APPLIED INDUSTRIAL ORGANISATION | 12th Nov, 2008 SJMSOM, IIT Bombay

Group 3 07927816 07927827 07927863

Defining Industrial Clusters

Classification of Clusters

Benefits of Cluster Formation

Significance of Clusters for SMEs

The Flowchart Model of Cluster Policy

Theory of Industrial Clusters

Defining Industrial Clusters

Geographically proximate group of companies and associated institutions in a particular field

Linked by commonalities and complementarities

Also known as a business cluster, competitive cluster,

or Porterian cluster

Was introduced and popularized

by Michael Porter CLUSTER

Identifying a Cluster

Sectoral

A cluster of businesses operating together within the same commercial

sector

Geographical

Geographically proximate group of

companies

Vertical

Typically a supply chain cluster

Horizontal

Interconnections between businesses

sharing resources

Types of Clusters

• High Technology Oriented

• Well – adapted to the Knowledge Economy

• Comprise of renowned institutions and research centers

• Silicon Valley

Techno - Clusters

• Maintain advantage of knowhow garnered over several years

• London as a financial centre

Historic Knowhow-based clusters

• Creation linked to comparative advantage derived due to geographic location

• Wine production clusters in France

Factor Endowment clusters

Agglomeration Effects

Benefits of Cluster Formation

Increased productivity More focused direction and faster innovation

cycles

Agglomeration Effects involve those benefits that firms obtain when locating near to each other

Cluster Benefits Increased Productivity

• Existing pool of specialized and skilled labor

• Reduces recruiting costs

• Provides a deep and specialized supplier base

Improved access to labor and suppliers

• Preferred access to extensive market, technical, and competitive information

Improved access to specialized information

• Investments made by government or other public organizations

Access to institutions and public goods

• Competitors share general circumstances

Easier to measure performance

Cluster Benefits Faster Innovation

• Outcome of ongoing relationships

• Allows manufacturers to learn early on about changing customer needs and service concepts

Innovation visibility through proximity

• Provide the capacity and flexibility to react rapidly to a customer request

Enhanced flexibility

• Companies delay large commitments until they are more assured that a particular innovation will be fruitful

Lower experimentation costs

Cluster Policy Kuchiki (2005)

Flowchart Model for Cluster Policy Effect of Toyota on the Industrial Policy of Guangzhou, China

Pharma Cluster - Ahmedabad

IT Cluster - Bangalore

Industrial Clusters in India

Evolution – Gujarat Pharma Cluster

• Alembic Chemical Works, started in 1907

• 6 years after the first pharma firm in India Early Starter

• Chemical, Pharma machinery, IT

• Support from academic field Strong Relation

• CRAMS, R&D, Generics, NCE

• Capitalized early-on into these areas

High-growth Segments

• 10% of India’s pharma output in 2002-03

• Increased to 42% of India’s output in 2005-06

Increasing Contribution

• Established pharma ecosystem with good infra

• Zydus , Cadila Pharma, Jubilant, JB Chemicals SEZ Driven

Pharma Cluster - Ahmedabad

Capital Investment in Gujarat has grown at around 54%

Number of units (directly owned and infused capital) increased from 1964 to 3462

Gujarat’s contribution to India’s total pharma turnover have risen from 10% to 42%

Contribution to India’s exports have increased from 8% to over 22%

6.4

0.7

10.6

4.4

0

2

4

6

8

10

12

India Gujarat

2002-03 2005-06

2.5

0.2

5.2

1.1

0

1

2

3

4

5

6

India Gujarat

2002-03 2005-06

Size & Growth of Pharma Industry Gujarat vs India

Size & Growth of Pharma Exports Gujarat vs India

CAGR 87%

CAGR 78%

Factors favouring Cluster formation

Strong linkages between small & medium players

Proper ecosystem for growth

Benign regulatory environment

75-100 bulk producers

1000+ formulation units

Raw Materials

• Bulk Drugs

• Excipients

• Capsules

• Glass Vials

Support Institutions

• B.V. Patel Center

• FDC Laboratory

• LM Pharma College

Financial Institutions

• SIDBI

• ICICI

• GSFC

Industrial Associations

• IDMA-GSB

• MDMA

• ADMA

Evolution – Bangalore IT Cluster

• Educational Industry linkages

• Favourable research climate, “R&D hub “of India Linkages

• Defense PSUs, Electronics Industry – natural extension

• BEL, HAL, HMT, BHEL, ITI Related Industries

• Exit of foreign firms left space of local firms

• Trade Protection and Import Liberalization

Favourable Environment

• Currently houses over 1500 IT firms

• Infosys, Wipro HQ and Motorola, hp, Texas Instruments Silicon Valley

• Firms started with Application Devl and Maintenance

• Moving up value chain to provide Integrated packages Service Offerings

IT Cluster – Factors and Benefits

Factors favouring formation

Policy initiatives of govt. (both central and local)

Availability of large number of skilled workers

Y2K problem – a fortuitous event for India

Role of the Indian Diaspora

Karnataka accounts for 37.6% of total software exports from India and Bangalore accounts for 97% of it.

Perceived benefits

Proximity Benefits with R&D intensive firms

Innovation Systems

Knowledge flows & Capability building

Intra firm linkages

Benefits of Cluster vs. Non-cluster firms

0

10

20

30

40

50

60

0

20

40

60

80

100

120

140

160

180

Bangalore Pune/NCR Non-cluster firms

No of employees Employee Productivity

Key Observations

Access to labour, R&D, processes

Access to information from competitors

Non-cluster firms seek better infra

Linkages nurture smaller firms

Higher employee productivity

Perceived Advantages B’lore Pune/NCR Non-cluster B'lore vs Pune B'lore vs Non-cluster

Access to skilled workers 3.99 3.74 3.29 Y Y

Access to R&D Inst. 3.61 3.25 2.56 Y Y

Access to information from comp 3.08 3.00 2.68 N Y

Better infrastructure 3.30 3.79 3.68 Y Y

Application Dev. Process (%) 88.60 88.13 76.67 N Y

Quality Process (%) 34.30 31.77 10.83 N Y

Evolution of Indian Automobile Sector

Study of two major Automobile Clusters in India

Analysis of Behavior & Performance of Cluster vs. Non – Cluster Firms

Automobile Clusters in India

Evolution of Automobile Sector

Timeline Autocomponents Passenger Cars

Pre 1985 Protected,

High import Tariff Licensed, Closed market Quantitative restriction

1985-1995 JV with OEM Entry of Maruti

1995-2000 Localization of

products Entry of Global Players

2000 onwards Export focus Indigenisation,

Thrust on exports

• Industry has developed strong backward and forward linkages • Characterized by technically capable companies in OEM and autocomponents • Areas include manufacturing, design, testing, product development • Exports of autocomponents growing at CAGR of 40% over the last 5 years

Performance of Automobile Sector

India’s position 2nd in two wheelers

11th in passenger cars

13th in commercial vehicles

Growth Targets: 2016 Automotive Industry

Total market $122 - $139 bn

Domestic market $82 bn

Exports ~ $35 bn

Autocomponent Industry Total market $40 – 45 bn

Domestic market

Exports ~ $25 bn

HHI = 527; CR4 = 34%

0 200 400 600 800 1000 1200 1400

2002

2003

2004

2005

2006

2007

Passenger Vehicles (Mn Units)

CAGR 15.4%

0 2 4 6 8 10 12 14 16

2003

2004

2005

2006

2007

Autocomponents Turnover ($ bn)

CAGR 28.9 %

References:

Industrial Clusters in India: Evidence from Automobile Clusters in Chennai and the National Capital Region

Aya Okada and N.S. Siddharthan

April 2007

Study of two major Indian Auto Clusters

Chennai Auto Cluster [Chennai, Bangalore, Hosur]

Leading Auto Cluster

21% of passenger cars

33% of commercial vehicles

35% of auto-components

>100 large & medium cos.

Capabilities

Valve assemblies

Fuel / Oil / Water Pumps

Motors & Engines

Steering gear & Wheel Rims

Tires & shock absorbers

Bearings & Radiators

1950s: Initial Formation

TVS & Std. Motors among first players

Heavy dependence on imports

Active government support

Genesis of large no. of auto component firms laid early

1960 – 1990: Capacity Building

Large no. of technical schools setup

Mid-day meal program for schools

Airports & Seaports

Financial incentives by state like technology subsidies and trade fairs

State agencies setup to facilitate FDI

Overview Evolution

50%

40%

10%

*% indicates Tamil Nadu’s share in overall manufacturing output

Chennai Auto Cluster

Leading Auto Cluster

21% of passenger cars

33% of commercial vehicles

35% of auto-components

>100 large & medium cos.

Capabilities

Valve assemblies

Fuel / Oil / Water Pumps

Motors & Engines

Steering gear & Wheel Rims

Tires & shock absorbers

Bearings & Radiators

1990s: Delicensing of Industry

Hyundai, Mitsubishi & Ford set shop

Attracted by capabilities of auto component manufacturing firms and government support

Rise of local firms with IT capabilities

Impact of smaller firms

Proliferation of industrial estates providing cheap technical services

Guindy Industrial Estate in Chennai is the largest and a typical example

Presently, in globalization mode fuelled by IT and increase in outsourcing

Overview Evolution

50%

40%

10%

*% indicates Tamil Nadu’s share in overall manufacturing output

TVS Group

Wheels India

Lucas TVS

Brakes India

Sundaram Clayton

Sundaram Fasteners

TVS Group

Sundaram Dynacast

Turbo Energy

Nippon Electricals

TVS Cherry

TVS Motors

Maj

or

Pla

yers

in t

he

Ch

enn

ai A

uto

Clu

ster

Rane Group

Rane Engine Valves

Rane Brake Linings

Rane Madras

Rane NSK Steering Systems

Rane TRW Steering Systems

Ashok Leyland (AL)

Global Players Hyundai, Ford, Mitsubishi

100% subsidiary setup in ’98 14 Korean Tier-1 suppliers Capacity ramp-up to 4L p.a.

75% local content Technology licensing (US firms)

Hub of global parts’ sourcing

30% local content Focus on premium segment JV with Hindustan Motors

Maj

or

Pla

yers

in t

he

Ch

enn

ai A

uto

Clu

ster

Rane Group

Rane Engine Valves

Rane Brake Linings

Rane Madras

Rane NSK Steering Systems

Rane TRW Steering Systems

Ashok Leyland (AL)

Maj

or

Pla

yers

in t

he

Ch

enn

ai A

uto

Clu

ster

Global Players Hyundai, Ford, Mitsubishi

Except Ashok Leyland, the lead firms in the Chennai auto cluster are component manufacturers which paved the way for the entry of foreign players like Ford & Hyundai in the nineties into the cluster This behavior is atypical of most auto cluster formations across the world

Government

Infrastructure

Established business houses

Smaller Firms

Highly skilled workforce

IT Emergence

Global players

Chennai Auto Cluster: Growth Drivers

NCR Auto Cluster [Delhi, Gurgaon, Faridabad]

Cluster Zone

Haryana, Delhi & some UP districts

Major Players

Maruti Udyog Ltd. (MUL)

Started in 1982 as GOI + Suzuki JV

First greenfield plant in Gurgaon

Two more plants in Gurgaon & Noida

Largest car manufacturer in India

Daewoo Motors India Ltd.

Ceased operation after few years

Insignificant contribution to cluster

Honda Siel Cars Ltd.

Recently established (2000)

Low production volume

GOI’s Phased Manufacturing Plan

Foreign firms to promote localization

Suzuki’s MOU: 70% localization by ’87

Government support to SSI

Dependence on outsourcing

80% components outsourced

Local supplier quality levels very low

Introduction of JIT + Taxes

Supplier close to plant was imperative

Octroi significantly reduced margins

Yen Appreciation in ‘80s

High custom duty on CKD units

Overview Need for Vendor Development

MUL’s Role in Vendor Development

Supplier MUL’s Role

Bharat Seats 15% equity stake JV with Howa, Japan

Macino Plastics 15% equity stake

Subros 15% equity stake Technology from Denso

Asahi Safety Glass 15% equity stake

Sona Steering 15% equity stake Technology from Koyo

Mark Auto Industry 24% equity stake

Jay Bharat 31% equity stake

Motherson Sumi Aided in collaboration

MUL Suppliers:

Geographical Distribution

MUL

Vendor Development

0

20

40

60

80

100

120

140

160

No

. of

Firm

s

Large Firms Medium Firms Small Firms

MUL’s major suppliers are

located in NCR

Methodology

Results & Conclusions

Analysis of behavior & performance of cluster versus non – cluster firms (Automobile sector)

Methodology

Data 19 Auto Component Sub – sectors

85 Firms

Timeline: 5 years (2004 – 2008)

Classification Plant Location (Cluster firms of NCR, Maharashtra, Chennai vs. others)

Source: Capitaline Database

Variables RONW

Advertisement Intensity

Inventory Turnover

Overall Performance Comparison

Cluster firms are clearly ahead of non – cluster firms with regards to total performance

RONW is a comprehensive measure of performance as it accounts for profit margin, asset turnover and leverage capacity

2004 2005 2006 2007 2008

NC 28.98 39.73 36.57 36.91 39.55

C 68.70 96.47 128.91 159.64 146.45

0

20

40

60

80

100

120

140

160

180R

ON

W

RONW = PAT/SALES x SALES/TOTAL ASSETS x TOTAL ASSETS/NET WORTH

Comparison of Advertisement Intensity

Advertisement as a % of Sales is higher for non-cluster firms.

Cluster firms benefit from the agglomeration effect

This demands lesser expenditure on advertisement for a comparable level of sales

2004 2005 2006 2007 2008

NC 0.51% 0.70% 1.16% 1.05% 0.71%

C 0.24% 0.24% 0.22% 0.22% 0.15%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

Ad

vert

ise

me

nt/

Sale

s%

Comparison of Inventory Efficiency

Inventory Turnover is higher for cluster firms compared to non – cluster firms.

This indicates that cluster firms maintain higher inventory efficiencies (possibly due to location proximity)

2004 2005 2006 2007 2008

Non - Cluster 8.20 9.27 13.27 12.93 12.48

Cluster 13.63 13.47 13.28 14.00 13.52

0

2

4

6

8

10

12

14

16

Inve

nto

ry T

urn

ove

r (d

ays)

Comparison of Employee Productivity

Counter intuitively, the employee productivity for non – cluster firms is greater as compared to cluster firms

One reason for this could be due to employees in cluster zones being paid higher wages and the inherent use of wages (rather than no. of employees) to measure productivity 2004 2005 2006 2007 2008

Non - Cluster 15.86 17.25 18.45 21.96 21.85

Cluster 16.04 17.19 16.69 17.67 18.59

0

5

10

15

20

25

Avg

. Em

plo

yee

Pro

du

ctiv

ity

Industrial Clusters in India: Evidence from Automobile Clusters in Chennai and the National Capital Region, Aya Okada and N.S. Siddharthan, April 2007

The Flowchart Model of Cluster Policy: The Automobile Industry Cluster in China, Akifumi Kuchiki, April 2007

Bangalore Cluster: Evolution, Growth and Challenges, Rakesh Basant, May 2006

Gujarat Pharma Industry, KPMG Report

Indian Auto Component Industry, IBEF Report, Jan 2008

Data Source: Capitaline

References

Thank You

Your queries are welcome