Parts in an Indian epic

There are joint venture opportunities in India for the smaller British car component suppliers. Arlene Foster reports

India’s car industry has come a long way since the 1940s when Hindustan Motors started production of the Morris Oxford in Madras state, the home of India’s motor industry. While the Oxford is still made under licence as the Hindustan Ambassador, along with other classics from Britain’s motor industry, they are fast being overtaken by today’s car giants.

Earlier this month Hyundai became the latest Korean car manufacturer to set up a production base, following the tracks of Daewoo. Ford, General Motors and Fiat are already in the market and Honda and Mitsubishi are expected to set up production in the next 18 months.

With strong economic growth and the purchasing power of 200 million middle class people, India is one of the world’s fastest growing automotive markets. According to the Automotive Component Manufacturers’ Association (ACMA) of India, rates of car production have been rising by over 30% in recent years. In the first six months of last year, there was a 24% rise to 373,343 cars, up from 301,055 over the corresponding period in 1995.

Supporting India’s thriving car market are the 350 firms in the components sector. Fifty-three of the firms have a turnover in excess of $15m and 262 have foreign collaborations. For British component suppliers this market offers great potential. Many first tier suppliers, such as T&N and Lucas, have long-standing joint ventures in India, but smaller suppliers have shown less enthusiasm. It is this group with which India’s component producers are keen to do business.

Taking up their cause is ACMA’s president, K Mahesh. `All our 257 members have existing joint ventures and are looking for more,’ he says.

The British are already lagging, he warns. The Japanese dominate joint ventures, being partners in 75 such deals. German firms are close behind with 50, while Britain and the US each have 34.

Hyundai intends to bring 20 Korean suppliers to make its new generation of the Accent in 1998. Longer-term, Hyundai and others will be looking to buy more local components.

According to ACMA, automotive component production value is set to rise from $2.5bn in 1995-96 to $6.5bn by 2000, with investment rising from $1.3bn to $2.8bn over the same period. Exports of components have been steadily rising to an estimated $200m last year and by 2000 are projected to reach $486m. British component firms, with their growing prestige as world-class suppliers, could pick up new business in India’s domestic market and nearby Asian markets, says Mahesh.

All they need do is find the right Indian partners. The main areas in which joint ventures are sought are automotive electronics (at present only 7% of components production), castings and forgings, interior and exterior trims. As India aligns its car safety and emission laws with the rest of the world, demand for expertise in airbags and other safety equipment is growing. The most developed sectors are engine parts, accounting for 34% of total Indian components production, drive transmission and steering parts, accounting for 22%, and suspension and brake parts which account for 19%.

The advantages of the Indian market, says Mahesh, are clear – high growth rates, opportunities to export to Asian markets and a large, high-spending middle class. The chief advantage is labour costs so low they account for just 10% of the overall production bill, says Mahesh. This compares with about 25-30% in Britain. Raw material costs are higher in India, 50% versus 35%. But there are exemptions from local duties for materials brought in and re-exported as finished goods.

Mahesh says potential partners have little to fear in the quality of Indian component suppliers. ACMA members must export at least 25% of sales, he says, and the sector benefited in the 1980s from the influx of Japanese car manufacturers. Suzuki first entered the market with a 50/50 joint venture with the Indian government, which still operates today.

Mahesh says that, according to a recent report by US consultant McKinsey, rejection rates among Indian component suppliers average 2.9%. Of this, 2% is due to poor quality of raw materials. `Improvements are being made aimed at reaching zero defect rates,’ says Mahesh. `In any case, the customers will ensure that only quality suppliers survive.’

As a director of TVS group, one of the largest components suppliers in India, Mahesh is no stranger to foreign collaborations. Since its establishment in 1911, TVS has developed into 25 businesses, and has joint ventures with well-known names including T&N, Lucas and Du Pont. Smaller British firms are less familiar with formal licensing agreements. `They want time to think things over – but in doing so they may lose out,’ says Mahesh.

British companies tend to know little about the Indian market. While information about the UK car market is readily available in India through television and radio, the communication does not appear to be two-way. Even the development of the Internet has not had much effect, says Mahesh. `ACMA is accessible on the Net but it’s not so easy to access information on UK companies,’ he says.

Concerns over control and ownership can also be a hindrance to joint ventures. Most Indian companies are happy to relinquish 51% of equity to foreign ownership but `nobody wants to work for someone else’.

Mahesh points to the many synergies between the two countries, not least their 250-year relationship through the British empire. `Common traditions of English language and family-owned businesses are also important. My mission is to rekindle relationships between India and the UK in this growing sector.’