Who is the next henry ford? India & china Automobile Industry International Business Group members: Marco Fossati, Davide Di Labio, JiHong He, Iman Alalawi, Viola D’Andrea, Harpreet Singh

Outline The World automotive industry Is the handbrake on? The countertrend A global road map A look at the engine Driving on the same lane The competitive advantage In the driver’s seat A story of change An emerging race Look down the road Introduction through the analysis of the outline – 1 minute

The World automotive industry 70 million cars, vans, trucks and buses in 2007. €1.9 trillion of global turnover. More than 8 million people directly employed (over 5% of the world’s total manufacturing employment). More than 50 million people: direct plus indirect employment. €85 billion invested in research, development and production in 2007. Over €430 billion of contribution to government revenues (in 26 countries alone). Why is this topic interesting? Because of its dimensions and global importance.

Is the handbrake on? Economic downturn Credit crunch Cultural delay of global players GLOBAL CRISIS OF THE AUTOMOTIVE SECTOR Oil price High costs of factors Why is this topic interesting? Because it’s a current affair topic. State intervention in US and Europe

The countertrend +329,3% vs 2000 +187,9% vs 2000 Why is this topic interesting? Because India and China represent a countertrend! Source: Internal elaboration on International Organization of Motor Vehicle Manufacturers data, 2008

Indian Automobile Industry Chinese Automobile Industry A global road map Indian Automobile Industry Chinese Automobile Industry World’s second largest market for two wheelers. Average growth rate: 17% a year since 1991. Average growth of vehicles exports: 30% a year since 2000. 11,1 billion units of volume in 2007 (+15% a year since 2000) – two wheleers mainly. 0,3 million people – direct employment (13,1 million including indirect employment). World’s second largest market for automobiles. Average growth rate: 25% a year since 2000. Average growth of vehicles exports: 67% a year since 2000. 8,79 million units of volume in 2007 (+22 vs 2006) – four wheleers mainly. 1,6 million people – direct employment. Comparison between India and China’s automotive industries

A look at the engine Indian Manufacturing Companies Chinese Manufacturing Companies Private companies. India’s major automakers are part of larger, family-controlled conglomerates Profit is the number-one priority. 3 major home-grown makers (Tata, Mahindra, Maruti) Mostly state-owned companies. With ith few exceptions (Geely, BYD), Chinese automakers are controlled by local, provincial or central government Employment is the number-one priority 12 major makers (SAIC, FAW, DFM, BAIC, GAIC, Chang’an,Chery, Geely, Brilliance, Great Wall, Hafei, BYD) Composition and structure of the companies.

Same lane (similarities) Attracting attention from global automakers and suppliers Low cost strategy based on low cost labour (competitive advantage) Joint ventures (with few exceptions, most JVs focused on feeding local demand) Component supply. Foreign OEs brought their suppliers with them Major multinational suppliers have forged strong relationships with locals Well-developed supply infrastructure in both countries Rapidly improving quality Growing R&D capability Similarities in the strategy of the firms within the industries of china and india.

India - The competitive advantage FACTORS CONDITIONS DEMAND CONDITIONS RELATED AND SUPPORTING INDUSTRIES STRATEGY, STRUCTURE & RIVALRY Availability of trained manpower at competitive cost Domestic industries Entire range of auto-components Ground up strategy Fairly well developed credit and financial facilities Multinationals outsourcing R&D investments and capabilities Homegrown entrepreneurship Local availability of almost all the raw materials at a competitive cost Rapidly growing middle-class Auto Clusters High competition Strong engeeniring skills Favourable foreign policy High technological internal resources Porter’s diamond – automotive industry in India

China - The competitive advantage FACTORS CONDITIONS DEMAND CONDITIONS RELATED AND SUPPORTING INDUSTRIES STRATEGY, STRUCTURE & RIVALRY Low cost labour MSC direct investment Manufacturing all the Auto- Components of the value chain Joint venture with MNC Sufficient capital Domestic demand (State Owned industries) After-sale service Price competition Basic industrial infrastructure External demand (exportation) Dependent on foreign technology Top down structure Raw materials Demand of labor intensive production Good infrastructure system Domestic brands are relatively weak Insufficient innovative technologies (technology outsourcing) Increasing domestic purchasing power Growing competition (between JVs) Sufficient skilled engineers More sophisticated customers High level of burocracy Porter’s diamond – automotive industry in India

The role of government in India The role of government in China In the driver’s seat The role of government in India The role of government in China Strong contribution and support to the automotive sector through the Automotive Mission Plan 2016 to make India a global auto hub. Support the National Automotive Testing and R&D Infrastructure project (NATRIP) to encourage growth of the auto industry. Reforms slowly being phased in restrictive labor laws still on the books. Still few real economic or legislative incentives for development. Too much bureaucracy, esp. for foreign investors. Infrastructure (roads, rail, power, water) lags China. Planning and direction setting through the 5Year Plan to control the growth of the market. Limitation on foreign investment (joint venture requirement) and restriction of financing. Entrepreneurship support and promotion of local industry. Shift from State’s direct intervention to State’s coaching of the industry. Fewer regulations, less red tape. Specific auto industry policies to enhance R&D capability. On-going privatization of state-owned enterprises. Support of innovation (through joint ventures). The role of government.

A story of change 423% vs 2000 203% vs 2000 Why Tata Motors and Chery? Because they are emerging giants. Source: Internal elaboration on International Organization of Motor Vehicle Manufacturers data, 2008

Tata Motors Based in Mumbai, the company has been established in 1945. Largest automobile manufacturer in India 23,000 employees World’s fifth largest manufacturing company of medium and heavy trucks 2006 revenue: $6.7 billion 2006 vehicle sales: 579,378 (inc. 53,540 exports) Overview and results of Tata Motors

Chery Founded by local government in 1997 to prop up the local economy. China’s first car exporter in 2001. 20,000 employees In 2007, Chery sold 381000 units complete cars, inside which 119800 units were sold to foreign markets. 2007 revenue: $2.4 billion Overview and results of Chery Founded a research and development organization Hired a Japanese engineer to head lean/six sigma production systems In 2008, a joint venture was set between Chery and Quantum LLC with Chery’s technology and Quantum’s fund Chery Huiyin Auto Finance Co. Ltd., an auto finance company was set by Chery in cooperation with Huishang Bank, the 10th auto finance company in China but the first exclusive domestic joint venture

Tata motors Strengths Weaknesses Opportunities Threats Well-known brand with good reputation Planned and smart international strategy Smart approach in responding to the market demand. Alliances with key players Fast product development ability Weaknesses Low level of infrastructures Lack of experience in certain new sectors. Opportunities Luxury brands (Land Rover and Jaguar) Acquisition of Daewoo Motor New long-awaited product (Nano) Government support Emerging markets high demand for passengers cars at low costs Threats Downturn of the world economy High level of competition Sustainability and environmentalism Oil rising prices SWOT – actual situation

Chery Strengths Weaknesses Opportunities Threats Sophisticated engine technology High strategic management skills Strong R&D capabilities Well-known brand with good reputation in China. Fast product development and growth. Weaknesses Small scale Narrow product line Weak after-sale service Opportunities Diversified customer demand Increasing purchasing power in emerging markets. Government support Foreign market expansion Threats Downturn of the world economy Credit and financial facilities for purchasing SWOT – actual situation

The speed up for Chery and Tata How did they overcome the disadvantages of being newcomers? STRATEGY INSTITUTIONS Understanding the character and driving forces behind the industrial dynamics State Compensatory role Gerschenkron approach valid for automotive industry of both countries. institutions, as we already seen previously, play a essential role in the development of the industry for both the countries and firms. New institutions for exploiting capital and technology Assessing existing resources Exploiting latecomer advantages!

The speed up for Tata Motors How did TATA create initial resource complement to overcome the disadvantage of being newcomers? STRATEGY INSTITUTIONS R&D Government support (10Year Plan) Strategic partnerships Joint ventures New institutions for trade promotion, technology up-gradation, quality enhancement (ACMA: Automotive Component Manufacturers Association, SIAM: Society of Indian Automobile Manufacturers ) Acquisitions Intensive management development

Tata Motors, the road so far… International strategy based on the competitive advantage: New product (eg. Tata Nano, the cheapest car in the World). Acquisitions (eg. Land Rover and Jaguar brands from Ford Motors). Partnership with established companies (eg. Alliance with Fiat since 2006) to enhance the product portfolio and knowledge exchange. Facilities for learning from other companies. Developing programmes for intensive management development. Consolidate position in India by exploiting opportunities: New mobility of young Indians. Government’s substantial road-building program GDP growth Past and present strategies of Tata Motors. Leverage on competitive advantage through a resource based view (link to the Porter’s diamond).

The speed up for Chery How did Chery create initial resource complement to overcome the disadvantage of being newcomers? STRATEGY INSTITUTIONS Foreign consultancies Government support and control (5Year Plan) Financial partnerships New institutions for the exploiting of capital and technology Joint ventures R&D

Chery, the road so far… International strategy Joint ventures to access financial resources (Quantum LLC and Huishang Bank) State support Take use of the matured global value chain and focus on independent innovation Exploit key strengths: leverage on competitive advantage (eg. its independent technology) Manage key weaknesses: Acquire resources: buy product line, equipment and technology from outside at proper time; find proper people from other joint ventures Access to capabilities: work with foreign consultant firms Create capabilities: learning by doing, enterprise-based R&D system, international market expansion Past and present strategies of Chery. Leverage on competitive advantage through a resource based view (link to the Porter’s diamond).

Look down the road The two key factors to become the new Henry Ford! INNOVATION Environmental friendly technology and alternative fuels development Environment and safety standards INSTITUTION Conclusions. Road Map for Auto Fuel Policy by the government to support strategies Reforms and regulations to sustain growth (eg. Labour reform) The two key factors to become the new Henry Ford!

Change gear The competitive advantages need to be leveraged in a manner to attain the twin objective of ensuring availability of best quality product at lowest cost to the consumers on one hand and developing and assimilating the latest technology in the industry on the other hand. The concept of attaining competitiveness on the basis of low cost and abundant labour, favorable exchange rates, low interest rates and concessional duty structure is becoming inadequate and not sustainable. The government’s role is to create a policy environment to help companies gain competitive advantage. The government policies target is to encourage growth, promote domestic competition and stimulate innovation. First conclusions. First change.

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