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Manufacturing lessons from the auto industry

It makes sense to identify what made auto manufacturing take off while other sectors lagged. Three things stand out—scale, latest products and a degree of protection

Published: 19th November 2020 06:25 AM  |   Last Updated: 19th November 2020 06:25 AM   |  A+A-

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The government has recently made several announcements, ostensibly to boost local manufacturing and also attract investments from abroad. The goal is to turn India into a global manufacturing powerhouse. Some of the announcements—the import license quota for television sets and the import duty revisions—have drawn criticism from economists.

They point out that these will hamper, not boost, some of our current exports. Other announcements like the production-linked incentives (PLIs) for 10 industries (around Rs 57,000 crore is earmarked for automobiles alone) look promising, though the fine print is awaited. A lot of hope is riding on the automobile sector, one of the few  success stories in Indian manufacturing.

We are now the largest manufacturer of two- and three-wheelers, and the fourth-largest maker of passenger cars in the world, according to a Ministry of Heavy Industries release in 2019. The industry is also integrated into the global supply chain—it exports two-wheelers, passenger and commercial vehicles. It accounts for 49% of India’s manufacturing GDP, 7.1% of its total GDP and employs 37 million people, directly and indirectly, according to the release. 

It therefore makes sense to identify what made auto manufacturing take off while other sectors lagged. Three things stand out—scale,  latest products and a degree of protection. Interestingly, the auto industry’s rise can be traced to policy decisions taken a decade before  the economic reforms were initiated in 1991.  

In the 1980s, the government allowed the production of 100 cc motorcycles and gave licenses to four companies. More importantly, these firms were allowed to choose their optimum production capacities, technology mix, etc., allowing licensed capacities to shoot up. These licensees tied up with Suzuki, Honda, Kawasaki and Yamaha to bring in bikes that would be considered low-powered in most countries but were fuel-efficient and ideal for commuting in India.

The commuter bikes quickly became favourites, their sales far outstripping the older, heavier, motorcycles (Royal Enfield Bullet, Rajdoot and Yezdi) as well as the scooters (Bajaj). By the 1990s, the players were producing enough volumes to keep investing in vendor development, R&D, marketing and quality. In passenger vehicles, a large portion of the credit for the success of their manufacturing and exports goes to Maruti Udyog Ltd, set up in 1982.

It brought in the first modern car into the country along with Japanese manufacturing practices and seeded a global quality vendor ecosystem.  Maruti, which rolled out its first car in 1983, enjoyed a largely competition-free run for a decade but, because of policies of that era, had to build a global quality vendor base in the country from scratch.

Maruti started as a PSU—Suzuki of Japan took only a 26% stake initially because it was not very confident of the success of the collaboration. But it had excellent top management—V Krishnamurthy was the founder chairman and managing director while R C Bhargava, its current chairman, was executive director.  The choice of Suzuki as a partner was remarkably astute—the company was not one of the top auto firms globally. It specialised in mini cars and was not in the same league as Toyota, General Motors, Ford, Volkswagen or Fiat. 

However, it had the perfect car for the market it was entering. The Maruti 800, based on the Suzuki Alto, was the right vehicle for a developing market though it was a fringe player in major auto markets.  
Maruti entered the market with the latest generation new small car in 1983 and its only competitors were the ancient Ambassadors and Premier Padminis. Most importantly, thanks to some hard lobbying by Krishnamurthy and Bhargava, it had grudgingly received permission to build a capacity of 1,00,000 cars per annum, though the government was sceptical of its ability to produce or sell them. 

However, given that the economy was still closed, imports were frowned upon, cars were seen as a luxury and foreign exchange outgo was discouraged. Maruti had to ensure 75% of its parts were localised by 1988. It was a tough task, given that Indian vendors at that time were not used to producing components that met global standards, nor was there any incentive to do it. Maruti had to hand-hold vendors on every count.

By 1993, when the market was fully opened up and global auto makers rushed in seeing a huge potential market, there was already the auto components ecosystem that Maurti had created that they could build on. Not all of them were successful in the domestic market but auto production as a whole kept thriving and the factories built kept churning out vehicles for domestic and export markets. 

What are the lessons from the auto manufacturing success? There are three. One, without scale, global quality standards and the latest technology, world-class manufacturing cannot be developed. While many economic mistakes were committed in the 1980s, it was a decade that saw relaxations in the License Raj, the introduction of domestic competition, larger production capacities, the induction of global technology products, and exposure to global manufacturing and management processes.

Two, the auto industry developed to the extent that global manufacturers were attracted by the domestic capacities but also found conditions that encouraged them to expand the auto component ecosystem in the country. Finally, the policies of the 1980s helped protect Maruti and the two-wheeler makers before the markets were fully opened up to global protection. 

Not every lesson can be applied to every industry. For example, building a components industry for mobile handsets might be far more difficult than it was for automobiles because of technical complexities. But they are important for policymakers because of the broad lessons they hold. 

Prosenjit Datta
Senior business journalist (prosaicview@gmail.com)



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