Instead Japanese capital and technology have transformed the industry with mixed out- comes ... class, a feature that makes the Indian automobile mar- ket very ...
WorldDevelopment,Vol. 23, No. 3, pp. 485-502, 1995 Copyright Q 1995 Elsevier Science Ltd Printed in Great Britain. All rights reserved 0305-750x/95 $9.50 + 0.00
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The Restructuring of the Indian Automobile Industry: Indian State and Japanese Capital ANTHONY P. D’COSTA* University of Washington, Tacoma, U.S.A. Summary. - This paper analyzes the changing institutional context in which the restructuring of the Indian automobile industry is taking place. It explains the internationalization of the industry under the aegis of deregulation of a heavily statist economy. Economic liberalization, however, has not resulted in withdrawal of the state from the industry. Transnational corporations have not necessarily weakened domestic capital. Instead Japanese capital and technology have transformed the industry with mixed outcomes, creating both benefits of and constraints to restructuring. The reorganization of the Indian automobile industry reflects not only global forces but rather the interplay of changing institutional factors in influencing industrial restructuring in a developing economy.
1.
ing cases, such as New Zealand (Greer, 1990), the role
INTRODUCTION
The decade of the 1980s witnessed significant restructuring of manufacturing industries in developing countries. The world economic slowdown, d ebt crisis, and promarket economic orthodoxy called for a reversal of the prevailing import-substitution strategy. The new strategy calls upon the state to retreat and to make room for private capital. Foreign capital and technology are welcome. Integration with the world economy is said to restructure inefficient domestic industries. India, often considered a bastion of dirigisme, has been no exception to this global trend. In 1991 India introduced far-reaching liberal industrial and trade policies, paving the way for industrial restructuring. The objective of this paper is to explain the restructuring of the Indian automobile industry, which is a much neglected case given the proliferation of the comparative literature on auto sectors around the world. Three areas of industrial restructuring are examined: how the industry has been reorganized, what are the major factors responsible for restructuring, and what are the prospects for global integration of the industry. Several recent studies have examined the specific institutional contexts in which restructuring has taken place.’ None of these studies, however, has examined restructuring as a result of deregulation of a heavily statist economy. Hence, unlike the Indian case, they have not encountered situations in which the state’s retreat from the overall economy has been accompanied by the state’s increasing presence in certain industrial sectors. Moreover, unlike other restructur485
of transnational capital in India has been circumscribed by domestic private capital. The Indian case is also atypical because of a rapidly emerging middle class, a feature that makes the Indian automobile market very attractive for foreign investment. This study shows how the Indian state orchestrated local and transnational capital in reorganizing the industry. Industrial restructuring under liberalization has been “two steps forward and one step backward” (Kohli, 1992). The initial enthusiasm of Japanese capital for tapping a growing market was followed by trepidation as segments of the auto industry became highly fragmented and fears about denationalization of a heavily protected domestic business mounted. Further restructuring has been constrained by domestic politics and small scale of production. The restmcturing of the auto industry also exposes both the “hard” and “soft” sides of the state as discussed by
* The Department of Education, Washington, DC and the American Institute of Indian Studies, Chicago/New Delhi supported fieldwork in India and Japan during 1991 and 1992. I received assistance from numerous officials from the automotive industry in India and Japan, particularly from Maruti Udyog Limited, Suzuki Motors Corporation, Automotive Components Manufacturers Association of India, and several government officials from India. Two anonymous referees and Janette Rawlings substantially improved the final version of this paper. I am grateful to them all but none of these institutions and individuals are responsible for the interpretations offered here. Final revision accepted: September 2.1994.
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Manor (1991) and Evans (1992). Japanese business responded to an emerging Indian market and deregulation by introducing capital and technology in their joint ventures. As a result, a moribund Indian automobile industry has been reinvigorated. The state actively sought to shape the structure of the industry however, by strictly enforcing local content rules and fostering Maruti Udyog Liited (MUL), a joint venture between Suzuki Motors and the government of India. MUL today has over 60% of the growing passenger car market. The older, inefficient companies have responded to this challenge by collaborating with other foreign companies. Despite the dismantling of regulations, the restructuring of the Indian industry demonstrates the extent to which the state can play a facilitative rather than purely a regulative role and how it can continue to dictate the terms of intemationalization of the industry. The outcomes of restructuring in India are mixed, negating any simple linear argument. Consumer choice has increased. Both higher concentration and greater fragmentation of the auto industry have taken place. Paradoxically the state, which has been unambiguously characterized as inept,2 is reaping significant benefits through MUL. The industry today is technologically more sophisticated and world-market oriented, thanks to Japanese technology and local initiatives. Low production volumes and market fragmentation, however, continue to constrain a second round of favorable restructuring. The remainder of the study is divided into three main sections. As the middle class has been historically important for the development of the automobile industry, section 2 examines the extent of class differentiation in India in the context of the incremental nature of liberalization of the automobile industry. I argue that statist policies contributed to the rise of the middle class. In the context of an altered social foundation, past economic policies that curtailed industrial production, especially consumer durables, could not be sustained. Section 3 shows how Japanese participation in this liberalized environment transformed the sttucture of the industry. More concretely, it identifies the economic and political processes by which the industry was reconfigured. Section 4 assesses the benefits and constraints of restructuring and increased integration into the global auto industry. Section 5 concludes.
2. THE INDUSTRIAL POLICY CONTEXT (a) Economic and social transformation In independent India the model of capital accumulation was import-substitution industrialization.3 Statist ideology was paramount, entry barriers were erected and the public sector was expanded. Private
capital accommodated itself to this regulatory environment as segments of national capital benefited from state control. Private capital sought protection from the international environment, while public sector expansion often rested on “bailouts” of the private sector. The provision of critical inputs by public enterprises for private capital accumulation followed the general pattern of late industrialization. The results of the import-substitution model were mixed (D’Costa, 1993). India’s structural transformation, both economic and social, has been limited when compared to some of the East Asian Newly Industrializing Countries (NICs). Changes in the postcolonial period however, are not negligible.4 Except for the 4th Five Year Plan (1969-74) period, the Indian economy from 1956 onward witnessed an average annual industrial growth of 6% or more. Engineering industries equalled or exceeded these growth rates? Public sector enterprises increased from five to 214 during 1950-84, with significant capacity expansion. During 1950-80 the share of manufacturing in national income increased from 15% to 27%. Large-scale investments deepened capital and intermediate goods sectors and were accompanied by local research and development. Several of these industries contributed to upstream activities for the automotive segment. Expansion in industry and services absorbed a significant number of workers. During 1961-81, while private sector employment increased by 45%, public sector employment jumped by nearly 120%.6 By the mid-1970s the state-led industrialization model had been economically exhausted. The economy was plagued by industrial inefficiency, macroeconomic imbalances, and anemic growth. Socially however, the statist policies fostered a growing class of consumers. Today, the Indian middle class comprises lO-20% of the population or 100-200 million people.7 This market is large enough to support a gamut of industries, especially consumer durables. Because of the structural bottlenecks, however, the model of import substitution could not satisfy the rising demand for consumer durables. Low productivity growth (Ahluwalia, 1989) and low investment growth (Bardhan, 1984) have been the principal factors creating an economy of scarcity. Many products, including automobiles, could not be produced efficiently. The quality of these products was very low compared to international norms and the industry was technologically obsolete. India’s increasing dependence on imported oil and chronic foreign exchange shortages called for the introduction of fuel-efficient vehicles. These conditions created the basis for economic liberalization and the possibility for the Indian middle class to gain access to higher value-added consumer goods made to international standards. India has the largest two-wheeler market in the world, reflecting the upward mobility of lower segments of the Indian middle class and potential buyers
INDIAN AUTOMOBILE INDUSTRY of passenger cars. The stock and production of twowheeled vehicles - motor cycles, scooters, and powered cycles - has increased substantially.s In 1980 the total registered number of two-wheeled vehicles rose to over two million. In 1984-85, the price of a popular scooter represented roughly 25% of the annual salary of a public sector employee.v The national per capita annual income at the time would have approximated the price of a scooter, while the prevailing official minimum wage earned by the majority was far less than the average income. Due to productivity increases the net dealer price index (1965=100) of the popular Bajaj scooter shows a slower growth rate than per capita net national product index with the same base year, making two-wheelers more accessible to the public.‘O The increase in passenger cars, half the registrations of two-wheelers in 1980, follows a similar trend even though cars cost 1O-l 5 times more than scooters. With class differentiation and rising incomes, the Indian market was perceived to be attractive by Japanese and lndian businesses. In the early 1980s several joint ventures were formed between them for technology transfer and equity participation. The collaboration between Suzuki Motors of Japan (SMC) and Maruti Udyog (MUL) of the Government of India is highly successful, using market shares and product quality as criteria. Other Japanese firms, such as Toyota, Mitsubishi, Nissan, and Mazda, in varying degrees, have also entered the four-wheeler segment. Numerous joint ventures in the Indian components and parts industry have also been established.
(b) Liberalization of the auto industry In 1949 the government of India banned the import of completely built vehicles and since 1953 has refused permission to Indian manufacturers to assemble imported vehicles without increasing local content. With this measure the government reduced the number of assembly firms from 12 to five within a few years.” Price controls on the industry, especially for passenger cars, remained in place until 1975. The industry’s output was controlled by capacity and product licensing. In 1975, as a general industrial policy, the government permitted an automatic capacity expansion by 25% every five years. This was over and above the 25% that was already allowed in the industrial license of the Industries Development and Regulation Act of 195 1. This policy did not however, include the passenger car segment. The “Industrial Policy Statements” of 1977 and 1980 marked the beginning of the liberalization process. The state loosened its tight grip in favor of increased competition at home and greater participation of foreign capital. This was achieved by relaxing regulations goveming production licenses, foreign
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collaboration, asset size, and the scope of industrial operations. For example, to reap the benefits of economies of scale the policies aimed to do away with limits on capacity. Through delicensing, both the large domestic business houses and foreign companies under Monopolies Restrictive Trade Practices Act (MRTP) and Foreign Exchange Regulation Act (FERA) were permitted to enter several areas reserved for the public sector. l* The liberalization of the automobile industry was aimed however, primarily at the components manufacturing segment that the govemment had largely reserved for the officially defined small-scale sector. Later in the assembly segment, the government attempted to eliminate inefficiencies, associated with a sheltered market and low-volume vehicle manufacturing units, by introducing “broadbanding” in 1985. This was a specific policy measure that permitted a vehicle manufacturer to produce different kinds of vehicles instead of one kind as decreed by the industrial license. It did away with production licenses for a specific commodity and instead encouraged production of a range of related products. A vehicle manufacturer thus could produce scooters, motorcycles, and three- and four-wheelers, thereby introducing economies of scale. Similarly, components manufacturers could produce a broad range of parts and related products. The government also introduced more liberal import policies. Previously, imports were restricted to reduce the outflow of scarce foreign exchange. ln 1975 imports of capital equipment for replacement were allowed as long as net foreign exchange outflow was zero, implying an export commitment of some sort by the importer. Eleven years later, importers of capital equipment were allotted nearly a 50% increase in their foreign exchange quota. In addition to raising the value of permissible imports, the bureaucratic permit process for net imports was significantly simplified. This indicated the government’s interest in upgrading technology, promoting exports, and deregulating the business environment. In 1985 those automotive firms that came under the purview of MRTP were allowed to expand capacity or set up new units. Furthermore, since 1970 the automotive industry has been gradually added to Appendix I, a list of core industries which the government has prioritized for promotion. This inclusion meant that the government would treat the industry’s expansion and modemization needs favorably. These policies departed significantly from the autarkic import-substitution model that had been in place in the previous four decades.
3. THE INTERNATIONALIZATION AND RESTRUCTURING OF THE AUTO INDUSTRY With liberalization, cars were gradually declassified as luxury items. Since the mid-1980s, demand for
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(a) 0
2
Total commercial
-A
8 150
8 ;._
Cars (includes jeep/utility vehicles)
mo-
I
I
vehicles
0 Light commercial
loo-
vehicles
& 50-
1950
1955 1960 1965 1970 1975 1980 1985 Year
Source:
1990
AIAM (1985). ACMA (1990-9 I ).
Figure 1. Vehicle production ( ‘000). 1950-90.
passenger cars and other vehicles has shot up rapidly. During 1980-90, the production of passenger cars and commercial vehicles increased fivefold and twofold respectively (Figure l), a result of liberalized technology transfers, foreign capital participation, and the rise in middle class purchasing Power. The timing of Indian economic liberalization coincided with Japanese fitms’ desire to find new markets as rising
wage costs in Japan, yen appreciation, and protectionism in industrialized countries continued unabated.13 The importance of proximity to final markets under flexible systems of production had already compelled many Japanese producers to invest in the auto industry overseas.
Production,
collaboration,
and market shares
Riding this Japanese wave of outward capital movement, Suzuki Motors Corporation @MC) ln the early 1980s teamed up with Maruti Udyog Limited (MUL) of the government of India. This joint venture between tmnsnational and state capital has been the most important contributor to the increase in passenger car production of the 1980s and has been the principal source for restructuring the Indian automobile industry. The doubling of commercial vehicle production during 198040 is not due, however, to Japanese participation, despite the entry of four Japanese firms in this segment. The established Indian firms TRLCO, Ashok-Leyland, and Bajaj remained the most important producers despite. the presence of such transnational corporations as Toyota, Nissan, Mitsubishi, and Mazda.r4 In the 1980s these four Japanese. firms collaborated with private Indian firms, and in three cases shared equity with state-level governments, to form joint ventures for the production of light commercial vehicles (LCVs) (Table 1). Other joint ventures, such as those between Hindustan Motors (HM) and Isuzu, and Premier Automobile (PAL) and Nissan, did not involve foreign equity. Rather these collaborations entailed technology transfer for engines and transmissions to Indian producers who were then able to upgrade some of their products. Japanese participation in the automobile industry brought significant changes to the structure of the passenger car market, including utility vehicles (Figure 2). As a result of Suzuki’s collaboration with MUL, two of India’s longstanding leading producers, Hindustan Motors (HM) and Premier Automobiles (PAL), witnessed significant declines in their market shares. In 1970 HM and PAL had market shares of 51% and 26% respectively; by 1990 they stood at 12
Table 1. Recent Japanese collaborations in the Indian automobile sector Indian
firm
Japanese collaborator
Year of production
Remarks on technology
Maruti Udyog (49%)* DCMS Eicher$ Swarajs MahmChXl$ (formerly Allwyu-Nissan) Hindustao Motors5
Suzuki Motors (51%)t Toyota Mitsubishi Mazda Nissan
1983 1985
1986 1985 1985
n * n
Isuzu
1986
Premier Automobilesfi
Nissan
1986
Ashok Leylands
Hino
1985
Engine/transmission for Contessa passenger car Engine/transmission for NE 118 passenger car Modernization of engine
Machinery, drawings, etc. n
Source: Fieldwork in India (August-November 1991, AugustSeptember 1992). * Figures iu parentheses refer to equity held. t This share was progressively increased by Suzuki, from 20 to 40%. With further liberalization in 1992, allowing foreign companies to own 51% of equity, Suzuki is now the major partner. $ Japanese. LCV units, equity in each ranges from 15% to appmximately 25%. 8 No Japanese equity.
INDIAN AUTOMOBILE
Source: ACMA (1991).*1970 figure is for 1966-70;tM&M = Mshindra & Mahindm; t = Suzuki’s equity stands at 51%.
Figure
2.
Structure of car market (percentage
share by
majorfirms). and 20% respectively. An established producer, Standard Motors, left the passenger car market altogether.r5 Sipani Automobiles, a relative newcomer to the industry, failed to get off the ground. Within eight years MUL increased its market share from zero to over 53%, more if only passengers cars are included (Figure 2). MUL, the only fuel-efficient producer of small vehicles in the country, weakened HM and PAL in the passenger car market and broke the monopoly of Mahindra and Mahindra in the utility vehicles market. Liberalization of the car segment allowed the entry of a new player (MUL), the elimination of an existing company (Standard), severe restructuring pressures on HM and PAL, greater choice for consumers, and an increase in market concentration. In the commercial vehicle segment a somewhat different picture emerges. The government does not Table 2.
Market structure of commercial vehicles*
Ashok Leyland Hindustan Motors Premier Automobiles TELCO Mahindra & Mahindra Bajaj DCM-Toyota* Either-Mitsubishit Swaraj-Mazda$ Mahindra-Nissan$ Standard Motors5
1971
1980
13 6 11 59 2 8
19 7 2 47 5 14 -
-
1
5
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489
directly own any productive capacity in this segment. Four new entrants, all of them with Japanese technology and equity, are in the light commercial vehicle (LCV) segment. Three old producers (Mahindra, Bajaj, and T’ELCO) continue, however, to have a strong grip on the Indian market with a combined share of nearly 67%.r6 In 1989 the four Japanese-led firms had a combined sham of about 33% of the LCV market or only 12% of the total commercial vehicle market (Table 2). In the heavy and medium commercial vehicle segment (buses and trucks), the established private Indian firms of TELCO and Ashok-Leyland have retained their market dominance. These two companies control over 98% of the non-LCV commercial vehicle market. Three passenger car producers (HM, PAL, and Standard Motors) who in the past also produced some commercial vehicles, had to retreat. The automotive parts and components segment has remained highly concentrated in spite of restructuring. In 1984 the four-firm concentration in the parts sector exceeded 80% in 38 of a total of 42 cases, representing over 90% of major components.r7 These included engine, electrical, transmission and steering, suspension and braking, and other equipment. Gn the other hand, the small-scale sector remained highly fragmented. New Japanese assembly operations set up in the 1980s required new units in the components segment thereby lowering the concentration ratios. A study by Swaminathan (1992) shows, however, that the TVS-Group, a major domestic components manufacturer, gained market control. Restructuring for TVS entailed diversification and vertical integration, resulting in monopoly control over several automotive components.
(b) Jockeying for market entry
1990t 17 0.9 57 3 11 3 3.3 2.6 2.2 -
Source: Automotive Components Msnufacturers Association, Automotive Industry of India (Facts and Figures); Association of Indian Automobile Manufacturers, Automan (various issues). * Columns may not add to 100 due to rounding t Figures for April 1990-March 1991. $ Japanese -Indian collaborations 8 Negligible.
The interaction between state and foreign capital restructured the four-wheeler segment in two contradictory ways: in the passenger car segment a nearmonopoly situation was created while the LCV segment was highly fragmented, resulting in uneconomic production units. To explain these outcomes it is necessary to understand the politics of market entry and exit in India. As infIows of foreign capital and technology were liberalized, HM, PAL, and Standard had to confront MUL with its superior product and technology. Liberalization in India certainly had the intended effect; to weed out the poor performers. But was MUL a product of market forces? The number of new firms in the passenger car segment was restricted to only one due to political patronage, undue strain on foreign exchange reserves and the government’s unfavorable posture toward consumer durables. Political patronage and concern for capital outflows also influenced the structure of the LCV
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industry. Market fragmentation however, was not anticipated according to (erroneous) demand projections. Yet the tenacity of strict government control over the car segment and the failure to prevent fragmentation of the LCV segment reflect both hard and soft sides of the state. These seemingly contradictory postures were conditioned by state pragmatism and favoritism, Japanese oligopolistic behavior, and inadequate demand. Without an understanding of these factors it is difficult to explain why the Japanese with superior technology, vast global operations, and massive financial resources did not wipe out the Indian producers, why MUL became a national champion, and why so many Japanese firms entered the same small LCV market, risking uneconomic production units. Whether Japanese or Indian firms took the initiative to create joint ventures in the automotive segment is difficult to say. A survey of major actors reveals a mixed picture.ls Indian capital needed Japanese technology to exploit rising expectations of the Indian middle class while the Japanese perceived this as a commercial opportunity. Joint ventures appeared attractive for all parties: the Japanese found a way to share risks, the Indian partners had equity in what appeared to be a very lucrative business, and the Indian government preferred national ownership. Indian big business possessed the commercial acumen and political connections necessary to maneuver around government regulations. This was very useful to the Japanese who were unfamiliar with the highly politicized and patronage-based Indian market. With some exceptions, Indian partners, accustomed to a non-Schumpeterian, protectionist environment, preferred quick and high returns in trading activities rather than long-tent-i investments in manufacturing. Hence, importing Japanese-made vehicle parts and components, known as completely knocked-down kits (OS), and assembling them in India, as long as commercially and politically feasible, were attractive propositions to Indian lirms. In addition this was an opportunity for Indian businesses to preempt future competition under a liberal environment by seeking Japanese technology. This also suited the Japanese strategy that used foreign direct investment to increase exports from home, especially when the small Indian market did not justify large investments in modern technology. MUL emerged as a near-monopoly under changing economic policies and social transformation. Since 1982, the year in which MUL-SMC joint venture was formed, no new producer has entered the car segment. In fact, after a burst of liberalization, the production of passenger cars throughout the 1980s and early 1990s remained tightly regulated through licensing. This parallels the government’s refusal in the 1960s to allow HM and PAL to upgrade their models through foreign collaboration. Although these regulatory mea-
sures could be viewed as a response to foreign exchange shortages and an obsession with “selfreliance,” partial liberalization followed by intervention must be interpreted differently, especially since majority ownership by the government in an important consumer durable industry was not only unprecedented but occurred afer liberalization. Like MUL, the four Japanese LCV ventures, Mahindra-Nissan, Either-Mitsubishi, DCM-Toyota, and Swaraj-Mazda emerged partly because the government wanted to reduce India’s heavy dependence on imported oil by promoting fuel-efficient vehicles. In the 1970s Indian migrant labor remitted considerable foreign exchange. Net invisibles, mainly remittances, increased from $241 million to over $3 billion during the second half of the 1970s.rg These inflows however, declined by the mid-1980s, resulting in the worsening of balance-of-payments position in the latter half of the 1980s. The vulnerability of the Indian economy to rising oil prices at a time when an expanding middle class began clamoring for a consumer durable forced the government to meet both challenges partly by imposing fuel-efficiency standards. Notwithstanding the fallacy of a policy of simultaneously attempting to reduce fuel consumption while promoting personal transportation, new fuel-efficiency norms were applicable only to new enterprises and new products. Thus established producers such as I-IM and PAL did not have to comply with fuelefficiency standards for existing products thereby averting plant shutdowns and labor strife. The Indian government’s selection of Suzuki Motors as a partner, aside from the routine technical and financial criteria, may have been based on Suzuki’s specialization in small carszo SMC’s aggressiveness in the Indian market is due to its recent successes in South Korea, through the licensing of small car technology to Daewoo, a manufacturing joint venture with General Motors in Canada for the North American market, and increasing competitive pressure inthe Japanese market. It is possible that Suzuki’s partnership in India was in part a response to the Japanese government policy of encouraging smaller firms to invest overseas and reduce crowding of the Japanese market. As we shall see below, however, other Japanese companies were also interested in the Indian passenger car market but failed to get production permits from the Indian government. The reluctance of the Indian government to completely liberalize the automobile sector was dictated by political pragmatism. In the 1970s Prime Minister Indira Gandhi had deliberately tried to secure support for her flagging leadership by creating “new” capitalists and weakening the old.*’ In some ways the liberalization policies of Mrs. Gandhi in the early 198Os, and their continuation by her son Rajiv Gandhi, can be interpreted as measures to weaken the domain of old capitalists. Hindustan Motors, for example, owned by
INDIAN AUTOMOBILE INDUSTRY
the powerful business house of the Birlas, relied on obsolete technology in a sheltered market. Changing fuel-efficiency standards meant the sudden need for huge investments for HM. It also meant that the old protected companies, such as HM, did not have the resources to meet the new capitalist challenge either financially or technologically. Restructuring for HM would have automatically entailed retrenchment of labor. This was neither socially nor politically acceptable, especially in the Marxist-ruled state of West Bengal where its main plant is located. Thus there was a general reluctance by the government and the established private sector firms to speed-up the liberalization processz2 Yet to claim that radical restructuring did not occur would be a misreading of the objective situation. After all, Standard Motors fell victim to fuel-efficiency standards, while HM and PAL have been essentially marginalized by MUL. In the car segment new capital is represented by the state in alliance with transnational capital. In the commercial vehicle segment, however, the industry is still controlled by the old capital such as Tata and Ashok-Leyland, although the latter has now passed on to the Hindujas, a nonresident Indian family. But unlike HM and PAL, the business house of Tata that manages and owns TELCO, is a very dynamic and diversified engineering company.23 The company has been very successful in adapting and reverse engineering imported technology, primarily from Daimler-Benz, which has a small equity stake. It is known for its excellent program for developing and cultivating new suppliers. Its own research and development wing has brought out several makes of vehicles that even the Japanese producers find difficult to compete with in the Indian market. Similarly, AshokLeyland has been engaged in product development and recently launched its new line of commercial vehicles in collaboration with Iveco, a subsidiary of Fiat, and exported to Mexico. The jockeying for entry into the passenger car industry was fierce in the 1980s. Clientilistic politics was already a precursor to MUL. ln the 1970s Mrs. Gandhi’s second son, Sanjay Gandhi, sought and obtained an industrial license to set up Maruti Limited to produce a fuel-efficient “people’s” car. Ministers and bureaucrats “bowed and scraped and bent rules to sanction a license.“” Under his stewardship several prototypes were made, but his sudden death ended the project. Maruti was later nationalized and was given a new lease on life through Suzuki’s participation. At the same time the government introduced new fuelefficiency standards. The initial round of liberalization attracted passenger car proposals from several transnational corporations. There were in all 19 proposals and inquiries. Transnational corporations such as Citroen, Fiat, Honda, Toyota, and Mitsubishi were leading contenders to enter the Indian passenger car market, Either Tractors with long manufacturing
491
experience wanted to team up with Citroen to produce small cars. This project was considered viable enough to export 50% of its output and its cost was projected to be lower than MUL. All of these proposals were ultimately rejected by the government of India on grounds of foreign exchange outflows. Perhaps the most important proposal that was turned down on grounds of excessive foreign exchange outflows was the proposed joint venture between TELCO and Honda of Japan. The joint venture was apparently intended to produce the high-end Accord or Civic. The project was rejected allegedly after the two private parties had already agreed to establish the joint venture and government permission was expected to be a mere formality.2s According to TELCO officials, the company’s in-house strengths would have allowed the project to begin with 50% local content and attain 90% in five years. The plan to increase local content conformed to the government’s Phased Manufacturing Program (PMP) policy, in force since the 1970s and revamped in the 1980s that stipulated that a local content ratio of about 90% be attained in five years. 26But the government wanted the venture to begin with 70% local content, which in all probability was not possible. Nor was it in the interest of Honda.27 The visible hand of the government ensured MUL’s leadership in the industry by rejecting the joint-venture proposal of TELCO and Honda of Japan. Both these firms have proven competence, and old capital such as the Tatas of TELCO had long experience working with those in the corridors of power. Most automotive producers quite unequivocally feel that the government wanted to foster and protect MUL.28 Since this project was almost certain to be licensed, it is possible that aggressive lobbying by one or more interested parties could have been involved. They allege that any of the passenger car proposals submitted by various firms could have succeeded and would have threatened MUL. Could it have been MUL with Suzuki attempting to keep other Japanese competitors away? Gr was it old capital, such as HM and PAL, who were really in a different class size in the car segment, that prevented new entrants? The (now defunct) industrial license disbursing agency, the Directorate General of Technical Development (DGTD) under the Ministry of Industry was vested with the power to allocate industrial production licenses. It was not an unknown practice for a private party to request the government (DGTD) informally to deny an industrial license to a third party. There is no evidence however, to prove this. There is no doubt MUL benefited from being the only new entrant in the car segment. After effectively eliminating potential competitors by rejecting all other proposals, MUL’s product mix of cars, vans, and utility vehicles, superior process technology, relatively large capacity, and government support in the initial years made MUL
492
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virtually unassailable. Thus the state remained preeminent in engineering the tInal structure of the industry, even as it deregulated the industry. An alternative explanation for the presence of only one new firm producing passenger cars in India could be India’s rather precarious foreign exchange reserves, justifying the government’s rejection of car projects. But the outcomes of the LCV segment undermine this argument. By allowing four Japanese collab orations in the LCV market the government failed to prevent fragmentation and most likely outflows of foreign exchange in the initial rounds.- Although commercial vehicle production has smaller economies of scale than passenger car production (see discussion below), the production capacity of LCV units in India was much too low relative to industry standards. Most of these projects fell under the aegis of the long-established Phased Manufacturing Pro-gram (PMP) that stipulated increasing local content to over 90% within five years. Aside from ambiguity regarding the dell&ion of local content, most of these joint ventures failed to meet stipulated targets?O MUL, on the other hand, achieved 88% local content for its principal vehicle within five years. Interestingly, failure to meet local content targets did not attract the govemment’s wrath. Rather the government, through its pragmatic approach, accomodated the mercantile practices of both Indian and Japanese businesses.31 The govemment ultimately abolished the PMP scheme altogether. The entry of four Japanese firms in the same segment could also be explained by pragmatism rather than objective economic criteria. The Japanese lirms may have overestimated the Indian market based on optimistic projections. But more important, almost all of the Japanese ventures initially aimed to enter the passenger car market and not the commercial vehicles market. Gn failing to obtain the requisite industrial licenses, all entered a different segment of the Indian market than they initially intended. The purpose was to maintain a presence in the Indian market.32 Several Japanese tirms entered the same LCV market, transferring their vigorous competition from their home turf to the Indian market. This Japanese behavior is akin to what Knickerbroker (1973) has described as “oligopo listic reaction” of US transnationals who match their rivals’ moves overseas with foreign subsidiaries. In the Japanese case, however, the firms are often goaded by the Japanese state. Finally, there were Indian firms who exploited the market opportunity by teaming up with the Japanese, initiated by MUL and consequently followed by others.
4. THE BENEFITS OF AND CONSTRAINTS TO RESTRUCTURING The economic crisis of the 1970s wrought significant restructuring of the global automobile industry
(Jenkins, 1987)33which resulted in Japanese foreign direct investment in Mexico, Brazil, South Korea, and other Asian countries but excluded India. North America and Western Europe also became major investment destinations for Japanese auto producers.” The impact of this worldwide reshuffling of production capacity was marginal for India. India’s participation has been limited because of small market, restrictive business environment, and the absence of Japanese flexible production elements, such as tight buyersupplier relationships (subcontracting), economies of scope (niche markets), and various organizational innovations (company unions, just-in-time inventory system). Since the partial liberalization of the 198Os, the Japanese industry has left an indelible mark on the stagnant auto history of India. The state’s policy changes and Japanese business response reorganized the Indian automobile industry. Full-blown industrial restructuring however, was muted by political considerations. It was not possible to ride rough-shod over established producers and their employees without adequate safety nets. Moreover, reproducing the high standards of Japanese-made components required Japanese industrial practices and a long-term commitment to local technological development. Both of these conditions were absent in the automotive segment and could not be. ushered in overnight. Furthermore, Japanese business strategy, such as production of vehicles based on imported components, circumscribed the restructuring process significantly. (a) Consumer choice, subcontracting, and world market production
Examining three elements of Japanese practices which have been transferred to India indicates both favorable and unfavorable effects of economic reorganization on the structure and performance of the automotive industry. These are market segmentation, subcontracting, and relocation of production to India. In the early 198Os,the Indian passenger car market had essentially four models manufactured by four companies. All of these had nearly 100% local content but invariably suffered from poor quality, technological obsolescence, and high prices. With the entry of MUL three new models were added, and more recently, a higher value-added passenger car with a 1,000~~ engine was introduced. As a strategic response to declining market shares, HM, PAL, and Standard each introduced one new model. HM’s Contessa and PAL’s NE118 utilized engine and transmission technology from Isuzu and Nissan respectively, while Standard relied on British technology for its 2OOflmodel. The engine sizes for all three were over one liter and thus these models did not compete directly with the more popular smaller 800 cc Maruti car. In the early 1990s
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the Indian passenger car market supported three manufacturers producing eight basic types of passenger vehicles. Two of them, HM and PAL, came under severe restructuring pressure. Market segmentation in the commercial vehicle segment was also a Japanese innovation. They cmated the LCV niche. Earlier, mostly medium and heavy vehicles comprised the commercial vehicle market. The introduction of LCVs widened the range of commercial vehicles, creating a distinct market segment. In the 1960s there were five LCV manufactumrs, three of which had nearly abandoned the market two decades later. In the late 1980s them were seven major LCV produceis. Of these seven, four were joint ventums with the Japanese, while only TELCO and Bajaj were major domestic firms. TELCO entered the LCV segment in the mid-198Os, responding to Japanese LCV manufacturing in India. Subcontracting is the second practice that the Japanese introduced in the four-wheeler segment. Paradoxically, while subcontracting increased, fragmentation of the ancillary industry continued unabated. Nearly half of the organized components sector firms entered the market in the 198Os,totalling about 300 large and mediumfirms and over 8,ooOsmall-scale tirms (Kathuria, 1990). Typically, older Indian limrs relied heavily on components made inhouse. Indian firms were motivated to “make” rather than “buy” components from external vendors because of the underdeveloped ancillary industry, a desire to reduce risks, and the need to enhance market control thmugh vertical integration. The Japanese markedly altered such a practice, with MUL in India taking the lead. Previously, Indian parts and components production (outside of inhouse production) was very limited and principally geared for the spare parts market. Mandatory local content requirements and favorable government policy for the small-scale sector encouraged the development of an automotive ancillary industry. With increased production of vehicles in a liberalized environment, production of components increased after
1985-86 (Table 3). Excluding a few large TNC controlled firms, however, such as TVS-Lucas and MICO-Bosch which are under FERA, the test of the organized compo nents segment is highly fmgmented. For example, there were 98 firms in engine parts with a 1990-91 combined output value of Rs.8.5 million or roughly $284,000.‘5The small-scale sector that normally produces for the spate parts market is even more deconcentrated.. Another outcome of subcontracting has been the establishment of two new industrial sites.36 The best known is Gurgaon, a town near New Delhi where MUL and many of its parts suppliers are located. MUL also has equity stakes in some of these parts makers. For example, the Indian firm, Sona Steering has technical and financial collaboration with Koyo Seiko (10% equity), Sank0 Ironworks, and Suzuki Auto Parts Manufacturers, all major suppliers to Suzuki Motors in Japan. Five other joint-venture firms (Asahi India, Mark Auto, Bharat Seats, Machino Plastics, and Jay Bharat) involve financial and technical tie-ups with Maruti, Suzuki Motors, and other Japanese companies. Crossownership by MUL varies from as low as 12% in Asahi India to 3 1% in Jay Bharat. Likewise, Suzuki owns 10% of Sona Steering, and 16% each of Bharat Seats and Machino Plastics. Pitampur, in the state of Madhya Pradesh, also hosts several automotive tirms. Either-Mitsubishi, the LCV manufacturer in Pitampur, has also fostered numerous interfirm linkages. Domestic integration between ancillary and manufacturing industries in India has been extended to a few international tie-ups. The Japanese emphasis on quality and subcontracting combined with an Indian government decree on local content encouraged the development of technologically modem domestic suppliers. The third element that Japanese collaborations introduced was selective production in India for the world market. For example, Suzuki Motors in Japan had two versions of the small passenger car, an 800 cc model
Table 3. Production index for parts and components (1970-71 Rs.)* Engine Parts
Electrical Parts
Transmission & steering
197&71 1975-76 1980-81 1985-86 1990-91t
100 157 214 272 499
100 103 165 183 452
100 117 208 277 553
1990-91 output value in thousand US dollars
284
66
181
Suspensions & braking
Equipment
Others
Total
100 81 129 190 268
100 65 93 162 345
100 75 44 102 166
100 111 155 213 391
101
33
72
719
Source: Computed from Automotive Components Manufacturers Association Automotive Industry of India (Facrs and Figures) (various issues).
* Rupee values deflated by wholesale price index for manufactured products (Government of India, Ministry of Finance, Survey, 1990-91, p. s-61) and then converted to production index with 1970-71 = 100. Does not include captive/in-house production and small-scale sector. t Deflator for 1988-89; Exchange Rate: One US$ = Rs. 30.
Economic
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for overseas production and 550 cc model for the Japanese market.37 In India, Suzuki’s partner h4UL currently produces the 800 cc version. In 1992-93 Suzuki discontinued the production of its version of the 800 cc model in Japan, and India has become the sole producer of this model. It will also upgrade the recently introduced 1,000 cc car, not produced in Japan, to 1,300 cc. In the LCV market, DCM-Toyota in India has been contemplating becoming the sole producer of Toyota’s Dyna model. Japanese participation in a liberalized environment has attracted other firms to the Indian market. General Motors has announced the partial shifting of production of the Opel Astra from its German subsidiary to India. General Motors India Liited is a joint-venture with HM and will produce about 20,000 units3s Production is slated to begin at the end of 1995. Previously GM, with the help of Isuzu, had improved another Opel vehicle, the Kadett, for the now defunct GM-Daewoo joint venture in South Korea. More recently, DCM-Toyota and Daewoo have announced a joint venture for producing initially 50,000 passenger cars. These global transactions are expected to make India a source for labor-intensive, low-value parts, such as castings. In addition, Daewoo’s production of Suzuki’s 800 cc car under license may facilitate modest part imports from India. Market segmentation introduced by the Japanese has provided greater consumer choice and introduced more fuel-efficient vehicles. But it also has encouraged the production of larger vehicles, albeit in very small quantities, as a response to MUL’s competitive products. The Contessa by HM, the NE 118 by PAL, and the Standard 2000 by Standard Motors are all with engines larger than one liter. Subcontracting has enhanced quality and developed a new-generation ancillary industry but has unwittingly discouraged local technological capability through fragmentation. As soon as the components industry was liberalized, new firms and technical collaborations with Japanese producers were created. For example, of a total of 25 1 collaborations with Japanese firms during 1971-80, 4% were auto related. During 1981-90, the total was 709 and 18% respectively.39 Relocating production of Suzuki’s 800 cc model to MUL will certainly be to India’s advantage. But the absence of reimports by Suzuki of the 800 cc car for Japan and third country markets and the vehicle’s failure to meet European Community’s emission standards constrain overseas market expansion. It is no coincidence that Suzuki phased out the 800 cc in Japan and inaugurated a new version of the 660 cc model for domestic and export markets, while MUL, in product cycle fashion was left with the obsolete 800 cc model for sale in local and neighboring developing country markets. Similarly, Sona Steering though potentially an important subcontractor of mechanical steering to Japanese firms, also manufactures an obsolete prod-
uct. The gains to India from relocation of production are quite tangible in terms of physical, human, and technological infrastructures. If technologies do not conform to international standards, however, the transfer constrains market expansion. This is especially true if production volume is small and market fragmentation is high, casting doubts on the benefits of partial relocation of production to India.
(b) Limits to competitiveness: scale versus scope One of the principles underlying mass production methods is reducing production cost per unit by increasing output. Technically this implies a minimum efficient scale (MES) for a given auto assembly plant. Any output below this minimum theoretically entails higher costs. Since the days of Henry Ford the automobile industry has witnessed rising MES, requiring the assembly of several hundred thousand vehicles per plant. If the scale of the assembly plant was balanced out with the individual economies of scale for parts and components production, then reaping the maximum benefits by vertically integrated firms or by the national economy as a whole entailed production of about two million units per year.@Thus Altshuler et al. (1984) indicate a minimum efficient scale of an assembly plant to be 240,000 vehicles a year, while casting of engine blocks is one million, pressing one to two million, and research and development five million units (Rhys, 1989). In a study conducted by Toyota in 1960, desirable economies of scale for assembly were 96-180,000 vehicles, casting 360-480,000, and stamping 480600,000 units.“’ With the development of flexible systems of production, especially subcontracting, economies of scale associated with mass production have certainly fallen but the importance of scale has not been eliminated. The optimum plant size for passenger cars and pickup trucks continues to be 100,000-400,000 units even as volumes of individual models become smaller. In reality however, auto assembly plants could be much smaller. This is due to price-product relationship. Bigger vehicles or highly specialized market (a nearmonopoly situation) command a higher mark-up price and greater rate of return. Hence firms with small volumes of production can still be commercially viable. General Motors India is expected to produce only 20,000 units a year, indicating that small scale can be supported by higher prices and “lean manufacturing.“42The Astra is Opel’s best selling car, a mid-sized sedan. Thus economies of scope made possible by flexible systems has not necessarily reduced the total size of production volume, especially of small, inexpensive vehicles. By international standards the Indian automotive industry is highly fragmented and operates far below minimum efficient scales with actual production even lower than available capacity.
495
INDIAN AUTOMOBILE INDUSTRY Table 4. A comparison of new North American plants with plants in India* Foreign plants
’
Nissan, Mexico Toyota, US Nissan, US Suzuki/GM, Canada Hyundai, Canada
Capacity (units per year) 200,ooo 400,ooo 480,ooo 200,ooo 120,ooo
Indian plant
Hindustan Motors Malllti Premier Standard Sipani
1982 capacityt
30,ooo 20$ 18,000 3,400 3,ooo
1991 capacityt
6WoW 140,ooo 54,500$ 12,500 3,ooo
1990-91 production (India) 25,748 121,158 42,925 500
Source: Dicken (1992); Automotive Components Manufacturers Association Automotive Industry of fndia (Facts ad Figures) (various issues).
* North American plants built in the 1980s. t = Licensed capacity. The capacity of Indian plants is expressed as “licensed” or “installed”. The former refers to tbe maximum permissible output per year while the latter to actual physical capacity, Given market conditions, licensed capacity often exceeds installed capacity and actual production. $ Installed capacity.
In the mid-1980s the government of India recognized the importance of economies of scale and hence permitted companies to raise their annual capacity. Such
recognition was confined, however, to very low capacity figures - 50,000 for small cars and 30,000 for cars above 2,000 cc.43These numbers under flex ible, mass production systems meet international norms. But without an internationally competitive local ancillary industry well-versed with long-term subcontracting arrangement, these volumes of production are considered to be low. Only MUL has production capacity comparable to international standards. Adding another 100,000 to MUL’s capacity for the production of new models will virtually ensure international competitiveness under high operating rates. The expansion is principally for upgrading the recently introduced 1,000 cc car and introducing a new 1,000 cc an, sold worldwide as the Suzuki Alto. HM and PAL have been allotted additional capacity with PAL making better use of capacity. For these two firms, however, it is unlikely that larger capacity implies economies of scale and hence lower costs because of the marginal state of production facilities and lack of systematic plant integration. GM with HM will produce the Astra in a new facility in the state of Gujarat, abandoning HM’s sprawling Calcutta facility. Two years ago TEZCO began producing passenger cars with a capacity of 20,000 units. But unlike HM and PAL its plant operations are
streamlined to take advantage of scale economies by combining the production of commercial vehicles with passenger cars. In the commercial vehicle segment the situation is a little different. First, the heavy and medium CV segment is not as susceptible to scale economies as that of passenger cars. International standards on production capacity vary between 15,000 and 40,000 units for medium-sized vehicles and from 5,000 to 6,000 for
heavy vehiclesU Therefore, both TELCO and AshokLeyland, by producing different variations of the same basiC model, are able to reap economies of scale. Their installed capacity in 1988-89 was 71,160 and 27,500 units respectively. As the minimum economic scale for LCV production is similar to that of cars, the Indian LCV segment is highly fragmented. Licensed capacity typically exceeds actual installed capacity. For most Indian LCV producers with Japanese collaboration even licensed capacity is far too small. For example, DCM-Toyota, Either-Mitsubishi, Mahindra-Nissan, and Swaraj-Mazda had licensed capacity of 15,000, 12,000, 5,000 and 10,000 units respectively. In 1990-91, actual production was 29%, 40%, 79%, and 38% of licensed capacity. With low operating rates, it is not unreasonable to expect high production costs and limits to increasing the quality and magnitude of local content. Exploiting economies of scope. would entail the introduction of flexible methods of production as developed by Japanese firms and reducing the industry’s dependence on low wages for competitiveness.” Most Indian firms with Japanese collaborations have introduced elements of flexible production. For example, MUL has promoted interfirm cooperation by having several joint ventures in close proximity to the assembly plant and like most Japanese firms, the joint ventures have company unions. Other changes in Indo-Japanese plants include common uniforms, common office spaces, and canteens. At EicherMitsubishi, the kaizen system (continuous improvements) is heavily encouraged. At DCM-Toyota, the Andon system (the ability of the worker to stop the production line should there be. difficulties) has been installed.& But piece-meal introduction of flexible methods in the absence of large-scale output, save for MUL, is likely to plague the industry’s competitiveness.
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(c) Prospects for international competitiveness
Baranson (1969) hypothesized that for a given size of output and technological and managerial capability the relative unit cost increases in developing countries as domestic content increases. Japanese officials in India have strongly supported such a hypothesis. Import substitution of ancillary production without economies of scale is thus expensive. Baranson also argued that, if the market expanded, the unfavorable cost curve would shift downward. Although demand in India had grown for all types of vehicles as the government loosened regulations, the market is still small relative to minimum efficient scales. With the increase in Japanese collaborations manufacturing in the automobile sector became quite import-intensive4’ (Figure 3). This could not be sustained for long because of yen appreciation and rupee devaluation. During 1985-89 the import value of auto components shot up rapidly, indicating not only the import intensity of Japanese ventures in India but also the technical inability of the local ancillary industry to meet the needs of a new generation of auto products.* Data published in its annual reports show, however, that MUL has progressively reduced the value of imported components per unit of output value, indicating the benefits of scale economies on quality and price. Furthermore, MUL’s aggressive effort in reducing its dependence ou imported components fostered an emerging ancillary industry. The Automotive Components Manufacturers Association reports a sharp decline in imports after 1987 due to the development of a supplier industry, thereby reducing imports of most basic components. Except for MUL, TELCO, and Ashok-Leyland, the
q
Imports
A Exports
Source:
ACMA (various
issues).
Figure 3. Componentsexportsand imports(by value).
Indian four-wheeler segment suffers from uneconomic production units and low operating rates. As a result the development of the domestic parts and components industry is small and largely remains uncompetitive internationally. In the 1980s India’s trade balance in the components sector was negative. Despite rising exports the magnitudes of exports are small - about $80 million or about 0.1% of total global exports in automotive parts and components. The government estimates that India may increase this to a modest 0.2% in 2ooO. Even some multinational firms, such as MICO-Bosch (the largest exporter from India) and Lucas-TVS, had export shares of only 10% and 2% respectively.49 The increase in exports reflects some improvements in Indian-made parts, the effect of devaluation, and imports of subcomponents and raw materials. Exports are small principally because of limited market access by Indian firms and poor quality of products, itself a result of poor technological development. The absence of buy-back arrangements with Japanese technical collaborators limits large-volume production. Furthermore, the technological backwardness of Indian suppliers has been compounded by low research and development (R&D) expenditure. The private transportation sector as a whole had an expenditure to sales ratio of 0.63 to 0.69% from 1988-89 to 1990-91.50 Even MUL, considered to be highly successfyl; had a ratio of 0.16% in 199&91, a figure that was exceeded by 110 of the 150 public/joint sector undertakings listed in a Department of Science and Technology survey. In 1989, the Japanese automobile industry accounted for mom than 14% of total R&D expenditures. Furthermore, liberal imports of technology have reduced long-term m-house research and development efforts (Swaminathan, 1992) and instead encouraged indiscriminate imports of technology. According to Jacobsson (199 1) the engineering industry’s excessive reliance on disembodied technology (blueprints) has hindered technology diffusion precisely because of the small internal market. The net result has been an “under-investment in R&D” and the consolidation of the inverse relationship between local content and product quality. Indian industry has been unable to reverse these trends. Local technological effort might be further discouraged if the Indian government grants unconditionally automatic renewals of technology licensing from existing collaborations, as demanded by the Automotive Component Manufacturers Association?’ India’s export of finished vehicles, valued slightly over $100 million in 1990-9 1, is minor by world standards. MUL, the most dynamic car producer in the country, was able to export about 5,008 vehicles in 199&91, less than 4% of its production. Over 50% of such exports went to Eastern Europe, a sharp departure from over 3,000 vehicles or nearly 65% exported
491
INDIAN AUTOMOBILE INDUSTRY Table 5. International competitiveness of Indian vehicles* Indian vehicles
Price in India
Comparable foreign vehicles and price abroad
Maruti (800 cc)
$3,567 (1985)
Yugo - $4,000 (1986, US)
Maruti (800 cc)
$3,992 (1990)
Citroen AK- 1OE- $8,664 (1990 France) Austin Mini - $7,739 (1990, France) SEAT Marbella - $6,600 (1990, France)t
Maruti-Zen (993 cc)
$7,161 (1993)
Nissan-March (997 cc) $7,284 (1993, Japan)+
HM-Ambassador (1,489 cc) HM-Contessa
$4,329 to 5,733 $5,468 to 7,026
Obsolete vehicles with no international comparators
PAL-Padmini (1,089 cc)
$4,200 to 5,5 10
TELCO - 16.6-ton truck Ashok-Leyland - 15.2-ton truck
$15,000 (1986) $11,850 (1985)
Fiat Iveco -
13.3-ton truck - $23,000 (1986)
Source: World Bank (1987), p. 18; Kathuria (1990). Table 3; Nissan Motor Co., Ltd. (1993), personal communication; SEAT (1994). personal communication. *All prices are in current US dollars, converted from Rupee prices at the prevailing exchange rates. They exclude excise duty and consumption tax, except where noted. t Net Retail Price in Spain. Until 1985 sold as “Panda” under Fiat license. $ Japanese price is average in yen, converted to US $ by using average yearly exchange rates. With the appreciation of the yen, prices of Japanese vehicles in US dollars increased rapidly in the past few years. to Western Europe in 1989-90. Stringent emission regulations by the European Community beginning in 1993 were responsible for the shift. The 1,000 cc car will probably not find a large export market as there are no plans to introduce a left-hand version. This may change when full production of the Zen and an upgraded version of the 1,000 cc take effect. To remain profitable, MUL must increase exports as it expands capacity by 100,000 units. With delicensing, the Indian market already shows signs of overcrowding. The Indian government recently cleared Peugeot’s joint venture with Premier Automobiles to produce 60,000 units per year. DCM-Toyota and Daewoo are planning to produce 50,000 vehicles. Fiat and Citroen are now negotiating with Ashok-Leyland and Escorts respectively to produce passenger cars. The Rover Group of Britain joined with Sipani Motors to produce the Rover Montego at $32,600, while TELCO will manufacture the upscale MercedesBenz. Chrysler also intends to produce the four-wheel drive Cherokee utility vehicle with Mahindra and Mahindra. When these developments are added to GM’s production of the Gpel Astra, the domestic market in the absence of exports is indeed crowded. In a capital-intensive industry with new forms of production organization, low wages in India have not been very useful in enhancing product quality, although they have helped maintain price competitiveness. The cars produced by HM and PAL are based on designs of the 1950s and thus do not have any international comparators. In the Indian market however, their products have been quite expensive (see Table 5). Maruti’s basic car has been price and quality com-
petitive at home and at the low end of the international vehicle market. The 800 cc however, does not meet 1993 ECemission standards. Maruti’s most recent car, the Zen, will be heavily export oriented, an indication of its price competitiveness in international markets. The domestic retail price for the Zen in New Delhi in 1993 was approximately $10,000 including excise duty.s2 This price is much too high for Indian consumers, hence exports are inevitable. Excluding the excise duty of 40%, the retail price would be $7,161. At this price the Zen is likely to be competitive in international markets, especially when compared to Nissan’s March. 53 The difference between Nissan and MUL is that Suzuki must clear the way for global market access on behalf of MUL. In an era of economic globalization, market access remains a formidable entry barrier for developing country firms.
5. CONCLUSION The transformation of the Indian automobile industry illustrates the complexity of industrial restructuring. With the exhaustion of the import-substitution model, the state, in response to middle-class demands, became more receptive to economic liberalization. As early entrants to the automobile sector, Japanese businesses introduced modem technology through equity participation and consequently radically transformed the industry. The Indian state continued however, to circumscribe Japanese participation through import and foreign exchange restrictions. Since the advent of liberalization until the early 199Os, the state, by
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deregulating and actively promoting MUL as a national champion, produced a rather curious, if not perverse, result. There was a near-monopoly in the passenger car segment without significant rationalization of the remaining producers in this segment; fragmentation of the LCV segment with four new Japanese joint ventures; and the increasing foreign technological dependence of parts and components suppliers. It would be a misinterpretation to view the partial denationalization of the Indian automobile industry as the handiwork of external monopoly power and a supplicant state. Suzuki’s presence has been bolstered because of an active state interested in enhancing MUL’s economic position through both political and technological means, while its competitors, because of prevailing political circumstances, could manage to postpone radical rationalization. The state’s de jure protection of MUL by barring new entrants was complemented by political accommodation of other firms, which contributed to the fragmentation of the LCV sector. Furthermore, by introducing strict fuel-efficiency norms for new firms the state displayed its concern for foreign exchange outflows and its pragmatic response to consumer demands. The internationalization of the industry introduced more competition, exit of firms, strategic joint ventures, and innovations by more dynamic domestic enterprises, resulting in several new products and upgraded technologies. Restructuring thus entailed a qualitative change in the industry and a transformation of the statemarket equation. Further restructuring of the Indian automobile industry will be subject to increasing scale of production and intensifying economies of scope. MUL, with its near-monopoly position, has successfully consolidated its market presence. For the industry as a whole however, raising domestic demand and capturing export markets will be critical. MUL, TELCO, and Ashok-Leyland are expected to benefit most from global integration. Lowering production costs through increasing volumes could be also supported by a reduction of the excise duty, currently at 40%. Taking advantage of flexible methods, such as the applica tion and diffusion of microelectronics technology (Hoffman and Kaplinsky, 1988), and creating favorable institutional arrangements (Best, 1990, Smitka, 1991) would be the third step. Without these conditions the Indian automobile industry, including the components segment, must be content with low-volume production and low-end niches of the world market. The difficulties in increasing local content due to small production scales and the rising Japanese yen
make Indo-Japanese assembly units relatively costly. Even as economies of scope become recognized, reducing the required volume of production, the absolute low level of demand will continue to dictate the extent of large-scale modem auto production. Aggressive exports will be difficult because of entry barriers. So far very few of the recent proposals, made by DaimlerBenz, Peugeot, General Motors, Citroen, and Daewoo, have indicated a desire to export. In addition, most of the cars made by these companies will cater to the upper end of the Indian market, thereby automatically constraining large volumes. Without explicit Japanese willingness to create export-oriented units for low-end vehicles, the Indian industry is unlikely to witness rapid expansion of production capacity. The Japanese auto producers, except for Suzuki, have not evinced any particular interest in using India as an export platform. Hence the opportunity for the export of components is also limited. Unless India is able to create a conducive business climate for investment, Southeast Asia will remain the major destination for Japanese investment. The appreciation of the yen, an emerging Indian middle class, a deregulated environment, and the entry of US and European firms may compel the Japanese to take a greater interest in India. The restructuring of the Indian auto industry illustrates the increasing influence of Japanese and nonJapanese foreign capital and technology in an era of economic globalization. This is an integral part of the internationalization of capital of the 198Os, begun by Japanese overseas investment to fend off the appreciation of the yen (end&), circumvent nontariff barriers, and reallocate capital toward knowledgeintensive industries. With greater transparency of the liberalization process, US and European firms have become major contenders to Japanese business in India. But the reorganization of the Indian auto industry does not indicate a simple operation of global forces. Rather, it reflects how the internal socioinstimtional contexts, such as a changing state-capital relationship and an emerging middle class, can influence industrial restructuring. The symbiotic relationship between the state, capital, and society largely suggests that dismantling of regulations need not result in the withdrawal of the state. Nor does the increasing role of transnational capital necessarily imply the withering away of domestic private capital. How far internationalization will integrate the Indian auto industry will depend as much on the institutional arrangements conducive to increasing domestic demand and engendering technological progress, as it will on the strategy of transnational capital. In both cases, sound industrial and trade policy could be decisive.
INDIAN AUTOMOBILE INDUSTRY
499
NOTES 1. Doner (1991). Middlebrook (1991), Shaiken (1990), Bennett and Sharpe (1985). 2.
15. The reasons cited were political, technical, and economic (personal interview with former Chairman, Madras, India, November 1991).
See Toye (1993) for a critique of this characterization. 16. See Kathuria (@Xl), p. II-3 and Table 3.6.
3. The preindependence “Statement of Government’s Industrial Policy” of 1945, followed by postindependence legislation in 1951 (Industries Development and Regulation Act), established the basis for state intervention in the economy. The i&a of planned development of industries was rooted in the Fabian tradition. State promotion of the national interest included regulation, creation, and expansion of industrial capacity. Subsequently, the Industrial Policy Resolution of 1956 reserved certain industrial sectors specifically for the state (see Marathe, 1989). 4.
See Hughes and Singh (1991), p. 93.
5.
Confederation of Engineering Industries (1990), p. vi.
6. Calculated from Government of India, Ministry of Finance, Economic Survey (various issues). 7. There are no objective criteria by which the middle class can be determined, especially in India where it is highly heterogeneous. Following Kohli (1992, pp. 328 329) and Nayar (1990, p. 88) however, this class comprises principally professionals, civil servants, and petit bourgeosie. One could also add the rich peasantry who exhibit consumption habits increasingly simiiar to that of the urban middle class. While this class displays facets of Westernized consumption and behavior patterns, local culture is quite resilient. See Dubey (1992) for a contemporary interpretation of the middle class as an economic group and Frankel (1988) for a historical assessment of the middle class as a political group. 8.
See also Nayar (1990), p. 88.
9. Calculated from Association of Indian Automobile Manufacturers (AIAM) (1985), p. 225; Government of India, Ministry of Finance, Economic Survey (1991), p. S-52. 10. See Association of Indian Automobile Manufacturers (AIAM), (1990); Government of India, Ministry of Finance, Economic Sunvy (1993). Although there is merit in studying the two-wheeler industry, the differences in industry structure from the four-wheeler segment and its status in the transportation sector call for a separate analysis of its restructuring. 11. Kathuria(1990),~.2. 12. Other than a 25% automatic increase in capacity, however, large domestic and foreign firms falling under MRTP/FERA regulations were still kept on a tight leash. 13. See Steven (1990); Encarnation (1992); Gwynne (1991); Shaiken and Herzenberg (1987). 14. Ashok-Leyland has had significant British capital participation but production has been almost 100% local.
17. See Kathuria (1990). Table 3.2. 18. Discussions held with relevant officials in New Delhi, Bombay, Madras, Calcutta, Tokyo, Hammamatsu, Hiroshima, and Toyota-&i (August-December, 1991). 19. See Jalan (1991), p. 99 and Ghosh (1990), p. 343. 20. In the Japanese market, Suzuki’s total market share has been around 796,making it the sixth largest producer (Toyota Motor Corporation, 1990, p. 2). The company is known for its smalI cars, which form the bulk of its passenger car output. In the production of small cars Suzuki doubled its production every five years in the decade of the 1980s (Japan Automobile Manufacturers Association, 1991, p. 16). 21. Manor (1988) sees this principally as a result of the breakdown of Congress party discipline. 22. See Kohli (1992), p. 322. Nayar (1992) illustrates the difficulty in privatizing state-run firms such as Scooters India Ltd. as part of the overall economic liberalization package. Even for private firms labor retrenchment is fraught with difficulty, as in the case of Standard Motors. According to Nayar the state perceived manufacturing scooters to be highly profitable but failed miserably because of incompetence. The success of MUL however, demonstrates that state firms need not fail. 23. See LaU(1987), pp. 175-182. Interviews with TELCO officials, Bombay (October 1991), Ashok-Leyland officials, Madras (October 1991), and personal correspondence with TELCO. 24.
See Venkataramani (1990), p. 16.
25. One component manufacturer confided that dies worth about $4 million for the TELCO-Honda project were already made and were lying idle in Japan. This could not be confirmed with Honda officials in Tokyo. 26. Although exporting the Indian-made Hondas was not explicitly stated in the application, one TELCO official stated exports could have been made if necessary. Both may not have been possible because of Honda’s existing global operations and the inability of TELCO to meet Honda’s quality requirements for the international market. He added that since the Hondas would be extremely popular in India there would not have been a need for exports (interview with TBLCO officials, Bombay, October, 1991). This argument, however, is not persuasive if the government was concerned with foreign exchange outflows. 27.
I am grateful to Makoto Kojima for this information.
28.
Because it met the government’s fuel-efficiency crite-
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ria, MUL obtained various kinds of concessions from the government whereas other manufacturers could not. MUL received reduced import/customs duties, from 40% from 1983-85 to 70% by 1991. Other companies allege their duty burden has been 150%. The discrimmation has been based on the fuel-efficiency criterion, although this may mask the ulterior motive of protecting the state-owned tirm. One producer of passenger cars alleged that while all manufacturers imported sheet steel, the duties varied. MUL imports steel which is precut, and accordingly it is de&red as a component. Whereas other producers import steel sheets as coils which is defined as raw material. Imports of raw materials were charged 150% while components were levied duties of only 40%. 29. There is little evidence for exchange outflows. Because of imported technology, relatively low local content due to strict Japanese requirements, and lack of exports, most Japanese collaborations contributed to Jndian deficits on the trade account. 30. For example, figures quoted by DCM-Toyota, claiming 80% local content by the sixth year and promising 90% in the seventh year, are contested by various industry officials in the private and state sectors. On the other hand, many industry experts were quite confident of Either-Mitsubishi attaining high levels of local content because of Either’s long experience in manufacturing tractors with local parts and components. 3 1. From 1983-84 to 1988-89 the average value of components imported exceeded the average value of components exported by nearly 170% (Automotive Component Manufacturers Association of India, Automorive Industry of India (Facts and Figures), 1991, pp. 67-69). Due to strict import regulations on completely built units and some exports to neighbouring developing countries, India’s balance of trade in this segment remained positive. 32. See Hamaguchi (1985) p. Ml18. 33. Nissan and Ford set up engine plants in Mexico to supply their US plants. Volkswagen shut down its plant in the United States and relied on its Brazilian subsidiary to serve part of the US market. While large foreign debts have compelled TNCs in Brazil to export, South Korean lirms have been successful because of their ability to fill the gap in small car production. US firms weak in this segment have used South Korea as a source for such vehicles, while most Korean units have relied on Japanese technology.
36. Japanese joint ventures in India have located in these new industrial areas because of historically weak labor movement and lower wages. This locational strategy is similar to Japanese automotive investments in southern US states. See Rubenstein (1992). 37. There are tax breaks in Japan for engines of 660 cc and less. 38. The recent introduction of the Contessa car by HM uses a Vauxhall body made by GM and an engine made by Isuzu in which GM has an equity of 37.5%. 39. Compiled from Indian Investment Centre (various issues). 40.
Dicken (1992), p. 280.
41. Cited in Gdaka et al. (1988), p. 63. Clearly the press shop would dictate the economies of scale for the auto assembly plant. See Gdaka (1983), p. 8. 42. General Motors Press Release, May 11,1994 and interview with GM Staff, July 19, 1994. 43.
Kathuria (1990). p. E-3.
44.
World Bank (1987), p. 12.
45. For example, according to one Nissan official, the cost of a vehicle produced in Nissan’s Mexico plant was only 10% cheaper than a US-based Nissan vehicle despite a wage ratio in Mexico that is only l/10 that of the US (Gwyrme, 1991, p. 84). 46. Plant visits and interviews with DCM-Toyota officials in Gaxiabad, MUL officials in Gurgaon, and EicherMitsubishi officials in Pitampur (1991 and 1992). 47.
Kathuria (1990), p. I-15.
48. Many Indian businesses privately allege that Japanese business and their Indian counterparts exploited the small window of opportunity to the maximum extent possible in the latter half of the 1980s. 49. Business India (May 13-26,1991), p. 104.
34. For Japan, 1980 was a watershed year, surpassing for the first time US production in automobiles. In that year total US imports stood at 27% while 20% of the US market was held by Japanese firms (Rubenstein, 1991, pp. 116-117). With the imposition of the Voluntary Restraint Agreements that lit Japanese exports to the United States, the Japanese auto tirms constructed seven production facilities during 1982-89 in the United States with a total capacity of 1.77 million units.
50. See Government of India, Department of Science & Technology (1990-91), p. 61, pp. 57-59.
35. See Automotive Components Manufacturers Association, Automotive Industry of India (Facts and Figures), 1991, pp. 354.
53. In 1993 the price of Nissan’s March in Japan was $7,284 (excluding 4.5% consumption tax). It would be more with the recent appreciation of the Japanese yen.
5 1. Automotive Component Manufacturers Association (1992), p. 7. 52.
Personal communication 1993).
from Suzuki, Japan (October,
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