Thursday, 20 December 2007

Industry Practice - India: take-aways & home-made recipes

Just as the Indian automakers TATA and Mahindra enter the final furlong to secure the assets, order-book and goodwill of 2 respected British marques, a 3rd Indian entity - Maruti-Suzuki - airs its intentions in seeking additional European small car market sales.

On the surface it looks like big news... the possible new entry of an Indian producer to beat the Chinese into Europe's heartland?

But in reality the Maruti-Suzuki alliance is actually slightly biased to Suzuki (54%). The 'interesting' news from Maruti Udyog Ltd really seeking to convey to Western, Japanese & Korean automakers the continued benefits of maintaining and extending India as a low-cost global production base. No doubt ideally partnering with MUL in their search for increased margins.

To date foreign manufacturing interests include: Suzuki, Ford, Chevrolet, Honda, Hyundai, Fiat, Mercedes, BMW, Mitsubishi, VW-Skoda, Toyota and Renault (partnering with Mahindra and latterly Bajaj).

Although last in, Renault have perhaps engaged the greatest favour amongst newcomers from the authorities by vocalising its commitment with its 2 partners. A commitment that should eventually promote the goal of full-service design and development competance. Starting in logical order with the 2005 'observational unit' that researches local design needs.

Mahindra, TATA, Bajaj and the politicos will want to hear similar sentiment from other 'guest' VMs so as to strengthen the indeginous skills-base and introduce advanced processes (across conceptual design, CAD engineering, production engineering, prototype construction etc). The obvious intended conclusion to provide India Inc. with 'world-class' development capabilities. India endeavours to absorb over 400,000 graduate engineers annually, and although local automakers have made remarkable NPD strides in recent years there is still a recognisable gulf in adopting latest practices to encourage quicker, efficient and quality orientated NPD techniques that in turn reduce resource/project expenditure.

Importantly, beyond the aim of a full-service engineering function within individual Indian VMs, we believe the national goal ought to, in parallel, create a new breed of leading Engineering Consultancies (akin to Lotus, Ricardo, AVL etc), and Niche Vehicle Houses (like Pinifarina, Bertone, Karmann, Valmet etc). This latter group of respected European specialists - in creation & niche production - are heavily 'distressed' at present and seek fresh injections of capital and business model modification.

If India Inc. were to partner these Carrozzeria, it would provide major strategic gain over the currently dominant Chinese. Local PE firms and the regional divisions of large investment banks, should take this opportunity to assess the cost and fit of such a proposition. And one would imagine the likes of the well connected Dilip Chhabria [of the very active but possibly under-resourced DC Design] to be exploring finance options to create such an outcome.

Such a national strategy would allow India to balance its manufacturing output ambitions with a new service dimension, thus providing a self-fulfilling ability to catch the Chinese, over-take it in the greater 'value-adding' NPD service sector. (Much as is done for IT today). IT & Auto would boost India's Balance of Payments considerably.

Such scenarios are undoubtedly on the 'Indian Radar' for seniors such as Ghosn, Mulally and of course (Osamu) Suzuki. Each are skilled diplomats and well recognise the role they could play in assisting such a hypothesis. They are more than cogniscent of need to create a mutually beneficial route-way forward, if they are to fully exploit a burgeoning Indian consumer-base and utilise the region as the global small-car production-base. (This obviously philosophically led by the much vaulted TATA 1 Lakh car). And of course from a corporate productivity angle, consequentially, the stronger India grows in its ability to deliver inexpensive units, the more pressure each CEO can apply to Eastern European, Latin American and Chinese facilities to drive down their own build costs.

However, the Indian focus has to be much more than an unco-ordinated rush for cheap export build and possible bolt-on acquisitions. The very nature of the region demands that the innate structure of the domestic industry needs to serve what is perhaps the broadest set of B2B and B2C customers ever known. The western industry matured from luxury to middle-class to affordable segments over a matter of decades and generally within isolated nations. In contrast, Indian industry must serve a full spectrum of clientele, from small IPR-centric start-ups to large Tier1/2 parts supplier facilities, from the one-off modified 'Raj' Rolls-Royce to what will be a modern day Model T for the millions. Include 3-wheelers, LCVs, HGVs and the very important downstream aspects of distribution, retail, vehicle financing (at 85% in India, a global high) etc and the level and increase of complexity is apparent.

This myriad of commercial interests, from all parties, desperately needs full and proper framework structuring, consensus-building and speedy implementation if we are to see the interests of global investors and corporations best served and the efficiency of the industry raised. Such a co-ordinating role is presently undertaken by SIAM guided by the 2006-2016 Mission Plan. This highlights the importance of R&D progress (in product and manufacturing, esp via leveraging local IT knowledge) and the need to gain far greater economies of scale. It states that China effectively has a 23% cost & productivity advantage. The productivity gap due to inflexible labour relations policies, poorly-skilled workforce and taxation policies which act in unison as surpressers.

Thus whilst external investment is being courted by the likes of Maruti, TATA, Mahindra and investors keep tryingto fathom the possibilities, there are still on a generalist level, if not case by case, fundamental barriers to be overcome. To at least parallel the Chinese (before a new round of efficiency-seeking Chinese industrial consolidation takes place) policy must be converted into action to speed up the rate of Indian structural change. The rapid transformation of local financing and capital markets is 'oiling the wheels' tremendously, but still there must be informed, market-sensitive guidence and entrepreneurship by industry luminaires. The prizes and risks are too great to be left to well-intentioned but ultimately unattached bureaucrats or remote association-linked intermediatories. Which to SIAM's merit, it well recognises.