A presentation on automobile industrial clusters in India made during my 2nd year at B-school

1. Group 3
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SJMSOM, IIT Bombay APPLIED INDUSTRIAL ORGANISATION | 12th Nov, 2008

2. Theory of Industrial Clusters
 Defining Industrial Clusters
 Classification of Clusters
 Benefits of Cluster Formation
 Significance of Clusters for SMEs
 The Flowchart Model of Cluster Policy

3. Defining Industrial Clusters
Geographically proximate group of companies
and associated institutions in a particular field
Was introduced Linked by
and popularized commonalities and
by Michael Porter CLUSTER complementarities
Also known as a business cluster, competitive cluster,
or Porterian cluster

4. Identifying a Cluster
Sectoral
A cluster of Geographical
businesses operating Geographically
together within the proximate group of
same commercial companies
sector
Horizontal
Vertical
Interconnections
Typically a supply
between businesses
chain cluster
sharing resources

5. Types of Clusters
Techno - Clusters
• High Technology Oriented
• Well – adapted to the Knowledge Economy
• Comprise of renowned institutions and research centers
• Silicon Valley
Historic Knowhow-based clusters
• Maintain advantage of knowhow garnered over several years
• London as a financial centre
Factor Endowment clusters
• Creation linked to comparative advantage derived due to geographic location
• Wine production clusters in France

6. Benefits of Cluster Formation
Agglomeration Effects
More focused direction
Increased productivity and faster innovation
cycles
Agglomeration Effects involve those benefits that firms
obtain when locating near to each other

7. Cluster Benefits
Increased Productivity
Improved access to labor and suppliers
• Existing pool of specialized and skilled labor
• Reduces recruiting costs
• Provides a deep and specialized supplier base
Improved access to specialized information
• Preferred access to extensive market, technical, and competitive information
Access to institutions and public goods
• Investments made by government or other public organizations
Easier to measure performance
• Competitors share general circumstances

8. Cluster Benefits
Faster Innovation
Innovation visibility through proximity
• Outcome of ongoing relationships
• Allows manufacturers to learn early on about changing customer needs and
service concepts
Enhanced flexibility
• Provide the capacity and flexibility to react rapidly to a customer request
Lower experimentation costs
• Companies delay large commitments until they are more assured that a
particular innovation will be fruitful

9. Cluster Policy Kuchiki (2005)
Effect of Toyota on the Industrial
Flowchart Model for Cluster Policy Policy of Guangzhou, China

10. Industrial Clusters in India
 Pharma Cluster - Ahmedabad
 IT Cluster - Bangalore

11. Evolution – Gujarat Pharma Cluster
• Alembic Chemical Works, started in 1907
Early Starter • 6 years after the first pharma firm in India
• Chemical, Pharma machinery, IT
Strong Relation • Support from academic field
High-growth • CRAMS, R&D, Generics, NCE
Segments • Capitalized early-on into these areas
Increasing • 10% of India’s pharma output in 2002-03
Contribution • Increased to 42% of India’s output in 2005-06
• Established pharma ecosystem with good infra
SEZ Driven • Zydus , Cadila Pharma, Jubilant, JB Chemicals

12. Pharma Cluster - Ahmedabad
Size & Growth of Pharma Industry Size & Growth of Pharma Exports
Gujarat vs India Gujarat vs India
12 6
10.6
5.2
10 5
8 CAGR 87% 4
6.4
6
4.4 3 2.5 CAGR 78%
4
2
1.1
2
0.7 1
0.2
0
0
India Gujarat
India Gujarat
2002-03 2005-06 2002-03 2005-06
 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%

13. Factors favouring Cluster formation
Raw Materials Support
Institutions
 Strong linkages between
• Bulk Drugs
• Excipients • B.V. Patel Center small & medium players
• Capsules • FDC Laboratory
• Glass Vials • LM Pharma  Proper ecosystem for
College
growth
 Benign regulatory
Financial Industrial
Institutions Associations environment
• SIDBI • IDMA-GSB  75-100 bulk producers
• ICICI • MDMA
• GSFC • ADMA  1000+ formulation units

14. Evolution – Bangalore IT Cluster
• Educational Industry linkages
Linkages • Favourable research climate, “R&D hub “of India
• Defense PSUs, Electronics Industry – natural extension
Related Industries • BEL, HAL, HMT, BHEL, ITI
Favourable • Exit of foreign firms left space of local firms
Environment • Trade Protection and Import Liberalization
• Currently houses over 1500 IT firms
Silicon Valley • Infosys, Wipro HQ and Motorola, hp, Texas Instruments
• Firms started with Application Devl and Maintenance
Service Offerings • Moving up value chain to provide Integrated packages

15. IT Cluster – Factors and Benefits
Factors favouring formation Perceived benefits
 Policy initiatives of govt.  Proximity Benefits with
(both central and local) R&D intensive firms
 Availability of large number  Innovation Systems
of skilled workers
 Y2K problem – a fortuitous  Knowledge flows &
event for India Capability building
 Role of the Indian Diaspora  Intra firm linkages
Karnataka accounts for 37.6% of total software exports
from India and Bangalore accounts for 97% of it.

16. Benefits of Cluster vs. Non-cluster firms
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
Key Observations 180 60
160
50
 Access to labour, R&D, processes 140
 Access to information from 120 40
100
competitors 30
80
 Non-cluster firms seek better infra 60 20
 Linkages nurture smaller firms 40
10
20
 Higher employee productivity 0 0
Bangalore Pune/NCR Non-cluster firms
No of employees Employee Productivity

17. Automobile Clusters in India
 Evolution of Indian Automobile Sector
 Study of two major Automobile Clusters in India
 Analysis of Behavior & Performance of Cluster vs. Non – Cluster Firms

18. Evolution of Automobile Sector
Timeline Autocomponents Passenger Cars
Protected, Licensed, Closed market
Pre 1985
High import Tariff Quantitative restriction
1985-1995 JV with OEM Entry of Maruti
Localization of
1995-2000 Entry of Global Players
products
Indigenisation,
2000 onwards Export focus
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

19. Performance of Automobile Sector
 India’s position Passenger Vehicles (Mn Units)
 2nd in two wheelers 2007
 11th in passenger cars 2006
 13th in commercial vehicles 2005
2004
2003
CAGR 15.4%
 Growth Targets: 2016
2002
 Automotive Industry
0 200 400 600 800 1000 1200 1400
 Total market $122 - $139 bn
Autocomponents Turnover ($ bn)
 Domestic market $82 bn
 Exports ~ $35 bn 2007
 Autocomponent Industry 2006
 Total market $40 – 45 bn 2005
CAGR
 Domestic market 2004
28.9 %
 Exports ~ $25 bn 2003
 HHI = 527; CR4 = 34% 0 2 4 6 8 10 12 14 16

20. Study of two major Indian Auto Clusters
References:
Industrial Clusters in India: Evidence from Automobile
Clusters in Chennai and the National Capital Region
Aya Okada and N.S. Siddharthan
April 2007

21. Chennai Auto Cluster [Chennai, Bangalore, Hosur]
Overview Evolution
 Leading Auto Cluster  1950s: Initial Formation
 21% of passenger cars  TVS & Std. Motors among first players
 33% of commercial vehicles  Heavy dependence on imports
 35% of auto-components  Active government support
 >100 large & medium cos.  Genesis of large no. of auto
component firms laid early
 Capabilities
 Valve assemblies  1960 – 1990: Capacity Building
50%  Fuel / Oil / Water Pumps  Large no. of technical schools setup
 Motors & Engines  Mid-day meal program for schools
Steering gear & Wheel Rims  Airports & Seaports
40% 
 Tires & shock absorbers  Financial incentives by state like
10% technology subsidies and trade fairs
 Bearings & Radiators
 State agencies setup to facilitate FDI
*% indicates Tamil Nadu’s share in overall manufacturing output

22. Chennai Auto Cluster
Overview Evolution
 Leading Auto Cluster  1990s: Delicensing of Industry
 21% of passenger cars  Hyundai, Mitsubishi & Ford set shop
 33% of commercial vehicles  Attracted by capabilities of auto
 35% of auto-components component manufacturing firms and
government support
 >100 large & medium cos.
 Rise of local firms with IT capabilities
 Capabilities
 Impact of smaller firms
 Valve assemblies
 Proliferation of industrial estates
50%  Fuel / Oil / Water Pumps providing cheap technical services
 Motors & Engines  Guindy Industrial Estate in Chennai is
40%  Steering gear & Wheel Rims the largest and a typical example
 Tires & shock absorbers  Presently, in globalization mode
10%
 Bearings & Radiators fuelled by IT and increase in
*% indicates Tamil Nadu’s share in overall manufacturing output
outsourcing

23. TVS Group TVS Group
Major Players in the Chennai Auto Cluster
Wheels Sundaram
India Dynacast
Turbo
Lucas TVS
Energy
Nippon
Brakes India
Electricals
Sundaram
TVS Cherry
Clayton
Sundaram
TVS Motors
Fasteners

24. Ashok
Rane Group Leyland (AL)
Major Players in the Chennai Auto Cluster
Rane Engine
Valves
Rane Brake
Linings
Global Players
Hyundai, Ford, Mitsubishi
Rane
Madras 100% subsidiary setup in ’98
14 Korean Tier-1 suppliers
Capacity ramp-up to 4L p.a.
Rane NSK
Steering 75% local content
Systems Technology licensing (US firms)
Hub of global parts’ sourcing
Rane TRW 30% local content
Steering Focus on premium segment
Systems JV with Hindustan Motors

25. Ashok
Rane Group Leyland (AL)
Major Players in the Chennai Auto Cluster
Rane Engine
Valves
Except Ashok Leyland, the lead firms
Rane Brake in the Chennai auto cluster are
component manufacturers which
Linings
paved the way for the entry of
foreign players like Ford & Hyundai in
the nineties into the cluster Global Players
Rane Hyundai, Ford, Mitsubishi
Madras This behavior is atypical of most auto
cluster formations across the world
Rane NSK
Steering
Systems
Rane TRW
Steering
Systems

26. Chennai Auto Cluster: Growth Drivers
Government
Infrastructure
Established business houses
Smaller Firms
Highly skilled workforce
IT Emergence
Global players

27. NCR Auto Cluster [Delhi, Gurgaon, Faridabad]
Overview Need for Vendor Development
 Cluster Zone  GOI’s Phased Manufacturing Plan
 Haryana, Delhi & some UP districts  Foreign firms to promote localization
 Major Players  Suzuki’s MOU: 70% localization by ’87
 Maruti Udyog Ltd. (MUL)  Government support to SSI
 Started in 1982 as GOI + Suzuki JV  Dependence on outsourcing
 First greenfield plant in Gurgaon
 80% components outsourced
 Two more plants in Gurgaon & Noida
 Local supplier quality levels very low
 Largest car manufacturer in India
 Daewoo Motors India Ltd.  Introduction of JIT + Taxes
 Ceased operation after few years  Supplier close to plant was imperative
 Insignificant contribution to cluster  Octroi significantly reduced margins
 Honda Siel Cars Ltd.
 Yen Appreciation in ‘80s
 Recently established (2000)
 Low production volume
 High custom duty on CKD units

28. MUL’s Role in Vendor Development
MUL Suppliers: MUL
Geographical Distribution Vendor Development
160 Supplier MUL’s Role
MUL’s major
140 suppliers are Bharat Seats 15% equity stake
located in NCR JV with Howa, Japan
120
100
Macino Plastics 15% equity stake
No. of Firms
80 Subros 15% equity stake
Technology from Denso
60
Asahi Safety Glass 15% equity stake
40
Sona Steering 15% equity stake
20
Technology from Koyo
0
Mark Auto Industry 24% equity stake
Jay Bharat 31% equity stake
Large Firms Medium Firms Small Firms Motherson Sumi Aided in collaboration

29. Analysis of behavior & performance of cluster
versus non – cluster firms (Automobile sector)
Methodology
Results & Conclusions

30. 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

31. Overall Performance Comparison
RONW = PAT/SALES x SALES/TOTAL ASSETS x TOTAL ASSETS/NET WORTH
Cluster firms are
clearly ahead of 180
non – cluster
firms with regards 160
to total
performance 140
120
RONW is a
comprehensive 100
RONW
measure of
performance as it 80
accounts for profit
margin, asset 60
turnover and
40
leverage capacity
20
0
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

32. Comparison of Advertisement Intensity
1.4%
Advertisement as
a % of Sales is
higher for non- 1.2%
cluster firms.
1.0%
Advertisement/Sales%
Cluster firms
benefit from the
agglomeration 0.8%
effect
0.6%
This demands
lesser expenditure
on advertisement 0.4%
for a comparable
level of sales 0.2%
0.0%
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%

33. Comparison of Inventory Efficiency
16
Inventory
Turnover is
14
higher for cluster
firms compared to
non – cluster 12
Inventory Turnover (days)
firms.
10
This indicates that
cluster firms 8
maintain higher
inventory 6
efficiencies
(possibly due to 4
location
proximity)
2
0
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

34. Comparison of Employee Productivity
Counter 25
intuitively, the
employee
productivity for
non – cluster 20
Avg. Employee Productivity
firms is greater as
compared to
cluster firms 15
One reason for
this could be due
to employees in 10
cluster zones
being paid higher
wages and the
inherent use of 5
wages (rather
than no. of
employees) to
measure 0
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

35. References
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

36. Thank You
Your queries are welcome