1. Chennai as an
Automotive
Cluster
Strategies for helping Tamil
Nadu put India first
CUNEYT OGE AND BISWAJIT DAS
© 2007 PRTM 1
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Executive Summary
T
oday’s global automotive industry
operates in the “flat world,” a play-
ing field that is intensely competitive.
Over the years, the governments of numer-
ous host countries have offered financial
and other incentives to attract foreign man-
ufacturers to set up operations. Global
automotive companies now have a range of
opportunities to choose from in their search
for an ideal production hub—one that offers
skilled labour, a low-cost manufacturing
base, a technology base, sound infrastruc-
ture, and government support.
Chennai is beginning to be recognized as a
preferred location for automotive companies.
To attract more international business, it must
strengthen its competitive position by creating
an automotive cluster that is competitive and
sustainable in the long run. This will provide
Chennai and its residents with significant eco-
nomic benefits, including new jobs, higher
GDP, and expanded exports. It will also pro-
mote technology development, as local plants
increasingly utilize world-class technologies.
To make this happen, Chennai must earn
a reputation in the international market
for providing efficient automotive produc-
tion capabilities that are more cost
competitive. It will also have to conform
to the new environmental realities, where
the public and the governments alike are
increasingly aware of the climate-change
effects. The various stakeholders in
Chennai’s automotive future—government,
academia, automotive companies, and the
public—need to collaborate to develop and
implement common solutions to foster the
industry and benefit the public.
The Tamil Nadu Government has a crucial
role to play in turning this vision into reali-
ty. Its primary responsibility is to formulate
effective policies to develop three key areas:
The infrastructure
The green value chain
The industry value chains
The Changing Industry Dynamics and the
Rise of Hyper-Competition
The growth of the modern automotive
industry has been anything but linear. In
the early 20th century, Henry Ford’s inven-
tions made Detroit the first centre of
automobile mass production, and Europe
followed soon afterwards. In the second
half of the 20th century, the automotive
industry started moving production to other
parts of the world—a trend that accelerated
significantly in the past few decades. Today,
almost all countries have some auto man-
ufacturing, and many have begun to
significantly expand it as a result of the
global opening of markets following the
General Agreement of Trade and Tariff
(GATT) and World Trade Organization
(WTO) initiatives.
Bythemid-1980s,manycountriesdeveloped
creative strategies to grow their domestic auto-
motive production. Some followed an
export-focusedpolicy.Thesecountriesprovided
incentives to foreign companies looking to

2. © 2007 PRTM 2
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expand their global manufacturing footprint.
Brazil,forexample,developeditsautoindustry
byprovidinganincentivesystem(BEFIX)linked
to local market access. Mexico developed its
MaquilaDorapolicythatleveragedthecountry’s
advantages, including low labour costs and its
proximitytotheUnitedStates.TheHungarian
Government introduced exemption from taxa-
tion, which boosted its automotive output by
morethan140percent.Korealeverageditswell-
developed heavy industry (steel, ship building)
andlinkstoJapanesetechnologyandbecamea
vehicle export hub.
The developments have resulted in the auto-
motive industry today operating in the
environment of global hyper-competition
(Figure 1). While in the past, globalization pri-
marily affected manufacturing centers in North
America and Europe, it has now extended
worldwide and across all business processes,
including product development. To succeed
in the new environment, companies are creat-
ing new operational business models that
heavily leverage the opportunities provided by
globalization. Asia, especially China and India,
play a particularly important role. These two
mega nations not only provide attractive mar-
kets to global automotive companies but also
offer a growing number of talented engineers.
In the future, China and India will become
the leading innovators in the automotive world.
According to an HSBC report, by the year
2010, the Asian region will be manufac-
turing nearly 32 million vehicles—as many
cars as Europe and North America com-
bined (Figure 2). China, Japan, India, and
Korea will account for almost 85% of Asia
Pacific production.
Figure 1: Drivers of Today’s Hyper-Competition
Open
Markets
Japanese
Exports
Technology
Environmental
Regulations
Asian
Prosperity
Engineering Talent/
Innovation
1769 1970s 2000s1990s1980s
Figure 2: Vehicle Production by Region, 2000-2010
18
Source: FOURIN, Automotive Yearbook 2004; HSBC
26.4
China 11.5
Japan 9.7
India 2.8
Korea 2.4
Production(millionvehicles)
17
18
17
19
24
31
18
17
10
15
20
25
30
35
2000 2005 2010
NA W. Eur A/P

3. © 2007 PRTM 3
Factors fostering this change include:
Low car-ownership rates in China and
India, with 6–8 % annual GDP growth
and rising incomes
Market-based economies with dimin-
ishing government controls and tariffs
Low-cost, highly skilled workforce in Asia
Global OEM’s outsourcing to Asia for
cost reductions of 25–40%
India Poised for Growth
The Indian automotive industry is one
of the major contributors to the growth of
the national economy. While the industry
started in the early 1940s, it did not grow
rapidly until the 1990s (Figure 3). Currently,
India is the world’s largest producer of trac-
tors and three-wheel vehicles, the second
largest producer of two-wheel vehicles, and
the 11th largest producer of passenger cars.
The automotive industry currently repre-
sents approximately five percent of India’s
GDP, which is still lower than the eight to 10
percent of other countries (e.g., China, Japan,
and the U.S.). However, the industry growth
in India is expected to accelerate in the next
few years. By 2016, its output in terms of
dollars is expected to quadruple (Figure 4a).
According to the Automotive Mission fore-
cast, the industry will create 25 million new
jobs in the next 10 years (Figure 4b).
India offers two major advantages to for-
eign automakers. First, it provides a large
and fast-growing market due to its expand-
ing middle class, which is now eager and
able to buy cars. Second, India provides a
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Figure 3: The Indian Auto Industry
Automotive industry emerges
Creation of manufacturing industry to support
auto sector
Emergence of Indian auto players
Maruti Udyog enters the car segment
1991
1940
1953
1970
1980
1985
1995
2000
2008
Foreign players enter Indian market
Cars produced for domestic and international market
Tata people’s car
Closed market
High-import tariffs
Outdated models
Growth limited by supply
Joint ventures with Japanese
companies
Car is still seen as a luxury
Advanced technology is
introduced
Auto financing available
Environmental issues are
considered
Liberalization
Figure 4a: Automotive Sector Contribution to
India’s GDP, 2006 and 2016
Total GDP: US$650B
Total GDP: US$1,390B
2006 2016
Source: Automotive Mission Plan
5% 10%
Figure 4b: New Automotive Jobs in India
by 2016
10%
28%
62%
Unskilled Workers
Management/General
Skilled Workers
Source: Automotive Mission Plan

4. © 2007 PRTM 4
low-cost manufacturing base with access
to skilled labour. In addition, the govern-
ment provides investment incentives by
allowing 100% foreign direct investment
(FDI) in the auto sector. As a result, a num-
ber of multinational companies have already
set up their production base in India.
Strategic Implications of the Hyper-
Competition
It is useful to place the key Asian
automakers in a framework that depicts
their basis of differentiation. As shown in
Figure 5, Japanese companies aim to pre-
serve their image leadership position, which
is based on technology and quality.
The Koreans are up-and-coming “value
leaders,” attempting to compete with the
Japanese by offering better price-value ratios.
The Chinese “scale leaders” appear midway
between Korea and Japan. They are not only
adding capacity but are working to engineer
their own brands and aiming to undercut the
Koreans with even less-expensive luxury vehi-
cles. India, which is focusing on economies of
scale, has staked a position to become the
global compact car manufacturing centre—a
fiercely competitive area that requires care-
ful examination of strategic options.
India Has Options
India has become a leader in producing
low-cost economy passenger cars, and many
companies are zeroing in on this opportu-
nity. Considering the current trends, the
country could emerge as the most compet-
itive “basic transportation” leader. To attain
this status, India may pursue at least four
different strategic options (Figure 6). It
could become the world’s least-cost compact
car manufacturer, or it could build a brand
for the most advanced compact cars. It
could think about competing with China for
the compact car leadership position, or it
could aspire to become a least-cost produc-
er of luxury cars for the global market.
Tamil Nadu Can Lead Automotive Growth
Tamil Nadu is already an important auto-
motive hub that contributes a significant share
of India’s automotive output (Figure 7).
The state is well poised to spearhead
India’s continuing progress. The govern-
ment of Tamil Nadu has been a strong
supporter of its auto sector. In 1996, Hyundai
Motor Company and Ford Motor Company
set up manufacturing locations in India,
and the Indian government offered them
support by providing the right political cli-
mate, infrastructure, and policies. Academia,
too, has been supportive by providing tech-
nical education and research. The success of
Chennai in the automotive space has earned
it the nickname “Detroit’s next big threat.” In
seven to eight years, the automotive sector in
Tamil Nadu is expected to grow into a
US$15–20 billion business, with 500,000
additional new jobs. Figure 8 provides a
forecast of the automotive sector’s output
in India and in Tamil Nadu by the year 2015.
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Figure 5: The Competitive Positioning of Key Players in the Asian Automotive Industry
BasisofCompetition
Product Segments
“Technology and
Image Leadership”
“Value Leadership”
“Scale Leadership”
“Basic
Transportation
Leadership”Cost
Technical
Performance
Image
ValueEconomy Luxury
India
China
Korea
Japan

5. © 2007 PRTM 5
A SWOT analysis of Tamil Nadu’s
strengths, weaknesses, risks, and oppor-
tunities shows that its advantages in
technology, skilled and educated workforce,
and investor-friendly government can cer-
tainly help to overcome the issues it faces
(Figure 9). But given the competition, the
state has to act quickly.
The Advantages of an Automotive Cluster
Michael Porter defined economic cluster as
a critical mass of activity that concentrates in
one place an unusual competitive success
in a particular field (Porter, “Clusters and
the New Economics of Competition, Harvard
Business Review, 1998). A formation of an
automotive cluster in Chennai can provide
several benefits. It would create a consider-
able skilled labour force, and would
encourage auto suppliers to form a base in
or near the cluster. With the availability of a
port facility in Chennai, companies would be
able to export their vehicles. Most impor-
tantly, with a number of key automobile
stakeholders present, an automotive cluster
in Chennai would receive strong govern-
ment support. The cluster will contribute
to overall growth of the industry in three
major ways: by increasing the productivity of
companies based in the area, by driving the
direction and pace of innovation, and by
stimulating the formation of new business.
The Environmental Footprint
To ensure its strategy is sustainable in
the long term, the Tamil Nadu Government
must take into account the impact automo-
tive growth will have on the environment.
No less important, better energy efficiency
in the state will lead to better energy securi-
ty. Therefore, the government needs to select
development that would encourage inno-
vation and at the same time care for the
environment. Figure 10 depicts a three-
legged stool of transportation air-quality
management—the policies related to fuels,
propulsion, and vehicle miles traveled. Each
leg is interconnected.
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Figure 6: Strategies Available to the Indian Automotive Sector
BasisofCompetition
Product Segments
“Technology and
Image Leadership”
“Value Leadership”
“Scale Leadership”
“Basic
Transportation
Leadership”Cost
Technical
Performance
Image
ValueEconomy Luxury
India
China
Korea
JapanThe
World’s Most
Advanced
Compact
Cars?
Competitive
with Asia in
the “Value”
Segments?
The
Most Cost-
Competitive
Luxury
Compacts?
The
World’s
Lowest-Cost
Compact
Cars?
Figure 7: Tamil Nadu’s Share in India’s
Automotive Production
Source: IMaCs estimates
30%
17%20%
20%
Automotive Components
Trucks
Passenger Cars
Two Wheelers

6. © 2007 PRTM 6
The “Three Ps” Framework for
Automotive Development in Chennai
The government must balance the dif-
ferent needs of environment, public
infrastructure, and industry (Figure 11).
This framework calls for policy develop-
ment to foster progress along the three
axes: people, planet, and profit.
PPeeooppllee:: BBuuiillddiinngg tthhee IInnffrraassttrruuccttuurree..
New highways, expanded ports, indus-
trial parks with world-class utilities,
and, ultimately, the infotronics-enabled
transportation management systems.
PPllaanneett:: BBuuiillddiinngg tthhee GGrreeeenn VVaalluuee
CChhaaiinn.. Alternative/low-carbon fuels,
advanced materials and battery tech-
nology, hybrid technologies, etc.
PPrrooffiitt:: BBuuiillddiinngg tthhee IInndduussttrryy VVaalluuee
CChhaaiinnss.. Leverage the auto industry
build out into adjacent sectors, from
aircraft to pharmaceuticals and other
downstream areas.
PPeeooppllee:: BBuuiillddiinngg tthhee IInnffrraassttrruuccttuurree
The development of the public infrastruc-
ture value chain entails expansion of
highways, seaports, airports, industrial parks,
and trade zones. Infrastructure poses the
most visible challenge for Chennai devel-
opment today. Although compared with
other states in India, Tamil Nadu is relative-
ly advanced, it still lags other countries like
China. For example, it is estimated that the
vehicle density (number of vehicles per kilo-
metre of road) in Tamil Nadu is 42,
compared with seven in China. The nation-
al highways in Tamil Nadu constitute roughly
two percent of the total roads (Figure 12). If
the vehicle density remains the same, the
state will require considerable additional
road capacity by 2015 (Figure 13).
Chennai has a geographic advantage
because of its ports. But the ports in Tamil
Nadu are in need of improvement (han-
dling large cargos, traffic movement,
computerization). Encouraging the develop-
ment of minor ports has the potential to
bring additional revenue and generate addi-
tional employment.
The railway system in Tamil Nadu also
needs considerable investment in order to
meet global standards. In the past, delays in
the execution of projects have hampered
rail development. These delays must be
avoided if there is to be adequate capacity in
the future. Hyundai Motor in India has
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Source: CII Report
$7
$11 $1
$1
Component Exports
Component and CBUs—Indian Market
CBU-Exports
Engg Services
Figure 8: Tamil Nadu Automotive Output
by 2015 (US$ Billion)
Threats
Competition from other states in India
Rising costs in Chennai
Global warming due to automobile
pollution
Opportunities
Manufacturing and technology
leadership
Job creation
Public-private collaboration
“Made in India (Tamil Nadu)” label
Road safety and security
Weaknesses
Road safety
Traffic congestion
Infrstructure
Environment sustainability
Strengths
Superior IT services
Strong commercial and industrial base
Excellent academic centres
Investor-friendly and proactive
government
Good infrastructure (compared to other
states in India)
Skilled and educated manpower
Figure 9: Chennai SWOT Analysis

7. © 2007 PRTM 7
recently requested a dedicated rail link from
its Chennai production plant to the Chennai
port. More such requests from various auto
players are likely in the future. The gov-
ernment therefore has to eliminate existing
bottlenecks and provide seamless trans-
port by road, rail, or sea.
China provides valuable lessons in infra-
structure development. The Chinese
government built highway capacity before the
manufacturing capacity, a move that has pro-
vided an attractive incentive for foreign
investors. Chennai could learn from this.
PPllaanneett:: BBuuiillddiinngg tthhee GGrreeeenn VVaalluuee CChhaaiinn
The goals of developing the green value
chain are to protect the environment and
ensure energy security. As car ownership in
India expands, so does the problem of emis-
sions, which requires creative policies to
encourage automakers to design more effi-
cient engines. Academia will have to work
with the industry to produce a technologi-
cal breakthrough so that petrol can be
replaced with a cleaner fuel.
The government needs to support clean-
fuel development, which the public is likely
to demand. Honda Motors is planning to
launch a hybrid vehicle in India early next
year, and these environmentally friendly,
fuel-efficient cars are likely to become pop-
ular. The government should consider
alternative fuels as a possible option and
devise policies and regulations that encour-
age their development. These fuels have a
number of advantages, notably lower emis-
sion of harmful pollutants and reduced
greenhouse gas emissions. The use of clean
fuels reduces dependence on oil and fosters
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Figure 10: The Three Critical Areas of Transportation Air-Quality Management
Volatile Organic
Compounds (VOCs)
NOxCO2 PM
Fuels
Low benzene/
aromatics
Low carbon (ethanol,
methanol, bio-diesel)
Low sulfur
Vehicle Miles Traveled
(VMT)
Public transportation
(Bus, light-rail, metro)
Multi-modal systems (bus/rail)
Business incentives
Low/no emission
Fuel-efficient
power trains
EE/non-EE
hybrids
Propulsion
Highways
Seaports
Airports
Industrial Parks
Water/Utilities
Transportation
Infotronics
Automotive
Aircraft
Space
Defence
Chemical
Pharmaceutical
Etc.…….
Renewable Fuels
Advanced Battery Technology
Advanced Materials
Frictionless Surfaces
EE/Non-EE Hybrid Technology
Low-Carbon Economy
Low-Carbon Fuels
“Planet”
Green Value Chain
Sustainable Growth and Development
“People”
Public Infrastructure
Value Chain
“Profit”
Industry Value
Chains
Figure 11: The “Three Ps” Framework

8. © 2007 PRTM 8
energy security. From the economic point
of view, clean fuel development would pro-
vide employment as well as increase social
well being.
A preliminary analysis indicates that the
Tamil Nadu Government might consider
ethanol and biomass as key alternative fuels.
India’s ethanol industry is mature, while its
bio-diesel sector is still in its infancy. But
under the ambitious National Bio-diesel
Mission, the country expects to meet 20 per-
cent of its diesel requirements from
renewable sources by 2011–2012. Hence, the
timing is right for Tamil Nadu to build a
green component into its automotive cluster
development policy. To that end, the gov-
ernment will need to fund projects that
improve agricultural practices and provide
grants to academic institutions that do
research studies on the use of alternate fuel.
PPrrooffiitt:: BBuuiillddiinngg tthhee IInndduussttrryy VVaalluuee CChhaaiinnss
The Tamil Nadu Government has to pro-
mote manufacturing development beyond
just the automotive sector. This objective
requires integration of the value chains of the
aerospace, space, defence, chemical, pharma-
ceutical, and other industries. An optimal
manufacturing ecosystem will leverage syn-
ergies and promote overall manufacturing
growth in the state and beyond.
In addition, Chennai has excellent IT and
telecom capabilities. The automotive indus-
try can partner with these two sectors to
devise a solution that will put India on the
world map in advanced automotive infotron-
ics. The global automotive infotronics market
is projected to be $43B globally in 2012 and
Chennai could gain a significant share of
this. Infotronics will offer significant improve-
ments in public good (safety, reduced
pollution, efficient buses) and economic
value. The government will need to take the
responsibility to facilitate cooperation and
collaboration between the industries to max-
imize the economic value of these initiatives.
Evaluating Policy Scenarios
As the government formulates policies to
foster the development of the three Ps, it needs
to evaluate their total impact by considering
end-state scenarios that show how much value
would be created. Six basic evaluation criteria
can be used in analyzing the impact of govern-
ment policies (Figure 14).
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Figure 12: Indicators of Road Infrastructure in Tamil Nadu
100194,140Total
19.2637,391Others
49.095,328Village Roads
22.242,479Other District Roads
3.907,569Major District Roads
3.536,849State Highway
2.194,254National Highway
Share of Total %2005–06 (km)Type of Road
83,040
Total required road capacity—excluding
village and other roads (km)
263,632Total required road capacity (km)
Figure 13: Additional Road Capacity Required in TN by 2015 to Support Vehicle Density

9. © 2007 PRTM 9
Using these criteria, we assessed the
incremental value provided by each of the
three axes (Figure 15). Clearly, the value
increases from End-State 1 to End-State 3.
Figure 16 details the cumulative impact of
end-state scenario on the six policy evaluation
criteria. Clearly, End-State 3—which combines
the three P policies—would provide the most
benefits in terms of the number of jobs creat-
ed, GDP growth, and exports. In addition, it
would create a good alignment between the
public good and profit generation. The chal-
lenge in such a case will be to find the right
balance between economic value and public
good. As the government decides to move to
End-State 3, it will have to move out of the
“comfort zone”: The degree of investment will
grow and there will be an increasing level of
organizational discomfort.
Making It Happen
Tamil Nadu has some of the most-skilled
resources in the world. It has leading auto-
motive players, visionary politicians, and
excellent academia. Hence, the state is well
positioned to develop a road map for
Chennai’s automotive growth that will
inspire a common vision for all stakehold-
ers. But creating a successful automotive
cluster in Chennai will require significant
commitment and investment. This is a
high-risk, high-reward strategy that
demands close cooperation between the
government and the industry.
To begin with, the government needs to
conduct a thorough gap analysis to under-
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Figure 14: Key Policy Evaluation Factors
How would India’s energy security be improved?Energy Security
How would India’s technology leadership be advanced?Technology Leadership
How would public health and welfare be improved?Public Good/Environment
How much additional foreign exchange would be generated?Export FX
How much would be added to the GDP?GDP
How many new jobs are created?Jobs
Figure 15: Value Created by the “Three Ps” Scenarios
Value
CreatedEnd-State 3
A. Build out the
infrastructure
B. Build out the
green value chain
C. Leverage across
industry value
chains beyond
auto
End-State 2
End-State 1
A. Build out the
infrastructure
B. Build out the
green value chain
A. Build out the
infrastructure
“Planet”
“People”“Profit”
AA
BB
CC
“Planet”
“People”“Profit”
AA
BB
CC
“Planet”
“People”“Profit”
AA
BB
CC

10. © 2007 PRTM 10
stand what has to be done to move from
the current to the desired state. A public
awareness program should be initiated and
a road map for policy development should
be sketched out. Joint investment between
government and industry also needs to be a
part of the initiatives. The government must
create a “nurturing” regulatory environ-
ment if a green auto cluster is to materialize
in Chennai. The auto industry needs to have
incentives so that it is willing to experiment
and innovate, especially if India wants to
lead the green cluster revolution. Academia
should be mobilized to work on clean-tech-
nology projects. With Indian Institute of
Technology (IIT) and the best academic uni-
versities in Tamil Nadu, innovative ideas
will flourish. Vocational training needs to be
provided so that labourers have the know-
how to operate state-of-the-art machines.
Clearly, if India has to lead the next wave
of automobile revolution, the catalyst for
such growth will come from Tamil Nadu.
Chennai has proved in the past that it can
create an impact in the global automotive
sector—now it is time to assume a leader-
ship position.
C O N T A C T S
PRTM Director Cuneyt Oge at
coge@prtm.com
or +1 202.756.1700
PRTM Associate Biswajit Das at
bdas@prtm.com
or +91 80.4010.0900
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Figure 16: Balancing Economic and Public Good
–
+
+
+
+
+
+
++
++
++
+6) Energy Security
+5) Technology Leadership
+4) Public Good/
Environment
++++3) Export FX
++++2) GDP
++++1) Jobs
A B CA B A+
End State 1 End State 2 End State 3
++
“Planet”
“People”“Profit”
AA
BB
CC
“Planet”
“People”“Profit”
AA
BB
CC
“Planet”
“People”“Profit”
AA
BB
CC
45374_sep2007