Making India a world class automotive manufacturing hub - 6

Making India a world class automotive manufacturing hub6 February 2016

ContentsF o rew o rd 0 3

I ndian auto m o tiv e industry : current scenario and o utlo o k 0 4

1 . Enabling regulatory environment 1 22 . Developing talent and skills 1 73 . Fast-tracking infrastructure development 2 14 . Incubating R& D and innovation 2 45 . Enhancing supply chain competiveness 2 8

W h at w o uld it tak e fo r I ndia to b eco m e a w o rld- class auto m anufacturing h ub ? 1 1

A p p endix 3 2

A b o ut E Y and C I I 3 3

ForewordThe Indian automotive sector, given its potential contribution to GDP and employment, presents a significant opportunity to be one of the biggest growth drivers for the economy. W hat we do need to emerge as a “ world-class automotive manufacturing hub” is a concerted effort from the Government and the automotive industry to create an enabling ecosystem. The country’ s key strengths such as a large domestic consumption base, a cost competitive value chain (that includes low design, testing and validation costs, frugal engineering capabilities and low labor costs) and strategic geographical location would go a long way to develop the country as a world class automotive manufacturing base.

The Indian automotive industry is witnessing testing times. The market continues to ex perience volatility and we are waiting to see clear signals of revival in growth. W ith the government and the judiciary taking steps to make transport cleaner and safer, there is some degree of uncertainty for automakers, especially regarding the fuel mix and the necessary investments for technology upgrades. W e believe that these are just short-term challenges as the long-term growth story for the automotive industry in India remains intact.

The Government’ s Automotive Mission P lan (AMP ) 2 0 1 6 – 2 6 envisions the industry to grow around four times by FY2 6 with approx imately 1 0 % CAGR for vehicle sales volumes. The Government’ s push to manufacturing through the “ Make in India” initiative has garnered considerable attention from the industry and brought the spotlight back on the manufacturing sector. According to the EY’ s India Attractiveness Survey 2 0 1 5 , the country was ranked as the most attractive investment destination and 6 2 % of respondents suggested “ manufacturing” as the nature of business activity they are planning in India.

As the country looks to establish its credentials as a manufacturing destination, there are some gaps that we need to address. These include an enabling regulatory environment, developing the req uisite talent and skills, fast-tracking of infrastructure development, incubating R& D and innovation culture, and enhancing supply chain competiveness.

R ak esh B atra,A uto m o tiv e and Transp o rtatio n L eader, E Y I ndia

M M S ing h,E x ecutiv e A dv iso r, Maruti S uz uk i I ndia L td

R ajeev W asan,S r V ice P resident Manufacturing, H o nda C ars I ndia L im ited

Indian Automotive Industry:current scenario and outlook

I ndia h as em erged as an im p o rtant auto m o tiv e m ark et and o ffers h uge gro w th p o tential due to lo w v eh icle p enetratio n and im p ro v ing eco no m ic fundam entals

P assenger v eh icle density ex p ected to b eco m e 1 . 5 tim es b y 2 0 2 0India has the largest population of young people in the world, with around 6 6 % of population under the age of 3 5 . The country’ s low vehicle penetration (3 2 vehicles per 1 0 0 0 people in 2 0 1 5 )

makes it one of the world’ s most attractive auto markets. O wing to its uniq ue demographic dividend, the Indian auto industry has immense growth potential. India’ s passenger vehicle parc of around 2 9 million during 2 0 1 5 is ex pected to grow to more than 4 8 million vehicles by 2 0 2 0 .

W o rld p assenger v eh icle density ( P erso nal v eh icles p er ‘ 0 0 0 driv ing p o p ulatio n)

1 6 9 1 5 9

3 5 0

1 0 2

5 4 5

7 6 5

6 1 1

3 2 6

1 9 2 1 8 4

3 9 3

1 8 4

5 4 7

8 0 1

6 2 4

3 6 9

W orld Brazil Russia China Japan

2 0 1 5 2 0 2 0

NorthAmerica

W esternEurope

EasternEurope

3 2 4 8

India

Sources: Automotive Mission Plan 2016–26 (AMP 2016–26), LMC Automotive, EY analysis

The auto sector is one of the most important contributors to GDP and employment in India, with huge potential for growth. The sector accounts for 7 % of India’ s GDP , 4 5 % of manufacturing GDP and employs about 1 9 million people both directly and indirectly. Further, the sector contributes around 4 . 3 % to India’ s total ex ports and 1 3 % to the country’ s ex cise revenues.

O ver the years, the Indian auto industry has emerged as one of the world’ s largest, with annual sales of 1 9 . 8 million vehicles in FY1 5 . It is also one of the fastest growing auto markets, with production of 2 3 . 4 million vehicles in FY1 5 and a leading position in several sub-segments.

W o rld’ s largest

W orld’ s 2 nd largest

W orld’ s 5 th largest



C urrent rank ing ( F Y 1 5 )

Tractor manufacturer

Two-wheeler (2 W ) manufacturer

Heavy truck manufacturer

P assenger vehicle (P V ) manufacturer

Commercial vehicle (CV ) Manufacturer

Mak ing I nd ia a w orl d c l ass au tomotive manu f ac tu ring hu b | 5

Mo st glo b al O E Ms h av e an estab lish ed p resence in th e m ark et alo ng w ith I ndian p lay ers; J ap anese p lay ers acco unt fo r aro und h alf o f th e p assenger v eh icle sales

H igh ly co m p etitiv e m ark et landscap eDespite the presence of several Indian and global players, each segment has a dominant player commanding more than 4 0 %

of the market share. However, with the increasing intensity of competition and new model launches, market shares are ex pected to realign over the nex t few years.

O E Ms and sup p liers co ntinue to inv est in I ndiaThe Indian auto industry has witnessed on-going interest with several global players entering the industry post liberalization through technical tie-ups and minority investments. The industry has seen investments from both global and local O EMs and

suppliers towards building/ ex panding capacity and research and development. The P V industry has witnessed a revival in new investments after three years of weak investment climate with the anticipation of a recovery in demand.

I nv estm ents in th e auto m o tiv e industry during th e 2 0 0 6 – 1 5 ( I N R b illio n)

* Daimler India Commercial V ehicles data not availableSources: Society of Indian Automobile Manufacturers (SIAM), AMP 2016–26, EY analysis

Mark et sh are ( F Y 1 5 )

2 %

3 %

5 %

6 %

7 %

9 %

1 6 %

4 5 %

GM

Ford

Toyota

Tata Motors

Honda

Mahindra

Hyundai

Maruti Suzuki

P assenger v eh icles

1 %

2 %

2 %

4 %

1 1 %

1 3 %

2 7 %

4 0 %

Mahindra

oyal nfield

Suzuki

Yamaha

Bajaj

TV S

Honda

ero

Tw o w h eelers C o m m ercial v eh icles*

1 %

2 %

3 %

6 %

1 5 %

2 5 %

4 7 %

P iaggio

Isuzu

Force

V ECV

Ashok Leyland

Mahindra

Tata Motors

A uto m o tiv eO E Ms

C o m p o nentsup p liers

1 , 0 8 0

4 9 5

~ I N R 6 , 0 0 0 b illio nV alue of planned investments by automakersover the nex t few years

4 8Number of automotive FDI projects in 2 0 1 4

6 | Mak ing I nd ia a w orl d c l ass au tomotive manu f ac tu ring hu b

Th e industry w itnessed a slo w rev iv al during 2 0 1 5 o w ing to lo w fuel p rices, declining interest rates and an up tick in th e eco no m yTo tal sales ( do m estic + ex p o rts) b y segm ent, F Y 0 9 – 1 5 , m illio n units

P assenger vehicles

Two-wheelers

Commercial vehicles

8 . 41 0 . 5

1 3 . 31 5 . 4 1 5 . 8 1 6 . 9

1 8 . 5

9 . 5

FY0 9 FY1 0 FY1 1 FY1 2 FY1 3 FY1 4 FY1 5 1 HFY1 6

Two-wheeler (2 W ) sales growth slowed during FY1 2 – 1 4 and recovered in FY1 5 driven by strong rural demand and the rising popularity of scooters.

Scooters continued to witness strong growth due to a strong surge in urban demand.

A decline in motorcycle sales due to shrinking rural demand has again weakened growth in the currentfiscal year

CAGR 1 4 . 0 %

1 . 9

2 . 4

3 . 0 3 . 1 3 . 2 3 . 1 3 . 2

1 . 7

FY0 9 FY1 0 FY1 1 FY1 2 FY1 3 FY1 4 FY1 5 1 HFY1 6 *

CAGR 9 . 1 % P V sales witnessed a slow down over the last couple of years due to economic uncertainty and high interest rates.

Compact cars (including compact sedans and premium hatchbacks) and compact SU V s continue to outperform overall P V sales on the back of increased consumer preference and successful new launches.

During FY1 6 , the market has begun to show moderate growth due to improving sentiment, low fuel prices and interest rates.

0 . 40 . 6

0 . 80 . 9 0 . 9

0 . 7 0 . 7

0 . 4

FY0 9 FY1 0 FY1 1 FY1 2 FY1 3 FY1 4 FY1 5 1 HFY1 6

CV sales declined during FY1 2 -1 5 due to the economic slowdown and stalled infrastructure projects.

During FY1 6 , demand is reviving, driven by economic recovery, urbanization and infrastructure development.

Medium and Heavy CV s are witnessing strong growth on the back of pent-up demand and an anticipated increase in infrastructure spending.

CAGR 8 . 5 %

* 1 HFY1 6 refers to April — September 2 0 1 5Sources: SIAM, EY analysis


Th e auto co m p o nent industry is ex p ected to w itness do ub le- digit gro w th o v er th e nex t decade o w ing to h uge dem and fro m b o th do m estic and ex p o rt m ark ets

Turno v er do m inated b y engine p arts and sup p ly to P V segm entIn FY1 5 , engine parts dominated the overall turnover of the Indian auto component industry with a share of 3 1 % , followed by other categories; while 4 5 % of the supply was made to the P V segment.

Turno v er trends in I N R b illio n ( U S $ b illio n) , F Y 1 0 – 1 5 E S h are o f m ark et segm ents ( F Y 1 5 E )

A uto co m p o nent industry grew at 1 1 % during F Y 1 5The Indian auto component industry comprises around 7 0 0 organized players and a few thousand unorganized players, with its size estimated at U S$ 3 8 . 3 billion in FY1 5 . After a challenging FY1 4 , the industry has rebounded during FY1 5 , growing at 1 1 % due to a recovery in domestic demand and ex ports.

E ntry o f glo b al O E Ms strength ening cap ab ilities o f I ndian sup p liers

uto component manufacturers in India have benefited from the entry of global O EMs through ex posure to global standards and technology by forming tie-ups with foreign suppliers. As a result, many global O EMs have also managed to achieve a fairly high level of localization in India.

1 ,3 8 6 (3 0 . 8 )

1 9 9(4 . 2 )

FY1 0

1 ,8 8 3(4 1 . 3 )

3 0 1(6 . 7 )

FY1 1

2 ,0 4 6(4 2 . 2 )

4 2 3(8 . 8 )

FY1 2

2 ,1 6 1(3 9 . 7 )

5 2 9(9 . 7 )

FY1 3

2 ,1 1 8(3 5 . 1 )

6 1 4(1 0 . 2 )

FY1 4

2 ,3 4 0(3 8 . 3 )

6 9 0(1 1 . 3 )

FY1 5 E

Total turnover Ex ports

2 2 %Ex ports

6 6 %O EM

1 2 %After market

A uto co m p o nents: sh are o f to tal turno v er ( F Y 1 5 )

7 %

9 %

1 0 %

1 2 %

1 2 %

1 9 %

3 1 %

O thers

Electrical parts

Eq uipment

Body & chassis

Suspension & Braking

Drive transmission

Engine parts

4 %

4 %

5 %

5 %

8 %

8 %

2 2 %

4 5 %

Three wheelers

O thers

Medium CV

LCV and SCV *

Heavy CV

Tractors

Two wheeler

P V

Sources: Automotive Component Manufacturers Association of India (ACMA), SIAM, AMP 2016–26, EY analysis

* SCV s (max imum mass): U pto 2 tonnes; LCV s (max imum mass): 2 to 7 . 5 tonnes

8 | Mak ing I nd ia a w orl d c l ass au tomotive manu f ac tu ring hu b

Mark et siz e o f I ndian auto m o tiv e industry , I N R b illio n ( U S $ b illio n)

Do m estic v eh icle sales o utlo o k A uto co m p o nent turno v er sp lit, I N R b illio n ( U S $ b illio n)

Th e I ndian G o v ernm ent’ s A uto m o tiv e Missio n P lan 2 0 1 6 – 2 6 env isages fo ur- fo ld gro w th b y F Y 2 6

A MP 2 0 1 6 – 2 6 fo recasts v eh icle sales to gro w at a C A G R o f aro und 1 0 % o v er th e nex t decadeAccording to the AMP 2 0 1 6 – 2 6 , vehicle sales are ex pected to touch 6 6 million units by FY2 6 . To achieve the projections, the auto industry will req uire additional investment of

INR4 . 5 trillion-5 . 5 trillion. The growth of the automotive market will translate into huge potential for the auto component sector. It is ex pected to grow at a CAGR of 1 3 % from U S$ 3 8 billion in FY1 5 to more than U S$ 1 5 0 billion by 2 0 2 6 .

Sources: ACMA, SIAM, AMP 2016–26, EY analysis

US$/INR at 67.0 for forecasts; average historical rates used for historical data

The Indian auto sector has the potential to generate up to U S$ 3 0 0 billion in annual revenue by 2 0 2 6 , create around 6 5 million additional jobs and contribute more than 1 2 % to

India’ s GDP , according to the Automotive Mission P lan 2 0 1 6 – 2 6 prepared jointly by the SIAM and the Government.

FY0 8 FY0 9 FY1 0 FY1 1 FY1 2 FY1 5 E FY2 6 F

1 ,8 7 3(4 7 )

1 ,7 9 5(3 9 )

2 ,3 4 7(5 0 )

2 ,8 3 3(6 2 )

3 ,3 6 7(7 0 )

4 ,7 0 1(7 7 )

2 0 ,1 0 0(3 0 0 )

1 3 % C A G R

1 0 % 1 0 % 1 0 % 9 %

1 9 . 5

5 3 . 4

FY1 5 FY2 6 F

2 W + 3 W

3 . 2

9 . 4

P V

0 . 6 1 . 5

Tractors

0 . 7 2 . 0

CV (incl SCV and LCV )

FY1 5 -2 6 (F)CAGR

8 3 5(1 8 . 9 )

2 ,3 4 0(3 8 . 3 )

1 0 ,6 0 5(1 5 8 . 3 )

6 9 %5 3 %

4 2 %

1 6 %

2 9 %

4 3 %

1 5 %

1 7 %

1 7 %

FY0 6 FY1 5 FY2 6 F

Ex ports AftermarketDomestic O EM sales


The concept of access to mobility is catching up q uickly, and the traditional, manufacturing driven profit model will be challenged. Automakers would, therefore, need to take notice of these new-age mobility providers, and prepare relevant offerings for customers.

Th e industry is w itnessing a sh ift fro m th e traditio nal “ o w nersh ip ” m indset to w ard “ access to m o b ility ”

I m p act o n auto m o tiv e industry

B usiness m o dels o p erating in th e sh o rt- term h ire sp aceDespite being a very young market, the advanced mobility space is gaining ground in the country, with a multitude of business model variants. Some of these have been listed below.

In line with other global markets, India is also witnessing the proliferation of technology-driven mobility service providers (such as cab aggregators and ride-sharing companies). This is driven by factors such as high cost of vehicle ownership, rising congestion, growing connectivity and mobile penetration. Conseq uently, the Indian consumer is being drawn toward the idea of “ access” from “ ownership,” as these technology-intensive business models provide short-term access to vehicles.

V alue p ro p o sitio n o ffered b y tech no lo gy - intensiv e, sh o rt-term h ire co m p anies

These businesses have been able to scale-up faster as they rely on higher vehicle utilization and are able to spread fixed costs of car ownership among many consumers.

The current models in India have a different market positioning compared with developed markets — in particular, they are more of an alternative to the tax i and other shared transport options rather than peer-to-peer sharing.

Easier access to vehicles

Real-time booking process

Digital payment options

U sage-based pricing model (per minute/ kilometres)

Some automakers are testing car sharing models in niche pockets such as corporates, students and small businesses

Technology-driven companies moving away from the traditional asset-heavy business model and providing access to vehicles (with drivers) by aggregating cab operators (individual/ small fleet through digital apps

Ride-sharing connects people traveling long distances (in the same direction) and seeking a cost-effective, eco-friendly mode of transit

2 nd and 3 rd car buyers in urban cities — allows them to defer/ cancel investments in a new car 2Traditional rental and tax i business models under pressure, thus calling for reinventing value proposition3

ew category of fleet buyers for the industry4

1 Ex pected to affect two segments — entry-level car and 2 W

Sources: report rban mobility redefined analysis

1 0 | Mak ing I nd ia a w orl d c l ass au tomotive manu f ac tu ring hu b

What would it take for India to become a world class automotive manufacturing hub?

Enablingregulatoryenvironment

Enhancingsupply chain

competitiveness

Developingtalent and skills

Fast-trackinginfrastructuredevelopment

Incubating R&Dand innovation

A stab le and sup p o rtiv e regulato ry env iro nm ent is critical to driv e gro w th in th e I ndian auto m o tiv e industryRegulations and government initiatives will play a critical role in driving the Indian automotive industry’ s growth. W e have seen a lot of activity in this space especially in the recent past. The Government has launched many new programs such as “ Make in India” and “ Skill India,” along with undertaking measures to improve the ease of doing business and the likely rollout of the GST. In addition, we are seeing an unprecedented thrust on addressing concerns around pollution, congestion and safer transport.

W hile the Government’ s initiatives to improve the business environment and make transport cleaner and safer are welcome moves, there is a need to provide clear guidelines and a road map for regulations. The automotive industry is capital intensive and req uires long-term planning on regulatory issues. Thus, a stable policy regime is critical to drive growth.

E nab lingregulato ryenv iro nm ent

E nh ancingsup p ly ch ain

co m p etitiv eness

Dev elo p ingtalent andsk ills

I ncub atingR&D andinno v atio n

F ast- track inginfrastructuredev elo p m ent

K ey go v ernm ent p ro gram s/ regulatio ns ex p ected to affect th e industry

G o v ernm ent p ro gram s/ initiativ es to b o o stm anufacturing and ease o f do ing b usiness

K ey auto m o tiv e regulatio ns to w atch o ut fo r

Advancement of BS V I norms

Likely rollout of the “ End of life” policy

C leaner transp o rt0 1

FAME-India scheme

U pcoming Road Transport and Safety bill

International safety standards from 2 0 1 7

S afer transp o rt0 2

Regulations for new mobility initiatives

A dv anced m o b ility0 3

Mak e in I ndia

S k ill I ndia

L ik ely ro llo ut o f th e G S T

S m art cities

Digital I ndia

S tartU p I ndia

Sources: SIAM, and EY analysis

1 E nab ling regulato ry env iro nm ent


Th e im p lem entatio n o f “ Mak e in I ndia” and initiativ es to im p ro v e th e ease o f do ing b usiness w ill driv e th e I ndian auto industry ’ s gro w th

I nitiativ es to im p ro v e th e ease o f do ing b usiness in I ndiaThe Government has taken a series of actions to support “ Make in India,” including those outlined below.

O th er initiativ es: The Government has also launched several other initiatives such as “ Smart Cities,” “ Skill India,” “ Digital India,” etc. , that will support India’ s development as a world-class manufacturing hub.

The “ Make in India” initiative has an aggressive ambition to transform India into a manufacturing and technology hub. It has garnered considerable attention from the industry and turned the spotlight on the manufacturing sector.

I m p licatio ns o f “ Mak e in I ndia” fo r th e auto secto rutomotive has been identified as a top priority under this

program. The implications for the industry are as follows:

• Create new employment opportunities

• Focus on buildingtechnical skills

• Boost domestic CV sales, and drive rural demand for vehicles

• Drive vehicle ex ports

• Facilitate investment and technology inflow

• Build best-in-class manufacturing infrastructure

• P romote R& D investment and protect intellectual property

B o o st to auto m o tiv e F DI and R&D

I nfrastructure dev elo p ment

L ab o

r law

refo rm

s

MA K E I N I ND I A

N ew trade p o licy

Ex port and import tax es on small volumes of goods have been abolished, and incentives have been introduced for ex port-oriented unitsand ex port processing zones.

N ew lab o r law s

These include a “ single-window” labor compliance process for companies, simpler P rovident Fund (compulsory employee insurance and pension) procedures and a new inspection scheme.

i pli ion o re l or o pli n e

To make doing businesses easier, companies can obtain environmental approvals and licenses online.

prove en o reso r e n e en pro r

The Government is taking steps to ensure that resources are used more efficiently such as opening coal blocks to companies through auctions while encouraging solar and wind power generation projects.

1 2 3 4

Sources: EY analysis

India’ s rank in the W orld Bank’ s Ease of Doing Business index has improved from 1 4 2 in 2 0 1 5 to 1 3 0 in 2 0 1 6

Mak ing I nd ia a w orl d c l ass au tomotive manu f ac tu ring hu b | 1 3

Th e “ S tartU p I ndia” p ro gram and th e lik ely ro llo ut o f G S T w o uld also h elp im p ro v e do ing and estab lish ing new b usinesses in th e co untry“ S tartU p I ndia” to b o o st entrep reneursh ip and create j o b sThe objective of the Government’ s “ StartU p India” program is to reinforce commitment toward creating an ecosystem conducive to the growth of startups.

There are immense opportunities in the Indian automobile industry for technological innovation and new solutions. The growing digitization in the country is driving innovation in advanced mobility (with initiatives such as technology-based cab aggregation and, ride sharing), vehicle and component retail, connected car, etc.

I m p licatio ns o f G S T fo r th e auto secto rThe tax reform is likely to change the transportation scenario, and industry players must start thinking about realigning their supply chain specifically the distribution networ his single reform will impact vehicle pricing, sourcing strategies, distribution costs and dealer profitability

R ed u c tion inl og istic s c ost

1 3

2 4

Greater transp arenc y

R ed u c tion in c ost of d oing b u siness

L ow er tax b u rd enon vehic l es

reater flexibility to redesign supply chains and thus lower costs due to elimination of embedded tax costs on inter state movement of goods and a shift in the point of taxation to the consumer

ignificant reduction in tax costs for the mid size and luxury

segments li ely

uto industry li ely to benefit from the ease of tax compliances and administration and reduced litigation under a simplified regime

emoval of the cascading effect of taxes especially for automotive distributors


Duration of income tax rebate for startups under the “ StartU p India” program

Fund size committed by the Government to support upcoming startup enterprises over the nex t four years

3 y ears

I N R1 0 0 b illio n


A uto m o tiv e regulatio ns are lik ely to fo cus o n m ak ing transp o rt cleaner and safer

* FAME-India: Faster Adoption and Manufacturing of Hybrid and Electric vehicles in India * * NATRiP : National Automotive Testing and R& D Infrastructure P roject Sources: SIAM and EY analysis

The automotive regulatory space is witnessing increased activity and some bold decisions by the Government and judiciary to battle the high pollution levels in Delhi and other metros. In the

medium term, we ex pect heightened regulatory activity in order to make transport cleaner and safer.

C leaner transp o rt

A dv ancem ent o f B S V I no rm s: The government recently decided to skip the BS V norms altogether, and adopt the BS V I norms from April 2 0 2 0 . Automakers and the oil companies will need to ma e significant investments to meet these deadlines. W e ex pect a continued thrust toward cleaner fuels in the policy formation and some possible announcements in the 2 0 1 6 U nion budget.

F A ME - I ndia* sch em e: The scheme, launched in April 2 0 1 5 , provides incentives for the purchase of green vehicles. W hile the scheme has pushed electric vehicle (EV ) sales, efforts need to be undertaken in areas such as setting up of charging infrastructure, launching compelling EV models, and reducing battery costs.

“ E nd o f life” p o licy : The Government is likely to introduce a policy promoting scrappage of old vehicles. This is a welcome move and is likelyto reduce pollution and drive new vehicle sales.

S afer transp o rt

C o m p liance w ith internatio nal safety standards: The Government has announced O ct 2 0 1 7 as the deadline for automakers to ensure international standards in terms of vehicle safety. Mandatory crash tests will be implemented from O ctober 2 0 1 7 for new models (O ct 2 0 1 9 for ex isting models). To conduct the tests, India is likely to have seven world-class automotive design and testing centers (being set up by NATRiP * * ) by the end of 2 0 1 6 .

N ew ro ad transp o rt and safety b ill: The bill seeks to drive faster clearances, stricter road and vehicle safety norms and define the recall policy. It focuses on transparency and computerization, heavy penalties for traffic violations and incorporates global best practices for issues related to vehicle regulation androad safety.

A dv anced m o b ility

Regulatio ns fo r new m o b ility initiativ es: The Indian market has recently witnessed a slew of advanced mobility offerings and new mobility initiatives such as technology-based cab aggregation and ride sharing. A regulatory environment conducive to promote innovation for these new mobility initiatives is needed. The road transport ministry has issued some guidelines, which could be the starting point for states to establish regulations.

he recent government policies reflect the beginning of a gradual shift in the Government’ s focus on cleaner transport. The industry should brace itself for more policy interventions in this aspect. The market is likely to shift in favor of petrol cars, and the industry needs to prepare accordingly, while also bringing in flexibility in production capacity. In addition, automakers need to work towards improving fuel efficiency of their products and ma e investments towards developing cleaner vehicles (hybrid and electric vehicles).

There is an urgent need for the industry to make investments and offer safety features (across all vehicle segments) to ensure that vehicles meet global standards — something that has been lacking so far.

In the medium to long term, automotive companies will need to assess the competition from mobility aggregators and come up with mobility-service-oriented strategies and offerings vs. product offerings to remain competitive and relevant

I m p licatio ns:


e i p o overn en ini i ives is s r in o s o res l s i si ni n gro w th in m anufacturing inv estm ents

Sources: EY’s India Attractiveness Survey 2015 and EY analysis

F DI gro w th turns p o sitiv e fro m 2 0 1 4W e have seen a sharp turnaround in FDI in 2 0 1 4 . After declining for two successive years, investment in India has bounced back with growth to b significantly ahead of the growth in FDI seen globally. This was driven by an improvement in India’ s macroeconomic indicators — in part, helped by declining oil prices — and ongoing government efforts to revitalize growth and improve the business environment.

F DI cap ital ( U S $ b )

S p lit o f F DI cap ital b y segm ent ( % )

H igh ligh ts 1 H 1 5

I ndia em erges as th e # 1 F DI destinatio n in 1 H 1 5urther with DI capital inflows of b during the first half

of calendar year 2 0 1 5 , India has emerged as the number one FDI destination in the world.

3 1 . 1

1 8 . 7

2 5

2 0 1 2 2 0 1 3 2 0 1 4

+ 3 4 %Jump in FDI capital FDI capital increase

in manufacturing

Highest-ever FDI capital per project

+ 1 3 5 % + 2 2 1 %

U S $ 9 1 m

3 8 % 3 7 % 3 7 %

4 6 %3 7 % 4 6 %

1 4 % 2 3 % 1 5 %

3 % 3 % 3 %

2 0 1 2 2 0 1 3 2 0 1 4

Services Manufacturing Retail Strategic

A fter a steep fall in 2 0 1 3 , F DI in m anufacturing grew at its fastest in sev en y ears. The upsurge coincided with the launch of the “ Make in India” program to promote manufacturing in the country. The program has also enhanced transparency by auctioning coal and power licenses, and has relax ed constraints on FDI in key sectors. Meanwhile, several states are moving ahead with labor law reforms.

y-o-y jump in auto sector FDI during 2 0 1 4 to reach U S$ 3 . 1 billion

1 2 %

1 6 3 %

W h at is th e nature o f th e b usiness activ ity y o u are p lanning in india?

(open-ended q uestion — multiple responses)

Source: EY’s India Attractiveness Survey 2015 (total respondents: 265 with overseas expansion plans, who are considering entering or increasing existing operations in India over the next year).

6 2 % 4 2 % 2 1 %

Manufacturing S erv icesS ales and m ark eting

S h are o f th e auto secto r in o v erall F DI in 2 0 1 4


A n ab undant lab o r p o o l and lo w lab o r co sts are h elp ing I ndia b eco m e an attractiv e m anufacturing destinatio nSIAM’ s Automotive Mission P lan 2 0 2 6 aims to propel the auto industry to become the engine of the “ Make in India” initiative. The automotive sector is ex pected to create 1 5 million direct jobs by 2 0 2 2 .

B reak - up o f w o rk fo rce in th e auto m o tiv e secto r• The majority of O EM and auto component segments’

employees are engaged in manufacturing.

• The workforce in tier-I auto components is similar to auto s in terms of educational ualifications and s ill levels

• W hile attrition is a concern at lower-tier auto component manufacturers and contractors, the attrition in auto O EMs and large auto component manufacturers is very less.

• According to the EY-SIAM HR study, attracting talent from the available pool is not a significant challenge for s and tier-1 suppliers. However, ready employability of the workforce req uires additional efforts from them.



co m p etitiv eness




A uto co m p o nents segm ent co ntrib utes 5 0 % to th e secto r’ s direct em p lo y m ent

• Tier-2 / 3 manufacturers, service centers and dealers have much larger workforce req uirements and they also face a multitude of challenges, such as attracting talent, developing skills and managing industrial relations

L ab o ur co sts in I ndia draw fo reign inv esto rs to th e co untryIndia’ s most lucrative feature for foreign investors is the abundance of labor. In addition, labor costs in the country remain far below those of advanced and other developing economies. India is the most competitive in terms of both average monthly wages and minimum monthly wages, compared with its Asian peers. This gives it an advantage in low-value-added, labor-intensive manufacturing.

S u b - S ec tor

Overal l sec tor

O EM

Auto component manufacturers

Service centers

Dealerships

1 . 9

4 . 8

2 . 8

1 . 5

2 . 0

6 . 0

3 . 1

1 . 7

2 . 2

7 . 3

3 . 4

2 . 0

D irec t emp l oy ment ( in mil l ion)

1 0 . 9 8 1 2 . 8 1 1 4 . 8 8

2 0 1 3 2 0 2 2 F2 0 1 7 F

G lo b al w age co m p ariso n ( co st o f lab o r, U S $ p er h o ur)

4 6 . 4

Germany

3 8 . 3

Canada

3 5 . 4

U S

3 5 . 4

Japan

2 1 . 9

Singapore

1 2 . 0

Brazil

9 . 2

Taiwan

2 . 8

China

0 . 9

IndiaSouthK orea

1 7 . 7

Sources: EY-SIAM report: Make in India — Leveraging human capital, National Skill Development Corporation — Auto Sector Report and EY analysis

2 Dev elo p ing talent and sk ills


S k ill dev elo p m ent o f th e large talent p o o l is seen as th e m o st critical lev er in deliv ering m anufacturing ex cellence

C ritical sk ill gap s in th e industryIndia s abundant talent reserves appear sufficient to meet the overall manpower req uirements of the automotive industry.

However, the industry is faced with certain key challenges with respect to skill development. According to the EY SIAM HR study, the industry faces a gap in the following areas:

A ddressing th e gap

The Indian automotive industry is likely to witness an increased demand for skilled labor in the coming years, as the economic environment improves and investments are made as part of the “ Make in India” initiative.

W ith reduction in product life cycles and the evolution of automotive technology, we ex pect an increase in product development, manufacturing and supply chain complex ity for both O EMs and suppliers. The industry, is therefore, faced with certain key considerations for skill development.

Institutions are unable to meet the industry’ s req uirement of skilled manpower due to a gap in the technical curriculum and the lack of the faculty’ s ex posure to technology changes. Industry participants need to work together to address this gap.

B uilding talent p ip eline

he lac of commonly accepted standards to define competency levels and correlating to an ideal wage has increased complexity of hiring planning and developing employees according to req uired capabilities.

E stab lish ing a centraliz ed certify ing agency

he sector needs an industry recognized centralized certifying body laying out clear standards and certifying s ill levels on defined competency levels

Dev elo p ing co m p etency -w age grid

K ey co nsideratio ns fo r sk ill dev elo p m ent

Are there any new skills that have emerged ascritical for the industry?

re government and industry initiatives sufficientto bridge the skill gap?

W hat percentage of the available resource pool is industry-ready? Does it have the req uisite skill-set to help organizations deliver?

321

S taff/ m anagem ent

N o n- m anagem ent

• Civil engineering and project management to build plants

• Concepts related to q uality and manufacturing ex cellence such as 5 S, TQ M etc.

• P roduction operations such as Total P roductive Maintenance

• Fitters, machinists, welders, painters, etc.

• Advanced electrical, CNC operations, automation skills

• Soft skills, work discipline

• Regular maintenance• Automotive service• Automotive and accident repair/ body

repair/ paint repair, etc.

• Selling and communication skills

O E Ms and auto co m p o nentm anufacturers S erv ice centers Dealers

• U nderstanding of local geographical dynamics and customer req uirements

• Customer need diagnostic skills• P roduct knowledge• Customer handling and

communication skills

Sources: EY-SIAM report: Make in India — Leveraging human capital


W h ile th e G o v ernm ent h as intro duced suitab le p o licy m easures, th e industry to o is also p lay ing an activ e ro le in b ridging th e sk ill gapThe Government and industry have undertaken various initiatives to help develop the skillset of the current and potential employee base. O ne of the key government initiatives is the development of the ational ills ualification ramewor which lays down the competency framework and standards with respect

India has the advantage of a vast and young talent pool. In order to build a strong workforce, the skill demand and supply gap needs to be bridged by investing in critical initiatives.

P artner with government agencies to provide vocational training to students

Set up their own dedicated training academies with programs focusing on technical and soft skills

Collaborate with universities to set-up training centers/ labs and offer joint certification

Invest in ex ternship programs and provide funding for various university curriculums

Training investments to leverage virtual classrooms to supplement classroom and on-the-job training

Collaborate with universities to run employability-skill enhancement programs

I ndustry p articip ants tak e

m easures to address sk ill gap s

• Create opportunities to develop talent of Indian youth • Aims at providing training and skill development to

5 0 0 m youth by 2 0 2 0 .

• Training for traditional occupations (eg. carpenters); emphasis on new areas (eg. transportation)

• Hallmark — ‘ Rural India Skill’ , to standardise and certify training process

• Tailor-made, need-based programs would be initiated (eg. management skills)

• Course methodology will be innovative — games, group discussions, etc.

O b j ectiv es F eatures

E arlier

• Emphasis on traditional jobs• Responsibility divided among various ministries

N o w

• Eq ual emphasis on all jobs• Responsibilities clubbed under ministry of skill

development and entrepreneurship

Difference fro m p rev io us p o licies

‘ S k ill I ndia’p ro gram

to competency levels for many trades in the industry. The Government also launched the “ Skill India” mission, which aims to converge and monitor skill development schemes across the country and provide subsidized loans to students for vocational training.

I ndustry p articip ants co llab o rate w ith academ ia, and inv est in training to address sk ill gap s

lthough the supply of engineering students is sufficiently high to meet the combined req uirement of auto O EMs and auto component manufacturers, they are not adeq uately trained to be industry fit arallel to government initiatives to address


the skill gaps, industry participants are also taking measures to help build a stronger talent pipeline. According to the EY-SIAM HR study, O EMs are increasingly viewing investments in skill development as core to the business and integrating them as part of their people agenda.

Details o f th e “ S k ill I ndia” p ro gram



B esides augm enting sk ills, fo stering h ealth y industrial relatio ns are k ey to dev elo p I ndia’ s m anufacturing ex cellence

armonious industrial relations is a significant driver to develop India’ s manufacturing ex cellence. This necessitates a change in industrial relations within the automotive sector in line with the evolving scenario. EY’ s India Attractiveness Survey 2 0 1 5 indicates that labor costs labor s ills and flexibility of labor laws are critical parameters for driving investment in India. Due to the intertwined nature of business, importance of industrial relations

in the auto sector does not stop with the O EMs, but is critically dependent on the partners in the ecosystem.

The changing times call for a mutual appreciation for ease of doing business and maintaining the cost competitiveness of the organization while treating the larger workforce with fairness, trust and eq uity. However, the industry is faced with the following challenges with respect to managing the industrial workforce.

I mp l ic ations f or b u il d ing p ositive ind u strial rel ations

A uto m o tiv e industry G o v ernm ent

• Regular and improved communication between management and employees

• Investment in skill building of workforce and providing career opportunities

• More inclusiveness in interactions with employees

• Active Engagement with unions

• Focus on maturity of IR practices internally as well as for partners in the ecosystem

• teps towards simplification and consolidation of labor laws

• Reforms related to upscaling/ downscaling of workforce numbers

• New inspection scheme

• E enablement for all returns and availability of information

K ey c hal l eng es 2

L ack o f fo cus in th e eco sy stem

1O utdated

lab o r law s

3L ab o r

relatio ns

• Labour laws have remained unchanged over the years: Cumbersome and lengthy laws for setting up and scaling down operations, slow and bureaucratic approaches for dispute resolution

• O rganizations are resorting to contract labor and this is skewing the workforce composition towards temporary employees

• Tier 2 / 3 suppliers and dealers especially lack enhanced focus on their IR philosophies and build maturity in their IR practices

• Absence of regular personal connect with the workforce and unions

• Difficulty in managing increasing wage and career aspirations of workforce


A stro ng fo cus o n dev elo p ing transp o rt infrastructure is essential to dev elo p I ndia as a m anufacturing h ub

G o v ernm ent initiativ es fo r infrastructure dev elo p m entThe Government is making concerted efforts to develop the transportation infrastructure. Some of the key initiatives include:

Transp o rtatio n m ix in I ndia h eav ily sk ew ed to w ard ro ads, w h ile w ater transp o rt rem ains underutiliz ed ( 2 0 1 4 )



co m p etitiv eness




India’ s rank on infrastructure competitiveness by the W orld Economic Forum in 2 0 1 5

Average length of highway added every day during 2 0 1 5 , compared with 8 km during 2 0 1 4 ; Government target to add 3 0 km per day by 2 0 1 6

8 1 / 1 4 0

1 8 k m

• 5 9 9 highway projects covering around 1 2 ,9 0 3 km of national highways have been sanctioned

• Development of 6 6 ,1 1 7 km of roads under different programs such as National Highways Development P roject (NHDP ), Special Accelerated Road Development P rogramme in North East (SARDP -NE) and Left W ing Ex tremism (LW E)

• Target of laying out new roads in India increased to 1 5 0 ,0 0 0 km/ year from 2 0 1 6 as against the ex isting 9 6 ,0 0 0 km/ year

• P rojects worthU S$ 1 . 5 9 billion havebeen sanctioned

• 1 0 0 % FDI approved in railway infrastructure

• ine corridors identified for developing high-speed rail network

I nv estm ent p lanso f U S $ 1 4 0 b illio n to m o derniz ing railw ay

2

• U S$ 1 0 . 5 billion investment in 1 2 major ports in the next five years under “ Sagarmala” initiative

• Convert 1 0 1 rivers across India into waterways to promote water transport

I nv estm ent p lans o f U S $ 2 7 . 1 b illio n fo r p o rts and sh ip p ing under 1 2 th F iv e Y ear P lan

3

I nv estm ent p lans o f U S $ 1 5 0 b illio n in h igh w ay s and sh ip p ing b y 2 0 1 9

1

India has the world’ s second-largest road network (4 . 7 million km), with highways constituting only 1 . 7 % of this network. The railway network is spread across 6 4 ,6 0 0 km and is also among the world’ s largest. India is the 1 6 th largest maritime country in the world, with a coastline of about 7 ,5 1 7 km.

6 0 %

3 1 %

8 %

1 %

India

3 0 %

2 3 %

4 6 %

1 %

China

3 7 %

4 8 %

1 4 %

1 %

U S

1 0 %

4 6 %

4 3 %

1 %

Europe

Air W ater Rail Road

Decades of underinvestment in infrastructure development have resulted in major infrastructure bottlenecks, slowing down the pace of India’ s economic growth. Globalizing trade is ex erting pressure on India’ s ex isting infrastructure. Thus, investment in developing railroad, port network and hinterland connectivity is imperative for the growth of the manufacturing sector in India.

Sources: Analyst reports, Planning commission

3 F ast- track ing infrastructure dev elo p m ent


Th e G o v ernm ent and industry are co llab o rating to im p ro v e th e transp o rtatio n and lo gistics eco - sy stem

I ndia’ s lo gistics co sts are do ub le th at o f th e dev elo p ed natio ns

Maj o r ch allenges fo r th e lo gistics secto r in I ndia

India’ s rank on the Logistics P erformance Index 2 0 1 4

5 4 / 1 6 0

* According to a study by the National Skills Development Corporation, the logistics sector will face incremental skill req uirements of 1 7 . 7 million people by 2 0 2 2 .

I n additio n to th e p o o r infrastructure, m ultip le gap s in th e sup p ly ch ain le o lo is i s ine ien o po n in os s or n rin co m p anies in I ndia.

n efficient logistics networ forms the bac bone of a strong economy lin ing all the elements of the supply chain – transportation, warehousing, integrated communication networks and logistics service providers (LSP s). Compared with the developed nations, the Indian logistics network is below par on all major aspects – infrastructure, customs and q uality of services. This has resulted in India having very high logistics costs for the manufacturing sector, including automotive.

L im ited interm o dal and last- m ile co nnectiv ityInefficient supply chain lin ages induce systemic wastages of already scarce resources resulting in sub optimal operations delays and unreliability of services

Regulato ry b o ttleneck somplex customs regulations non uniformity of toll charges and multiple taxes lead to a high

level of compliance disparity resulting in operational inefficiencies

Increasing demand for integrated s is widening the re uired s ill gap ma ing the unavailability of a productive wor force a critical issue

S k ill sh o rtage*

S h o rtage o f w areh o using here is limited warehousing capacity in India as the ma ority of operators in the warehousing

sector are small to mid sized companies with limited investment appetite

1 3 %

8 . 5 %

8 . 5 %

8 . 8 %

India

U SA

Japan

8 . 5 %Singapore

Germany

Sources: EY analysis, Armstrong & Associates

G o v ernm ent and industry p articip ants tak e m easures to address ch allenges

Aut

omot

ive

indu

stry

Gov

ernm

ent

P otential GST roll out

Increasing government investment oninfrastructure development

Tax breaks and incentives toinfrastructure investors

P P P and privatization measures todevelop infrastructure

Collaborating with the government forinfrastructure development

Long-term partnership with specializedthird party logistics providers to invest intechnology, assets, employee training, etc.

Focus on continuous skill developmentthrough dedicated programs for logisticsprofessionals, training drivers, etc.


Th e lik ely ro llo ut o f G S T w ill result in a p leth o ra o f o p p o rtunities to re- engineer sup p ly ch ains and o p tim iz e m anufacturing co sts in I ndia

I m p licatio ns o f lik ely G S T ro llo ut fo r th e lo gistics secto r

I m p licatio ns o f infrastructure dev elo p m ent fo r th e auto m o tiv e secto r

The logistics industry is highly fragmented, with organized LSP s constituting less than 5 % of the total market. P ost rationalization of tax es, the share of organized LSP s is ex pected to increase.

E m ergence o f o rganiz ed p lay ers

4

Minimized tax ation will lead to logistics companies consolidating their warehousing network by creating large, centralized warehouses, instead of the ex isting multiple small warehouses across states.

2L arge centraliz ed w areh o uses

The supply chain network will be redesigned with the objective of ensuring prox imity to manufacturing locations and consumption centers, leading to the emergence of hub and spoke models.

3E v o lutio n o f h ub and sp o k e m o dels

Reduced compliance req uirements at toll checkpoints will minimize transportation hassles and optimize delivery times. This is likely to reduce distribution costs by roughly 1 0 % – 1 5 % .

1I ncreased o p eratio nal e ien n re e distrib utio n co sts

• fficient execution of infrastructure pro ects and minimizing regulatory bottlenec s will reduce supply chain and logistics costs for auto companies

• ncourage s to establish their manufacturing base in India

• India can potentially emerge as a ey exporting country in the auto sector

Dem and stim ulatio n

Reduced sup p ly

ch ain co sts

L o catio n o f ch o ice

0 1

0 2

0 3

• trong correlation in stimulating demand for mobility and connectivity• urther opening of the rural mar et for automotive companies

Logistics companies in India have evolved from freight forwarding companies to integrated LSP s providing a complete package of services. Complementing this, the Government is also focusing

on improving the regulatory environment. The anticipated GST rollout is a major initiative in this direction, which will help optimize logistics costs and bring in efficiencies





co m p etitiv eness




Th e co untry ’ s R&D eco sy stem o ffers an o p p o rtunity to driv e inno v atio n fo r b o th do m estic and glo b al co m p anies

he research and innovation ecosystem in India presents a significant opportunity for companies across the globe to ex plore the rich talent availability in the country. India hosts a number of R& D centers, which either serve the local market, or help the parent companies develop nex t-generation innovative products and introduce them faster to the global markets.

In 2 0 1 4 , India had the world’ s eighth-largest annual R& D investment (2 . 7 % of global R& D ex penditure) estimated at U S$ 4 4 billion. The country’ s total R& D spending is around 1 % of GDP , and the Government’ s spending is two to three times more than that of the industry’ s

Sources: The World Economic Forum’s Global Competitiveness Report 2015–16, EY’s 2015 India attractiveness survey and EY analysis

Stable political and social environment

7 4 %

5 9 %

Improvements in 2 0 1 5

2 0 1 5 2 0 1 4

A s p er E Y ' s I ndia A ttractiv eness

S urv ey , b usiness leaders fo und I ndia si ni n l ore attractiv e in 2 0 1 5

s o p re to 2 0 1 4

S tro ngly p o sitio ned fo r 2 0 2 0

India is on course to becoming one of the world’ s three leading fast-growth economies and a preferreddestination for manufacturing, as well as a regional hub for operations including R& D/ innovation.

Macroeconomic stability

7 6 %

7 0 %

7 2 %

6 9 %

Research and development

E Y ’ s I ndia A ttractiv eness S urv ey 2 0 1 5

I ndia R&D and inno v atio n cap ab ility — current standing

The W orld Economic Forum’ s Global Competitiveness Report 2 0 1 5 – 1 6 puts India at the 4 2 nd place among countries worldwide in terms of innovation capacity. India is strong among the BRICs in terms of the availability of scientists and engineers, but lags on other parameters such as university-industry R& D collaboration and patents granted per head.

Th e w ay fo rw ardAccelerating R& D and innovation has a vital role in enhancing India’ s manufacturing capability and sharpening its competitiveness. The Government is keen on developing dedicated R& D centers in the manufacturing, agriculture and life sciences sectors. The robust Indian IT industry will further facilitate the development of the R& D eco-system.

4 I ncub ating R&D and inno v atio n


Th e G o v ernm ent is fo cused o n enh ancing I ndia’ s R&D and inno v atio n cap ab ilities to attract glo b al and I ndian p riv ate secto r inv estm ents

National Institution for Transforming India (NITI)To increase involvement of entrepreneurs, researchers to foster scientific innovations

National Innovation Council A think-tank council to discuss, analyze and help implement strategies and road map for innovation

Science, Technology and Innovation (STI) P olicy Focus on increasing R& D spend, sharing risk with the private sector providing new financing mechanisms

Favorable industrial relations scenario to facilitate improved productivity and business continuity

Incubating entrepreneurial mind-set through funding and policy support

Streamlining the patents and IP R application and registration process

Integrating R& D and innovation initiatives of multiple stakeholders including Government, R& D labs, universities, sectors, corporates

Th e G o v ernm ent and industry need to driv e a

m indset ch ange and create an R&D p ush at th e grassro o ts lev el,

enab ling co - dev elo p m ent o f p atents and I P

Sources: National Portal of India, EY’s India Attractiveness Survey 2015

The Government of India has taken several steps to promote the R& D sector in the country and has declared 2 0 1 0 to 2 0 2 0 as the

“ Decade of Innovation. ” The following institutions have been set up to drive R& D and innovation in India:

• Tax incentives for in-house R& D on chemicals, drugs, automotive, pharmaceuticals, electronics, computers, telecom, aircrafts and helicopters; investments are eligible for a tax deduction of 1 . 5 X the amount spent

• Ex emption from imports custom duty to both public and privately funded R& D institutions

• The Science and Engineering Research Board is implementing the P rime Minister’ s Doctoral Fellow-ship Scheme with a view to develop human capacity for industrially relevant R& D.

• India has partnered with the U K for bilateral research and innovation via the Newton-Bhabha Fund contribution of m each over the next five years

• StartU p India initiative: The Department of Industrial P olicy and P romotion is spearheading the Government’ s efforts to provide impetus to the start-up sector in urban and rural India. It will work with banks to make funding easier for startups and small ventures.

E ntrep reneurial and inno v atio n

initiativ es

P artnersh ip s w ith o th er co untries, academ ia

Regulato ry incentiv es

A ddressing th e gap


R&D and inno v atio n in m anufacturing need to fo cus o n rap id tech no lo gy ado p tio n, w h ich is also critical to th e success o f “ Mak e in I ndia”

Competitiveness of India’ s manufacturing sector Time to move beyond cost-effectiveness; differentiate through R&D and innovationThe Government has outlined ambitious targets for the manufacturing sector in India including a 2 5 % share in GDP and creating 1 0 0 million new jobs by 2 0 2 2 . Developing an R& D and innovation eco-system is seen as a critical lever in delivering manufacturing ex cellence under the “ Make in India” initiative.

The manufacturing R& D growth story in India has often centered on cost efficiencies due to labor arbitrage he stress has been on driving process efficiencies for cost reduction to compete globally The need of the hour, however, is to drive R& D and technology innovation. This will allow Indian companies to move up the manufacturing value chain and become leading global providers for product design and IP , while navigating through production complex ity and supply chain challenges.

Technology needs attentionW hat do you think are the main measures to improve India’ s technology and innovation capacity?

3 7 %

2 9 %

1 5 %

3 7 %

2 1 %

3 4 %

3 1 %

2 9 %

2 5 %

1 9 %

Increase incentives to invest in R& D and innovative technologies

Increase government support

Focus on collaborations between universities and industry

Focus on P P P s in technology

Facilitate R& D partnerships between foreign and local companies

Non-manufacturing sector respondents

Manufacturing sector respondents

Sources: National Portal of India, EY’s India Attractiveness Survey 2015

V aried R&D and inno v atio n p ersp ectiv es fro m m anufacturing and no n- m anufacturing secto rs

Respondents related to the manufacturing sector suggest more partnerships between foreign and local companies to improve technology and innovation capacity. O n the other hand, non-manufacturing respondents demand more incentives for investment in new technologies.

W ill the industry have the right skills available to effectively attract and utilize R& D investment across value chain levels?

1W hat is the preparedness with respect to R& D and innovation capability at O EMs, suppliers and sales & service network partners?

2K ey enab lers to p ut I ndia o n th e glo b al m ap as a p referred destinatio n fo r m anufacturing R&D:• Increasing use of automation technologies such

as robotics for the assembly line, infusion of hi-tech materials and nanotechnology, developing lighter but stronger and safer parts

• Fast adoption of new technologies in electronics, sensors, CAD, CAM, 3 D printing etc.

• P romoting corporate investments in manufacturing R& D with tax holidays and funding support

K ey q uestio ns to b e answ ered:


Th e I ndian auto m anufacturing secto r is set to p lay a p iv o tal ro le in glo b al auto m o tiv e R&D, inno v atio n and new p ro duct dev elo p m ent

A uto m o tiv e industry transfo rm atio n h inges o n th e success o f R&D and inno v atio n initiativ esP roduct design and development in the automotive industry globally is gearing for rapid transformation with changing customer needs and stringent regulations for safety and emissions ew initiatives around connectivity fuel efficiency electric vehicles, autonomous, on-demand mobility are driven by cross-sector R& D and innovation.

India is steadily gaining importance for both domestic and foreign multinational companies as a strategic hub for R& D and innovation initiatives. The R& D ecosystem in the country is focused on the three key areas of R& D — fundamental research, designing and engineering of new vehicle models, and development.

Developing/ attracting high-end R& D talent, especially in electronics, safety, materials, body engineering, interiors and powertrain development

ontinuing the fiscal incentives on R& D ex penditure and ex tending the scheme to outsourced R& D

Developing a network of industry-academia-government bodies to build core R& D skills and training modules

Focus on achieving global standards in emissions and safety while also manufacturing global q uality products in an environment friendly way

Attracting domain ex perts from mature markets to imbibe a strong process culture, improve q uality, increase R& D capabilities and facilitate creation of domestic IPK ey im p erativ es fo r

auto m o tiv e stak eh o lders to

p o sitio n I ndia as a glo b al R&D h ub

Sources: AMP 2016–26, India Brand Equity Foundation (IBEF), EY-SIAM report: Make in India — Leveraging human capital

Share of the automotive sector in India’ s R& D ex penditure

Number of private sector automotive R& D centers in India

8 % 3 0Mark et indicato rs

A uto m o tiv e R&D driv ers

G lo b al p lay ers inv esting in R&D to tap I ndia’ s engineering b ase and co st adv antage

ene s• Influx of global D talent• igher indigenization and

localization• undamental research and

ground up platforms

Do m estic p lay ers inv esting in R&D to co m p ete at a glo b al lev el

ene s• trategic build up of local

D eco system• D approach moving

closer to global standards• lobal D partnerships

G o v ernm ent sup p o rt to driv e R&D inv estm entsK ey initiativ es:• i for testing

certification homologation• ax benefits on D

expenditure• ech ac uisition fund• India partnership


Th e auto sup p ly ch ain co ntinues to strength en w ith th e ev o lutio n o f th e I ndian auto m o tiv e industry



co m p etitiv eness




O E Ms p lan to co nso lidate direct v endo rs

Suppliers to own development, manufacturing and assembly of critical components and become module providers as O EMs plan to consolidate vendors

I ncreasing v eh icle p ro liferatio n resulting in a co m p lex sup p ly ch ain

Car models are ex pected to increase with the introduction of new models/ vehicle segments

> 1 8 0 m o dels in 2 0 2 0 fro m ~ 1 5 0 in 2 0 1 5

H igh gro w th in co m p o nent ex p o rts and stro ng rep lacem ent dem and

Sharper growth in ex ports on the back of cost benefits and improved uality of components he aftermarket would witness the release of pent-up demand, due to delayed replacements over the last two years

S up p liers to b ear h igh er R&D o w nersh ipand ex p ense

Stricter regulations and higher R& D ownership necessitate product and process innovation and a faster response to O EMs’ product launches

S u p p l y c hain trend s

Indian suppliers are ex panding their customer base and attaining scale through global ac uisitions as domestic demand remained wea during

I ndian sup p liers acq uiring scale and cap ab ilities w ith glo b al acq uisitio ns

In the short to medium term, the industry is facing headwinds with high demand volatility, but is estimated to witness double-digit growth in the long term, necessitating continuous capacity expansion

S tro ng lo ng- term gro w th w h ile dem and v o latility co ntinues

AMP 2 0 1 6 – 2 6 forecasts the Indianautomotive industry to grow at a CAGR of around 1 0 %

8 0 % y-o-y growth in number of outbound deals among automotive suppliersin FY1 5

Ex ports contributed 2 9 % to revenues in FY1 5 ; estimated to reach 3 5 % -4 0 % in 2 0 2 0 ; > 1 0 % growth in replacement demand over FY1 5 – 1 6

< 1 % R& D/ sales spend of most Indian suppliers, compared with the global average of ~ 3 %

The automotive supply chain, comprising more than 7 0 0 suppliers (organized sector), serves as the backbone of the industry and supports the operations of around 3 5 global and Indian O EMs.

Sources: ACMA, LMC Automotive, SIAM, AMP 2016–26 and EY analysis

5 E nh ancing sup p ly ch ain co m p etiv eness


W ith increasing o p eratio nal co m p lex ity , th e industry needs to address sev eral ch allenges

K ey ch allenges faced b y th e auto m o tiv e sup p ly ch ain

In addition to regular raids, suppliers/O EMs should join industry bodies to launch awareness drives and spread information on spurious parts

O EMs, suppliers, academic institutes and industry bodies should collaborate and facilitate supply chain specific skill-development programs

Suppliers and O EMs should ex plore close collaboration across products/ process development

• Logistics cost in India is around 1 3 % of GDP compared with 8 % -9 % for developed countries; higher logistics costs are led by the predominant use of road transport, and impact the competiveness of the auto supply chain

Infrastructure bottlenec s including deficient roads and ports transport, and inadeq uate power distribution, increase operational costs and impact overall supply chain operations

Companies should focus on innovative/analytics-driven cost management and strive to make optimum use of ex isting resources, while the Government works toward building the necessary infrastructure

L arge sh are o f sp urio us

p arts

S h o rtage o f sup p ly ch ain p ro fessio nals

H igh lo gistics co sts and

e ien infrastructure

E v o lv ing regulato ry

p o licies

• Spurious parts have ~ 3 0 % share in the overall replacement market, due to which the industry faces annual turnover loss of around INR9 0 billion

• ~ 2 0 % of total road accidents in India are attributed to the use of spurious auto parts

• Industry to face shortage of strategic and functional supply chain professionals as supply chain becomes complex and global

• Constraints in attracting and retaining automotive supply chain professionals, as they are lured by high-paying FMCG companies

• U pcoming regulatory policies around emissions, safety and would significantly impact supply chain operations

and the development of new products/ processes

Sources: ACMA, Armstrong & Associates and EY analysis


G reater industry - w ide co llab o ratio n is needed to reinv ent th e v alue p ro p o sitio n o f th e auto m o tiv e sup p ly ch ain

n evolve n e ien s ppl in o l provi e o pe i ive v n e n pl pivo l role in e s s in ble ro o th e secto r

I ncrease co llab o ratio n acro ss th e auto m o tiv e v alue ch ain

O EM-supplier collaboration in demand forecasting, product development and greater transparency across the supply chain would reduce time to market, increase responsiveness, optimize inventory levels and reduce the overall operational cost

I m p ro v e sup p ly ch ain v isib ility th ro ugh use o f tech no lo gy

Improved supply chain visibility and efficient IT-driven processes would be vital in managing the complex supply chain

Dev elo p a glo b ally integrated netw o rk and co m p etent sup p ly ch ain fo r an ex p o rt- led gro w th

Suppliers need to develop a globally integrated supply chain to manage customized delivery schedules, varying regulatory compliances and combination of completely built units (CBU s) and completely knocked down units (CK Ds).

Develop responsive/flexible p ro ductio n sy stem s

Demand volatility necessitates flexible produc-tion systems. Further, suppliers need to actively manage contracts to cater to the cost pressures of any unutilized capacity which is a significant part of overall supply chain cost

E nh ancing co m p etiv eness to b uild a w o rld- class

sup p ly ch ain

1 2

34

Source: EY analysis


K ey co nsideratio ns fo r th e G o v ernm ent and th e industry

K ey themes Government I nd u stry


E nab ling regulato ry env iro nm ent • P rovide a stable and consistent policy regime

• Continued thrust on initiatives such as Make in India, Skill India, etc .

• Greater clarity on regulations around new mobility service providers

oo to build flexible production capacity

• Continued focus on investments aimed at reducing vehicle emissions and introducing safety technologies

• Ex plore opportunities for a play in the rapidly evolving mobility eco-system

Dev elo p ing talent and sk ills • P artner with the industry to facilitate vocational training for students and laying out clear standards on competency levels

nderta e steps towards simplification and consolidation of labor laws

rovide flexibility of operations through reforms related to upscaling/ downscaling of workforce numbers

• W ork with academic institutions to develop technical skills in line with the industry req uirements

• O EMs to work with suppliers and dealers in the eco-system on training and skilling agenda

• Focus on maturity of IR practices internally as well as for partners in the ecosystem

F ast- track ing infrastructuredev elo p m ent

• Continue to encourage private participation to develop specialized infrastructure across ports, railway terminals, etc.

• Fast track GST implementation to improve logistics efficiency

• Adopt global best practices for improving transportation and logistics efficiency

• O utsource logistics function and collaborate with the specialized logistics service providers

I ncub ating R&D and inno v atio n

ontinued fiscal incentives on D ex penditure and ex tending the scheme to outsourced R& D

• Bridging the gap between Indian and global automotive standards for safety and emissions

• Develop a network of industry-academia-government to build core R& D skills and training modules

• Attracting domain ex perts from mature markets/ other industries to imbibe a strong process culture, improve q uality, increase R& D capabilities and facilitate creation of domestic IP

Enhancing supply chain competitiveness

P artner with the industry and academia to facilitate supply chain specific s illdevelopment programs

Introduce checks and measures along with launching awareness drives to reduce the usage of spurious parts

Improve supply chain visibility through use of technology

Invest in developing an integrated network and competent supply chain to drive efficiency in operations


Appendix :Th e N o rth ern regio n is o ne o f th e m o st attractiv e regio ns in I ndia o ffering a m ultitude o f o p p o rtunities fo r auto m ak ers and sup p liersA large m ark et and an attractiv e inv estm ent destinatio nNorth India is a large market with the youngest population in the country with several states including Delhi, P unjab and Haryana

having a per capita GDP above India’ s average. The region is an attractive investment destination that accounts for around 2 8 % of total DI inflows to the country

H o m e to o ne o f th e largest auto cluster in I ndiaThe Northern region is home to the second largest automotive cluster in India in terms of revenues (accounting for more than

of the total mar et he region also benefits from its close

prox imity to policy makers in the government and industry bodies such as I and he region also houses corporate offices or sales headq uarters of various major entities in the passenger vehicle and two-wheeler segments.

2 6 %Share of Northern region innational GDP

3 2 %Share of Northern region in totalpopulation of India

H uge m ark et siz e A ttractiv e inv estm ent destinatio nA large v eh icle sales andp ro ductio n h ub

2 6 %Share of Northern region in totalinstalled power capacity

5 9 %Share in proposed W estern andEastern Dedicated Freight Corridors

~ 3 0 %Share of Northern India in totalpassenger vehicle demand

~ 5 0 %Share of Haryana in total passengercar and 2 W production

Ludhiana Delhi-Gurgaon-Faridabad

ManesarHaridwarLucknow

Manufacturing

Ashok Leyland

Bajaj Auto

Eicher

Escorts

Hero Moto Corp

Honda

HMSI

ICML

Mahindra

Maruti Suzuki

New Holland

Suzuki Motorcycles

Swaraj Mazda

Tata Motors

Yamaha

Major OEMs' HQ in North

JCB

R&D and Testingfacilities

OEM RohtakManesar

GovernmentInternational Center for Automotive Technology (iCAT), Manesar



The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the development of India, partnering industry, Government, and civil society, through advisory and consultative processes.

II is a non government not for profit industry led and industry managed organization playing a proactive role in India’ s development process. Founded in 1 8 9 5 , India’ s premier business association has around 8 0 0 0 members, from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 2 0 0 ,0 0 0 enterprises from around 2 4 0 national and regional sectoral industry bodies.

CII charts change by working closely with Government on policy issues, interfacing with thought leaders and enhancing efficiency competitiveness and business opportunities for industry through a range of specialized services and strategic global linkages. It also provides a platform for consensus-building and networking on key issues.

Ex tending its agenda beyond business, CII assists industry to identify and ex ecute corporate citizenship programmes. P artnerships with civil society organizations carry forward corporate initiatives for integrated and inclusive development across diverse domains including affirmative action, healthcare, education, livelihood, diversity management, skill development, empowerment of women, and water, to name a few.

In its 1 2 0 th year of service to the nation, the CII theme of B uild I ndia — I nv est in Dev elo p m ent: A S h ared Resp o nsib ility , reiterates Industry’ s role and responsibility as a partner in national development. The focus is on four key enablers: Facilitating Growth and Competitiveness, P romoting Infrastructure Investments, Developing Human Capital, and Encouraging Social Development.

ith offices including entres of xcellence in India and overseas offices in ustralia Bahrain, China, Egypt, France, Singapore, U K , and U SA, as well as institutional partnerships with 3 1 2 counterpart organizations in 1 0 6 countries, CII serves as a reference point for Indian industry and the international business community.

C o nfederatio n o f I ndian I ndustry The Mantosh Sondhi Centre 2 3 , Institutional Area, Lodi Road, New Delhi — 1 1 0 0 0 3 (India) T: 9 1 1 1 4 5 7 7 1 0 0 0 / 2 4 6 2 9 9 9 4 -7 | F: 9 1 1 1 2 4 6 2 6 1 4 9 E: info@ cii. in | W : www. cii. in

Reach us via our Membership Helpline: 0 0 -9 1 -1 2 4 -4 5 9 2 9 6 6 / 0 0 -9 1 -9 9 1 0 4 4 6 2 4 4CII Helpline Toll free No: 1 8 0 0 -1 0 3 -1 2 4 4

F ol l ow u s on:facebook. com/ followcii twitter. com/ followcii www. mycii. in


facebook.com/followcii

http://twitter.com/followcii

http://www.mycii.in

Notes

34 | Making India a world class automotive manufacturing hub

Notes

Making India a world class automotive manufacturing hub | 35

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