The Contribution of

the Automobile Industry

to Technology and
Value Creation
How can the auto industry in India build
momentum for growth?

The Contribution of the Automobile Industry to Technology and Value Creation

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 industrys evolution in other countries offers a roadmap forward.
Indias auto industry is the worlds 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 Indias GDP and is responsible for 7 to 8 percent of Indias total employed population.
To maintain autos 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.

Autos 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 industrys
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 on page 3).

Figure 1
The core automotive industry supports upstream and downstream industries

Upstream

Core automotive

Downstream

Mining

Original equipment
manufacturers (OEMs)

Finance and insurance

Steel
Metals (primary
and fabricated)

Passenger vehicles

After-market
(services, auto parts)

Commercial vehicles

Used car market

Fuel

Two-wheelers

Car hires and rentals

Plastic, rubber, glass

Three-wheelers

Fuel supply

Electronics

Component
manufacturers

Advertising
Transportation
Warehousing

Adjacent industries (finance, legal)

Source: A.T.Kearney analysis

The Contribution of the Automobile Industry to Technology and Value Creation

Figure 2
The auto industrys contribution to the economy

Generate
government
revenue

Automotive
ecosystem
Encourage
people
development

Create
economic
development

R&D and innovation

Source: A.T.Kearney analysis

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.1
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 countrys current-account performance and trade
balance with other economies. Not surprisingly, the share of automotive exports is higher in
developed countries than in emerging economies18 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
All monetary figures are in U.S. dollars unless otherwise noted.

The Contribution of the Automobile Industry to Technology and Value Creation

growth in auto output and FDI is almost 1 to 1, as the automotive industrys rise has closely
tracked that of Chinas 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 worlds 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.

Figure 3
South Koreas auto industry has seen impressive growthand led to 1.4 million jobs

Upstream

Core automotive

Poscos automotive
steel sales*
(thousand tons)

Annual car production

(thousand units)

Sales by installment
financing companies

+1.4x

+3.8x
210

Downstream

3,242

4,562

2002

2012

Sales of auto components

(US$ billion)

14%

General

86%

Car
financing

30%

70%

+2.6x

55

59
23
2002

2012

2002

2012

2002

2012

*POSCO is a multinational steel producer headquartered in Pohang, South Korea.

Sources: Korea Automobile Manufacturing Association, media research, Korea statistics database research; A.T. Kearney analysis

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 So 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 Chinas total GDP and
had a GDP per capita roughly 75 percent higher than the national average.
The Contribution of the Automobile Industry to Technology and Value Creation

 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-urbanizationthe 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 overalla multiplier of more than fiveadding up to 7 percent of the
countrys workers (see figure 4). In Japan, the industry employs 5.4 million people, representing
8 to 9 percent of the total workforce.

Figure 4
Autos direct and indirect impact on employment in South Korea
Tens of thousands of people
(2011)
2,351

170

7.2%

Direct

27

Indirect

12
23
27
92.8%

81

Total
South Korea
employment

Total auto
employment

Auto
manufacturing

Parts
manufacturing

Sales and
Retail and
maintenance distribution

Logistics

Sources: Korea Industrial Productivity Database; A.T. Kearney analysis

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.
The Contribution of the Automobile Industry to Technology and Value Creation

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.2 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, Fords assembly line manufacturing and the lean principles of the Toyota Production
Systemare 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 industrys 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.

Automotive is a training ground for

technical and managerial expertise
valuable in many industries. Valuable skills
cover many areas, including R&D, design,
sourcing, manufacturing, supply chain,
sales, and marketing.
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 growthincubation, penetration,
and sustainabilitygovernments 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 on page 7).
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.
Figures are for 2011 and based on the largest 1,500 companies worldwide.

The Contribution of the Automobile Industry to Technology and Value Creation

Examples of Government Interventions

The government can play a major
role in building and sustaining a
countrys automotive industry.
Brazil promoted FDI and exports
while supporting local growth, and
China backed foreign investors
while maintaining control over its
burgeoning industry. South Korea
permitted some foreign partnerships and supported automaking
clusters, institutes, and R&D. The

United States improved its road

network and promoted vehicle
safety and pollution control,
steering the auto industry
toward more sustainable industry
practices. The figure gives more
details on these interventions and
their impact.

Promote global firms while

encouraging homegrown
technological capabilities
Focus on infrastructure to
increase demand
Set safety, environmental,
and efficiency norms to ensure a
sustainable industry

For India, there are three important lessons from these examples.

Figure
Government intervention in automotive

Industry

Brazil

China

South Korea

United States

Government
objective

Accelerate
domestic growth

Protect with
technology access

Promote
self-reliance

Increase industry
sustainability

Policy
support

Encourage import
substitution

Allow joint
ventures with up
to 50 percent FDI
if they maximize
local content and
localize R&D

Permit some Korean

conglomerates to
enter into foreign
partnerships

Build regional and

interstate highway
system

Forbid investment
by Chinese private
companies

Create technical
autonomy in parts

Stipulate pollution
control and fuel
efficiency

Expanded domestic
and export markets

Brought influx of
global firms

Created local parts

industry

Invested in local
skills development

Increased Korean
firms technological
prowess

Improved infrastructure to drive

domestic demand

Left limited local

technological
capabilities

Threatened
intellectual property
because of crossholding

Enabled synergistic
learning

Led to sustainable
industry practices

Created oligopolistic
domestic market

Allowed new
product imports
from Japanese
firms

Promote FDI with

98 percent local
content
Use free-trade
agreements to
promote exports

Policy
impact

Harmed domestic
brands and skills

Led to struggles by
domestic brands

Support clusters,
institutes, and R&D

Fostered exportdependent growth

Promote vehicle
safety

Sources: Research papers; A.T. Kearney analysis

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
developmentrestricting 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 Malaysias, is stronger today because
of open trade and investment policies.
The Contribution of the Automobile Industry to Technology and Value Creation

Penetration stage. This stage is characterized by industry initiatives that increase automotives
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, Brazils 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 countrys transportation infrastructure, including a massive interstate highway system.

Auto is a spark for regional development,

leading to new municipalities with solid
road infrastructures, railway and freight
connectivity, and new housing
developments.
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 backpreserving 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.
Germanys 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,
The Contribution of the Automobile Industry to Technology and Value Creation

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, Indias automotive industry has become an important cog in the
countrys 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 Indias 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 worlds largest
automotive producer (see figure 5).

Figure 5
Comparing auto industry growth in India, China, and South Korea
Automotive production
(million units)
20

China
South Korea
India

15

10

0
1950

1950

1960

1960

1970

1970

1980

1980

1990

2000

2010

Sources: Society of Indian Automobile Manufacturers, Korea Automobile Manufacturing Association, China Automotive Industry
Yearbook; A.T. Kearney analysis

Indias auto industry has similar growth potential. China reached Indias 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 Indias 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 on page 10). 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.
The Contribution of the Automobile Industry to Technology and Value Creation

Figure 6
Growth projections for Indias auto industry
Vehicle production
(million units)
50

Ideal growth
Stunted growth
(limited policy support)

45
40
35
30
25
20
15
10
5
0
2010

2011

2012

2013

2014e

2015e

2016e

2017e

2018e

2019e

2020e

Sources: Society of Indian Automobile Manufacturers, International Energy Agency; A.T. Kearney analysis

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.
The Contribution of the Automobile Industry to Technology and Value Creation 10

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 industrys 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
Indias 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.

Authors
Goetz Klink, partner, Stuttgart
goetz.klink@atkearney.com

Manish Mathur, partner, New Delhi

manish.mathur@atkearney.com

Ram Kidambi, principal, Mumbai

ram.kidambi@atkearney.com

Kaustav Sen, consultant, Mumbai

kaustav.sen@atkearney.com

The authors wish to thank Akash Jain, Tamanna Padhi, and Deepak Maloo for their contributions to this paper.

The Contribution of the Automobile Industry to Technology and Value Creation 11

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