Indian cars have come a long way from being the rattling boxes that ran on our roads till about two decades ago. Yet, there is the odd bump still. Some car manufacturers, for instance are worried that components for their products are not up to the mark.
The problem, as Mint has reported in three articles this month, is that auto component suppliers are finding it difficult to keep pace with the torrid growth in auto sales. The number of cars that rolled off local production lines in 2006-07 was 1.4 million, more than twice the production figure five years ago. The components industry has had to keep pace.
But there are now concerns on the capability of suppliers to maintain growth without sacrificing product quality. This is especially true of the tier-2 and tier-3 suppliers, who feed the tier-1 suppliers that auto manufacturers directly buy from. Some companies such as Hyundai Motor India Ltd and MAN Nutzfahrzeuge may reportedly look outside the country for key supplies.
The current difficulties with component quality in the auto sector are a symptom of a larger challenge before Indian industry—maintaining a good supply chain in times of rapid growth. It is well known that local and global manufacturing giants are growing rapidly in India as a result of the economic boom. But their continued success depends on the ability of their suppliers to feed them with key inputs—on time, at the right price, and with the requisite quality.
As far back as 2001, John Sutton of The London School of Economics and Political Science wrote in a research paper: “The main challenge now facing the (Indian and Chinese automobile) industries lies in the extension of international best practice to second- and third- tier component suppliers.”
This has larger implications for the economy and its competitiveness. The traditional production system has splintered the world over and given way to an intricate web of supply chains. Companies such as Dell Inc. have built an entirely new business model by using a global network of suppliers. Industrial growth in many sectors today depends on how well local firms integrate into global supply chains. The current problems in the local automobile industry show that many suppliers are incapable of delivering quality to companies in the same country, let alone those in other parts of the world. This is worrisome.
India’s own auto components sector took off in the 1990s, with the arrival of many global companies. These companies developed a local supply chain, partly by bringing in their own global suppliers and partly by nurturing local component manufacturers. The Koreans have been particularly successful in creating such an ecosystem, which is one reason why they succeeded when so many others skidded into trouble. The development of auto supply chains helped transfer technology and management practices to local firms.
A similar process works in many other industries as well. Such linkages to global supply chains help local industry become more productive. A lot has been written on how the national highways programme and the introduction of a national goods and services tax will help companies manage suppliers and inventories more efficiently. But, equally important is the ability of suppliers, especially those with small and medium scale, to manage growth.
Of course, the fault does not lie with the component makers alone. They complain that the automobile companies are squeezing them on prices. This ensures that suppliers do not have the incentive to invest in technology and growth. India is not unique in this matter.
Something similar has happened globally, as a result of which some of the world’s largest auto component companies are gasping for air.
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