US automotive industry heads for India

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Registered: 04-16-2003
US automotive industry heads for India
Fri, 03-26-2004 - 10:26am
US automotive industry heads for India

By Indrajit Basu

KOLKATA - Amid all the offshoring brouhaha, the fact is that there's at least one industry sector in the United States in which India still features as the top destination for moving jobs. An online survey conducted recently by a global management consultant revealed on Wednesday that the US automotive industry unanimously voted India the most preferred destination for offshoring engineering and technical jobs.

"India was the chosen country with a huge margin," said AT Kearney principal Nagi Palle. Bigger automotive markets, China and Mexico, lagged behind at 15 percent and 13 percent respectively, while auto hubs Brazil, Thailand and the Philippines cornered just 10 percent, 2 percent and 3 percent of the votes. "Most firms chose it for its cost competitiveness and good quality," said Palle, adding: "What was most surprising was automotive firms using India more for engineering and technical services."

After a decade of modernization and revamp, India's auto industry indeed appears to be finally on its way to integrating with the global auto industry, and staking its claim there. Scarcely a day passes without news of the country's increasing presence (in terms of booming auto exports) in the global markets, or of global auto giants planning to use India as a hub for their worldwide operations.

Take the instance of two recent major announcements. The Detroit News created a sensation on Tuesday when it leaked an internal memo of the world's numero uno auto company, Detroit-based General Motors, saying that the company was planning to send US$48 million worth of white-collar jobs to India and Canada to keep up with "competitors who are driving relentlessly to reduce costs".

The Detroit News added that GM's plan ignores the order of the Democratic governor of Michigan, Jennifer Granholm, of giving preferences for state contracts to firms that employ workers in that state. Last week GM also said it had decided to invest $21 million in its research-and-development center in Bangalore, India - its first outside the United States - to turn it into its Asian R&D hub.

And in late January, Akira Okabe, managing officer in charge of Asia, Oceania and Middle East operations of US and Japan-based Toyota Motor Corp - which has recently emerged as the world's No 2 car maker - said: "One of my missions is to use Toyota's know-how and culture of cost-cutting to turn India into our lowest-cost manufacturing center in the world. It would be wonderful if we could begin from the development stage and utilize India's many resources to achieve this."

Toyota and GM are just two of the plethora of auto giants considering outsourcing from India. Other big names that are eyeing India with a $10 billion outsourcing wallet include Volvo, Ford, Fiat, Toyota, Delphi, Navistar, Cummins, Caterpillar and DaimlerChrysler, AT Kearney said. Besides, United Kingdom-based MG Rover, Korea's Hyundai and Japan's Suzuki Motors, which have already been outsourcing from India for a while now, have all said they plan to ramp up their offshoring plan significantly going forward, which will not only include components and engineering and technical services, but also fully built cars. Non-auto companies such as US Rail Roads and Oil Lines, too, have started talking with Indian suppliers to outsource forged components.

For India's auto industry, though, this isn't the first brush with outsourcing. In 1992, a 40-member GM team spent time in India and identified about 10 suppliers. But GM said it had to retreat hastily after "some did not deliver on time there were quality issues, which resulted in consignments getting rejected". Then, in the mid-1990s, when Ford, GM and Hyundai set up bases in India, its auto-industry vendors got excited again and started shouting: "If we are good enough to supply to Ford and GM here, why can't we supply worldwide?" But successes then were only stray cases and consequently the second wave, too, never took off.

Of course there was another reason behind those two failures. In the early 1990s, global auto makers were going through a period of bumper profits. Ford even registered its highest profit of the century, and therefore there was no great need really for it to cut costs. "Naturally, global auto makers looked at India only with amused interest," say industry sources.

However, this time around - the current flurry - it is different. The global auto industry perhaps is going through its worst slowdown in 20 years. Last decade's profits have evaporated. In 2002, the Big Three - GM, Ford and DaimlerChrysler - lost roughly $1 billion each, and wild speculation is even doing the rounds that at least two majors, Fiat and Ford, may not live beyond this decade. Moreover, according to the US auto industry, more than 200 US-based suppliers (in the $10 million-$500 million revenue bracket) that supply original equipment and components are in trouble. "Suppliers have been filing for bankruptcy at record rates for the last few years," though it can be used as a tool to become more competitive, said Laura Marcero of Stout Risius Ross, a US-based turnaround outfit.

Which is why suddenly there's a rush to set up operations in India. "While for the majority the outsourcing route is primarily to cut costs, 17 percent chose these destinations to support customers' global footprint and 14 percent to the route to develop capacity," said Kearney's Palle. He added that nearly 75 percent of surveyed auto makers have said the quality of products and services sourced from India and Canada would be on par with the original services, while another 14 percent found the quality to be better than their original suppliers elsewhere.

But even as a push from Indian suppliers may be matching a pull from global auto makers for the first time, hurdles still exist. The first is, despite the fact that India's auto industry has a large number of suppliers, few may be world-class. And the challenge that global companies still face is to get them to operate at the same level. The second, which threatens to be a big one according to Indian auto makers, is inadequate infrastructure facilities and logistics. In fact, Indian auto makers such as Maruti Udyog - India's largest car maker and a Suzuki joint venture - and Hyundai Motors India say they had to set up captive arrangements to overcome the infrastructure and logistical problems.

Nonetheless, many consider the latest round of global interest a watershed and similar to the one seen in the information-technology industry in the early 1990s. "Vis-a-vis the international market, we are today where the software industry was in 1992-93," said K N Subramaniam, managing director of India's largest manufacturer of shock absorbers - an auto component - Gabriel India.

And according to Automotive Component Manufacturers Association (ACMA) officials, "this huge support from global auto companies" will help the Indian auto industry secure a foothold in the global arena, which is already evident from rising exports. "In 2002-03, the industry had exported products worth $800 million. This year, we are expecting to cross $1 billion, and next year onwards, exports could grow by 30 percent," ACMA said.

http://www.atimes.com/atimes/South_Asia/FC27Df07.html