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 ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude to our H.O.D. NEERAJ SIR who
gave me the golden opportunity to do this wonderful
opportunity to pen down a innovative business plan and also helped me in doing a
lot of Research and i came to know about so many new things I am really thankful
to her.
I am highly indebted to my Faculty guide MR. SUMIT SIR
for their throughout guidance and constant supervision as well as for providing
necessary information regarding the project & also for their support in completing
the project.
I would like to express my special gratitude and thanks to our Coordinator MR.
RAVI TIWARI Sir for giving me such knowledge of marketing which i
inculcated in making of this business plan and also for their throughout attention
and time.
I would like to express my gratitude towards my parents & my college mate MR.
ASHISH SIR for their kind co-operation and encouragement which help me in
completion of this project.

However, it would not have been possible without the kind support and help of
many individuals and organizations. I would like to extend my sincere thanks to all
of them who have willingly helped me out with their abilities.
 TABLE OF CONTENTS

 ACKNOWLEDGEMENT

 TABLE OF CONTENTS

 THE GROWTH OF THE INDIAN AUTOMOBILE INDUSTRY

 FIRST WAVE OF FDI FROM 1981 to 1991

 SECOND WAVE OF FDI SINCE 1992

 ROLE OF DOMESTIC DEMAND

 OUTPUT AND PRODUCTIVITY

 ROLE OF JVs

 THE FUTURE SCENARIO

 CONCLUSION
The Growth of the Indian Automobile Industry: Analysis
of the Roles of Government Policy and Other Enabling Factors

Abstract

The automobile industry is one of the most important drivers of economic growth of
India and one with high participation in global value chains. The growth of this sector
has been on the back of strong government support which has helped it carve a unique
path among the manufacturing sectors of India. The automobiles produced in the
country uniquely cater to the demands of low- and middleincome groups of population
which makes this sector stand out among the other automobile-producing countries.
This chapter analyzes the roles of government policy, infrastructure, and other
enabling factors in the expansion of the automobile and automotive component sectors
of India. In 2017, India became the world’s fourth largest automobile market, and the
demand for Indian vehicles continues to grow in the domestic and international
markets. To meet the future needs of customers (including the electrical vehicles) and
stay ahead of competition, manufacturers are now catching up on upgradation,
digitization, and automation. The chapter also analyzes India’s national policy in light
of these developments.

Keywords

Automobiles · Joint ventures · Government policy · Research and

development · Intellectual property rights
Introduction

The automobile industry is an important driver of the economic growth in India and
one of the successful sectors in which the country has high participation in global
value chains (GVCs).1 This chapter analyzes the role of government policy,
infrastructure, and other enabling factors in the expansion of the automobile and
automotive component sectors and the direction they are likely to take for growth path
in the next few years. The analysis in this chapter is organized into seven sections: The
first section discusses the structure and makeup of the Indian automobile industry. The
second section analyzes the growth of the sector over the past decades, while the third
section discusses the role of government. The fourth section deals with other enabling
factors in the growth of the industry. The fifth section analyzes initiatives in upgrading
and innovation. The sixth section includes a discussion of the future scenario and the
seventh section concludes.

Structure and Makeup of the Indian Automobile Industry

The Indian automobile industry – comprising of the automobile and the automotive
components segments – is one of the key drivers of economic growth of India. Being
deeply integrated with other industrial sectors, it is a major driver of the
manufacturing gross domestic product (GDP), exports, and employment. This sector
has grown on account of its traditional strengths in casting, forging and precision
machining, fabricating (welding, grinding, and polishing) and cost advantages (on
account of availability of abundant low-cost skilled labor), and significant foreign
direct investment (FDI) inflows. India was the sixth largest producer of automobiles
globally with an average annual production of about 29 million vehicles in 2017–2018,
of which about 4 million were exported.2 India is the largest tractor manufacturer,
second largest two-wheeler manufacturer, second largest bus manufacturer, fifth
largest heavy truck manufacturer, sixth largest car manufacturer, and eighth largest
commercial vehicle manufacturer. The contribution of this sector to GD has increased
1The index of the length of GVCs helps ascertain the “number of production stages”
involved in the industry. This index was above 2.5 for India (in 2008), indicating fairly
high level of vertical linkages including stages of production located abroad. GVC
participation can be measured through exports and imports of intermediate goods. The
automobile industry exports have been growing continually. In the 1990s, the average
annual growth of exports was around 15%. For details, see OECD (2012), Mapping
Global Value Chains. TAD/TC/WP/RD (2012)
Table 1 Indian Automobile Market and Market Share (%) by segment, 2017–2018
Commercial Vehicles 3
Three wheelers 3
Passenger vehicles 13
Two wheelers 81
Source: Society of Indian Automobile Manufacturers (SIAM) statist

from 2.77% in 1992–1993 to about 7.1% now and accounts for about 49% of
manufacturing GDP (2015–2016).3 It employs more than 29 million people (direct
and indirect employment). The turnover of the automobile industry is approximately
US$ 67 billion (2016–2017)4 and that of the component industry is US$ 43.5 billion
(2015–2016).5 As per the OICA6 statistics, the Indian industry accounted for 4.92%
of vehicle production globally in 2017 (5.38% of production in the car segment and
3.48% of production in the commercial vehicle segment).7 India is a prime destination
for many multinational automobile companies with aspirations of business expansion
in Asia. It attracted about US$ 14.48 billion (5.2% of total) in cumulative FDI equity
inflows between 2000 and 2015.8 The basic advantages that the country provides as
an investment destination include cost-effectiveness of operations, efficient manpower,
and a fast-growing dynamic market. In the past, major investments have come from
Japan, Italy, and the USA followed by Mauritius and Netherlands. The industry
manufactures a wide range of products to meet both domestic and international
demands. Table 1 shows the market share of different segments of the motor vehicles
industry in 2015–2016. Irrespective of any policy regime, the two-wheelers segment
has dominated the market share. Its share in production increased from around 54% in
1970–1971 to 80% in 1990–1991, close to 75% in the 1990s and 80% now.9 Till the
1980s, the commercial vehicles were the second largest segment (after two-wheelers)
holding around 20% share in production. After the mid-1980s, passenger vehicles
emerged as the second dominant segment, increasing its share from 7% in 1985–1986
to around 15% in 2011–2012 and 14% in 2015–2016. Sales of passenger cars touched
1.2 million units in 2006 and 3 million units in 2016–2017 to maintain the second
largest market share in the industry. Production in the sector is mainly concentrated
around four large auto manufacturing hubs across the country: Delhi-Gurgaon-
Faridabad in the north, MumbaiPune-Nashik-Aurangabad in the west, Chennai-
Bengaluru-Hosur in the south, and Jamshedpur-Kolkata in the east of India.
 Growth Path of the Indian Automotive Industry

From 1950 to 1980: Very Slow-Paced Growth

India’s indigenous passenger car industry was launched in the 1940s with the
establishment of Hindustan Motors and Premier Automobiles Limited. The two
companies together garnered most of the market share till the 1970s, along with Telco,
Ashok Leyland, Mahindra & Mahindra (M&M), and Bajaj Auto. The market for
automobiles was not large given the low rate of economic growth in the country at this
time, and thus the industry had a very slow-paced growth till the 1980s. Efforts to
establish an integrated auto component industry were initiated in the 1950s. The
industry was protected by high import tariffs, and the production was catered to the
demands of local automobile manufacturers. Manufacturing was licensed, and there
existed quantitative restrictions on imports of automobiles and automotive components.
However, a significant demand for passenger cars was emerging as the country’s
population and per capita income began to grow. The government felt the need to
introduce modern, fuel-efficient, and low-cost utility cars that could also be affordable
for “the common man.”

First Wave of FDI from 1981 to 1991

FDI in automotive assembly was allowed in two major waves in 1983 and in 1993.
This FDI was mainly “market-seeking” in nature.10 Government policies such as
import barriers and local content requirements contributed to the influx of FDI and
helped the industry to compete with international players.
In February 1981, an Indian company called the Maruti Udyog Limited (MUL)
was incorporated as a government company with Suzuki Motor Corporation as a
10The literature on FDI identifies three most common investment motivations:
resource-seeking,
market-seeking, and efficiency-seeking. For details, see Dunning, John H. (1993),
“Multinational
enterprises and the global economy.” Workingham: Addison Wesley.
S. Miglani
443
minor partner to make an efficient people’s car for middle-income class in the country.
In October 1982, the company signed the license and joint venture agreement
with Suzuki.11,12 Suzuki took up 26% equity in the company and made an investment
of US$ 260 million. MUL created history by rolling out its first vehicle in
13 months, the Maruti 800 in 1984. This was the first domestically produced car in
the country with completely modern technology. MUL made significant strategic
moves including building a very strong ancillary vendor network around it and
achieved an installed capacity of one lakh unit garnering about 62% of market share
in a decade.13 In 1989, Suzuki increased its equity stake to 40% and in 1992 to
50%.14 However, private sector participation was still restricted in the passenger car
segment with only three major players – MUL, Hindustan Motors, and Premier
Automobiles Limited.
India also allowed four Japanese firms – Toyota, Mitsubishi, Mazda, and Nissan –
to enter the market for light commercial vehicles through joint ventures (JVs) with
Indian companies and some sharing equity with state-level governments in the 1980s.
Around this time, the government also put in place a Phased Manufacturing
Programme (PMP) for localization of components, under which domestic original
equipment manufacturers (OEMs) had to increase the proportion of domestic inputs
used in their output over a specific period. The Indian companies went ahead to have
JV collaboration with several Japanese and foreign OEMs. This enabled Indian
companies to benefit from equity inflows and technology transfers.15 This phase is
widely regarded as the first wave of FDI in the sector

Second Wave of FDI Since 1992

In the middle of 1991, the Indian Government made significant changes to its
economic and industrial policies leading to the liberalization of the markets. This
provided the impetus for the Indian automobile industry to flourish further. A new
automobile policy was launched in 1993, facilitating the entry of global assemblers.
Auto licensing was abolished in 1991, and the weighted average tariff was lowered

Table 2 Mode of entry of selected companies, 1983–2007

Company Mode of entry Year
(a) Before 2000
Suzuki JV with government (Maruti) 1983
Mercedes-Benz JV with Telco 1995
PAL-Peugeot JV with Premier Automobiles 1995
Daewoo Motors JV with DCM 1995
Honda Seil JV with Shriram 1995
Ford Motors JV with M&M 1996
General Motors JV with Hindustan Motors 1996
Hyundai 100% subsidiary 1996
Toyota Kirloskar Motors JV with Kirloskar 1997
(b) Post-2000
Skoda (Volkswagen) 100% subsidiary 2001
Renault JV with Mahindra 2005
Nissan 100% subsidiary 2005
BMW 100% subsidiary 2007
Source: Ramachandran J. (2011), “India Entry Strategy of Auto Majors, Tejas Article,
IIM
Bangalore,” September
from 87% to 20.3% in 1997. The PMP policy ended in 1992. The Indian Government
introduced a memorandum of understanding (MOU) system that continued to
emphasize localization of components, up to 50%, for approving financial
collaboration proposals on a case-by-case basis, which was raised to 70% later. Mass
emission regulatory norms for vehicles were introduced, and a national highway
policy
was announced in this decade.
In 1997, automatic FDI approval of JVs with a 51% majority share for the foreign
partner was allowed. Liberalized policies and the attraction of a huge unsaturated
market made many globally competitive automakers to enter the passenger car
market.16 The most common route of entry was through JVs with Indian firms.
Some manufacturers also left the market due to increased competition.17 Table 2
illustrates the entry of major assemblers in the Indian market and their mode of
entry for the period between 1983 and 2007.
Japanese participation in the Indian automobile industry brought significant
changes to the structure of the passenger car market, including utility vehicles.
Gradually, established players such as Telco entered the commercial passenger car
segment capitalizing on their engineering capabilities, and economies of scale,18
and domestic players in the commercial vehicle segment started developing passenger
cars on a limited scale. Indian companies such as Telco, M&M, Hindustan
Motors, Premier Automobiles, and DCM entered into JVs with Ford, Mercedes,
General Motors (GM), and Peugeot for assembly of medium-sized cars from
knocked-down units. This increased the market competition and restructured pressures
on existing players.
The post-1992 period is widely regarded as the second wave of FDI in the sector,
which played a crucial role in bringing dynamism, diversification, and intense
competition in the industry. Many companies started operating at a significant scale in
the market and started operations in the midsize car segment. Indian companies
such as Tata Motors introduced special purpose vehicles and platforms to enter the
passenger car segment. This period saw creation of wide networks, as many
companies had full technology and competence in producing state-of-the-art models of
vehicles and had contractual arrangements with their component suppliers.
The role of foreign presence in the passenger vehicle segment grew much more
than all the other segments of automobiles, followed by the multi-utility vehicle
segment. Thus, foreign partners now hold all or a greater share of the equity in most
of these cases even though most of them initially formed JV of equal sharing of
equity.19 The inability of the Indian partners to contribute toward capacity expansion
allowed foreign partners to increase their stake or take total control by buying out
their Indian partners.20
In both the waves of FDI that occurred in 1983 and post-1992 period, a significant
amount of FDI by the multinational corporations (MNCs) flowed into the country to
build modern plants. Maruti Suzuki’s investment in the early 1980s was made
possible mainly due to its willingness to invest capital. Subsequently, various MNC
manufacturers have made investments of millions of US dollars in the country.21
In the post-2000 period, Indian firms such as Maruti Suzuki slowly started moving
toward building its own design and development capabilities. Tata Motors made rapid
strides toward developing an advanced level of technological capability by launching
the first indigenously developed Indian car, “Tata Indica” (1998). In 2002, M&M
launched “Scorpio” as a sport utility vehicle (SUV) – a product of in-house design and
development effort. In 2004, Tata Motors signed a JV with Daimler-Benz for
manufacturing Mercedes-Benz passenger cars in India. The Mercedes-Benz India
Limited
plant assembled completely knocked-down units imported from abroad.Increased
competition led to restructuring and cutting of costs, enhanced quality,
and improved responsiveness to demand. MNC automakers such as Hyundai,
Nissan, Toyota, Volkswagen, and Suzuki which had established production plants in
India eventually started using India as an export platform for their overseas networks.
The small car segment did particularly well, and India’s potential as a global
hub for manufacturing small cars began to be recognized.
Between the years 2001 and 2010, passenger vehicle sales grew at a compound
annual growth rate (CAGR) of 15.67%. Of the total sales, roughly 10% were
contributed by exports. Between 2000 and 2015, the average year-on-year growth rate
of export of vehicles from the country was approximately 23%.22 The industry is
known for export of mini hatchbacks and an evolving export base for midsize cars
and compact SUVs.23 As per the World Trade Organization’s World Trade Statistical
Review 2017, India was the tenth largest exporter of automobile products worldwide
in 2016, accounting for US$ 13 billion worth of exports.

Since 2001 Fully De-licensed, Free Imports and 100% FDI

Allowed
In the last decade again, various trade and investment restrictions were removed to
speed up momentum for large-scale production. As of today, the government
encourages foreign investment and allows 100% FDI in the sector via the automatic
route. The industry is fully de-licensed, and free imports of automotive components
are allowed. India is the second fastest-growing market for automobiles and
components globally (after China).25
With an outward vision of component makers, and competitive pressures from
international firms, the component industry had to upgrade process and product
qualities and technology standards to gain and sustain capabilities.26 Many manu
facturers now adhere to the global environmental norms regarding
emission/technological standards and quality certifications. The industry grew by
around 20%
annually in the 1990s, and the average annual growth of exports was around 15%
during that period.27,28 Over the years, it has been able to modernize its technology
and improve quality and has developed capabilities to manufacture components for
new-generation vehicles. Indian companies maintained their traditional strengths in
casting, forging and precision machining, and fabricating (welding, grinding, and
polishing) at technology levels matching the required scale of operations. They
achieved significant success in garnering engineering capabilities and adapted to
local requirements through local design.29 High growth has taken place in engine,
drive transmission, and steering parts. Engine parts, being high value-added in its
nature, have been contributing most to total production. Endowed with the potential
of low-cost quality products, India edges over many other developing countries in
component manufacturing.30
Table 3 provides the category-wise trends for automobile production, domestic
sales, and exports (in numbers) from 2011–2012 to 2016–2017.31 Further, using
estimates from the SIAM of India, it is calculated that between 2001 and 2018, the
CAGR of export of all vehicles from India was 20.02%.32 The estimates for other
parameters – production, domestic sales, and exports – as percentage of production
are given under Table 4. Comparable data for the selected categories before 1995 is
not available. However, calculations have been made by other authors for earlier
periods and different segments.

There are many reasons for the impressive growth achieved by Indian manufacturers
over the last two decades. These are discussed in detail in the next section.
The main strengths have been a large unsaturated domestic market for small cars
(and presence of a large middle economic class), low production costs (on account
of availability of low-cost labor and other inputs), and skilled engineering talent.
Global affiliations and tie-ups also enabled technology upgrading and expansion of
scale of production in the industry.
In the passenger car segment, there are more than 30 international quality models
in the market, some of which are now being exported to MNCs’ home markets.
Leading Indian manufacturers are in the process of transforming from local players
to global companies. India’s domestic carmakers, viz., Tata Motors, M&M, and
Ashok Leyland, have developed manufacturing facilities, significant R&D,
Table 4 Segment-wise estimates of CAGR
Production
Category 1995–2000 2001–2010 2011–2018 2001–2018
Passenger vehicles 6.82 15.01 3.53 11.10
Commercial vehicles −6.91 14.91 −0.54 10.55
Three-wheelers 1.62 12.60 2.17 9.67
Two-wheelers 7.18 10.53 5.97 10.45
Grand total 6.19 11.41 5.21 10.51
Domestic sales
Category 1995–2000 2001–2010 2011–2018 2001–2018
Passenger vehicles 9.80 12.52 3.31 9.76
Commercial vehicles −6.96 15.41 0.81 10.94
Three-wheelers 2.28 9.15 3.10 7.03
Two-wheelers 7.10 9.24 5.99 9.63
Grand total 6.57 9.91 5.32 9.60
Exports
Category 1995–2000 2001–2010 2011–2018 2001–2018
Passenger vehicles 27.50 5.65 17.23
Commercial vehicles 15.96 0.70 13.14
Three-wheelers 30.79 0.74 20.74
Two-wheelers 30.45 5.19 21.40
Grand total 29.06 4.66 20.02
Exports as percentage of production
Category 1995–2000 2001–2010 2011–2018 2001–2018
Passenger vehicles 10.87 2.04 5.52
Commercial vehicles 0.92 1.25 2.34
Three-wheelers 16.16 −1.40 10.10
Two-wheelers 18.03 −0.73 9.91
Grand total 15.85 −0.52 8.60
Source: Author’s calculations using SIAM Statistics
The Growth of the Indian Automobile Industry: Analysis of the Roles of
Government…
450
technology development, and testing centers.34 In addition, Indian companies have
bought capacity or made alliances with other manufacturers in East Asia, South
America, Africa, and Europe.
Low cost of labor and economies of scale have made India an ideal export hub
for small cars. The Indian auto industry is expected to be the world’s third largest
automotive market by volume by 2026.35 Promotion of exports has been part of
companies’ business strategies for better utilization of installed capacities.36 Low
cost of manufacturing and economies of scale achieved as a result of catering to
overseas markets have allowed vehicle makers to become competitive and offset
weak demand in the domestic market. Companies which have had partnerships with
foreign players or received FDI have benefited in terms of engagement in GVCs

4 Role of the Government

The automobile industry has in many ways been shaped by the Indian Government’s
policy and nurtured in microeconomic environment it helped to create. Apart from
the direct impact through fiscal policy instruments, the industry policy even influenced
firm-level learning processes and shaped technological capability
accumulation.37
Since 1970, the Indian Government gradually added the automotive industry to
a list of its core or “pillar” industries, recognizing it as a significant driver to achieve
economic growth since it had many forward and backward linkages.38 The industry
began to be prioritized in the manufacturing sector for promotion and favorable
policy support to promote productivity. In 1975, as a general industrial policy, the
government permitted an automatic capacity expansion by 25% every 5 years and
removed price controls.39
The share of commercial vehicles and passenger car segment also changed in
response to policy changes. Indian policy had favored the development of the
commercial vehicles industry, i.e., light and heavy vehicles (for public transport of.
goods and passengers), as opposed to the development of passenger vehicles. Cars
in particular were considered as luxury goods.40 By the early 1980s, the government
had realized the need to develop the passenger vehicle segment and took decisions
like permitting increased foreign capital and overseas collaborations and reduced
production licenses on manufacturing operations. In 1981, the policy of “broadbanded”
licenses was announced – permitting vehicle manufacturers to produce
different kinds of vehicles instead of just one kind decreed earlier. Firms were
allowed greater flexibility in operations through policies such as minimum economic
scale requirements, exemption from detailed Monopolies and Restrictive
Trade Practices (MRTP) Act41 notification procedures. The components sector was
also de-licensed substantially.42
In the 1980s, government-funded training programs and cluster building also led
to changes in supplier relations, enabling vendor development and effective supply
chain management. More liberal import policies were introduced in 1986 when
importers of capital equipment were allotted about 50% increase in their foreign
exchange quota.
In July 1991, the New Industrial Policy was introduced which removed most of
the constraints relating to investment, expansion, and foreign investment in the
Indian industry. The system of industrial licensing was abolished for all (except 18)
industries, and the passenger car industry was de-licensed in May 1993. Foreign
investment was allowed on an automatic basis in 34 industries, including the
automotive industry. Liberal policies of the 1990s led to the entry of new competitors
and spillover benefits, especially on the technology side, and to increased expenditure
on R&D and a desire to innovate to distinguish products in the market. The time
span between productions of new products shortened rapidly. The policies remained
tilted in favor of the domestic industry as MNCs were still required to make specified
capital investments and meet export obligations. In 2001, the government
removed auto import quotas and permitted 100% FDI in the sector. Excise duties
were reduced to 24% on passenger cars.
High tariffs forced the OEMs to set up parts-manufacturing plants in India.
Institutional support for developing supplier capabilities led to the establishment of
flexible supplier relationships which further helped the industry in building

innovation capabilities as well.43 An initiative specifically targeted in this direction

was the setting up of the National Automotive Testing and R&D Infrastructure
Project (NATRIP) under the Automotive Mission Plan 2006–2016 (AMP 2016),44
costing US$ 388.5 million to enable the industry achieve parity with global
standards.
The Indian car industrial policy also protected the domestic market by setting up
challenges for firms such as requirements for higher local content. This policy
helped the development of basic capabilities in manufacturing and laid foundations
of the auto component supplier industry.45 The protection policies of the 1980s and
1990s encouraged acquisition of basic production capabilities.46 Local content
requirements or indigenization47 of up to 70% forced OEMs and their suppliers to
make significant capital investments and created a chain of world-class component
suppliers.48,49 The process of indigenization has also been recognized as a key
regulation responsible for enhancing technological capabilities.50 This entailed
collaborative effort between local suppliers and engineers from parent company and
led
Indian firms toward development of technological capabilities.
Key interventions undertaken by the government under this plan have been in
areas of tariff policy, infrastructure (improved and expanded road network,
development of auto wagon rakes, creation of few specialized ports in the private
sector),
R&D (setting up of NATRIP, upgradation of existing centers), and promotion of
electric and hybrid vehicles. Currently, the automobile manufacturing policy in

Other Enabling Factors in the Growth of the Industry

Other enabling factors in the growth of the industry include domestic market
demand, FDI, JVs, and corporations’ competitive strategies.

Role of Domestic Demand

A growing working population and an expanding middle-class have been the key
demand drivers for automobiles in India. India has the second largest road network
in the world at 4.7 million kilometers. Road development activity has gradually
increased over the years with an improvement in connectivity between cities, towns,
and villages in the country. The Government of India’s policy to set aside substantial
investment layout for infrastructure development in every 5-year plan has
included the focus on the development of country’s roads. This has given a fillip to
the demand for cars and other vehicles.
India is home to the second largest population in the world. The estimated population
is about 1.3 billion people. The GDP per capita has grown from approximately
US$ 1432 in 2010 to US$ 1500 in 2012 and US$ 1939 in 2017.52 Factors like
increasing disposable incomes in the rural agriculture sector, presence of a large
pool of skilled and semiskilled workers, and a strong educational system will continue
to increase vehicle demand in future.53 It is estimated that by 2020, migration
on account of urbanization will be over 140 million.54 India is projected to add over
68 million households to its already significant middle-class by 2030, which would
drive an increased demand for automobiles. The number of registered motor vehicles
per 1000 population was only 167 in 2015.55 These facts point to a huge potential of
increasing private vehicle ownership penetration in the future.

Impact of FDI

The impact of FDI can be seen in terms of output and productivity, technology, and
better practices, all of which could make the industry more competitive.56 These
aspects are discussed in detail below.

Output and Productivity

FDI has positive impact of output and productivity growth. In the period 1947–
1983, the output growth remained limited. The models of cars sold were unchanged
for decades, and foreign models assembled in the country were primarily European.
The number of models manufactured in the passenger car segment was 2 in 1982–
1983, which rose to 8 in 1994–1995 and 28 in 2001–2002.
The most prominent spillover impact of FDI was on the component industry,
whose turnover more than tripled from 1992–1993 to 2001–2002. Supplier
productivity increased as foreign firms co-located suppliers (i.e., put them in a
common
area) and required home-country suppliers to invest in India. Competition was also
provided by international MNCs which entered the sector to serve international
assemblers, resulting in increased quality and reliability. This led to the establishment
of a reliable component supplier industry, which encouraged more MNCs to
enter the Indian market after the 1990s.
5.2.2 Technology
A significant infusion of global technology occurred with the entry of foreign firms.
The first 192 cars to roll out of the Maruti Suzuki factory in December 1983 were
almost entirely Japanese cars, with only tires and batteries sourced from MRF and
Chloride India, respectively. Localization ambitions of Indian firms were facilitated
through 40 JVs between Indian vendors and Japanese collaborators by the end of
the century
 Role of JVs

As mentioned before, JVs and technical collaboration played a vital role as a source
of innovation for local auto component supplier firms in India. Some important
partnerships in the Indian automobile industry are listed under Table 2.
Acquiring knowledge and skills through external collaboration is an efficient
way to achieve innovation within automotive clusters. Collaborations result in
frequent interactions, reflected in acquisition of knowledge, sharing, diffusing,
and creation of it. Linkages among settings such as clusters result in learning
through networking and interacting and are seen as important for innovative
activities.61
There are a number of examples in India which have shown that the JV collaboration
has been an efficient way of achieving greater growth in the industry through
benefits such as technology sharing, learning best practices, and training of workers.
For instance, MUL’s first established plant was a close copy of Suzuki’s Kosai plant
in Japan in terms of plant layout, equipment, the organization of production, and

subject to the legal system, regulations, infrastructure and human capital endowments;
(2) Positive
spillovers generated through training of local workers by foreign-owned companies; (3)
Increased
competition due to the presence of foreign firms, subject to the size of the technology
gap between
the foreign owned and domestic company, as well as the ease of entry into, and exit
from the market; and (4) Vertical or backward spillovers resulting from increased
demand for intermediate
goods manufactured by foreign owned companies by domestic companies in the host
nation. For
details, see Saggi, Kamal (2002), ‘Trade, Foreign Direct Investment, and International
Technology
Transfer: A Survey’, World Bank Research Observer, 17, 191–235.
58These refer to a completely new investment projects, not building on anything
already in
existence.
59The reallocation of resources that accompanies the entry of foreign firms may not
be immediate.
Resources released in this process may be put to better use by foreign firms with
superior technologies, efficient new entrants (both domestic and foreign), or by other
sectors. Studies indicate that
positive spillovers in the host country will occur if there is an environment conducive
to inflows of
FDI. The conditions range from human capital, private and public infrastructure, legal
protection,
educational institutions, and publicly funded R&D. The host country factors that are
likely to
attract export-oriented FDI involve the possibilities of fragmenting production
geographically.
Location factors that influence this type of FDI are labor costs, infrastructure, trade
barriers,
exchange restriction, and policies favorable to FDI. For details, see Ray Saon, Smita
Miglani, and
Neha Malik (2014), “Impact of American FDI in India.” Academic Foundation, New
Delhi.
60More, Rahul Z. and Karuna Jain (2013), “Innovation and competitiveness among
the firms in the
automobile cluster in Pune.” Knowledge Forum: Annual International Conference
Paper. Pune.
61Breschi, Stefano and Franco Malerba (2001), “Geography of innovation and
economic clustering.” Industrial and Corporate Change, 10(4), 817–33.
The Growth of the Indian Automobile Industry: Analysis of the Roles of
Government…
456
operating principle.62 Also, it was the first firm to introduce a partial “just-in-time”
and total quality management in India, which aimed to reduce inventory cost. MUL
followed a strategy of massive investment in the program of vendor development,
involving stable and close supplier relations with its first-tier suppliers (40 top
suppliers), equity participation in key suppliers, and promotion of technical
collaboration between its suppliers with Suzuki’s suppliers in Japan.
Other lead firms63 of Indian origin including the TVS Group, the Rane Group, and
Ashok Leyland Limited have played critical role in the development of the Chennai
automobile cluster. Ashok Leyland Limited, one of the largest manufacturer of
commercial vehicles, trucks, and buses in India and the world, entered into an
agreement
with Leyland Motors, UK, to manufacture Leyland vehicles way back in 1950.
Brakes India Private Limited was founded in 1962 as a JV between TVS and Lucas
Industries Limited of the UK (100% subsidiary of ZF TRW) and is the largest
manufacturer of braking components and systems in India with an annual turnover of
more
than US$ 600 million. It exports products to 35 countries and caters to over 60% of
the domestic OEM market. The Rane Group which plays a dominant role in the
component segment has had critical partnerships with foreign firms like ZF TRW
(USA)
and NSK and Nisshinbo (Japan) for a long time. Other group firms, such as Brakes
India, Sundaram-Clayton Ltd., Sundram Fasteners Ltd., and Turbo Energy Ltd., were
established in the 1960s, as JVs with British firms. M&M and Bajaj Tempo also
operated through JVs and developed quality products over the years.

Firm Strategies, Ownership, and Managerial Vision

In addition to the aforementioned reasons, an important role was played by firm

strategies, ownership, and managerial vision of diversified and big business groups
such as
the Tata Group and M&M in building technological capabilities in the sector.65 For
instance, the ambition and vision of Tata’s head Ratan Tata to develop the first “Indian
car” and then “people’s car” were the driving forces behind the development of Tata
Indica and Tata Nano. The company’s diaspora connections and family-owned
diversified businesses also facilitated inter-sector learning and played a significant role.
62Okada, Aya and N.S. Siddharthan (2007), “Industrial clusters in India: Evidence
from Automobile
clusters in Chennai and the National capital Region,” Discussion Paper No. 103,
Institute of
Developing Economies, JETRO.
63Large MNCs are usually referred by the name of “lead firms” or “governor firms”
that largely
determine production parameters and wield power over other firms in global
production networks
or chains. These firms decide the location of high value activities and conditions under
which firms
participate in these networks and thus largely also affect the upgrading outcomes of
other smaller
firms.
64More, Rahul Z. and Karuna Jain (2013), “Innovation and competitiveness among
the firms in the
automobile cluster in Pune.” Knowledge Forum: Annual International Conference
Paper. Pune.
65Kale, Dinar (2011), “Co-evolution of policies and firm level technological
capabilities in the
Indian automobile industry,” Atlanta Conference on Science and Innovation Policy,
September
13–17. Atlanta, GA, USA.
S. Miglani
457
Firms like Tata Motors and M&M had global aspirations, and their business
models were focused on domestic as well as markets in other countries with similar
characteristics such as those in Africa, Latin America, and South Asia. In 2004, Tata
Motors bought the Daewoo’s truck-manufacturing unit in South Korea. In 2005,
Tata acquired 21% share in Hispano Carrocera, SA, a Spanish bus-manufacturing
firm. In 2005, M&M acquired Stokes Group, a leading auto component manufacturer
in the UK. In 2008, M&M acquired Jaguar and Rover and established plants
in Malaysia, Kenya, Bangladesh, Spain, Ukraine, and Russia to assemble
knockeddown units exported to these countries. The same model extended to Australia,
South Africa, Italy, and Uruguay. In 2006, M&M formed a JV with Marco Polo, a
Brazilian firm to manufacture and assemble fully built buses and coaches. In
November 2017, M&M opened its new manufacturing plant with an investment of
US$ 230 million in Detroit, USA.
The profitability of group-affiliated firms exceeded that of other companies due
to advantages such as greater access to funds, diversified and skilled labor, and other
resources. These business groups or conglomerates were often able to fill the
institutional gaps typically found in developing countries by building institutions for
the
benefit of group members

Upgrading and Innovation

Indian lead firms have made significant efforts toward upgrading over the years,
including the use of advanced modular platforms, new materials, and platform sharing
in India.67 The concept of upgrading refers to the capacity of firms to make better
products, more efficiently, and move into more skilled activities.68
The government has been encouraging R&D in this sector by offering tax cuts on
such expenditure. The NATRIP project, initiated in 2005, was set up to enable the
industry to adopt and implement global performance standards and provide lowcost
manufacturing and product development solutions.
Among Indian companies, M&M and Ashok Leyland have made significant
investment in R&D centers and technology development and testing centers and have
ventured abroad. Global firms have been putting up development centers in India,
either on
their own or in partnership with local players (for instance, GM, DaimlerChrysler AG,
Johnson Controls International Plc, Delphi and Bosch). These have helped their
partners acquire the global best technologies and standards in short period of time.
Several
global OEMs such as Ford, GM, Hyundai, Toyota, and Volvo India Pvt. Limited
(Volvo) have established technology centers in India for doing R&D in automobile
design.69 FDI in R&D and design in India has followed FDI in manufacturing.
Collaborative R&D activities have opened avenues for material substitution, better
vehicular design that are resource and energy efficient.70
With upgraded R&D, the innovative capacity goes up naturally. One outcome or
measure of this is their intellectual property (IP) rights. Most leading automobile
companies are actively engaged in filing for their IP in the country. The recent patent
deployment strategies of established players demonstrate considerable improvement in
areas such as propulsion technology, telematics, vehicle safety, and
security.
Statistical data published by the World Intellectual Property Organization
(WIPO) and the Office of Controller General of Patents, Designs & Trade Marks
under the Indian Ministry of Commerce and Industry provide estimates related to
patent applications filed by the automobile industry in India. Table 5 shows the
number of patents granted to some leading Indian manufacturers in India between
the period January 1, 1990 and July 31, 2018. It can be seen that the number of
patent grants has increased in the last 10 years. Among Indian companies, TVS
Group, Tata Motors, and M&M have been among the top Indian applicants for
patents.71
The majority of Indian patent applications filed by automobile companies fall
under the categories of mechanical engineering, in areas like arrangement or mounting
of propulsion units, transmissions systems, instrumentation for vehicles, conjoint
control of drive units, arrangements in connection with cooling, air intake, gas
exhaust, or fuel supply of propulsion units in vehicles.
However, suppliers or vendors are often small and medium enterprises (SMEs)
which do not have many opportunities or resources to upgrade. The major challenges
faced by the indigenous component manufacturers are high cost of capital,
nonavailability of skilled labor, and rising price of operational cost. Stiff competition
from China and other Asian countries on the price front is also emerging. Under
these pressures, converging toward international safety standards would encourage
firms to adopt (and contribute to) international good practices. Adoption of automation
and robotics in recent times has helped the industry to significantly improve
quality, productivity, and delivery outcomes and reduce costs.72 To meet the needs
of the future (including electrification of vehicles) and stay competitive, SME
manufacturers also need to rise up to the challenges of constant upgradation,
digitization, and automation. However, in the process, they may require support from
lead
firms and the government.

The Future Scenario

The current policy debate in India is around the issue of achieving greater
competitiveness, efficiency standards, and the need for introducing electric vehicles.
The
Draft National Automotive Policy 2018 formulated by the Department of Heavy
Industries (Government of India) envisages increasing exports to 35–40% of the
output and to make India one of the major automotive export hubs in the world. It
also envisages long-term roadmap for emission standards beyond Bharat Stage VI
and harmonization with the global standards by 2028
With a view to promoting electric mobility in the country, the Indian Government
approved the National Mission on Electric Mobility (NMEM) in 2011, and
subsequently a National Electric Mobility Mission Plan 2020 was unveiled in 2013.
This
Mission Plan was designed considering the fuel security and environmental pollution
in the country. It aims for a cumulative fuel saving of about 9500 million liters
equivalent resulting in reduction of pollution and greenhouse gas emission of 2 million
tonnes with targeted market penetration of 6–7 million vehicles by 2020. As
part of this mission, the Department of Heavy Industries launched a scheme called
Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India
(FAME-India) in April 2015. The scheme is proposed to be implemented over a
period of 6 years, i.e., 2020, wherein it is intended to support the hybrid electric
vehicles market development and the manufacturing ecosystem to achieve
selfsustenance. The scheme has four focus areas – technology development, demand
creation, pilot projects, and charging infrastructure. Under this scheme, 148,275
electric/hybrid vehicles have been given direct support by way of demand incentives
amounting to approximately US$ 28 million since its launch on April 1, 2015 and
till June 30, 2017.74
Another major initiative in this area has been the launch of the New Green Urban
Transport Scheme in 2017. The objective of this scheme is to promote low-carbon
sustainable public transport system in urban areas. The scheme is to be executed
with the help of private sector including assistance from the central and state
governments under a 7-year mission with a total cost of US$ 10.76 billion. It pushes
for
promotion of non-motorized transport, public bike sharing, bus rapid transit systems,
intelligent transport systems, and urban freight management.
With the plans of introducing electric vehicles, car manufacturers in India are
gearing up to new production processes and machines. In 2017, the NITI Aayog75
suggested that 40% of private vehicles in the country could go electric by 2030.76
Currently, M&M is the only manufacturer of an electric car – the e20, a micro
vehicle at present. Mahindra Electric, a fully owned subsidiary of M&M, has
announced its EV 2.0 platform roadmap for electric vehicles.
Maruti Suzuki has revealed plans to manufacture electric vehicles at a factory in
Gujarat in 2017. Other companies like Volvo are also planning to expand their plugin
hybrid and electric vehicle portfolio in India. The major reason for the push
toward electric mobility has been to steer India away from its overdependence on
imported oil. However, about 50% of electric cars currently built by domestic
companies are imported. This includes the batteries, the main part of the vehicle.
Global
Conclusion

With its buoyant economy, a large young population, and growing foreign direct
investment, India has been an attractive investment destination for global automobile
and component manufacturers since the last two decades. Its growth story has
been dominated by more homegrown lead firms. However, absorption of global best
practices has been slower than in China. Strategies of firms in the Chinese auto
industry provided a boost to technological learning more quickly and broadly than
in India.78 Capable of end-to-end production, India has also become an assembly
hub for large cars and manufacturing hub for small cars. Firms have started exporting
to other countries. India-based manufacturers are engaged in global innovation
networks and sourcing suitable technologies from all over the world to complement
their own R&D efforts.
The AMP 2026 envisions that by the year 2026, the Indian automotive industry
will be among the top three of the world in engineering, manufacture, and export of
vehicles and auto components, growing in value to over 12% of India’s GDP and
generating an additional 65 million jobs.
According to OICA statistics, the Indian industry accounted for just 5.38% of
production in the cars segment and 3.48% of production in the commercial vehicle
segment in 2017. It has also not created lead firms or MNCs of the scale that other
more successful players like Japan, South Korea, and other western countries have
created. In spite of the success of government policy in building auto supplier industry,
India continues to be a net importer of auto components with its trade deficit for
auto components increasing from US$ 210 million in 2004–2005 to US$ 4.4 billion
in 2009–2010 and US$ 13.8 billion in 2015–2016.
The current policy debate is around the issue of how greater resource efficiency
can be achieved and the need for newer materials in light of the industry’s plans to
produce electric vehicles in India. Innovation in new product development is lagging
behind and remains critical for the future of India to achieve competitive superiority or
at least maintain its low-cost advantage. Manufacturing technologies need
to be upgraded continuously. Large investments for developing new indigenous
technologies that are green and compliant with recognized high efficiency standards
would help India move up the value chain.