Vendors struggle to cope with industry scale-up

Vendors struggle to cope with industry scale-up
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First Published: Fri, Jul 20 2007. 12 11 AM IST
Updated: Fri, Jul 20 2007. 12 11 AM IST
Indian auto makers say some of the smaller component vendors are having trouble maintaining quality as they struggle to cope with rapid growth in the sector. This is forcing them to spend more time and resources trying to improve the quality of supplies. Some companies such as Hyundai Motor India Ltd and MAN Nutzfahrzeuge AG are even scouting for alternative sources.
The $10 billion Indian auto component industry has around 450 autoparts makers and 70%, or more than 300 vendors, are classified as small and medium enterprises. These are typically part makers who supply smaller parts to tier I vendors—those who directly supply to the auto manufacturers.
“Some tier I suppliers maintain standards with the best of the best,” says Arvind Mathew, president and managing director of Ford India Pvt. Ltd. “Where you’ve got to be careful is with the tier IIs and tier IIIs supplying to the tier I.”
An 8%-plus economic expansion over the past three years that put more money in people’s hands and easy credit has driven demand in Asia’s fourth largest automobile market for several years. Passenger vehicle production has more than doubled from 650,000 units in 2001-02 to nearly 1.4 million units in 2006-07. With new entrants such as Nissan Motor Co. and Volkswagen AG planning to spend Rs60,000 crore on building factories, passenger vehicle production capacity is expected to double to three million units in the next three years.
Auto makers try to source as many components as possible locally since these are less expensive and it enables them to price their vehicles cheaper. Components sourced from overseas attract a duty of 12.5%, unless they are exempt under trade agreements.
“Overall, India includes many excellent suppliers; however it still needs to develop the capabilities of its entire supply base, especially lower-tier suppliers, to be globally competitive,” says a recent study on the Indian automotive industry released by International Business Machines Corp. (IBM) and the University of Michigan.
India’s parts makers exported $2.2 billion (Rs8,888 crore) worth of auto parts in 2005-06 compared with $630 million in 2001-02.
While the auto industry as a whole says there are no problems with the big names among the suppliers, smaller vendors—traditionally family-owned companies—are facing teething troubles while scaling up. Even tier I auto parts makers admit there is a problem but attribute it to the fast pace of growth and say it is a manageable problem if they concentrate on basic things such as process management.
“There’s a bit of a stretch,” says A.K. Taneja, managing director of Shriram Pistons & Rings Ltd. “As companies become multi-locational, it becomes difficult to recruit people, train them. But it’s a new learning that’s happening and people are addressing it.
Firms such as Shriram Pistons and Sona Koyo Steering Systems Ltd say they are devoting more resources to address the problem by concentrating on process management with their suppliers. “We have formed total productive maintenance teams which help our suppliers to address quality issues,” says Surinder Kapur, chairman and managing director of Sona Koyo, which supplies steering systems to many car makers. The company is one of the nine Indian companies that has won the Deming Prize for quality. The award is named after W. Edward Deming, an American professor who helped fashion production techniques in the US and later introduced processes for exacting quality in Japan.
“At the end of the day, the test of the pudding is in the eating. I don’t think the quality of cars on the roads is bad,” says Kapur.
“Making parts is one thing, but making parts as described in the blueprint without tolerance is almost an art,” says Tomotaka Ishikawa, managing director of Yamaha Motor India Pvt. Ltd. “We have around 40 Japanese (experts) visiting our suppliers for almost half a year now” to teach them about quality.
However, an auto parts industry body official, who didn’t wish to be named because the issue is too sensitive, blames the “extreme pricing pressure” on part of auto makers for the reason in the dip in quality. “We can make 50% more money on shipping 500 pieces (of auto parts) abroad than supplying 5,000 parts to the same company in India.”
Trouble is, soon enough it might become affordable for Indian auto makers to import their parts from Thailand. India has a free trade agreement with Thailand and certain components such as engine parts won’t be slapped with import duty. With Thailand able to make some parts cheaper than India, auto makers may look to source more from Thailand.
Still, there are some car makers such as Honda Siel Cars India Ltd, which sells its cars on the quality promise, who say they are not facing problems. “It depends on the lead time you give to suppliers and how closely you work with them,” says Rajesh Goel, head of quality control.
He claims that the rejection rate of parts coming into the Honda factory in India is 24 parts per million, which compares with US levels, even if it’s less than their Japanese plant levels of 13 parts per million.
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First Published: Fri, Jul 20 2007. 12 11 AM IST