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Article Excerpt
We trace the evolution of the auto-component supply chain in India beginning with the opening of the economy in 1990 by using a combination of data on firm and sector performance, customer-satisfaction surveys, and interviews with experts. During the past decade, the industry has made remarkable progress on multiple fronts. This is particularly true with regard to quality--10 firms in this industry have won the coveted Deming prize during the past six years. Surprisingly, we first observe that the financial performance of the firms that won the Deming prize (i.e., Deming firms) shows no definitive differences from the performance in the rest of the industry. We then analyze the productivity growth at the firm level across two five-year intervals using a total-factor productivity model. Our results suggest that productivity improved much more during the second period, which is the interval in which most of the firms won the Deming prize. We also analyze the impact of winning the award on profitability and suggest that new firms were able to grow faster in the improving business environment. To "externally" validate our findings, we compare the auto sector in India with that in China. Despite a 10-year disadvantage because of costs that are beyond the control of the firm, the auto sector in India seems to be competitive with that sector in China on all firm-specific factors. In summary, we suggest that firms in this sector have taken the first step by becoming competitive in the areas of cost and quality. We suggest that they are now at a crossroads and must make several choices to leverage these quality gains into a profitable, global supply chain strategy.
Key words: manufacturing; performance; productivity; regulations. History: This paper was refereed.
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We study the evolution of the auto-component supply chain in India beginning with the opening of the economy in 1990 using a combination of data on firm and sector performance, customer-satisfaction surveys, and interviews with experts. We relate these changes to competitive forces and to operational decisions that the firms made. We also discuss future trajectories for firms in this industry.
We find that the quality movement and the adoption of lean manufacturing techniques have been extremely successful in this sector. As of September 2004, 10 Indian auto companies had won the Deming prize. This is a spectacular achievement considering the number of firms and the short duration in which they changed from pedestrian to world-class-quality-award status. We find that in the metric of financial performance there are no definitive differences between these firms and other firms that operate in the same business within the industry. Our analysis suggests that this is not due to a lack of significant improvement by the award winners, but to a lack of significant differences between the award winners and others. The award winners and the other firms appear to be clustered together along quality and delivery metrics.
We analyze whether the quality improvements have translated into productivity gains by studying the total-factor productivity gains between 1994-1998 and 1998-2003. Our results suggest that productivity improved much more in the second period, which is the interval in which most of the firms won the Deming prize. Furthermore, we find significant variation in productivity gains across segments.
We perform a financial analysis of the sector to trace whether the quality and productivity gains have translated into an increase in profitability. Despite the price pressure from original equipment manufacturers (OEMs), and consistent with our findings about quality and productivity, the profitability of the entire sector improved. In addition, a study of firm-level profit performance with respect to firm size and by product segment reveals that newer firms were able to grow faster; however, an export-oriented strategy shows limited benefits in general. Segments of the industry that had higher increases in productivity show no drop in financial performance despite price pressures. The sector's improvement in profitability is a remarkable confirmation that operational decisions that began with a concerted effort to improve quality helped almost every firm to improve in multiple dimensions.
To examine whether these changes have made these firms more competitive in world markets and to externally validate our findings, we compare the auto sector in India with that in China. The lack of data permits only a limited analysis. Despite higher costs (e.g., for raw material and energy) in India, multinational OEMs operating in the Indian market produce cars that have high local content, and they sell at competitive retail prices. In many cases, the delivered retail price of a car in India is 50 percent of the price in China. Although the Indian car companies operate at lower profit margins, their return on capital employed is higher. In the last section, we discuss how we can interpret our findings and the implications for future strategic directions of these firms.
We describe our findings in three parts. In The Indian Automobile Industry section, we trace the response by firms in this sector to market and economic forces. We follow this by an in-depth analysis of the supply chain with regard to cost, quality, productivity, and profitability (sections on Financial Performance of Deming Prize Winners, Sector-Wide Quality Performance, Analysis of Productivity, and Profitability). In the Comparison of Industry Performance in India and China section, we evaluate the performance of the sector in the context of increasing its market share in the global auto supply chain by doing a comparison with China. Finally, in the Discussion and Conclusions section, we also present alternative strategies that individual players in the chain are currently pursuing and comment on these strategies.
The Indian Automobile Industry
In this section, in which we use data collected from the Center for Monitoring the Indian Economy (CMIE) Prowess database and the Indian Automotive Components Industry (ICRA 2003), we trace the growth in the Indian auto-component sector and describe the market, cost structure, and export performance. The Indian auto-component industry's annual revenue (FY 2003) was US$6.73 billion. This is miniscule compared with the global automotive-components-industry revenue of US$737 billion. However, at a compounded annual growth rate of 20-25 percent, the growth of India's auto-component exports is significantly higher than that of the domestic market (10-14 percent) and markets elsewhere.
A very visible outcome of the transformation of the auto-component sector is the rapid growth in the number of cars that India exported (Table 1).
The significant growth of exports from India signals that its auto sector is rapidly becoming globally competitive, particularly in the small-car segment (Morgan Stanley Equity Research 2004). We examine this in later sections of this paper.
The auto-component industry that helped to enable this transformation caters to three markets. OEMs or vehicle manufacturers make up 25 percent of the total demand; the replacement market makes up 65 percent of the total demand; and the export market that primarily includes exports to international tier-1 suppliers constitutes 10 percent of the total demand. We can also subdivide the auto-component industry into six segments: engine parts, electrical parts, drive transmission and steering parts, suspension and braking parts, equipment, and others. Table 2 shows the cumulative annual growth rate of sales, profits, and exports by segment during the period 1998-2003.
The six business segments...
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