CONTRIBUTION OF THE AUTOMOBILE INDUSTRYTO TECHNOLOGY AND VALUE CREATION

AUTHORS

GÖTZ KLINK

is Partner at AT Kearney.

MANISH MATHUR

is Partner at AT Kearney.

RAM KIDAMBI

iis Principal at AT Kearney.

KAUSTAV SEN

is Consultant at AT Kearney.

INTRODUCTION

How can the auto industry in India

build momentum for growth?

The automobile industry is a pillar of

the global economy, a main driver of mac-

roeconomic growth and stability and tech-

nological advancement in both developed

and developing countries, spanning many

adjacent industries. For developing coun-

tries such as India, understanding the

auto industry's evolution in other coun-

tries offers a roadmap forward.

India's auto industry is the world's

sixth-largest producer of automobiles in

terms of volume and value. It has grown

14.4 % over the past decade, according to

the Society of Indian Automobile Manu-

facturers (SIAM). With more than 35

automakers, the industry contributes 7 %

to India's GDP and is responsible for 7 to

8 % of India's total employed population.

To maintain auto's primary role in

growth, India must make the right moves

at all critical junctures. This paper exam-

ines how the industry, government, and

key stakeholders in other countries have

propped up their auto industries, and

how India and other emerging markets

can use the same strategies to build

growth momentum.

CONTRIBUTION TO

GLOBAL ECONOMY

The core automotive industry (vehicle

and parts makers) supports a wide range

of business segments, both upstream and

downstream, along with adjacent indus-

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STUDY VALUE CREATION

19autotechreview July 2014 Volume 3 | Issue 7

tries, ➊. This leads to a multiplier effect

for growth and economic development.

Furthermore, R&D and innovation within

automotive can benefit other industries,

such as the insurance industry's use of

innovative ideas (for example, automo-

tive telematics).

Automotive contributes to several

important dimensions of nation building:

generating government revenue, creating

economic development, encouraging

people development, and fostering R&D

and innovation.

A. GENERATING REVENUE

The automotive sector contributes signifi-

cant tax revenues from vehicle sales,

usage-related levies, personal income

taxes, and business taxes. Production and

sales of new and used vehicles, parts, and

services deliver excise, sales, value-added,

and local taxes and import duties. For

instance, in Japan, auto-related taxes

totalled $ 7.72 bn in 2012, roughly 9 to 10

% of all tax revenues, according to the

Japan Automobile Manufacturers Associa-

tion [1]. In the United States, auto contrib-

utes $ 135 bn per year, including 13 % of

state tax revenues and 2 % of federal tax

revenues. In India, duties collected from

sales of motor vehicles, accessories, and

fuel contributed 7 to 8 % of central tax

collections in 2012.

Additionally, as automakers reap the

benefits of globalisation through exports,

they also generate foreign exchange earn-

ings. This is crucial to a country's current-

account performance and trade balance

with other economies. Not surprisingly,

the share of automotive exports is higher

in developed countries than in emerging

economies — 18 % in Germany and 17 %

in Japan, compared with 6 % in Brazil

and 5 % in India. However, for some

developing economies, 4 to 6 % of export

earnings are offset by vehicle imports and

auto components.

B. ECONOMIC DEVELOPMENT

The automotive industry is important to

global economic development. Globally,

automotive contributes roughly 3 % of all

GDP output; the share is even higher in

emerging markets, with rates in China

and India at 7 % and rising. There is also

a close correlation between foreign direct

investment (FDI) inflows and automotive

output, particularly in developing econo-

mies. For example in China, the correla-

tion between growth in auto output and

FDI is almost 1 to 1, as the automotive

industry's rise has closely tracked that of

China's economy.

Automotive FDI also brings investment

in related industries and can lead eventu-

ally to the development of a wider auto-

motive ecosystem. In South Korea, for

example, 40 % of total FDI in 2000 was

for the automotive industry, providing the

country a crucial step out of its recession

following the 1997 Asian financial crisis.

Today, South Korea is the world's fifth-

largest vehicle producer, and has bene-

fited from a multiplier effect as adjacent

industries (such as steel and finance) also

profit from the growth, ➋. Steel sales, for

example, went from 55 thousand tons in

2002 to 210 thousand tons in 2012. Every

job in the core auto industry leads to

more than four additional jobs in

upstream or downstream industries.

Economic development is primarily in

two areas:

:: Industrial development: Across the

world, auto is a spark for regional

development. Industrial clusters form

as OEM plants are surrounded by com-

ponent manufacturing facilities, includ-

ing steel plants, glass manufacturers,

used car dealerships, aftermarket

shops, and transportation service pro-

viders. These clusters lead to new

municipalities with solid road infra-

structures, railway and freight connec-

tivity, and new housing developments.

Most major auto economies have these

clusters, including Detroit in the United

States and Ulsan in South Korea. In

developing countries, these clusters

include the ABC region near São Paulo

in Brazil; Pune, Gurgaon, and Chennai

in India; and Guangzhou province in

China, where more than 55 automak-

ers, 100 component suppliers, and

200,000 workers now reside. In 2007,

Guangzhou contributed to 13 % of

China's total GDP and had a GDP per

capita roughly 75 % higher than the

national average.

:: Mobility: Automobiles have revolu-

tionised the concept of mobility, with

goods and people now easier than

ever to move across geographic

regions. For decades, developed coun-

tries have witnessed how increased

vehicle ownership and improved

transport infrastructures have led to

counter-urbanisation — the migration

of people, businesses, and industry

from cities to newly developed subur-

ban areas. This trend is spreading to

emerging economies. In New Delhi,

for example, significant development

has arisen in the suburbs of Noida

and Gurgaon, bringing crucial reve-

nue sources for their respective states.

C. PEOPLE DEVELOPMENT

Worldwide there is one motor vehicle for

every five people; in the United States

there is one car for every 1.25 citizens.

Automobiles can increase quality of life

through increased mobility, comfort, and

safety. The industry also contributes to

Adjacent industries (finance, legal)

Downstream

• Finance and insurance• After-market

(services, auto parts)• Used car market• Car hires and rentals• Fuel supply• Advertising• Transportation• Warehousing

Upstream

• Mining• Steel• Metals (primary

and fabricated)• Fuel• Plastic, rubber, glass• Electronics

Core automotive

• Original equipmentmanufacturers (OEMs)

— Passenger vehicles — Commercial vehicles — Two-wheelers — Three-wheelers • Component

manufacturers

➊ The core automotive industry supports upstream and downstream industries

20 www.autotechreview.com

STUDY VALUE CREATION

job creation and skill development. Its

numerous forward and backward links

bring both direct and indirect employ-

ment. To put this in context, 313,000 peo-

ple were employed by OEMs in the United

States in 2010, and another 1.1 mn

worked for adjacent industries. All told, 5

% of the US workforce had direct or indi-

rect links to automotive. In South Korea,

OEMs accounted for 270,000 jobs in 2011,

and related industries added 1.4 mn jobs

overall — a multiplier of more than five

— adding up to 7 % of the country's

workers. In Japan, the industry employs

5.4 mn people, representing 8 to 9 % of

the total workforce.

Given the complex nature of the indus-

try, employees develop valuable skills

covering R&D, design, sourcing, manufac-

turing, supply chain, sales, and market-

ing. In this regard, automotive is a train-

ing ground for developing technical and

managerial expertise valuable in many

industries — and for the entire economy.

D. FOSTERING R&D AND

INNOVATION

R&D investment by automakers is driven

by consumer demands for more product

variety, better performance, improved

safety, higher emission standards, and

lower costs. Auto companies spend the

third most on R&D of any industry — $

108 bn compared to $ 111 bn spent by

technology companies and $ 120 bn spent

by pharmaceuticals [2]. Automotive makes

up a significant percentage of total manu-

facturing R&D spending in the auto hubs

of Germany (33 %), Japan (20 %), and

South Korea (18 %).

The automotive industry remains at

the forefront of cutting-edge manufactur-

ing technology, which has spread to other

industries. Production processes that ger-

minated in automotive — for example,

Ford's assembly line manufacturing and

the lean principles of the Toyota Produc-

tion System — are now common in many

industries. Automotive pioneered the use

of robots as an automation solution;

robotics today is a $ 25 bn industry, with

food and beverage, pharmaceuticals, and

communications among the industries

using this technology extensively. The

auto industry's supply chain integration

and modular sourcing have been influen-

tial as well. Automakers were among the

first companies to transfer direct task

responsibilities, such as design, engineer-

ing, R&D, and purchasing, to suppliers.

By focusing on core processes, automak-

ers have improved profitability and served

niche markets more efficiently.

THE STAKEHOLDER ROLE IN

INDUSTRY GROWTH

The government and other important

stakeholders play an important role in

shaping the automotive industry. Across

the three stages of growth — incuba-

tion, penetration, and sustainability —

governments introduce policies that

influence the evolution and momentum

of the auto industry.

A. INCUBATION STAGE

How the auto industry got its start varies

by country. In the US, the industry grew

as private affluence rose, along with the

demand for vehicles. In Germany and

Japan, the auto industry was propped up

by a desire for improved military prowess.

In general, there is a common pattern:

After identifying automotive as a pillar for

growth, the government supports invest-

ment in mass manufacturing capabilities

and protects the infant domestic industry.

:: Investment: Timely and appropriate

capital investment is undoubtedly

important, especially for developing

economies such as Brazil and China.

The most pragmatic approach is to gar-

ner support from foreign OEMs.

:: Protection: Governments typically

demonstrate a protectionist attitude

early in industry development —

restricting imports with special rules,

tariffs, and mandates on local content.

However, too much protectionism can

be risky. In Russia and Malaysia, for

example, protectionist policies stifled

competition and affected quality,

whereas Thailand, whose industry

arose at the same time as Malaysia's, is

stronger today because of open trade

and investment policies.

B. PENETRATION STAGE

This stage is characterised by industry ini-

tiatives that increase automotive's reach

across income levels and borders.

:: Open the economy to outside inves-

tors: To expand industry output, it is

important to tap into outside markets.

For example, Brazil's BEFIEX pro-

gramme, introduced in the 1970s,

brought in major automakers to set up

export-oriented plants, reducing import

duties on parts and accelerating depre-

ciation on machinery.

:: Push affordability and value: Domes-

tic growth will only come when vehi-

cles are more affordable and accessible

to more people. Countries such as

➋ South Korea’s auto industry has seen impressive growth—and led to 1.4 million jobs

Source: Korea Automobile Manufacturing Association, media research, Korea statistics database research; A.T. Kearney analysis

*POSCO is a multinational steel producer headquartered in Pohang, South Korea.

DownstreamUpstream

2002

55

Posco’s automotive steel sales*(thousand tons)

Annual car production(thousand units)

Sales of auto components(US$ billion)

Sales by installmentfinancing companies

Core automotive

2012

210

+3.8x

2002

23

2012

59

+2.6x

2002

3,242

2012

4,562

2002 2012

30%

14%

70%86%

General

Carfinancing

+1.4x

21autotechreview July 2014 Volume 3 | Issue 7

Japan, Brazil, and South Korea

rewarded OEMs for conceiving low-

cost compact cars for the masses, and

the resultant models not only increased

automakers' popularity in these coun-

tries but also boosted export revenues.

As penetration increases and the

industry evolve further, customers

begin to evaluate products based on

total cost of ownership. OEMs thus

begin to focus more on improving

quality and service, and the value of

their products.

:: Improve the infrastructure: Adequate

infrastructure is needed to support

auto industry growth. In the US, the

landmark Federal-Aid Highway Act in

1956 invested $ 25 bn in the country's

transportation infrastructure, including

a massive interstate highway system.

C. SUSTAINABILITY STAGE

As the industry plateaus, the policy focus

shifts to improving productivity, safety,

and the customer experience.

:: Support the industry during down-

turns: Mature auto industries occa-

sionally struggle and require significant

government aid to get back on track.

When General Motors and Chrysler

filed for bankruptcy in 2009, the US

government stepped in with billions of

dollars to bail out these companies.

Both firms successfully bounced back

— preserving a host of other down-

stream and upstream industries and

millions of jobs.

:: Encourage innovation-driven

growth: As the industry matures,

demand for more product variety and

additional features rises. In the future,

this may include alternative fuels and

electric vehicles; the industry can help

by stepping up R&D efforts and

rewarding innovation. Germany's

automotive industry spent $ 20.6 bn

on R&D in 2011.

:: Improve efficiency, emissions, and

safety: As the number of cars on the

road increases, fuel efficiency, emis-

sion-reduction efforts, and safety

become important government initia-

tives. Germany cut carbon emissions

by 30 mn metric tons from 1990 to

2010. South Korea and China have

announced plans to invest in alternate

fuels and hybrid vehicles to drive

green mobility. Such initiatives require

appropriate infrastructure support. The

United States' landmark 1966 National

Traffic and Motor Vehicle Safety Act

and Highway Safety Act mandated

head rests, energy-absorbing steering

wheels, shatter-resistant windshields,

and seat belts. Roads were made safer

with better signage, guardrails, and

barriers. Similar interventions in Japan

reduced accidents by approximately 30

% from 2005 to 2010.

LEARNING FROM THE GLOBAL

AUTO INDUSTRY

Since its birth in the 1950s, India's auto-

motive industry has become an important

cog in the country's growth engine. Auto

accounts for 7 % of total GDP, comprises

4 % of exports, and 3.9 % of FDI inflows,

with $ 5.5 bn in cumulative FDI between

2009 and 2013. The industry employs 2.2

mn people, with indirect employment of

another 17 mn, and invests significant

amounts of money on R&D, behind only

pharmaceuticals.

Still, the auto industries in South Korea

and China achieved greater growth and

did so more quickly, reaching India's cur-

rent production levels in roughly two-

thirds of the time (about 40 years). Today,

both are ahead of India in production;

China is now the world's largest automo-

tive producer, ➌.

India's auto industry has similar

growth potential. China reached India's

current level of production (approximately

4 mn vehicles) in the middle of 2004, and

since then its GDP has increased 10.7 %

per year and its auto industry has grown

19.5 % annually. Based on India's

expected GDP growth and using a similar

correlation between GDP growth and

automotive output, the industry could

grow at more than 12 % annually through

2020, ➍. This level of growth has hap-

pened before, albeit on a lower scale.

Reaching the same growth levels

today will require favourable government

policies, a strong focus on developing

infrastructure, investments in manufac-

turing and technology, forward-thinking

initiatives by automakers and suppliers,

and overall improvement of the local

supplier base. Otherwise, more moderate

growth is likely.

GOVERNMENT IMPERATIVES

The government can play an important

role in creating a healthy, sustainable

automotive ecosystem with the following:

:: Develop infrastructure: Streamlining

the land acquisition process and reduc-

ing delays in statutory clearances can

reduce the duration of projects. Plan-

ning rural road networks through the

Public Private Partnership (PPP) route

can bring faster execution. In cities,

new roads and bypass routes (such as

special freight corridors) can address

the issue of road congestion. Commer-

cial vehicle growth requires upgraded

logistics-handling facilities to increase

➌ Comparing auto industry growth in India, China, and South Korea

Source: Saed Samadi, 2013

Source: Society of Indian Automobile Manufacturers, Korea Automobile Manufacturing Association, China Automotive Industry Yearbook; A.T. Kearney analysis

Automotive production(million units)

China

01950 1960 1970 1980 1990 2000 2010

5

10

15

20

1950 1960 1970 1980

South KoreaIndia

22 www.autotechreview.com

STUDY VALUE CREATION

Vehicle production(million units)

2010 2011 2012 2013 2014e 2015e 2016e 2017e 2018e 2019e 2020e

Ideal growthStunted growth(limited policy support)

10

20

30

40

50

0

5

15

25

35

45

capacity at ports, airport and railway

freight terminals, and truck terminals.

:: Encourage innovation: Leading

global auto suppliers spend 5 to 10 %

of their revenues on R&D, but in India

most spend less than 1 %. Govern-

ment incentives can encourage R&D

by assemblers and component suppli-

ers. Innovation will not only help

meet current demand in new seg-

ments (such as compact SUVs and

quadricycles) but also meet the needs

for future technologies focused on

green mobility.

:: Develop human capital: Attractive

career opportunities will draw high-

potential talent. Creating a wider tal-

ent base through effective technical

and soft-skills training programmes is

equally important, especially in rural

India and Tier II and III cities. Institu-

tions that offer automotive-focused

courses will further fuel this effort.

:: Target sustainability: As the auto

industry seeks immediate growth, the

government must simultaneously

push it into the future, largely through

sustainability. Policies on road and

vehicle safety systems and emissions

controls must be to global standards.

Incentives and infrastructure invest-

ments will help automakers gear up

for next-generation transportation

such as hybrid, electric and alterna-

tive fuel vehicles.

:: Institute a clear policy on GST: Insti-

tuting the long-pending Goods and

Services Tax (GST) will help simplify

the tax structure and allow automakers

to better plan their product portfolios.

IMPERATIVES FOR OEMS

AND SUPPLIERS

By contributing to product innovation and

improved quality, automakers and their

suppliers can align with global standards,

while maintaining low costs. Rigorous

quality and productivity improvement ini-

tiatives are necessary, including total

quality management (TQM), Six Sigma,

total productive maintenance (TPM), and

lean manufacturing. Establishing innova-

tion centres and forming technology joint

ventures with global players will further

the industry's credentials and knowledge.

IMPERATIVES FOR UPSTREAM AND

DOWNSTREAM INDUSTRIES

Upstream and downstream industries

change their focus to follow the auto

industry. For example, the steel, alumin-

ium, plastics and glass industries will

invest in R&D and innovation to come up

with high-strength, lightweight compos-

ites to improve quality and offer “green

solutions” for sustainable automobiles.

Downstream, the finance and insurance

industries will become more innovative to

make automobiles more affordable for

drivers in Tier II cities and rural areas.

AUTOMOTIVE AS AN ANCHOR

India's auto industry has made strides,

but it can do more to meet its full

potential: active and favourable policy

interventions, infrastructure building,

investments in technology and R&D,

and the development of a healthy and

sustainable automotive ecosystem. A

collaborative approach by OEMs, the

government, and other stakeholders will

achieve this growth.

REFERENCES:

[1] All monetary figures are in US dollars unless

otherwise noted.

[2] Figures are for 2011 and based on the largest

1,500 companies worldwide.

[The Contribution of the Automobile

Industry to Technology and Value Crea-

tion, copyright A.T. Kearney, 2013. All

rights reserved. Republished with

permission.

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THANKS

The authors wish to thank Akash Jain, Tamanna

Padhi, and Deepak Maloo for their contributions

to this paper.

➍ Growth projections for India’s auto industrySource: Society of Indian Automobile Manufacturers, International Energy Agency; A.T. Kearney analysis