Tamil Nadu Automotive Cluster - Michael Porter

Microeconomics of CompetitivenessTamil Nadu Automotive ClusterHarvard Business School – Spring 2012Sandeep Bapat Abhinav Chaturvedi William Drewery Fei Fei Eric Hepfer

Tamil Nadu Automotive Cluster AnalysisMicroeconomics of CompetitivenessTable of ContentsSectionPage1.0 Executive Summary . 22.0 India and its Competitive Position . 32.12.22.32.4Country Overview . 3Macroeconomic competitiveness and Economic Growth . 3Economic Composition . 6Microeconomic competitiveness and National Diamond . 73.0 Tamil Nadu Competitive Position . 103.13.23.3State Overview . 10Economic Overview . 10Diamond Analysis . 114.0 The Automotive Industry . 144.14.24.34.44.5Global Automotive Industry . 14Indian Automotive Industry . 14History. 16Value Chain. 17Trends . 185.0 Tamil Nadu Automotive Cluster . 205.15.25.35.45.55.6Cluster History and Evolution . 20Cluster Map . 20Specific Activities in Tamil Nadu Cluster . 21Quantitative Analysis of Relative Cluster Performance . 21Cluster Diamond . 22Recommendations for Tamil Nadu Automotive Cluster . 286.0 Bibliography. 32i

Tamil Nadu Automotive Cluster AnalysisMicroeconomics of Competitiveness1.0 Executive SummaryIndia is one of the world’s most populous nations, and in recent years has attractedwidespread attention for its rapidly growing economy. In addition to national clusters such as ITand Business Services, India boasts an evolving auto cluster. India produces more than 10million vehicles annually, raking it in the top seven automobile producing nations. Nearly everymajor OEM has set up operations in India, and thousands of local firms have sprouted up toserve the industry.Tamil Nadu is one of India’s leading manufacturing states, and is home to one of the topauto clusters in the nation. Tamil Nadu is home to six foreign OEM’s, two domestic OEM’s, andover 100 local suppliers. The cluster benefits from favorable diamond conditions and has seenrapid expansion in the years since economic liberalization. Although Tamil Nadu is currently aleader in the Indian auto industry it risks loosing its competitive advantage due to a significantpower shortage and congested ports. While these actions are required to sustain Tamil Nadu’scompetitiveness, they are not sufficient to upgrade the cluster and achieve the state’s goal ofbecoming the “Detroit of India.” In order to achieve this goal, both India and the Tamil Nadugovernment must create policies to encourage R&D and attract more talent to the region.Finally, India must continue to liberalize its financial sector and reduce automotive importtariffs. Our key recommendations are summarized below:India Continue to build Automotive Centers of Excellence across India.Continue to liberalize financial sector.Reduce Automotive Import Tariffs.TamilNadu Invest in infrastructure to solve power deficit and port congestions problems.Encourage formation of local IFC’s.2

Tamil Nadu Automotive Cluster AnalysisMicroeconomics of Competitiveness2.0 India and its Competitive Position2.1Country OverviewIndia is the largest democracy in the world with a population of 1.2 billion. Moreover,with GDP in PPP terms at 4.5 trillion, India has the third largest economy in the World.1However, the per capita income (in PPP terms) is low at 3300. (EIU) Delhi (population: 11mm) is the political capital of the country and Mumbai (population: 12 mm) is the financial andindustrial capital.Location & Endowments: India is located in South Asia, one of the least developedregions of the world. India has hostile relations with its largest neighbor, Pakistan. Due to tenserelations between countries in the region, intra-region trade is fairly low. India has the fourthlargest coal reserves in the world and is the fourth largest producer of iron ore. The country hasrich reserves of bauxite, copper, alumina and limestone, and has the second largest arablelandmass in the world. However, India has only moderate proven reserves of oil and gas and thecountry has to fulfill 80% of its oil and gas demand through imports.2.2Macroeconomic competitiveness and Economic GrowthFor the first 45 years since independence (1947 to 1992), India adopted a Soviet stylecommand and control economy with a focus on import substitution. Severe restrictions on FDI,over regulation and a license-quota regime handicapped India’s competitiveness during thisperiod. GDP per capita grew at a sluggish pace of 1.5% between 1947 and 1992. After the oil-1IMF, www.imf.org, May 2012.3

Tamil Nadu Automotive Cluster AnalysisMicroeconomics of Competitivenessshock of the late 1980s, India’s current account deficit ballooned and this led to a severe Balanceof Payment crisis in 1991.In 1992 the Finance Minister began the process of liberalizing India’s economy byreducing taxes and tariffs, eliminating the license-quota regime, and encouraging FDI. After thereforms, there has been a significant increase in growth with GDP per capita growing at a 4.8%CAGR between 1992 and 2004. A second set of reforms was implemented in the 2001/2002period. Between 2003 and 2007, GDP per capita grew at an 8.2% CAGR driven by a robustglobal economy, rise in FDI and a substantial increase in savings and investment. Indiaweathered the global financial crisis well with GDP per capita growing at 6.4% between 2007and 2011. However, a lot of this growth was driven by increases in government spending and thefiscal deficit increased from 3% in 2008 to 6% in 2011. There has been a lack of reforms in thelast seven years (2004-2011) and there is growing recognition that a new set of reforms needs tobe implemented to keep GDP growing at an 8% plus rate. (EIU)Figure 1: Total Factor Productivity GrowthFigure 2: Rising Savings and InvestmentsRising Savings and InvestmentsRising Total Factor Productivity Growth5.0%Annual Productivity 0%10%0.0%1990-95Source: (EIU)1995-002000-052005-101980199020002010Source: EIU4

Tamil Nadu Automotive Cluster AnalysisMicroeconomics of CompetitivenessFigure 3: Persistently High InflationFigure 4: High Current Account and Fiscal DeficitHigh current account and fiscal deficitPersistently high inflation10%12.0%CA DeficitFiscal Deficit8%8.0%6%4%4.0%2%0.0%1985-90 1990-95 1995-00 2000-05 2005-100%1980Source: EIU199020002010Source: EIUPolitical Institutions: When India gained independence from Britain in 1947, it inheritedBritish common law and a relatively well-developed administrative system. After independence,India adopted a parliamentary form of government.India was divided into different states on linguistic lines just after Independence. Today,the country is divided into 28 states and 7 union territories with each state and union territoryhaving its own local government. Areas like education, health, law and order, and certain typesof taxes fall under the purview of the state governments. There is a large income disparitybetween states in India.The Congress Party ran the government for 42 years (1947-1989). The late 1980s saw therise of the BJP and many regional/state parties. Since 1989, the central government has beenruled by a coalition led by Congress or BJP. Over the last 20 years, regional parties have gainedsignificant strength as these parties run governments in many states in the country and bothCongress and BJP need their support to form the coalition government at the center. A keypositive for economic development is that the two main political parties, BJP and Congress,broadly agree on the need for economic reforms.5

Tamil Nadu Automotive Cluster AnalysisMicroeconomics of CompetitivenessSocial Development: According to the United Nation’s Human Development Report(2011), India has contributed to the large reduction in global poverty. In India, poverty rates areprojected to fall from 51% to about 22% in 2015. However, India still ranks 119th out of 169countries (30 spots below China) on the United Nations’ Human Development Index (HDI), acomparative measure of life expectancy, literacy, education, and standard of living.2.3Economic CompositionIndia’s rapid growth in the last couple of decades has been primarily driven by servicessectors like technology and business process outsourcing. The services sector contributes 57% tothe GDP with industry and agriculture contributing 27% and 16% only, respectively. Themanufacturing sector has been hindered by poor infrastructure, a cumbersome regulatory and taxenvironment, and stringent labor laws. Due to slow growth in labor-intensive manufacturing,52% of the population is still dependent on agriculture with only 34% and 14% of the work forceemployed by services and industry. (EIU)Exports have grown at a CAGR of 16% between 1992 and 2011 and the share of exportshas gone up from 9% in 1992 to 26% of GDP in 2011. Indian exports are dominated byCommunication Services ( 58bn) and Business Services ( 29bn). Unlike China, India has notbeen able to gain significant market share in labor-intensive manufacturing sectors. Automotiveexports constitute 9bn in 2010 with 0.7% of world market share (0.64% share increase in thelast decade). (EIU)6

Tamil Nadu Automotive Cluster AnalysisMicroeconomics of CompetitivenessFigure 5: Export PortfolioIndia Export Portfolio2010 World Export Market Share (%)25.00%20.00%Communication Services(18.5%, 58bn)15.00%10.00%5.00%Jewelry (8%, 33bn)Textile (6%, 16bn)Business Services (3.3%,Leather goods ApparelFin ServMining 29bn)FishingOil and Gas (1.8%, 39bn)Agri HospitalityAuto (0.7%, 9bn) 12.00%14.00%Increase/(decrease) in market share (%) (2000-2010)-5.00%AutomotiveIndustrySource: Cluster Mapping Project 20122.4Microeconomic competitiveness and National DiamondFactor Conditions: India has availability of ores and minerals, and has built productioncapacities for iron and steel (raw material for the auto sector). Due to an above average highereducation system the country has a good base of engineering talent. The country has inexpensivemanufacturing labor, but the quality of labor is not adequate due to the poor condition of primaryeducation and healthcare. The government has not been able to keep pace with the huge increasein the demand for power, roads, railways, and ports. Lack of adequate infrastructure is a seriousbottleneck for the manufacturing and automotive sectors which rely heavily on electricity andother material inputs for production.Demand conditions: A growing middle class and a young aspirational population haveresulted in strong demand conditions for the automotive sector. Demand for automobiles is7