the contribution of the automobile industry to technology and value creation

8/10/2019 The Contribution of the Automobile Industry to Technology and Value Creation

1/121The Contribution of the Automobile Industry to Technology and Value Creation

The Contribution ofthe Automobile Industryto Technology and

Value CreationHow can the auto industry in India build

momentum for growth?



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 industrys evolution in other countries offers a roadmap forward.

Indias auto industry is the worlds sixth-largest producer of automobiles in terms of volume

and value. It has grown . percent over the past decade, according to the Society of Indian

Automobile Manufacturers (SIAM). With more than automakers, the industry contributes

percent to Indias GDP and is responsible for to percent of Indias total employed population.

To maintain autos 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.

Autos 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 ). 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 industrys

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 on page ).

Adjacent industries inance, legal

Downstream

Source: A.T. Kearney analysis

Figure

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 equipment

manufacturers (OEMs)

Passenger vehicles

Commercial vehicles

Two-wheelers

Three-wheelers

Component

manufacturers


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growth in auto output and FDI is almost to , as the automotive industrys rise has closely

tracked that of Chinas 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, percent of total FDI in was for the automotive industry, providing the country

a crucial step out of its recession following the Asian financial crisis. Today, South Korea is

the worlds 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 ). Steel sales, for

example, went from thousand tons in to thousand tons in . 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

South Koreas auto industry has seen impressive growthand led to . million jobs

DownstreamUpstream

Poscos automotive

steel sales*

(thousand tons)

Annual car production

(thousand units)

Sales of auto components

(US billion)

Sales by installment

inancing companies

Core automotive

+.x

+.x

,

,

%

%

%

%

General

Carinancing

+.x

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 So Paulo in Brazil; Pune, Gurgaon, and Chennai in India; and Guangzhou

province in China, where more than automakers, component suppliers, and ,

workers now reside. In , Guangzhou contributed to percent of Chinas total GDP and

had a GDP per capita roughly percent higher than the national average.



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-urbanizationthe 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 . 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, ,

people were employed by OEMs in the United States in , and another . million worked foradjacent industries. All told, percent of the U.S. workforce had direct or indirect links to

automotive. In South Korea, OEMs accounted for , jobs in , and related industries

added . million jobs overalla multiplier of more than fiveadding up to percent of the

countrys workers (see figure ). In Japan, the industry employs . million people, representing

to percent of the total workforce.

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

Figure

Autos direct and indirect impact on employment in South Korea

TotalSouth Koreaemployment

Tens of thousands of people

()

.%

Indirect

Direct.%

,

Total autoemployment

Automanu-

facturing

Partsmanu-

facturing

Sales andmaintenance

Retail anddistribution

Logistics

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.



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

billion compared to billion spent by technology companies and billion spent

by pharmaceuticals.Automotive makes up a significant percentage of total manufacturing

R&D spending in the auto hubs of Germany ( percent), Japan ( percent), and South

Korea ( 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, Fords assembly line manufacturing and the lean principles of the Toyota Production

Systemare now common in many industries. Automotive pioneered the use of robots as

an automation solution; robotics today is a billion industry, with food and beverage,

pharmaceuticals, and communications among the industries using this technology extensively.

The auto industrys 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 skillscover 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 growthincubation, penetration,

and sustainabilitygovernments 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 ).

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 and based on the largest , companies worldwide.



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

developmentrestricting 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 Malaysias, 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

countrys 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-trade

agreements topromote exports

China South Korea United StatesIndustry

Government

objective

Policy

support

Sources: Research papers; A.T. Kearney analysis

Figure

Government intervention in automotive

Expanded domestic

and export markets

Created local parts

industry

Left limited localtechnologicalcapabilities

Harmed domesticbrands and skills

Protect withtechnology access

Allow jointventures with upto 50 percent FDI

if they maximizelocal content andlocalize R&D

Forbid investmentby Chinese privatecompanies

Brought inlux of

global irms

Invested in local

skills development

Threatenedintellectual propertybecause of cross-holding

Led to struggles bydomestic brands

Promoteself-reliance

Permit some Koreanconglomerates toenter into foreign

partnerships

Support clusters,institutes, and R&D

Create technicalautonomy in parts

Increased Korean

irms technologicalprowess

Enabled synergisticlearning

Created oligopolisticdomestic market

Fostered export-dependent growth

Increase industrysustainability

Build regional andinterstate highwaysystem

Promote vehicle

safety

Stipulate pollution

control and fueleiciency

Improved infra-

structure to drivedomestic demand

Led to sustainableindustry practices

Allowed newproduct importsfrom Japanese

irms

Policy

impact



Penetration stage.This stage is characterized by industry initiatives that increase automotives

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, Brazils BEFIEX program, introduced in the s, broughtin 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 invested billion

in the countrys 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 freightconnectivity, and new housingdevelopments.

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 andrequire significant government aid to get back on track. When General Motors and Chrysler

filed for bankruptcy in , the U.S. government stepped in with billions of dollars to bail

out these companies. Both firms successfully bounced backpreserving 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.

Germanys automotive industry spent . billion on R&D in .

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 million metric tons from to . 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

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 percent from to .

Learning from the Global Auto IndustrySince its birth in the s, Indias automotive industry has become an important cog in the

countrys growth engine. Auto accounts for percent of total GDP, comprises percent of

exports, and . percent of FDI inflows, with . billion in cumulative FDI between and

. The industry employs . million people, with indirect employment of another 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 Indias current production levels in roughly two-thirds of the time (about years). Today, both are ahead of India in production; China is now the worlds largest

automotive producer (see figure ).

Indias auto industry has similar growth potential. China reached Indias current level of

production (approximately million vehicles) in the middle of , and since then its GDP

has increased . percent per year and its auto industry has grown . percent annually.

Based on Indias expected GDP growth and using a similar correlation between GDP growth

and automotive output, the industry could grow at more than percent annually through (see figure on page ). 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 IndustryYearbook; A.T. Kearney analysis

Automotive production

(million units)China

South Korea

India

Figure

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



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 to percent of their revenues

on R&D, but in India most spend less than percent. Government incentives can encourageR&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 and 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 andvehicle 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)

e e e e e e e

Ideal growth

Stunted growth

(limited policy support)

Figure

Growth projections for Indias auto industry


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the contribution of the automobile industry to technology and value creation

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