaj Auto Hero Honda Motors Kinetic Engg. Kinetic Motor LML Maharashtra Scooters Majestic Auto Scooters India TVS Motor Co. VCCL Average Period Sales Output Inventory Emolument R&D Capital R&D Export Growth Growth Growth Growth Growth Growth as a as a % % of of Sales Sales N.A. N.A. N.A. N.A. N.A. N.A. 0.00 0.00 48.40 46.12 38.38 -66.67 25.56 33.86 0.01 0.19 25.82 26.17 23.42 19.98 8.11 15.30 0.60 4.45 12.57 13.08 5.19 14.83 4.32 9.31 1.02 7.38 29.23 28.11 35.92 19.30 20.48 14.70 0.08 2.25 32.43 31.11 28.60 28.89 15.38 24.44 0.28 2.74 14.09 14.19 19.97 -50.25 8.44 16.25 1.00 4.66 1.08 -1.02 5.26 15.35 11.33 9.32 1.46 6.76 21.98 21.88 26.46 348.00 28.67 14.20 0.10 4.85 -1.67 -3.05 9.94 18.19 0.22 11.16 1.07 5.52 20.84 20.67 17.46 28.36 18.20 7.88 0.05 3.95 -8.61 -5.14 17.31 39.43 3.44 15.19 1.05 4.75 14.70 14.94 19.16 N.A. 13.05 8.06 0.00 0.00 -16.65 -15.00 3.60 N.A. 27.99 8.78 0.00 0.00 35.34 32.84 25.97 -100.00 33.31 20.71 0.11 14.82 25.33 21.61 20.76 75.93 -5.00 9.75 0.53 13.86 39.89 41.33 10.50 N.A. 13.86 1.50 0.00 4.78 8.01 8.66 8.82 12.22 6.23 6.22 0.14 0.77 22.63 22.39 17.42 38.93 10.35 15.48 0.39 3.00 20.25 19.04 21.45 42.99 23.79 26.46 1.59 1.95 -31.84 -34.79 -20.65 N.A. -1.54 -0.17 0.00 6.04 95.79 133.65 -10.11 N.A. -10.86 -0.44 0.00 0.00 19.09 18.56 17.57 45.99 14.97 11.78 0.23 4.49 19.81 22.48 13.89 20.95 10.05 13.49 0.60 3.99 Profit as a % of sales 9.45 5.13 7.79 12.79 4.08 8.90 4.27 -2.15 2.14 -1.63 -0.69 -2.82 7.72 7.30 -1.35 -2.85 -111.88 8.74 2.39 4.68 -302.72 652.26 -37.81 57.47

1988-1995 1996-2005 1988-1995 1996-2005 1988-1995 1996-2005 1988-1995 1996-2005 1988-1995 1996-2005 1988-1995 1996-2005 1988-1995 1996-2005 1988-1995 1996-2005 1988-1995 1996-2005 1988-1995 1996-2005 1988-1995 1996-2005 1988-1995 1996-2005

Source: Calculations from CMIE Prowess Database and Annual Reports of Companies Notes: 1. All values are in Rs. crore in current prices 2. R&D Share, Export Share and Profit Share are the shares of R&D, Export and Profit Expenses in total sales, respectively, in Rs. crore in current prices

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Table A1.2.5: Average Annual Growth Rates in Major Automobile Companies Name of the Company Ashok Leyland Daewoo Motors Eicher Motors Force Motors Hindustan Motors Honda Siel Hyundai Mahindra Maruti Udyog PalPeugeot Swaraj Mazda Tata Motors Average Period Sales Growth 22.80 12.71 72.46 25.79 17.26 26.60 16.22 6.01 13.01 -2.90 22.23 27.40 16.87 13.54 32.51 9.20 N.A. 36.63 12.00 15.75 25.84 14.07 25.44 17.25 Output Growth 24.30 13.32 68.23 31.12 17.10 26.32 16.19 6.27 13.28 -3.19 26.40 32.54 17.14 14.06 31.52 10.33 N.A. 37.08 12.61 15.09 27.34 13.79 25.30 18.59 Inventory Growth 20.88 11.53 190.97 -16.28 14.16 10.88 23.17 4.23 8.60 0.27 11.62 29.89 13.01 9.87 31.34 6.26 N.A. 156.04 17.08 9.54 21.19 8.55 37.82 20.20 Emolument Growth 22.34 10.04 50.26 25.57 27.03 26.97 13.45 10.15 12.89 -1.44 18.21 34.13 12.44 6.76 28.33 10.98 N.A. 131.21 16.49 16.35 16.69 7.71 22.21 24.72 R&D Growth -0.18 8.57 23.04 139.75 N.A. 35.85 30.61 -1.58 -1.04 -1.43 48.26 95.85 -21.24 2.77 -1.68 21.71 N.A. N.A. N.A. -2.76 46.99 7.72 10.93 32.25 Capital Growth 23.94 7.97 36.76 158.27 17.65 20.66 18.19 10.22 8.25 4.96 8.53 23.27 17.54 14.57 30.95 13.07 N.A. 19.50 2.87 8.31 19.85 12.07 19.56 25.12 R&D as a % of Sales 0.33 0.90 0.06 2.58 0.00 1.46 0.99 1.93 0.36 0.47 0.18 0.10 0.05 1.08 0.05 0.38 0.00 0.00 0.00 0.30 0.36 1.47 0.24 0.90 Export as a % of Sales 8.05 7.92 9.47 18.26 4.19 6.49 1.41 1.38 1.90 3.61 0.57 15.79 3.95 3.81 8.77 6.63 0.13 0.12 3.01 4.96 8.89 8.62 5.52 6.51 Profit as a % of sales 3.04 3.60 -3.27 -27.00 1.02 4.23 2.86 0.26 0.19 -2.50 -1.36 3.20 2.80 5.41 3.54 4.34 9.41 -29.30 -1.02 2.63 4.41 2.79 1.51 -2.81

1988-1995 1995-2005 1988-1995 1995-2005 1988-1995 1995-2005 1988-1995 1995-2005 1988-1995 1995-2005 1995-2005 1995-2005 1988-1995 1995-2005 1988-1995 1995-2005 1988-1995 1995-2005 1988-1995 1995-2005 1988-1995 1995-2005 1988-1995 1996-2005

Source: Calculations from CMIE Prowess Database and Annual Reports of Companies Notes: 1. All values are in Rs. crore in current prices 2. R&D Share, Export Share and Profit Share are the shares of R&D, Export and Profit Expenses in total sales, respectively, in Rs. crore in current prices

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Table A1.2.5 shows the trends for major automobile companies, other than two-/threewheeler manufacturers. The trends for the companies that are exclusively engaged in manufacture of Commercial Vehicles (CV) are almost correlated and quite cyclical in nature. In the past two decades, 1992-93, 1998-99 and 2004-05 have been the only periods where sales has seen a decline in most CV manufacturers. Production has grown more or less in tandem with sales in most companies in this period. However, inventories growth has always been quite high, though it has declined in a few years for some companies. Further, the rates of decline are much lower than those of growth. Growth in emoluments has not been as high as that in production and sales. Nevertheless, decline in emoluments could be seen only in Force Motors for two years. This is perhaps because of the stringent labour regulations that do not allow a proportionate reduction in employment when there is a slump, and that discourages the companies from recruiting many permanent workers during booms. Growth in R&D expenses is too low to comparable to that in other indicators. In fact, this has declined in many years for the CV manufacturers. Nevertheless, growth rates are impressive (around 100 per cent) for a few companies in specific years. However, the share of R&D expenditure in sales has grown to 2-5 per cent from zero for all CV manufacturers other than Swaraj Mazda, which has an R&D share of less than 1 per cent. It is impressive to note that there has been a secular growth in capital of commercial vehicle manufacturers for the past two decades. Ashok Leyland appears to have gradually reduced its capital growth over the years, while it has still increased after 2004-05. Swaraj Mazda has seen capital growth rates that are lower than most other CV majors, while Eicher appears to be the leading investor among these, despite the fact that it has reduced its capital in 2005-06. Export shares of CV majors have been relatively lower for the entire time period considered. While Swaraj Mazda and Force Motors have always exported 0-10 per cent of their sales, Ashok Leyland and Eicher have exported more than 10 per cent in the recent past. However, in 2005-06, export shares of all the four companies are less than 8 per cent. This indicates that Indian CV players are either not very keen on expanding their export markets or not very competitive in international arena. This could also be due to the fact that their products are more catered to the conditions of countries similar to India. Ashok Leyland is the only company which has been profitable during the entire period. Other companies have faced losses for a year or two each, in the 1990s, but are profitable in 2005-06. Eicher is the most profitable, with a profit rate of 12 per cent, while others have a profit rate of less than 6 per cent, in 2005-06, and even before, over the past 18 years. Including Mahindra and Mahindra (M&M) and Tata Motors along with other passenger vehicle manufacturers in India, we examine the performance of other auto manufacturers in the remaining part of this section. Hindustan Motors has been suffering from sales decline since 2000, while all other companies have been performing well for the past few years. Maruti (except in 2001), Honda Siel and Hyundai have never seen a decline in

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sales in the period considered. Production growth trends are quite similar to these trends. However, the growth rates in production have been usually higher than those in sales. This observation is confirmed by the relatively higher growth rates of inventories for most companies. Contrary to two-/three-wheelers and CV manufacturers, other auto manufacturers have seen higher growth rates in emoluments. While M&M, Hindustan and Honda Siel cars have seen huge decline in R&D expenditure in a few years, all companies have witnessed high growth rates for some years. However, this trend of high growth rates in R&D does not get much translated into dramatic increases in R&D expenditure as a share of turnover. Other than Tata Motors and M&M, which have increased their R&D shares from 0 per cent in 1988-89 to 2 per cent and 1.5 per cent respectively in 2005-06, all other auto manufacturers have 0-0.8 per cent R&D share. There is a secular trend of growing capital for the past two decades in other auto manufacturers. The only exception to this trend has been Hindustan Motors in 2000-01. Hyundai has been a striking outlier in terms of export share. While its export share in turnover is about 40 per cent in 2005-06, all other auto majors are far behind, with 0-10 per cent shares. Both Maruti and Tata have been exporting 5-10 per cent of their total sales, while M&M exports around 5 per cent for the past few years. All companies except Hindustan Motors have been profitable since 2001-02. M&M, Maruti and Tata have been profitable for almost all the 18 years, while Hyundai and Honda Siel have been profitable after the initial period of 1-3 years that took for them to break-even. A striking observation is that most of these companies enjoy a profit rate of 5-10 per cent, which has been increasing in the past few years.

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Appendix 2: India’s Trade of Auto Products A2.1 Exports from Indian Auto Industry

Figure A2.1.1 dwells more on vehicle exports from India, taken in isolation. Exports of cars has been growing along aggregate vehicle exports, while all other vehicle categories, except the negligible and stagnant Special Purpose Vehicle exports, have seen a gradual increase since 2001-02. As Figure A2.1.2 shows, cars are the major segment of exports, followed by two-wheelers. Commercial Vehicles, Tractors and Public Transport Vehicles comprise almost equal shares of around 10 per cent. Share of two-wheeler exports has fallen from 34 per cent in 2002-03 to 15 per cent in 2005-06. Share of public transport vehicles has dropped from 24 per cent in 1999-2000 to 9 per cent in 2005-06, while that of CVs has fallen from 19 per cent in 2000-01 to 10 per cent in 2005-06. On the other hand, the share of cars has risen from 32 per cent in 2000-01 to 56 per cent in 2005-06 and that of tractors has grown from 4 per cent in 1997-98 to 10 per cent in 2005-06. Figure A2.1.1: Trends in Indian Vehicle Exports (in Constant 1993-94 Prices, Rs. lakh)
600000 500000 400000

Figure A2.1.2: Composition of Indian Vehicle Exports
100% 21 80% 12 60% 16 15 13 19 17 51 50 45 38 32 33 24 6 19 7 38 18 18 20 22 19 31 34 5 60 54 56 6 18 10 15 10

300000 200000 100000 0

40%

20% 0% 11 5 12 4 17 6

10 10

10 12

8 8

9 8

9 10

-9 7

-9 8

-9 9

-0 0

-0 1

-0 2

-0 3

-0 4

-0 5 04 20 20

01

03

19

19

19

19

20

20

20

20

05

02

96

97

98

99

00

-0 6

-9 7

-9 8

-9 9

-0 0

-0 1

-0 2

-0 3

-0 4

-0 5 04 20 20

96

00

01

99

02

19

19

20

19

19

20

20

Total Vehicles Cars Tw o Wheelers

Tractors Commercial Vehicles

Public Transport Vehicles Special Purpose Vehicles

Tractors

Public Transport Vehicles

Cars

Commercial Vehicles

20

03

97

Two Wheelers

Source: Calculations from Directorate General of Foreign Trade Website

Since CV segment is one of the major segments of the Indian auto industry, it is essential to look further into this segment so as to figure out the sources of its decline in export share. Figure A2.1.3 shows the exports from sub segments of CV sector. It clearly emerges that there has been a structural change in Indian CV exports, as LCV has emerged as the major export item, with its export share in CV segment rising from a mere 31 per cent in 1996-97 to 65 per cent in 2005-06. This has been facilitated by shrinkage of export share of MCVs from 46 per cent in 1996-97 to a mere 18 per cent in 2005-06 and also a reduction of HCV’s share from 7 per cent in 1997-98 to 4 per cent in 2005-06. Figure A2.1.4 illustrates the trends of exports of Indian auto-components, in constant 1993-94 prices. Each of the categories of auto-component exports has been less than Rs. 800 crore, except the category ‘other auto-components’, as mentioned in IHS classification, which comprises over Rs. 2,000 crore in 2005-06.

05

98

-0 6

125

Figure A2.1.3: Composition of the Exports of Commercial Vehicles
100% 19 80% 3 44 46 40% 67 20% 43 31 72 75 56 56 53 61 5 7 2 3 27 0 3 25 5 2 18 39 37 5 0 4 3 12 1 35 12 3 24 13 4 18

60%

65

0%

19 96 -9 7

19 97 -9 8

LCV

19 98 -9 9

19 99 -0 0

MCV

20 01 -0 2

20 00 -0 1

HCV

20 02 -0 3

20 03 -0 4

Source: Calculations from Directorate General of Foreign Trade Website

Figure A2.1.4: Trends in Indian Autocomponent Exports (in Constant 199394 Prices, Rs. lakh)
600000 500000

Figure A2.1.5: Composition of Indian Auto-component Exports97
100% 28 80%

31

31

31

33

20 04 -0 5

Other

36

35

20 05 -0 6
41 41

44

400000
60%

2 12

2 12 17 4

2 15 12 7 21 4 5 3 2

1 16 13 7 18 3 4 4 2

1 17 9 6 18 4 5 6 2

1 15 8 5 18 7 4 3 2

1 17 5 4 20 6 4 5 3 2 19 6 5 11 6 4 4 2 2 14 6 5 14 7 3 5 3 1 12 6 5 11 7 4 8 3

300000
24

200000

40% 4

100000
20% 17 4 3 3 3

21 4 4 3 2

0 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
0%

1996-97
Total Suspension & Braking Parts Rubber & Plastic Parts Motorcycle Parts Electrical parts Bumpers Bodies& Chassis Others Drive transmission & Steering parts Engine Parts Screw & Springs
Electrical parts Bumpers

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

Drive transmission & Steering parts Engine Parts Screw & Springs

Suspension & Braking Parts Rubber & Plastic Parts Motorcycle Parts

Bodies& Chassis Others

Source: Calculations from Directorate General of Foreign Trade Website

Figure A2.1.5 shows that the share of exports of bodies and chassis has dropped tremendously from 24 per cent in 1996-97 to 6 per cent in 2005-06. Rubber and plastic auto-parts have grown from 4 per cent in 1996-97 to 5 per cent in 2005-06, despite having declined from 7 per cent in 1999-2000. Bumpers have grown from 4 per cent in 1996-97 to 7 per cent in 2005-06. Screws, springs, forgings and stampings have maintained a share of 12 per cent in 1996-97 and 2005-06, but with the share going up to 17 per cent in 2000-01. Engine parts have grown rapidly from 17 per cent in 1996-97 to 21 per cent in both 1997-98 and 1998-99, but declined then on to 11 per cent in 2005-06. Export share of suspension and braking parts is almost stagnant at 3-5 per cent
97

Here, around 130 items at 8-digit level of H.S. code, from chapters 39, 40, 70, 73, 84, 85 and 87, are clubbed into 10 broad categories. This was based on our discussions with ACMA. 126

throughout the period. Export share of drive transmission and steering parts has gone up from 1 per cent in 1996-97 to 8 per cent in 2005-06. Share of electrical parts has been stagnant at around 2-3 per cent throughout this period. Figure A2.1.6 illustrates the region-wise trends in automobile exports from India. Exports to all regions except rest of Asia and Europe have declined from 1996-97 to 2000-01 and have increased steeply since 2000-01 onward.

Figure A2.1.6: Region-wise Trends in Indian Automobile Exports (in Constant 1993-94 Prices, Rs. lakh)
120000 100000 80000

Figure A2.1.7: Region-wise Composition of Indian Automobile Exports

100% 16 80% 1 14 8 9 26 6 5 9 9 4 7 20 3 16 18 12 7 4 32 20

60%

60000
40%

10 2

40000 20000 0 1996-97 EU LATIN AMERICA ASEAN 2000-01 REST OF EUROPE MIDDLE EAST REST OF ASIA 2005-06 NORTH AMERICA AFRICA OTHER
EU MIDDLE EAST 20% 39

0% 1996-97 2000-01 REST OF EUROPE AFRICA NORTH AMERICA ASEAN 2005-06 LATIN AMERICA REST OF ASIA

Source: Calculations from Directorate General of Foreign Trade Website

Figure A2.1.8: Region-wise Trends in Indian Auto-component Exports (in Constant 1993-94 Prices, Rs. lakh)
180000 160000 140000 120000 100000 80000 60000 40000 20000 0 1996-97 EU LATIN AMERICA ASEAN 2000-01 REST OF EUROPE MIDDLE EAST REST OF ASIA 2005-06 NORTH AMERICA AFRICA OTHER

Figure A2.1.9: Region-wise Composition of Indian Auto-component Exports

100% 20 80% 10 8 60% 13 3 40% 25 2 20% 1 21 0% 1996-97 EU MIDDLE EAST 2000-01 REST OF EUROPE AFRICA NORTH AMERICA ASEAN 2005-06 LATIN AMERICA REST OF ASIA 27 30 27 16 5 7 12 4 13 11 8 6 4 25 1

Source: Calculations from Directorate General of Foreign Trade Website

A2.2

Imports of Auto Products by India

Figure A2.2.1 shows the trends in imports of different categories of vehicles. Car imports have been rising steeply, while other imports have not been growing much. Figure A2.2.2

127

illustrates the growth of different segments of India’s vehicle imports. Cars have been the major import category all these years, though its share has declined from 85 per cent in 1996-97 to 59 per cent in 2001-02 and increased to 78 per cent in 2005-06. Figure A2.2.1: Trends in Imports of Vehicles (in Constant 1993-94 Prices, Rs. lakh)
60000 50000 40000
60%

Figure A2.2.2: Composition of India’s Vehicle Imports
100% 9 0 80% 6 2 13 5 8 11 4 4 3 9 9 5 3 14

18

24

19

18

30000
85 86 73

20000 10000 0 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 Tractors Commercial Vehicles Total Public Transport Vehicles Special Purpose Vehicles Cars Tw o Wheelers

40%

63

64

83 59

91 75 78

20% 1 4 1 3 3 6 4 6 2 6 1 5

0%

0 1

0 2

0 1

0 3

1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 Tractors Commercial Vehicles Public Transport Vehicles Special Purpose Vehicles Cars Tw o Wheelers

Source: Calculations from Directorate General of Foreign Trade Website

Rapid growth of import of commercial vehicles, which has been happening in the recent years, warrants attention, because the tariffs have been cut every year in this segment, the latest cut being in 2007-08 to 10 per cent. Figure A2.2.3 shows that MCVs have been the major constituents of commercial vehicle imports. LCVs have been prominent only in 1997-98 and 2000-01, while HCVs have been prominent in many recent years. This Figure gives an impression that import of LCVs should not be a major threat to the domestic industry, while reasons for rising imports HCVs and MCVs should be examined further by the domestic CV manufacturers. Figure A2.2.3: Sub-segment-wise Trends in Imports of Commercial Vehicles
100% 0 25 80% 50 60% 100 40% 41 88 49 33 30 28 6 2 57 22 57 72 91 90 40 67 1 11 1 13 0 2 1 6 1 8

20%

0%

5 2 1 0 0 0 0 0 0 1996-97 1997-98 1998-99 1999-00 2001-01 2001-02 2002-03 2003-04 2004-05 2005-06

LCV

MCV

HCV

Other

Source: Calculations from Directorate General of Foreign Trade Website

Figure A2.2.4 shows the import trends of auto-components by India, at constant 1993-94 prices. Even in real terms, auto-component imports have doubled. Engine and its parts has been the major category imported, while others are relatively quite small. Figure
128

A2.2.598 shows that import share of engine and its parts has increased from 25 per cent in 1996-97 to 49 per cent in 2002-03, but has declined since then to 30 per cent in 2005-06. Import share of drive transmission and steering parts has risen from 2 per cent in 1996-97 to 6 per cent in 2005-06. Import share of rubber and plastic parts has risen from 1 per cent in 1996-97 to 5 per cent in 2005-06. Import share of screws, springs, forgings and stampings has gone up from 1 per cent in 1996-97 to 6 per cent in 2005-06. The import share of bumpers has declined from 11 per cent in 1996-97 to 1 per cent 2005-06. It emerges form this figure that engine parts, drive, transmission and steering parts, screws and springs and rubber and plastic parts have been the major imported auto-component items in the recent years. Figure A2.2.4: Trends in Imports of Auto-components (in Constant 1993-94 Prices, Rs. lakh)
450000 400000 350000 300000 250000 200000 150000 100000 50000 0 1996-97 Electrical parts Engine Parts Screw & Springs Others 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Figure A2.2.5: Composition of India’s Auto-component Imports
100% 80%
53 52 42 37 0 4 6 29 0 6 6 37 2 7 6

42

47

48

43

60% 40% 20% 0%
11 3 3 25 2 4 3 5 30 2

1 5 6

1 3 4

1 4 8

2 5 5 30

1 6 5 30

38

38

38

46

49

39

3

3

3

3

5

6

5

8

Drive transmission & Steering parts Rubber & Plastic Parts Bumpers Total

Suspension, Braking & Exhaust Bodies& Chassis Motorcycle Parts

1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
Drive transmission & Steering parts Rubber & Plastic Parts Others Suspension, Braking & Exhaust Screw & Springs Engine Parts Bumpers

Source: Calculations from Directorate General of Foreign Trade Website

Figure A2.2.6 shows that rest of Asia has overtaken the EU as the biggest exporter of automobiles to India, by 2005-06. North America has risen from being a minor exporter in 2000-01 to the third major exporter to India by 2005-06. Figure A2.2.7 shows it more clearly that rest of Asia has increased its share in India’s imported automobiles market more than threefold, from 20 per cent in 1996-97 to 64 per cent in 2005-06. The EU, on the other hand, has lost its share from 64 per cent in 1996-97 to 36 per cent in 200506.The Middle East had increased its share from 7 per cent in 1996-97 to 14 per cent in 2000-01, but this declined rapidly to a negligible share by 2005-06. North America has been maintaining a fairly stable share of around 7-10 per cent during these years.

98

This figure excludes the categories for which the shares are less than 1 per cent 129

Figure A2.2.6: Trends in Region-wise Imports of Automobiles (in Constant 1993-94 Prices, Rs. lakh)
30000 25000

Figure A2.2.7: Region-wise Composition of India’s Automobile Imports
100% 90% 80% 20 1 7 7 19 3 14 10 1 0 7 64 52 35 54

20000 15000 10000 5000 0 1996-97 EU LATIN AMERICA ASEAN 2000-01 REST OF EUROPE MIDDLE EAST REST OF ASIA 2005-06 NORTH AMERICA AFRICA OTHER

70% 60% 50% 40% 30% 20% 10% 0%

1996-97

2000-01

2005-06

EU

NORTH AMERICA

MIDDLE EAST

ASEAN

REST OF ASIA

Source: Calculations from Directorate General of Foreign Trade Website

Figures A2.2.8 and A2.2.9 show that EU (38 per cent), rest of Asia (40 per cent), ASEAN (11 per cent) and North America (8 per cent) are the major exporters of auto-components to India. Steep increase in value of imports from rest of Asia, the EU and ASEAN has occurred since 2000-01. Share of imports from rest of Asia has fallen from 62 per cent in 1996-97 to 40 per cent in 20005-06, on account of the rising share of ASEAN from nowhere in 1996-97 to 11 per cent in 2005-06. Figure A2.2.8: Trends in Region-wise Imports of Auto-components (in Constant 1993-94 Prices, Rs. lakh)
250000 200000 150000
60% 100% 80% 52 50

Figure A2.2.9: Region-wise Composition of India’s Autocomponent Imports
40

100000
40%

1 0 9

50000 0 1996-97 EU LATIN AMERICA ASEAN 2000-01 REST OF EUROPE MIDDLE EAST REST OF ASIA 2005-06
0% 20% 37

4 4 8

11 1 8

31

38

NORTH AMERICA AFRICA OTHER

1996-97

2000-01

2005-06

EU

NORTH AMERICA

LATIN AMERICA

ASEAN

REST OF ASIA

Source: Calculations from Directorate General of Foreign Trade Website

130

Appendix 3: Field Survey Table A3.1 Description of the Structure of the Sample Analysed Products EPDM Rubber Products Stamping Parts and Dies Engines Engine/Transmission Parts (Including FIPs) Interior Parts: Luxury Cars Mechanical Control Cables, Stamping and Plastic Injection Turning Components and Tooling Steering and related parts Automotive Chains Auto Electricals Castings Wheels Clutches Ride-control devices Filters Forgings Gears Brakes Motorcycle components Passenger Cars and MUVs Commercial Vehicles Two-/Three-Wheelers Number of Region Enterprises North India (Delhi, UP, 2 MP, Punjab, Haryana) 1 Bangalore 2 West India Tamil Nadu 2 1 1 1 3 2 5 1 1 1 1 1 2 2 1 1 8 3 3 Total No of Enterprises covered: 45 Number of Enterprises 17 5 11 12

As indicated in Tables A3.1 and A3.2, we have covered firms that deal with a wide range of turnovers and products in different regions. The lowest turnover of auto-component manufacturing firms covered all over India is Rs. 40 lakh per annum, while the highest is over Rs. 3,200 crore and both of these firms are in Haryana. Among the OEMs covered, the lowest turnover is that of a Pune-based OEM at Rs. 60 crore and the highest is Rs. 15,000 crore for a Haryana-based OEM. As shown in Table A3.3, the sample contains auto-component firms established in each of the last five decades, while the OEMs covered were established either in the 1940s or in the 1990s. Almost all firms that have a turnover of Rs. 50 crore and above have subsidiaries or associates. The only small-scale firm in our sample caters to a major player in the region, as a Tier-2 supplier, while all

131

other auto-component firms covered in the survey are either Tier-1 players in India or Tier-2 suppliers for companies abroad or both. Table A3.2: Aspects of Turnover in Different Regions Covered Region North India (Delhi, Haryana, UP, Punjab, MP) Type Auto-component (Average Turnover: Rs. 427.6 crore) OEMs (Average: Rs. 6286 crore) Bangalore (Bangalore city) Auto-Component (Average Turnover: Rs. 270.4 crore) OEM (Average Turnover: Rs 4000 rore) Auto-Component (Average Turnover: Rs. 505.2 crore) Turnover Range Less than Rs. 1 crore Rs. 1 crore-50 crore Rs. 50-100 crore Rs. 100-150 crore Rs. 450-500 crore Rs 3000-3500 crore Rs. 100-150 crore Rs. 3000-4000 crore Rs 4000-5000 crore Rs 10000-15000 crore Rs. 1 crore-50 crore Rs. 50-100 crore Rs. 150-200 crore Rs 3500-4000 crore Number of Firms 1 3 2 2 3 1 1 1 1 2 1 2 1 1 1 1 1 2 1 1 2 2 1 1 1 3 1 1 1 1 1 1

Mumbai, Pune and Kalol, Gujarat

Tamil Nadu

Rs. 1 crore-50 crore Rs. 50-100 crore Rs. 150-200 crore Rs 500-1000 crore Rs 1000-1500 crore OEM (Average Rs. 50-100 crore Turnover: Rs 3622 Rs. 500-550 crore crore) Rs. 8000-9000 crore Auto-Component Rs 1-50 crore (Average Rs. 200-250 crore Turnover: Rs. Rs. 250-300 crore 516.6 crore) Rs 300-650 crore Rs. 650-700 crore Rs. 800-850 crore Rs. 1000-1500 crore OEM (Average Rs 400-500 crore Turnover: Rs Rs. 6000-6500 crore 5164.7 crore) Rs 9000-10000 crore

The sample examined here is, to a large extent, a representative one, covering 70 per cent of the Indian automobile sector and over 20 per cent of the auto-component sector, in terms of turnover. A wide range of auto-component products are included, so that each of

132

them gets a reasonable representation in the study. While we find in the previous section that the output share of unorganised auto-component sector in total auto-component production is roughly 0.08 per cent, the turnover of the only small firm included in our study is Rs. 40 lakh, which is less than 0.08 per cent of the total turnover of our sample auto-component sector. All the major auto industry hubs and some relatively minor hubs have been included: north India (including some parts in Punjab and Madhya Pradesh, which are not major auto hubs), south India (including Bangalore, which is not a major hub) and west India. In terms of export share, there is diversity in the sample covered, as inferred from Table A3.4. Table A3.3: Years of Establishment of Firms Covered Period of Establishment Before 1930 1930-40 1940-50 1950-60 1960-70 1970-80 1980-90 1990-2000 Number of OEMs 0 0 5 0 0 1 3 5 No of Auto-component Manufacturers 1 1 1 6 6 2 10 4

Table A3.4: Export Orientation of Firms Covered Export as a Proportion of Sales 0% 1-10% 10-20% 20-30% 30-40% 40-50% >50% Number of OEMs 3 7 3 0 0 0 1 Number of Autocomponent Manufacturers 8 7 6 4 1 3 2

Questionnaire used in the Field Survey99 1. General Information: a. Name and Address of the Company b. Year of Establishment c. Approximate Annual Turnover d. Ownership Structure: e. Subsidiaries/Associates (If Any)
99

This was designed for OEMs. There is another questionnaire meant for auto-component manufacturers; since most aspects are similar in the two questionnaires, we have excluded this from this report. The differences are noted in this questionnaire in the relevant places. Questions with ‘*’ mark at the end are not relevant for auto-component firms. 133

2. Production Structure: a. Products: b. Total Manufacturing Area (Square Feet) c. Personnel Details: i. Number of Production Employees ii. Number of Supervisory Staff iii. Number of Administrative Staff iv. Number of R&D Employees v. Number of Management Executives d. Installed Capacity and Actual Production of Each Product: e. If Installed capacity is more than Actual Production, what are the reasons for producing less than the potential? f. Has the scale of production been perceived a serious problem (as being too excessive or too limited) in the recent past? i. If yes, what was the context and how was it proposed to be solved? g. Is there any recent addition to the product range and/or individual products? Yes, this year/ Yes, in the past 2 years / Yes, in the past 5 years/ No h. Supplier Details (If Any): i. Products ii. Number of Suppliers for Each Finished/Intermediate Product iii. Expenditure and Output Shares of Suppliers iv. Role of Suppliers in Timely Delivery of Products to Customers Excellent/Good/Satisfactory/Poor v. Do you think Indian component-manufacturers are competitive in all your component supply requirements?* 1. What are their strengths relative to other countries? 2. What are their drawbacks and weaknesses compared to other countries, from where you import? i. Has Infrastructure bottleneck been a major problem influencing the overall production performance? Yes / No 1. If yes, what are the specific problems? 2. If no, which specific infrastructural aspects (relevant directly/indirectly to production) are reasonably good in your region? j. Other Risks and Concerns Involved in Production k. How are the industrial relations (employer-employee relations in particular) in the organisation and their impact on performance and competitiveness? l. Do you operate optimal labour or do you have to carry labour surplus? If you have labour surplus, what are the reasons and in which departments? What is the approximate additional cost burden (in value or % terms)? m. What are the recent policy decisions of the central and state governments that are likely to have a direct impact on your production, performance and competitiveness?

134

n. Do you think the investment climate and other policy aspects are better in your state, with relevance to your industry? o. Has location played a crucial role in your production performance? i. If yes, was your choice of location deliberate, foreseeing this possibility? ii. If no, what else was/were the reasons behind your choice of location? p. Are there any incentives for your organisation from the central/state government? q. Foreign OEMs: Do you plan to develop your facilities in India as a production base to cater your global requirements or merely to serve the Indian market?* 3. Market Structure: a. Who are your clients/customers?: Domestic Retail/Foreign Retail/ Others (Specify) b. Approximate Share of Exports in Total Sales: c. Has there been a rapid expansion of domestic/export markets in recent past for your company? Which of these is expanding more rapidly? Domestic Markets: Export Markets: d. Competitors and their location: i. List of Domestic Competitors and their location: 1. Which among these pose a major threat and what is the nature of threat (quality/price/both/other)? ii. List of Foreign Competitors and their location: 1. Which among these pose a major threat and what is the nature of threat (quality/price/both/other)? e. Do you have your dealership network in place or do you look for new ones every year?* 100 i. Number of Regular Dealers: ii. Number of Service Stations: iii. Any Other Company Infrastructure to reach customers: iv. In the case of regular dealers, is there any possibility that your competitors might grab your share in future? If yes, what are the strategies you follow to retain and expand your share in the market? v. In the case of new dealers, what are the strategies followed to explore new markets? Are you successful to enter the markets that are served by other competitors? If yes, how was it possible? f. What is the general feedback from the market, on your products? g. Are there any synergies with other similar producers/suppliers? If yes, what are they?
100

This question is not relevant for auto-component manufacturers. Instead, we have a question on their buyers and their strategies to retain them and look for new ones. We also asked them about the role of OEMs in their capacity-building. 135

h. Is there any positive feedback from the market for your technology, operation, mode of production, etc.? If yes, specify in detail. 4. Financial and Cost Structure (in terms of Value and/or % Share) a. Sales, Turnover and Production: b. Material Costs (includes raw material costs of things like steel, copper, aluminum, plastics): c. Power & Fuel Costs: i. Electricity Charges ii. Fuel Expenses: iii. Electricity Taxes/Duties: d. Other Manufacturing Expenses: i. Conversion expenses ii. Stores consumed iii. Technical fee paid iv. Repair & maintenance v. Miscellaneous manufacturing expenses e. Salary & Wages: i. Salaries to Managerial employees: ii. Salaries to Supervisory employees: iii. Salaries to Production Workers: iv. Total Welfare Expenses to Employees: f. Royalty Expenses g. General and Administrative Expenses: i. Rent Paid and Received: ii. Taxes 1. Excise 2. Customs 3. Sales tax 4. Octroi tax 5. Entry tax 6. Surcharges 7. Stamp duty 8. Water tax 9. Electricity tax iii. Insurance iv. Communication expenses v. Travel/Transportation expenses 1. General Travel Expenses: 2. Port charges for the raw materials and finished products vi. Printing & stationery expenses vii. Legal expenses viii. Audit expenses ix. Director’s remuneration x. Rejection/Quality Defect Costs xi. Other administrative expenses.

136

h. Interest i. Paid: ii. Received: i. Depreciation: j. Research and Development Expenditure: k. Capital Investment and Cost of Capital i. Invested Capital: ii. Working Capital: l. Profits (Before and After Tax) m. Earnings/Share n. Return on Capital o. Dividend p. Growth of i. Sales ii. Output/Production iii. Capital iv. Profits q. How cost-competitive do you think your organisation is, in comparison with your domestic and foreign competitors, especially those in the following countries? i. China ii. Thailand iii. Malaysia iv. South Korea v. South Africa vi. Taiwan vii. Indonesia viii. EU ix. USA r. What are the major impediments in becoming more cost-competitive? 5. Technology, Quality and Standards: a. How competitive do you think your organisation is, in comparison with your domestic competitors, in the following terms: i. Technology ii. Quality of products iii. Compliance with national/global standards? b. Compare yourselves with typical firms in the following countries in the above terms: i. China: ii. Thailand iii. Malaysia iv. South Korea v. South Africa vi. Taiwan vii. Indonesia viii. EU
137

ix. USA c. Are you Planning for New Technology or Technology Upgradation i. Yes ii. No: 1. Reason for not being prepared for new technologies: 2. Plans for survival/expansion in future without technology upgradation: d. Role of Government in Technology Upgradation, Standards and Quality: i. Do Governments in Countries like China, Thailand, Malaysia, Indonesia, etc., mentioned above, extend any support to their respective firms in this area in acquiring new technologies, setting and compliance to global standards and quality upgradation? ii. To what extent does our government play an important role in this area, in comparison with these countries? iii. What are the areas in which more governmental support is required? Details of awards, recognitions, quality systems and standards (such as ISO 9000 and 14000): Do you have any sort of collaboration with Indian/foreign companies for technological upgradation and import of technologies? Do you have any R&D infrastructure or facility? i. If yes, what is the proportion of R&D investment in total? ii. If no, do you have plans for investing in R&D in near future, or do you have collaborations with other Indian/foreign firms in this connection? How far do you think NATRIP facilities would enhance your production technology and competitiveness? Have your interactions with your Indian/foreign suppliers and/or Indian/foreign buyers enhanced your technological capabilities, quality and competitiveness in any way? How do you compare the technologies that you employ with the best in India and best in the world? What are your strengths and weaknesses compared to similar companies in China and Thailand? Are there any rejections from the customer, because of lack of quality? i. If yes, what is the approximate proportion of this in the total production and its approximate cost share? ii. Do you see any inherent disadvantage/weakness of your organisation that results in rejection, or is it something that is merely incidental or is it something that can be eliminated by proper process planning? Are the quality parameters of raw materials used satisfactory? i. If no, have you discussed this with the raw material suppliers, and what are the reasons for this?

e. f. g.

h. i. j. k. l.

m.

138

n. What are the strengths and weaknesses of component suppliers operating in India? o. How can Indian component industry increase their cost competitiveness vis-à-vis the other countries mentioned above? 6. Plans for the Future: a. Do you think increasing the product range, i.e., diversification, is a good strategy for future? b. How important do you think is to establish Made-in-India brand abroad? c. Which are the markets where Indian industry should focus on to increase exports? d. What is the role of the government in overseas market development in the countries mentioned above? Do you think government can play a similar role in overseas market development? e. Do you feel a need to build brand image for your own organization? f. What are the future strategies on technology front to enhance global competitiveness? g. Do you think mergers or acquisitions, to enhance scales of production, are useful in future? h. Which strategy, do you think, is more beneficial in the future: Focus on export markets or domestic markets? i. Do you anticipate any shortfall in terms of raw materials in future? j. Are you open for any technological/business collaboration with other domestic or foreign firms? k. Are there indications and expectations that your organisation will become globally competitive in the next few years, given current set of policies of the state and central government? If no, can you elaborate on the required policy changes? l. Are there any inherent disadvantages/weaknesses in terms of technology, raw materials or management in your organisation, which hinder it from being globally competitive? If yes, how do you plan to eliminate them in future?

139

Appendix 4: Econometric Analysis The data sources used herein are CMIE Prowess (1988-89 to 2005-06), annual reports of some auto companies and ACMA Buyer’s Guide. The entire analysis is based on firmlevel data. Though the sample of firms covered by CMIE Prowess database does not cover the entire population, it does comprise over 70 per cent of the population, and hence the results arrived at herewith are quite reliably applicable for the entire auto industry in India. In addition, the analysis of determinants of market share done in Section 8.3, using ACMA Buyer’s Guide, is more reliable because of the fact that this comprises more than 90 per cent of the entire auto-component industry. Stochastic frontier analysis is a popular parametric method used to estimate technical efficiency and its determinants and is extensively used in the literature (See, Coelli et. al., 1998, for a detailed explanation of the relevant theories and methodologies). It requires specification of a production function, which carries the information on the inputs involved in production and the interactions between them, relevant for production. In our analysis, we assume transcendental logarithmic production function, which has four inputs, namely, capital, labour, energy and materials. This is the most general and flexible form, without imposing any theoretical restriction. There are two equations that estimated simultaneously in this regression. First one is the production function that contains logarithm of output as the dependent variable and the logarithms of the inputs, their cross-products and quadratic terms. The error term in this equation has two components: one is stochastic error term, while the other is the inefficiency component, which is measured as the deviation from the stochastic production frontier that represents the firm in the sample that is able to make maximum output from a given basket of inputs. The second equation is the one that represents the inefficiency term as a variable that follows a distribution, say, truncated normal distribution, with a mean that is a linear function of various determinants of inefficiency, along with a stochastic error term in it. This estimation is done using Joint Maximum Likelihood, wherein both equations are estimated simultaneously by some iteration. Once the equations are estimated, technical efficiency scores could be calculated, using a formula that expresses the score as an exponentially decreasing function of inefficiency predicted from the second equation estimated as mentioned above. In this subsection, we illustrate and explain the results of stochastic frontier analysis performed for a reasonably huge unbalanced panel of firms from 1988-89 to 2005-06. This was done separately for automobile (26 firms) and auto-component industries (228 firms). As Figure A4.1 shows, technical efficiency of two-/three-wheelers has been increasing gradually on an average. It has grown very rapidly since mid-1990s for Hero Honda, TVS, Bajaj and Kinetic Motor, while it has fallen for Maharashtra Scooters, LML and Majestic. Figure A4.2 shows that the upswing of technical efficiency has occurred in the other automobiles segment only after 1999-2000, on an average. Maruti has always been the most technically efficient, while Hyundai has started bettering it in 2004-05.

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Hindustan, Eicher and Daewoo have seen declining efficiency in the recent years, while Force has an almost stagnant level and others have been improving since the late 1990s. Figure A4.1: Trends in Technical Efficiency of Two-/Three-Wheelers
1.2 1 0.8 0.6 0.4 0.2 0
19 88 -8 19 9 89 -9 19 0 90 -9 19 1 91 -9 19 2 92 -9 19 3 93 -9 19 4 94 -9 19 5 95 -9 19 6 96 -9 19 7 97 -9 19 8 98 -9 19 9 99 -0 20 0 00 -0 20 1 01 -0 20 2 02 -0 20 3 03 -0 20 4 04 -0 20 5 05 -0 6
Bajaj Scooters India HHM Maha. Scooters Kinetic Motor Co. Ltd. Average Majestic L ML Kinetic Eng. TV S

Figure A4.2: Trends in Technical Efficiency of Other Automobiles
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

Figure A4.3: Aggregate Trends in Technical Efficiency of Auto-component Firms
0.92 0.9 0.88 0.86 0.84 0.82 0.8 0.78 0.76 0.74

19 88 19 89 89 -9 19 0 90 19 91 91 19 92 92 19 -93 93 19 94 94 -9 19 5 95 19 96 96 19 97 97 19 98 98 19 99 99 20 00 00 20 01 01 20 -02 02 20 03 03 20 04 04 20 05 05 -0 6

19 88 -8 9 19 89 -9 0 19 90 -9 1 19 91 -9 2 19 92 -9 3 19 93 -9 4 19 94 -9 5 19 95 -9 6 19 96 -9 7 19 97 -9 8 19 98 -9 9 19 99 -0 0 20 00 -0 1 20 01 -0 2 20 02 -0 3 20 03 -0 4 20 04 -0 5 20 05 -0 6
Tata Eicher Ashok Leyland Mahindra Maruti Average Hindustan Daew oo Force Hyundai

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NO. 200 TITLE TRADE POSSIBILITIES AND NONTARIFF BARRIERS TO INDO-PAK TRADE ECONOMY-WIDE IMPACT OF EXPORT PROMOTION SCHEMES: A QUANTITATIVE ASSESSMENT OF SEZS, EOUS AND STPI IMPACT OF PREVENTIVE HEALTH CARE ON INDIAN INDUSTRY AND ECONOMY CAN HORTICULTURE BE A SUCCESS STORY FOR INDIA? CAPITAL ADEQUACY REGIME IN INDIA: AN OVERVIEW OECD AGRICULTURAL TRADE REFORMS IMPACT ON INDIA’S PRICES AND PRODUCERS WELFARE IMPACT OF SPECIAL ECONOMIC ZONES ON EMPLOYMENT, POVERTY AND HUMAN DEVELOPMENT TECHNOLOGICAL CAPABILITY AS A DETERMINANT OF FDI INFLOWS: EVIDENCE FROM DEVELOPING ASIA & INDIA INDO-U.S. FTA: PROSPECTS FOR AUDIOVISUAL SERVICES AUTHOR NISHA TANEJA YEAR OCTOBER 2007

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About ICRIER
ICRIER, established in August 1981, has successfully completed its 25 years as an autonomous, policy-oriented, not-for-profit research institute. We have nurtured our cherished autonomy by establishing an endowment fund, income from which meets all our administration expenses. ICRIER’s offices are located in the prime institutional complex of India Habitat Centre, New Delhi. The prime focus of all our work is to support India’s interface with the global economy. ICRIER’s founding Chairman was Dr. K.B. Lall who led the organization from its inception from 1981 to 1992 when he handed over the Chairmanship to Mr. R.N. Malhotra (1992-1996). He was followed by Dr. I.G. Patel who remained Chairman from 1997 to 2005 until his demise in July 2005. ICRIER’s current Chairperson is Dr. Isher Judge Ahluwalia. Amongst ICRIER’s founding member are: Dr. Manmohan Singh, Dr. C. Rangarjan, Dr. M.S. Swaminathan, Dr. Jagdish Bhagwati, Mr. Montek Singh Ahluwalia and Mr. Bharat Ram. ICRIER conducts thematic research in the following six thrust areas: • • • • • • Trade, Openness, Restructuring and Competitiveness WTO Related Issues Regional and Bilateral Issues Financial Liberalization and Integration Macro-economic Management in an Open Economy Strategic Aspects of India’s External Relations

In addition, ICRIER holds public policy workshops to bring together policy makers, academicians, Union Cabinet Ministers, senior industry representatives, Members of Parliament and Media persons to try and forge a consensus on issues of major policy interest. In the effort to better understand global developments and experiences of other economies which have bearing on India’s policies and performance, ICRIER invites distinguished scholars and policy makers from around the world to deliver public lectures on economic themes of interest to contemporary India. ICRIER’s highly qualified core team of researchers includes several PhD’s from reputed Indian and foreign universities. At present the team has 18 economists. The team is led by Dr. Rajiv Kumar, D.Phil in Economics from Oxford University.
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