Friday, 4 November 2011

Micro Level Trends – Indian Autos (Part 2) – 2016 Planning: Remaining on Track After Exploring a Dead-End Road.

The previous web-log, in a very basic manner, reviewed the macro-level past and present conditions of the Indian automotive sector. The vehicle sales figures from 2000 to date demonstrated the metamorphosis that India has undergone. This thanks to a general mixture of: previous long-track global growth trend, the competitive advantage India leveraged in new-age and smokestack sectors, the opportunities generated for many enabling the rise of a 750m strong new middle class (of 1.21bn people), and the aspirational consumer dreams that have been created by a Bollywood with ever increasing western cultural exposure, which Indian companies seek to satisfy.

India's Grand Prix Event -

Whilst the story of modern Indian socio-economic progress is well entrenched and comprehensively reported, it was the long-awaited arrival of last weekend's inaugural F1 / Grand Prix race that many observers (both inside and external to) the auto-sector may view as highly symbolically, yet another important representation of India's increasingly powerful position on the world stage

Held in New Delhi, its final arrival was well over a decade 'late', this outcome resulting from the faltering hosting ambitions of various rival provinces (ie Kolkata, Mumbai, Bangalore, Chennai) many of which subsequently either altered their own economic planning templates, or necessarily did so from civil service central planning.. The successful candidate proving to be New Delhi.

The decade-long delay in the hosting of the event, may investment-auto-motives' theorises, may have been for very good reason. The late stage homologation of the Buddh International Circuit - only signed-off in early September (2 months before the race) – reflects a what could be viewed as a rushed intent to stage. If so why?

As explained in the previous web-blog, the global macro-headwinds of a contracting China, stagnant Eurozone and seemingly over-stated growth indicators in the USA, have created a new set of headwinds for India. Its export base suffering perhaps longer than previously anticipated, necessitating future national economic growth be self-generated; thus typical of the 2011-12 EM country scenario.

“Track Timing” -

It may well be the case that the Grand Prix was indeed timed to help overcome such headwinds, to act as a positive catalyst for not only New Delhi's local economy (gaining $170m or so and as part of the JP Sports City development) but the far broader Indian society and national commerce. F1 then encouraged and leveraged by central government to propagate national pride, enthuse broad society, coalesce different cultural factions and critically maintain consumer interests in the dream of new car ownership, and its related services. It was also planned to coincide with the Diwali festival which sees the highest level of consumer spend and most internal travel.

The Buddh track itself displayed upon advertising boards the names of high profile national companies such as Bajaj Auto (auto-manufacturing) , Airtel (telecoms) alongside international names like Pirelli (tyres) Allianz (insurance), DHL (logistics) and UBS (banking). Whilst the TATA logo sits on the flank of the Ferrari car and India's own 'Sahara Force India' team - owned by Vijay Mallya, Sahara India Pariwar & Dutchman Michiel Mol, run from its UK base – of course displays Mallya's own Kingfisher (brewing & airline) name. Interestingly the previous Indian sponsors of yesteryear such as ICICI (banking) and Reliance Industries (conglomerate) have been replaced by international brands, so demonstrating that whilst previously Force India was literally an 'advertising vehicle' for home brands to a global audience, it has now become a platform for those old and new internationally minded brands brands to re-enforce their Indian links.

The F1 event was then an important showcase: to a world-wide audience to highlight the country's geo-politically and culturally elevated standing, to its Indian citizens to demonstrate the internal dynamism of India and a 'can do' attitude, and with a sub-text relative to the broad national and internal ambitions of its automotive sector.

The Gradient Steepens -

The auto-sector faces recently availed structural challenges regards cost, quality and (labour) production flexibility, made all the more apparent by the juxtaposition of a global economic slow-down yet with a new set of EMs – the 'Next 11' – emerging as powerful attractors of industrial and commercial activity, FDI led and home-grown.

That is not to say India – nor any 'BRIC' – faces any immediate danger of economic meltdown or stagnation, the growth and investment fundamentals still extremely strong long-term. Simply that it is necessary for India - and counterparts – to recognise the international threat which has emerged and thus to evolve in response.

This inevitability was of course is was recognised in the country's 2006-16 AMP (Automotive Mission Plan) – as previously outlined - and so ongoing efforts were consequentially made in order to re-assess India's competitive position, alternative visionary possibilities and the competence of the sector's structural base.

“Visioneering” a Future Path -

In mid 2008 the Indian authorities approached America's MIT (the Massachusettes Institute of Technology) and set the question of identifying a route-way forward by which the Indian auto-sector could develop into the future, with ideally the ability to leverage a competitive advantage. MIT's Sloan Management School tasked two professors, Charlie Fine (Operations Mgmt & Supply Chain Strategy) and Richard Roth (Materials Technology Laboratory) to seek a tenable solution.

The MIT Routeway – “Light-weighting” India.

Here and now, given the recent running of the first ever Indian F1 race - which philosophically integrates the ideals of lightweight engineering - that route-way may appear at first glance all the more appealing. And indeed investment-auto-motives is indeed an advocate of reduced mass vehicles so improving fuel efficiency and typically production complexity and cost. And indeed it congratulates the likes of TATA Motor for capturing JLR's achievements in the use of advanced lightweight materials and in the long-run perhaps integrating such learning from premium vehicles toward mass market cars.

investment-auto-motives believes the route-way set-out by MIT to have been ultimately simplistic, highly theoretical, and very 'blue sky'; the professors' lectures showing it comprised of:

1. Recognising India's position as low-down on the market maturity 'S Curve' model, so still in its early development stages (as compared to N.America or Europe)

2. Identified broad 'Strategic Option' and the already 'owned' options by competitors:
- High Performance Cars – “tough because of Germans” (BMW, Audi, Mercedes) [plus British AML, McLaren, Ginetta, Noble etc & Italian Ferrari, Maserati & Japan's Subaru, Lexus]
- High Productivity - “hard to topple Toyota, Honda” [plus major achievements by Hyundai-Kia and Renault (ie Logan) and increasing JV projects on platform sharing]
- Low Cost - “how defensible is this?” (ie Next 11 EMs)
- High fuel economy - “high barriers given R&D levels for powertrain”

3. Thus leading to the consideration that:
- the “Lightweighting” - “field is still wide-open”

[NB This then immediately appears to echo the long-touted lightweight HyperCar ideology from Amory Luvins and the 'Rocky Mountain Institute' in the USA].

The following provides reply and comment to portions of the 'Lightweighting' theory, as explained by a Fine-Roth lecture and web-broadcast by MIT:

To requote Prof Charles Fine...”no-one has nailed this as a competitive advantage, it's still open”, which obviously begs the question why such an opportunity has gone uncaptured, such a business-technology space would be soon entered, then invaded. Prof Fine answers himself..“So, why aren't US companies doing this?”...."lack vision and will"...”[it will be] down to regulatory actions in CAFE fuel economy standards to drive change, [but I] doubt it very much”. Presumably due to his disbelief that Congress would be willing to de-stabalise the US auto-industry, no doubt the case, especially after the massive 'bail-out' of GM and Chrysler and the fact that GM stock prices still sit at $10 below their IPO launch level of $33 (as of midday Wednesday EST).

Thus the US context is made clear, and correctly so.

In contrast the India opportunity, as a very different PESTEL environment is presented:

Thesis A - “Vehicle Speeds Suit Lightweight”:
Prof Fine highlights the different driving and travelling environment, and sees a 'speed vs safety' regard that would support lightweight, less crash-resistant vehicles...”Indian roads are 'slow roads', the poor highway infrastructure prohibits 'high-speed' travel”....”it's not like US with fast [heavy/large] Chevy Suburbans crashing into each the requirement is different...and can be populated by low mass lower speed vehicles doing less damage to each other...and so the crash requirement lower”.

Yes, the less developed Indian road infrastructure, with poorer road surface conditions and slower lawful road limits, notionally prohibits faster driving speeds. But the fact is that the regionally different speed limits are viewed with relative indifference by road users (The speed limits set to try and encompass the wide variety vehicle mix of scooters / tuk-tuks / cars / LCVs to HGVs – these becoming bigger and heavier). So nearly all drivers of all vehicle types commonly flout the speed limits, seen by road users as antiquated relative to modern vehicle capabilities and so too prescriptive and prohibitive. (Though greater road policing is being undertaken). Thus the different vehicle types tend to move at speeds relative to themselves in traffic conditions and weather conditions, with a typical self-regarding attitude of “fast as one can”. Thus on suburb and rural roads there will be a mix of slow scooters, medium speed trucks and faster motorcycles and cars.

These real-world conditions then do not match Prof Fine's theory of 'slow speed' environment, indeed, as in nature, the smaller vehicles 'buzz' round the larger heavier and slower. The need for high standards of crash protection then perhaps arguably greater in India because of its poor infrastructure (esp lane markation & utilisation and crash barriers) compared with better organised western roads that have very different vehicles travelling with far less difference in their respective speeds.

Thesis B - “Lightweighting is Future Orientated”:
The argument is made that historically trends regards fuel demand, fuel prices and fuel price volatility tends to 'trend up'. Prof Fine's self-stated “back of an envelope” guestimate is that fiscal savings of $24bn per year can be achieved by 2035 compared to the use of all-steel vehicles.

Undoubtedly, the appearance is that there is a 'trending-up', but an historical time-line is always an approximated average, one consisting of natural inflationary price pressures but critically also hiding the broader era-long phases of 'cheap gasoline' or 'expensive gasoline'. Those previously mentioned Chevy Suburbans and their large car ilk on US roads were only able to be 'fed' by a relatively recent era of 'cheap gasoline'. The US case is of course relative to its ability to influence its gasoline price via the supply-demand equation through trade, regional relations (ie OPEC etc) and previously war to ensure oil supply, now seemingly superceded by a 'soft-power' approach; but note how relatively short the 1973 oil crisis actually lasted.

India of course has historically had far less influence than the USA, but as its economic strength grows, and is seen to grow across the world, so too will its ability to influence its oil importation prices via trade negotiations. Furthermore India's own geographic position gives it closer proximity to major oil reserves to the west in the Arabic Peninsula, to the north west Pakistan & Iran and CIS states; this increasingly elastic supply chain then able to deliver the increasing import need.

[NB India's domestically sourced oil from off-shore rigs has been 'flat' between 700k-800k barrels per day between 1990-2009, compared to a much ramped-up importation demand over that period from 1,200k-2,900k barrels per day].

Thus, it appears that improvements created by greater globalisation – via a softening of old geo-ideological barriers – indicates that Indian oil supply and so its pricing could actually improve, any rise in future pump prices very probably a consequence of future government policy to raise taxation revenues.

Critically, the 2006-16 Automotive Mission Plan set out a template by which a major portion of India's future economic growth will be by forming ever greater commercial tentacles – upstream and downstream – with the oil industry.

These basic observations then undermines the “Fuel Future Orientation” argument set-out.

Thesis C - “Indian Industry is Still Young”
MIT's proposition here is that “Lightweighting” would be attractive to India's auto-sector because the industry is relatively 'young'. So, unlike a naturally resistive American, Japanese [S.Korean] or now Chinese which have heavy 'sunken costs' in conventional 'old' industry methods and models, India's manufacturers are not so entrenched and so have a choice.

It is true indeed, that in comparative terms India has not sunken as much investment into the steel unibody production system as have its western and eastern counterparts. But the very essence of India's domestically produced steel vehicles are closely correlated to an Indian engineering history intrinsically tied to steel through its steel based railway infracture in rails, locomotives and rolling stock, through its previous use of robust seemingly 'over-engineered' but ultimately 'fit for purpose' trucks and of course the intrinsic interdependence of its conglomerate groups which have supply chains and value systems that stretch from mining iron ore to iron processing to steel fabrication to steel structured vehicles.

Furthermore, much (though of course not all) of India's engineering education system at the student and undergraduate level especially has been historically formed by the past requisite knowledge of ferrous (and lesser extent non-ferrous) metals so massively influencing the knowledge-base of tomorrow's engineers and engineering managers.

But critically the whole of India's servicing and repair industry for the last 90 years has is based on steel vehicles, a sector which is now seemingly represented by the modern garages of city-centre car dealerships, but in great part is truly represented by back-street mechanics, sheet metal vehicle body workers and 'next-door' paint-sprayers.

Lastly, India though self-improving quickly, is (realistically) still reliant upon external multi-national VMs and their supply-chain (typically steel orientated) to introduce any powerful technical or quality advances. Advanced which can be quickly introduced in JV vehicles, or latterly transferred for use in fast-acting Indian brands so to gain USPs versus domestic competitors; this the case across all systems: body, powertrain, chassis, electronics and exterior-interior trim.

[NB Part of Ratan Tata's effort with Nano was to produce something 'Indian own', yet the basics of the car is still very conventional technology].

Hence, whilst India's car sector's actual growth spurt has been recent, and so appears 'young', the reality is that the sectors history is entwined with that of the country's deeply engrained steel production, vehicle fabrication and vehicle repair past. Those apparent last 10 years stretch back over a century.

Thesis D - India as “Last Great Virgin Market”:
Prof. Fine describes India's future opportunity with the phrase the “last great virgin market”, something which indeed appears the case when the vehicle ownership statistics from various bodies reveal that only about 5% of households own a 4-wheeled vehicle, roughly equating to about 10 in 1000 people inside a country with a population of 1.21 billion.

Of course a sizeable proportion of that population will be non-adults or aged, so outside of the earnings and ownership bracket, but Fine stipulates that (to paraphrase) “from a global perspective there is no other region as large and as relatively homogeneous”.

That level of homogenity may be debatable given the cultural 'mosaic' that exists, ranging across religions (though primarily Hindu also including Muslim, Sikh, Jain, etc) with in addition the still very prevalent (though very slowly dissappearing) caste system of social hierachy.

Nevertheless, the phrase Prof Fine used was indeed apt, since the above mentioned very low vehicle saturation figures speak for themselves,

But of course vehicle ownership and use patterns rely heavily on people becoming more economically engaged which itself depends upon the ability of the Indian government to both generate a more powerful economic model for the country at large and ensure that the wealth created does indeed pass down throughout the broad populace.

This issue is viewed in more detail below under the heading 'Assessing the Potential'.

Thesis E - “Exportability”
The Automotive Mission Plan regards export ambition is addressed here, and it is stated that specifically “Lightweighted” vehicle designs would appeal as export propositions to foreign countries' consumers; presumably given the trend to eco-consciousness and reduced 'carbon footprints'.

Prof Fine says that India will not stay a low-wage auto-build environment and so must climb the value ladder, hence the idea of specifically built lightweight vehicles holds promise. The premis being that a new idealism of self-design and self-manufacture by Indian players will allow them to capture new innovations via improved self-R&D activities. The outcome scenario would be IPR-backed product innovation directly deployed on Indian roads, and thus attracting export sales to countries that wish to mimic the 'Indian leap', and provide the potential for IPR/build licensing agreements.

investment-auto-motives believes that the general high-brow global eco-philosophy does indeed 'read the zeitgeist', especially pertinent to the previous and ongoing moulding of social mindsets in notionally 'advanced' post-industrial countries. And so perceptually at a surface level the thesis appears to have substance.

However, though India's low-wage economy, well suited to labour intensive assembly, has indeed been pressurised with high inflation levels, the general global deflationary environment – which India is forced to follow – will temper much of the threat to India remaining in parts a low wage economy.

Secondly, to date it is well established that alternative build types such as lightweight engineered vehicles do in fact require far greater levels of manual labour in their construction, as well demonstrated in the specialist sportscar or specialist utility vehicle fields.

This a consequence of the typical business plan which bounded by know or estimated order numbers (usually limited) so devises the appropriate alternative product construction solution, materials type, bought-in component schedule, BOM (Bill of Materials), labour content and overheads absorption. However, it should be noted that even since WW2 and the proliferation of new materials and methods adopted and advanced (ie fibreglass, to SMC plastics to carbon-fibre) unless a company simply churns-out a standard product (which is rare) the ability of even the best known auto-engineering firms to accurately business model is questionable, this opaqueness the case since each product in this field - sportscar or tailored utility vehicle - tends to be insular, later product types typically enhancing new new construction and materials advances to improve performance and so upsetting the accuracy of the business modelling capability.

However, whilst this is the general norm, cases of progress have undoubtedly been made on a proprietary basis at: VW-Audi-Lamborghini, Porsche, BMW, Mercedes-Benz (McLaren-Mercedes), Ferrari, Pagani Aston Martin Lagonda and seemingly more recently McLaren Automotive (details below).

Thus paradoxically, only a maintained low-wage environment could indeed be helpful to the MIT ideal of the “Lightwieghting” revolution. But given the size of ultimate demand levels for vehicles in private, commercial and governmental spheres, the thought that such demand could be effectively met by multiplying and scaling-up the niche vehicle model to include many many more assembly workers would appear to capital markets as little more than a India-wide job creation scheme, akin to the civil service, rail-network or ship dismantling, employment protected but from an investment perspective value destrucutive

The idealised outcome of simultaneously or consecutively creating India as the new-age physical demonstrator for “Lightweighting” so attracting export sales to those countries that wish to mimic the 'Indian leap' and therefore provide potential for IPR licensing agreements, once again appears flawed. Any other country seeking to replicate would very probably seek to develop their own lightweight vehicle design and production capabilities, possibly using a western engineering firm to create the basic template for each vehicle type, then themselves nationally build latter development capabilities. It would make little sense in their own economic planning to move from reliance upon the western steel unibody model to that of an 'alternative' Indian lightweight model.

And lastly, the previous belief that business models and tenable long-term income streams can be obtained from IPR licensing appears to be waning. The advanced and disruptive nature of advanced IPR in mature industries (esp autos) looks to create very real hurdles, which are increasingly hard to overcome in a growing climate of national and corporate self-sufficiency. Investment-auto-motives previously reviewed such a company – Torotrak in the UK – and the experience of that firm's income seemed to rely upon a mix of commissioned advanced engineering projects and governmnet funded eco-engineering initiatives; its own IPR licensing model failing to attain the potential first thought (itself possibly promoted by Silicon Valley hi-tech influenced investment bankers).

Thesis F: “The Semi-Conductor Industry Parallel”

It is suggested, with indeed good reason, that any transformational change of 'vehicle DNA' would need to be undertaken at an industry-wide level as opposed to company specific level. The obvious reasoning for this being that all players then move technically forward together, able to mutually develop and share resources and breakthroughs.

Critically, any technology leap is blocked by the already in situ supplier base, which to a similar or greater extent, has 'sunk costs', future investment interests and core knowledge in its specialist field. To quote and paraphrase Prof Fine “no single firm can make the supply chain change...too risky [an] investment for one...[thus] one 'road-map' for all means all must undertake the journey”

Prof Fine uses the case study of the US Semi-Conductor industry in the 1970s whereby the very real external threat then coming from Japan, and later S.Korea, urged the sector's players to abandon their go it alone strategies and acting as a consortium (though not legally presented as such) changed the R&D roadmap to put them a generation ahead.

To once again paraphrase: “Between 1970-1990 there was a reversal of fortunes between US and Japanese firms in chips and production technologies, the US created a consortium called "Semi-Tech" since the technology was seen as [core to] national government circumvented anti-trust laws to allow co-operation, collaboration via a new roadmap...which then allowed for supply chain co-ordination. It led to rolling 10-year road-maps which became ITRS at global level, So very much a case of “if we built it they will come” like the film 'Field of Dreams'”

It is noted that the for the Indian auto industry to similarly change course requires scale and "all-in" involvement, recognising that today's R&D and CapEx knowledge is very much biased to steel given its 100+ year history, Thus naturally “Lightweighting” R&D would cost more than that for 'turn the handle' steel vehicles.

He suggests that those R&D costs would be (eventually) repaid by the 'lifecycle costs' per vehicle type, hence upfront R&D expenditure would be recouped by through-life fuel cost savings. Yet he acknowledges that these are very different parties, the manufacturer (and often supplier who may share R&D costs) versus the private car buyer or business owner or fleet operator. The question remains “who capatilises up front?”, and cites that “the government may need to 'step-up'” along with “firms should justify it too”. “It's not for the faint hearted, requiring an industry roadmap, technological roadmap, supply-chain roadmap, business model roadmap, regulatory roadmap”...”all to build consensus and form collaborative R&D”. It is suggested “that all players would then compete in the broad product market, not 'sectioned' market as is today”.

Prof Fine indeed recognises the very severe set of challenges that would lay ahead in embarking on such a mission, but with overt optimism believes it possible given the 'Semi-Tech' story. A more pragmatic investment-auto-motives believes that the highly engrained history, knowledge and methods of the Indian auto-sector is in reality little different to that of the US sector, indeed possibly more so given the far more limited financial resources the main players can utilise.

The difference is that while equally or more entrenched, India does indeed sit at the bottom of the market maturity s-curve, thus is in a prime position to simply re-run the US model over coming decades, perhaps seeing itself presently mirroring the US in the late 1920s, early 1930s, for the Model T read the Maruti 800, and the model variety now seen and exemplified by Maruti-Suzuki's broad portfolio, indicative of the differentiation strategy undertaken by GM.

Realistically there are not enough real-world parallels to convincingly compare the US semi-conductor industry of yesteryear with today's Indian auto-industry, so it is a spurious parallel, even if noted as a great success story.

As for the off-setting of up-front higher R&D costs repaid by the 'lifecycle' cost-savings per vehicle, the fact is that it is unlikely that the new vehicle purchaser would hold onto the vehicle long enough to recoup the higher price that must be paid (given R&D cost amortisation per unit).The fact that a vehicle's typical 10-15year life may be spread across 3,4 or 5 different owners massively complicates the 'lifetime pay back' scenario.

The Indian government, or a specific region, could well be enticed to “step-up'” and fund the R&D work required. But it must also be remembered that – as a closer case study - many regions decided to fall out of the race to support the escalating costs of the new India GP Race Track itself, the transformational face of India. Many regions might feel the “Lightweighting” initiative to be similar, critically bound to fund an essentially unknown quantity, with probable recurrent calls for funding (ie “how long is a piece of string”).

As for the suggestion that “all players would then compete in the broad product market, not sectioned market as is today”; this is highly debatable since without true alteration of the marketplace all that would be seen is that 'plastic vehicles supplant steel vehicles' the sectioned market-place seen today still very apparent.

Thus, as alluded to, the proposed technology switch to lightweight materials is anything but a panacea for structural market reform.

The Materials Perspective -

Prof Roth, of MIT's Materials Tech Lab provided a basic overview of applicable lightweight materials options that would theoretically underpin such a new technology routemap. Citing the obvious options of Metals vs Composites.

Within the Metals group the options of:
- High-Strength (ie more lightweight) Steels
- Aluminium (alloys)
- Magnesium (alloys).

Within the Composites group the options of:
- Fibreglass
- Sheet Moulded Compound (SMC)
- Carbon Fibre

Prof Roth Stating the well known edict that the materials are typically viewed as a matrix of options. This relative to performance requirements, level of project investment finance available and competitor actions etc. This usually applied to specific vehicle parts: structural BIW, closures, and chassis / suspension on a case by case nature, and typically feasible in small batch operations, not feasible or not proven so in mass manufacture; given that the present mass production infrastructure is dedicated to steel based vehicles.

[NB However, one must remember (as stated above) the proprietary advances made by VW-Audi, Aston Martin Lagonda, Jaguar Land Rover and McLaren. Ferrari's efforts (trickling to Maserati) should not be overlooked, though its design approach appears more model specific].

The main challenges that advanced materials pose are:

- the procurement & processing routes of each material.
- the positive & negative behavioural properties of each material
- the finishing methods required
- the assembly planning required for each material-specific vehicle subsystem

Specialist materials tend to be mined / extracted from rarer locations and typically more remote locations, the supply route of the raw material more easily disrupted and with that pricing volatility, as such they are less generally traded and thus available. Of the materials listed, magnesium typically has an insufficient supply to meet present demands.

As regards processing, China is seemingly ahead with magnesium through development of the Pidgeon process method., but presently not reached automotive-grade standards. As for aluminium sheet (a speciality alloy) requires highly tailored properties and must be made in large quantities, with no facilities in India (or indeed the the USA). As for composites, even the theoretically large market potential in China has not yet provided a convincing case, its high sourcing costs unable to be off-set by the low-cost labour advantage

As for the ideal of carbon fibre, investments levels are so high and scale requirement so large that no-one has of yet sought to conquer the issue, which ultimately is the usual 'chicken and egg' dilemma between demand and supply

[NB BMW appears furthest down this 'dark road' having used carbon fibre as a roof material for an M3 variant, and presently researching the feasibility of creating carbon fibre substructure shells for the i3 concept vehicle, which it seeks to assemble on a standard production line].

This highlights the big quandry about advanced materials: given the impracticability of 'mass-niche production', then how to ensure that lightweight structures and components can be assimilated to standard mass production methods of running assembly line and JIT (Just-In-Time) parts delivery.

Ultimately challenges abound regards constant availability of raw materials, the manner in which any materials require painting, that affect upon assembly procedure and so the manner in which infrastructure and so capacity is altered. As regards perceived product quality, one important issue is the challenge to attain a similar high quality A-surface finish to steel & paint on a vehicle exterior.

The challenges are viewed as a “learning issue” by Prof Roth, given that steel is so well understood after 100 years of use.

However, unsurprisingly the big picture analysis demonstrates that whilst the positive results of that “lightweighting” notion can be partially achieved through the use of High-Strength Steels at small marginal additional costs, the real leap forward is only available through sophisticated metals and plastics.

These though are viewed as innately troublesome at most stages of the supply and assembly chain (ie volatile in availability and price through the value-chain).

Prof Roth mentions that the 'advanced materials story' has been around a long time, with little action resulting from initiatives such as USCAR and US AMP. He also notes that the US has had “bad plastics experiences”, which positively for India it has not experienced, at least on a similar scale, and he notes that the national fleet mix in India appears more amenable to switch to plastics. And feels that the supply chain would be theoretically more 'open'; theoretically yes but as for practicality, probably only on a project by project basis.

But as one may well deduce, the present steel-based eco-system of the automotive sector ione that has far greater inherent supply and pricing stability. These two elements are crucial to its efficient and smooth operation.

Proprietry “Lightweighting” Technologies -

Thus on a mass manufacturing level the headwinds facing advanced materials suggest that there is a long way to go before each and every negative aspect can be overcome, so as to be suitable for large scale production.

Whilst “Lightweighting” may appear an eco-panacea for the planet itself, if designed and produced en mass, the ability for actual implementation looks to remain remote on anything except low and mid volume vehicles.

So as a truly 'disruptive technology' to mass produced vehicles the chances look bleak, but that is not to say India cannot continue learning through private company and publicly funded R&D about lightweight technology applications.

An indeed this is exactly the route taken by TATA as part of its strategic take-over of Jaguar Land Rover. Although it had good learning of mass produced steel vehicles with its own small car range, it nevertheless recognised that Maruti-Suzuki had greater experience of steel mass manufacturer and so might well parallel its competitor's capabilities, but would be hard pressed to surpass it. Also seeing the need to climb the value-ladder JLR's acquisition has undoubtedly been a source of important 'alternative structures' internal learning, with it is suggested even the new Land Rover assembly plant in Pune offering production engineering learning for steel based vehicles.

However, as mentioned above with case examples, unsurprisingly the advances in “Lightweighting” have been undertaken by well established marques recognised for their sporting performance lineage. They operating in typically a very competitive arena – especially amongst the Germans, British and Italians – where R&D, race-circuit success and associated sales success are indeterminably inter-linked; an arena whence functionality underlies symbolism.

Thus unlike the MIT scenario-gazing, actual engineering advances have come at the proprietry technology level, pushed by the ethos of seeking competitive advantage. As with the technical advances made in war-time or to stay ahead militaristically in peace-time (typically exploited by corporates thereafter) there appears at a sociological level a need for necessary climate of 'animal spirits' shared amongst a close-knit team. It is doubtful such an environment would be created by a 'democratised', largely Indian government-led initiative.

Proprietry development, ownership and reward appears the most market and capital efficient route-way, thus leaving the decision in the hands of specific Indian manufacturers, if they indeed feel it would be of competitive assistance; which presently and into the mid-term it seems not.

The 'Oil Economy' Paradox -

Stand back from the everyday societal rhetoric, and the 'big picture' view presents a paradox for BRIC countries, the 'Next 11' and India in particular.

For political reasons EM countries are necessarily having to nod along in agreement with the US and Europe about the dangers of apparent climate change, and the resultant need to develop eco-friendly products. But the leaders of those EMs know all too well that their best chance for socio-econiomic development, to bring people out of poverty and raise general living standards, relies heavily on the much maligned 'oil economy'.

This is stated in India's Automotive Mission Plan as a necessary step to ensure timely expansion of its economic growth.

Yet whilst that may seem doom and gloom, the irony is that the products of Indian auto-sector – themselves often born from previous austere times in Europe – might well serve as part of the answer to seeming global climate change.

Just as tuk-tuk 3-wheeler and mini-CVs have been exported across SE Asia, into the Middle East and across CIS, there is now good reason for their re-entry into Europe (S. Europe espcially given Brussel's and IMF's austerity packages) and even entry into major cities in the USA. With Euro5/6 compliant engines the tuk-tuk could indeed become the new-era small CVs and even taxis in Madrid, Barcelona, Rome, Milan, Athens, and even New York, Seattle, Portland and other cycling-centric cities.

Thus just as India has much to learn from western VMs and specialist engineering developers, it may well be able to philosophically and physically export a “Less is More” ethos to the west using what is ostensibly old era technology and products.

The Powerful Anti-Thesis Argument to “Mass Lightweighting”-

The 'replies' by investment-auto-motives to Prof Fine & Prof Roth serve to critically highlight that many of the thesis proposed have fundamental flaws in either their initial assertion or the picture build around them:

Thesis A: “Vehicle Speeds Suit Lightweight” - No. An unfounded perception.
Thesis B: “Future Orientated” - No. Oil supplies appear strong as India grows
Thesis C: “India Industry Still Young” - No. An unfounded perception.
Thesis D: “Last Great Virgin Market” - Yes. But also highly complex
Thesis E: “Exportability” - No. Viewed to be highly doubtful.
Thesis F: “The Semi-Conductor Industry Parallel” - no. The parallel does not 'fit'.

Moreover, we have seen how technical advances, when actually deemed necessary and not simply 'nice to have' tend to bear fruit under proprietary conditions. India's vehicle producers and their engineering and manufacturing functions are plainly not under such intense pressures, and critically would best serve the country at large and themselves by following the 20th century auto-sector development route, improving vehicle safety, comfort, speed and ultimately desirablity from the exploitation of the steel unibody (monocoque) principle.

Sound Hypothesising (Thesis + Anti-Thesis) -

Whilst, as described, the “Lightweighting” idea should not be wholly dismissed, it must be practically integrated into the realism of today, the immediate future and mid-term (ie to 2025), thus as and when appropriate to corporate competitive advantage, vehicle type and effect on overall vehicle sector.

The MIT suggestion looks fundamentally flawed given the realities of the Indian case at the macro PESTEL level and micro industry level; resulting from an over simplified, broad-brush academic approach; one heavily reliant upon theory (indeed over-theorised) and poorly suited external case studies.

[NB However, MIT's investigation may have been politically expedient at the time given the need to support TATA's fiscally stretched purchase of JLR]

So, whilst 'food for thought' the direct inapplicability (so 'emptiness') the recommendation then leaves the Indian authorities with no feasible alternative route-way.

Thus investment-auto-motives poses the question, “is such a radical re-formation of the very fundamental design and production 'mechanicals' of the sector actually required ?”

India views China, Brazil and Russia as its prime auto-manufacturing foes – all to date using the same high-volume pressed-steel unibody and chassis-body manufacturing model; a model devised by the Budd Manufacturing Co in 1930s America, long the global industry standard, its scale suited to large consumer populations and export ambitions.

Instead then, Indian authorities should seek a better 'Thesis + Anti-Thesis' formula than that offered by MIT, to arrive at a more convincing conclusion with accompanying recommendations about the future of India's vehicle sector.

A Macro Study For Ongoing Liberalisation -

There seems a need for far greater focus on the more macro aspects of the Indian Marketplace and the Auto-Players therein; as opposed to vehicle construction methods, the vehicle types themselves or indeed the mix of those vehicles.

It appears to investment-auto-motives that since India has come from a very low personal wealth base (and arguably similar for business) that those vehicles that populate the country have been devised to very well suit its general and specific purposes.

Whilst western markets saw a 'perversion' of vehicle use – more symbolic than necessarily practical (especially witnessed by America's love affair with the truck-based SUV, and Europe's ongoing affectation for personal coupe-cabriolets) – India, though similarly seeking SUV symbolism in the new upper-middle classes, is for the most part a nation who's vehicle closely match their use. This then no doubt provides what the west would see as remarkably small 'carbon foot-prints', the scooter, moped, motor-cycle and tuk-tuk providing remarkable transport efficiency by western standards.

Thus it is not the vehicles themselves that need 'visioneering' but the structure of the national champion VMs, the down-stream suppliers and up-stream retailers and the (as noted by theAMP paper) the potential for growth complimentary to the auto-sector, and investment-auto-motives suspects for growth by structurally re-configuring the major players and by further liberating all sections of the 2-wheeler, 3-wheeler and 4-wheeler market places.

It is this separate arena that must be 'visioneered' so as to increase industrial efficiency and continue to improve consumer choice.

This has been undertaken to a great extent by the periodic creation of JVs between national players and Japanese and European multinationals, and this encouragingly does indeed allow for the improvement of indigenous vehicles.

But the vehicle market itself is still largely governed by domestic players which have developed and now 'own' or 'share' their respective segments:

Mahindra – 4x4 (Jeep) and latterly SUVs
TATA Motor – Trucks, later cars and latterly SUVs
Maruti-Suzuki – small & compact cars and laterly small SUVs
Hindustan Motor - iconic Ambassador model & Mitsubishi products
Bajaj Auto – 2-wheelers, 3-wheelers and expected low-cost small car
Force Motors – tractors, mini-trucks, LCVs, Vans, Trucks and latterly SUVs

[NB investment-auto-motives suspects that with an increasingly wealthy Indian elite, there may be a chance that Force Motor (in present or future guise) may seek to link with the similarly named Formula One team (based in the UK) to create the first Indian Supercar.

Thus seeking to take Indian ownership of the presently relatively small supercar segment, so mimicking the race-road interlinks created by Ferrari & McLaren; very possibly using the Buddh Race Circuit to operate a similar 'own and run' facility for exclusive vehice owners, based on the Ferrari FXX template. This necessary given the poor condition of Indian roads, and the traffic dangers in urban areas where good roads exist]

However, whilst such far-off plans may well be in long-term thinking in certain corners, it is obviously the mid and long-term potential (in breadth and depth) of the mainstream segments that the likes of the Mahindra family, Ratan Tata & Ravo Kant, the Bajaj family and the Firodia family wish to determine.

Assessing the Potential -

A very recent study by Rajesh Shukla, Anuj Das & Charu Jain of the National Council of Applied Economic Research looks at the question of Indian car ownership potential and arrived at what appear basic (common sense) yet important conclusions about the past demographic pattern of new car buyers.

The NCAER's results showed:

- 5% of households have a 4-wheeled vehicle vs 32% with 2-wheeler
- average HHD income was R198,966 vs R83,184
- regular savings pattern was 38% vs 33%
- (non-agricultural) self-employment was 37% vs 24%
- (agricultural) self-employment was 17% vs 29%
- literacy rates of 0% vs 1%
- education to 'higher secondary' 31% vs 60%
- education to 'graduation +' level 66% vs 37%

- of 9.5 million car owning households, 6 million (65%) are in urban areas,

The characteristics of these urban car owners:

- around 90 per cent of them belong to higher income classes (4th and 5th quintiles).
- average annual household income is Rs. 206,556, average expenditure is Rs. 108,664
* (so saving nearly 50% of income for health, education etc)
- although average household size is 5 but average number of earners is just 1.4
* (which abolishes the old general belief that bigger family households adds to more income)
- about 66 per cent of car owning households also own a two-wheeler.
- the car purchase decision in Indian urban families is influenced by the head of the household followed by the chief earner, female members contribute just 14 per cent in making such decisions.
- The durable ['brown & white' goods] ownership patterns show: TV at 93%, refrigerator at 90%, mobile phone at 82%, washing machine at 66%, motorcycle at 51%, scooter at 21%, credit cards at 19%.

The results then concur with typical expectation regards income levels, propensity / ability to save, type of employment and education levels. But critically the NCAER also noted other 'common sense' aspects. To re-quote the conclusions:

...”Results show that while income has great influence on demand, it is the expenditure pattern that really determines the likelihood of purchase of major consumer durables, including car, by a household. The increase in annual expenditure by Rs. One lakh reflects the increase in status of a household in terms of both financial and social aspects and hence increases the chances of a household to go for a car (still considered as a status symbol)”.

So, as has historically been the case, whilst there is an undoubted link between earnings and car ownership, the sociologically engrained need to 'save for a rainy day' plays a major part in purchase decision-making: timing of purchase, ability to negotiate a good price, other family commitments etc.

...”Secondly, the major source of household income also plays an important role in creating possibility of car purchase by a household. This is what our result shows. It clearly shows that those households with business as major source of income have greater chance of purchasing a car in comparison to households with salary as major source of income”.

...”Lastly, the product ownership (white goods) of a household also, to a great extent, determines the car purchase likelihood. Those households with presently owning at least colour television, refrigerator, motorcycle, cellular phone and credit card have greater chances of purchasing a car in near future. The reason is that these households already own all the major white goods; so, their next priority could be a status item like car”.
Importantly whilst India could indeed be said to be a young car country, given the growth explosion over the last decade, the very notion, idea and ideal of the car is unsurprisingly deeply engrained, that level of conditioning only exacerbated by western TV and cinema images so further crystallising the expected DNA of a car.
[NB this fact was of concern to investment-auto-motives when the TATA Nano appeared, since though priced as affordable to a whole new (previously 2-wheeler) demographic, the cars small wheels and rear engine did not conform to the norm, even if it be a superb product].

Global VM 'Entwinement' -

In order to fulfil that consumer expectation, instead of India going its own way with a radical step-change in vehicle engineering, it may very well will need to become ever more entwined with leading foreign VMs.

This need not be the 'one-way street' of multinational VM dominance as is so often thought inevitable. History shows that India is very well practiced in absorbing foreign industrial learning, the 1983 founding of Maruti Udyog (Suzuki Maruti) later becoming Maruti-Suzuki, which though still majority owned by Japan's Suzuki (54.5%) reflected a change in ownership structure from government to institutional shareholders. Suzuki benefited from its advantage of its advantage in the vehicle sales during the early phase, whilst India seized the opportunity to create a then all new car company with international standards, thus a benchmark and catalysts for India Inc. to transform the internal practices of its auto-sector. More recently it gained greater benefits from the swap of majority as the marketplace boomed.

A different model exits with TATA Motor and FIAT SpA, where TATA's large dealer network and website portal provided FIAT with an easier entry into India than entering solo, and benefits from a powerful sales channel to access new customer groups. The recent 'threat' by FIAT's CEO Marchione highlights the desire to uncouple itself from Italian semi-dependency and re-create its Brazilian success in India, could provide TATA with greater leverage in its somewhat strained relationship with FIAT, as to transfer capacity from Italy to India would add volume at the Ranjangaon plant near Pune, and notionally see much improved margins and profitability for the JV from FIAT's Palio, Grande Punto & Linea models. This an other actions providing additional direct learning for TATA regards Euro-Brazilian quality levels

In late 2009 Bajaj Auto sought to ride the PR wave for TATA Nano by stating that, in conjuction with Renault-Nissan, it too would create a new Indian low-cost car, pitched at $2,500 and released in 2012. That project was reported as abandoned 4 months ago, partly no doubt due to the Nano's like warm sales figures, which may have been underlying tensions between the JV partners, aswell as Renault's working with Mahindra. Yet Bajaj whilst successful with 2 & 3 wheelers may see the continued strategic need to develop a car so as to not loose future sales as people switch from bikes and trikes to small vehicles. Thus it is assumed that the company's strategic intent is to still follow the car path and so requiring a new global VM to assist in a major portion of the development work. That could envelope other small car makers such as PSA Group, Daimler's Smart division, VW Group (Up model) etc.

Mahindra & Mahindra previously created a JV with Renault to market the Dacia Logan in India, now known as the Mahindra Verito, providing the M&M brand with a plausible entry into the passenger car sector, and so expanding its portfolio. Sales expectations however were not reached, recording only 60k units in its first 5 years. The adapted new model (Verito) is said to be better suited for India, but there is a possibility that Mahindra saw Dacia's Duster cross-over model as a threat to Mahindra's own compact SUV the XUV500, and so possibly sought to avoid a clash of mutual competitors. This will have been recognised by Renault.

Hindustan Motor is renowned for its iconic Ambassador model, based on the 1956 Morris Oxford it has served India in various guises from sedan to taxi to pick-up for generations. Aswell as new model sales which have declined heavily the company provides parts and service operations for the still large India wide fleet. However, the cars decline has been seen and is inevitable, recognising this the company sought various collaborative agreements with foreign VMs, ending with an assembly and sales channel agreement with Japan's Mitsubishi Motor. The only vehicles now displaying the Hindustan badge are Ambassador, Veer ( Ambassador pick-up variant) and Winner, a self-developed mini-LCV. It however markets a number of Mitsubishi vehicles including: Lancer, Lancer Evo, Cedia Sports, Montero, Outlander & Pajero SFX. Hindustan's parent, the Birla Technical Services Group will need to consider its future strategic position and a possible method for remaining in the car sector, something it might come under government pressure to do, so as to keep an Indian brand active. This could provide a fresh start possibility with an ambition to re-run the Suzuki-Maruti model.

Force Motor has has a foothold in utility vehicles and adapted previous generation SUVs for some time. Like Bajaj Auto, if its chose to pursue the car market, it would probably have to do so by piggy-backing another foreign VM and re-branding the vehicles. However, given its sales base it is not a front-runner a multinational VM's JV partner. However, its freedom is that it might be able to pick and choose products from a plethera of other providers on an 'systemised ad hoc' basis. Possibly creating a partnership with another smaller Indian brand to convincingly access other VMs product ranges.

Premier Motor currently sells a re-badged Kia Sportage, and appears a much smaller entity in car market participation than during its former 1960s years as a partner with FIAT. Premier then like Force Motor sits on the fringes of the market, and so could see itself as teaming up with another Indian brand to similarly access alternative products fro elsewhere.

Conclusion -

The global threats that have appeared on the Indian horizon in the form of the 'Next 11' EM countries are indeed of growing concern, especially so their ability to replicate the standard steel-based automotive manufacturing system, just as India has done.

And indeed, relative to the competencies any of those 'Next 11' evolve, some quarters of the Indian auto-sector may indeed come under attack. But this very probably set to be regards either independent low-value component manufacture as is typically the case, or through creation of a small scale vehicle specific economic eco-system, usually in utility vehicles for domestic and regional use first, then years later with often unachievable international export ambition.

However, whilst an undoubted threat, such countries typically don't pose a major immediate or mid-term threat, so any industry reaction should be measured and proportionate relative to the actual – not loosely perceived – threat.

As such, the MIT proposal for “Indian Lightweighting” should be allotted its correct position in the grand scheme of things. This means that it cannot serve as a template for complete re-orientation or re-configuration of the auto-sector's historic and present 'centre of industrial gravity'; to do removes India from the global industrial and consumer standard.

Instead any “Drastic Lightweighting” idea should be used as a 'high-concept' philosophy for the far horizon, and placed into a category which serves the 'hi-design' school of thought that stretches from automotive design & engineering colleges across to niche manufacturers offering bespoke or near-bespoke low-volume vehicles for specialist customer groups. However, the notion of “Practical Lightweighting” within the realms of industry standard practice, should become ever more prevalent as a necessary function of vehicle design & engineering, the ethos and practical solutions seen on the TATA Nano then providing inspiration industry-wide.

[NB Unfortunately, the MIT idea of India pursuing an initially domestically directed, radically different, vehicle set has overtones of the AFRICAR ambition seen in the late 1970s and early 1980s. An 'Indigenous Africa' low-cost lightweight vehicle, using the most high-minded design principles and simple locally available parts, flailed dismally in the face of Africa's transition from conventional French vehicles (ie Peugeot 404/5 pick-up) to conventional Japanese vehicles (ie Toyota LandCruiser & Hi-Lux)

Equally, history also shows how Turkey twice tried to develop its own (lightweight) national vehicle – the Devrim and Anadol - but the strength of competition from conventionally engineered, high volume vehicles, and the issue of Turkish-American political relations (GM & Ford) scuppered the initiative].

Thus, the conventional all-steel (or largely steel) manufacturing model then looks set to stay so as to fulfil both increasingly high consumer expectations (esp in crash safety and noise,vibration, harshness), aswell as auto-sector business model norms. This is not to say there cannot be broad variation in vehicle design methods, including greater use of composites, simply that such applications must be very well considered

But it must be remembered that India is a country of 1.21 people, its labour force participating in what historically has been, and still largely is, a highly regulated, semi-protected national economy.

The country is of course a product of its 'mosaic' culture and complex history, so although seemingly united as 'India Inc' is in fact far more layered and nuanced across politics, economics, commerce and general society than is initially obvious. A result of past Feudal rule, British Colonialism, Raj rule, declined British hold, 1947-91 Socialist tendencies and post 1991 a welcome but often seeming 'dragged' regulatory liberalisation of commerce because of the need to balance critical stable employment versus national growth.

Thus the country is necessarily a slow economic actor on what seems a fast paced, tumultuous global economic stage – especially so presently. Much of this beyond safe-guarding the social stability interest through maintained employment, is the understandable ideal held by India's elite that the Indian future should be its very own, determined by Indians for Indians. To this end that political and business elite appear to want to merge the best of those economic systems that the country has experienced, so balancing social stability and growth issues whilst maintaining a string country-wide organisational system – the conglomerate replacing that of the yesteryear bureaucracy.

Given the central importance of stability it seems inconceivable that India could or should be led down a path of radical re-orientation regards the future of its auto-sector.

Thus instead of “Lightweighting” or some such, India is effectively destined to maintain the steel-body mass manufacturing methods that served it so well in the past and do today. To follow a seperate path to the rest of the world would be foolhardy, for its own economy and the investment potential the country still offers.

Thus like other geographically large EM countries with major populations, India will benefit most by re-running the historically proven western economic model; a model that indisputably raised the living standards of hundreds of millions, now able to replay for billions across Asia.

That model in turn will offer investment and reward potential for institutional investors, PE investors and private retail investors. With importantly, the future seeing the Indian citizen more likely to become self-engaged in the system itself as a consequence of improved educution in formal and governmental realms, aswell as far more self-learning than was perhaps the case in Europe or sections of the USA in the 20th century.

The Indian people then, like their own conglomerate corporations, will very probably absorb the best lessons from the western past to create their own very Global-Indian future. Similar liberalisation will in time be seen across the Indian auto-sector.

In the meantime, India will continue to require robust, relatively low-cost vehicles, with proven steel chassis and monocoque construction methods that make them fit for purpose, and increasing comfortable and safe. It seems inevitable that the market will continue to remain protected as its own VMs court foreign manufacturers for learning, and conglomerates maintain their own or affilaited deep supply-chains in conventional steel technology.

India's business elite – like China previously – well recognises that it holds the cards regards foreign VM's growth ambitions, hence it appears to operate a 'treat them mean' attitude. This stems from historical interaction and a more combatitive business theology the west typically brings to the table. But if western VMs are to prosper in India they must adopt a more long-term symbiotic approach, as undertaken by the Japanese.

In the niche mould, the past has witnessed entrepreneurial auto-manufacturing efforts which sought to capture opportunity from the country's wealth expansion and emergence of the new lifestyle-led new middle class. That 'lifestyle' is simultaneously embodied and created by Bollywood's modern-era story-telling, which inter-mixes plots of youthful care-free city-scape and international adventure with the intrinsic Indian 'village' value-system of family, morals etc.

Precisely that 'Bollywood interplay' of 'personal freedom' governed by 'self-reliance' and bounded by 'cultural cohesion' has been the seeming mantra for auto-entrepreneurial efforts of the recent past. Efforts spanning various backgrounds and capabilities. The range appears broad, from the relatively recent self-established 'start-up' to seemingly 'semi-sponsored' efforts.

But these too, although generically closer that “Lightweighting” ideal by virtue of feasible construction methods, will need to be securely inter-linked with the conventional (1930s Budd) manufacturing system, so as to exploit synergies and gain the latest vehicle systems sets which underpin those aspirational cars.

To close, with a pertinent segway from where this web-log started, it should be remembered that those light, aerodynamically and electronically sophisticated F1 cars that raced around India's new race track did so on the Buddh International Circuit.

It is apt indeed that in India everything comes full circle and revolves around the national symbol of the wheel.

In India Autos Part 3, investment-auto-motives looks at the present picture for investors reviewing the main automotive players.