Auto Component Industry Thriving in a Global economy role of PM

This white paper examines the emerging competitive scenario for the Indian Auto Component Industry; and what the industry needs to do to face the global onslaught on their market share. Countries like China, Thailand and Taiwan are ramping up their capabilities to accommodate low pricing mechanisms and economies of scale without compromising on quality.

Given this scenario, it is imperative that the Indian auto component manufacturers need to focus on developing and effectively managing their innovation skills.

However, the fundamental question that needs to be answered is, Are they really gearing up for this? What are the key issues that need to be addressed right now? Will Project Management techniques show them the way?

Thriving in a global economy & the role of Project Management

Change or Die may have been an apt motto for the Indian auto ancillary industry in the nineties. All around, industries were rationalising their workforces and modernising their production processes. Automobile companies were tying up with car makers in US and Japan to roll out an array of choices for the Indian consumer. Old alliances between auto ancillary suppliers and car manufacturers were wearing thin, under the strain of changing demands and rapidly accelerating expectations.

The comfortable relationship that most automobile companies had with their component suppliers was being challenged. The suppliers realised that it was imperative to spread their client base and look beyond the domestic automobile industry growth. It was clear to most that price competitiveness was not going to be enough; quality and scale of operation would be important factors for survival.

Many believe that the year 1991 was a watershed year for the industry. Although the impact was felt only a few years later, the first wave of reforms unleashed at this time led to sweeping changes in the decade to come. Import duties tumbled, the restrictions on foreign direct investment were taken off and there was a sharp rise in the quality and the number of car and bike models on Indian roads.

Many observers and industry insiders almost wrote off the Indian auto components industry because it was fragmented, unprofessionally managed and low on technology and marketing expertise. Few were willing to bet on its survival. The industry’s ability to cater to global quality standards was being questioned by many. And justifiably so, given the industry’s poor track record at the time.

But the industry transformed itself. It surprised its detractors and even more important, surprised itself with the speed with which it switched lanes. Component manufacturers opened up their production facilities to outside inspection focused on quality and global standards and entered into strategic alliances with car manufacturers and international auto component suppliers. A recent article in a business magazine highlighted some of the prominent deals struck in the industry (Businessworld, 14 November 2005). It said that Bharat Forge has made five acquisitions in the last five years and the Amtek group has bought over 7 companies in the last three years.

The last decade has also seen several auto component companies winning the prestigious Deming award for quality (see table below). Companies such as Sona Koyo Steering, Sundaram Brake Linings, Rane Brake Linings and Brakes India have all won the Deming prize. These companies were among the earliest to understand that price can not provide a competitive edge in this industry. Quality is just as important.

The Quality Lane

Companies	Year of winning the Deming prize
Sundaram-Clayton Limited, Brakes Division*	1998
Sundaram Brake Linings Ltd	2001
TVS Motor Company	2002
Brakes India Ltd., Foundry Division	2003
Mahindra and Mahindra Ltd., Farm Equipment Sector	2003
Rane Brake Linings Ltd	2003
Sona Koyo Steering Systems Ltd	2003
Lucas TVS Limited	2004
Krishna Maruti Limited, Seat Division	2005
Rane Engine Valves Limited	2005
Rane TRW Steering Systems Limited, Steering Gear Division	2005
* Also won the Japan Quality medal in 2002

Source: The W.Edwards Deming Institute
Today the industry is entering unfamiliar times once again. The US motoring mammoths are in trouble and their component suppliers have been hit by bankruptcy fever. In India, the car manufacturers are looking to set up component manufacturing units of their own and taking over some of the smaller suppliers. A handful of Indian components suppliers are acquiring companies in Europe and America to gain in scale and technology. And everywhere, the clamour for newer and more innovative products is growing louder.

For the Rs 20,000 crore industry that has over 400 companies, the future is looking gloriously uncertain. It is Change or Die time once more. Indian suppliers need to face up to rapidly evolving industry structures and market conditions. It is critical that the developments taking place all over the world are mapped to the conditions prevalent at home for Indian industry to comprehend the enormity of transformation required and capitalise on their existing advantages. 

Most importantly, these changes will spare none in the industry. All the three categories that Indian ancillary companies can be grouped into are going to be affected. The categories are: 

Category I: The multinational companies that have wholly owned subsidiaries in India or have the controlling stake in an Indian subsidiary.
(US majors Delphi and Visteon).

Category II:  Indian companies where an international company holds a minority stake
(India Nippon Electricals, IP Rings) 

Category III:  Indian companies that have no foreign involvement at all.
(Kaanda Motors, IAL Group)

Auto ancillary companies, across all groups, need to transform, restructure, and institutionalize global management practices in their organizations. The companies also have to consider how to inculcate a culture of innovation, product research and development and enterprise in their organizations.

Our report covers these factors in detail and brings you a ringside view of an industry in transition.

The anatomy of change

The changes that will have a huge impact on the industry in the coming years fall into two categories: internal and external. On the internal front, the industry is going to have to deal with a more demanding domestic market, a large replacement market and an opportunity to become a production centre for the rest of the world. On the external front, Asia is emerging as a potential production centre, a number of ancillary companies in Europe and the US are up for sale and technology has emerged as the key differentiator between companies in this industry.

A demanding domestic market

Competition in the domestic market is set to intensify. A number of large multinationals are eyeing production opportunities in India and this will mean an increase in resources being poured into the sector. Also going off the list of small scale industries will uncap the limits set on investment in the components manufacturing industry.

Both these developments will lead to increased competition. For the majority of small suppliers in this industry it will mean shedding their low tech garb and increasing their capacities to benefit from economies of scale. It also means adapting their production lines to the needs and demands of a changing customer base.

Already, Indian companies say, they are being inundated with offers from European and American firms. Everybody is keen to strike a deal – either for setting up a manufacturing outfit in India or tying up with a local player for a slice of the Indian market.  For instance, Dell’Orto (an Italian ancillary manufacturer) has tied up with EcoAuto Components in India. It plans to shift its entire manufacturing capacity from Italy to India. (The Economic Times, Aug 16, 2005)

Many such deals have been struck in the past few months and many more are in the pipeline (Operation Detroit, Businessworld, 14 November 2005). For companies who are contemplating these deals, it is important to pose this question to every opportunity for an acquisition or an alliance that comes their way: ‘What is the best option -- to ally or to acquire?’ According to a report in the Harvard Business Review (July-August 2004) by Jeffrey H Dyer, Prashant Kale and Harbir Singh, “Knowing when to use which strategy may be a greater source of competitive advantage than knowing how to execute them”. More and more Indian companies will have to ask themselves some hard questions as they sift through the deals that are dropping at their doorsteps every day. 

With the competition going global, component design and manufacturing facilities in the country will need to align with global standards and comply with more stringent product specifications. Also most car makers are looking for production lines that can be easily scaled up and is flexible enough to accommodate model upgrades. Indian suppliers will have to create facilities that meet these requirements.

To an extent, this is already happening. Our report shows that there has been a conscious effort by manufacturers to improve productivity of their suppliers in the last three years. Though the number of active vendors has declined significantly for auto manufacturers, technology transfer and fresh fund infusions have resulted in improved productivity in the remaining ones. A lot more companies need to follow the same route. They need to invest more in technology and scale up their production facilities.

Also the automobile manufacturers are keen to involve their component suppliers’ right from the product design stage, which calls for greater involvement and more efficient project management processes in these companies. One of the difficulties that suppliers in India face is lack of trained managerial manpower. This problem will get more acute in the months ahead and unless the industry arms itself with the skills required, growth and even survival could become an issue.  

The companies we spoke to, agree that the need to abide by quality standards and delivery schedules is going to get more acute in the coming months. Manufacturers are keen to cut down on the number of vendors associated with a model or a project and this will mean that component companies will either be bought out or close shop unless they are able to meet with the quality and delivery requirements. It is being estimated that at least 50% of India's strong supplier base, numbering around 6,000 will have to face extinction, bulk of them in the small scale sector.

To keep afloat, these companies must increase their size, upgrade themselves technologically and employ more management professionals.

Tackling the replacement market

The replacement market presents an enormous opportunity to Indian auto ancillary manufacturers. It is a relatively easy market to enter as the investment requirements are not as high as in the other categories. Also, multinationals are not interested in this market and hence competition is not as fierce.

There are five factors that influence the demand for replacement parts:

• Size of the national vehicle population
• Average age of the national vehicle population
• Pollution norms and Government regulations
• Average number of kilometres driven per vehicle
• Road and other related conditions

 

In India, all of these factors are presently generating a demand push for replacements. The country has a huge vehicle population, which is increasing at a CAGR of more than 10 per cent. The poor state of the roads and the fact the most vehicle owners in India don’t replace their cars very frequently are also creating greater demand for automobile spare parts. 

Indian companies could develop this market to their advantage by nurturing the relationship that they have built with their existing clients and, by weeding out the spurious suppliers from the industry. At present this market is marked by undercutting, inconsistent quality and a fragmented supplier base. Companies need to change this and tighten the supply chain to ensure quality deliverables on time.

It would be profitable, perhaps, for companies that are targeting the replacement market, to work at maximising customer lifetime value. Economists define customer lifetime value as the net profit a company accrues from transactions with a given customer during the time that a customer has a relationship with the company.

For an example that explains this concept well, refer to a paper written by management experts Ronald T Rust, Valarie A Zeithaml and Katherine N Lemon for the Harvard Business Review (Customer Centered Brand Management, HBR September 2004). The authors say that companies must focus on customer equity and cite the example of how Honda benefited from this approach during the launch of Acura Legend which was being sold as a luxury vehicle in markets other than America. The company realised that it would be alienating its core clientele in America who, believed that Honda made dependable cars that were not too exciting. Thus it decided to reposition Acura without the luxury branding tag. Honda used customer research to sharpen its marketing strategies and decided to focus on customer equity rather than brand equity. Indian component suppliers need to do the same to capture and consolidate their base in the replacement market.

A whole new world

Global markets are in a spin. Several component suppliers are either, closing down or, scaling down their production facilities in US and Europe. A number of companies are shifting base to Asia and almost all are already off shoring to countries like China and India. 

For Indian component suppliers, these changes have huge implications on their export potential and production strategies. For exports, currently estimated at between $1 and $1.5 billion, to grow at the same pace that they have in the past few years would require the industry to focus on quality. It is not enough to have a handful of quality conscious companies but, the emphasis should be on creating consistent performers.

According to Auto Components Manufacturers Association (ACMA), over 170 of its members have an ISO9000 certification and 23 have the QS9000 certification. Several Indian suppliers are single source vendors for companies like General Motors and Ford and many have received the Deming award for quality. However these facts are not representative of the entire industry. This is reflected in a survey conducted by consultants, A.T Kearney, which shows that defect rates in India are in the range of 1000-2000 ppm while the Japanese average is 100-200 ppm. Indian industry has a lot of catching up to do.

With global auto component manufacturers realigning their businesses, there are export opportunities as well as scope for new alliances for Indian companies. According to a McKinsey study the auto components exports have the potential to go up to $23 billion by 2015. The potential would remain only on paper unless companies are able to bridge the quality gap.

Exports will also suffer if Indian companies are unable to innovate and get into technology intensive components. The core skills of Indian companies are in metals and plastics but, it will be impossible to notch up $ 23 billion worth of exports without getting into automotive electronics.

In the US and in Europe, studies show that almost a quarter of the cost of building a car is accounted for by automated components. The market is big and is going to get bigger in the future. India has the software skills required to build the components but lacks the knowledge and experience that are required to give shape to these products. These skills can either be acquired by buying over small, tech-intensive suppliers or by allying with a large manufacturer or supplier with the requisite expertise.

Given the rapidly changing global markets, the time is right for Indian companies to go out and strike new friendships and seek out partners who can take them into the future. It is critical also that they look at how they compare with their Asian competitors before they draw up their strategies for the future. (Refer table below)

Where Does India Stand?

Parameter	India	China	Thailand	Taiwan
Quality Of Supply	1	4	2	3
Ability To Supply Consistent Quality	3	4	2	1
Price Competitiveness	4	1	3	2
Design And Engineering Capability	1	4	3	2
Customer/After, Sales Support	3	4	1	2
Maturity Of the Auto Components Industry	1	4	3	2
Government Regulations	4	3	1	2
Attractiveness Of the Domestic Market	2	1	3	4
Compliance And Transperency	2	4	3	1

          Source:Frost And Sullivan

Into the future - Building deep relationships

The future belongs to partnerships. In an industry that is scale driven and technologically dependant; joint ventures, acquisitions, mergers and strategic alliances are going to be the way ahead. Indian companies will find themselves looking closely at an array of deals in the coming months and it is important that they know how to strike alliances and build relationships.

However, building relationships is tough. Even tougher is deepening, consolidating and keeping them. At present, Indian companies appear attractive on account of their ability to produce components cheaply and their access to a large domestic market. These advantages are under threat from countries like China and Thailand. Also, they are not enough to keep the relationships steady and flourishing in the long run. To an extent, this advantage is also frittered away by…

The low productivity of Indian labour

A Japanese employee is ten times more productive than his or her Indian counterpart. In fact this is driving some Indian OEMS to set up manufacturing units in countries like Thailand where labour productivity is higher than in India.

Besides, a look at some successful supplier-manufacturer partnerships in other parts of the world shows that low wages are not enough for a partnership. Companies like Toyota look for suppliers’ innovation and technological capabilities. These companies also work very closely with their suppliers to develop their technical capabilities and are ready to share information that would enhance their production capacities or lower costs. They are naturally, extremely selective about whom they choose to partner with. For Indian companies to become a partner of choice, there is a lot that still needs to be fixed in terms of quality, scale and employee productivity.

The other problem that Indian companies will face is the high cost and poor quality of raw materials. Materials such as steel, polymers, castings etc are 20 per cent to 50 per cent more expensive than other countries. According to the table above, Indian companies are unable to supply quality components consistently. Although the industry has the capability to manufacture high quality products, it lacks the organisation and discipline to do so for every project.

Unless the quality of materials improves, taxation structures are better aligned to market realities and companies take a closer look at their project management skills, it would be very difficult to run a successful global business out of India.

Innovation and Product Design

There are very few who doubt the importance of innovation and product design to the auto components sector. Even though several US automakers and their suppliers have sought out partnerships with Indian and Chinese companies on account of the cost advantages of the region, Japanese car makers have been reluctant to come here.

According to a study on supplier relationships by Jeffrey K Liker and Thomas Y Choi (Harvard Business Review, December 2004), companies like Toyota and Honda believe that a suppliers’ innovation capabilities are more important than wage advantages. These companies insist on working very closely with designers and developers from the suppliers companies.

More and more auto makers would like to do the same. Working with a supplier who can manage innovation programs and has a product development strategy is always preferred over someone who just executes a supply order. Indian suppliers believe that this is going to play a very important role in their growth (ref. table below – npd = new product development) and that the industry needs to skill itself in these areas.

Currently the innovation and new product development being carried out by Indian firms is very meagre. Companies list a litany of problems when questioned about the lack of work being done in these areas. According to the survey carried out for this report, we found that the top five issues faced by the companies in new product development activities, as identified by the respondents, in descending order are as follows:

• Inadequate clarity of components
• Time overruns
• Too many development projects
• Limited manpower exposure
• Limited manpower capability

All of the above are significant problems. They will pose hurdles in the progress of Indian auto ancillary companies in the years ahead. All companies are agreed that a solution needs to be found if Indian suppliers are to consolidate their strengths and establish themselves as long run players.

Managing the future

Our analysis of the problems faced by Indian companies’ shows that there is a need to instil a rigorous project management culture in the organizations. Thus far, project management has been an ad hoc and infrequently used tool by the Indian auto component suppliers. It can no longer be so. For innovation to flourish and new product developments to emerge out of India, the discipline of project management is an imperative. Most of the organisations surveyed were not able to judge their project management culture nor did they have any metric to assess the performance of their projects. However all agreed to the urgency of having the relevant project management methodologies in place to stay competitive in the coming months.

Would that help?

Project management techniques will enable companies to allocate manpower and financial resources optimally between projects, eliminate inconsistencies in quality and ensure that deadlines are kept for every project.

By developing a ‘Management By Projects’ culture, a robust execution engine gets created. All initiatives gets prioritised and concurrent project activities get effectively managed within the various teams. The right set of tools and techniques will reduce lead times by atleast 30%.

These kinds of examples are already visible in the Indian auto Industry. Companies like Tata Motors, Mahindra and Mahindra have proved that effective project management techniques speed up innovation of processes as well as products. Project management measures and evaluates the progress of a project at regular intervals to ensure that customer and project requirements are being consistently met. It is proven and effective management skills which will help Indian suppliers find a way around their constraints.  A well established project management framework can help take companies to their next level of competence. It will partner their development of innovation skills and technological capabilities while sharpening the quality focus that companies in this sector are getting used to. Project management could well be the most potent weapon in the armoury of the Indian auto components sector.