By P.V. Balasubramaniam, Former Director & CEO, York Transport Equipment (Asia) Pte. Ltd., Singapore
(Continued from July 2019 edition)
India imported $15.9 billion worth of auto parts in 2017-18 (31% of automotive industry sales) and AMP 2026 forecasts $28 billion import by 2026 (just 14% of automotive industry sales) against a four-fold increase in automotive industry sales. Highly unlikely that we can reduce import content so drastically and so quickly.
Considering that the industry globally is moving towards EVs, investing in ICE (IC Engine) parts manufacturing may not be attractive as the market for the same will have much lower growth and will be increasingly competitive. China is aggressively pursuing EVs and this will result in idle capacities in ICE parts manufacturing. This will further dampen international prices for such parts and making it more difficult for India to compete.
Nonetheless, it is critical for India to invest greatly in EV components manufacture. This is certainly the future of automotive industry and delaying this would make our automotive industry completely import dependent. But we don’t have our own technology for manufacturing any EV component, unlike China which is a leading manufacturer of batteries having developed its own technology. India would now have to seek JV partners or attract FDI from foreign companies, including from China. We have no other option but to market India as an attractive destination for foreign companies. This could work in our favor in view of recent issues on China’s policy on IP protection and aggressive posture against the US.
The World Bank report further states: “A second – and connected – challenge is moving up the global value chain through greater innovation, investment in R&D and commercialization of new products which remain below global average, with local suppliers primarily relying on build to print models.” Much of India’s auto components export is based on customers’ design, specifications, drawings, etc. India does not have many auto parts designed by its own R&D team. The report further says: “With a few exceptions, firms in India are not demonstrating sufficient and quick uptake of design capabilities, which is likely to impair their competitiveness and ability to link to Global Value Chains”.
“While the importance of design capability is rising, investment in R&D and commercialization of new products in India remain below the global average, and local suppliers rely primarily on build to-print models. At the same time, foreign companies such as BMW, Mercedes, Renault-Nissan, Volvo, GM and Honda have been exploring India to set up R&D centers, in which intellectual property rights associated with the research would typically reside with the mother company overseas.” This shows that while foreign OEMs believe that Indians have the capability to design products they do not sufficiently invest in R&D.
“More emphasis is needed on improving design capabilities within local firms to increase participation in GVCs. India has tremendous potential to become a global design hub. Tier-1 suppliers who seek more global reach could collaborate with foreign firms to establish R&D facilities to perform adaptation and process R&D, as well as fundamental research. They could also sponsor PhD theses and capstone projects with academia to develop advanced solutions, prepare future industry leaders, and reinforce links with the university.”
Mckinsey Global Institute, in its report: Globalisation in Transition: The future of trade and value chains, January 2019, makes some interesting observations on the global trade trends that would be relevant for India.
- First, goods-producing value chains have become less trade-intensive. Output and trade both continue to grow in absolute terms, but a smaller share of the goods rolling off the world’s assembly lines is now traded across borders. Between 2007 and 2017, exports declined from 28.1 to 22.5 per cent of gross output in goods-producing value chains.
- Second, cross-border services are growing more than 60 per cent faster than trade in goods, and they generate far more economic value than traditional trade statistics capture.
- Third, less than 20 per cent of goods trade is based on labor-cost arbitrage, and in many value chains, that share has been declining over the last decade. (India’s auto components export is also based on labor-cost arbitrage).
- The fourth and related shift is that global value chains are becoming more knowledge-intensive and reliant on high-skill labor. Across all value chains, investment in intangible assets (such as R&D, brands, and IP) has more than doubled as a share of revenue, from 5.5 to 13.1 per cent, since 2000.
- Finally, goods-producing value chains (particularly automotive as well as computers and electronics) are becoming more regionally concentrated, especially within Asia and Europe. Companies are increasingly establishing production in proximity to demand.
- The challenges are getting steeper for countries that missed out on the last wave of globalization. As automation reduces the importance of labour costs, the window is narrowing for low-income countries to use labour-intensive exports as a development strategy.
Conclusion
- AMP 2026 need to be revisited and the auto component export target need to be pruned down, maybe by 50% to $35 to $40 billion by 2026.
- Promote investment in manufacturing of EV components, particularly electricals and electronics. Schemes to attract FDIs in these sectors to be devised.
- Market India as an attractive destination for design and R&D centers among the automotive and technology companies.
- Encourage collaborative work between industry and reputed academic institutions for R&D and frame rules for IP ownership and protection.
- India’s comparative advantage and capability that brought us to $15 billion export of auto components will not take us any further as the industry has rapidly changed in recent years. New investments are in EVs and autonomous vehicles. And India does not have any manufacturing base for export of components that are required in 2020s. Unless we focus on this, we shall be importing massively auto components rather than doing much export!