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Cost advantages can erode if infrastructure doesnt deliver
January, 10th 2008

The labour cost advantage that India enjoys will not vanish in the medium term. As the economy develops and based on the demand-supply situation of skilled labour the advantage can waver. - MR YEZDI NAGPOREWALLA, DIRECTOR, KPMGS INDUSTRIAL MARKETS AND AUTO PRACTICE.


With only hours to go for the grand unveiling of the all-new small car at the auto event in New Delhi, one thing is no longer debated. That a viable peoples car will increase the overall penetration of cars, since many people who do not own cars or any vehicle will now be induced to buy one.

The fallout could be far reaching, observes Mr Yezdi Nagporewalla, National Industrial Director for KPMGs Industrial Markets and Auto practice. Increased congestion in cities could force taxing of vehicles and improvement in public conveyance infrastructure. Manufacturers would look to penetrate deeper into B and C towns and rural markets, he elaborates, during the course of an e-mail interaction with Business Line.

What would a car with a more affordable price tag mean for auto component makers? The large volumes generated in the domestic market would enable them to drive down costs and become more competitive in global markets, foresees Mr Nagporewalla. Another area that I see being impacted significantly because of the sheer volumes, would be the service chain. One will see OEMs (original equipment manufacturers) investing heavily in this space, as well as the emergence of multi-service outlets. There are numerous possibilities.

A chartered accountant by qualification, he has over 15 years experience in audit and advisory, with focus on the auto sector. Also a Fellow of the Institute of Management Consultants of India, Mr Nagporewalla has worked with major MNCs and Indian companies in the auto sector and is a member of the global auto steering group in KPMG. Recently, his team brought out the India Automotive Study 2007, on the theme, domestic growth and global aspirations.

Excerpts from the interview:

What are the top five findings of KPMGs India Automotive Study 2007?

One, cost advantage will erode if infrastructure fails to deliver. Two, rising labour costs can be counteracted with increased pace of automation. Three, Government support is critical for alternative fuels. Four, Indian manufacturers face a steep brand building challenge. And five, component industry needs consolidation to facilitate achievement of global scales.

You have stated that the challenge is no longer to create opportunities but to manage the same. How can automotive exporters, especially the small and medium players, weather a weakening dollar?

This is no doubt a challenge, and will result in some degree of consolidation. However, to sustain the Indian cost advantage players need to look at streamlining their processes, eliminating all forms of waste and developing a high degree of efficiency in manufacturing process. This will enable the Indian players to remain competitive. Once this is done, the journey would be to improve quality, acquire technology, improve R&D and innovation and move up the value chain. There are now multiple options of funding available as compared to a few years ago.

Labour cost remains a small component in the total cost of automotive manufacturing and so the cost arbitrage is expected to eventually vanish. What then will be the key driver to propel the industry in the future?

The labour cost advantage that India enjoys will not vanish in the medium term. As the economy develops and based on the demand-supply situation of skilled labour the advantage can waver. We also see leading players now investing heavily in design capabilities, and working closely with OEMs and designing modules, which should reduce total costs. Drivers such as automation, efficiencies, adequate R&D, etc., will help the industry move up the value chain which in turn brings in sustenance within the industry. We see this happening currently but at a slow pace.

Do FTAs weigh down on the indigenous industry? Again, with a falling dollar, should we be thinking of reversing import substitution drives?

Not necessarily. I believe the dollar exchange correction is here to stay and one should accept it as a compliment to the overall growth and strength of the Indian economic environment. Competitiveness of the industry has to be viewed holistically within the environment. That would mean aspects such as foreign exchange, innovation, products, etc., play a big role. An import substitution drive is akin to a crutch given the circumstances. Companies need to evaluate their sourcing options on a global basis, based on what makes economic sense, while also taking into account indirect costs of sourcing from different geographies.

Are Indian automotive manufacturers paying enough attention to R&D and IP creation? What cutting-edge research is now on?

Indian players have begun to feel the need for R&D and IP creation as a requisite to operating effectively in the global arena. So far a lot of off-shoring of R&D and engineering and design has already been conducted by MNCs in India. In the short run, we expect Indian players to source R&D services on a contract basis, though there is a move towards developing internal capabilities with some of the large players.

On the alternative fuels front, what is the level of preparedness of the Indian automotive industry to meet the needs and aspirations of a greener world?

Judging by the plans and standards announced by the EU, etc., India still has a distance to cover. To successfully meet those objectives on a pan-India basis, one needs the infrastructure (especially in rural areas) to support the roll out of initiatives. The entire supply chain of fuels as well as incentivisation would need to be looked at densely so we create a platform to ramp up the adoption of the same. While there are some pockets where progress has been made, including commercial launches of electric two-wheelers and four wheelers, Indian auto still has a long way to go before it comes out with a commercially viable mass-market alternate-fuel-based vehicle.

With automobiles competing for public spaces in fast-growing urban centres, do you foresee changes in policies, be they about taxes or managing congestion?

Decongestion measures such as taxes are well known in the western world. I would not rule out the possibility of this happening in the select cities in India. However, for these to work effectively, the measures need to be supplemented with significant urban infrastructure projects as well as mass urban transportation projects.

To what extent does the growth of the automotive sector take a hit from rising fuel prices and loan interest rates?

Growth is usually spurred by a beneficial interest rate. We have witnessed the negative impact of this in the recent past when interest rates increased consecutively. This did have an impact on the growth, especially on the commercial vehicle and two-wheeler segments, which is dependent largely on availability of funds. Fuel prices also have an impact but not as much as the other economic ones.

Does the industry face a dilemma between greater sophistication through automation and labour-intensive methods? Also, on the problem of attrition, and land procurement in special zones.

I believe that it is clear to the industry that the pace of automation will determine the pace of sophistication, which in turn will propel competitiveness. To reach the accepted level of standards in product quality, manufacturers do not have a choice other than to automate. It is the pace of automation that has the potential to counteract rising labour costs. In fact the further you move up the chain i.e., from automation to designing and to R&D the more sustainable and profitable will be the operation.

Are automotive component manufacturers perennially put to cost squeeze by their buyers?

One of the attributes of this industry is that OEMs have a crunch on their margins with overcapacities, rising costs and increased competition. They tend to pressure the suppliers. The key is to move up the chain into value added services/products, which ultimately turns into a win-win situation for both.


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