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Industrial Clusters in India (Auto Sector)

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A presentation on automobile industrial clusters in India made during my 2nd year at B-school

A presentation on automobile industrial clusters in India made during my 2nd year at B-school

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  • Excellent presentation. Could you put up some thing with focus on the scientific instruments?
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  • 1. Group 3 07927816 07927827 07927863 SJMSOM, IIT Bombay APPLIED INDUSTRIAL ORGANISATION | 12th Nov, 2008
  • 2. Theory of Industrial Clusters  Defining Industrial Clusters  Classification of Clusters  Benefits of Cluster Formation  Significance of Clusters for SMEs  The Flowchart Model of Cluster Policy
  • 3. Defining Industrial Clusters Geographically proximate group of companies and associated institutions in a particular field Was introduced Linked by and popularized commonalities and by Michael Porter CLUSTER complementarities Also known as a business cluster, competitive cluster, or Porterian cluster
  • 4. Identifying a Cluster Sectoral A cluster of Geographical businesses operating Geographically together within the proximate group of same commercial companies sector Horizontal Vertical Interconnections Typically a supply between businesses chain cluster sharing resources
  • 5. Types of Clusters Techno - Clusters • High Technology Oriented • Well – adapted to the Knowledge Economy • Comprise of renowned institutions and research centers • Silicon Valley Historic Knowhow-based clusters • Maintain advantage of knowhow garnered over several years • London as a financial centre Factor Endowment clusters • Creation linked to comparative advantage derived due to geographic location • Wine production clusters in France
  • 6. Benefits of Cluster Formation Agglomeration Effects More focused direction Increased productivity and faster innovation cycles Agglomeration Effects involve those benefits that firms obtain when locating near to each other
  • 7. Cluster Benefits Increased Productivity Improved access to labor and suppliers • Existing pool of specialized and skilled labor • Reduces recruiting costs • Provides a deep and specialized supplier base Improved access to specialized information • Preferred access to extensive market, technical, and competitive information Access to institutions and public goods • Investments made by government or other public organizations Easier to measure performance • Competitors share general circumstances
  • 8. Cluster Benefits Faster Innovation Innovation visibility through proximity • Outcome of ongoing relationships • Allows manufacturers to learn early on about changing customer needs and service concepts Enhanced flexibility • Provide the capacity and flexibility to react rapidly to a customer request Lower experimentation costs • Companies delay large commitments until they are more assured that a particular innovation will be fruitful
  • 9. Cluster Policy Kuchiki (2005) Effect of Toyota on the Industrial Flowchart Model for Cluster Policy Policy of Guangzhou, China
  • 10. Industrial Clusters in India  Pharma Cluster - Ahmedabad  IT Cluster - Bangalore
  • 11. Evolution – Gujarat Pharma Cluster • Alembic Chemical Works, started in 1907 Early Starter • 6 years after the first pharma firm in India • Chemical, Pharma machinery, IT Strong Relation • Support from academic field High-growth • CRAMS, R&D, Generics, NCE Segments • Capitalized early-on into these areas Increasing • 10% of India’s pharma output in 2002-03 Contribution • Increased to 42% of India’s output in 2005-06 • Established pharma ecosystem with good infra SEZ Driven • Zydus , Cadila Pharma, Jubilant, JB Chemicals
  • 12. Pharma Cluster - Ahmedabad Size & Growth of Pharma Industry Size & Growth of Pharma Exports Gujarat vs India Gujarat vs India 12 6 10.6 5.2 10 5 8 CAGR 87% 4 6.4 6 4.4 3 2.5 CAGR 78% 4 2 1.1 2 0.7 1 0.2 0 0 India Gujarat India Gujarat 2002-03 2005-06 2002-03 2005-06  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%
  • 13. Factors favouring Cluster formation Raw Materials Support Institutions  Strong linkages between • Bulk Drugs • Excipients • B.V. Patel Center small & medium players • Capsules • FDC Laboratory • Glass Vials • LM Pharma  Proper ecosystem for College growth  Benign regulatory Financial Industrial Institutions Associations environment • SIDBI • IDMA-GSB  75-100 bulk producers • ICICI • MDMA • GSFC • ADMA  1000+ formulation units
  • 14. Evolution – Bangalore IT Cluster • Educational Industry linkages Linkages • Favourable research climate, “R&D hub “of India • Defense PSUs, Electronics Industry – natural extension Related Industries • BEL, HAL, HMT, BHEL, ITI Favourable • Exit of foreign firms left space of local firms Environment • Trade Protection and Import Liberalization • Currently houses over 1500 IT firms Silicon Valley • Infosys, Wipro HQ and Motorola, hp, Texas Instruments • Firms started with Application Devl and Maintenance Service Offerings • Moving up value chain to provide Integrated packages
  • 15. IT Cluster – Factors and Benefits Factors favouring formation Perceived benefits  Policy initiatives of govt.  Proximity Benefits with (both central and local) R&D intensive firms  Availability of large number  Innovation Systems of skilled workers  Y2K problem – a fortuitous  Knowledge flows & event for India Capability building  Role of the Indian Diaspora  Intra firm linkages Karnataka accounts for 37.6% of total software exports from India and Bangalore accounts for 97% of it.
  • 16. Benefits of Cluster vs. Non-cluster firms 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 Key Observations 180 60 160 50  Access to labour, R&D, processes 140  Access to information from 120 40 100 competitors 30 80  Non-cluster firms seek better infra 60 20  Linkages nurture smaller firms 40 10 20  Higher employee productivity 0 0 Bangalore Pune/NCR Non-cluster firms No of employees Employee Productivity
  • 17. Automobile Clusters in India  Evolution of Indian Automobile Sector  Study of two major Automobile Clusters in India  Analysis of Behavior & Performance of Cluster vs. Non – Cluster Firms
  • 18. Evolution of Automobile Sector Timeline Autocomponents Passenger Cars Protected, Licensed, Closed market Pre 1985 High import Tariff Quantitative restriction 1985-1995 JV with OEM Entry of Maruti Localization of 1995-2000 Entry of Global Players products Indigenisation, 2000 onwards Export focus 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
  • 19. Performance of Automobile Sector  India’s position Passenger Vehicles (Mn Units)  2nd in two wheelers 2007  11th in passenger cars 2006  13th in commercial vehicles 2005 2004 2003 CAGR 15.4%  Growth Targets: 2016 2002  Automotive Industry 0 200 400 600 800 1000 1200 1400  Total market $122 - $139 bn Autocomponents Turnover ($ bn)  Domestic market $82 bn  Exports ~ $35 bn 2007  Autocomponent Industry 2006  Total market $40 – 45 bn 2005 CAGR  Domestic market 2004 28.9 %  Exports ~ $25 bn 2003  HHI = 527; CR4 = 34% 0 2 4 6 8 10 12 14 16
  • 20. Study of two major Indian Auto Clusters References: Industrial Clusters in India: Evidence from Automobile Clusters in Chennai and the National Capital Region Aya Okada and N.S. Siddharthan April 2007
  • 21. Chennai Auto Cluster [Chennai, Bangalore, Hosur] Overview Evolution  Leading Auto Cluster  1950s: Initial Formation  21% of passenger cars  TVS & Std. Motors among first players  33% of commercial vehicles  Heavy dependence on imports  35% of auto-components  Active government support  >100 large & medium cos.  Genesis of large no. of auto component firms laid early  Capabilities  Valve assemblies  1960 – 1990: Capacity Building 50%  Fuel / Oil / Water Pumps  Large no. of technical schools setup  Motors & Engines  Mid-day meal program for schools Steering gear & Wheel Rims  Airports & Seaports 40%   Tires & shock absorbers  Financial incentives by state like 10% technology subsidies and trade fairs  Bearings & Radiators  State agencies setup to facilitate FDI *% indicates Tamil Nadu’s share in overall manufacturing output
  • 22. Chennai Auto Cluster Overview Evolution  Leading Auto Cluster  1990s: Delicensing of Industry  21% of passenger cars  Hyundai, Mitsubishi & Ford set shop  33% of commercial vehicles  Attracted by capabilities of auto  35% of auto-components component manufacturing firms and government support  >100 large & medium cos.  Rise of local firms with IT capabilities  Capabilities  Impact of smaller firms  Valve assemblies  Proliferation of industrial estates 50%  Fuel / Oil / Water Pumps providing cheap technical services  Motors & Engines  Guindy Industrial Estate in Chennai is 40%  Steering gear & Wheel Rims the largest and a typical example  Tires & shock absorbers  Presently, in globalization mode 10%  Bearings & Radiators fuelled by IT and increase in *% indicates Tamil Nadu’s share in overall manufacturing output outsourcing
  • 23. TVS Group TVS Group Major Players in the Chennai Auto Cluster Wheels Sundaram India Dynacast Turbo Lucas TVS Energy Nippon Brakes India Electricals Sundaram TVS Cherry Clayton Sundaram TVS Motors Fasteners
  • 24. Ashok Rane Group Leyland (AL) Major Players in the Chennai Auto Cluster Rane Engine Valves Rane Brake Linings Global Players Hyundai, Ford, Mitsubishi Rane Madras 100% subsidiary setup in ’98 14 Korean Tier-1 suppliers Capacity ramp-up to 4L p.a. Rane NSK Steering 75% local content Systems Technology licensing (US firms) Hub of global parts’ sourcing Rane TRW 30% local content Steering Focus on premium segment Systems JV with Hindustan Motors
  • 25. Ashok Rane Group Leyland (AL) Major Players in the Chennai Auto Cluster Rane Engine Valves Except Ashok Leyland, the lead firms Rane Brake in the Chennai auto cluster are component manufacturers which Linings paved the way for the entry of foreign players like Ford & Hyundai in the nineties into the cluster Global Players Rane Hyundai, Ford, Mitsubishi Madras This behavior is atypical of most auto cluster formations across the world Rane NSK Steering Systems Rane TRW Steering Systems
  • 26. Chennai Auto Cluster: Growth Drivers Government Infrastructure Established business houses Smaller Firms Highly skilled workforce IT Emergence Global players
  • 27. NCR Auto Cluster [Delhi, Gurgaon, Faridabad] Overview Need for Vendor Development  Cluster Zone  GOI’s Phased Manufacturing Plan  Haryana, Delhi & some UP districts  Foreign firms to promote localization  Major Players  Suzuki’s MOU: 70% localization by ’87  Maruti Udyog Ltd. (MUL)  Government support to SSI  Started in 1982 as GOI + Suzuki JV  Dependence on outsourcing  First greenfield plant in Gurgaon  80% components outsourced  Two more plants in Gurgaon & Noida  Local supplier quality levels very low  Largest car manufacturer in India  Daewoo Motors India Ltd.  Introduction of JIT + Taxes  Ceased operation after few years  Supplier close to plant was imperative  Insignificant contribution to cluster  Octroi significantly reduced margins  Honda Siel Cars Ltd.  Yen Appreciation in ‘80s  Recently established (2000)  Low production volume  High custom duty on CKD units
  • 28. MUL’s Role in Vendor Development MUL Suppliers: MUL Geographical Distribution Vendor Development 160 Supplier MUL’s Role MUL’s major 140 suppliers are Bharat Seats 15% equity stake located in NCR JV with Howa, Japan 120 100 Macino Plastics 15% equity stake No. of Firms 80 Subros 15% equity stake Technology from Denso 60 Asahi Safety Glass 15% equity stake 40 Sona Steering 15% equity stake 20 Technology from Koyo 0 Mark Auto Industry 24% equity stake Jay Bharat 31% equity stake Large Firms Medium Firms Small Firms Motherson Sumi Aided in collaboration
  • 29. Analysis of behavior & performance of cluster versus non – cluster firms (Automobile sector) Methodology Results & Conclusions
  • 30. 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
  • 31. Overall Performance Comparison RONW = PAT/SALES x SALES/TOTAL ASSETS x TOTAL ASSETS/NET WORTH Cluster firms are clearly ahead of 180 non – cluster firms with regards 160 to total performance 140 120 RONW is a comprehensive 100 RONW measure of performance as it 80 accounts for profit margin, asset 60 turnover and 40 leverage capacity 20 0 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
  • 32. Comparison of Advertisement Intensity 1.4% Advertisement as a % of Sales is higher for non- 1.2% cluster firms. 1.0% Advertisement/Sales% Cluster firms benefit from the agglomeration 0.8% effect 0.6% This demands lesser expenditure on advertisement 0.4% for a comparable level of sales 0.2% 0.0% 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%
  • 33. Comparison of Inventory Efficiency 16 Inventory Turnover is 14 higher for cluster firms compared to non – cluster 12 Inventory Turnover (days) firms. 10 This indicates that cluster firms 8 maintain higher inventory 6 efficiencies (possibly due to 4 location proximity) 2 0 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
  • 34. Comparison of Employee Productivity Counter 25 intuitively, the employee productivity for non – cluster 20 Avg. Employee Productivity firms is greater as compared to cluster firms 15 One reason for this could be due to employees in 10 cluster zones being paid higher wages and the inherent use of 5 wages (rather than no. of employees) to measure 0 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
  • 35. References 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
  • 36. Thank You Your queries are welcome