Auto Cluster in Tamil Nadu - IM12Y005 PDF

COMPETITIVENESS & CLUSTERS FINAL REPORT 2013
TERM 2 (Jan-Feb)
STUDENT ID: IM12Y005

Tamil Nadu Automotive Cluster Analysis
IM12Y005 – Competitiveness and Clusters Mobile +61 419462640 IM12Y005@g.hit-u.ac.jp
Contents
1. Tamil Nadu Competitive Position ....................................................................................................... 3
Tamil Nadu Economy – an overview ................................................................................................ 3
Tamil Nadu Diamond Analysis ......................................................................................................... 5
Tamil Nadu Diamond Map ................................................................................................................ 7
2. Indian Automotive Industry ................................................................................................................ 8
3. Tamil Nadu Automotive Cluster:...................................................................................................... 10
Cluster Map [10] .............................................................................................................................. 10
Tamil Nadu Auto Cluster Diamond ................................................................................................. 11
4. Recommendation to a Company to improve cluster’s competitiveness ........................................ 16
5. Recommendation to Government to improve cluster’s competitiveness ...................................... 19
6. References............................................................................................................................................ 22
1. Tamil Nadu Competitive Position
Tamil Nadu Economy – an overview

Tamil Nadu is the 11th largest and the seventh most populous state in India, and second most
economically important state in Southern India. Bordered by the Bay of Bengal on its east, it has the
second largest coastline in India with a length of 1,076 km and is an important center for sea trade and
has a national highway of 2,002 km in length. Chennai, which is the capital city, is a strategic point
for trade and an important port. Along with a vibrant manufacturing sector, the state leads the country
in IT, being the second largest software exporter, and healthcare services, being the chosen location
for medical tourism in India.
Snapshot of Key Indicators for Tamil Nadu in 2011
Indicator Unit Tamil Nadu India
GSDP contribution to GDP (2010-2012) % 8.0 100.0
Average Growth rate (2001 to 2012) % 8.0 7.4
Per Capita GSDP (2012) US$ 1,785.1 1,324.3
Literacy Rate (2010-2012) % 80.3 74.0
Installed Power Capacity (2012) MW 17,601.5 199,627
National Highway Length (2012) KM 4,832 71,772
Airports (2012) Number 6 133
Ports (2012) Number 18 199

Note: GSDP: Gross State Domestic Product, GDP: Gross Domestic Product, MW: Mega-Watt
Source: Frost & Sullivan Analysis on State Profile for Tamil Nadu
Tamil Nadu is one of the most developed states in India. Its value of economic activity, the GSDP,
stands at USD 132.4 billion, making it the second largest state economy in India. Tamil Nadu is
characterized as a state with high per capita income and an increasing standard of living. It is an
important hub for manufacturing industries, especially automotive, textiles and software. Tamil Nadu,
at 15.1 percent, accounts for the largest number of Micro, Small and Medium Enterprises (MSMEs).
A slew of incentives from the Government with respect to investment and good infrastructure have
helped the industrial and the ICT services sector. A state with financial soundness; USD 115 million
of revenue surplus was recorded for 2011-12 and USD 508 million of revenue surplus is likely to be
recorded during 2012-13.[1]
An industrialized state, Tamil Nadu has shown consistent

performance over the last decade. It has grown at an
average annual growth rate of 10.3 percent between
2004-05 and 2011-12. Tamil Nadu’s growth rate has
been above that of India’s averaged growth rate.
It has grown at a faster rate than the other industrialized
states of India. An investor friendly state with the
government formulating policies for the development
of the various industries such as the IT, automotive
industries etc., Tamil Nadu will continue to remain in the top rung of the country in the next decade.
The per capita income of Tamil Nadu has shown a CAGR of 14.5 percent between 2004 and 2012.
The per capita income of the state has consistently been greater than the national per capita income on
account of higher growth rates of the economy. A robust, well performing and steadily growing
economy has resulted in Tamil Nadu performing better than India’s average performance. Its per
capita income growth in 2010 - 11 and 2011 - 12, at 11.2 and 8.7 percent respectively, has been the
fifth highest in the country and highest among the more industrialized states.[2] In terms of
infrastructure, Tamil Nadu has a well-developed system of roads, railways, ports, power,
communication etc. All villages in the state are fully electrified. It has 3 major and 17 non-major
ports. It has 5 domestic airports, while Chennai also has an international airport.
According to the Department of Industrial Policy &

Promotion, the cumulative FDI inflows from April 2000
to January 2012 amounted to US$ 8.0 billion.[3] In
2011-12, outstanding investments in the state were
US$ 721.6 billion. Of the total outstanding investments,
the electricity sector accounted for around 37.5 per cent
followed by services sector (31.0 per cent). While electricity sector attracted investment of US$ 270.3
billion, the services sector secured investments worth US$ 223.6 billion in 2011-12.
Aside from the automotive cluster, textiles and engineering are the two main clusters in Tamil Nadu.
The textile sector is next only to agriculture with regards to labour employed in the state. Tamil
Nadu’s yarn cluster accounts for 60% of India’s yarn exports.[4] The engineering sector produced $4.7
billion in products in 2010 and employs over 250,000 people
Tamil Nadu Diamond Analysis
Factor Conditions: Tamil Nadu has some of the best academic institutions in India producing English-
speaking engineers, researchers and skilled workers for the state’s clusters. As of 2012, the state had
34,871 primary schools, 9,969 middle schools and almost 10,827 high schools for its 72 million
people. Total literacy rate for the state is at 80.3% which is better than a lot of other states in India.
The state has ample hospitals and other health care facilities. The population’s average life expectancy
is 65 for males, and 67.4 for females.
The physical infrastructure as mentioned above involves well-developed system of roads, railways,
ports, power, communication etc. All villages and towns in the state are fully electrified, however
significant shortage of electricity to the extent of 3,312 MW in the last 2 years has crippled industrial
development. The Tamil Nadu government is in the process of constructing a nuclear plant near a
village called Kudankulam in the southern part of Tamil Nadu to ease the power requirements for the
state, but is facing a lot of protests from the local population in the wake of Fukushima disaster. Tamil
Nadu has 3 major and 15 non-major ports. It has 5 domestic airports, while Chennai also has an
international airport. Certain key physical infrastructure details are provided below[5]:
Context for Firm and Strategy: Tamil Nadu government claims that in relation to investment
proposals or new business, right from incorporation of company and allotment of land to registration
approvals for power, water, sales tax and state excise, it takes only 30 days under the state’s single-
window clearance facility. It claims that the single window obtains all approvals necessary for the
investment proposal within the aforementioned time. It also claims that the cost of doing business is
one of the lowest in India with the below mentioned information:[3]
However, based on my experience during my working days in Tamil Nadu, investors always found it
difficult to obtain the necessary approvals within the given time and delays to the extent of 6 months
have also been witnessed.
Related and Supporting Industries: Tamil Nadu has always been known for its strong medical,
agricultural, environmental, industrial and engineering products. It also has a very strong network of
3,000 engineering units, employing over 250,000 skilled workforce making high quality inputs
including castings and forgings and a wide variety of ancillary products. Tamil Nadu also has a strong
information technology network with 1,751 software units and 22 approved IT parks. The “TIDEL
Park” in Chennai is spread over 1.28 million sq.ft. and is the largest IT facility in India. The banking
sector needs more development with mostly back office operations in Tamil Nadu to address financing
needs of large scale investors.
Demand Conditions: The high growth in GSDP rates predominantly is from the growth of middle-
income class who work in the IT sector. This growth has the potential to drive consumption and
thereby increase demand for goods and services. However, it is the natural tendency of the Tamil
people in the middle-income group to save more compared to other states in India. The monthly
consumer saving rate for India for 2012 has averaged around 28% with Tamil Nadu being higher at
close to 38%.[6] These high savings rates has a tendency to reduce consumption in times of
uncertainty.
Tamil Nadu Diamond Map
Factor Conditions: Context for Firm & Strategy:

 Well educated workforce  Single Window System
(Lots of schools with high (Blanket approval within 30
literacy rate) days)
 Well-developed infrastructure  Low cost for business

(roads, ports, railways, power (very low as per government
communication, airports etc.) estimates)
 Good Healthcare system  Difficult to do business

Context for Firm & Strategy (Practical experience suggest
 Extreme power crisis (Nuclear delay in obtaining licenses)
plant crucial for power)
Factor Conditions Demand Conditions
Related & Supporting Demand Conditions:

Industries:
 High GSDP growth rate
Related & Supporting Industries (Middle income sector driving
 Strong Industrial Base growth)
(Medical, Agricultural,
engineering)
 1 of 4 Metropolitan states
(Almost every company has
 Advanced IT infrastructure office in Chennai. Huge
(Tidel Park and other IT parks) working population)
 Robust banking sector  Tendency to save more
(scope for more development) (Risk averse population, save
more in uncertain times)
 3000 engineering firms with
skilled labour force
2. Indian Automotive Industry

The automotive industry in India is one of the largest in the world and one of the fastest growing
globally. India's passenger car and commercial vehicle manufacturing industry is the sixth largest in
the world, with an annual production of more than 3.7 million units in 2010. According to recent
reports, India is set to overtake Brazil to become the sixth largest passenger vehicle producer in the
world, growing 16-18 per cent to sell around three million units in the course of 2011-12. [7]
The diagram explains the key players in

India. The majority of India's car industry
is based around three clusters in the South,
West and North. The southern cluster near
Chennai in Tamil Nadu is the biggest with
35% of the revenue share. The western
hub near Maharashtra is 33% of the market.
The northern cluster is primarily Haryana
with 32%. Chennai, is also referred to as
the "Detroit of India" with the India
operations of Ford, Hyundai, Renault
and Nissan headquartered in the city and
BMW having an assembly plant on
the outskirts. Chennai accounts for 60% Source: The Indian Automotive Industry by Roland Berger Strategy Consultants
of the country's automotive exports.[7] Haryana forms the northern cluster where the country's largest
car manufacturer, Maruti Suzuki, is based. Pune, Maharashtra is the western cluster with companies
like General Motors, Volkswagen, Skoda, Mahindra and Mahindra, Tata Motors, Mercedes Benz,
Land Rover, Fiat and Force Motors having assembly plants in the area. Aurangabad with Audi, Skoda
and Volkswagen also forms part of the western cluster. Another emerging cluster is in the state of
Gujarat with manufacturing facility of General Motors. Ford, Maruti Suzuki and Peugeot-Citroen
plants are also set to come up in Gujarat. Kolkata in the east with Hindustan Motors, Honda and
Bangalore in the south with Toyota are some of the other automotive manufacturing regions around
the country.
The Indian Automobile Industry manufactures over 11 million vehicles and exports about 1.5 million
each year. The dominant products of the industry are two-wheelers with a market share of over 75%
and passenger cars with a market share of about
16%. Commercial vehicles and three-wheelers
share about 9% of the market between them. About
91% of the vehicles sold are used by households
and only about 9% for commercial purposes.
The industry has a turnover of more than
USD $35 billion and provides direct and indirect
employment to over 13 million people. [7] Over
the next decade, India will be one of the fastest
growing automotive markets worldwide and move
from 8th position to the 3rd position [8]. Source: The Indian Automotive Industry by Roland Berger Strategy Consultants
Value Chain of Indian Automotive Indus [9]:

The below diagram shows the value chain of the Automotive industry in India:
3. Tamil Nadu Automotive Cluster:

Tamil Nadu Auto cluster is located in its capital city called Chennai. First, when the Tariff
Commission decided to discourage imports and favour the domestic production of automobiles and
spare parts, several Tamil Nadu-based firms like TVS and Standard Motors were already at the
forefront. The emergence of Chennai, and Mumbai as important auto clusters until the early 1960s is
partly because these cities had important seaports. Clearly, proximity to a seaport was an important
consideration for the formation of the auto clusters in the earlier years, as until the early 1960s the
industry (including the component sector) heavily depended on imports. Several Tamil Nadu-based
industrialists, such as those of the TVS group, MRF, Ashok Leyland, Standard Motors, and the Rane
group, played a notable role in forming the auto cluster in Chennai.
Cluster Map [10]
The Tamil Nadu cluster exhibits a close tie up of component units nearby which facilitate OEM
manufacturers in coming to the Chennai. Presence of the wide range of suppliers, collaborators etc.,
make the cluster highly competitive.
Tamil Nadu Auto Cluster Diamond
The Tamil Nadu Auto Cluster Diamond is explained in the diagram below:
Factor Conditions: Context for Firm & Strategy:

 Well educated workforce  Investor friendly state
(Access to skilled English (Implementation of Single
speaking labour) Window System and approval
of Auto SEZ, (Blanket approval
 Well-developed infrastructure within 30 days)
(Proximity to ports and airports)
 Intense competition amongst 6
 Road infrastructure still far foreign OEMs and 1 domestic
from acceptable OEM in the cluster
Context for Firm & Strategy
 Extreme power crisis (Nuclear  High Tax and Tariff rates
plant crucial for power) with procedural delay due to
bureaucracy.
Factor Conditions Demand Conditions
Related & Supporting Demand Conditions:

Industries:
 Great Export market
Related & Supporting Industries (Highest exporter of passenger
 Very large supplier base cars in India)
(Biggest amongst component
manufacturers in whole of India
with 35% market share)  Highest capacity in India at
1.28 million cars per annum
(Caters to demand requirements
 Advanced IT infrastructure across whole of India)
(Tidel Park and other IT parks)
 Local demand low for
 Challenges with many Tier II passenger cars, more for 2
and III suppliers relating to
wheelers
R&D, Quality understanding,
Process competence, Lack of
root cause analysis etc.
Factor Conditions:
 One important factor that attracts FDI and domestic firms in auto and information technology (IT)
industries in Chennai is the adequate infrastructure – both physical (ports and airports), and of
human resources (a steady supply of skilled workforce). With regard to human resources, Tamil
Nadu produces the largest number of engineering graduates in the country.
 In Chennai, several engineering colleges are located, including the Indian Institute of Technology
(IIT), the Guindy Engineering College, and the A. C. College of Technology. In addition, some
regional engineering colleges and several private engineering colleges were also established in
Tamil Nadu. Due to the development of industrial estates, several technical institutes to train
technicians and mechanics were simultaneously set up. From primary schools to highly
sophisticated engineering institutes, Tamil Nadu has the education institutions in place right from
1950s. Lower-level technical institutions such as the government-run Industrial Training Institutes
(ITI) to train technicians have also been set up and consequently Tamil Nadu produces the largest
number of technical graduates in the country. The state government has also involved the private
sector in training workers and professionals.
 In the recent years, Tamil Nadu is suffering from acute power shortage which is acting as a
deterrent for growth of the industries in the state. The government has lost significant investments
to other states like Gujarat on account of this issue. The Kudankulam nuclear project is nearing
completion and as per the claims of the government, this will satisfy the power requirements of the
state. However, there are issues being faced on account of public outcry over construction of a
nuclear plant post the Fukushima disaster. For Tamil Nadu to be competitive and not lose further
investments to states like Gujarat, it is imperative that they solve the power crisis.
Context for Firm, Strategy and Rivalry:
 Tamil Nadu has predominantly been an investor friendly state and has been a very early adopter of
providing incentives for foreign investments in the state. Recently, Tamil Nadu government have
introduced the single window system for obtaining all approvals in one shot for new investments.
This system has been set up to speed up the issue of statutory clearances that once plagued the
state. Now, an approval for setting up shop including approvals from “Town and Country Planning
Department”, “Public Health Department”, “Fire Service Department”, “Labour Department”,

“Pollution Control Board”, “Electricity Board” and “Local Body” can be obtained with one
application in 21 to 30 days as per the Tamil Nadu Government website.[11] Even though
government has introduced this system, there are still procedural delays experienced as part of the
bureaucracy and something that the government needs to work on.
 There are 6 foreign OEM’s in the Chennai Cluster like BMW, Toyota, Nissan, Ford, Volvo and
Hyundai and one domestic OEM TVS (partnership with Honda) who compete intensively. Players
like BMW and Volvo target the premium segment and compete more with players like Audi in the
west cluster. Also, there is an abundant supplier competition in the market for servicing these
OEM’s.
 Tariff rates are very high in the whole of India, including Tamil Nadu as government in interested
more in protecting the interest of the numerous small component manufacturers in the cluster.
These high tariff’s act as a deterrent for the OEM’s to import components into the state, thereby
affecting the local suppliers. The tariff structure comparison of different countries are given
below:[12]
Type China EU Indonesia India S. Korea S. Africa USA
Cars 29.99% 9.99% 45-80% 60.00% 8.00% 25.13% 2.50%

Commercial Vehicles 13.85% 12.67% 10.45% 10.00% 9.69% 9.59% 22.50%
Components 13.39% 3.70% 15.00% 10.00% 8.00% 13.15% 1.34%
Related & Supporting Industries:
 Tamil Nadu Industrial Investment Corporation (TIIC), State Industries Promotion Corporation of
Tamil Nadu (SIPCOT) are few of the entities who are jointly responsible for developing industrial
infrastructure in the state. They have done a phenomenal job of incubating a lot of auto
components suppliers in the state because of which the OEM’s have an abundant supply of auto
component suppliers in Tamil Nadu
 Tamil Nadu holds almost a 35.0 percent share in the total Indian auto components market. The
manufacture of auto components grew at 1.5 percent during 2010-11. The major players in this
market are Visteon, Delphi, Robert Bosch, and Lera, etc. and three Indian industrial groups,
namely, TVS, Rane and Amalgamations. A majority of these suppliers act as Tier I suppliers to
global OEMS’s or as Tier II suppliers to various Tier I suppliers around the globe. The market
structure of these component manufacturers are as follows: Major proportion (nearly 55 percent) is
the vehicle industry for original equipment. Replacement demand constitutes 35 percent of
domestic production. Exports account for the remaining 10 percent.[10]
 At present, over 100 medium and large auto companies are located in and around the Chennai
cluster. In the auto component industry, Tamil Nadu has a more than 50 percent share in the
production of inlet and exhaust valves, valve guides, valve tappets, fuel pumps, oil pump
assembly, thermostat, timings chair, water pump assembly, starter motors, alternators, camshafts,
oil seals, brake linings, wiper motors, air brake assembly and engines. It enjoys between a 30 and
50 percent share in the voltage regulations, flywheel magnetos, steering gears, wheel rims, electric
horns, and dashboard instruments. Further, it has between a 10 and 30 percent share in delivery
valves, crankshafts, bi-metal bearings, radiators, clutch plates, clutch assembly, shock absorbers,
tyres and automotive seats.[13]
 However, there are some challenges with regards to the Tier II and Tier III suppliers as they do not
invest much in R&D. Most of them are ISO certified, but lack a clear understanding of quality.
They lack project management skills, quality and production and production process systems etc.
When issues are raised, the do not have a process of root cause analysis and execution of the
necessary measures to handle issues. These are some issues that definitely need to be addressed to
make the cluster more competitive.
Demand Conditions:
 Local demand conditions are improving with income of the working class population in Tamil
Nadu and India improving with the boom in the IT industry. However, still a major portion of the
population prefer to own 2 wheelers as against cars, due to poor road and infrastructure facilities,
which cause a lot of gridlocks and traffic jams. Also, cars are expensive to buy and hence there is
still a reluctance amongst families to purchase a car. The people of Tamil Nadu tend to be very
conservative in their spending patterns. In times of uncertainty relating to the global financial
crisis, people have a tendency to save a lot of money.
 However, the capacity of the cluster at 1.28 million units per annum, provides the global OEM’s a
lot of flexibility to export their cars out of Tamil Nadu. Tamil Nadu cluster is the highest exporter
of passenger cars out of India. The cheap cost of production enable the OEM’s to improve their
margins on the exports out of the cluster.
Current Institutional Matrix of the Cluster:

 ACMA: The Automotive Component Manufacturers Association of India (ACMA), with a
membership of over 365 companies, has been the Indian auto component industry's spokesman for
the last 38 years. ACMA has a membership of over 365 companies that contribute 90% of the total
output in the organized sector. The Association's active involvement in trade promotion,
technology upgradation, quality enhancement, and collection and dissemination of information has
made it a vital catalyst for the progress of the industry. ACMA is represented on a number of
panels, committees and councils of the Government of India through which it helps in the
formulation of policies pertaining to the Indian automotive industry.[14]
 NATRiP: National Automotive Testing and R&D Infrastructure Project (NATRiP), the largest and
one of the most significant initiatives in Automotive sector so far, represents a unique joining of
hands between the Government of India, a number of State Governments and Indian Automotive
Industry to create a state of the art Testing, Validation and R&D infrastructure in the country. The
Project aims at creating core global competencies in Automotive sector in India and facilitate
seamless integration of Indian Automotive industry with the world as also to position the country
prominently on the global automotive map. As part of NATRiP, a Global Automotive Research
Center (‘GARC’) has been set up in Chennai. The center will have certification test facilities to
conduct the performance testing of full range of automobiles, tractors and construction equipment
vehicles. The center will also have the center of excellence for passive safety, EMC and
Automotive Infotronics. NATRiP has been gaining a lot of popularity in the recent years and their
initiatives towards R&D and safety will definitely help improve the competitiveness of the auto
cluster in India.[15]
 ARIA: The Automotive Research Association of India ( ARAI ) has been playing a crucial role in
assuring safe, less polluting and more efficient vehicles. ARAI provides technical expertise in
R&D, testing, certification, homologation and framing of vehicle regulations. ARAI is a co-
operative industrial research association established by the automotive industry with the Ministry
of Industries, Government of India. It works in harmony and complete confidence with its
members (major automotive players), customers and the Government of India to offer the finest
services.[16]
 SIAM: Society of Indian Automobile Manufacturers (SIAM) is the apex Industry body
representing 46 leading vehicle and vehicular engine manufacturers in India. SIAM is an important
channel of communication for the Automobile Industry with the Government, National and
International organisations. The Society works closely with all the concerned stake holders and
actively participates in formulation of rules, regulations and policies related to the Automobile
Industry. SIAM provides a window to the Indian Automobile industry and aims to enhance
exchanges and communication, expand economics, trade and technical cooperation between the
Automotive Industry and its international counterparts.[17]
4. Recommendation to a Company to improve cluster’s competitiveness
I have chosen, Hyundai Motor India as the Company to whom these recommendations are provided to
improve the competitiveness of the Chennai Cluster. Hyundai Motor India Limited (HMIL) is a
wholly owned subsidiary of Hyundai Motor Company (HMC). HMIL is the largest passenger car
exporter and the second largest car manufacturer in India. It currently markets nine car models across
various segments. HMIL's fully integrated state-of-the-art manufacturing plant near Chennai boasts of
advanced production, quality and testing capabilities. HMIL forms a critical part of HMC’s global
export hub. It currently exports to around 120 countries across EU, Africa, Middle East, Latin
America, Australia and the Asia Pacific. HMIL has been one of India’s leading exporters for last eight
years in a row. To cater to rising demand the company commissioned its second plant in February
2008 having an installed capacity of 330,000 units per annum. To support its growth and expansion
plans HMIL currently has 355 dealers and more than 850 service points across India. HMIL has also
set up a modern multi-million dollar R&D facility in Hyderabad. The R&D centre endeavours to be a
center of excellence in automobile engineering. HMIL have been very successful in its venture in the
Chennai Cluster, and most of the OEMs in the cluster are very successful global companies following
some of the best practices in the industry. Hence, recommendations to improve the whole automotive
cluster has been approached from what improvements HMIL can provide to its suppliers who in turn
will improve the competitiveness of the cluster.[18]
Time
Challenges Recommendation Rank
Frame
1. Suppliers lack of ability to scale up Vendor accreditation program 1 year 1
2. Quality understanding amongst

Training Programs Ongoing 2
vendors very low
3. Component suppliers lack process

competence (Project management, Introduction to best practices Ongoing 3
quality and production)
Comprehensive global market

4. Operating at less than capacity 1 year 3
research
5. Potential for more skilled labour Start education programs aimed at 1 to 2

4
available helping the poor (CSR initiatives) years
1. Vendor Accreditation Program:

Most of the suppliers in the cluster do not have the ability or resources to scale up their production
to meet demand requirements. A clear vendor accreditation program by HMIL will help these
vendors by partnering with them and providing them necessary resources to enable them to scale
up their production and be more competitive in the cluster. This will help in the consolidation of
the auto component suppliers who are hundreds in the number at the moment to realise economies
of scale and improve their profitability. This in turn will increase the competitiveness of the
clusters by reducing the OEMs costs.
2. Training Programs:
The boom in the Chennai automotive cluster happened very suddenly with a lot of OEMs entering
the cluster in the last decade. Many of the suppliers in the region who want to be part of the boom
focus a lot on the quantity at the expense of compromising the quality. Most of the OEMs maintain
4 to 5 vendors for every component allowing them to just reject the components if they are not of
quality. However, training programs to the component suppliers emphasizing the importance of
quality and the requirements will provide them with an opportunity to reduce wastage from
producing low quality goods and sustained businesses from the OEMs. This will in turn lead to
more profitability, reduce imports and hence the competitiveness of the clusters.
3. Introduction to best practices:

As explained above, most of the suppliers do not focus on quality. When there is an issue, they try
and eliminate the symptom as against addressing the root cause of the problem. These vendors do
not have access or knowledge of the best practice methodologies followed by some of the global
OEMs like HMIL. Introduction to some of these practices like lean manufacturing, JIT, root cause
analysis etc. and training them to implement these practices will enable these local suppliers to
become world class suppliers of auto components. This implies that exports will increase and
increase the competitiveness of the cluster.
4. Comprehensive global market research:

OEMs like HMIL need to improve their capacity utilisation and minimise their inventories, by
better market research and a greater focus on exports, since that would provide additional market
to absorb inventories and maximise capacity utilisation. Field survey done as part of determinants
of competitiveness in the Indian auto industry showed that almost all OEMs operate below their
capacities, probably because they generally focus on domestic markets and occasionally over-
estimate the demand for their products. This problem could probably be eliminated by undertaking
a comprehensive global market research and then focusing on exports.
5. Education programs targeting the poor:

In spite of Tamil Nadu churning out the highest number of engineering graduates in the country,
there is still a big section of the population who cannot afford decent education for their children
and transform them to join the skilled workforce mainstream. HMIL as part of its CSR activities
can start educational institutions or technical training institutions to provide education
opportunities to the poor and then employ them in their workforce. This will help in imparting the
required training for the workers that can make HMIL employ them along with giving them an
opportunity to break the shackles of poverty. This will improve the quality of the labour force and
in turn the competitiveness of the cluster.
5. Recommendation to Government to improve cluster’s competitiveness

Tamil Nadu government have a few challenges ahead of them to sustain the competitiveness of the
Auto cluster. There are lots of rumours that Tamil Nadu is no longer the favoured auto hub in the
country, rather it is the state of Gujarat which is turning into a big auto cluster. Even erstwhile
mainstays of the auto cluster in Chennai like Ford, Hyundai etc. are looking at other destinations
when it comes to expanding operations within the country. Ford recently announced that its second
facility at an investment of $800 million with an installed capacity of 240,000 units will be in Gujarat
and not Tamil Nadu. Few of the challenges and the recommendations are listed below in the table:
Ease of Time
Rank Challenges Recommendation Responsibility
Implementation Frame
1. Power shortage in the state Privatize power sector Difficult State Govt. 1 yr.
a big concern & more allocation from
new power plants
2. Exports represent only Market Development Difficult State/ 2 yr.

10% of capacity Assistance (MDA) Central
grants
3. High Tariffs and Taxes on Reduce automotive Not very Central 2 yr.
Inputs import tariffs difficult
4. Better Infrastructure for Increase Infrastructure Not very State 2-5

Roads and Ports needed budget difficult yrs.
5. Skills of component Financing facilities for Easy State/ Auto 2 -3

suppliers not world class scale and research Players yrs.
(Less R&D, Low Quality
etc.)
6. Improving domestic Research grant for Easy State 2-3

demand for Cars cheap Cars yrs.
1. Addressing Power Shortage in the State (Factor Conditions):

Good infrastructure and abundance of power was one of the main reasons for the formation of the
cluster in the state. However, in the present the state is reeling from acute power shortage and
firms are not able to function to their full capacity because of lack of power. The alternate means
of power generation are increasingly expensive. This is one of the main reasons for further
investments to move away from the state. As mentioned earlier, a nuclear power plant in
Kudankulam is being constructed with installed capacity of 6800 MW. The government must
make sure that there is adequate allocation of power to the automotive cluster to meet their
requirements and also look at options to privatize the state power sector.
2. Focus on increasing exports from the state (Demand Conditions):

Since “exports : sales ratio” has a significant positive impact on competitiveness and since only
10% of installed capacity is currently exported, it is imperative for the government to encourage
exports by means of higher Market Development Assistance (MDA) grants and by further
strengthening the provisions under different promotional schemes. The most important measure
that the government could take is to ensure that the rupee does not appreciate unduly vis-à-vis
other currencies. Other tax incentives such as those on octroi, entry taxes, sales tax, etc., must be
standardized across all states. In addition, Special Economic Zones (SEZs) can avail other
exclusive incentives such as exemptions in almost all taxes and duties, tax holidays for 15 years
and world-class infrastructure. The incentives could be given to all those export oriented OEMs
who continuously export more than 50 per cent of their output.
3. Reduction of Tariffs and taxes on inputs (Context for Firm & Strategy):
Higher taxes on inputs, especially on capital goods, reduce efficiency and competitiveness of
OEMs. Hence, the government should minimise the tax burden, by reducing tariffs and import
duties further and by implementing “Value Added Tax” across all states. These measures will also
have a direct bearing on reducing the cost of production and bringing down the prices of the cars in
the market, this stimulating more domestic demand.
4. Better Port and Road Infrastructure (Factor Conditions):

Port and road congestions have been increasing lately with increase in activity in the state. This is
acting as a deterrent to the growth of the sector with severe logistical delays in terms of inputs and
exports. Government should aim to increase the budget for infrastructure to address these issues
and can also look at a public private partnership for improving the efficiency of the infrastructure
projects.
5. Better financing solutions for component suppliers (Related & Supporting Industries):
As mentioned earlier, most of the component suppliers do not invest a lot into R&D and focus
more on quantity, rather than quality. They also do not have the necessary resources to scale up
their production to meet the OEMs demands. Improving the quality of the component suppliers
will have a direct impact on the competitiveness of the cluster, where there is potential for cost
reduction and improved margins. Government should ensure that there are adequate financing
options available for the suppliers to scale up their operations by liberalizing the finance sector and
allowing more foreign banks to come into the state. Also, partner with the OEMs to introduce best
practice methodologies like lean manufacturing, JIT etc. to the suppliers along with adequate
training for ensuring quality standards.
6. Improving domestic demand for cars (Demand Conditions):

As mentioned earlier, people in Tamil Nadu prefer to travel by 2 wheelers as it is more economical
in terms of fuel consumption, maintenance charges and initial capital expenditure. It is vital to
stimulate domestic demand to increase the competitiveness of the cluster and as part of addressing
the problem and as part of promoting long term affordability of passenger cars, the government
can provide research grants to the OEM’s to produce cheaper economical cars. It will be similar to
initiatives started by Tata Motors, where they came up with a $3,000 car called the Tata Nano,
which could be afforded by a large section of the market.
6. References
1. “Vision Tamil Nadu – Building Sustainable Tomorrow” by The Associate Chambers of Commerce
and Industry in India on Feb 13, 2013
2. “Press Information Bureau”, “Government of India website < http://india.gov.in/>
3. India Brand Equity Foundation document accessed on Feb 13, 2013
<www.ibef.org>
4. Tamil Nadu state presentation accessed on Feb 13, 2013
5. http://www.fropki.com/automotive-industry-india-vt48319.html
6. “Middle-Class Indians Scrimp – India Real Time” (Wall Street Journal) accessed on Feb 13, 2013
7. Automotive Industry in India accessed on Feb 21, 2013
<http://www.fropki.com/automotive-industry-india-vt48319.html>
8. The Indian Automotive Industry by Roland Berger Strategy consultant accessed on Feb 21, 2013
9. Tamil Nadu Automotive cluster – Harvard Business School April 2012 accessed on Feb 21, 2013
10. Diagnostic study report of Auto Component cluster Chennai accessed on Feb 21, 2013
<http://www.fropki.com/automotive-industry-india-vt48319.html>
11. Directorate of Industries and Commerce website on Single Window Clearance accessed on Feb 21,
2013. < http://www.indcom.tn.gov.in/single_window_sys.htm>
12. Determinants of competitiveness of the India Auto Industry by Badri Narayanan accessed on Feb 22,
2013. < http://www.eaber.org/sites/default/files/documents/ICRIER_Narayanan_2008.pdf>
13. “Industrial Clusters in India: Evidence from Automobile Clusters in Chennai and the National Capital
Region” by Okada and Siddharthan accessed on Feb 22, 2013
14. The Automotive Component Manufacturers Association of India accessed on Feb 22, 2013
<http://auto.indiamart.com/auto-industry/associations-acma.html>
15. NATRiP website accessed on Feb 22, 2013
< http://www.natrip.in/>
16. ARIA website accessed on Feb 22, 2013
< https://www.araiindia.com/>
17. SIAM website accessed on Feb 22, 2013
< http://www.siamindia.com/>
18. Hyundai Motor India website accessed on Feb 22, 2013
< http://www.hyundai.com/in/en/main/>

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COMPETITIVENESS & CLUSTERS FINAL REPORT 2013

STUDENT ID: IM12Y005

1. Tamil Nadu Competitive Position ....................................................................................................... 3

Tamil Nadu Economy – an overview ................................................................................................ 3

Tamil Nadu Diamond Analysis ......................................................................................................... 5

Tamil Nadu Diamond Map ................................................................................................................ 7

2. Indian Automotive Industry ................................................................................................................ 8

3. Tamil Nadu Automotive Cluster:...................................................................................................... 10

Cluster Map [10] .............................................................................................................................. 10

Tamil Nadu Auto Cluster Diamond ................................................................................................. 11

4. Recommendation to a Company to improve cluster’s competitiveness ........................................ 16

5. Recommendation to Government to improve cluster’s competitiveness ...................................... 19

1. Tamil Nadu Competitive Position

Tamil Nadu Economy – an overview

Snapshot of Key Indicators for Tamil Nadu in 2011

Indicator Unit Tamil Nadu India

GSDP contribution to GDP (2010-2012) % 8.0 100.0

Average Growth rate (2001 to 2012) % 8.0 7.4

Per Capita GSDP (2012) US$ 1,785.1 1,324.3

Literacy Rate (2010-2012) % 80.3 74.0

Installed Power Capacity (2012) MW 17,601.5 199,627

National Highway Length (2012) KM 4,832 71,772

Airports (2012) Number 6 133

Ports (2012) Number 18 199

An industrialized state, Tamil Nadu has shown consistent

According to the Department of Industrial Policy &

Tamil Nadu Diamond Analysis

Tamil Nadu Diamond Map

Factor Conditions: Context for Firm & Strategy:

 Well-developed infrastructure  Low cost for business

 Good Healthcare system  Difficult to do business

Factor Conditions Demand Conditions

Related & Supporting Demand Conditions:

2. Indian Automotive Industry

The diagram explains the key players in

Value Chain of Indian Automotive Indus [9]:

3. Tamil Nadu Automotive Cluster:

Cluster Map [10]

Tamil Nadu Auto Cluster Diamond

Factor Conditions: Context for Firm & Strategy:

Factor Conditions Demand Conditions

Related & Supporting Demand Conditions:

Context for Firm, Strategy and Rivalry:

Department”, “Public Health Department”, “Fire Service Department”, “Labour Department”,

Cars 29.99% 9.99% 45-80% 60.00% 8.00% 25.13% 2.50%

Related & Supporting Industries:

Current Institutional Matrix of the Cluster:

4. Recommendation to a Company to improve cluster’s competitiveness

1. Suppliers lack of ability to scale up Vendor accreditation program 1 year 1

2. Quality understanding amongst

3. Component suppliers lack process

Comprehensive global market

5. Potential for more skilled labour Start education programs aimed at 1 to 2

1. Vendor Accreditation Program:

3. Introduction to best practices:

4. Comprehensive global market research:

5. Education programs targeting the poor:

5. Recommendation to Government to improve cluster’s competitiveness

2. Exports represent only Market Development Difficult State/ 2 yr.

4. Better Infrastructure for Increase Infrastructure Not very State 2-5

5. Skills of component Financing facilities for Easy State/ Auto 2 -3

6. Improving domestic Research grant for Easy State 2-3

1. Addressing Power Shortage in the State (Factor Conditions):