Strategic Analysis of the Automobile Industry in India

This report provides an external analysis of the factors affecting the automobile industry in India, utilizing models such as PESTLE and Porter’s diamond. India benefits from political stability, revised GST, low labor costs, rapid urbanization, and technological advancements, particularly in hybrid vehicles. However, the industry faces challenges from legislation for cleaner transport and compliance with international safety standards. The Porter’s diamond model examines firm strategies, demand, and competition. The report also discusses Vernon’s international product life cycle and Hofstede's cultural dimensions to explain the industry's development. Recommendations for continued investment include infrastructure development, support for innovation, human capital development, sustainable initiatives, and a long-term policy roadmap. It also touches upon corruption, ease of doing business, country of origin effect and regulations to protect investors.

AUTOMOBILE INDUSTRY IN INDIA
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Executive Summary
The report provides external analysis of the factors that affect automobile industry in India.
As such, various models have been used including PESTLE and Porter’s diamond model.
Indian has been provided with favorable environment for businesses and investment which is
attributed to political stability, and revision of goods and services taxes, low labor costs, rapid
urbanization, rising income levels, rise of technology which gives incentives for development
of hybrid vehicles. However, the automobile industry is affected by legislation for cleaner
transport as well as the compliance with international safety standards that sometimes inhibit
their production. The Porter’s diamond model considers factor such as the strategies of the
firms, demand and competition. The report also discusses two theories that explain the rise
and development of automobile industry in India which include Vernon’s international
product life cycle and Hofstede cultural dimensions. To ensure that there is continued
investment in automobile industry in India, the reports suggests that the following should be
taken into consideration; development of infrastructure, support of innovation, development
of human capital, introduction of sustainable initiatives and introduction of long-term policy
roadmap.

Contents
1.0. Introduction.........................................................................................................................5
2.0. PESTEL analysis.................................................................................................................5
2.1. Political factors................................................................................................................5
2.2. Economic factors.............................................................................................................6
2.3. Social factors...................................................................................................................7
2.4. Technological factors......................................................................................................8
2.5. Environmental factors.....................................................................................................8
2.6. Legal factors....................................................................................................................9
3.0. Porter’s diamond model....................................................................................................10
3.1. Firm strategy, structure and rivalry...............................................................................10
3.2. Factor conditions...........................................................................................................11
3.3. Demand conditions........................................................................................................11
3.4. Related and supporting industries.................................................................................12
3.5. Chance...........................................................................................................................12
3.6 Government....................................................................................................................12
4.0. Vernon’s international product life cycle..........................................................................13
5.0. Hofstede cultural dimensions............................................................................................14
5.1. Power Distance..............................................................................................................15
5.2. Individualism.................................................................................................................15
5.3. Masculinity....................................................................................................................15
5.4. Uncertainty avoidance...................................................................................................15
5.5. Long-term orientation....................................................................................................15
6.0. Recommendations.............................................................................................................16
6.1 Level of corruption.............................................................................................................16
6.2 Ease of doing business.......................................................................................................17
6.3 Country of origin effect......................................................................................................17
6.4 Regulations to protect Investors.........................................................................................18
6.5 Encouraging Foreign Direct Investment............................................................................18
7.0 Recommendations..............................................................................................................19
8.0 Positioning..........................................................................................................................20

9.0 Comparative analysis.........................................................................................................22
10 Conclusion...........................................................................................................................23
10.1 Overall market attractiveness.......................................................................................23
10.2. .....................................................................................................................................24
References................................................................................................................................25

1.0. Introduction
India is categorised as a leading emerging market economy. It is one of those former
developing economies which have achieved significant industrialisation, modernisation and
rapid economic growth (Hamilton and Webster, 2015). Regarding the automobile sector, at
present, the country ranks 4th in Asia and 9th worldwide among the world’s largest automobile
manufacturers. Several leading automobile manufacturers including ISUZU Motors, Ford
Motors, Honda and Suzuki Motors have heavily invested in India’s automobile
manufacturing industry. Thereby, establishing new assembly lines, manufacturing, and
Greenfield units. With the current pace of growth, India aims to become the third largest
automobile manufacturer in the world by the year 2020 (India Briefing, 2017).
2.0. PESTEL analysis
There are several macroeconomic factors which have helped in India becoming a prime
market for automobile manufacturers. According to Ho (2014), .PESTEL analysis is a
framework which is used in analyzing as well as monitoring macro-environmental factors or
rather the external factors which directly or indirectly impacts the organization (p.6480).
They include Political, Social, Economic, Technology, Environmental and Legal factors as
discussed below.
2.1. Political factors
 Positive government outlook
The government has played an active role in developing the automobile manufacturing
sector. First and foremost it adopted a liberalisation policy and allowed 100% Foreign Direct
Investment in the industry. Moreover, it introduced several policies and measures to boost
sector growth. One such plan was the Auto Policy implemented in the year 2000. The policy
aided the development of vehicles driven by alternative energy sources, raised production and
availability of auto components, and developed safety methods aligned with international
standards (Invest in India, n.d.). Recently, the government implemented two plans including
the Automotive Mission Plan and National Electric Mobility Mission Plan (NEMP). The
former aims to triple industry revenues by 2026 whereas the latter aims to raise local
emission standards to be at par with global standards (Gupta, 2018).

 Revision of Goods and Services Taxes (GST) structure
The government is also planning to exercise a revision in the current GST structure. This is
likely to have a positive impact on the automobile manufacturing sector. This reform is
expected to positively impact vehicle pricing, sourcing strategies, distribution costs and
dealer profit margins. The elimination of the tax on movement of goods across interstates is
expected to lower logistics costs for manufacturers. Moreover, it will increase transparency
and ease tax compliance and administration and lastly it would reduce the cost of doing
business for automobile distributors (EY, 2016). The graph below shows the political
stability index (-2.5 weak or 2.5 strong). The data ranges from 1996 to 2017 with the average
political stability index of India being -1.14, with the lowest being -1.51 in 2003 and the
maximum is -0.83.
Accessed from https://www.theglobaleconomy.com/India/wb_political_stability/
2.2. Economic factors
 Low labour costs
One of the most lucrative factors for foreign manufacturers is the low average wage rate in
India and an abundance of labour. As compared to other BRIC countries such as Brazil and

China the average monthly and minimum monthly wages in India are considerably lower. For
instance, the per hour wage rate in India is only $0.9 as compared to $12 in Brazil and $2.8 in
China (EY, 2016) As such, the labor cost of South Asia labor is generally low as compared
to Southeast Asia. However, Indian costs of labor is $110 is lower than Vietnam’s labor cost
of $158, Indonesian ranked at $159 and China’s cost ranked at $310.
Accessed from http://economists-pick-research.hktdc.com/business-news/article/Research-
Articles/Make-in-India-Comparative-Production-Costs-of-Selected-Indian-States/rp/en/
1/1X000000/1X0A6T6F.htm
2.3. Social factors
 Rapid urbanisation
Owing to rapid urbanisation over the next decade over 500 million people are expected to be
living in cities. This is likely to rapidly increase the demand for passenger cars (EY, 2016).
 Rising income levels
By the year 2025, over 60 million Indian households will enter the consuming class having an
annual income higher than $8000. Furthermore, the workforce participation rate is expected

to rise to 67% by 2020 with more women and youth being employed thereby increasing the
demand for mobility (EY, 2016).
2.4. Technological factors
 Incentives for development of hybrid vehicles
In 2015, the Indian Government launched a scheme for the Faster Adoption and
Manufacturing of Hybrid and Electric Vehicles (FAME) to incentivise the development and
manufacture of hybrid/electric, full hybrid and pure electric vehicles. The plan is expected to
achieve a penetration rate of 6 to 7 million cars by 2020 (India Briefing, 2017). The graph
below shows the changes that technology have had in the automobile industry.
Accessed from https://www.google.com/search?
q=graph+of+technological+development+in+automobile+in+india&client=opera&tbm=isch
&tbo=u&source=univ&sa=X&ved=2ahUKEwjUjdyE6efeAhUMCxoKHZepASUQsAR6BA
gEEAE&biw=721&bih=456
2.5. Environmental factors
 Legislation for cleaner transport
Owing to the global trend of switching to cleaner modes of transportation, the Indian
Government has decided to skip the Bharat Stage (BS) V emission standards and directly
adopt the BS VI norms by the year 2020. This initiative will align Indian motor vehicle
emission regulations with the more stringent European Union emission standards for light-
duty cars and commercial vehicles (International Council on Clean Transportation ICCT,
2016).

Furthermore, the government is expected to introduce a formal “end of life” policy for
vehicles which were manufactured before the BS I standard was launched. This initiative will
provide consumers with incentives and tax rebates for scrapping old cars and replacing them
with greener and more fuel-efficient new age vehicles (Khan, 2017). The millions of cars in
the Indian streets emit tons of exhaust gases that cause air pollution. Environmental
legislation have been established to prevent more emission of carbon gases that would
otherwise pollute the environment. The table below shows the extent at which the gases are
emitted.
Pollutants Pollution load (in tons/day)
Carbon monoxide 217.7
Hydrocarbons 66.7
Nitrogen oxide 84.1
Particulate matter 9.7
Sulphur dioxide 0.72
Accessed from https://automotivelectronics.com/vehicular-pollution-india/
2.6. Legal factors
 Compliance with international safety standards
The Indian government has drafted several policies to ensure that all manufactured vehicles
adhere to international standards. For instance, crash tests were made mandatory for all new
models post 2017. For this purpose over seven world class testing centres have also been set
up (EY, 2016). The regulations have been enacted to reduce the increasing number of
accidents as shown in the figure below. Comparing China and India, India has registered a
higher number of accidents than China and hence more regulations are need to curb the
menace.

Accessed from https://www.google.com/search?
q=table+of+car+accidents+in+India&client=opera&tbm=isch&tbo=u&source=univ&sa=X&
ved=2ahUKEwjXo8DZ7efeAhWPxYUKHbwwBMYQsAR6BAgEEAE&biw=1326&bih=62
7#imgrc=Nhwzy0QQvp3-WM:
3.0. Porter’s diamond model
Porter’s diamond model also referred to as the theory of international competitive advantage
of industries can be used to explain the success of the Indian Automobile manufacturing
industry globally. Porter’s diamond model is a diamond-shaped framework that emphasizes
on why certain industries in a nation are competitive internationally whereas others are not
(Bakan and Doğan, 2012p.450). The model also examines why some companies are more
innovative as compared to others. The key factors include:
3.1. Firm strategy, structure and rivalry
This factor refers to the degree of internal competition within the industry. The higher the
degree of competitiveness the higher is the likelihood of companies developing unique and
sustainable competitive advantages. India has a highly competitive market landscape with
several local and international players vying for market share. In the passenger vehicle

segment, the major players include Maruti Suzuki, Hyundai, Mahindra, Honda, Toyota, Ford
and General Motors. Moreover, the competition is expected to increase with automakers
planning to invest a cumulative value of INR 6,000 billion in the sector within the next few
years.
3.2. Factor conditions
This factor refers to the natural, capital and human resources present in a country/region. First
and foremost, India has an abundant labour pool with low labour costs specialising in labour-
intensive manufacturing. With the rapid increase in the scale of operations, demand for
skilled labour is also likely to increase. Hence, the government has initiated the “Skills India”
program to dispatch skill development schemes for over 500 million youth by the year 2020.
Moreover, the National Skills Qualification Framework (NSQF) has also been developed to
standardise the competency framework and standards for different trades in the industry.
Furthermore, leading OEMs are also investing in collaborations with universities for
employability skill enhancement programs, externship programs and joint certification from
training centres (EY, 2016).
Another critical factor is the governments focus on enhancing the industry’s Research and
Development (R&D) and innovation capacity. At present 8% of India’s total R&D
expenditure is dedicated to the automotive sector, and over 30 private automotive R&D
centres are active in the region (EY, 2016)
3.3. Demand conditions
This factor refers to the nature of consumer demand which encourages manufacturers to
improve their quality of production, Due to increasing population, rising income levels and
rapid urbanisation India is likely to experience a surge in demand for vehicles. At present
only 20.3 out of every 1000 Indians own a car, and this figure is expected to increase to 29.5
per 1000 by the year 2021 (National Auto Policy, 2018). Moreover, according to the Indian
Government’s Automotive Mission Plan, 2016-2026 vehicle sales are expected to reach 66
million units by the year 2026 (EY, 2016).
Furthermore, the new Goods and Services Tax (GST) structure is likely to stimulate demand
since tax rates would be reduced for small cars by 2% and SUVs by over 12% (Thoppil,
2018).

3.4. Related and supporting industries
This factor refers to the presence of supporting industries including key component
manufacturers. The entry of global Original Equipment Manufacturers (OEM) has helped
local manufacturers gain exposure to global standards and advanced technologies for
manufacturing. Moreover, tie-ups with local companies have helped foreign OEMs achieve a
high degree of localisation in the Indian market. As a result, the auto parts industry
experienced a stable growth of 11% in the year 2015. Furthermore, the increase in demand
for vehicles is likely to propel the growth of the auto component sector by a Compound
Annual Growth Rate (CAGR) of 13% (EY, 2016).
3.5. Chance
While Porter did not originally discuss anything about chance, the significance of chance is
usually included in the Diamond Model as the probability that external events which include
natural catastrophes and wars that can have a great impacts in the operations of the
organization. Chance also incorporates random events that go beyond the control of the
company or even the government (Smit, 2010 p.15). A good example of such event is the
September 11 terrorist attack which inhibited the import of goods from Mexico and this
negatively impacted the exporters in Mexico. With regard to India, a good example is terror
attack that happened in capital Mumbai on 26th November 2008. The attack targeted the
international visitors and this negatively impacted foreign visitors who had come to invest in
India.
3.6 Government
Government has been described as the catalyst and challenger and in this case, Porter does
not believe that there could be free market. Therefore it is practically impossible for the
government to leave economy in invisible hands. Nevertheless, Porter does not consider
government as an important supporter of the organizations since its only companies that
create competitive markets but governments cannot. Sölvell (2015) notes that essentially, the
role of the Indian government is to encourage and push companies so that they can raise
aspiration and create a competitive environment (p.468). In addition to this, the government
may stimulate this by creation of infrastructure, improvement of health sector, education
system, encouraging change and also promotion of local rivalry through the establishment of
anti-trust laws.