making india a world class automotive manufacturing hub

Making India a world class automotive manufacturing hub6 February 2016

ContentsForeword 03

Indian automotive industry: current scenario and outlook 04

1. Enabling regulatory environment 122. Developing talent and skills 173. Fast-tracking infrastructure development 214. Incubating R&D and innovation 245. Enhancing supply chain competiveness 28

What would it take for India to become a world-class auto manufacturing hub? 11

Appendix 32

About EY and CII 33

ForewordThe Indian automotive sector, given its potential contribution to GDP and employment, presents a

drivers for the economy. What we do need to emerge as a “world-class automotive manufacturing hub” is a concerted effort from the Government and the automotive industry to create an enabling ecosystem. The country’s key strengths such as a large domestic consumption base, a cost competitive value chain (that includes low design, testing and validation costs, frugal engineering capabilities and low labor costs) and strategic geographical location would go a long way to develop the country as a world class automotive manufacturing base.

The Indian automotive industry is witnessing testing times. The market continues to experience volatility and we are waiting to see clear signals of revival in growth. With the government and the judiciary taking steps to make transport cleaner and safer, there is some degree of uncertainty for automakers, especially regarding the fuel mix and the necessary investments for technology upgrades. We believe that these are just short-term challenges as the long-term growth story for the automotive industry in India remains intact.

The Government’s Automotive Mission Plan (AMP) 2016–26 envisions the industry to grow around four times by FY26 with approximately 10% CAGR for vehicle sales volumes. The Government’s push to manufacturing through the “Make in India” initiative has garnered considerable attention from the industry and brought the spotlight back on the manufacturing sector. According to the EY’s India Attractiveness Survey 2015, the country was ranked as the most attractive investment destination and 62% of respondents suggested “manufacturing” as the nature of business activity they are planning in India.

As the country looks to establish its credentials as a manufacturing destination, there are some gaps that we need to address. These include an enabling regulatory environment, developing the requisite talent and skills, fast-tracking of infrastructure development, incubating R&D and innovation culture, and enhancing supply chain competiveness.

Rakesh Batra,Automotive and Transportation Leader, EY India

M M Singh,Executive Advisor, Maruti Suzuki India Ltd

Rajeev Wasan,Sr Vice President Manufacturing, Honda Cars India Limited

Indian Automotive Industry:current scenario and outlook

India has emerged as an important automotive market and offers huge growth potential due to low vehicle penetration and improving economic fundamentals

Passenger vehicle density expected to become 1.5 times by 2020India has the largest population of young people in the world, with around 66% of population under the age of 35. The country’s low vehicle penetration (32 vehicles per 1000 people in 2015)

makes it one of the world’s most attractive auto markets. Owing to its unique demographic dividend, the Indian auto industry has immense growth potential. India’s passenger vehicle parc of around 29 million during 2015 is expected to grow to more than 48 million vehicles by 2020.

World passenger vehicle density (Personal vehicles per ‘000 driving population)

169 159

350

102

545

765

611

326

192 184

393

184

547

801

624

369

World Brazil Russia China Japan

2015 2020

NorthAmerica

WesternEurope

EasternEurope

32 48

India

Sources: Automotive Mission Plan 2016–26 (AMP 2016–26), LMC Automotive, EY analysis

The auto sector is one of the most important contributors to GDP and employment in India, with huge potential for growth. The sector accounts for 7% of India’s GDP, 45% of manufacturing GDP and employs about 19 million people both directly and indirectly. Further, the sector contributes around 4.3% to India’s total exports and 13% to the country’s excise revenues.

Over the years, the Indian auto industry has emerged as one of the world’s largest, with annual sales of 19.8 million vehicles in FY15. It is also one of the fastest growing auto markets, with production of 23.4 million vehicles in FY15 and a leading position in several sub-segments.

World’s largest

World’s 2nd largest

World’s 5th largest



Current ranking (FY15)

Tractor manufacturer

Two-wheeler (2W) manufacturer

Heavy truck manufacturer

Passenger vehicle (PV) manufacturer

Commercial vehicle (CV) Manufacturer

Making India a world class automotive manufacturing hub | 5

Most global OEMs have an established presence in the market along with Indian players; Japanese players account for around half of the passenger vehicle sales

Highly competitive market landscapeDespite the presence of several Indian and global players, each segment has a dominant player commanding more than 40%

of the market share. However, with the increasing intensity of competition and new model launches, market shares are expected to realign over the next few years.

OEMs and suppliers continue to invest in IndiaThe Indian auto industry has witnessed on-going interest with several global players entering the industry post liberalization through technical tie-ups and minority investments. The industry has seen investments from both global and local OEMs and

suppliers towards building/expanding capacity and research and development. The PV industry has witnessed a revival in new investments after three years of weak investment climate with the anticipation of a recovery in demand.

Investments in the automotive industry during the 2006–15 (INR billion)

* Daimler India Commercial Vehicles data not availableSources: Society of Indian Automobile Manufacturers (SIAM), AMP 2016–26, EY analysis

Market share (FY15)

2%

3%

5%

6%

7%

9%

16%

45%

GM

Ford

Toyota

Tata Motors

Honda

Mahindra

Hyundai

Maruti Suzuki

Passenger vehicles

1%

2%

2%

4%

11%

13%

27%

40%

Mahindra

Suzuki

Yamaha

Bajaj

TVS

Honda

Two wheelers Commercial vehicles*

1%

2%

3%

6%

15%

25%

47%

Piaggio

Isuzu

Force

VECV

Ashok Leyland

Mahindra

Tata Motors

AutomotiveOEMs

Componentsuppliers

1,080

495

~INR 6,000 billionValue of planned investments by automakersover the next few years

48Number of automotive FDI projects in 2014

6 | Making India a world class automotive manufacturing hub

The industry witnessed a slow revival during 2015 owing to low fuel prices, declining interest rates and an uptick in the economyTotal sales (domestic + exports) by segment, FY09–15, million units

Passenger vehicles

Two-wheelers

Commercial vehicles

8.410.5

13.315.4 15.8 16.9

18.5

9.5

FY09 FY10 FY11 FY12 FY13 FY14 FY15 1HFY16

Two-wheeler (2W) sales growth slowed during FY12–14 and recovered in FY15 driven by strong rural demand and the rising popularity of scooters.

Scooters continued to witness strong growth due to a strong surge in urban demand.

A decline in motorcycle sales due to shrinking rural demand has again weakened growth in the current

CAGR 14.0%

1.9

2.4

3.0 3.1 3.2 3.1 3.2

1.7

FY09 FY10 FY11 FY12 FY13 FY14 FY15 1HFY16*

CAGR 9.1% PV sales witnessed a slow down over the last couple of years due to economic uncertainty and high interest rates.

Compact cars (including compact sedans and premium hatchbacks) and compact SUVs continue to outperform overall PV sales on the back of increased consumer preference and successful new launches.

During FY16, the market has begun to show moderate growth due to improving sentiment, low fuel prices and interest rates.

0.40.6

0.80.9 0.9

0.7 0.7

0.4

FY09 FY10 FY11 FY12 FY13 FY14 FY15 1HFY16

CV sales declined during FY12-15 due to the economic slowdown and stalled infrastructure projects.

During FY16, demand is reviving, driven by economic recovery, urbanization and infrastructure development.

Medium and Heavy CVs are witnessing strong growth on the back of pent-up demand and an anticipated increase in infrastructure spending.

CAGR 8.5%

*1HFY16 refers to April — September 2015Sources: SIAM, EY analysis


The auto component industry is expected to witness double-digit growth over the next decade owing to huge demand from both domestic and export markets

Turnover dominated by engine parts and supply to PV segmentIn FY15, engine parts dominated the overall turnover of the Indian auto component industry with a share of 31%, followed by other categories; while 45% of the supply was made to the PV segment.

Turnover trends in INR billion (US$ billion), FY10–15E Share of market segments (FY15E)

Auto component industry grew at 11% during FY15The Indian auto component industry comprises around 700 organized players and a few thousand unorganized players, with its size estimated at US$38.3 billion in FY15. After a challenging FY14, the industry has rebounded during FY15, growing at 11% due to a recovery in domestic demand and exports.

Entry of global OEMs strengthening capabilities of Indian suppliers

the entry of global OEMs through exposure to global standards and technology by forming tie-ups with foreign suppliers. As a result, many global OEMs have also managed to achieve a fairly high level of localization in India.

1,386 (30.8)

199(4.2)

FY10

1,883(41.3)

301(6.7)

FY11

2,046(42.2)

423(8.8)

FY12

2,161(39.7)

529(9.7)

FY13

2,118(35.1)

614(10.2)

FY14

2,340(38.3)

690(11.3)

FY15E

Total turnover Exports

22%Exports

66%OEM

12%After market

Auto components: share of total turnover (FY15)

7%

9%

10%

12%

12%

19%

31%

Others

Electrical parts

Equipment

Body & chassis

Suspension & Braking

Drive transmission

Engine parts

4%

4%

5%

5%

8%

8%

22%

45%

Three wheelers

Others

Medium CV

LCV and SCV*

Heavy CV

Tractors

Two wheeler

PV

Sources: Automotive Component Manufacturers Association of India (ACMA), SIAM, AMP 2016–26, EY analysis

*SCVs (maximum mass): Upto 2 tonnes; LCVs (maximum mass): 2 to 7.5 tonnes


Market size of Indian automotive industry, INR billion (US$ billion)

Domestic vehicle sales outlook Auto component turnover split, INR billion (US$ billion)

The Indian Government’s Automotive Mission Plan 2016–26 envisages four-fold growth by FY26

AMP 2016–26 forecasts vehicle sales to grow at a CAGR of around 10% over the next decadeAccording to the AMP 2016–26, vehicle sales are expected to touch 66 million units by FY26. To achieve the projections, the auto industry will require additional investment of

INR4.5 trillion-5.5 trillion. The growth of the automotive market will translate into huge potential for the auto component sector. It is expected to grow at a CAGR of 13% from US$38 billion in FY15 to more than US$150 billion by 2026.

Sources: ACMA, SIAM, AMP 2016–26, EY analysis

US$/INR at 67.0 for forecasts; average historical rates used for historical data

The Indian auto sector has the potential to generate up to US$300 billion in annual revenue by 2026, create around 65 million additional jobs and contribute more than 12% to

India’s GDP, according to the Automotive Mission Plan 2016–26 prepared jointly by the SIAM and the Government.

FY08 FY09 FY10 FY11 FY12 FY15E FY26F

1,873(47)

1,795(39)

2,347(50)

2,833(62)

3,367(70)

4,701(77)

20,100(300)

13% CAGR

10% 10% 10% 9%

19.5

53.4

FY15 FY26F

2W + 3W

3.2

9.4

PV

0.6 1.5

Tractors

0.7 2.0

CV (incl SCV and LCV)

FY15-26(F)CAGR

835(18.9)

2,340(38.3)

10,605(158.3)

69%53%

42%

16%

29%

43%

15%

17%

17%

FY06 FY15 FY26F

Exports AftermarketDomestic OEM sales


The concept of access to mobility is catching up quickly, and the traditional,

model will be challenged. Automakers would, therefore, need to take notice of these new-age mobility providers, and prepare relevant offerings for customers.

The industry is witnessing a shift from the traditional “ownership” mindset toward “access to mobility”

Impact on automotive industry

Business models operating in the short-term hire spaceDespite being a very young market, the advanced mobility space is gaining ground in the country, with a multitude of business model variants. Some of these have been listed below.

In line with other global markets, India is also witnessing the proliferation of technology-driven mobility service providers (such as cab aggregators and ride-sharing companies). This is driven by factors such as high cost of vehicle ownership, rising congestion, growing connectivity and mobile penetration. Consequently, the Indian consumer is being drawn toward the idea of “access” from “ownership,” as these technology-intensive business models provide short-term access to vehicles.

Value proposition offered by technology-intensive, short-term hire companies

These businesses have been able to scale-up faster as they rely on

ownership among many consumers.

The current models in India have a different market positioning compared with developed markets — in particular, they are more of an alternative to the taxi and other shared transport options rather than peer-to-peer sharing.

Easier access to vehicles

Real-time booking process

Digital payment options

Usage-based pricing model (per minute/kilometres)

Some automakers are testing car sharing models in niche pockets such as corporates, students and small businesses

Technology-driven companies moving away from the traditional asset-heavy business model and providing access to vehicles (with drivers) by aggregating cab operators (individual/small

Ride-sharing connects people traveling long distances (in the same direction) and seeking a cost-effective, eco-friendly mode of transit

2nd and 3rd car buyers in urban cities — allows them to defer/cancel investments in a new car 2Traditional rental and taxi business models under pressure, thus calling for reinventing value proposition3

4

1 Expected to affect two segments — entry-level car and 2W

Sources:


What would it take for India to become a world class automotive manufacturing hub?

Enablingregulatoryenvironment

Enhancingsupply chain

competitiveness

Developingtalent and skills

Fast-trackinginfrastructuredevelopment

Incubating R&Dand innovation

A stable and supportive regulatory environment is critical to drive growth in the Indian automotive industryRegulations and government initiatives will play a critical role in driving the Indian automotive industry’s growth. We have seen a lot of activity in this space especially in the recent past. The Government has launched many new programs such as “Make in India” and “Skill India,” along with undertaking measures to improve the ease of doing business and the likely rollout of the GST. In addition, we are seeing an unprecedented thrust on addressing concerns around pollution, congestion and safer transport.

While the Government’s initiatives to improve the business environment and make transport cleaner and safer are welcome moves, there is a need to provide clear guidelines and a road map for regulations. The automotive industry is capital intensive and requires long-term planning on regulatory issues. Thus, a stable policy regime is critical to drive growth.



competitiveness

Developingtalent andskills

IncubatingR&D andinnovation


Key government programs/regulations expected to affect the industry

Government programs/initiatives to boostmanufacturing and ease of doing business

Key automotive regulations to watch out for

Advancement of BS VI norms

Likely rollout of the “End of life” policy

Cleaner transport01

FAME-India scheme

Upcoming Road Transport and Safety bill

International safety standards from 2017

Safer transport02

Regulations for new mobility initiatives

Advanced mobility03

Make in India

Skill India

Likely rollout of the GST

Smart cities

Digital India

StartUp India

Sources: SIAM, and EY analysis

1 Enabling regulatory environment


The implementation of “Make in India” and initiatives to improve the ease of doing business will drive the Indian auto industry’s growth

Initiatives to improve the ease of doing business in IndiaThe Government has taken a series of actions to support “Make in India,” including those outlined below.

Other initiatives: The Government has also launched several other initiatives such as “Smart Cities,” “Skill India,” “Digital India,” etc., that will support India’s development as a world-class manufacturing hub.

The “Make in India” initiative has an aggressive ambition to transform India into a manufacturing and technology hub. It has garnered considerable attention from the industry and turned the spotlight on the manufacturing sector.

Implications of “Make in India” for the auto sector

program. The implications for the industry are as follows:

• Create new employment opportunities

• Focus on buildingtechnical skills

• Boost domestic CV sales, and drive rural demand for vehicles

• Drive vehicle exports

• Facilitate investment and

• Build best-in-class manufacturing infrastructure

• Promote R&D investment and protect intellectual property

Boost to automotive FDI and R&D

Infrastructure development

Labo

r law

reform

s

MAKE IN INDIA

New trade policy

Export and import taxes on small volumes of goods have been abolished, and incentives have been introduced for export-oriented unitsand export processing zones.

New labor laws

These include a “single-window” labor compliance process for companies, simpler Provident Fund (compulsory employee insurance and pension) procedures and a new inspection scheme.

To make doing businesses easier, companies can obtain environmental approvals and licenses online.

The Government is taking steps to ensure that resources are used

coal blocks to companies through auctions while encouraging solar and wind power generation projects.

1 2 3 4

Sources: EY analysis

India’s rank in the World Bank’s Ease of Doing Business index has improved from 142 in 2015 to 130 in 2016


The “StartUp India” program and the likely rollout of GST would also help improve doing and establishing new businesses in the country“StartUp India” to boost entrepreneurship and create jobsThe objective of the Government’s “StartUp India” program is to reinforce commitment toward creating an ecosystem conducive to the growth of startups.

There are immense opportunities in the Indian automobile industry for technological innovation and new solutions. The growing digitization in the country is driving innovation in advanced mobility (with initiatives such as technology-based cab aggregation and, ride sharing), vehicle and component retail, connected car, etc.

Implications of GST for the auto sectorThe tax reform is likely to change the transportation scenario, and industry players must start thinking about realigning their supply

will impact vehicle pricing, sourcing strategies, distribution costs

Reduction inlogistics cost

1 3

2 4

Greater transparency

Reduction in cost of doing business

Lower tax burdenon vehicles


Duration of income tax rebate for startups under the “StartUp India” program

Fund size committed by the Government to support upcoming startup enterprises over the next four years

3 years

INR100 billion


Automotive regulations are likely to focus on making transport cleaner and safer

*FAME-India: Faster Adoption and Manufacturing of Hybrid and Electric vehicles in India **NATRiP: National Automotive Testing and R&D Infrastructure Project Sources: SIAM and EY analysis

The automotive regulatory space is witnessing increased activity and some bold decisions by the Government and judiciary to battle the high pollution levels in Delhi and other metros. In the

medium term, we expect heightened regulatory activity in order to make transport cleaner and safer.

Cleaner transport

Advancement of BS VI norms: The government recently decided to skip the BS V norms altogether, and adopt the BS VI norms from April 2020. Automakers and the oil companies will

to meet these deadlines. We expect a continued thrust toward cleaner fuels in the policy formation and some possible announcements in the 2016 Union budget.

FAME-India* scheme: The scheme, launched in April 2015, provides incentives for the purchase of green vehicles. While the scheme has pushed electric vehicle (EV) sales, efforts need to be undertaken in areas such as setting up of charging infrastructure, launching compelling EV models, and reducing battery costs.

“End of life” policy: The Government is likely to introduce a policy promoting scrappage of old vehicles. This is a welcome move and is likelyto reduce pollution and drive new vehicle sales.

Safer transport

Compliance with international safety standards: The Government has announced Oct 2017 as the deadline for automakers to ensure international standards in terms of vehicle safety. Mandatory crash tests will be implemented from October 2017 for new models (Oct 2019 for existing models). To conduct the tests, India is likely to have seven world-class automotive design and testing centers (being set up by NATRiP**) by the end of 2016.

New road transport and safety bill: The bill seeks to drive faster clearances, stricter road and vehicle

policy. It focuses on transparency and computerization, heavy penalties for

global best practices for issues related to vehicle regulation androad safety.

Advanced mobility

Regulations for new mobility initiatives: The Indian market has recently witnessed a slew of advanced mobility offerings and new mobility initiatives such as technology-based cab aggregation and ride sharing. A regulatory environment conducive to promote innovation for these new mobility initiatives is needed. The road transport ministry has issued some guidelines, which could be the starting point for states to establish regulations.

the beginning of a gradual shift in the Government’s focus on cleaner transport. The industry should brace itself for more policy interventions in this aspect. The market is likely to shift in favor of petrol cars, and the industry needs to prepare accordingly, while also

capacity. In addition, automakers need to work towards improving fuel

investments towards developing cleaner vehicles (hybrid and electric vehicles).

There is an urgent need for the industry to make investments and offer safety features (across all vehicle segments) to ensure that vehicles meet global standards — something that has been lacking so far.

In the medium to long term, automotive companies will need to assess the competition from mobility aggregators and come up with mobility-service-oriented strategies and offerings vs. product offerings to remain competitive and relevant

Implications:


growth in manufacturing investments

Sources: EY’s India Attractiveness Survey 2015 and EY analysis

FDI growth turns positive from 2014We have seen a sharp turnaround in FDI in 2014. After declining for two successive years, investment in India has bounced back

growth in FDI seen globally. This was driven by an improvement in India’s macroeconomic indicators — in part, helped by declining oil prices — and ongoing government efforts to revitalize growth and improve the business environment.

FDI capital (US$b)

Split of FDI capital by segment (%)

Highlights 1H15

India emerges as the #1 FDI destination in 1H15

of calendar year 2015, India has emerged as the number one FDI destination in the world.

31.1

18.7

25

2012 2013 2014

+34%Jump in FDI capital FDI capital increase

in manufacturing

Highest-ever FDI capital per project

+135% +221%

US$91m

38% 37% 37%

46%37% 46%

14% 23% 15%

3% 3% 3%

2012 2013 2014

Services Manufacturing Retail Strategic

After a steep fall in 2013, FDI in manufacturing grew at its fastest in seven years. The upsurge coincided with the launch of the “Make in India” program to promote manufacturing in the country. The program has also enhanced transparency by auctioning coal and power licenses, and has relaxed constraints on FDI in key sectors. Meanwhile, several states are moving ahead with labor law reforms.

y-o-y jump in auto sector FDI during 2014 to reach US$3.1 billion

12%

163%

What is the nature of the business activity you are planning in india?

(open-ended question — multiple responses)

Source: EY’s India Attractiveness Survey 2015 (total respondents: 265 with overseas expansion plans, who are considering entering or increasing existing operations in India over the next year).

62% 42% 21%

Manufacturing ServicesSales and marketing

Share of the auto sector in overall FDI in 2014


An abundant labor pool and low labor costs are helping India become an attractive manufacturing destinationSIAM’s Automotive Mission Plan 2026 aims to propel the auto industry to become the engine of the “Make in India” initiative. The automotive sector is expected to create 15 million direct jobs by 2022.

Break-up of workforce in the automotive sector• The majority of OEM and auto component segments’

employees are engaged in manufacturing.

• The workforce in tier-I auto components is similar to auto

• While attrition is a concern at lower-tier auto component manufacturers and contractors, the attrition in auto OEMs and large auto component manufacturers is very less.

• According to the EY-SIAM HR study, attracting talent from

tier-1 suppliers. However, ready employability of the workforce requires additional efforts from them.



competitiveness




Auto components segment contributes 50% to the sector’s direct employment

• Tier-2/3 manufacturers, service centers and dealers have much larger workforce requirements and they also face a multitude of challenges, such as attracting talent, developing skills and managing industrial relations

Labour costs in India draw foreign investors to the countryIndia’s most lucrative feature for foreign investors is the abundance of labor. In addition, labor costs in the country remain far below those of advanced and other developing economies. India is the most competitive in terms of both average monthly wages and minimum monthly wages, compared with its Asian peers. This gives it an advantage in low-value-added, labor-intensive manufacturing.

Sub-Sector

Overall sector

OEM

Auto component manufacturers

Service centers

Dealerships

1.9

4.8

2.8

1.5

2.0

6.0

3.1

1.7

2.2

7.3

3.4

2.0

Direct employment (in million)

10.98 12.81 14.88

2013 2022F2017F

Global wage comparison (cost of labor, US$ per hour)

46.4

Germany

38.3

Canada

35.4

US

35.4

Japan

21.9

Singapore

12.0

Brazil

9.2

Taiwan

2.8

China

0.9

IndiaSouthKorea

17.7

Sources: EY-SIAM report: Make in India — Leveraging human capital, National Skill Development Corporation — Auto Sector Report and EY analysis

2 Developing talent and skills


Skill development of the large talent pool is seen as the most critical lever in delivering manufacturing excellence

Critical skill gaps in the industry

overall manpower requirements of the automotive industry.

However, the industry is faced with certain key challenges with respect to skill development. According to the EY SIAM HR study, the industry faces a gap in the following areas:

Addressing the gap

The Indian automotive industry is likely to witness an increased demand for skilled labor in the coming years, as the economic environment improves and investments are made as part of the “Make in India” initiative.

With reduction in product life cycles and the evolution of automotive technology, we expect an increase in product development, manufacturing and supply chain complexity for both OEMs and suppliers. The industry, is therefore, faced with certain key considerations for skill development.

Institutions are unable to meet the industry’s requirement of skilled manpower due to a gap in the technical curriculum and the lack of the faculty’s exposure to technology changes. Industry participants need to work together to address this gap.

Building talent pipeline

according to required capabilities.

Establishing a centralized certifying agency

Developing competency-wage grid

Key considerations for skill development

Are there any new skills that have emerged ascritical for the industry?

to bridge the skill gap?

What percentage of the available resource pool is industry-ready? Does it have the requisite skill-set to help organizations deliver?

321

Staff/management

Non- management

• Civil engineering and project management to build plants

• Concepts related to quality and manufacturing excellence such as 5S, TQM etc.

• Production operations such as Total Productive Maintenance

• Fitters, machinists, welders, painters, etc.

• Advanced electrical, CNC operations, automation skills

• Soft skills, work discipline

• Regular maintenance• Automotive service• Automotive and accident repair/body

repair/paint repair, etc.

• Selling and communication skills

OEMs and auto componentmanufacturers Service centers Dealers

• Understanding of local geographical dynamics and customer requirements

• Customer need diagnostic skills• Product knowledge• Customer handling and

communication skills

Sources: EY-SIAM report: Make in India — Leveraging human capital


While the Government has introduced suitable policy measures, the industry too is also playing an active role in bridging the skill gapThe Government and industry have undertaken various initiatives to help develop the skillset of the current and potential employee base. One of the key government initiatives is the development

down the competency framework and standards with respect

India has the advantage of a vast and young talent pool. In order to build a strong workforce, the skill demand and supply gap needs to be bridged by investing in critical initiatives.

Partner with government agencies to provide vocational training to students

Set up their own dedicated training academies with programs focusing on technical and soft skills

Collaborate with universities to set-up training centers/labs and offer joint certification

Invest in externship programs and provide funding for various university curriculums

Training investments to leverage virtual classrooms to supplement classroom and on-the-job training

Collaborate with universities to run employability-skill enhancement programs

Industry participants take

measures to address skill gaps

• Create opportunities to develop talent of Indian youth • Aims at providing training and skill development to

500m youth by 2020.

• Training for traditional occupations (eg. carpenters); emphasis on new areas (eg. transportation)

• Hallmark — ‘Rural India Skill’, to standardise and certify training process

• Tailor-made, need-based programs would be initiated (eg. management skills)

• Course methodology will be innovative — games, group discussions, etc.

Objectives Features

Earlier

• Emphasis on traditional jobs• Responsibility divided among various ministries

Now

• Equal emphasis on all jobs• Responsibilities clubbed under ministry of skill

development and entrepreneurship

Difference from previous policies

‘Skill India’program

to competency levels for many trades in the industry. The Government also launched the “Skill India” mission, which aims to converge and monitor skill development schemes across the country and provide subsidized loans to students for vocational training.

Industry participants collaborate with academia, and invest in training to address skill gaps

high to meet the combined requirement of auto OEMs and auto component manufacturers, they are not adequately trained


the skill gaps, industry participants are also taking measures to help build a stronger talent pipeline. According to the EY-SIAM HR study, OEMs are increasingly viewing investments in skill development as core to the business and integrating them as part of their people agenda.

Details of the “Skill India” program



Besides augmenting skills, fostering healthy industrial relations are key to develop India’s manufacturing excellence

India’s manufacturing excellence. This necessitates a change in industrial relations within the automotive sector in line with the evolving scenario. EY’s India Attractiveness Survey 2015

are critical parameters for driving investment in India. Due to the intertwined nature of business, importance of industrial relations

in the auto sector does not stop with the OEMs, but is critically dependent on the partners in the ecosystem.

The changing times call for a mutual appreciation for ease of doing business and maintaining the cost competitiveness of the organization while treating the larger workforce with fairness, trust and equity. However, the industry is faced with the following challenges with respect to managing the industrial workforce.

Implications for building positive industrial relations

Automotive industry Government

• Regular and improved communication between management and employees

• Investment in skill building of workforce and providing career opportunities

• More inclusiveness in interactions with employees

• Active Engagement with unions

• Focus on maturity of IR practices internally as well as for partners in the ecosystem

• labor laws

• Reforms related to upscaling/downscaling of workforce numbers

• New inspection scheme

• E enablement for all returns and availability of information

Key challenges 2

Lack of focus in the ecosystem

1Outdated

labor laws

3Labor

relations

• Labour laws have remained unchanged over the years: Cumbersome and lengthy laws for setting up and scaling down operations, slow and bureaucratic approaches for dispute resolution

• Organizations are resorting to contract labor and this is skewing the workforce composition towards temporary employees

• Tier 2/3 suppliers and dealers especially lack enhanced focus on their IR philosophies and build maturity in their IR practices

• Absence of regular personal connect with the workforce and unions

• increasing wage and career aspirations of workforce


A strong focus on developing transport infrastructure is essential to develop India as a manufacturing hub

Government initiatives for infrastructure developmentThe Government is making concerted efforts to develop the transportation infrastructure. Some of the key initiatives include:

Transportation mix in India heavily skewed toward roads, while water transport remains underutilized (2014)



competitiveness




India’s rank on infrastructure competitiveness by the World Economic Forum in 2015

Average length of highway added every day during 2015, compared with 8km during 2014; Government target to add 30km per day by 2016

81/140

18km

• 599 highway projects covering around 12,903 km of national highways have been sanctioned

• Development of 66,117 km of roads under different programs such as National Highways Development Project (NHDP), Special Accelerated Road Development Programme in North East (SARDP-NE) and Left Wing Extremism (LWE)

• Target of laying out new roads in India increased to 150,000km/year from 2016 as against the existing 96,000 km/year

• Projects worthUS$1.59 billion havebeen sanctioned

• 100% FDI approved in railway infrastructure

• developing high-speed rail network

Investment plansof US$140 billion to modernizing railway

2

• US$10.5 billion investment in 12 major ports in the

“Sagarmala” initiative• Convert 101 rivers across

India into waterways to promote water transport

Investment plans of US$27.1 billion for ports and shipping under 12th Five Year Plan

3

Investment plans of US$150 billion in highways and shipping by 2019

1

India has the world’s second-largest road network (4.7 million km), with highways constituting only 1.7% of this network. The railway network is spread across 64,600km and is also among the world’s largest. India is the 16th largest maritime country in the world, with a coastline of about 7,517 km.

60%

31%

8%

1%

India

30%

23%

46%

1%

China

37%

48%

14%

1%

US

10%

46%

43%

1%

Europe

Air Water Rail Road

Decades of underinvestment in infrastructure development have resulted in major infrastructure bottlenecks, slowing down the pace of India’s economic growth. Globalizing trade is exerting pressure on India’s existing infrastructure. Thus, investment in developing railroad, port network and hinterland connectivity is imperative for the growth of the manufacturing sector in India.

Sources: Analyst reports, Planning commission

3 Fast-tracking infrastructure development


The Government and industry are collaborating to improve the transportation and logistics eco-system

India’s logistics costs are double that of the developed nations

Major challenges for the logistics sector in India

India’s rank on the Logistics Performance Index 2014

54/160

*According to a study by the National Skills Development Corporation, the logistics sector will face incremental skill requirements of 17.7 million people by 2022.

In addition to the poor infrastructure, multiple gaps in the supply chain

companies in India.

elements of the supply chain – transportation, warehousing, integrated communication networks and logistics service providers (LSPs). Compared with the developed nations, the Indian logistics network is below par on all major aspects –infrastructure, customs and quality of services. This has resulted in India having very high logistics costs for the manufacturing sector, including automotive.

Limited intermodal and last-mile connectivity

Regulatory bottlenecks

Skill shortage*

Shortage of warehousing

13%

8.5%

8.5%

8.8%

India

USA

Japan

8.5%Singapore

Germany

Sources: EY analysis, Armstrong & Associates

Government and industry participants take measures to address challenges

Aut

omot

ive

indu

stry

Gov

ernm

ent

Potential GST roll out

Increasing government investment oninfrastructure development

Tax breaks and incentives toinfrastructure investors

PPP and privatization measures todevelop infrastructure

Collaborating with the government forinfrastructure development

Long-term partnership with specializedthird party logistics providers to invest intechnology, assets, employee training, etc.

Focus on continuous skill developmentthrough dedicated programs for logisticsprofessionals, training drivers, etc.


The likely rollout of GST will result in a plethora of opportunities to re-engineer supply chains and optimize manufacturing costs in India

Implications of likely GST rollout for the logistics sector

Implications of infrastructure development for the automotive sector

The logistics industry is highly fragmented, with organized LSPs constituting less than 5% of the total market. Post rationalization of taxes, the share of organized LSPs is expected to increase.

Emergence of organized players

4

Minimized taxation will lead to logistics companies consolidating their warehousing network by creating large, centralized warehouses, instead of the existing multiple small warehouses across states.

2Large centralized warehouses

The supply chain network will be redesigned with the objective of ensuring proximity to manufacturing locations and consumption centers, leading to the emergence of hub and spoke models.

3Evolution of hub and spoke models

Reduced compliance requirements at toll checkpoints will minimize transportation hassles and optimize delivery times. This is likely to reduce distribution costs by roughly 10%–15%.

1Increased operational

distribution costs

• •

•

Demand stimulation

Reduced supply

chain costs

Location of choice

01

02

03

••

Logistics companies in India have evolved from freight forwarding companies to integrated LSPs providing a complete package of services. Complementing this, the Government is also focusing

on improving the regulatory environment. The anticipated GST rollout is a major initiative in this direction, which will help





competitiveness




The country’s R&D ecosystem offers an opportunity to drive innovation for both domestic and global companies

companies across the globe to explore the rich talent availability in the country. India hosts a number of R&D centers, which either serve the local market, or help the parent companies develop next-generation innovative products and introduce them faster to the global markets.

In 2014, India had the world’s eighth-largest annual R&D investment (2.7% of global R&D expenditure) estimated at US$44 billion. The country’s total R&D spending is around 1% of GDP, and the Government’s spending is two to three times more than that of the industry’s

Sources: The World Economic Forum’s Global Competitiveness Report 2015–16, EY’s 2015 India attractiveness survey and EY analysis

Stable political and social environment

74%

59%

Improvements in 2015

2015 2014

As per EY's India Attractiveness

Survey, business leaders found India

attractive in 2015

to 2014

Strongly positioned for 2020

India is on course to becoming one of the world’s three leading fast-growth economies and a preferreddestination for manufacturing, as well as a regional hub for operations including R&D/innovation.

Macroeconomic stability

76%

70%

72%

69%

Research and development

EY’s India Attractiveness Survey 2015

India R&D and innovation capability — current standing

The World Economic Forum’s Global Competitiveness Report 2015–16 puts India at the 42nd place among countries worldwide in terms of innovation capacity. India is strong among the BRICs in terms of the availability of scientists and engineers, but lags on other parameters such as university-industry R&D collaboration and patents granted per head.

The way forwardAccelerating R&D and innovation has a vital role in enhancing India’s manufacturing capability and sharpening its competitiveness. The Government is keen on developing dedicated R&D centers in the manufacturing, agriculture and life sciences sectors. The robust Indian IT industry will further facilitate the development of the R&D eco-system.

4 Incubating R&D and innovation


The Government is focused on enhancing India’s R&D and innovation capabilities to attract global and Indian private sector investments

National Institution for Transforming India (NITI)To increase involvement of entrepreneurs, researchers to

National Innovation Council A think-tank council to discuss, analyze and help implement strategies and road map for innovation

Science, Technology and Innovation (STI) Policy Focus on increasing R&D spend, sharing risk with the private

mechanisms

Favorable industrial relations scenario to facilitate improved productivity and business continuity

Incubating entrepreneurial mind-set through funding and policy support

Streamlining the patents and IPR application and registration process

Integrating R&D and innovation initiatives of multiple stakeholders including Government, R&D labs, universities, sectors, corporates

The Government and industry need to drive a

mindset change and create an R&D push at the grassroots level,

enabling co-development of patents and IP

Sources: National Portal of India, EY’s India Attractiveness Survey 2015

The Government of India has taken several steps to promote the R&D sector in the country and has declared 2010 to 2020 as the

“Decade of Innovation.” The following institutions have been set up to drive R&D and innovation in India:

• Tax incentives for in-house R&D on chemicals, drugs, automotive, pharmaceuticals, electronics, computers, telecom, aircrafts and helicopters; investments are eligible for a tax deduction of 1.5X the amount spent

• Exemption from imports custom duty to both public and privately funded R&D institutions

• The Science and Engineering Research Board is implementing the Prime Minister’s Doctoral Fellow-ship Scheme with a view to develop human capacity for industrially relevant R&D.

• India has partnered with the UK for bilateral research and innovation via the Newton-Bhabha Fund

• StartUp India initiative: The Department of Industrial Policy and Promotion is spearheading the Government’s efforts to provide impetus to the start-up sector in urban and rural India. It will work with banks to make funding easier for startups and small ventures.

Entrepreneurial and innovation

initiatives

Partnerships with other countries, academia

Regulatory incentives

Addressing the gap


R&D and innovation in manufacturing need to focus on rapid technology adoption, which is also critical to the success of “Make in India”

Competitiveness of India’s manufacturing sector Time to move beyond cost-effectiveness; differentiate through R&D and innovationThe Government has outlined ambitious targets for the manufacturing sector in India including a 25% share in GDP and creating 100 million new jobs by 2022. Developing an R&D and innovation eco-system is seen as a critical lever in delivering manufacturing excellence under the “Make in India” initiative.

The manufacturing R&D growth story in India has often centered

The need of the hour, however, is to drive R&D and technology innovation. This will allow Indian companies to move up the manufacturing value chain and become leading global providers for product design and IP, while navigating through production complexity and supply chain challenges.

Technology needs attentionWhat do you think are the main measures to improve India’s technology and innovation capacity?

37%

29%

15%

37%

21%

34%

31%

29%

25%

19%

Increase incentives to invest in R&D and innovative technologies

Increase government support

Focus on collaborations between universities and industry

Focus on PPPs in technology

Facilitate R&D partnerships between foreign and local companies

Non-manufacturing sector respondents

Manufacturing sector respondents

Sources: National Portal of India, EY’s India Attractiveness Survey 2015

Varied R&D and innovation perspectives from manufacturing and non-manufacturing sectors

Respondents related to the manufacturing sector suggest more partnerships between foreign and local companies to improve technology and innovation capacity. On the other hand, non-manufacturing respondents demand more incentives for investment in new technologies.

Will the industry have the right skills available to effectively attract and utilize R&D investment across value chain levels?

1What is the preparedness with respect to R&D and innovation capability at OEMs, suppliers and sales & service network partners?

2Key enablers to put India on the global map as a preferred destination for manufacturing R&D:• Increasing use of automation technologies such

as robotics for the assembly line, infusion of hi-tech materials and nanotechnology, developing lighter but stronger and safer parts

• Fast adoption of new technologies in electronics, sensors, CAD, CAM, 3D printing etc.

• Promoting corporate investments in manufacturing R&D with tax holidays and funding support

Key questions to be answered:


The Indian auto manufacturing sector is set to play a pivotal role in global automotive R&D, innovation and new product development

Automotive industry transformation hinges on the success of R&D and innovation initiativesProduct design and development in the automotive industry globally is gearing for rapid transformation with changing customer needs and stringent regulations for

vehicles, autonomous, on-demand mobility are driven by cross-sector R&D and innovation.

India is steadily gaining importance for both domestic and foreign multinational companies as a strategic hub for R&D and innovation initiatives. The R&D ecosystem in the country is focused on the three key areas of R&D — fundamental research, designing and engineering of new vehicle models, and development.

Developing/attracting high-end R&D talent, especially in electronics, safety, materials, body engineering, interiors and powertrain development

on R&D expenditure and extending the scheme to outsourced R&D

Developing a network of industry-academia-government bodies to build core R&D skills and training modules

Focus on achieving global standards in emissions and safety while also manufacturing global quality products in an environment friendly way

Attracting domain experts from mature markets to imbibe a strong process culture, improve quality, increase R&D capabilities and facilitate creation of domestic IPKey imperatives for

automotive stakeholders to

position India as a global R&D hub

Sources: AMP 2016–26, India Brand Equity Foundation (IBEF), EY-SIAM report: Make in India — Leveraging human capital

Share of the automotive sector in India’s R&D expenditure

Number of private sector automotive R&D centers in India

8% 30Market indicators

Automotive R&D drivers

Global players investing in R&D to tap India’s engineering base and cost advantage

• •

•

Domestic players investing in R&D to compete at a global level

•

•

•

Government support to drive R&D investmentsKey initiatives:•

•

• •


The auto supply chain continues to strengthen with the evolution of the Indian automotive industry



competitiveness




OEMs plan to consolidate direct vendors

Suppliers to own development, manufacturing and assembly of critical components and become module providers as OEMs plan to consolidate vendors

Increasing vehicle proliferation resulting in a complex supply chain

Car models are expected to increase with the introduction of new models/vehicle segments

>180 models in 2020 from ~150 in 2015

High growth in component exports and strong replacement demand

Sharper growth in exports on the back of cost

aftermarket would witness the release of pent-up demand, due to delayed replacements over the last

Suppliers to bear higher R&D ownershipand expense

Stricter regulations and higher R&D ownership necessitate product and process innovation and a faster response to OEMs’ product launches

Supply chain trends

Indian suppliers are expanding their customer base and attaining scale through

Indian suppliers acquiring scale and capabilities with global acquisitions

In the short to medium term, the industry is facing headwinds with high demand volatility, but is estimated to witness double-digit growth in the long term, necessitating

Strong long-term growth while demand volatility continues

AMP 2016–26 forecasts the Indianautomotive industry to grow at a CAGR of around 10%

80% y-o-y growth in number of outbound deals among automotive suppliersin FY15

Exports contributed 29% to revenues in FY15; estimated to reach 35%-40% in 2020; >10% growth in replacement demand over FY15–16

<1% R&D/sales spend of most Indian suppliers, compared with the global average of ~3%

The automotive supply chain, comprising more than 700 suppliers (organized sector), serves as the backbone of the industry and supports the operations of around 35 global and Indian OEMs.

Sources: ACMA, LMC Automotive, SIAM, AMP 2016–26 and EY analysis

5 Enhancing supply chain competiveness


With increasing operational complexity, the industry needs to address several challenges

Key challenges faced by the automotive supply chain

In addition to regular raids, suppliers/OEMs should join industry bodies to launch awareness drives and spread information on spurious parts

OEMs, suppliers, academic institutes and industry bodies should collaborate

skill-development programs

Suppliers and OEMs should explore close collaboration across products/process development

• Logistics cost in India is around 13% of GDP compared with 8%-9% for developed countries; higher logistics costs are led by the predominant use of road transport, and impact the competiveness of the auto supply chain

transport, and inadequate power distribution, increase operational costs and impact overall supply chain operations

Companies should focus on innovative/analytics-driven cost management and strive to make optimum use of existing resources, while the Government works toward building the necessary infrastructure

Large share of spurious

parts

Shortage of supply chain professionals

High logistics costs and

infrastructure

Evolving regulatory

policies

• Spurious parts have ~30% share in the overall replacement market, due to which the industry faces annual turnover loss of around INR90 billion

• ~20% of total road accidents in India are attributed to the use of spurious auto parts

• Industry to face shortage of strategic and functional supply chain professionals as supply chain becomes complex and global

• Constraints in attracting and retaining automotive supply chain professionals, as they are lured by high-paying FMCG companies

• Upcoming regulatory policies around emissions, safety and

and the development of new products/processes

Sources: ACMA, Armstrong & Associates and EY analysis


Greater industry-wide collaboration is needed to reinvent the value proposition of the automotive supply chain

the sector

Increase collaboration across the automotive value chain

OEM-supplier collaboration in demand forecasting, product development and greater transparency across the supply chain would reduce time to market, increase responsiveness, optimize inventory levels and reduce the overall operational cost

Improve supply chain visibility through use of technology

IT-driven processes would be vital in managing the complex supply chain

Develop a globally integrated network and competent supply chain for an export-led growth

Suppliers need to develop a globally integrated supply chain to manage customized delivery schedules, varying regulatory compliances and combination of completely built units (CBUs) and completely knocked down units (CKDs).

production systems

-tion systems. Further, suppliers need to actively manage contracts to cater to the cost pressures

part of overall supply chain cost

Enhancing competiveness to build a world-class

supply chain

1 2

34

Source: EY analysis


Key considerations for the Government and the industry

Key themes Government Industry


Enabling regulatory environment • Provide a stable and consistent policy regime

• Continued thrust on initiatives such as Make in India, Skill India, etc .

• Greater clarity on regulations around new mobility service providers

• Continued focus on investments aimed at reducing vehicle emissions and introducing safety technologies

• Explore opportunities for a play in the rapidly evolving mobility eco-system

Developing talent and skills • Partner with the industry to facilitate vocational training for students and laying out clear standards on competency levels

consolidation of labor laws

reforms related to upscaling/downscaling of workforce numbers

• Work with academic institutions to develop technical skills in line with the industry requirements

• OEMs to work with suppliers and dealers in the eco-system on training and skilling agenda

• Focus on maturity of IR practices internally as well as for partners in the ecosystem

Fast-tracking infrastructuredevelopment

• Continue to encourage private participation to develop specialized infrastructure across ports, railway terminals, etc.

• Fast track GST implementation to improve

• Adopt global best practices for improving

• Outsource logistics function and collaborate with the specialized logistics service providers

Incubating R&D and innovation expenditure and extending the scheme to

outsourced R&D

• Bridging the gap between Indian and global automotive standards for safety and emissions

• Develop a network of industry-academia-government to build core R&D skills and training modules

• Attracting domain experts from mature markets/ other industries to imbibe a strong process culture, improve quality, increase R&D capabilities and facilitate creation of domestic IP

Enhancing supply chain competitiveness

Partner with the industry and academia

development programs

Introduce checks and measures along with launching awareness drives to reduce the usage of spurious parts

Improve supply chain visibility through use of technology

Invest in developing an integrated network and

operations


Appendix:The Northern region is one of the most attractive regions in India offering a multitude of opportunities for automakers and suppliersA large market and an attractive investment destinationNorth India is a large market with the youngest population in the country with several states including Delhi, Punjab and Haryana

having a per capita GDP above India’s average. The region is an attractive investment destination that accounts for around 28% of

Home to one of the largest auto cluster in IndiaThe Northern region is home to the second largest automotive cluster in India in terms of revenues (accounting for more than

proximity to policy makers in the government and industry bodies

or sales headquarters of various major entities in the passenger vehicle and two-wheeler segments.

26%Share of Northern region innational GDP

32%Share of Northern region in totalpopulation of India

Huge market size Attractive investment destinationA large vehicle sales andproduction hub

26%Share of Northern region in totalinstalled power capacity

59%Share in proposed Western andEastern Dedicated Freight Corridors

~30%Share of Northern India in totalpassenger vehicle demand

~50%Share of Haryana in total passengercar and 2W production

Ludhiana Delhi-Gurgaon-Faridabad

ManesarHaridwarLucknow

Manufacturing

Ashok Leyland

Bajaj Auto

Eicher

Escorts

Hero Moto Corp

Honda

HMSI

ICML

Mahindra

Maruti Suzuki

New Holland

Suzuki Motorcycles

Swaraj Mazda

Tata Motors

Yamaha

Major OEMs' HQ in North

JCB

R&D and Testingfacilities

OEM RohtakManesar

GovernmentInternational Center for Automotive Technology (iCAT), Manesar



The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the development of India, partnering industry, Government, and civil society, through advisory and consultative processes.

proactive role in India’s development process. Founded in 1895, India’s premier business association has around 8000 members, from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 200,000 enterprises from around 240 national and regional sectoral industry bodies.

CII charts change by working closely with Government on policy issues, interfacing with thought

range of specialized services and strategic global linkages. It also provides a platform for consensus-building and networking on key issues.

Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship programmes. Partnerships with civil society organizations carry forward corporate

action, healthcare, education, livelihood, diversity management, skill development, empowerment of women, and water, to name a few.

In its 120th year of service to the nation, the CII theme of Build India — Invest in Development: A Shared Responsibility, reiterates Industry’s role and responsibility as a partner in national development. The focus is on four key enablers: Facilitating Growth and Competitiveness, Promoting Infrastructure Investments, Developing Human Capital, and Encouraging Social Development.

Bahrain, China, Egypt, France, Singapore, UK, and USA, as well as institutional partnerships with 312 counterpart organizations in 106 countries, CII serves as a reference point for Indian industry and the international business community.

Confederation of Indian Industry The Mantosh Sondhi Centre 23, Institutional Area, Lodi Road, New Delhi — 110 003 (India) T: 91 11 45771000/24629994-7 | F: 91 11 24626149 E: [email protected] | W: www.cii.in

Reach us via our Membership Helpline: 00-91-124-4592966/00-91-99104 46244CII Helpline Toll free No: 1800-103-1244

Follow us on:facebook.com/followcii twitter.com/followcii www.mycii.in


Notes


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Rakesh BatraIndia Automotive and Transportation Leader +91 124 671 4532 [email protected]

Anil ValsanGlobal Automotive & Transportation Lead Analyst +44 20 7951 6879 [email protected]

Gaurav BatraAssociate Director, EY Knowledge +91 124 470 1245 [email protected]

EY contacts

In line with EY’s commitment to minimize its impact on the environment, this documenthas been printed on paper with a high recycled content.

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

ey.com/automotive

Randall J MillerGlobal Automotive & Transportation Leader +1 313 628 8642 [email protected]

Regan GrantGlobal Automotive & Transportation Marketing Leader +1 313 628 8974 [email protected]

Anuj ChandnaAnalyst, EY Knowledge +91 124 470 1282 [email protected]

making india a world class automotive manufacturing hub

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