How India beat China in auto exports

Discussion in 'Economics' started by Yuvrajjj, Nov 29, 2009.

  1. Ford Motors announced that India would be a global manufacturing hub for its new small car, the Figo. This underlines a remarkable new development. India has overtaken China as a car exporter this year, exporting 201,138 cars in January-July against China’s 164,800. What’s more, Indian exports in this period went up 18%, while China’s fell by 60%.

    Of other big Asian exporters, Korea’s exports have fallen 31% and Thailand’s 43%. In a terrible global recession, India is the only country with zooming exports. Hyundai has long made India an export hub for small cars, and aims to export 300,000 India-made cars this year. Maruti-Suzuki comes second in exports, with Tata, Mahindra and others well behind. Nissan is about to build a new factory in India specifically for exports. India looks like exporting half a million cars in 2009-10, and should cross the million mark within five years.

    What accounts for India’s success? Visionary planning? Long-term strategy? No, India’s triumph was completely unplanned. No planning document ever envisioned or planned for beating China.

    Analysts say China has become a great auto exporter because of huge subsidies, an undervalued exchange rate and dirt-cheap credit. But India never aimed at an undervalued exchange rate to pile up large trade surpluses — rather, it aimed to keep the real effective exchange rate unchanged from 1993 onward. India’s interest rates were always among the highest in Asia. It stubbornly refused to reform its inflexible labour laws, with adverse effects on productivity and wages relative to Asian competitors. No Indian strategic vision targeted special provisions or subsidies to the auto sector. Indeed, the sector for years suffered exceptionally high excise duties and sales tax.

    How then did this sector become world class? In the early 1990s, auto production was freed for investment by any domestic and foreign investor. Indian planners as well as foreign investors regarded India as a low-skilled, low-productivity country producing third-rate cars like the Ambassador and Premier. Foreign investors came only because car imports were virtually banned. The small size of the Indian car market created serious scale diseconomies.

    Critics from both the Right and Left criticized the new auto policy. Leftists claimed foreigners would decimate the industry. Free-marketers complained that foreigners were being wooed to create an inefficient, high-cost industry behind high tariff walls.

    Nobody foresaw what fierce competition would do. Auto companies compete by constantly producing new models with improved features like fuel efficiency. Indian consumers are very price-sensitive, so design changes to reduce costs are also vital. India’s auto parts companies had rarely been asked for innovative changes during the old licence-permit raj, when the Ambassador and Premier faced little competition. But MNCs brought in competition, and started a dialogue with auto ancillary manufacturers on constant design changes. To their surprise, they found that Indian engineers had considerable skills, and could make improvements quickly and cheaply.

    Bharat Forge, which makes auto forgings like crankshafts and axles, was among the first to realize that India’s big advantage was not cheap labour but cheap skills. The company decided to have no blue collar workers at all, only engineers. This yielded a huge rise in innovation and productivity, and soon made Bharat Forge the second biggest auto forging company in the world.

    For new auto components, global giants like Delphi and Visteon typically took three months to go from concept to design, prototype, testing, removal of glitches, and final manufacture. But Bharat Forge found it could do the entire sequence in just one month.

    Soon, every auto company and parts maker in India focused on using cheap skills to constantly produce better and cheaper parts and vehicles. Bajaj Auto once relied on know-how from Kawasaki for motor-cycles, but soon found that its own R&D produced far better bikes for Indian conditions. Maruti Suzuki made India a global hub for R&D. And Tata Motors created the Nano, the world’s cheapest car, making the world sit up.

    The ultimate compliment to India’s design skills came from Carlos Ghosn of Renault-Nissan. He decided to build an ultra-cheap car (that might compete with Tata’s Nano) in collaboration with Bajaj Auto. In such partnerships, the global partner usually does the R&D and the Indian partner the low-cost production. But Ghosn decided the new car should be designed by Bajaj Auto, which had never produced a car before. Why? Because Ghosn felt it was easier to upgrade from a two-wheeler than downgrade from a standard sedan to produce an ultra-cheap car.

    This then is the secret of India’s success. Don’t waste time with strategic planning and picking winners. Simply let competition happen. You will be surprised how the most unlikely sectors can become world class. That’s how India has just beaten China.
  2. Another major advantage is that India has decent western style legal and tort justice system.
    Without a fair legal system the risks of business are difficult to quantify.
    China is a legal mess.
  3. and China's govt has a lock on the economy, playing it to their advantage.
  4. Contrary to what was quoted by the original poster above, it is not really about central planning versus free market economics.

    It is all about small cars, lower costs (including design), and exchange rates. The global demand happens to favor small cars and low costs right now.

    "Small cars will account for 95% of the 690,000 passenger vehicles India will export in 2015, according to Tim Armstrong, Paris-based director of IHS Global Insight Inc. In 2016, India may share the top slot with Japan as the world’s biggest small car producer, building as many as three million units. “All of India’s expertise has been the small car,” Armstrong said. “So obviously it’s a natural place to turn to to set up export units.” "

    "The cost of labour in India is around one-tenth of that in the US and Europe, and raw material costs in the nation are lower by 11%, according to Puneet Gupta, an analyst at CSM Worldwide Inc., an industry consultant. “Developing a car from the design stage in India may take $225 million to $250 million, while in Europe it may be $400 million.”"

    " Since 5th May 2007 to 5th Oct 2009, Chinese currency has strengthened 11.41% against USD (from 7.706 RMB to 6.827) whereas Indian currency has weakened 16.19% during same period (from 40.899 INR to 47.522). The total effect of this is 26.6%. "

    The original post was titled:
    How India beat China in auto exports
    27 Sep 2009, 0611 hrs IST, Swaminathan S Anklesaria Aiyar , TNN
  5. 11Blade


    I have read other material on the export of cars from India and unable to recall the source - most of the manufacturers realized that Indian's own auto consumption is dwarfed by china's internal market.

    China's markets can absorb a much higher percentage of domestically produced cars than that of India's.

    I have to find the source and the numbers but I think the "auto production numbers" are still bigger in China but absolute export numbers favor India.

    So as much as it is about exchange rates (which favor export profits), engineering skills and central "unplanning" + free marketeering.. I think this may be just smoke and mirrors?
  6. Are you refering to this one? I did not join the thread before because I found it pointless, to satisfy someone's wounded ego.
  7. Is this about India taking some of China's automotive market? Hopefully this doesn't affect us too much.(I'm guessing it will) Are we going to outsource more of our jobs to India in lieu of this?
  8. I think the dynamics of the World auto industry is as following. China's auto manufacturing and sales are becoming very aggressive, recent few months having surpassed U.S. in production and sales. China is buying up auto-factories as a short-cut to enter Western market. From the experience of other products, Western auto industries will fall if nothing is done differently. Western auto industries are setting up factories in India or other countries to compete with China. My 2cents.:D
  9. 11Blade


    yes. thanks for the reference. China still produces more cars than India, just so happens more of those cars stay in China than export.

    I guess it makes for some good reading.
  10. mahadiga


    There is a huge internal demand for small cars in India.
    #10     Nov 30, 2009