July 13, 2018
Between April 2000 and December 2017, foreign direct investment (FDI) in the auto sector exceeded US$18 billion, which goes to show the interest of foreign auto companies in India
Foreign auto manufacturers have benefited from the prevailing conducive business environment in India that encourages production for the local as well as overseas markets
There has also been a surge in collaboration between global auto brands and Indian academic and research institutes to drive and incorporate new-age automotive innovations
The robust auto industry is supported by a thriving auto components sector with revenues exceeding US$43 billion and exports alone accounting for $11 billion, thus attracting FDI
When auto giant Volkswagen announced its decision to invest over US$1.2 billion this July to reboot its business in India over the next five years, it was merely following its European and American counterparts such as Daimler AG, Volvo Cars, Groupe Renault and Ford Motor. Or, for that matter, Korean and Japanese carmakers such as Honda Motor, Hyundai Motor, Suzuki Motor and Nissan Motor have cumulatively invested or announced fresh injection of funds exceeding US$3 billion in recent years. Each of them has been making significant investments in India either to consolidate or upgrade their presence besides using their Indian operation as an export hub.
Hyundai Motors, for example, has invested in excess of US$3 billion so far with its facility near Chennai producing around 700,000 cars per annum. In addition, the Korean giant is readying its R&D facility in Hyderabad even as it exports a major portion of its small cars manufactured in India. Hyundai’s rival, Kia Motor recently signed an agreement with the Andhra Pradesh Government to invest over US$1 billion into a new plant. All these companies have benefited from the prevailing conducive business environment in India that encourages production for the local and overseas markets. Resultantly, India has emerged as a high-margin manufacturing destination.
Similarly, Japan which was perhaps the first to enter the Indian automobile market, has seen investments from its companies soaring beyond US$4.7 billion. For example, Nissan, while tapping the domestic market, has also managed to export more than 700,000 cars to over 106 countries since the beginning of its operations in India. Likewise, Germany and Sweden have not lagged behind. Daimler India Commercial Vehicles, for one, is already exporting Mercedes Benz trucks and buses produced near Chennai. Daimler recently exported its 10,000th truck to Indonesia. In addition, its India-made Mitsubishi Fuso range of trucks is being exported to over 28 countries.
Alongside Daimler, Volvo is helping in positioning India as an export hub for buses and trucks besides automobile engines. The latter just got ready to ship its light duty UD Trucks, manufactured at the Pithampura plant in Madhya Pradesh. Recently, Volvo executed the shipment of what was termed as the country’s first fully built intercity luxury bus to Europe recently. India has also begun making the Euro VI engines for Volvo’s home market in Europe. Euro VI, equivalent to India’s Bharat Stage VI, is the latest vehicular fuel emission standard being rolled out globally. Besides cleaning up the environment, this has created new business opportunities for manufacturing industries.
Interestingly, a comparatively weak response to a company’s product can also open up other business avenues. A case in point is General Motors which found the ‘Make in India’ initiative extremely useful as it has begun to export its Chevrolet Beat model to Mexico, using the Talegaon factory in Pune as its base. There were apprehensions earlier that the plant would close down, but the surge in demand for Beat from Mexico, changed the scenario with exports hovering over 3,000 units. Such developments have helped India climb up in global value chain, which has led to India’s merchandise exports growing to US$303.4 billion during financial year 2017-18.
These developments do not come as a surprise though, because in 2017 the Indian auto industry became the fourth largest in the world with domestic sales increasing 9.5 per cent year-on-year to 4.02 million units (excluding two wheelers). It also became the seventh largest manufacturer of commercial vehicles besides accounting for overall annual export of 747,287 units. Meanwhile, there has also been a surge in collaboration between global auto manufacturers with Indian academic and research institutes to drive new-age automotive solutions that incorporate zero emission technology, artificial intelligence (AI), machine learning, Internet of Things (IoT), among others.
The robust auto industry is supported by a thriving auto components sector with revenues exceeding US$43 billion and exports alone accounting for $11 billion. This, coupled with automobile clusters spread across Pune, Nasik, Aurangabad, Sanad, Chennai, Gurugram, Bengaluru, Hosur and Faridabad, where skilled labour and resources at low cost is aplenty, the surge in inflow of foreign investment in the automobile sector does not come as a surprise.
According to the Department of Industrial Policy and Promotion (DIPP) between April 2000 and December 2017, FDI in the automotive sector exceeded US$18 billion, which goes to show the interest of foreign auto companies in India. Simplification of policies relating to FDI and sharp improvement in inter-state movement of high-volume goods following the introduction of the Goods and Services Tax, have provided the ideal environment.
According to the Automotive Component Manufacturers Association (ACMA), the Indian auto-components industry is expected to register a turnover of US$100 billion by 2020 backed by strong exports ranging between US$80-100 billion by 2026, from the current US$11.2 billion. Recent developments have strengthened this belief. Last month, for example, Motherson Sumi Systems, an Indo-Japanese joint venture, signed a deal to acquire Reydel Automotive for US$201 million.
The acquisition would help the company enter new geographies. Similarly, Schaeffler India, the Indian arm of Germany’s automotive and industrial parts maker, as well as Setco Automotive are planning huge investments over the next three years for capacity expansion and modernisation. Meanwhile, growing investment in manufacturing of auto components have spilled over to production of higher value engineering products for a wide range of industries.