“You know you’ve arrived when Lou Dobbs talks about you everyday,” says Debasish Chakraborty, professor of economics at Central Michigan University.
If that is the case, as Dr. Chakraborty suggests in his AAPEX presentation: Emerging Markets — The Indian Influence, India has arrived on the world stage as a major player in the global automotive market.
“There is spectacular growth opportunities in the auto component industry,” Chakraborty says. “It’s currently a $10 billion industry and it’s really growing very fast, producing every conceivable component: engine lines, drive trains, steering lines, suspension, transmission, braking, electrical — everything is there.”
With a population exceeding 1.1 billion and a surging economy, India has become a huge attraction for both OE and aftermarket manufacturers.
Since the country “opened up” in 1991, India has averaged economic growth of about 9 percent per year. With a GDP of about $9 trillion, it has the fourth biggest economy behind the U.S., China and Japan.
As foreign and domestic investment pour into India’s auto parts sector, analysts forecast 9 percent annual growth, building the Indian aftermarket up to $15 billion annually by 2015.
Clearly, one of the main reasons for India’s growth in the auto parts sector is the availability of cheap labor.
“India offers huge economies of scale,” says Chakraborty. “Cheap labor saves the American maybe 20 percent and the European 50 percent, so it’s a big cost advantage.”
Beyond labor, however, India is also positioned well geographically and technologically. Chakraborty mentions its strategic location between Europe and Asia as a big selling point to foreign manufacturers, as well as a large English-speaking population, which helps bring in American dollars.
“The national companies (such as Chrysler and Porsche) are gaining confidence in India’s ability to produce complex products and parts,” Chakraborty says. “India’s often at the forefront of designing vehicles and has a well-trained engineering tradition.”
India’s substandard — though improving — roads and infrastructure can be a challenge, but also an opportunity. Companies who want to reach the Indian market almost have no choice but to bring production into the country because of the logistics of transporting goods throughout the country. Yet at the same time, the substandard roads mean that vehicles will wear down quicker and need additional maintenance.
Though the current economic crisis and global slowdown in automotive sales has negatively impacted India’s exports, the financial crunch has been lessened because India doesn’t allow a lot of foreign equity investments, Chakraborty says.
Still, to keep growth on track, Chakraborty says India has rolled out a 10-year auto emission plan. This include incentives, such as:
- Foreign tax holiday for auto industry investment exceeding $225,000;
- 100 percent tax deduction on export profit; and
- 50 percent tax deduction in foreign exchange earnings.
India is also doing what it can to “unfreeze the labor market” and reduce the power of labor unions. Though it could be an area of conflict in the future, open employment could be a great incentive to foreign investors.
Chakraborty mentions a couple other potential stumbling blocks for India, including the lack of infrastructure, which the country is spending billion remedying, as well as electricity.
“Electricity is not keeping up with economy, so what the country is doing is giving tax breaks to encourage companies to build their own power generation,” he says.
While other countries are certainly facing bigger challenges, Chakraborty suggests that one of the major impediments to growth will be…growth.
“Really, one of the biggest challenges the country faces is how to properly manage the growth the country is experiencing,” Chakraborty says. “It could lead to some very serious problems. Farmers are losing out on some land and that’s creating some social tensions between industry and agriculture. Convincing the government to manage this growth will be a major challenge up ahead.”
