Contribution of auto industry.

The automobile industry is a pillar of the
global economy, a main driver of
macroeconomic growth and stability and technological
advancement in both developed and developing countries,
spanning many adjacent industries. For developing
countries such as India, understanding the auto industry's
evolution in other countries offers a roadmap forward.
India's auto industry is the world's sixth-largest producer
of automobiles in terms of volume and value. It has
grown 14.4 percent over the past decade, according to
the Society of Indian Automobile Manufacturers (SIAM).
With more than 35 automakers, the industry contributes 7
percent to India's GDP and is responsible for 7 to 8
percent of India's total employed population.
To maintain auto's primary role in growth, India must
make the right moves at all critical junctures. This paper
examines how the industry, government, and key
stakeholders in other countries have propped up their
auto industries, and how India and other emerging
markets can use the same strategies to build growth
momentum.
Auto's Contribution to the Global Economy
The core automotive industry (vehicle and parts makers)
supports a wide range of business segments, both
upstream and downstream, along with adjacent industries
(see figure 1). This leads to a multiplier effect for growth
and economic development. Furthermore, R&D and
innovation within automotive can benefit other industries,
such as the insurance industry's use of innovative ideas
(for example, automotive telematics).
Automotive contributes to several important dimensions
of nation building: generating government revenue,
creating economic development, encouraging people
development, and fostering R&D and innovation (see
figure 2).
Generating revenue. The automotive sector contributes
significant tax revenues from vehicle sales, usage-
related levies, personal income taxes, and business
taxes. Production and sales of new and used vehicles,
parts, and services deliver excise, sales, value-added,
and local taxes and import duties. For instance, in Japan,
auto-related taxes totaled $7.72 billion in 2012, roughly
9 to 10 percent of all tax revenues, according to the
Japan Automobile Manufacturers Association. In the
United States, auto contributes $135 billion per year,
including 13 percent of state tax revenues and 2 percent
of federal tax revenues. In India, duties collected from
sales of motor vehicles, accessories, and fuel contributed
7 to 8 percent of central tax collections in 2012.
Additionally, as automakers reap the benefits of
globalization through exports, they also generate foreign
exchange earnings. This is crucial to a country's current-
account performance and trade balance with other
economies. Not surprisingly, the share of automotive
exports is higher in developed countries than in emerging
economies—18 percent in Germany and 17 percent in
Japan, compared with 6 percent in Brazil and 5 percent in
India. However, for some developing economies, 4 to 6
percent of export earnings are offset by vehicle imports
and auto components.
Economic development. The automotive industry is
important to global economic development. Globally,
automotive contributes roughly 3 percent of all GDP
output; the share is even higher in emerging markets, with
rates in China and India at 7 percent and rising.
There is also a close correlation between foreign direct
investment (FDI) inflows and automotive output,
particularly in developing economies. For example in
China, the correlation between growth in auto output and
FDI is almost 1 to 1, as the automotive industry's rise has
closely tracked that of China's economy. Automotive FDI
also brings investment in related industries and can lead
eventually to the development of a wider automotive
ecosystem. In South Korea, for example, 40 percent of
total FDI in 2000 was for the automotive industry,
providing the country a crucial step out of its recession
following the 1997 Asian financial crisis. Today, South
Korea is the world's fifth-largest vehicle producer, and
has benefited from a multiplier effect as adjacent
industries (such as steel and finance) also profit from the
growth (see figure 3). Steel sales, for example, went from
55 thousand tons in 2002 to 210 thousand tons in 2012.
Every job in the core auto industry leads to more than four
additional jobs in upstream or downstream industries.
Economic development is primarily in two areas:
Industrial development. Across the world, auto is a
spark for regional development. Industrial clusters
form as original equipment manufacturer (OEM)
plants are surrounded by component
manufacturing facilities, including steel plants,
glass manufacturers, used car dealerships,
aftermarket shops, and transportation service
providers. These clusters lead to new
municipalities with solid road infrastructures,
railway and freight connectivity, and new housing
developments. Most major auto economies have
these clusters, including Detroit in the United
States and Ulsan in South Korea. In developing
countries, these clusters include the ABC region
near São Paulo in Brazil; Pune, Gurgaon, and
Chennai in India; and Guangzhou province in China,
where more than 55 automakers, 100 component
suppliers, and 200,000 workers now reside. In
2007, Guangzhou contributed to 13 percent of
China's total GDP and had a GDP per capita
roughly 75 percent higher than the national
average.
Mobility. Automobiles have revolutionized the
concept of mobility, with goods and people now
easier than ever to move across geographic
regions. For decades, developed countries have
witnessed how increased vehicle ownership and
improved transport infrastructures have led to
counter-urbanization—the migration of people,
businesses, and industry from cities to newly
developed suburban areas. This trend is spreading
to emerging economies. In New Delhi, for example,
significant development has arisen in the suburbs
of Noida and Gurgaon, bringing crucial revenue
sources for their respective states.
People development. Worldwide there is one motor
vehicle for every five people; in the United States there is
one car for every 1.25 citizens. Automobiles can increase
quality of life through increased mobility, comfort, and
safety.
The industry also contributes to job creation and skill
development. Its numerous forward and backward links
bring both direct and indirect employment. To put this in
context, 313,000 people were employed by OEMs in the
United States in 2010, and another 1.1 million worked for
adjacent industries. All told, 5 percent of the U.S.
workforce had direct or indirect links to automotive. In
South Korea, OEMs accounted for 270,000 jobs in 2011,
and related industries added 1.4 million jobs overall—a
multiplier of more than five—adding up to 7 percent of the
country's workers (see figure 4). In Japan, the industry
employs 5.4 million people, representing 8 to 9 percent of
the total workforce.
Given the complex nature of the industry, employees
develop valuable skills covering R&D, design, sourcing,
manufacturing, supply chain, sales, and marketing. In this
regard, automotive is a training ground for developing
technical and managerial expertise valuable in many
industries—and for the entire economy.
Fostering R&D and innovation. R&D investment by
automakers is driven by consumer demands for more
product variety, better performance, improved safety,
higher emission standards, and lower costs. Auto
companies spend the third most on R&D of any industry—
$108 billion compared to $111 billion spent by
technology companies and $120 billion spent by
pharmaceuticals. Automotive makes up a significant
percentage of total manufacturing R&D spending in the
auto hubs of Germany (33 percent), Japan (20 percent),
and South Korea (18 percent).
The automotive industry remains at the forefront of
cutting-edge manufacturing technology, which has
spread to other industries. Production processes that
germinated in automotive—for example, Ford's assembly
line manufacturing and the lean principles of the Toyota
Production System—are now common in many industries.
Automotive pioneered the use of robots as an automation
solution; robotics today is a $25 billion industry, with
food and beverage, pharmaceuticals, and
communications among the industries using this
technology extensively. The auto industry's supply chain
integration and modular sourcing have been influential as
well. Automakers were among the first companies to
transfer direct task responsibilities, such as design,
engineering, R&D, and purchasing, to suppliers. By
focusing on core processes, automakers have improved
profitability and served niche markets more efficiently.
The Stakeholder Role in Industry Growth
The government and other important stakeholders play an
important role in shaping the automotive industry. Across
the three stages of growth—incubation, penetration, and
sustainability—governments introduce policies that
influence the evolution and momentum of the auto
industry. Consider how stakeholders in different countries
have an impact at each stage (see sidebar: Examples of
Government Interventions) .
Incubation stage. How the auto industry got its start
varies by country. In the United States, the industry grew
as private affluence rose, along with the demand for
vehicles. In Germany and Japan, the auto industry was
propped up by a desire for improved military prowess. In
general, there is a common pattern: After identifying
automotive as a pillar for growth, the government
supports investment in mass manufacturing capabilities
and protects the infant domestic industry.
Investment. Timely and appropriate capital
investment is undoubtedly important, especially for
developing economies such as Brazil and China.
The most pragmatic approach is to garner support
from foreign OEMs.
Protection. Governments typically demonstrate a
protectionist attitude early in industry development
—restricting imports with special rules, tariffs, and
mandates on local content. However, too much
protectionism can be risky. In Russia and
Malaysia, for example, protectionist policies stifled
competition and affected quality, whereas
Thailand, whose industry arose at the same time
as Malaysia's, is stronger today because of open
trade and investment policies.
Penetration stage. This stage is characterized by industry
initiatives that increase automotive's reach across
income levels and borders.
Open the economy to outside investors. To expand
industry output, it is important to tap into outside
markets. For example, Brazil's BEFIEX program,
introduced in the 1970s, brought in major
automakers to set up export-oriented plants,
reducing import duties on parts and accelerating
depreciation on machinery.
Push affordability and value. Domestic growth will
only come when vehicles are more affordable and
accessible to more people. Countries such as
Japan, Brazil, and South Korea rewarded OEMs for
conceiving low-cost compact cars for the masses,
and the resultant models not only increased
automakers' popularity in these countries but also
boosted export revenues. As penetration increases
and the industry evolves further, customers begin
to evaluate products based on total cost of
ownership. OEMs thus begin to focus more on
improving quality and service, and the value of
their products.
Improve the infrastructure. Adequate infrastructure
is needed to support auto industry growth. In the
United States, the landmark Federal-Aid Highway
Act in 1956 invested $25 billion in the country's
transportation infrastructure, including a massive
interstate highway system.
Sustainability stage. As the industry plateaus, the policy
focus shifts to improving productivity, safety, and the
customer experience.
Support the industry during downturns. Mature
auto industries occasionally struggle and require
significant government aid to get back on track.
When General Motors and Chrysler filed for
bankruptcy in 2009, the U.S. government stepped
in with billions of dollars to bail out these
companies. Both firms successfully bounced back
—preserving a host of other downstream and
upstream industries and millions of jobs.
Encourage innovation-driven growth. As the
industry matures, demand for more product variety
and additional features rises. In the future, this may
include alternative fuels and electric vehicles; the
industry can help by stepping up R&D efforts and
rewarding innovation. Germany's automotive
industry spent $20.6 billion on R&D in 2011.
Improve efficiency, emissions, and safety. As the
number of cars on the road increases, fuel
efficiency, emission-reduction efforts, and safety
become important government initiatives. Germany
cut carbon emissions by 30 million metric tons
from 1990 to 2010. South Korea and China have
announced plans to invest in alternate fuels and
hybrid vehicles to drive green mobility. Such
initiatives require appropriate infrastructure
support. The United States' landmark 1966
National Traffic and Motor Vehicle Safety Act and
Highway Safety Act mandated head rests, energy-
absorbing steering wheels, shatter-resistant
windshields, and seat belts. Roads were made
safer with better signage, guardrails, and barriers.
Similar interventions in Japan reduced accidents
by approximately 30 percent from 2005 to 2010.
Learning from the Global Auto Industry
Since its birth in the 1950s, India's automotive industry
has become an important cog in the country's growth
engine. Auto accounts for 7 percent of total GDP,
comprises 4 percent of exports, and 3.9 percent of FDI
inflows, with $5.5 billion in cumulative FDI between 2009
and 2013. The industry employs 2.2 million people, with
indirect employment of another 17 million, and invests
significant amounts of money on R&D, behind only
pharmaceuticals.
Still, the auto industries in South Korea and China
achieved greater growth and did so more quickly,
reaching India's current production levels in roughly two-
thirds of the time (about 40 years). Today, both are ahead
of India in production; China is now the world's largest
automotive producer (see figure 5).
India's auto industry has similar growth potential. China
reached India's current level of production (approximately
4 million vehicles) in the middle of 2004, and since then
its GDP has increased 10.7 percent per year and its auto
industry has grown 19.5 percent annually. Based on
India's expected GDP growth and using a similar
correlation between GDP growth and automotive output,
the industry could grow at more than 12 percent annually
through 2020 (see figure 6). This level of growth has
happened before, albeit on a lower scale.
Reaching the same growth levels today will require
favorable government policies, a strong focus on
developing infrastructure, investments in manufacturing
and technology, forward-thinking initiatives by
automakers and suppliers, and overall improvement of the
local supplier base. Otherwise, more moderate growth is
likely.
Government imperatives
The government can play an important role in creating a
healthy, sustainable automotive ecosystem with the
following:
Develop infrastructure. Streamlining the land
acquisition process and reducing delays in
statutory clearances can reduce the duration of
projects. Planning rural road networks through the
Public Private Partnership (PPP) route can bring
faster execution. In cities, new roads and bypass
routes (such as special freight corridors) can
address the issue of road congestion. Commercial
vehicle growth requires upgraded logistics-
handling facilities to increase capacity at ports,
airport and railway freight terminals, and truck
terminals.
Encourage innovation. Leading global auto
suppliers spend 5 to 10 percent of their revenues
on R&D, but in India most spend less than 1
percent. Government incentives can encourage
R&D by assemblers and component suppliers.
Innovation will not only help meet current demand
in new segments (such as compact SUVs and
quadricycles) but also meet the needs for future
technologies focused on green mobility.
Develop human capital. Attractive career
opportunities will draw high-potential talent.
Creating a wider talent base through effective
technical and soft-skills training programs is
equally important, especially in rural India and tier
2 and 3 cities. Institutions that offer automotive-
focused courses will further fuel this effort.
Target sustainability. As the auto industry seeks
immediate growth, the government must
simultaneously push it into the future, largely
through sustainability. Policies on road and vehicle
safety systems and emissions controls must be to
global standards. Incentives and infrastructure
investments will help automakers gear up for next-
generation transportation such as hybrid, electric,
and alternative fuel vehicles.
Institute a clear policy on GST. Instituting the
long-pending Goods and Services Tax (GST) will
help simplify the tax structure and allow
automakers to better plan their product portfolios.
Imperatives for OEMs and suppliers
By contributing to product innovation and improved
quality, automakers and their suppliers can align with
global standards while maintaining low costs. Rigorous
quality and productivity improvement initiatives are
necessary, including total quality management (TQM), Six
Sigma, total productive maintenance (TPM), and lean
manufacturing. Establishing innovation centers and
forming technology joint ventures with global players will
further the industry's credentials and knowledge.
Imperatives for upstream and downstream industries
Upstream and downstream industries change their focus
to follow the auto industry. For example, the steel,
aluminum, plastics, and glass industries will invest in
R&D and innovation to come up with high-strength,
lightweight composites to improve quality and offer
"green solutions" for sustainable automobiles.
Downstream, the finance and insurance industries will
become more innovative to make automobiles more
affordable for drivers in tier 2 cities and rural areas.
Automotive as an Anchor
India's auto industry has made strides, but it can do more
to meet its full potential: active and favorable policy
interventions, infrastructure building, investments in
technology and R&D, and the development of a healthy
and sustainable automotive ecosystem. A collaborative
approach by OEMs, the government, and other
stakeholders will achieve this growth.