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views or policies of the Asian Development Bank

Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy
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ADB official terms.

Leveraging the participation of small and medium

enterprises in global value chains of the automotive
industry: Insights from Maruti Suzuki India Limited

Dr. Falendra Kumar Sudan

Professor, Department of Economics,
University of Jammu, India
 Outline of Presentation

1. Introduction
2. Objectives and Methodology
3. Indian automobile industry
4. Recent performance of automotive industry in India
5. Recent automotive industry policy
6. Recent performance of MSIL
7. Results of the study
a. Awareness and understanding of GVCs
b. Cooperation and types of linkages in GVCs
c. Relationship between lead firm and supplier firms
d. Government support to enhance participation in GVC
e. Perceived impact of GVC participation
f. Upgrading in automotive lead firm
8. Policy implications
 Introduction
• Emergence of GVCs and digital economy
– new opportunities for SMEs to integrate into international markets
• Innovative SMEs, key partners of large MNEs
• GVCs provide SMEs to specialize in manufacturing
– higher productivity and increased exports
– upstream supplies to larger firms
– access to cheaper inputs and capital goods including foreign
technologies
• Strengthen and upgrade supply linkages
– imports to improve export competitiveness of SMEs
• Non-exporters SMEs can increase their productivity through cheaper and
more sophisticated imports
– increased access to new technologies by linking international firms
• specializing in parts of value-chain to foster upgrading
• However, existing potential of SMEs remains untapped in most developing
countries including India
 Introduction
• In India, most SMEs
– lower share of foreign goods and services than larger firms
• Dependent SMEs
– greater integration in terms of import compared to independent SMEs
– better equip to overcome import trade barriers
• Therefore, robust policies essential to address constraints faced by SMEs
in export and import
• Gains from GVC participation in GPNs
– more to firms at the centre with greater access to foreign inputs and
technologies compared to small firms at the periphery
• SMEs also face certain risks in GVC participation
– weaker bargaining power vis-à-vis larger firms, which calls for creating
a level playing field
• With above backdrop, present study intends to analyze the role of SMEs
engaged in automotive sector in GVCs using case study of Maruti Suzuki
India Limited (MSIL) as lead firm and how this role could be enhanced by
government support
 Objectives
• Qualitative case study focused on highly competitive automotive sector
• Capture information on
– awareness & understanding; cooperation & types of linkages in GVCs
– relevance of managerial and technological skills, standards and
intellectual property rights
– expected role of governments in strengthening SMEs integration
– benefits of GVC participation
– upgrading experiences of lead firm
• Also probed following questions:
– How has ICTs facilitated SMEs participation in GVCs?
– How improved logistics, financial services and specific business
services have promoted SMEs integration in GVCs?
– To what extent do SMEs participate in GVCs?
– What are the mechanisms for productive and technological learning
from GVCs?
– How policies influence GVCs processes and trade integration processes
in SMEs?
 Methodology

• In-depth qualitative case study

– structured interviews with lead firm and its upstream and downstream
local SMEs partners, whose identities not disclosed
• ten SMEs linked to lead firm
• twenty key informant interviews among SME owners and
managers who participated in GVC
• five officials from government agencies that implement
programmes helping SMEs to participate in GVCs to take
perspective of policymakers
 Indian automobile industry
• Debut of automobiles in India (1897)
• Production of automobiles started (1920s)
• General Motors in Mumbai (late 1920s)
• Ford in Chennai, Mumbai and Kolkata (early 1930s)
• Import of completely-built cars and commercial vehicles: 4,000 per
annum in 1940s
• Hindustan Motors Ltd. (1942) and Premier Automobiles Ltd. (1944)
with foreign technical collaboration.
• Automotive industry heavily protected, regulated and indigenized
(1947 to 1965)
– highly protected and regulated until 1970s due to license system
• some relaxation of technology acquisition in 1980s
– led to entry of Japanese firms
 Indian automobile industry
• In 1984, government relaxed import regulations and provided fiscal
incentives to import technology and improve fuel efficiency
– led to entry of new players and intensified competition in Indian
automotive industry
• Government of India and Suzuki Motor Corporation (SMC) of Japan
entered a JV
– established Maruti Udyog Limited (MUL) later named as MSIL
• led to diverse changes due to introduction of Japanese
standards and technologies
• also incentivized domestic auto component suppliers to
improve their competences
• passenger car segment expanded
• but emphasis on indigenization continued
 Indian automobile industry
• In this phase, auto-components segment experienced significant changes
– collaborations between domestic & foreign firms
• In early 1985, auto-component segment
– delicensed and investment limit of SMEs increased significantly
– export promotion measures led to double the exports
• In 1991, wide ranging economic reforms & new Industrial Policy Statement
– to improve competition, and remove barriers to entry
• Auto-component segment delicensed in July 1991
– delicensing of passenger car segment in May 1993
– liberalized foreign investment with automatic FDI of 51%
– restructuring and fierce price and quality competition
– technology acquisition and improved performance of established firms
 Indian automobile industry
• By mid-1990s, several foreign firms entered JVs with Indian firms
• In 1997, import of auto-components kept under OGL
• Hyundai entered car market, led to growth of small cars by 59.7%
• Import restrictions removed and customs duties reduced by 2002
– domestic protection with high import duty of 125% on used cars
• In 2002, new Auto Policy introduced
• Automotive Mission Plan (AMP) (2006-16) envisaged several
initiatives
– technology development & increased production of small cars
• created supply chains to serve local assembly operations
– making India an Asian hub for auto components
 Indian automobile industry
• By 2008, along with global OEMs, several foreign auto-component firms
also entered Indian automotive market
– created competition in both domestic and international markets
• upgrading technology and management practices followed by cost
reduction and quality improvement
– resulting in their integration into global supply chains of
automobile and auto-components
• Exports of automobiles produced in India also increased
• Collaboration of domestic automobile manufacturers with foreign auto-
component firms resulted in new automotive models
– leads to globalization of India’s automotive industry
 Indian automobile industry
• In 2014, passenger cars account for 62.8% of all passenger
vehicles sold in India
– a lead domestic and overseas market for small cars
• In 2015, 758 SMEs registered with Automotive Components
Manufacturers Association (ACMA) with 85% of automotive
industry turnover in India
• Four automotive clusters with registered auto- component
suppliers
– 348 in north (Delhi/Gurugram), 222 in west
(Pune/Aurangabad), 154 in south (Chennai) and 34 in
east
• Buyer-supplier network of automotive industry spread
across all regional clusters
 Recent performance of automotive industry in India
• In 2018, Indian automotive industry becomes 4th largest globally
with production of 5.17 million units
– overall automobile exports increased by 14.50%
– exports of passenger cars shown a decline of 9.64%
• In early 2019, production of vehicles stood at 30,915,420 vehicles
compared to 29,094,447 vehicles in early 2018 at a growth of 6.26%
– domestic growth in sale of passenger vehicles at 2.70% in early
2019 compared to early 2019
– automobile exports surge at 14.50%, while exports of passenger
vehicles declined by 9.64% from early 2018
– auto-components industry recorded robust growth of 7% of
GDP and provided 19 million jobs directly or indirectly
• manufactures almost all kinds of products to cater to the
needs of OEM, exports and the replacement market
 Recent performance of automotive industry in India
• Turnover of auto-components industry grown more or less
steadily in recent years
– likely to increase to US$ 100 billion in 2020 from US$ 39.0
billion in 2015
– projected exports at US$ 100 billion in 2026 from US$ 10.8
billion in 2015
– experienced decline in investment from US$ 2.5 billion in
2010 to US$ 0.66 billion in 2015
• expected to surge with launch of National Mission for
Electric Mobility (NMEM) 2020
• Cost reduction and stringent quality standards increased
perception of Indian component makers among global
automotive majors
 Recent automotive industry policy
• Recent automobile manufacturing policy based on AMP 2016-26
• Targets of Automotive Mission Plan (AMP) 2016-26
– annual revenue of US$ 300 billion, more than 12 % to GDP &
generating 65 million jobs by 2026
– vehicle sales to increase by 66 million units in 2026
– auto component sector to increase from US$ 38 billion in 2015 to
more than US$ 150 billion by 2026
• Other direct initiatives include
– Draft National Automotive Policy 2018
– National Electric Mobility Mission Plan (NEMMP) 2020
– Faster Adoption and Manufacturing of Hybrid and Electric Vehicles in
India (FAME)
– New Green Urban Transport Scheme (GUTS) 2017
• Other indirect initiatives: Make in India, Skill India, Goods and Services Tax
(GST) including measures to improve ease of doing business
• Draft National Automotive Policy 2018 : to increase exports of 35-40% of
automobile production, to make India a major automotive export hub in
world and to achieve global emission standards by 2028
 Recent performance of MSIL
• Production capacity of 1.58 million units per annum
– using highly efficient lean manufacturing processes and a skilled and
motivated workforce to manufacture reliable and quality products
• Suzuki Motor Gujarat Private Limited (SMG), a subsidiary of SMC with
additional production capacity of 0.5 million units per annum
– combined production capacity stood at 2.08 million units
– expected to increase SMG production capacity to 0.75 million units by
2020
• MSIL hold about 50% of market share in 2018
– sold 1,779,574 units in 2017-8 with growth rate of 13.4% over 2016-17
– launched two Bharat Stage VI (BSVI) compliant models Wagon R and
Swift Petrol in mid-2019
• becomes first car maker to introduce BSVI complaint cars in India
• In 2019-20, company sold 1,862,449 units
• Several companies set up as suppliers to MSIL including Jai Bharat Maruti,
Minda Industries, Sona Koyo Steering Systems Ltd etc
– few used a proprietary technology developed by Suzuki’s Japanese
supplier
 Results of the study
• Qualitative case study
– highlights how lead firm enabled integration of Indian SMEs into
GVC by initially providing them with ability and technological
know-how to leverage their participation in GVC
• Over the period, lead firm gains access to new markets due
to which existing SME suppliers needed to adapt to
demands of international large manufacturers due to
consolidation and high competitiveness
• With trade liberalization since early 1990s, lead firm
explored export opportunities and substantially increased
its production by adding new plant and different models
• Most SMEs in automotive industry experienced growing
levels of competition along with lead firm seeking new
suppliers that could meet more stringent technology,
investment and quality standards
 Awareness and understanding of GVCs

• All participating SMEs: high level of awareness of other firms and overall
structure in automotive industry
• Smaller firms at lower tiers are less aware of benefits of GVC participation
• Most SMEs aware of key elements for successful participation in GVCs and
understand the value of quality, cost and timeliness, including skills and
technology to reap the benefits
• Senior officials of participant lead firm: clear understanding of GVCs and
associated concepts and process and acknowledged growing competition
– revealed that declining import tariffs significantly impact productivity
and cost competitiveness of its suppliers
• Lead firm face intense domestic competition with other OEMs and
international OEMs
– cost and quality of supply in export markets
• Lead firm’s global strategy: to expand its export markets and restructure
domestic plant with new models
 Cooperation and types of linkages in GVCs

• Scale and scope of coordination processes increased substantially

– firms became more integrated into production processes of lead firm
• Large SME suppliers opined that building trust with SME suppliers
– a key activity of lead firm
• Participation of local components supplier’s plants in GVCs
– helped maintain global standards, and production and logistics
efficiencies
• Lead firm’s production depends on demand
– supply arrangements based on production schedules
• Long-term supply and technology development relationships
preferred with suppliers
– in case of necessity, short-term contracts arranged
• Regular coordination and interaction emphasized to build trust
 Relationship between lead firm and supplier firms
• Lead firm: most important business partner of all components firms
• Components firms learnt from other suppliers to OEMs
• Proximity to lead firm strengthened participation in GVC
• All suppliers: international standard certifications
– mandatory condition of lead firm
• Small firms engaged in low-value components
– attaining these standards difficult for small firms
• but strengthened their position in GVC
• Components firms face
– high level of price competition
– acceptable quality ratings of lead firm
• Most component firms
– achieving international material certification difficult, expensive, and
complex
 Government support to enhance participation in GVC

• Most firms believed in government support to address their genuine

needs
– but always remained very slow to intervene
• skills development, investment incentives, technology
development and labour reforms
• Government be proactive for benefiting OEMs and small component firms
participating in GVCs
• Most component firms gained access to government schemes
– investment incentives and export opportunities
 Perceived impact of GVC participation
• Significant rise in capital intensity of production resulting from expansion
of GVCs and decline in labour share in income of majority of SMEs
– sub-contracting led to widening wage gap between skilled and less
skilled employees
• Most SMEs perceived negative effect of GVC participation in demand for
high-skill workers and negative impact of sub-contracting more for high-
skilled workers
• Some SMEs perceived higher levels of foreign value added supports
economic upgrading through GVC participation
• All SMEs perceived GVC integration leads to more intensive use of labour
intensive services and also more skills intensive upstream inputs
• Three SMEs confirm positive effect of skills building on value added gains
 Perceived impact of GVC participation
• Significant impact on production, market extension, networking, training
employees, finance access, and employment growth
• Functional upgrading of suppliers remained outside design and branding,
but confined to lead firms, which possessed more resources, robust
industry position and better institutional support than small components
suppliers
• Lead firm engage in product, process, and functional upgrading including
design and branding functions
• Participation in GVC
– attracts more investment, positively effect on productivity, provide
advantage of cheaper and better quality inputs through sub-
contracting, improve efficiency, and induce technology transfer and
knowledge spillovers from lead firms
• Finance access remains an obstacle for most SMEs
 Upgrading in automotive lead firm
• Main upgrading activities carried out by lead firm
– process upgrading through various channels including use of new
production machinery and developing new models, workers training,
reduction in delivery times, improvement in quality, new management
techniques, improved production process, and increased use of ICTs
– systematically trained workers in multi-skills, strongly used
information technology (IT) system, and increased automation
– started the ‘Dojo’ (place or the way in Japanese) training centres to
maintain top quality component suppliers, useful for other tier 1 and 2
suppliers
– upgrading of auto components’ technological capabilities by replacing
older components with more advanced parts to meet consumer
demands and to compete with global suppliers
– ensured quality for growth and survival through formal quality
improvement programmes such as just-in-time, total quality
management (TQM), total productivity management (TPM)
• Lead firm enhanced flexibility to produce multi-models on a single line
– aims to double vehicle sales from 2017 to 2020 using auto-gear shift
technology (AGS)
 Upgrading in automotive lead firm
• Ignis and Dzire launched in 2016 and 2017 respectively
– enhanced flexibility in product lines to enable production of multiple
models on a single line
• Maruti’s Swift, Dzire and Ertiga models
– platform sharing in product parts such as common chassis and core
components
• Product upgrading activities of lead firm
– improved product quality, use of improved materials to enhance
product range and reduced reworking rates
• Functional upgrading in design, but left marketing and branding
– improve product quality by meeting regulatory norms and consumer
demands and to innovate and improvise on existing product portfolio
• Product quality improvements include upgraded features, design face-lifts,
and new and improved engines
 Policy implications
• Priority areas for government intervention
– upgrading technology and innovation capacity
– adequate finance and human capital
– meeting global standards and certification requirements
• Need for transparent laws and regulations focusing on bankruptcy,
property rights, tax, licencing, standard certification and efficient dispute
settlement
• Building SMEs capacity in designing and implementing
• SMEs need support to meet global quality standards
• Low-cost SME suppliers need upgrading due to cost disadvantages in
established locations to meet the expectations and demands of buyers
and price structures of competitors
• Continuous technological upgrading essential to meet standards
• Government support to SMEs by providing financial incentives to invest in
appropriate technology and strengthen national innovation systems to
develop their R&D capacity
• Priority government policy options
– skills development, investment incentives, technology development
and labour law reforms