Learning from India: The auto industry

You think China is the biggest exporter of cars in the world? You would if you observe the rapidity with which China companies gobble up the brand names in the auto industry. They have taken over Hummer, they have taken over Volvo. There are about 150 registered auto manufacturers in China. We see China made cars here in Malaysia- the Cherry's, Geelys Great Wall Motors (GWM) and so on.

Over here in Malaysia, those in the auto industry or industries related to it are also affected by recent developments. Proton has announced its improving. I am not sure whether it has overtaken Perodua in passenger car sales. The main investors in Proton are of course Khazanah Nasional and EPF. It is a GLC. Proton acquired Lotus sometime in the late 1990's from the owner of the bankrupt Bugatti. It has recently announced that it will enter F1 formula racing under F1 Lotus after BMW- Sauber exited. The Malaysian F1 Lotus team is sponsored by a few corporate players such as Air Asia, Naza. It was of course banking on the money from PETRONAS and now that PETRONAS has announced that it's not sponsoring Malaysia's F1 Lotus, perhaps Air Asia will finance our racing hopes. Just don't ask Proton to come up with the money.

Consider this. Wouldn't be better if all that money that is going to be spent on F1 racing be channelled into propping up Proton itself so that we can produce better cars, more affordable vehicles and our Proton city in Tanjung Malim can emerge as a manufacturing hub for a regional market? You are going to spend RM 1 billion a year for what? So that some people whose imaginations we look at in awe and admiration can realise some phallic dreams of driving in super charged cars?

Look again at India. No one gave the country a tinker's cuss about its capability to emerge as the biggest car exporter. We would have thought China will swamp the world market. Maybe Proton may want to look at the reasons that propelled India into first place as a car exporter. Don't get dragged into pouring money into F1 racing now that uncle PETRONAS isn't going to give you money.

Don't fault PETRONAS- it must after all operate on strictly business principles. If it thinks that sponsoring Mercedes will give better premium and returns to PETRONAS and this country, we must support it. This isn't an issue whether Hassan Merican is a maverick or not. As PETRONAS CEO he has to make hardnosed business decision and if Mr Omar Ong is not up to it, then probably his stint as consultant in Mckinsey was wasted.

India has overtaken China as a car exporter this year, exporting 201,138 cars in January-July against China's 164,800. What accounts for India's success? We don't see anyone drafted from an Indian Perodua coming out with some visionary planning? Or talk in grandiose terms about a Long-term strategy. India's triumph was completely unplanned. No planning document ever envisioned or planned for beating China.

Look again at China. Analysts say China has become a great auto exporter because of huge subsidies, an undervalued exchange rate and dirt-cheap credit. Sounds similar to Proton eh? India didn't go for an undervalued exchange rate so that its exports are cheaper. Indeed, India's interest rates were always among the highest in Asia. It has inflexible labour laws, with adverse effects on productivity and wages relative to Asian competitors. Indian strategic vision does not include giving special provisions or subsidies to the auto sector like our Proton has. Indeed, the sector for years suffered exceptionally high excise duties and sales tax. Suppose Proton is subjected to high duties and high sales tax, do you think it can survive the rigors of competition?

Ah yes, COMPETITION. The word has become a byword for nightmares of some kind spooking many policy makers. But that is precisely what revved up India's auto industry. In the early 1990s, auto production was freed for investment by any domestic and foreign investor. Indian planners as well as foreign investors regarded India as a low-skilled, low-productivity country producing third-rate cars like the Ambassador and Premier. Foreign investors came only because car imports were virtually banned. The small size of the Indian car market created serious scale diseconomies.

Everyone criticized the new auto policy. Leftists claimed foreigners would decimate the industry. In Malaysia, nationalists claimed this. Tun Dr Mahathir became the chief spokesman for this new form of economic colonialism. Some economists complained that foreigners were being wooed to create an inefficient, high-cost industry behind high tariff walls.

But nobody foresaw what fierce competition would do. Auto companies compete by constantly producing new models with improved features like fuel efficiency. As we know, Indian consumers are very price-sensitive, so design changes to reduce costs are also vital. Cheaper and affordable cars are demanded. India's auto parts companies had rarely been asked for innovative changes during the old licence-permit raj, when the Ambassador and Premier faced little competition. Here, Malaysian auto parts manufactures will gang up t press for higher prices. They want to be protected under our own version of licence-permit raj.

What happened on the Indian scene? The MNCs brought in competition, and started a dialogue with auto ancillary manufacturers on constant design changes. To their surprise, they found that Indian engineers had considerable skills, and could make improvements quickly and cheaply.

For example, Bharat Forge, a company which makes auto forgings like crankshafts and axles, was among the first to realize that India's big advantage was not cheap labour but cheap skills. The company decided to have no blue collar workers at all, only engineers. This yielded a huge rise in innovation and productivity, and soon made Bharat Forge the second biggest auto forging company in the world.

For new auto components, global giants like Delphi and Visteon typically took three months to go from concept to design, prototype, testing, removal of glitches, and final manufacture. But Bharat Forge found it could do the entire sequence in just one month.

Soon, every auto company and parts maker in India focused on using cheap skills to constantly produce better and cheaper parts and vehicles. Bajaj Auto once relied on knowhow from Kawasaki for motor-cycles, but soon found that its own R&D produced far better bikes or Indian conditions. Maruti Suzuki made India a global hub for R&D. And Tata Motors created the Nano, the world's cheapest car, making the world sit up.

This then is the secret of India's success. Don't waste time with strategic planning and picking winners. Simply let competition happen. You will be surprised how the most unlikely sectors can become world class. That's how India has just beaten China.

Don't waste time with Formula 1 racing. PETRONAS is doing the right thing in sponsoring Mercedes team. Let our Lotus F1 team qualify itself first to justify spending on them. If you can ask that requirement from ordinary Bumi companies, why not ask the same thing from Lotus F1? Better to pump money into Proton to study how India does it.