Growing beyond manufacturing

Opportunities in India as an emerging auto product development hub ACMA Annual Convention 2012 5th September, 2012

India is fast emerging as the one of the largest global manufacturing hubs for small cars and other vehicles

India will emerge as the largest producer of small cars by 2013 Further, Indias production of small commercial vehicles (<3.5 T) has grown at >25% in the past five years; faster than the global average
Source: LMC, IHS Page 2 ACMA Annual Conference: India as a product development hub

To achieve global industry leadership India needs to evolve as an integrated development & manufacturing hub

Leadership position in the automotive world

Manufacturing
Vehicles and components manufactured in India are increasingly meeting global standards of Quality, Reliability and Durability

Product & Process Development

However, today there is limited end-to-end product development and process engineering capability across the supply chain

Innovation
Significant work needs to be done in this area to improve Indias innovation quotient

Cost and Quality (Strong Foundation)

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ACMA Annual Conference 2012: India as a product development hub

Rising customer expectations and increasing volumes have driven OEMs to evolve from localization to global platform development
Start-up Respond to local market Global market ambition

- Localize and adapt

- Develop India specific products

- Build local product development capability

- Reduce time to market - Incorporate global standards

- Develop global platforms

Pre 2002
Source: EY Analysis Page 4

2002 to 2007
ACMA Annual Conference: India as a product development hub

2007 to 2012

OEMs and component manufacturers are responding to the opportunity by investing in local product development capabilities
Start-up Respond to local market Global market ambition

~40 centers
Arvin Meritor Continental Daimler India Comm Veh Dana DuPont Faurecia Hyundai Eaton GM Mahindra Research Valley Paccar RenaultNissan Sharda Motor SKF

Upcoming / expanding

~20 centers ~ 10 centers

Bajaj Bosch Caterpillar Cummins Delphi Maruti Mercedes Tata TVS Eaton GM Bajaj Bosch Caterpillar Cummins Delphi John Deere Visteon Maruti Mercedes Tata TVS

John Deere Visteon Maruti Mercedes Tata TVS

Bajaj Bosch Caterpillar Cummins Delphi

Pre 2002

2002 to 2007

2007 to 2012

2012 -

The number of engineers employed in product development centers in India is estimated to have grown from <1,000 in 2002 to >25,000 in 2012
Source: EY Analysis Page 5 ACMA Annual Conference: India as a product development hub

Organizations, who have invested into R&D in India, are taking up greater product development roles for local and global markets
Illustrative List

OEMs
Developed Endto-End product and process design capabilities Development of Global Platforms Developed Global Centers of Excellence in India

Suppliers

Development of Eeco, New Alto

Development of Pulsar, Discover

Engine components

Low cost condensers

XUV5OO

Ace, Nano

Development for global markets

Ownership of global market products

Global centre of Development of 3 excellence for virtual cylinder diesel testing and analysis engine

One of the global Global Centre of product Excellence for gear development hubs pumps

Source: Primary research, Secondary research, EY Analysis ACMA Annual Conference: India as a product development hub Page 6

Our analysis of global suppliers identifies 2.5X returns by companies who are investing a higher percentage in R&D
R&D/sales* and EBITDA Margin*
EBITDA < 9% EBITDA 9% to 12% EBITDA > 12%

EBITDA Margin

Median 18.5%

Median 7.3%

R&D/sales
* R&D/Sales and EBITDA numbers are averaged over duration of 4 years (2008-2011)

Source: Primary research, EY Analysis Page 7 ACMA Annual Conference: India as a product development hub

Analysis of Indian suppliers during our research reveals three paths adopted in developing capabilities across the design value chain
Design value chain (From Infancy
State
Initial step
Process Engineering QFD Prototyping Problem resolution Testing & validatio n

to maturing
Product design Program Mgmt

Basic and applied research

Depende nts

Current state Future state

Initial step

Explorers

Current state Future state Initial step

2 3 ACMA Annual1 Conference: India as a product development hub

Visionaries Current state

Future state
Source: Primary research, EY Analysis Page 8

Dependents: Followed OEM pull towards better engineering capabilities to support faster product development cycles
Ecosystem enablers:
Triggers

OEM/Parent

Institution

OEM

pull on suppliers to take up product design / prototyping

2
Initial steps
Identified

Future state
Product

and system design capabilities Process engineering capabilities

Approach: Collaborate with OEMs and learn

specific projects to support OEM needs Shared financial risk and resources

Policy
LOW

Testing facilities
MEDIUM HIGH

Next steps
Defined

product design strategy Enhanced testing and validation Developed few products Increased spend on R&D to 1% of sales

3 Investment
Initially shared resources as Collaborative learning approach Increased after initial success

Source: Primary research, EY Analysis Page 9 ACMA Annual Conference: India as a product development hub

Explorers: Setup design cell to resolve design problems, understand product & process development
Ecosystem enablers:
Triggers

OEM/Parent

Institution

Entry

by Global players Increasing product launches Global expansion opportunity

2
Initial steps
Setup

Future state
Product

and system design & test capabilities Process engineering capabilities

Approach: Establish success and then invest

Design cell for process engineering and problem solving Setup basic test facilities

Policy
LOW

Testing facilities
MEDIUM HIGH

Next steps
Increase

spend on R&D to 1-2% of sales Strengthened process engg Testing and validation capabilities

3 Investment
Initially low investment as Explore and watch approach Increased after initial success

Source: Primary research, EY Analysis Page 10 ACMA Annual Conference: India as a product development hub

Visionary Technocrats: Envisioned an integrated design and manufacturing capability

Ecosystem enablers:
Triggers

OEM/Parent

Institution

Leadership

vision and risktaking propensity Use Indian engineering talent Global expansion opportunity

2
Initial steps
Invested

Future state
Basic

and applied research (collaborative) Application of India developed tech. for global applications

Approach: Set vision & pursue leadership

in facilities, manpower for understanding design, prototyping, testing and validation

Policy
LOW

Testing facilities
MEDIUM HIGH

Next steps
End-to-end

product design Program management of many projects Risk sharing with OEMs on specific opportunities

3 Investment
Planned investment in facilities and manpower development Advanced testing, research labs

Source: Primary research, EY Analysis Page 11 ACMA Annual Conference: India as a product development hub

The product development ecosystem in India is in its infancy and is evolving

Industry teps, taken s ired t has ernmen vision is requ gov - The nger term y the but a lo s to pla on need rnment ringing focus e - Gov role in b D anchor tomotive R& au Indias

Policy

Product Development Ecosystem

- The test improv ing infrastruc ed tu compa , but is still n re has ot rable to global standa Testin rds g Inf

Tie-Up - Effort at buildin g Industr institute r y elationsh ip, is driv mainly by en the indus - Institu tr te capab ility on ap y plied research is still ev - Engin olving eers requ ire 3 yea rs of On-Job t raining

Institutio

rastru cture

ve Few OEM-Suppliers ha started e adopting a collaborativ product development a few approach, but limited to vehicle systems

boration OEM Supplier colla

Source: Primary research, EY Analysis Page 12 ACMA Annual Conference: India as a product development hub

An expectation mismatch exists between OEMs and suppliers on the approach to develop suppliers product development capabilities
Suppliers Expectations

Product Development Ecosystem

Government policies

OEMs Expectations

Explore joint development opportunities with suppliers Share resources and financial risks India specific product development can be best done in India Honour commitments during design/development phase

Expectation Mismatch

Suppliers should build capabilities in basic areas Problem solving Design understanding Program management Invest in testing facilities Collaborate with other suppliers to provide a system solution Provide proven products

To take advantage of affordable R&D and develop India as an integrated hub, OEMs and suppliers need to increase collaboration for mutual benefit
Source: Primary research, EY Analysis Page 13 ACMA Annual Conference: India as a product development hub

Government policies in other automotive hubs have facilitated and anchored a long term R&D roadmap
Government policies

Product Development Ecosystem

China

Korea

Government defines strategic direction for future R&D

Policies ensure that FDI is accompanied by technology transfer

Germany

Ulsan - Auto Parts Innovation Center Government funded efforts to strengthen local R&D capability

Policy led to automotive innovation clusters in Bavaria, Baden-Wurttemberg

lie rs

Universities/Research Institutes
Inputs

titu Ins

Su pp

tes

OEMs

Areas of basic research for country

Indian policy needs to anchor a long term product development roadmap

Source: Secondary research, EY Analysis Page 14 ACMA Annual Conference: India as a product development hub

Industryinstitute tie-up is an essential part of the ecosystem, wherein Institutes provide basic and applied research input
Government policies

Product Development Ecosystem

Industry-Institute relationship is more mature in Germany and UK, where development, prototyping happens. It is mandatory for institutes to do applied research Industry Institute Interaction While few institutions have started focusing on applied research, institutional R&D is piecemeal and applied research is largely missing

Industry is ahead of the level of manpower provided by institutes; Indian engineers need 3 years of on-job training as compared to 3 months in Germany

Pre-competitive or basic research is happening in India wherein Industry and institutes interact for common minimum programs

Institutes need to be mandated and incentivized for applied research

Source: Primary research, Secondary research ACMA Annual Conference: India as a product development hub Page 15

Testing and validation infrastructure is critical to product development in India

Government policies

Product Development Ecosystem

Indias automotive R&D testing infrastructure

There has been an effort towards improvement of testing and validation infrastructure in India The testing infrastructure is insufficient for Indias product development ambitions Visionary OEMs and suppliers have not waited for infrastructure to come up, they have invested in own advanced testing facilities

Rohtak Jaipur

Delhi/ NCR

Lucknow

Rae Bareilly Silchar

Indore

Mumbai Pune

Ahmednagar Baramati Hyderabad Legend* GOI Facilities Bangalore Chennai Coimbatore OEM/Supplier captive testing facilities * Height of column is directly proportional to number of testing centers

Source: Primary research, Secondary research ACMA Annual Conference: India as a product development hub Page 16

Roadmap for Automotive Product Innovation and Development (RAPID) for the Ecosystem
OEM-Supplier collaboration

Industry-Institute Tie-up

Greater collaboration through resource and financial risk sharing Collaboration is essential to India achieving global industry leadership as an integrated development and manufacturing hub

Pro-active role of institutes with industry for research, skill management Progress towards applied research Update curriculum to improve knowledge and skills of engineers

ECOSYSTEM

Set roadmap for future technology leadership in specific areas e.g., Powertrain, Electric mobility etc. Encourage innovation clusters Mandate and incentivize research by academic institutions

Enhance Government and private testing facilities to global standards Benchmark with test facilities required by suppliers and OEMs in other product development hubs

Policy
Source: EY Analysis Page 17

Testing Infrastructure
ACMA Annual Conference: India as a product development hub

Roadmap for Automotive Product Innovation and Development (RAPID) for Suppliers
Dependents

Explorers

Visionaries

Initial steps

Identify areas of need with OEM on a specific component/ product design Basic testing facilities Advanced facilities shared with OEMs Access to technology/design skills

Setup design cell Problem resolution Process engineering Component design

Setup PD vision Product strategy Technology strategy Investment plan

Setup team of high performing individuals Test facilities for problem solving and new product testing

Setup PD centre Build advanced test facilities Hire experts for product design

Essentials

Knowledge and Skill Management Tie-up with institutes for training and research

Investment

Investment would depend on nature of product/cost of technology

Initial Investment in R&D is not substantial as basic facilities

Investment is higher as manpower and facilities need to evolve quickly

Source: EY Analysis Page 18 ACMA Annual Conference: India as a product development hub

India can become a global industry leader, to do so it needs to evolve as an integrated development & manufacturing hub

Leadership vision

Provide direction, determine evolution path and invest for the future OEM-Supplier collaboration a key enabler to build/enhance Indian model of affordable R&D solution Suppliers and OEMs will need to inculcate and absorb an organization-wide design and innovation culture Invest for the future, to achieve higher levels of profitability and customer satisfaction Ecosystem is a key enabler; need to enhance deployment monitoring, applied research, testing facilities

B Collaboration C
Culture

D Profitability E Ecosystem

Source: EY Analysis Page 19 ACMA Annual Conference: India as a product development hub

The team interacted with various stakeholders from the industry and we take this opportunity to thank all participants for their inputs
OEMs
Bajaj Auto Ltd. Daimler India Commercial Vehicles Pvt. Ltd. (DICV) Mahindra & Mahindra Automotive Division Maruti Suzuki India Ltd. Tata Motors Ltd. Tractors and Farm Equipment Limited (TAFE)

Component Manufacturers
Bharat Forge Ltd. Bosch Ltd. Cummins India Ltd. Gabriel India Ltd. Hi Tech Gears Ltd. Lucas-TVS Ltd. Minda Group Hi Tech Gears Ltd. Rane Group RICO Auto Industries Sharda Motor Industries Ltd. Shiram Pistons & Rings Ltd. Sona Koyo Steering Systems Ltd. Subros Ltd. Varroc Engineering Pvt. Ltd.

Institutions
Automotive Research Association of India (ARAI) Fraunhofer India National Automotive Testing and R&D Infrastructure Project (NATRiP) Indian Institute of Technology, Delhi (IITD)

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ACMA Annual Conference: India as a product development hub

Thank you