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The Contribution of the Automobile Industry to Technology and Value Creation How can the auto industry in India build momentum for growth?

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Page 1: The Contribution of the Automobile Industry to …Contribution...The Contribution of the Automobile Industry to Technology and ... The Contribution of the Automobile Industry to

1The Contribution of the Automobile Industry to Technology and Value Creation

The Contribution of the Automobile Industry to Technology and Value CreationHow can the auto industry in India build momentum for growth?

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2The Contribution of the Automobile Industry to Technology and Value Creation

The automobile industry is a pillar of the global economy, a main driver of macroeconomic growth and stability and technological advancement in both developed and developing countries, spanning many adjacent industries. For developing countries such as India, understanding the auto industry’s evolution in other countries 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 percent over the past decade, according to the Society of Indian Automobile Manufacturers (SIAM). With more than 35 automakers, the industry contributes 7 percent to India’s GDP and is responsible for 7 to 8 percent 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 examines 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.

Auto’s Contribution to the Global EconomyThe core automotive industry (vehicle and parts makers) supports a wide range of business segments, both upstream and downstream, along with adjacent industries (see figure 1). 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, automotive 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 (see figure 2 on page 3).

Adjacent industries (finance, legal)

Downstream

Source: A.T. Kearney analysis

Figure 1 The core automotive industry supports upstream and downstream industries

• 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

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Generating revenue. The automotive sector contributes significant 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 totaled $7.72 billion in 2012, roughly 9 to 10 percent of all tax revenues, according to the Japan Automobile Manufacturers Association.1 In the United States, auto contributes $135 billion per year, including 13 percent of state tax revenues and 2 percent of federal tax revenues. In India, duties collected from sales of motor vehicles, accessories, and fuel contributed 7 to 8 percent of central tax collections in 2012.

Additionally, as automakers reap the benefits of globalization through exports, they also generate foreign exchange earnings. 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 percent in Germany and 17 percent in Japan, compared with 6 percent in Brazil and 5 percent in India. However, for some developing economies, 4 to 6 percent of export earnings are offset by vehicle imports and auto components.

Economic development. The automotive industry is important to global economic development. Globally, automotive contributes roughly 3 percent of all GDP output; the share is even higher in emerging markets, with rates in China and India at 7 percent and rising.

There is also a close correlation between foreign direct investment (FDI) inflows and automotive output, particularly in developing economies. For example in China, the correlation between

Source: A.T. Kearney analysis

Figure 2The auto industry’s contribution to the economy

Encouragepeople

development

Automotiveecosystem

R&D and innovation

Generategovernment

revenue

Createeconomic

development

1 All monetary figures are in U.S. dollars unless otherwise noted.

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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 eventually to the development of a wider automotive ecosystem. In South Korea, for example, 40 percent 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 benefited from a multiplier effect as adjacent industries (such as steel and finance) also profit from the growth (see figure 3). 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.

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

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

Figure 3South Korea’s auto industry has seen impressive growth—and led to 1.4 million jobs

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

Economic development is primarily in two areas:

• Industrial development. Across the world, auto is a spark for regional development. Industrial clusters form as original equipment manufacturer (OEM) plants are surrounded by component manufacturing facilities, including steel plants, glass manufacturers, used car dealerships, aftermarket shops, and transportation service providers. These clusters lead to new municipalities with solid road infrastructures, railway and freight connectivity, 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 automakers, 100 component suppliers, and 200,000 workers now reside. In 2007, Guangzhou contributed to 13 percent of China’s total GDP and had a GDP per capita roughly 75 percent higher than the national average.

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• Mobility. Automobiles have revolutionized the concept of mobility, with goods and people now easier than ever to move across geographic regions. For decades, developed countries have witnessed how increased vehicle ownership and improved transport infrastructures have led to counter-urbanization—the migration of people, businesses, and industry from cities to newly developed suburban 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 revenue sources for their respective states.

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 job creation and skill development. Its numerous forward and backward links bring both direct and indirect employment. To put this in context, 313,000 people were employed by OEMs in the United States in 2010, and another 1.1 million worked for adjacent industries. All told, 5 percent of the U.S. workforce had direct or indirect links to automotive. In South Korea, OEMs accounted for 270,000 jobs in 2011, and related industries added 1.4 million jobs overall—a multiplier of more than five—adding up to 7 percent of the country’s workers (see figure 4). In Japan, the industry employs 5.4 million people, representing 8 to 9 percent of the total workforce.

Sources: Korea Industrial Productivity Database; A.T. Kearney analysis

Figure 4Auto’s direct and indirect impact on employment in South Korea

Total South Koreaemployment

Tens of thousands of people(2011)

92.8%

Indirect

Direct7.2%

2,351

Total autoemployment 

170

Auto manu-

facturing

27

Parts manu-

facturing

12

Sales andmaintenance

23

Retail anddistribution

27

Logistics

81

Given the complex nature of the industry, employees develop valuable skills covering R&D, design, sourcing, manufacturing, supply chain, sales, and marketing. In this regard, automotive is a training ground for developing technical and managerial expertise valuable in many industries—and for the entire economy.

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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 billion compared to $111 billion spent by technology companies and $120 billion spent by pharmaceuticals.2 Automotive makes up a significant percentage of total manufacturing R&D spending in the auto hubs of Germany (33 percent), Japan (20 percent), and South Korea (18 percent).

The automotive industry remains at the forefront of cutting-edge manufacturing technology, which has spread to other industries. Production processes that germinated in automotive— for example, Ford’s assembly line manufacturing and the lean principles of the Toyota Production System—are now common in many industries. Automotive pioneered the use of robots as an automation solution; robotics today is a $25 billion 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 influential as well. Automakers were among the first companies to transfer direct task responsibilities, such as design, engineering, R&D, and purchasing, to suppliers. By focusing on core processes, automakers have improved profitability and served niche markets more efficiently.

Automotive is a training ground for technical and managerial expertise valuable in many industries. Valuable skills cover many areas, including R&D, design, sourcing, manufacturing, supply chain, sales, and marketing.

The Stakeholder Role in Industry GrowthThe government and other important stakeholders play an important role in shaping the automotive industry. Across the three stages of growth—incubation, penetration, and sustainability—governments introduce policies that influence the evolution and momentum of the auto industry. Consider how stakeholders in different countries have an impact at each stage (See sidebar: Examples of Government Interventions on page 7).

Incubation stage. How the auto industry got its start varies by country. In the United States, 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 investment in mass manufacturing capabilities and protects the infant domestic industry.

2 Figures are for 2011 and based on the largest 1,500 companies worldwide.

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• Investment. Timely and appropriate capital investment is undoubtedly important, especially for developing economies such as Brazil and China. The most pragmatic approach is to garner 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.

Examples of Government Interventions

The government can play a major role in building and sustaining a country’s automotive industry. Brazil promoted FDI and exports while supporting local growth, and China backed foreign investors while maintaining control over its burgeoning industry. South Korea permitted some foreign partner-ships and supported automaking clusters, institutes, and R&D. The

United States improved its road network and promoted vehicle safety and pollution control, steering the auto industry toward more sustainable industry practices. The figure gives more details on these interventions and their impact.

For India, there are three import-ant lessons from these examples.

• Promote global firms while encouraging homegrown technological capabilities

• Focus on infrastructure to increase demand

• Set safety, environmental, and efficiency norms to ensure a sustainable industry

Brazil

Acceleratedomestic growth

• Encourage importsubstitution

• Promote FDI with98 percent localcontent

• Use free-tradeagreements topromote exports

China South Korea United StatesIndustry

Governmentobjective

Policysupport

Sources: Research papers; A.T. Kearney analysis

Figure Government intervention in automotive

• Expanded domesticand export markets

• Created local partsindustry

• Left limited localtechnologicalcapabilities

• Harmed domesticbrands and skills

Protect withtechnology access

• Allow joint ventures with up to 50 percent FDI if they maximize local content and localize R&D

• Forbid investment by Chinese private companies

• Brought influx of global firms

• Invested in local skills development

• Threatened intellectual property because of cross-holding

• Led to struggles by domestic brands

Promoteself-reliance

• Permit some Korean conglomerates to enter into foreign partnerships

• Support clusters, institutes, and R&D

• Create technical autonomy in parts

• Increased Korean firms’ technological prowess

• Enabled synergistic learning

• Created oligopolistic domestic market

• Fostered export-dependent growth

Increase industry sustainability

• Build regional and interstate highway system

• Promote vehicle safety

• Stipulate pollution control and fuel e�iciency

• Improved infra-structure to drive domestic demand

• Led to sustainable industry practices

• Allowed new product imports from Japanese firms

Policyimpact

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Penetration stage. This stage is characterized by industry initiatives that increase automotive’s reach across income levels and borders.

• Open the economy to outside investors. To expand industry output, it is important to tap into outside markets. For example, Brazil’s BEFIEX program, introduced in the 1970s, brought in major automakers to set up export-oriented plants, reducing import duties on parts and accelerating depreciation on machinery.

• Push affordability and value. Domestic growth will only come when vehicles are more affordable and accessible to more people. Countries such as 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 countries but also boosted export revenues. As penetration increases and the industry evolves 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 United States, the landmark Federal-Aid Highway Act in 1956 invested $25 billion in the country’s transportation infrastructure, including a massive interstate highway system.

Auto is a spark for regional development, leading to new municipalities with solid road infrastructures, railway and freight connectivity, and new housing developments. Sustainability stage. As the industry plateaus, the policy focus shifts to improving productivity, safety, and the customer experience.

• Support the industry during downturns. Mature auto industries occasionally struggle and require significant government aid to get back on track. When General Motors and Chrysler filed for bankruptcy in 2009, the U.S. government stepped in with billions of dollars to bail out these companies. Both firms successfully bounced back—preserving a host of other downstream 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 billion on R&D in 2011.

• Improve efficiency, emissions, and safety. As the number of cars on the road increases, fuel efficiency, emission-reduction efforts, and safety become important government initiatives. Germany cut carbon emissions by 30 million 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,

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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 percent from 2005 to 2010.

Learning from the Global Auto IndustrySince its birth in the 1950s, India’s automotive industry has become an important cog in the country’s growth engine. Auto accounts for 7 percent of total GDP, comprises 4 percent of exports, and 3.9 percent of FDI inflows, with $5.5 billion in cumulative FDI between 2009 and 2013. The industry employs 2.2 million people, with indirect employment of another 17 million, 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 current 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 automotive producer (see figure 5).

India’s auto industry has similar growth potential. China reached India’s current level of production (approximately 4 million vehicles) in the middle of 2004, and since then its GDP has increased 10.7 percent per year and its auto industry has grown 19.5 percent 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 percent annually through 2020 (see figure 6 on page 10). This level of growth has happened before, albeit on a lower scale.

Reaching the same growth levels today will require favorable government policies, a strong focus on developing infrastructure, investments in manufacturing and technology, forward-thinking initiatives by automakers and suppliers, and overall improvement of the local supplier base. Otherwise, more moderate growth is likely.

Sources: 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

Figure 5 Comparing auto industry growth in India, China, and South Korea

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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 reducing delays in statutory clearances can reduce the duration of projects. Planning 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. Commercial vehicle growth requires upgraded logistics-handling facilities to increase capacity at ports, airport and railway freight terminals, and truck terminals.

• Encourage innovation. Leading global auto suppliers spend 5 to 10 percent of their revenues on R&D, but in India most spend less than 1 percent. Government incentives can encourage R&D by assemblers and component suppliers. Innovation will not only help meet current demand in new segments (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 talent base through effective technical and soft-skills training programs is equally important, especially in rural India and tier 2 and 3 cities. Institutions 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 investments will help automakers gear up for next-generation transportation such as hybrid, electric, and alternative fuel vehicles.

• Institute a clear policy on GST. Instituting the long-pending Goods and Services Tax (GST) will help simplify the tax structure and allow automakers to better plan their product portfolios.

Sources: Society of Indian Automobile Manufacturers, International Energy Agency; A.T. Kearney analysis

Vehicle production(million units)

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

Ideal growthStunted growth(limited policy support)

Figure 6 Growth projections for India’s auto industry

10

20

30

40

50

0

5

15

25

35

45

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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 initiatives are necessary, including total quality management (TQM), Six Sigma, total productive maintenance (TPM), and lean manufacturing. Establishing innovation centers 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, aluminum, plastics, and glass industries will invest in R&D and innovation to come up with high-strength, lightweight composites 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 2 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 favorable 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.

Authors

Goetz Klink, partner, Stuttgart [email protected]

Ram Kidambi, principal, Mumbai [email protected]

Manish Mathur, partner, New Delhi [email protected]

Kaustav Sen, consultant, Mumbai [email protected]

The authors wish to thank Akash Jain, Tamanna Padhi, and Deepak Maloo for their contributions to this paper.

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