The Indian Government recently have made several announcements, ostensibly to improve domestic demand and also draw investment from abroad. The aim is to transform India into a powerhouse for global manufacturing. Some of the decisions have attracted scepticism from economists, such as the import license quota for TV sets and the import duty revisions.
They find out that they are going to hamper some of our existing exports, not improve them. While the fine print is planned, other announcements such as the Production Linked Incentives (PLIs) for 10 sectors (around Rs 57,000 crore is earmarked for automobiles alone) look positive. There’s a lot of optimism in the automotive industry, one of the few success stories in Indian manufacturing.
India is also the largest producer of two and three wheeler, and world fourth largest maker of passenger cars according to a Ministry of Heavy Industries released in 2019. In the global supply chain, the market is still interconnected, manufacturing two-wheeler, passenger and commercial cars. It accounts for 49 per cent of the industrial GDP of India, 7.1 per cent of it’s overall GDP and according to the release, employs 37 million people directly and indirectly.
Therefore it makes sense to describe what made automotive manufacturing take off when other industries lagged. Three features stand out: scale, new products and a degree of security. Interestingly, the growth of the auto industry can be traced back to policy decisions made a decade before the 1991 economic reforms were introduced.
The government authorised the manufacture of 100 cc motorcycles in the 1980s and granted four companies licences. More specifically, these businesses were allowed to select their optimal production capacities, a combination of technologies, etc., enabling them to build up to licenced capacities. These licences were connected to Suzuki, Honda, Kawasaki and Yamaha to put in motorcycles that in most countries would be considered low-powered but were fuel-efficient and suitable for Indian commuting.
The commuting bikes soon became favourites, their sales well outstripping the older, heavier bikes (Royal Enfield Bullet, Rajdoot and Yezdi) and scooters (Bajaj). By the 1990s, adequate volumes were generated by the players to continue investing in vendor growth, R&D, marketing and quality. In the case of passenger vehicles, a large part of the credit for the success of their production and exports goes to Maruti Udyog Ltd, which was founded in 1982.
Along with Japanese industrial activities, it took in the first modern car into the world and seeded a global quality vendor ecosystem. For a decade, Maruti, which rolled out its first car in 1983, enjoyed a relatively competition-free run but had to develop a global premium supplier base in the country from scratch due to policies of the era.
Maruti began as a PSU. Originally, Suzuki of Japan took just a 26 per cent stake because it was not very sure about the collaboration’s progress. V Krishnamurthy was the founding chairman and managing director, while R C Bhargava, its new chairman, was executive director, but it had outstanding top management. Suzuki’s decision as a partner was exceptionally astute; the firm was not one of the world’s largest car companies. It specialised in mini cars and was not in the same league as Toyota, General Motors, Ford, Volkswagen or Fiat.
However, for the business it was joining, it had the right car. The Maruti 800 was the right vehicle for an emerging market, based on the Suzuki Alto, although it was a fringe participant in the big car markets. In 1983, Maruti entered the industry with the new compact car of the current generation, and it’s only rivals were the ancient Ambassadors and Premier Padminis. Most importantly, thanks to some hard lobbying by Krishnamurthy and Bhargava, it had grudgingly received permission to build a capacity of 1,00,000 cars per annum, though the government was sceptical of its ability to produce or sell them.
However, imports were frowned upon as the market was still closed, cars were seen as a luxury and foreign exchange outgo was discouraged. By 1988, Maruti had to ensure that 75% of its components were localised. It was a challenging challenge, considering that at that time, Indian manufacturers were not used to manufacturing components that followed global requirements, nor was there any reason to do it. On each count, Maruti had to hand-hold vendors.
By 1993, when the industry was completely opened up and global auto companies raced to see a massive potential market, the ecosystem of auto components that Maruti had built that they could expand on was already there. In the domestic market, not all of them were successful, but car manufacturing as a whole continued to prosper and the factories established continued to churn out automobiles for domestic and export markets.
Three lessons from the growth of auto manufacturing:
- World-class production can not be produced without scale, global quality requirements and the latest technologies. Although many economic errors were perpetrated in the 1980s, it was a decade that saw relaxations in the License Raj, the advent of domestic competition, larger production capacity, the induction of foreign technological goods, and openness to foreign manufacturing and management systems have been relaxed for a decade
- To the degree that global automakers were drawn to domestic capacities, the auto industry grew, but also found conditions that enabled them to extend the country’s auto product ecosystem. Finally, Maruti and the two-wheeler manufacturers were protected by the policies of the 1980s until the markets were completely opened up to global protection
- For any industry, not every lesson can be implemented. Building a component market for mobile handsets, for example, maybe much more complicated because of technological challenges than it was for cars. But because of the large lessons they carry, they are important for policymakers