Indian Auto Supply Chains

1
Indian Auto Supply Chains

• Ananth V. Iyer
• Krannert School of Management, Purdue University
• Karthik Balakrishnan, Sridhar Seshadri, Anshul
  Sheopuri
  
• Leonard N. Stern School of Business, New York
  University

2
Outline

• Describe Indian Auto Industry
• Quality Improvements, Awards and their Impact
• Price Pressures
• Performance
• Total Factor Productivity
• Conclusions

3
Key Ideas/Questions

• Large number of Deming Award winners but not much
  financial benefit
  
• Lower margins and decreasing total factor
  productivity
  
• Newer larger firms show benefits, but exports
  dont show significance
  
• OEMs have produced cars locally with high export
  content, and are exporting small cars
  
• What is the future ?

4
Indian Auto Industry Size and Composition

• The Indian automotive components industrys
  annual turnover (for FY 2003) was US 6.73
  billion (global industry of US 737 billion)
  
• Compounded growth rate of 20-25 , the growth in
  Indias auto components exports is much faster
  than that of the domestic market (10-14).
  
• The auto ancillary industry caters to three broad
  categories of the market
  
• Original equipment manufacturers (OEM) or
  vehicle manufacturers, that comprises of 25
  total demand
  
• Replacement market, that comprises 65 of the
  total demand
  
• Export Market, that comprises primarily of
  international Tier I suppliers and constitutes
  10 of total demand

5
Auto Ancillary Industry

• The auto ancillary industry can be further
  divided into six main segments
  
• Engine Parts - Engine assembly, fall into 3
  broad categories core engine parts fuel
  delivery system and others. This also includes
  products such as Pistons, Piston Rings, Engine
  Valves, Carburetors, and Diesel-based Fuel
  Delivery Systems.
• Electrical Parts - The main products in this
  category include starter motors, generators,
  spark plugs and distributors.
  
• Drive Transmission Steering Parts- Gears,
  wheels, steering systems, axles and clutches are
  the important components in this category.
  
• Suspension Braking Parts These include
  Brakes, Leaf Springs, Shock Absorbers
  
• Equipment This includes headlights, Dashboard
  Instruments
  
• Others - Sheet metal components and plastic
  molded parts are two of the major components in
  this category.

6
Auto Ancillary Industry Sales
Figure 1.1.2 Indian Auto Ancilliary Industry
Sales
7
Auto Ancillary Exports
Figure 1.1.3 Indian Auto Ancillary Industry
Exports
8
Indian Auto Exports
Exports India exported 15 of its production of
cars (120,000 units in 2004), as shown in the
Table 1.1.2 below. The surge of exports of cars
from India suggest that the auto industry in
gaining in global competitiveness, at least in
the small car segment
Table 1.1.2 Indian Car Exports (number of units)
9
India exported 15 of its production of cars
(120,000 units in 2004)
10
Table 2.1 Deming Award winners list (1998-2004)
Source JUSE website www.juse.or.jp
11
Quality Improvements
Table 2.3 Quality Performance of the
auto-component industry
Source Customer Satisfaction Tracking Surveys
12
Delivery Performance
Table 2.4 Delivery Performance of the
auto-component industry
Source Customer Satisfaction Tracking Surveys
13
Did Deming Awards benefit ?

• Compare Deming firms with benchmark firms in the
  same industry
  
• Evaluate performance differences each year over
  the past few years
  
• Examine correlation of financial performance with
  benchmark firms

14
Did Deming Awards benefit ?
15
Did Deming Awards benefit ?
16
Did Deming Awards benefit ?
17
Did Deming Awards benefit ?
What does the analysis suggest? We see that none
of the Deming companies have outperformed the
control group significantly and consistently with
respect to the past performance. In addition, we
calculate the correlation between the profit to
earnings ratio (P/E) of the firm and that of the
control group (Table 2.2). We observe that the
firm performance seems to be strongly correlated
with the industry segment performance. This
suggests that the quality successes have not
translated into significantly different
performance than the rest of the industry.
18
What do we conclude ?

• No significant operational difference with paired
  firms who did not win the Deming Award
  
• No significant financial benefits
• Feedback from industry Improved Quality was
  necessary for the Indian industry to survive
  product volume drops, international OEM
  requirements

19
Weighted Price Variation
Table 3.2 Weighted Price variation over time for
each product segment
Source Calculated from CMIE Prowess Data
20
Conclusion

• Significant price pressures by market segment
• Except for electricals and braking, prices
  declined in real terms.

21
Local Content of Foreign Cars in India
Table 2.5 Local Content in foreign cars
22
However

• Foreign OEMs found improved quality and
  competitive prices
  
• Increased auto component exports
• Increased local content for foreign OEMs
• Increased exports of cars

23
Auto Ancillary Industry Sales
Figure 1.1.2 Indian Auto Ancilliary Industry
Sales
24
Auto Ancillary Exports
Figure 1.1.3 Indian Auto Ancillary Industry
Exports
25
Indian Auto Exports
India exported 15 of its production of cars
(120,000 units in 2004), as shown in the Table
1.1.2 below. The surge of exports of cars from
India suggest that the auto industry is gaining
in global competitiveness, at least in the small
car segment.
Table 1.1.2 Indian Car Exports (number of units)
26
Examining Profitability

• Consider financial performance by market segment
• Study effect of age of firm, size, exports etc

27
Segment Profitability

• Regression analysis of 68 firms over five years
  (1998-2003).
  
• The key performance indicators of a firm
• Growth (G),
• Operating margin (O) and
• Return on net worth (R) were regressed
  separately against
  
• Age of firm, (A)
• Exports as a percentage of sales, (E)
• Net sales, (S)
• Overheads as a percentage of sales (OH)

• was measured by the number of years since
  incorporation
  
• (E) by the percentage of sales as exports,
• (S) size by annual sales (S),
• (OH) as the difference between PBDIT and
  Operating Profit ( of sales)

28
We focus on the probability of the firms by
product segment. We focus on the net operating
margin (the ratio of operating profit to sales),
net profit margin (the ratio of profit after tax
to sales) and asset turnover for each product
segment.
29
OLS Regression Results
Table 3.3 Analysis of Financial Performance
Notes R, G and O denote the return on net worth,
growth and operating margin of the firm, whereas
A, E, S, OH are the age of the firm, exports as a
percentage of sales, revenues and overheads
respectively. Significance at the 10 level is
denoted by the symbol or -, and at the 5 level
by the symbol or --. The direction of the
effect (positive or negative -) determines the
symbol used.
30
OLS Regression Results

• New firms with lower overheads had high growth
  rates.
  
• Small firms that are newer, larger and have
  lower overheads witness high growth rates and are
  more profitable.
  
• Amongst large firms, new firms have better
  return on assets than old firms, i.e.,
  traditional large companies perform poorly. They
  also show higher growth.
• Segment-wise analysis shows that the steering
  parts segment with high export focus grow poorly.
  (May be because firms with an export focus that
  operating in segments that lack a critical scale
  cannot leverage their volumes to get export
  orders easily.)

31
Total Factor Productivity

• How has Indian auto industry productivity changed
  in the last few years ?

32
Total Factor Productivity Analysis
Taking logs and re-labeling
where, Y refers to the output, L is the labor
inputs and K is the capital input. The index i
refers to a firm and t refers to the year. If
ß ? 1, it would imply constant returns to
scale, scale and 1 would imply an increasing returns to
scale. It measures the total factor productivity
(TFP) because it increases all factors marginal
product simultaneously.
Table 4.1 Estimates of the co-efficients of the
production function
33
Figure 4.1 TFP for the auto-ancillary industry
Observation Decline in overall TFP recently
why ?
34
Table 4.2 TFP Growth between 1999-2003
It can be observed that the TFP for the engine
and braking parts has shown an upward trend that
is almost double that of other segments (Table
4.2).
Explanation of Results
The results for overall sector TFP show a decline
during 1998-2003 compared to earlier years.
However, a segment-wise analysis shows some
increasing trends, particularly for engine parts
and braking parts. An examination of the cost
composition for engine parts (in section 1.1)
shows that the labor cost for engine parts is
higher than in other segments. The data given in
Appendix 2 also shows that engine parts segment
is growing faster. All of these factors put
together suggest an industry in transition, from
parts with lower labor content to parts with
higher labor content (and possibly higher
associated design and engineering content). This
increase in share of the engine parts results in
higher use of labor giving the false impression
that the factor productivity is declining.
However, these conclusions need further
substantiation.
35
TFP Results
Table 4.1 Estimates of the co-efficients of the
production function
The values of the co-efficients concur with those
calculated in Mitra et al 1998. It can be
observed that the sum of the co-efficients add up
almost to one, indicating constant returns to
scale.

• 4.4 Explanation of Results
• Results for overall sector TFP show a decline
  during 1998-2003 compared to earlier years.
  
• Segment-wise analysis shows some increasing
  trends, particularly for engine parts and braking
  parts.
  
• For engine parts, the labor cost for engine
  parts is higher than in other segments and the
  engine parts segment is growing faster.
  
• Suggests transition from parts with lower labor
  content to parts with higher labor content (and
  possibly higher associated design and
  engineering content).
• Thus a false impression that the factor
  productivity is declining.
  
• However, these conclusions need further
  substantiation.

36
Cost Components

• What is the composition of the cost structure for
  this industry ?

37
Cost Structure
Table 1.1.1 Cost Structure in the auto ancillary
sector
As of Operating Income Source ACMA
38
Comparison with China

• Higher energy costs in India
• Higher gas prices (50 higher)
• Poorer infrastructure .
• But
• India exports 15 of cars produced
• Is becoming a significant small car producer
• Small cars sold at 50 of retail price of China
• How ?
• Better Engineering and management ? Does that
  matter so much ?

39
Conclusions

• The Indian Auto industry has shown significant
  quality improvements but no significant
  profitability improvement
  
• Better quality at competitive prices has seen
  growing exports of components, cars and foreign
  OEMs with high local content
  
• Leveraging the capability to generate profits has
  proved difficult
  
• How will the industry evolve in the future ?