3.1 From 1950 to 1980: Very Slow-Paced Growth
India’s indigenous passenger car industry
was launched in the 1940s with the establishment of Hindustan Motors and Premier Automobiles Limited. The two companies together garnered most of the market share till the 1970s, along with Telco, Ashok Leyland, Mahindra & Mahindra (M&M), and Bajaj Auto. The market for automobiles was not large given the low rate of economic growth in the country at this time, and thus the industry had a very slow-paced growth till the 1980s.
Efforts to establish an integrated auto component industry were initiated in the 1950s. The industry was protected by high import tariffs, and the production was catered to the demands of local automobile manufacturers. Manufacturing was licensed, and there existed quantitative restrictions on imports of automobiles and automotive components. However, a significant demand for passenger cars was emerging as the country’s population and per capita income began to grow. The government felt the need to introduce modern, fuel-efficient, and low-cost utility cars that could also be affordable for “the common man.”
3.2 First Wave of FDI from 1981 to 1991
in automotive assembly was allowed in two major waves in 1983 and in 1993. This FDI was mainly “market-seeking” in nature.Footnote 10 Government policies such as import barriers and local content requirements contributed to the influx of FDI and helped the industry to compete with international players.
In February 1981, an Indian company called the Maruti Udyog Limited (MUL) was incorporated as a government company with Suzuki Motor Corporation as a minor partner to make an efficient people’s car for middle-income class in the country. In October 1982, the company signed the license and joint venture agreement with Suzuki.Footnote 11,Footnote 12 Suzuki took up 26% equity in the company and made an investment of US$ 260 million. MUL created history by rolling out its first vehicle in 13 months, the Maruti 800 in 1984. This was the first domestically produced car in the country with completely modern technology. MUL made significant strategic moves including building a very strong ancillary vendor network around it and achieved an installed capacity of one lakh unit garnering about 62% of market share in a decade.Footnote 13 In 1989, Suzuki increased its equity stake to 40% and in 1992 to 50%.Footnote 14 However, private sector participation was still restricted in the passenger car segment with only three major players – MUL, Hindustan Motors, and Premier Automobiles Limited.
India also allowed four Japanese firms – Toyota, Mitsubishi, Mazda, and Nissan – to enter the market for light commercial vehicles through joint ventures (JVs) with Indian companies and some sharing equity with state-level governments in the 1980s.
Around this time, the government also put in place a Phased Manufacturing Programme (PMP) for localization of components, under which domestic original equipment manufacturers (OEMs) had to increase the proportion of domestic inputs used in their output over a specific period. The Indian companies went ahead to have JV collaboration with several Japanese and foreign OEMs. This enabled Indian companies to benefit from equity inflows and technology transfers.Footnote 15 This phase is widely regarded as the first wave of FDI in the sector.
3.3 Second Wave of FDI Since 1992
In the middle of 1991, the Indian Government made significant changes to its economic and industrial policies leading to the liberalization of the markets. This provided the impetus for the Indian automobile industry to flourish further. A new automobile policy was launched in 1993, facilitating the entry of global assemblers. Auto licensing was abolished in 1991, and the weighted average tariff was lowered from 87% to 20.3% in 1997. The PMP policy ended in 1992. The Indian Government introduced a memorandum of understanding (MOU) system that continued to emphasize localization of components, up to 50%, for approving financial collaboration proposals on a case-by-case basis, which was raised to 70% later. Mass emission regulatory norms for vehicles were introduced, and a national highway policy was announced in this decade.
In 1997, automatic FDI approval of JVs with a 51% majority share for the foreign partner was allowed. Liberalized policies and the attraction of a huge unsaturated market made many globally competitive automakers to enter the passenger car market.Footnote 16 The most common route of entry was through JVs with Indian firms. Some manufacturers also left the market due to increased competition.Footnote 17 Table 2 illustrates the entry of major assemblers in the Indian market and their mode of entry for the period between 1983 and 2007.
Japanese participation in the Indian automobile industry brought significant changes to the structure of the passenger car market, including utility vehicles. Gradually, established players such as Telco entered the commercial passenger car segment capitalizing on their engineering capabilities, and economies of scale,Footnote 18 and domestic players in the commercial vehicle segment started developing passenger cars on a limited scale. Indian companies such as Telco, M&M, Hindustan Motors, Premier Automobiles, and DCM entered into JVs with Ford, Mercedes, General Motors (GM), and Peugeot for assembly of medium-sized cars from knocked-down units. This increased the market competition and restructured pressures on existing players.
The post-1992 period is widely regarded as the second wave of FDI in the sector, which played a crucial role in bringing dynamism, diversification, and intense competition in the industry. Many companies started operating at a significant scale in the market and started operations in the midsize car segment. Indian companies such as Tata Motors introduced special purpose vehicles and platforms to enter the passenger car segment. This period saw creation of wide networks, as many companies had full technology and competence in producing state-of-the-art models of vehicles and had contractual arrangements with their component suppliers.
The role of foreign presence in the passenger vehicle segment grew much more than all the other segments of automobiles, followed by the multi-utility vehicle segment. Thus, foreign partners now hold all or a greater share of the equity in most of these cases even though most of them initially formed JV of equal sharing of equity.Footnote 19 The inability of the Indian partners to contribute toward capacity expansion allowed foreign partners to increase their stake or take total control by buying out their Indian partners.Footnote 20
In both the waves of FDI that occurred in 1983 and post-1992 period, a significant amount of FDI by the multinational corporations (MNCs) flowed into the country to build modern plants. Maruti Suzuki’s investment in the early 1980s was made possible mainly due to its willingness to invest capital. Subsequently, various MNC manufacturers have made investments of millions of US dollars in the country.Footnote 21
In the post-2000 period, Indian firms such as Maruti Suzuki slowly started moving toward building its own design and development capabilities. Tata Motors made rapid strides toward developing an advanced level of technological capability by launching the first indigenously developed Indian car, “Tata Indica” (1998). In 2002, M&M launched “Scorpio” as a sport utility vehicle (SUV) – a product of in-house design and development effort. In 2004, Tata Motors signed a JV with Daimler-Benz for manufacturing Mercedes-Benz passenger cars in India. The Mercedes-Benz India Limited plant assembled completely knocked-down units imported from abroad.
Increased competition led to restructuring and cutting of costs, enhanced quality, and improved responsiveness to demand. MNC automakers such as Hyundai, Nissan, Toyota, Volkswagen, and Suzuki which had established production plants in India eventually started using India as an export platform for their overseas networks. The small car segment did particularly well, and India’s potential as a global hub for manufacturing small cars began to be recognized.
Between the years 2001 and 2010, passenger vehicle sales grew at a compound annual growth rate (CAGR) of 15.67%. Of the total sales, roughly 10% were contributed by exports. Between 2000 and 2015, the average year-on-year growth rate of export of vehicles from the country was approximately 23%.Footnote 22 The industry is known for export of mini hatchbacks and an evolving export base for midsize cars and compact SUVs.Footnote 23 As per the World Trade Organization’s World Trade Statistical Review 2017, India was the tenth largest exporter of automobile products worldwide in 2016, accounting for US$ 13 billion worth of exports.Footnote 24
3.4 Since 2001 Fully De-licensed, Free Imports and 100% FDI Allowed
In the last decade again, various trade
and investment restrictions were removed to speed up momentum for large-scale production. As of today, the government encourages foreign investment and allows 100% FDI in the sector via the automatic route. The industry is fully de-licensed, and free imports of automotive components are allowed. India is the second fastest-growing market for automobiles and components globally (after China).Footnote 25
With an outward vision of component makers, and competitive pressures from international firms, the component industry had to upgrade process and product qualities and technology standards to gain and sustain capabilities.Footnote 26 Many manufacturers now adhere to the global environmental norms regarding emission/technological standards and quality certifications. The industry grew by around 20% annually in the 1990s, and the average annual growth of exports was around 15% during that period.Footnote 27,Footnote 28 Over the years, it has been able to modernize its technology and improve quality and has developed capabilities to manufacture components for new-generation vehicles. Indian companies maintained their traditional strengths in casting, forging and precision machining, and fabricating (welding, grinding, and polishing) at technology levels matching the required scale of operations. They achieved significant success in garnering engineering capabilities and adapted to local requirements through local design.Footnote 29 High growth has taken place in engine, drive transmission, and steering parts. Engine parts, being high value-added in its nature, have been contributing most to total production. Endowed with the potential of low-cost quality products, India edges over many other developing countries in component manufacturing.Footnote 30
Table 3 provides the category-wise trends for automobile production, domestic sales, and exports (in numbers) from 2011–2012 to 2016–2017.Footnote 31 Further, using estimates from the SIAM of India, it is calculated that between 2001 and 2018, the CAGR of export of all vehicles from India was 20.02%.Footnote 32 The estimates for other parameters – production, domestic sales, and exports – as percentage of production are given under Table 4. Comparable data for the selected categories before 1995 is not available. However, calculations have been made by other authors for earlier periods and different segments.Footnote 33
There are many reasons for the impressive growth achieved by Indian manufacturers over the last two decades. These are discussed in detail in the next section. The main strengths have been a large unsaturated domestic market for small cars (and presence of a large middle economic class), low production costs (on account of availability of low-cost labor and other inputs), and skilled engineering talent. Global affiliations and tie-ups also enabled technology upgrading and expansion of scale of production in the industry.
In the passenger car segment, there are more than 30 international quality models in the market, some of which are now being exported to MNCs’ home markets. Leading Indian manufacturers are in the process of transforming from local players to global companies. India’s domestic carmakers, viz., Tata Motors, M&M, and Ashok Leyland, have developed manufacturing facilities, significant R&D, technology development, and testing centers.Footnote 34 In addition, Indian companies have bought capacity or made alliances with other manufacturers in East Asia, South America, Africa, and Europe.
Low cost of labor and economies of scale have made India an ideal export hub for small cars. The Indian auto industry is expected to be the world’s third largest automotive market by volume by 2026.Footnote 35 Promotion of exports has been part of companies’ business strategies for better utilization of installed capacities.Footnote 36 Low cost of manufacturing and economies of scale achieved as a result of catering to overseas markets have allowed vehicle makers to become competitive and offset weak demand in the domestic market. Companies which have had partnerships with foreign players or received FDI
have benefited in terms of engagement in GVCs.