Industrial Clusters in India (Auto Sector)
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Transcript of Industrial Clusters in India (Auto Sector)
APPLIED INDUSTRIAL ORGANISATION | 12th Nov, 2008 SJMSOM, IIT Bombay
Group 3 07927816 07927827 07927863
Defining Industrial Clusters
Classification of Clusters
Benefits of Cluster Formation
Significance of Clusters for SMEs
The Flowchart Model of Cluster Policy
Theory of Industrial Clusters
Defining Industrial Clusters
Geographically proximate group of companies and associated institutions in a particular field
Linked by commonalities and complementarities
Also known as a business cluster, competitive cluster,
or Porterian cluster
Was introduced and popularized
by Michael Porter CLUSTER
Identifying a Cluster
Sectoral
A cluster of businesses operating together within the same commercial
sector
Geographical
Geographically proximate group of
companies
Vertical
Typically a supply chain cluster
Horizontal
Interconnections between businesses
sharing resources
Types of Clusters
• High Technology Oriented
• Well – adapted to the Knowledge Economy
• Comprise of renowned institutions and research centers
• Silicon Valley
Techno - Clusters
• Maintain advantage of knowhow garnered over several years
• London as a financial centre
Historic Knowhow-based clusters
• Creation linked to comparative advantage derived due to geographic location
• Wine production clusters in France
Factor Endowment clusters
Agglomeration Effects
Benefits of Cluster Formation
Increased productivity More focused direction and faster innovation
cycles
Agglomeration Effects involve those benefits that firms obtain when locating near to each other
Cluster Benefits Increased Productivity
• Existing pool of specialized and skilled labor
• Reduces recruiting costs
• Provides a deep and specialized supplier base
Improved access to labor and suppliers
• Preferred access to extensive market, technical, and competitive information
Improved access to specialized information
• Investments made by government or other public organizations
Access to institutions and public goods
• Competitors share general circumstances
Easier to measure performance
Cluster Benefits Faster Innovation
• Outcome of ongoing relationships
• Allows manufacturers to learn early on about changing customer needs and service concepts
Innovation visibility through proximity
• Provide the capacity and flexibility to react rapidly to a customer request
Enhanced flexibility
• Companies delay large commitments until they are more assured that a particular innovation will be fruitful
Lower experimentation costs
Cluster Policy Kuchiki (2005)
Flowchart Model for Cluster Policy Effect of Toyota on the Industrial Policy of Guangzhou, China
Pharma Cluster - Ahmedabad
IT Cluster - Bangalore
Industrial Clusters in India
Evolution – Gujarat Pharma Cluster
• Alembic Chemical Works, started in 1907
• 6 years after the first pharma firm in India Early Starter
• Chemical, Pharma machinery, IT
• Support from academic field Strong Relation
• CRAMS, R&D, Generics, NCE
• Capitalized early-on into these areas
High-growth Segments
• 10% of India’s pharma output in 2002-03
• Increased to 42% of India’s output in 2005-06
Increasing Contribution
• Established pharma ecosystem with good infra
• Zydus , Cadila Pharma, Jubilant, JB Chemicals SEZ Driven
Pharma Cluster - Ahmedabad
Capital Investment in Gujarat has grown at around 54%
Number of units (directly owned and infused capital) increased from 1964 to 3462
Gujarat’s contribution to India’s total pharma turnover have risen from 10% to 42%
Contribution to India’s exports have increased from 8% to over 22%
6.4
0.7
10.6
4.4
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4
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10
12
India Gujarat
2002-03 2005-06
2.5
0.2
5.2
1.1
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1
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6
India Gujarat
2002-03 2005-06
Size & Growth of Pharma Industry Gujarat vs India
Size & Growth of Pharma Exports Gujarat vs India
CAGR 87%
CAGR 78%
Factors favouring Cluster formation
Strong linkages between small & medium players
Proper ecosystem for growth
Benign regulatory environment
75-100 bulk producers
1000+ formulation units
Raw Materials
• Bulk Drugs
• Excipients
• Capsules
• Glass Vials
Support Institutions
• B.V. Patel Center
• FDC Laboratory
• LM Pharma College
Financial Institutions
• SIDBI
• ICICI
• GSFC
Industrial Associations
• IDMA-GSB
• MDMA
• ADMA
Evolution – Bangalore IT Cluster
• Educational Industry linkages
• Favourable research climate, “R&D hub “of India Linkages
• Defense PSUs, Electronics Industry – natural extension
• BEL, HAL, HMT, BHEL, ITI Related Industries
• Exit of foreign firms left space of local firms
• Trade Protection and Import Liberalization
Favourable Environment
• Currently houses over 1500 IT firms
• Infosys, Wipro HQ and Motorola, hp, Texas Instruments Silicon Valley
• Firms started with Application Devl and Maintenance
• Moving up value chain to provide Integrated packages Service Offerings
IT Cluster – Factors and Benefits
Factors favouring formation
Policy initiatives of govt. (both central and local)
Availability of large number of skilled workers
Y2K problem – a fortuitous event for India
Role of the Indian Diaspora
Karnataka accounts for 37.6% of total software exports from India and Bangalore accounts for 97% of it.
Perceived benefits
Proximity Benefits with R&D intensive firms
Innovation Systems
Knowledge flows & Capability building
Intra firm linkages
Benefits of Cluster vs. Non-cluster firms
0
10
20
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40
50
60
0
20
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80
100
120
140
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180
Bangalore Pune/NCR Non-cluster firms
No of employees Employee Productivity
Key Observations
Access to labour, R&D, processes
Access to information from competitors
Non-cluster firms seek better infra
Linkages nurture smaller firms
Higher employee productivity
Perceived Advantages B’lore Pune/NCR Non-cluster B'lore vs Pune B'lore vs Non-cluster
Access to skilled workers 3.99 3.74 3.29 Y Y
Access to R&D Inst. 3.61 3.25 2.56 Y Y
Access to information from comp 3.08 3.00 2.68 N Y
Better infrastructure 3.30 3.79 3.68 Y Y
Application Dev. Process (%) 88.60 88.13 76.67 N Y
Quality Process (%) 34.30 31.77 10.83 N Y
Evolution of Indian Automobile Sector
Study of two major Automobile Clusters in India
Analysis of Behavior & Performance of Cluster vs. Non – Cluster Firms
Automobile Clusters in India
Evolution of Automobile Sector
Timeline Autocomponents Passenger Cars
Pre 1985 Protected,
High import Tariff Licensed, Closed market Quantitative restriction
1985-1995 JV with OEM Entry of Maruti
1995-2000 Localization of
products Entry of Global Players
2000 onwards Export focus Indigenisation,
Thrust on exports
• Industry has developed strong backward and forward linkages • Characterized by technically capable companies in OEM and autocomponents • Areas include manufacturing, design, testing, product development • Exports of autocomponents growing at CAGR of 40% over the last 5 years
Performance of Automobile Sector
India’s position 2nd in two wheelers
11th in passenger cars
13th in commercial vehicles
Growth Targets: 2016 Automotive Industry
Total market $122 - $139 bn
Domestic market $82 bn
Exports ~ $35 bn
Autocomponent Industry Total market $40 – 45 bn
Domestic market
Exports ~ $25 bn
HHI = 527; CR4 = 34%
0 200 400 600 800 1000 1200 1400
2002
2003
2004
2005
2006
2007
Passenger Vehicles (Mn Units)
CAGR 15.4%
0 2 4 6 8 10 12 14 16
2003
2004
2005
2006
2007
Autocomponents Turnover ($ bn)
CAGR 28.9 %
References:
Industrial Clusters in India: Evidence from Automobile Clusters in Chennai and the National Capital Region
Aya Okada and N.S. Siddharthan
April 2007
Study of two major Indian Auto Clusters
Chennai Auto Cluster [Chennai, Bangalore, Hosur]
Leading Auto Cluster
21% of passenger cars
33% of commercial vehicles
35% of auto-components
>100 large & medium cos.
Capabilities
Valve assemblies
Fuel / Oil / Water Pumps
Motors & Engines
Steering gear & Wheel Rims
Tires & shock absorbers
Bearings & Radiators
1950s: Initial Formation
TVS & Std. Motors among first players
Heavy dependence on imports
Active government support
Genesis of large no. of auto component firms laid early
1960 – 1990: Capacity Building
Large no. of technical schools setup
Mid-day meal program for schools
Airports & Seaports
Financial incentives by state like technology subsidies and trade fairs
State agencies setup to facilitate FDI
Overview Evolution
50%
40%
10%
*% indicates Tamil Nadu’s share in overall manufacturing output
Chennai Auto Cluster
Leading Auto Cluster
21% of passenger cars
33% of commercial vehicles
35% of auto-components
>100 large & medium cos.
Capabilities
Valve assemblies
Fuel / Oil / Water Pumps
Motors & Engines
Steering gear & Wheel Rims
Tires & shock absorbers
Bearings & Radiators
1990s: Delicensing of Industry
Hyundai, Mitsubishi & Ford set shop
Attracted by capabilities of auto component manufacturing firms and government support
Rise of local firms with IT capabilities
Impact of smaller firms
Proliferation of industrial estates providing cheap technical services
Guindy Industrial Estate in Chennai is the largest and a typical example
Presently, in globalization mode fuelled by IT and increase in outsourcing
Overview Evolution
50%
40%
10%
*% indicates Tamil Nadu’s share in overall manufacturing output
TVS Group
Wheels India
Lucas TVS
Brakes India
Sundaram Clayton
Sundaram Fasteners
TVS Group
Sundaram Dynacast
Turbo Energy
Nippon Electricals
TVS Cherry
TVS Motors
Maj
or
Pla
yers
in t
he
Ch
enn
ai A
uto
Clu
ster
Rane Group
Rane Engine Valves
Rane Brake Linings
Rane Madras
Rane NSK Steering Systems
Rane TRW Steering Systems
Ashok Leyland (AL)
Global Players Hyundai, Ford, Mitsubishi
100% subsidiary setup in ’98 14 Korean Tier-1 suppliers Capacity ramp-up to 4L p.a.
75% local content Technology licensing (US firms)
Hub of global parts’ sourcing
30% local content Focus on premium segment JV with Hindustan Motors
Maj
or
Pla
yers
in t
he
Ch
enn
ai A
uto
Clu
ster
Rane Group
Rane Engine Valves
Rane Brake Linings
Rane Madras
Rane NSK Steering Systems
Rane TRW Steering Systems
Ashok Leyland (AL)
Maj
or
Pla
yers
in t
he
Ch
enn
ai A
uto
Clu
ster
Global Players Hyundai, Ford, Mitsubishi
Except Ashok Leyland, the lead firms in the Chennai auto cluster are component manufacturers which paved the way for the entry of foreign players like Ford & Hyundai in the nineties into the cluster This behavior is atypical of most auto cluster formations across the world
Government
Infrastructure
Established business houses
Smaller Firms
Highly skilled workforce
IT Emergence
Global players
Chennai Auto Cluster: Growth Drivers
NCR Auto Cluster [Delhi, Gurgaon, Faridabad]
Cluster Zone
Haryana, Delhi & some UP districts
Major Players
Maruti Udyog Ltd. (MUL)
Started in 1982 as GOI + Suzuki JV
First greenfield plant in Gurgaon
Two more plants in Gurgaon & Noida
Largest car manufacturer in India
Daewoo Motors India Ltd.
Ceased operation after few years
Insignificant contribution to cluster
Honda Siel Cars Ltd.
Recently established (2000)
Low production volume
GOI’s Phased Manufacturing Plan
Foreign firms to promote localization
Suzuki’s MOU: 70% localization by ’87
Government support to SSI
Dependence on outsourcing
80% components outsourced
Local supplier quality levels very low
Introduction of JIT + Taxes
Supplier close to plant was imperative
Octroi significantly reduced margins
Yen Appreciation in ‘80s
High custom duty on CKD units
Overview Need for Vendor Development
MUL’s Role in Vendor Development
Supplier MUL’s Role
Bharat Seats 15% equity stake JV with Howa, Japan
Macino Plastics 15% equity stake
Subros 15% equity stake Technology from Denso
Asahi Safety Glass 15% equity stake
Sona Steering 15% equity stake Technology from Koyo
Mark Auto Industry 24% equity stake
Jay Bharat 31% equity stake
Motherson Sumi Aided in collaboration
MUL Suppliers:
Geographical Distribution
MUL
Vendor Development
0
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40
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80
100
120
140
160
No
. of
Firm
s
Large Firms Medium Firms Small Firms
MUL’s major suppliers are
located in NCR
Methodology
Results & Conclusions
Analysis of behavior & performance of cluster versus non – cluster firms (Automobile sector)
Methodology
Data 19 Auto Component Sub – sectors
85 Firms
Timeline: 5 years (2004 – 2008)
Classification Plant Location (Cluster firms of NCR, Maharashtra, Chennai vs. others)
Source: Capitaline Database
Variables RONW
Advertisement Intensity
Inventory Turnover
Overall Performance Comparison
Cluster firms are clearly ahead of non – cluster firms with regards to total performance
RONW is a comprehensive measure of performance as it accounts for profit margin, asset turnover and leverage capacity
2004 2005 2006 2007 2008
NC 28.98 39.73 36.57 36.91 39.55
C 68.70 96.47 128.91 159.64 146.45
0
20
40
60
80
100
120
140
160
180R
ON
W
RONW = PAT/SALES x SALES/TOTAL ASSETS x TOTAL ASSETS/NET WORTH
Comparison of Advertisement Intensity
Advertisement as a % of Sales is higher for non-cluster firms.
Cluster firms benefit from the agglomeration effect
This demands lesser expenditure on advertisement for a comparable level of sales
2004 2005 2006 2007 2008
NC 0.51% 0.70% 1.16% 1.05% 0.71%
C 0.24% 0.24% 0.22% 0.22% 0.15%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
Ad
vert
ise
me
nt/
Sale
s%
Comparison of Inventory Efficiency
Inventory Turnover is higher for cluster firms compared to non – cluster firms.
This indicates that cluster firms maintain higher inventory efficiencies (possibly due to location proximity)
2004 2005 2006 2007 2008
Non - Cluster 8.20 9.27 13.27 12.93 12.48
Cluster 13.63 13.47 13.28 14.00 13.52
0
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4
6
8
10
12
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16
Inve
nto
ry T
urn
ove
r (d
ays)
Comparison of Employee Productivity
Counter intuitively, the employee productivity for non – cluster firms is greater as compared to cluster firms
One reason for this could be due to employees in cluster zones being paid higher wages and the inherent use of wages (rather than no. of employees) to measure productivity 2004 2005 2006 2007 2008
Non - Cluster 15.86 17.25 18.45 21.96 21.85
Cluster 16.04 17.19 16.69 17.67 18.59
0
5
10
15
20
25
Avg
. Em
plo
yee
Pro
du
ctiv
ity
Industrial Clusters in India: Evidence from Automobile Clusters in Chennai and the National Capital Region, Aya Okada and N.S. Siddharthan, April 2007
The Flowchart Model of Cluster Policy: The Automobile Industry Cluster in China, Akifumi Kuchiki, April 2007
Bangalore Cluster: Evolution, Growth and Challenges, Rakesh Basant, May 2006
Gujarat Pharma Industry, KPMG Report
Indian Auto Component Industry, IBEF Report, Jan 2008
Data Source: Capitaline
References
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