Case Study – Business Economics

Semester – 1

On the basis of given case study for Business Economics following are the answers of given
questions. Please note that order in which questions are given in case study and answers
written here are the same.

Answer 1: Automotive industry, globally, as well in India, is one of the key sectors of the
Economy. Due to its deep forward and backward linkages with several major segments of the
economy, the industry has a strong multiplier effect of industrial growth. The rise in efficiency and
productivity helps directly and indirectly to accelerate the efficiency of other sectors through factor
movements of goods and people in the economy. Therefore the industry is recognized as one of
the drivers of economic growth as it contributes significantly to the overall GDP of the nation. It
has been identified at different forums as a sector with a high potential to increase exports and
employment. It also helps in attaining two critical goals of the common minimum programme that
of increasing manufacturing output and of providing employment.

The Indian automotive industry has flourished after economic liberalisation in 1990s like never
before. This extra-ordinary growth of the industry is mainly due to higher disposable incomes of
the middle class and resultant increase in their living standards. This is well supported by the
economic conditions particularly in the financial sector, which has played a big role in boosting
the demand and sustaining a long-term growth in the industry.

India has several competitive advantages over the world in the automobile
sector. The competitive landscape of the industry has been developed using the Porter (1990)
Diamond Framework by India Brand Equity Foundation (2006) as shown in Figure 1.
Figure 1: Competitive Picture of Indian Automobile Industry

OVERVIEW OF THE INDIAN AUTOMOBILE INDUSTRY:

The automotive industry in India is poised for a giant leap forward as it is
being rapidly integrated into the global automotive supply chain. Global automotive
firms are looking towards India not only for its growing market but also as an
efficient supplier base.

Structure of Automobile Industry in India:

The Indian automotive sector has a presence across all vehicle segments and comprises of key
component manufactures, concentrated in regional clusters. The Indian automobile market is still
in its evolutionary stage. Therefore, no fixed or widely accepted method of segmenting the market
has evolved as yet. Segmentation has mostly been done on the basis of product types, its
weight/size or product uses. It is categorized into following four segments namely; Commercial
Vehicles, Passenger Vehicles, Two Wheeler and Three Wheelers, which covers 5%,14%, 77%
and 4% of the total market share of the industry respectively (Society of Indian Automobile
Manufacturers 2007).

The efficiency of vehicle production is closely linked to that of the supplier base (Singh 2004). In
India the auto component industry is one of the important key sectors of the auto industry.

The total numbers of auto component companies, which are member of Automotive
Component Manufacturers Association (ACMA), are 536 at present and more than
10,000 firms in unorganized small sector, in tierized format (Ministry of Heavy
Industries and Public Enterprises 2006b). The industry is however dominated by a
few industrial business houses. The industry in the country has made rapid strides and is growing
at a fast pace, which may be summarized in the following Figure 2. The industry has grown at
annual compound growth rate of 17% over the last few years from 2000-01 to reach a size of
around US $10 billion in 2005-06, while component exports have grown at around 25 % per
annum (IBEF 2006) as its shown in figure 2.

Figure 2: Size and Export of Indian Auto Component Industry (In US $ billion)

Current Status of the Indian Automobile Industry:

Growth trends of key industry indicators are improving every year as seen in Table 1. Industry
volumes, export performance as well as domestic sales are increasing on a steady rate. Although
there is a potential for much higher growth in the domestic market.

Table 1: Growth Trends of Key Variables of the Industry

YEARS PRODUCTION DOMESTIC SALES EXPORT

1. Consolidation of the industry has gained momentum. Foreign automotive firms have arrived
and are in queue. There is a long list of foreign companies that are forging alliances with their
Indian counterparts. Corporate participation in these alliances varies from 10 to 100 percent of
equities (i.e. wholly owned foreign subsidiaries) (Nath 2006).
2. India is becoming an important destination for automobile research and development as it is
fully equipped to take up design, engineering and components manufacture.

3. Armed with higher buying power and an ever-increasing expectation from products and
services, the customer is undoubtedly the king and has propelled a fierce competition among the
major players in the market.

The following trends can be seen in the various segments of the industry today. In case of
Commercial Vehicles, the importance of large-tonnage multi-axle vehicles and light commercial
vehicles is on the rise and likely to increase further on account of superior economies in
transportation they offer. The dominant basis of competition in the Indian passenger car industry
has changed from price to price value, especially in the passenger car segment. The market for
multi-utility vehicles has also been redefined. The recent years have witnessed a robust growth in
motorcycle sales and a decline in the share of scooters in the overall Indian two wheelers market
hence a demand shift.

Level and Nature of Competition:

The level and nature of competition for Indian automobile industry at the firm level can be
discussed and explained using competitiveness index.

Competitiveness Index:
One of the immediate problems in analyzing competitiveness is that despite widespread
acceptance of its importance for economic performance and growth, no consensus exists on its
definition and measurement. The Oxford Dictionary of Economics defines the term
competitiveness as ‘the ability to compete in markets for goods or services’.

Competitiveness can be observed from different perspectives, through products, firms, industry
and branches of the economy or national economies. At each level of aggregation, there are
different measures or indicators of competitiveness. The second issue relating to competitiveness
is the distinction between one-dimensional and multi-dimensional concepts, relating to the
number of dimensions it integrates and measures. The number of dimensions included in its
measurement can be seen as a mark of complexity of the concept (Siggel 2003). We are mainly
concerned with the firm level multidimensional concept of competitiveness in the domestic
market.
One of the interesting attempts to capture more than one dimension of firm competitiveness was
made by Buckley et al. (1988). According to him, “a firm is competitive if it can produce products
and services of superior quality and at lower costs than its domestic and international
competitors. Competitiveness is synonymous with a firm's long-run profit performance and its
ability to compensate its employees and provide superior returns to its owners”.

Of the micro indicators assessing the multi-dimensionality of the concept of competitiveness, the
best known attempt was made by Porter (1990) in his ‘Diamond Framework’. He identified four
main determinants of competitiveness of enterprises as their strategy, structure and rivalry, the
demand conditions they face, the factor supply conditions they encounter, and the conditions of
related industries.
A White Paper on competitiveness by the UK Government (Department of Trade and Industry
1994) offers a multi-notion definition at the company level, which says, ‘for a firm,
competitiveness is the ability to produce the right goods and services of the right quality, at the
right price, at the right time. It means meeting customers’ needs more efficiently and more
effectively than other firms’.

A firm’s competitiveness can thus be examined as a function of factors such as

(i) Its own resources
(ii) Its market power;
(iii) Its behavior toward rivals and other economic agents;
(iv) Its capability to adapt to changing circumstances;
(v) Its capability to create new markets; and
(vi) The institutional environment, largely provided by the government, including physical
infrastructure and the quality of government policies.

The variables that compose the competitiveness composite index for Indian auto industry have
been identified on the basis of factors related to competitiveness at the firm level, considering the
specific issues peculiar to the Indian automobile industry. Total number of sub-indicators used for
the competitiveness index are 62 out of which 38 (61%) are taken from PROWESS database of
Centre for Monitoring Indian Economy (CMIE) and 24 (39%) from other data sources. Other data
sources include a questionnaire survey, company websites, SIAM and ACMA websites and other
publications.

A composite competitiveness index is defined as the mathematical combination of

individual indicators that represent different dimensions of the concept whose description is the
objective of the analysis.
Formula for Competitiveness Index is

Where Cj is the Competitiveness Index for jth firm, Wi is the weight of ith indicator, Vi is the ith
indicator and n is the number of indicators.
.
Competitiveness of the Firm
In the overall competitiveness rankings, Maruti Udyog Limited comes first with 64.06 score. This
result is largely due to its position in the productive performance and consumer satisfaction
indicator. The good competitive position it enjoys in productive performance is because of its
highest capacity utilization and labour productivity in the automobile industry However the
company’s performance in foreign trade is scored very low and is on 12th position in the list.This
is mainly because of its negative net foreign exchange earnings due to high imports (mainly of
components). The percentage of exports in total sales basket is also very low at only 3.85%
where the highest is 27.32%. In all the other indicators, it has performed above average of the
industry.

Table 2: Overall Rankings and Scores of Automobile Firms

Table 3: Scores and Ranks of the Firms for Indicators

Bajaj Auto Limited is at the second position in the competitiveness index and 1st in the financial
index as it gets 8.93 score there. It can be noted here that this company has 1st ranks in five
indicators; still it has got second ranking in the overall index mainly because of poor performance
in productivity where it stands 13th. The difference in the total productivity score is very wide
where Maruti Udyog has got 14 and Bajaj Auto gets only 1.61 score due to its low capacity
utilization of 56% and low labour productivity, which is only 0.74 as compared to 3.61 in case of
Maruti Udyog. Low foreign exchange spending on technology acquisition, R & D expenditure and
royalty know-how expenses has led the company to 7th ranking in technological
indicators too, further pulling down the total score. The difference of total score between Hero
Honda and Bajaj Auto is only of about 2 points (both two-wheelers); hence performance wise the
company is doing well as it stands at number 3 position. The company holds 1st position in cost
effectiveness as it has lowest cost component in its gross sales. Also raw materials etc and
financial charges are the lowest. Human resource, growth variables and foreign trade measure
have pulled it down to this position although it is 2nd in other 4 sub indicators such as productive
and financial performance, sales and marketing strategy and customer satisfaction.

The overall score of Tata Motors is 48.80 on the basis of technology; the company tops the list
mainly because of highest R&D expenditure and good product differentiation, as it caters to two
segments in the industry namely passenger vehicles and commercial vehicles. In terms of
growth, the company performs well, as sales and profits both showed good growth and also their
plans to launch new models in future .However, the company’s performance in other indicators is
average and exceptionally poor in financial indicators such as liquidity ratios and interest
coverage ratio.

In the list of competitive performance, 5th, 6th and 7th positions are held by Hyundai, Mahindra &
Mahindra and TVS Motors, with very little difference in their total scores. Nevertheless, strength
of Hyundai is its second highest rank in human resource and foreign trade indicator with 27.32%
of export in total sales. But it lags behind in the stock market performance as is not listed on NSE
and hence its score is zero for the indicator. Mahindra & Mahindra is doing well in cost
effectiveness and sales and marketing strategy whereas financial performance is relatively very
poor. Human resource performance is strongest for TVS Motor Co. Limited where it is ranked
first, which is offset by poor productive and financial performance. All the firms discussed above
in terms of their competitive performance in various indicators are above the industry average
and hence showing good competitive behavior. The remaining other firms, which are below the
industry average, are discussed below.

Ashok Leyland, Honda Siel Cars India and Eicher Motors are 8th, 9th and 10th in the list of
competitive rankings getting 39.21, 33.55 and 31.03 scores respectively. All are very close with
each other although Ashok Leyland is exceptionally good in technological indicators and average
in other indicators. Honda Siel’s strength seems to be consumer satisfaction where it has 3rd
position but because of poor performance in sales and foreign trade the overall score is very low.
Whereas, Eicher Motors has below average performance in all the indicators of competitiveness.
Firms such as Force Motors, Scooter India and Swaraj Mazda are on the 11th,12th, and 13th
rankings respectively in the list of index of competitiveness being very close in scoring except
Kinetic Motors, which is 14th with very low score. Scooters India at 11th has done above average
performance in financial and productive variables. Swaraj Mazda is ranked 3rd in productive
performance because of 99% capacity utilization. Kinetic Motors has consistently been in the last
two in four indicators, only doing better in foreign trade measure as net foreign exchange
earnings has positive value. In case of other indicators, all these four firms show below industry
average performance.

If we divide the industry in segments then it can be seen that the two-wheeler segment and three-
wheeler segments is dominated by Bajaj Auto as it is the most competitive as reflected by its high
scores. The passenger vehicle segment is obviously ruled by Maruti Udyog whereas the
commercial vehicles segment is dominated by Tata Motors.

The pattern of difference of scores can be observed from the overall index of all the sample firms.
It is seen that maximum difference is between the 13th and 14th positions i.e. Swaraj Mazda and
Kinetic Motors (7.17) which shows exceptional relatively poor performance of the later in terms of
competitiveness. Next is the difference between Maruti Udyog and Bajaj Auto (6.54) showing the
dominance of the former on the automobile industry. The gap between Hero Honda and Tata
motors (6.09) is also large, which is followed by Ashok Leyland and Honda Seil (5.65). All the
other firms are very close in competitive scores, which show close competition among them.

Competitiveness On The Basis Of Financial and Non-Financial Indices:

Competitiveness is concerned with the ability of firms to perform better than

rivals, where performance is dependent on both financial and non-financial conditions of the firm.
For the purpose of analysis, competitiveness index has been divided into financial index and non-
financial index. The objective is to ascertain which of the two indices has more effect on the
overall competitiveness index of a firm.
For the purpose financial indicators such as different financial ratios, cost
effectiveness, stock market performance and foreign trade indicators are grouped
under financial index and other indicators such as productive performance, sales and marketing
strategy, consumer satisfaction, technological issues, human resource and growth variables are
grouped under non-financial indicators. The former has 31% of the total weights whereas the later
gets remaining 69%. Importance to non-financial factors is given visibly more by the industry
experts.
.
It can be seen that although Maruti Udyog stands first in non- financial index,
it is on sixth position in financial index reflecting its weakness in four of the financial indicators
such as foreign trade and financial ratios (Table 6). It is way ahead of all other firms in non-
financial indicators as reflected by the score of the index. It can hence be said that the company
can dominate the industry completely if it tries to improve its financial performance. This is the
only firm from the sample firms whose non-financial performance is superior to financial
performance. However, opposite is the case with Bajaj Auto as it has highest score in financial
and is third highest in non- financial index. It has ranked 1st in all of the financial indicators except
in cost effectiveness where it stands 4th. But the company has got 3rd highest rank in non-
financial performance because of its relatively poor performance in productivity and technological
indicators. Performance of Hero Honda is marginally better in non-financial than in financial index.
However, Tata Motors and Mahindra & Mahindra are the two firms, which have same ranks in
both the indices, but the performance of Tata Motors is much superior to Mahindra & Mahindra
because Tata Motors could maintain the same rank in overall index but Mahindra & Mahindra
went down by one rank i.e. from 5th to 6th (Table 4). Hyundai despite of being very strong in
financial performance has lagged behind due to weakness in non-financial index. There is very
marginal unevenness in the comparative position of other firms, which has altered

Table 4: Comparison of Rankings in Financial and Non-financial Indicators

their overall rankings in the competitive index. However, exceptions to this are Honda Seil and
Eicher Motors who have inter-changed their positions in the two indices. Kinetic Motors although
has poor performance in both the indices, its relative weakness is much higher in financial than in
non-financial index.
From the above it is evident that competition is more intense in the passenger vehicle and two-
wheeler segments.

Answer 2: The automobile sector is a key player in the global and Indian economy. The
global motor vehicle industry (four-wheelers) contributes 5 per cent directly to the total
manufacturing employment, 12.9 per cent to the total manufacturing production value and 8.3 per
cent to the total industrial investment. In addition, the auto industry is linked with several other
sectors in the economy and hence its indirect contribution is much higher than this. All over the
world it has been treated as a leading economic sector because of its extensive economic
linkages.

India’s manufacture of 7.9 million vehicles, including 1.3 million passenger cars, amounted to 2.4
per cent and 7 per cent, respectively, of global production in number. The auto-components
manufacturing sector is another key player in the Indian automotive industry. Exports from India
in this sector rose from US$1.0 billion in 2003- 04 to US$1.8 billion in 2005-06, contributing 1 per
cent to the world trade in auto components in current USD.

In India, the automobile industry provides direct employment to about 5 lakhs persons. It
contributes 4.7 per cent to India’s GDP and 19 per cent to India’s indirect tax revenue. Till early
1980s, there were very few players in the Indian auto sector, which was suffering from low
volumes of production, obsolete and substandard technologies. With de-licensing in the 1980s
and opening up of this sector to FDI in 1993, the sector has grown rapidly due to the entry of
global players.

A rapidly growing middle class, rising per capita incomes and relatively easier availability of
finance have been driving the vehicle demand in India, which in turn, has prompted the
government to invest at unprecedented levels in roads infrastructure.

The Reserve Bank of India’s (RBI) Annual Policy Statement documents an annual growth of 37.9
per cent in credit flow to vehicles industry in 2006. Given that passenger car penetration rate is
just about 8.5 vehicles per thousand, which is among the lowest in the world, there is a huge
potential demand for automobiles in the country.

There are two distinct sets of players in the Indian auto industry: Automobile component
manufacturers and the vehicle manufacturers, which are also referred to as Original Equipment
Manufacturers (OEMs). While the former set is engaged in manufacturing parts, components,
bodies and chassis involved in automobile manufacturing, the latter is engaged in assembling of
all these components into an automobile.

India is a global major in the two-wheeler industry producing motorcycles, scooters and mopeds
principally of engine capacities below 200 cc. It is the second largest producer of two-wheelers
and 13th largest producer of passenger cars in the world. Tata figures among the ten largest
global manufacturers of LCVs, heavy trucks, buses and coaches, while it is among the top 25 in
passenger car manufacturing.

The two-wheeler industry in India has grown at a compounded annual growth rate of more than
10 per cent (in number) during the last five years and has also witnessed a shift in the demand
mix, with sales of motorcycles showing an increasing trend. Indian two wheelers comply with
some of the most stringent emission and fuel efficiency standards worldwide. The passenger car
segment has been growing at a rapid pace -- from over 6,50,000 vehicles sold during 2001 to
over a million vehicles sold during 2004-05, showing an annual growth rate of 17.36 per cent.

Below has been discussed the Demand, Supply and Price effect on Indian Automobile Industry.
Demand Effect : Sales of Automobiles

It has been seen that the two-wheelers constitute a major part of total automobile production, with
gradually expanding share. Two-wheelers form the predominant category of vehicles in India, in
terms of sales as well. Cars continue to constitute the major and expanding share in passenger
vehicles segment. Light commercial vehicles (LCVs) are expanding their shares in the sales of
commercial vehicles segment, though heavy and medium commercial vehicles are still dominant
in this segment. The anticipated high growth of large tonnage and long-haul movement with the
construction of new highways has encouraged a number of firms to announce plans for new
generation Heavy Commercial Vehicles. (HCVs) (Figures 1 to 4).

Figure1: Domestic Sales of Automobiles (Number)

Figure 2: Domestic Sales of Passenger Vehicles (Number)

Figure 3: Domestic Sales of Commercial Vehicles (Number)

Figure 4: Domestic Sales of Two-Wheelers (Number)

Figure 4 shows that motorcycles have constituted a major and expanding share in the sales of
two-wheelers, while the shares of scooters and mopeds have been declining.

Sales of motorcycles has been the major contributor to the overall growth in two-wheeler
segment, as sales of mopeds and scooters have been declining or growing at far lower rates in
the recent years. However, growth rates of sales of two-wheelers, including motor cycles, started
declining after 2004-05. Except in 2004-05, three-wheelers sales has been posting double-digit
growth rates, mainly due to exceptional growth rates of goods carrier sales till 2004-05, despite a
decline in the growth of passenger carriers in this year. However, in 2006-07, both these
segments have grown at comparable rates (Table 1).
Growth rates in CV segment and its sub-segments are the highest among all auto segments, as
shown in Table 1, except in 2005-06, because of the very low growth rate in the Medium and
Heavy Commercial Vehicles (MHCVs) segment. MHCVs has grown at lower rate than LCVs
throughout this period, with the exception of 2003-04. The passenger vehicles (PVs) segment has
grown at two-digit rates in all years except in 2002-03 and 2005-06. Car sales27 has grown at
fairly high rates recently, though Multi- Purpose Vehicles (MPVs) have grown at a far higher rate
than cars in 2006-07. Utility Vehicles (UVs) have been witnessing a double-digit growth rate
except in 2002-03.
Table 1: Growth Rates in Auto Sales (in %, based on Number of Vehicles sold)

Most of the recent growth in two-wheeler sales has been from the motorcycles and scooters that
have medium engine capacity, ranging from 75-125 cc for scooters and 75-250 cc for
motorcycles. Mopeds and all other segments that have either too low or too high engine
capacities have seen rapid decline in sales in the recent years.

Among the sub-segments of passenger cars30, sales of compact and mid-size cars have
grown more than two-fold from 2000-01 to 2005-06. Sales of cars in executive/premium/luxury
segment have grown more than five-fold during this period. However, the small car segment has
seen a decline in sales after 2003-04, though it has not grown very impressively even till 2003-04.
As for other passenger vehicles, all segments other than B2, which is heavy utility vehicle, have
been growing in the recent years. Growth has been lower for MPV, but it has been quite high for
other segments. In the passenger cars too the growth of mid-sized cars has been higher than
other segments (Figures 5 & 6).
Figure 5: Sales of Passenger Cars

Figure 6: Sales of Other Passenger Vehicles

Price Effect : Figures 7 & 8 show that the Wholesale Price Index (WPI) of automobiles was
almost identical to the WPI of all commodities, till 1991-92. Since 1992-93, WPI of automobiles
has risen at a lower rate than that of all commodities, and the gap between these two WPIs has
become conspicuously wide by 2005-06. Figure 8 further illustrates the fact that prices have fallen
for cars in 2002-03 and motorcycles in 2001-02,thanks to the cuts in excise duties for these
vehicles. All WPIs have moved together from 1993-94 to 2000-01, but the WPIs of all the
automobile segments have been consistently lower than those of all commodities. After 2001-02,
WPIs of trucks and buses have been rising at a higher rate than cars and motorcycles but at a
lower rate than the index for all commodities.

Figure 9 sheds light on an interesting trend regarding the growth of real prices of automobiles
over the years. When we compare the growth of auto prices with growth in real per capita GDP, it
is noteworthy that auto prices had been growing at much higher rate than per capita income in
the 1970s. However, the differential has been falling drastically since the early 1990s, and this
has been negative persistently since 2001-02. This means that compared to the rate at which
Indian per capita income has been growing in real terms in the past few years, the growth in auto
prices has been low. This could be because of the fact that tariffs have been cut since the 1990s
and also because of the huge volumes accumulated by many auto majors.
Figure 8: Wholesale Price Indices of Automobiles & All Commodities (Base Year: 1981-82)

Figure 9: Wholesale Price Indices of Different Segments in Automobiles (Base Year: 1993-94)
Figure 10: Growth Rates of Wholesale Price Indices of Automobiles (Base Year: 1981-82)

Conclusions from Demand and Price Effect

• While the domestic sales have been growing at reasonably good rates for all segments
of automobiles, the trend has been mixed when we look at the subsegments. For
example, sales of mopeds, motorcycles and scooters with lowest or highest engine
capacities and small cars have fallen in the recent years.

• In the real terms, the growth in prices of automobiles has been lower than the per capita
GDP growth in India over the past three decades, while the rise in auto prices has been
lower than rise in the aggregate price of all commodities, since the 1990s, possibly
because of high growth rates of inventories of auto companies,33 lower tariffs and higher
competition that followed the reforms since 1991.

Supply Effect: Here various supply-side features of the Indian auto industry are examined. The
first part deals with the organised auto sector, while its second part is about the unorganised
sector.

Organised Auto Sector in India

While the Original Equipment Manufacturers (OEMs) are at the top of the auto supply
chain, it should be noted that there are a few OEMs in India which supply some components to
other OEMs in India or abroad. Most of the Indian OEMs are members of the Society of Indian
Automobile Manufacturers (SIAM), while most of the Tier-1 auto component manufacturers are
members of the Automobile Component Manufacturers’ Association (ACMA). All of them are in
the organised sector and supply directly to the OEMs in India and abroad or to Tier-1 players
abroad.

Tier-2 and Tier-3 auto-component manufacturers are relatively smaller players. Though some of
the Tier-2 players are in the organised sector, most of them are in the unorganised sector. Tier-3
manufacturers include all auto-component suppliers in the unorganised sector, including some
Own Account Manufacturing Enterprises (OAMEs) that operate with one working owner and his
family members, wherein manufacturing involves use of a single machine such as the lathe.
Auto-component manufacturers cater not only to the OEMs, but also to the after-sales market. In
the recent years, there has been a rapid transformation in the character of the automotive
aftermarket, as a fast maturing organised, skill-intensive and knowledge driven activity. Hence,
the auto industry in India possesses a very diverse and complex structure, in terms of scale,
nature of operation, market structure, etc.

In order to examine the level of concentration of sales in the Indian auto industry, the Herschman-
Herfindahl’s Index (HHI) was used. Figure 11 shows that market concentration has been lower in
the two-/three-wheelers sector than in the other automobile sectors. While it has declined in the
mid-1990s in the latter, it clearly emerges from this figure that there is an increasing trend of
market concentration from 2000-01 in the Indian automobile sector. Even in the Indian auto-
component sector, market concentration has been rising since 2003-04, has now attained the
high levels of 1990-91, showing that some companies are scaling up.

Figure 11: Market Concentration (HHI) in Indian Auto Industry

Figure 12 shows that the capacity utilisation has been rising in the recent years in the Indian
automobile manufacturing sector. The increase has been more conspicuous in commercial and
passenger vehicles (CV/PV) other than two-/three-wheelers. From 65 per cent in 1997-98, it has
increased to over 85 per cent in 2005-06 in CV/PV sector. It has increased from about 65 per
cent in 1997-98 to more than 70 per cent in two-/three wheeler sector in 2005-06. Since 2003-04,
capacity utilisation has been higher in CV/PV than two-/three-wheelers, mainly because of higher
growth of domestic17 and export18 demand for CV/PV.

Figure 12: Capacity Utilisation in Indian Automobile Industry

It has been seen while both exports and imports are more prominent among automobile firms that
have higher equity participation, import content is much higher than export share in sales, for
firms that have 75-100 per cent Foreign Equity (FE). However, there is no clear role of foreign
equity participation in export/import behaviour of auto-component firms.

R&D expenditure share in total sales appears to be declining in the automobile industry, with a
rise in foreign equity participation. This is probably because of the fact that most of the foreign
firms have R&D facility in their parent country. R&D cost share remains almost invariant with
respect to FE participation in auto-component firms. Fuel cost share does fall with a higher FE in
both automobile and auto-component sectors.

Emoluments’ share in total costs falls in automobile firms with higher FE (Foreign Equity),
perhaps because of the fact that most of the foreign OEMs in India have high levels of
automation. However, it increases with FE (Foreign Equity) for auto-component firms, indicating
that foreign auto-component firms probably want to exploit the low-cost advantage of Indian
labour. Higher FE (Foreign Equity) participation corresponds to lower inventory share, which is
attributable to better market research, production planning and efficiency of the foreign auto firms
in India.

With recent reduction in auto-component tariffs and ongoing FTA negotiations, Indian auto-
component manufacturers are concerned about the possibility of imports replacing their
production. Hence, it is useful to examine the imports of auto-components as a share of total
auto-component productions in India. An important observation from Table 1 is that the ratio of
imports to total production of auto-components in India was declining till 2002-03, but it increased
steeply in 2003-04, which is the period when the Indo-Thailand FTA was implemented, though it
fell slightly in 2005-06. This increase in the share of imports to production of auto-components is
partly attributable to the growing imports of auto-components, on account of cost, by many Indian
subsidiaries of global OEMs and even Indian OEMs. Hence, there are possibilities of auto-
component imports substituting the domestic production, due to FTA and tariff cuts for auto-
components. Though India has the advantage of low labour costs, policy frameworks in other
countries need to be studied, to ensure that our goods are not subject to unfair competition as a
result of FTAs. However, this may not lead us to a conclusion that entry of MNCs to India is
affecting the prospects of Indian auto-component industries, because of the fact
that most of these MNCs play a vital role in upgrading the skills and technologies of the Indian
auto-component manufacturers.
Table 1: Import Content of Indian Auto Industry

Unorganised Auto Sector in India

The unorganised sector consists of enterprises that are not registered under certain
sections of the Factories Act.20. As Table 2 shows, the unorganised auto sector in India has
grown in terms of number of enterprises, employment, output, capital, capital intensity and labour
productivity. However, capital productivity has fallen considerably. However, it is evident that the
growth of this sector has been quite low in the rural areas than in the urban areas.

Rural-urban disparities are even more striking from Table 3. It is clear that the rural unorganised
sector is very small compared to its urban counterpart in the auto industry. However, rural areas
still have a major part of OAME. Thus, it could be inferred that only tiny players, even among the
smaller firms under the unorganised sector, prefer doing business in rural areas. These
observations point towards the importance of making rural areas more attractive for all industries,
including the auto industry, by enhancing infrastructure and introducing incentives, given the
current levels of urban congestion and corresponding infrastructure bottleneck.
Table 2.: Annual Average Growth Rates in Unorganised Auto Sector: 1994-95 to 2000-01

Table 3: Performance of Unorganised Auto Sector

In Table 4, the organised sector is compared with the unorganised sector in the Indian auto
industry. While the share of employment of the unorganised auto sector in the entire auto industry
has grown from 16 per cent in 1994-95 to 30 per cent in 2000-01, the share of the unorganised
auto sector in total value of auto output has grown only from 2 per cent to 3 per cent. The share
of the unorganised auto sector in total capital stock employed in the auto industry has grown from
4 per cent to 8 per cent, during this period.
In 2005-06, the number of enterprises in the unorganised sector was about 10 times higher than
that in the organised sector. Figures of labour productivity in this table show that the unorganised
sector is about 30 times less labour-productive than the organised sector. Capital productivity is
almost 10 times lower in the unorganised auto sector, while per-enterprise averages of
employment, output and capital, are respectively, 23, 678 and 70 times22 higher in the organised
sector than the corresponding figures for the unorganised sector. All these observations illustrate
one major point: the unorganised sector consists of tiny enterprises, which are, nevertheless,
quite significant for the auto sector as a whole, in terms of employment and to some extent also
for sectors output and capital employed.

Table 5, shows that the growth rates of almost all variables has been higher in the unorganised
sector, than in the organised sector. The only exceptions are output per enterprise, labour
productivity and capital productivity. This indicates that scales of operation and productivity
measures in the unorganised auto sector in India are not growing as rapidly as they are in the
organised auto sector.

Table 4: Comparison of Organised and Unorganised Auto Sectors

Table 5: Comparison of Growth rates of Organised and Unorganised Sectors: 1994-95 to 2005-06

Comparison of the cost structures of organised and unorganised auto sectors in India shows that
emoluments and fuels comprise a higher cost share in the unorganised sector (Figure 13). Higher
share of emoluments is probably because of the fact that the major part of the inputs involved in
the unorganised sector is labour, while that of fuels could be explained by the fact that these
smaller firms use fuel-inefficient and obsolete technologies. Thus, irrespective of whether or not
these firms aspire to grow bigger, it is in their interest to invest more on technologies and the
government could play a role in promoting such investments.

Figure 13: Comparison of Cost structure in Organised and Unorganised Auto Sectors
Conclusions

The following points could be inferred from the analysis in this section on the supply side:

• Two-wheelers are the major vehicle category produced in India, in quantity terms, while
the production of other vehicles also has been increasing every year.

• Market concentration has been increasing in both vehicle and component manufacturing
sectors.

• The ratio of the import of the auto-components to the auto-components produced in

India has risen, indicating that this sector may face threats from cheaper imports.

• Wage growth has been lower than labour productivity growth in this industry.

• Capital productivity, labour productivity and Total Factor Productivity have been higher in
two-/three-wheeler manufacturers than in CV/PV manufacturers, while capital intensity
has been higher in the latter. All these measures have been growing for all sub-sectors in
the entire auto industry in India. Capital productivity, labour productivity, Total Factor
Productivity and capital intensity have been higher in vehicle manufacturers than in auto-
component manufacturers in the recent years. However, the auto-component sector has
always been more labour-intensive and export-oriented than the automobile sector. This
shows the higher potential of the auto-component sector, in terms of employment
generation and export expansion.

• For the automobile sector, emolument growth has been relatively stagnant over the
years, despite fluctuations in sales, indicating an adverse impact of stringent labour
regulations. Inventories growth rate is comparable to growth rates in sales and output for
 most companies. R&D expenses growth and share in total sales have been low, though
improving over the years for some companies. Other than Hyundai, most CV/PV
manufacturers are less export-oriented than two-/three wheeler manufacturers.

• The unorganised sector contributes 30 per cent to total employment, 13 per cent to
capital and 1.5 per cent to output in the Indian auto industry. This has grown more rapidly
in urban areas than in rural areas, possibly due to lack of rural infrastructure. This sector
has much lower scales of operation and productivity measures than the organised sector.
Emolument cost and fuel cost shares are higher and services cost share is much lower in
this sector.

• There seems to exist a link between equity shares of foreign promoters and
performance/nature of an auto firm. Foreign firms in vehicle manufacturing export and
import more, as a share of sales, while there is no such clear trend for component firms.
The share of R&D in total cost is lower for foreign firms, hinting at lack/absence of their
R&D activities in India. Still, their better technical performance could be inferred from
lower fuel cost share for foreign vehicle manufacturers. While foreign vehicle
manufacturers have lower shares of emoluments in their total costs than Indian firms,
foreign component manufacturers have emolument shares comparable to Indian ones.
Foreign firms have lower inventories.

End of Case Study