India is fast growing into a global exports hub for automobiles and auto parts. What are the prospects for Indian auto exporters in the two largest automobile buying markets? And are there easier options?

Arthur C. Wheaton | @TheDollarBiz

When I began teaching about the global automotive industry in the 1990s, it usually involved long discussions about the Detroit Big Three: GM, Ford and Chrysler. Significant time was spent on the-then up-and-coming Japanese companies Toyota, Honda and Nissan, with their new production systems. The remaining international content revolved around the engineering and social progress made by Western European brands: Volkswagen, Mercedes-Benz, BMW, PSA Peugeot Citroen, with casual reference to Renault and Fiat. While there were many other auto companies, those three geographic regions comprised the majority of production, sales and conversation. Thankfully today, the global auto industry has moved away from US, Japan and Western European domination.

Arthur C. Wheaton, Director, Western NY Labour and Environmental Programs and Expert – Automotive, Healthcare & Labour management, Cornell University ILR School

India’s impressive auto domestic mart...

Significantly, for exporters from low-cost manufacturing nations like India, situations changing across markets have mattered too. Each destination, country or region developed their preferred brands and vehicle preferences. Some markets placed very high barriers for new entrants to compete. Japan and Korea were incredibly difficult to establish new international brands. China placed restrictions on ownership of automotive production demanding 50% ownership by a Chinese JV partner.

China surpassed US to become the largest market with new vehicle sales over 20 million units in 2013, (including buses and trucks). Korea has grown with Hyundai and Kia. Recently, India has made significant progress in this highly competitive and expensive industry.

Though comparing vehicle sales across countries can be problematic with varying definitions and classifications of vehicles, one fact that is clear is that sales are no longer classified as US, Western Europe and other.

Eighteen different countries reported sales of at least one million vehicles between 2005 and 2013. According to data from OICA, both Spain and Iran sold over a million units in the past but fell below that threshold in 2013. Argentina and Turkey appear likely to join the club in the near future with 2013 sales over 890,000.

According to the International Organization of Motor Vehicle Manufacturers, India sold about 1.4 million vehicles in 2005 and rapidly increased sales to over 3 million units by 2010. More than doubling its sales totals in less than 5 years established India as a major player. India at 3.2 million in sales is currently the sixth largest automotive market trailing only China, US, Japan, Germany, and Brazil for vehicle sales in 2013.

Tata Motors acquiring Land Rover and Jaguar put the spotlight back on India. Small cars have been manufactured in India for decades with the Maruti Alto selling more than 2.5 million units in India and hundreds of thousands more exported to other markets. These very successful world class vehicles based on Suzuki and Maruti technology raise awareness of Indian automotive expertise and help change the image of Ambassador taxi cabs and antiquated technologies of 1950s-based British platforms.

...and its capacity as an exporter nation

Automotive sales are not just a great source of economic profits for the manufacturer. Automotive assembly is a significant multiplier industry. For every assembly plant job in an auto plant can create from 8-10 additional jobs in automotive suppliers and related industries. While Original Equipment Manufacturers and vehicle sales are clearly important, their impact is magnified by the hundreds of automotive parts manufacturers required to supply key components.

World class auto suppliers currently have expanded their operations in India with additional investments on the way. According to the Automotive Components Manufacturing Association in India investment in India is increasing. Japanese component manufacturers Aisin Seiki, Denso, Yazaki, Toyoda Gosei and many others have plants in India. European companies include Faurecia, Robert Bosch, ZF and Valeo. American companies include Borg Warner, Delphi, Eaton, Honeywell and Visteon. There are certainly opportunities for manufacturers in India to provide parts for both the domestic and export markets.

Opportunities and risks for auto manufacturers in India

While the automotive industry can lead to many opportunities it can often be cyclical. There are frequently dramatic swings in supply and demand for automobiles leading to variable employment security. [The U.S. lost 43.1% of auto manufacturing jobs from 2003-2009. The deterioration of profits by GM, Ford and Chrysler and the Great Recession in 2008-2009 resulted in the loss of more than half a million auto workers.] Maintaining profits in the auto industry is not easy. There are many failures and workers end up losing a great deal when poor decisions are made. 

There are opportunities and risks for Indian manufacturing for the US and Chinese markets. According to Business-in-Asia.com, India is the largest producer of tractor and three-wheeled vehicles. India is the second-largest producer of two-wheel vehicles and fourth-largest commercial vehicle producer. All of those markets are relevant in both China and the United States. Indian exporters of three wheelers could stand a chance of grabbing some market share from some new automotive companies in the US market that are trying to establish new or under-represented vehicles. For instance, Elio Motors is building a new three-wheel vehicle in an effort to create or expand the market for alternatives to the passenger car. [These three-wheeled vehicles are being built in a former GM auto plant.] 

Chrysler’s Jefferson North factory, Detroit: With over $133 billion in exports in 2013, USA is the industry’s third-largest exporter nation

Blue ocean for Indian auto exporters

Indian auto and auto component exporters may have a potential entry to the US market given that three-wheeled vehicles in the United States are not very common and are governed by motorcycle laws. Any vehicle with less than four wheels in the United States is considered a motorcycle and is exempt from many of the highly regulated crash and emissions standards for passenger cars. Mahindra, Bajaj and Hero MotoCorp are well-established brands in many parts of the world but have limited name recognition in the United States. Again, in this respect, Elio Motors is a brand new company trying to establish a new market. So there could be opportunities for new auto brands emerging from India and or may be even smaller suppliers from India waiting to tap potential of the three-wheeled market in US.

Indian brands could also go the inorganic way. Fiat established a significant presence in the agricultural implement (tractor) sector through mergers and acquisitions of well-known brands Case and New Holland. This path to success is also underway for Mahindra as it partners with Spanish automotive parts company CIE and another Japanese company. [Though as a note of caution it is important to state that global mergers and joint-ventures have been tried by many multinational companies with varying degrees of success. DaimlerChrysler and Fiat-GM were failures. Fiat Chrysler Automotive successfully saved both companies.]

JVs could be a strategy too. Two of the largest Indian automotive companies have opportunities through joint ventures such as Mahindra CIE or Tata Motors strategy of acquiring Jaguar and Land Rover. Both Mahindra and Tata make SUVs for one of the faster growing segments in both China and US.

China: Tough game

Hero MotoCorp and Bajaj have opportunities in motorcycles and three-wheeled markets in China and US as well. The opportunities for profits and growth are easy to identify.

The risks associated with those markets are also easy to identify. Establishing new nameplates in China is no easy task. Almost every large automotive manufacturer is drawn to the billion potential drivers in China. Barriers for entry are made difficult due to China’s high tariffs for imported vehicles and the requirement that automotive manufacturing for sales in China must have 50% ownership by a Chinese company.

GM and VW have made billions in investment in China and have battled for market leadership for decades. An exception is Ford that is making significant progress in China through its One Ford Policy. [The Ford Focus claims to be the #1 selling vehicle in the world in the past two years since its introduction to the Chinese market.]

Risks in China are high. Toyota has faced obstacles in China due to a territorial dispute. The multiplier effect of auto production encourages nearly every country to somehow capture those magical jobs. India has made great strides in the past decade and shows signs of becoming a major player. There are a great many benefits to gain from a successful launch in China. There are also a number of companies that were unable to survive in the brutally competitive market.

Beyond China: ASEAN...

Indian companies could seek to boost exports into ASEAN countries and smaller but expanding markets. Both Ford and GM have announced in recent weeks that they will utilise their Indian based plants as a major export hub. GM will export the Chevrolet Beat from the Talegaon Plant. Ford will export the EcoSport from the Maraimalainagar facility.

June 26, 2013, Chicago: USA is the world’s largest importer of automobile and auto parts. Its imports in 2013 were 161% more than that of the #2 importer (Germany)

...and wage advantage

The relative lower wage rates in India helps to make Indian companies an intriguing business case. According to a September 2012 UBS Prices and Earnings report, India has lower wage rates than China. UBS determined that Delhi net hourly pay rates were $2.10 per hr, Mumbai $2.30, Beijing $4.50, Shanghai $5.40, Chicago $20.30 & NY $25.20.

Having the lowest international wage rates are never a guarantee for success. Wages go up and tend to increase at different rates over time. According the most recent AON Hewitt study, wages in India increased 10% – the lowest increase in a decade with the automotive segment lagging industry average at 9.5%.

What is impressive about the Indian industry is its embrace of world-class business and work practices. According to ACMA India has 576 auto suppliers that are ISO 9001 certified. India also has 12 Deming Award (quality-related) winners, the most outside of Japan. Global OEMs do not like to take risks with quality. The intense focus on quality in India will place increasing pressure on suppliers across other low-cost manufacturing nations and establish India as a major export hub for automobiles and auto parts.

That the global auto industry has moved away from US, Japan and Western European domination is good news for Indian exporters. At the same time however, both Indian auto and auto component makers have to be careful to choose the right markets to move into.

Think beyond China and US if entry barriers and saturation is a headache. Talk about opportunities in markets like Brazil and Russia is common today. Perhaps Indian exporters could begin with the ASEAN markets. This is particularly a relatively safer bet for small-to-medium-sized exporters in the auto industry.

About the author: Art Wheaton is a Workplace and Industry Education Specialist for the Institute for Industry Studies at Cornell Univeristy ILR School. His expertise includes industry education and workplace training, high performance work systems, negotiations and conflict resolution, and auto & aerospace industrial relations. Prior to joining the ILR faculty in 1999, Art was with MIT’s Labour Aerospace Research Agenda. Art has also served as executive board member for the American Federation of State, County and Municipal Employees, AFL-CIO in Michigan in the past.

Written in coordination with: Steven Philip Warner, Editor-in-Chief, The Dollar Business