What does the WTO agreement really mean for corporate India? If you attend even a quarter of the numerous seminars that New Delhi's think tanks conscientiously host on the issue, you come away with one recurring impression of Indian industry: fear and ignorance. Each conference ends with nervous unanimity: there's so much to understand, everyone says, as they head for the sumptuous lunches that are laid on, or set up committees to study the subject.
It's been six years since India signed on the dotted line at Marrakesh but so far, industry's reaction has been two-fold. Many of those who were hit early (steel, carbon black, chemicals) floundered, then took cover behind anti-dumping cases and finally started to kick the bad habits ingrained by years of protectionism. Those who are yet to feel the heat, have mostly drawn up policy prescriptions with which to lobby Raisina Hill. This is not an unwarranted exercise. India negotiated the WTO agreement without almost any consultation with industry -- a point on which most domestic businessmen are still bitter. And it is also true that there are crucial issues to be addressed by government as India gears up for a world of open trading.
Still industry needs to recognise that what's done is done. By next year, all chocks will be off, and there will be little choice but to graduate from collective grumbling to radical reform. How radical? For an answer, look to the $ 3 billion auto-components industry. This industry will be among the hardest hit by trade policy reform. Officially, nobody in the industry admits to the possibility of a crisis post 2001. But you only have to look at the plight of the machine tool industry in the early nineties to understand the threat. That was when a flood of cheap imports from Taiwan put hundreds of small manufacturers out of business -- and this was before GATT had become a four-letter word in the Indian businessman's lexicon.
The auto-component industry has been a victim of both protectionism and liberalisation. From the fifties onwards, the official policy of import substitution saw component units come up in comfortable but inefficient profusion that improved a little when Maruti entered the scene. By the mid-nineties, as the automobile industry was delicensed, components were made freely importable, bar finished products (including CKD and SKD kits). But with stringent local content obligations in place for car manufacturers, investment in the components business accelerated -- even as it became clear that such regulations were GATT-illegal and would eventually have to be scrapped. Yet, even as late as last fiscal, investment in the industry is estimated to have grown 40 per cent!
This last trend is symptomatic of just how short-sighted the industry has been. In terms of numbers, it's fairly large. There are 400 firms in the organised sector, which account for three quarters of sales and employ more than 250,000 people. Below this are some 5,000 units in the unorganised sector which mostly service the after-market. But this is a fragmented industry. According to an analysis by A T Kearney, only 17 firms in the organised sector have sales of more than $ 40 million each and a majority -- 178 -- have sales below $ 5 million.
The gay abandon with which the government allowed car manufacturers to set base in a limited market has also precluded real viability. Consider this: the mid-size car market in India has some 14 players chasing total volumes of roughly 1,00,000 cars. Internationally, viability norms are set at 1,00,000 units per model!
Free trade is expected to impact the industry in two ways. One, once local content norms are scrapped, localisation will become entirely market driven. Two, if second-hand cars are made freely importable, then the anticipated drop in demand for cars made in India will have a cascading effect on the components industry.
To survive, the industry needs to look harder at exports, which currently accounts for 10 per cent of turnover but just a sixth of the global market. Can Indian firms compete? There's a huge question mark here. Despite lower productivity, Indian auto components are 20 to 30 per cent cheaper than Japanese suppliers. The flip side is that though India actually introduced quality norms before Japan, it reports the worst rejection rates at 2,150 parts per million (PPM) compared to a Japanese average of 200 PPM and a European average of 450 PPM.
India is expected to score on low-value, high-volume items as plastic trims, seats and rubber parts, but not on engine parts -- which account for a third of component units in India. Exports to the after-market are possible, but being metal, engine parts have moderate demand. Besides, this market tends to be model-specific and with India's fragmented base, units lack the R&D and systems integration capabilities to service global buyers efficiently.
In this assembly-driven business, one option for the industry lies in restructuring its supply chain on global lines by "tiering". Under this smaller manufacturers become sub-assemblers (or tier II and III) suppliers to giant tier I OEM suppliers. This has advantages since such functions as marketing and quality guarantees become the responsibility of the tier I supplier. In India, this process has already started with multinationals like Delphi, Visteon and Indian firms like Taco and Sona, increasingly emerging as tier I suppliers. This presents a clear window of opportunity for the vast majority of small and medium units in this industry that are struggling as OEM suppliers. But here again, there are hurdles in the inter-state imposts and the complexities of Modvat, which the government needs to address.
If the the domestic components business is to survive, it is clear that both government and the industry will have to opt for a fundamental change in mind set. Indeed, success will make the Indian auto-components industry a powerful case study for future B-school graduates.
