How China Raced Past India to Dominate Global Car Manufacturing with Raghavan Srinivasan
Insights on the current state of the Global Automotive Sector
In this episode, author and journalist Puja Mehra speaks to Raghavan Srinivasan, journalist and former editor for The Hindu Business Line. They discuss the factors and history that gave rise to China’s domination in Global car manufacturing. They also talk about the role of the US, and the opportunities that India might have in this sector. Tune in for a discussion that clarifies and simplifies the tide that is turning in the automotive sector.
NOTE: This transcript is done by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
—
TRANSCRIPT
Puja Mehra: Srini Sir, thank you for joining the show today to talk about India's automobile sector and how it compares with China's automobile sector. I'm asking you this question because in the 1990s, after India started liberalising, China had a very low share in the global automobile production industry, just about 1.4%. At that time, Japan was the leader. And today, China accounts for more than 38% of global automobile manufacturing.
India is in number three, but none of Indian brands are as big as at one point the Japanese brands were, or the American auto industry was, or now the Chinese brands are. So, how do these two journeys compare, if you could help us understand?
Raghavan Srinivasan: Well, first of all, thanks for having me on the show, Puja. It's always a pleasure to have these conversations. So, we need to be clear about one thing before we start.
And that is that in India, we're very fond of comparing ourselves with China. But nothing in China compares with India except in two areas, which is population and agriculture. Other than that, they are, by an order of magnitude, a bigger economy than India.
You know, whether in nominal terms, purchasing power, parity terms, they are a true upper-middle-income country. We are a nominal upper-middle-income company in the sense that our GDP per capita sort of puts us in the upper-middle-income bracket. But even with the kind of income inequalities that we have in our country, if you take away even the top 1%, it falls drastically.
In that sense, there is no comparison. And China, of course, had a good quarter of a century to three decades ahead of India in terms of getting its manufacturing act together. So, that's the basis, you know.
But nevertheless, what you say is true. At one point, the Chinese automobile sector was not very different from the Indian automobile sector in the sense that they didn't have a domestic automobile sector to speak of, excepting certain state-owned factories which produced vehicles largely based on Russian technology, very outdated. And then, of course, you know, China started targeting, becoming the manufacturing hub for the world.
And one of the key areas that it targeted was the automotive manufacturing sector. Many countries would like to have the automobile manufacturing sector grow in their domestic economies because it is known to have a real force multiplier effect on the economy. India is no exception.
I should say that our Indian automobile sector is, in fact, one of the success stories of our manufacturing sector. It's one of the few manufacturing sectors, heavy engineering and precision engineering combined, where we are at world scale in terms of volumes. It's not that we have done badly.
I think it's just that China has done way better. But there are a number of reasons why China has managed to do better than India. And I think the fundamental reason is that their approach to developing the sector was radically different from India's approach to developing the automobile sector.
And I think that's a key difference. So China looked at automobile manufacture as a means to sort of ramp up its exports, create infrastructure and employment. These are all sorts of collateral benefits.
But the policy primarily looked outwards at the world market. It was aimed at developing China as a manufacturing hub for global brands and global manufacturers. The incentives, the infrastructure, everything was developed accordingly.
India's policy has never been aimed at the global market. We have looked at developing the automobile manufacturing sector from an economic viewpoint, from an employment viewpoint, from catering to domestic demand viewpoint. But you've not really gone out and specifically tailored any kind of policy to make India actually a manufacturing hub for automobiles for the rest of the world.
There's that fundamental divergence in a policy approach, which I think has sort of led to these very divergent development paths that the sector has followed in these two countries.
Puja Mehra: And what's the reason for India not aiming at the global market? I don't know about policy, but I do recall that around 2009 or so, maybe it was when Mr. Ratan Tata announced the Nano project and talked about frugal engineering, low-cost manufacturing advantage of the India sector. He was looking at projecting India as the global manufacturing hub for small cars.
Am I right?
Raghavan Srinivasan: Well, not quite as a global manufacturing hub for small cars, but a global sort of low-cost manufacturing hub. I think what the Nano did, it may have failed as a product, but what it did was that it radically altered the cost equation when it came to building a small automobile. It sort of showed that it could be done at a significantly lower cost than what the industry thought was the lowest possible till that point of time.
And they actually went ahead and did it, right? They produced the vehicle, they sold it, and therefore it showed to the rest of the world that you could manufacture at a significant cost advantage in India. And I think that was one of the things that he wanted to go out and show with the Nano project, that you could do frugal engineering and lean manufacturing in the country, and that we had the talent and the ability to do so.
So I think that's the biggest achievement of the Nano project.
Puja Mehra: Global ambition.
Raghavan Srinivasan: Even the Tatas didn't, and they were a much more globally orientated company. It's a large transnational group. They had a long history of actually venturing into overseas markets, even with the manufacture of vehicles, but heavy vehicles, the commercial vehicles division.
So they had assembly and manufacturing plants in several other countries and they were exporting widely. So the Tatas knew the world, the new world markets, they had history and experience of doing it. But when it came to personal vehicles, I don't think they thought about going global.
They were looking at the Indian market.
Puja Mehra: Why do Indian companies and Indian policymakers not think of global dominance? Why is that not the vision? How come China did not constrain itself to its domestic market?
What's the difference in the way these two setups think about these things?
Raghavan Srinivasan: I think, you know, I mean, there are two parts to this answer. One part is to do with why manufacturers don't think global. And the other part is why policy doesn't look global.
And the reasons are a little different in both cases, right? Manufacturers don't look global because there is an easier, cheaper option available right at home, right? You have a huge domestic market, potential actualised or possible to be created, but it is there, right?
A large addressable market right at home. Second, when you sort of start looking at international markets and international customers, you are looking at things like quality, costs, compliance, et cetera, which are of an order of magnitude more difficult to achieve than what was required to do so to satisfy the Indian customer. Our quality regulations, our emissions norms, our safety norms, you name it.
I'm talking specifically with reference to the automobile sector, but, you know, give or take a few factors, it is true for most of our manufacturing sector is that, you know, they could just manufacture a cheaper, shoddier product, sell it at a good profit. The market was protected. Remember that, you know, we enjoyed a lot of tariff production, the manufacturing sector in particular, the automobile sector still does.
There are sharp import duties on, you know, fully imported vehicles on semi assembled.
Puja Mehra: But is it still an infant industry?
Raghavan Srinivasan: It is not an infant industry, but, you know, they have managed to convince the policy makers that without tariff protection, the ecosystem, which is now developed around the automobile sector, the millions of jobs that it has created, the vendor ecosystem, is all at risk of flood of cheap imports. So we have a number of tariff and non-tariff protection. So we don't allow import of secondhand vehicles, for instance, right?
If you go to Africa, most countries there, you know, don't have a domestic manufacturing sector. So they allow free import of this thing. And, you know, automobiles are long lived products.
This whole scrappage rule is an artificial creation, basically designed to sort of create demand rather than actually, you know, solve any other problem. So as long as they are reasonably fit, you can run an automobile for at least 50 years, you know, if you maintain it. So, you know, other countries didn't have the problem, those who didn't have a local industry to protect.
So, and that's why there is always a difference. I mean, you know, Indians of my generation, definitely, we immediately understand what the term export quality means. It meant that it was just better than what was available to you locally, right?
Maybe now it's changing, you know, I don't know about Gen Z and whether they will recognise or attribute the same values to that term, but it's still there. The same product sent abroad is of a better quality than what is marketed locally in every sector. So that was the thing.
So manufacturers didn't want to take the hard road when there was an easier, softer, more lucrative option available locally. So that's one part. So they don't look at it.
Puja Mehra: But Sunita, is really India's automobile market that large because per capita car ownership compared to some of the other countries is low, isn't it? Or am I wrong?
Raghavan Srinivasan: No, I think per capita is, of course, one way of looking at the addressable market size.
Puja Mehra: See, I don't know if the numbers are correct, but I think I read somewhere that there are 33 cars on roads in India per thousand people.
Raghavan Srinivasan: Right. It's much, much lower than developed economies, particularly large open countries like the US. But per capita is not the correct yardstick to look at the size of the sector because you also need to look at volumes, right?
So volume wise now, several million vehicles are being manufactured and sold every year. We are a pretty large market. We're probably the world's third biggest.
Puja Mehra: Yeah, I think five million units. That includes passenger commercials.
Raghavan Srinivasan: We're basically like the world's third biggest producer of passenger vehicles. And that's a large size. That's a large size.
But the only difference is that almost all of it is just meant for local consumption. A small fraction gets exported, but it's not significant. We are not a significant player in the global automobile market in terms of exports.
But, you know, I just wanted to finish my earlier part of the answer about the policy side. The policies also were never aimed at developing, you know, encouraging these guys to export. Yes, they gave them some shocks.
So you could do some duty-free import of certain equipment or components required if you are going to export that product. So a very cumbersome process procedure. But all your other India overheads remained, which means greater transaction costs, greater friction in transaction, greater friction in logistics, higher logistics costs, higher, you know, electricity, finance, you name it, you know.
So whatever little, you know, our policymakers unfortunately look at incentives only in tax terms. That, okay, if I don't tax you, that's an incentive. That's not, that's not enough.
Yes, you need that. But you need tactical subsidies. You need to look at access to improving access to finance.
You need to improve infrastructure and reliability of that infrastructure. All these things come into play. All that is this thing they say, no, we're giving you this wonderful scheme.
You know, we're giving you less. I mean, we're taxing you less. And that's the end of the story.
So most of our policies are built around tax, either increasing it or decreasing it. But they don't look at all the other things which are necessary and required in order to create a globally competitive industry in any sector. And that's the other part of the problem.
Puja Mehra: The other thing you and I discussed before we started recording is that we don't have too many large automobile makers. There are just about six to seven dominating companies in the Indian market, of which only Maruti, but Suzuki and Tatas and Mahindra are actually Indian companies. So with all the protection, etc.
and with all the focus on the domestic market, we don't have homegrown brands.
Raghavan Srinivasan: Yes. So, you know, there is, I mean, Maruti is, yes, I mean, one could call it, it's a semi-Indian company, but it's very much, you know, majority owned by Suzuki Japan and a very Japanese company in terms of orientation and approach. But, you know, because now the Indian arm is larger than the parent, it's a very, very significant part of the Suzuki empire.
But that doesn't still make it an Indian company. So you essentially have just Tatas and Mahindras who have automobiles, which are sort of fully in that sense, made in India, in the sense that they're designed in India, they're manufactured in India, the engines are made in India, their own designs, they're not using foreign technology for that. But, you know, the others are all, you know, significant players.
So some of the global brands, Hyundai in particular, it's the second biggest. And then you have Honda, you have Toyota. So you have some of the major brands.
But I think foreign players have had problems dealing with India. So it's not just that India has not been able to produce its own brands, but also foreign players have also. So India is a difficult nut to crack.
But I think getting into the automobile manufacturing sector from scratch at this point of time requires massive investments and a willingness to stay for the course for a long time and absorb a lot of losses. And I think that kind of willpower, only the Tatas had, and the Tatas only had it because it was Ratan Tata's personal dream. Otherwise, they wouldn't have done it.
It's not that we don't have people who are capable of doing that kind of investment. You look at Adani's, you look at Ambani's, you look at the Pirla Group, and you know, you have enough and more large conglomerates which are capable of putting into this thing. But that kind of appetite to absorb punishment, to learn and keep developing, you know, take the losses and carry on, I don't think that exists when it is so much simpler to either just tie up or become a part of the global value chain and then, you know, take your little share from there.
It's not that we don't have the capability. We have the design capability. We have the engineering capability.
By now, we have a well-developed and deep-rendered ecosystem which is capable of innovating and producing on its own as well. So, you know, we have the necessary ecosystem, but I don't think we have the will to do so.
Puja Mehra: Right. So, let's talk a little bit now about the Chinese industry and the Chinese journey to this sort of domination that they're coming to. They're edging out the US automobile industry from the market.
Raghavan Srinivasan: Yeah. So, you know, the US is now trying to reverse something which I think is irreversible, which is trying to sort of reverse the offshoring of its manufacturing capacities, which went largely, migrated largely to China. But China basically, like, you know, like I said, it sort of had a set of targeted policies which were aimed at building this sector.
So, that included heavy subsidy, that included creating the infrastructure regardless of cost. You know, and I'm not talking just about building a factory. I'm talking about building the connectivity, the rail, road links, the ports, the transportation infrastructure, the power infrastructure, everything was done.
Then they had, in that sense, a much more controlled economy. So, you know, labour costs were managed quite strongly and brutally. None of these sectors, you know, and particularly complex engineering manufacturing like automobiles, is not a standalone venture.
You need an ecosystem of suppliers and vendors for building and manufacturing the thousands of components which go into a vehicle, right? You cannot do everything yourself. They help those component manufacturers also massively with, you know, with subsidies and very cheap credit and all the other, the infrastructure, this thing.
The education system was geared up to, you know, provide the sort of skills required for this. So, it was a holistic plan and the West also very gleefully participated in it because they were making money. They were saving huge costs by shifting their manufacturing to China and shipping the end product back to their home markets.
Everybody was very happy with the setup till China started flexing some of its newly developed economic muscle. And then they realised that they had a serious problem on hand. But by this time, China has reached a stage where it doesn't need the West, you know.
It has now fully developed the capability to compete with the West in the automobile space, whether it is a conventional thing. But they also did another thing which was very foresighted. The Chinese basically approached, I think, policy like a chess game.
They sort of planned 64 moves ahead. They take a long-term approach to things and not like from budget to budget. Okay, I've given this incentive and I expect some dramatic transformation within 11 months.
You know, that doesn't happen in the real world. So, one of the things they did back in 2009, by that time, some pressures had started building up because, you know, there were job losses, there was this de-industrialisation happening, particularly in the U.S. Detroit had died, the global financial meltdown meant that three of the four largest U.S. automobile manufacturing companies had to declare bankruptcy and the government had to bail them out. And that's when they realised that you have a serious problem that, you know, by allowing your domestic manufacturing capability to wither, you have now created a problem which is much harder and much more expensive to solve. The Chinese also knew that the West had realised this and that sooner or later there will be the inevitable blowback and that they cannot really bank on being the manufacturer for the West, particularly in automobiles, in conventional automobiles for a very long time, let me put it that way.
So, they started looking at alternatives and the alternative was electric mobility, which was really nascent at that time and they decided that this is an area where we can compete with everybody because everybody's starting from the same point. Nobody has the technology, nobody has the edge, everybody's technology is only in the laboratory state, so we can do the same thing. But again, being Chinese, they didn't just limit themselves to one thing.
When they looked at EVs, they looked at the whole ecosystem. So, from EV design and manufacture was one thing, but the technology, the battery technology, the manufacture of the batteries and then even things that go into rechargeable batteries, so the whole value chain and the ecosystem was developed. So, today China is the world's largest EV manufacturer, passenger vehicles are the world's number one electric vehicle manufacturing companies, not Tesla but a Chinese company.
China is the world's largest automobile battery manufacturer, right? So, they basically just went out to dominate it and they said this is one area where we intend to dominate the world. So, from the beginning, the policy was aimed not at meeting and China had the same kind of problems India has and one of the reasons why we are pushing electric mobility is, for instance, increasing pollution in our cities and China had the same problem, but they weren't content with just solving for a local problem.
They said, no, we need to dominate the world, we need to build capability which will take on the best that the West can offer and beat them at that game and they did everything to do that, but they also realised that they had to leverage their strength which was just like India, the same strength that we offer which is a large domestic market, right? Because that immediately gives you scale. So, they developed policies to encourage electric vehicles, not only manufacturer but purchase, right?
So, they were, you're given huge incentives, easy credit and also they changed laws. So, you couldn't sort of really run internal combustion vehicles in some places or during certain times and they kept tightening that. So, they kept pushing and pushing towards more and more EV usage and that sort of ramped up their domestic demand.
So, Chinese manufacturers had the dual benefit of having a large home market to deal with which gave them the scale and then given supportive policies, they could compete on the price front globally and today they dominate the world. So, I think, you know, you need an approach like this. If you want to say that, look, I want to be a significant player, forget number one or number two, I want to be a significant player who actually impacts the world in any sector, you need to have this holistic approach where you say, what do I need to get that, you know, it's not just sort of the ability to make something to be sold, made here, sold here, no longer works, you know.
So, you need to capture as much of the value chain as possible and Chinese also know that, you know. So, the COVID pandemic, for instance, showed you how important a part they play in the component ecosystem. So, you know, in between, say, 2009 and 2020, a lot of things that happened, a lot of manufacturing have been restructured, but they quietly switched to the components.
So, critical parts are still coming from China, even for Indian manufacturers. So, some of the key electronics, some of the key capital goods, they're all coming from China. They basically had a very, very different, radically different approach to the Indian policymakers' approach.
That's essentially what I'm saying.
Puja Mehra: Yeah, in fact, I was reading that there is this company controlled by Shanghai city government called SAIC. Is that how it's called?
Raghavan Srinivasan: Yes.
Puja Mehra: SAIC motor company, which has a JV with some of the international brands, such as the British MG brand, and they help them turn around. This is, I think, sometime around the same time that the Tatas bought JLR. But the difference being, a lot of manufacturing in this case takes place in China.
Also, similarly for some of the American brands, such as GM, Ford, etc., they were, because of this post-2009 increased dependence on Chinese manufacturing, selling nearly two-thirds of the cars that they make internationally. But now China's been edging them out, and now they are going to have to sell two-thirds of their cars produced in the US market. And that brings me to my next question, which is that, like you're saying, China has all these very focused policies for the EV sector, which is a chance all over again for everybody to sort of, you know, the race starts again.
India has almost, I think, five to six schemes. There is a FAME scheme for faster adoption and manufacturing of EVs. There's an electric mobility promotion scheme.
There's a PME drive scheme. There's a PLI. And also, especially under the Biden administration, the US also had ruled out some new schemes for reviving Detroit.
So in the second chance that India now has, how much better placed we are, you think, to once again see if we can capture global markets?
Raghavan Srinivasan: It's still a work in progress. I think we definitely have a better chance in two-wheelers and small passenger and cargo three-wheelers, electric, or the single-ass mile kind of thing, because there, again, scale matters. So we already have a large domestic market.
We also had large-scale adoption, particularly among electric two-wheelers, because the infrastructure constraints are not so difficult to overcome in case of two-wheelers, right? So for passenger vehicles, larger vehicles, the big problem is the lack of charging infrastructure. And in our cities, we don't even have adequate parking.
It's all street parking, as you know, in most of our cities. Whereas for two-wheelers, it's easier to set up. They don't require so much space.
And given their size and the design, it's much easier to do alternative solutions like battery swapping stations, which work out very economically. And therefore, the infrastructure problem was bypassed by the electric two-wheeler manufacturers. And so some of them are beginning to scale now.
And likewise, in the small electric passenger, three-wheelers, basically, three-wheelers, passenger and cargo vehicles, where because of the growth of our e-commerce sector and 10-minute delivery and so on, the last mile is now huge. So that has created a lot of demand, both for two-wheeled delivery vehicles, as well as three-wheeled, small, last-mile cargo delivery vehicles. And so these are giving you the sort of base which is required to scale up.
And I think that if we focused on it now, and if we developed certain other policies, which will help these manufacturers basically go global, we could look at this thing. But it will still mean thinking very differently and thinking at a very different scale compared to what we're doing right now.
Puja Mehra: But will we have something like an Indian BYD, an internationally known brand for EVs, if not the traditional conventional cars?
Raghavan Srinivasan: It's difficult. I mean, it's not impossible. You can have some kind of disruptor coming, but I doubt it.
You know, we don't have an internationally known brand in any manufactured product, right? We're not known for that. Even now, other than services exports, we do have a brand in the sense of a larger brand for Indian intellectual capital.
But otherwise, we don't have a brand. We don't have a global brand. Even though India is a dominant producer in the world, the Tatas had to buy a British brand to go global.
So we don't have that. We just, we're not taught that way. We're not developed that way.
And like I said, there is insufficient incentive on the part of our entrepreneurs to actually think of this thing. So none of them have truly global ambitions because there is a much easier, more quickly deliverable and more profitable option available on hand in terms of the domestic market. So we just haven't gone that way.
So I doubt it, to answer your question.
Puja Mehra: I asked you that question because I read somewhere that Detroit got the world on the road, but BYD will inherit the earth. And I was wondering if there was one industry where India had some chance of becoming a global player, with some ambition, it was probably the auto industry. And so we are not being mentioned in that conversation globally at all.
Raghavan Srinivasan: I think maybe in two wheelers, it might happen. Ola was the first one to take a step in that direction. They set up what was, I mean, at least they announced the plans.
I don't think they've got anywhere close to that scale as yet, but at least they started with thinking big, saying, okay, we'll build the world's largest manufacturing plant for electric scooters. But nobody else is thinking that way. I mean, look at our passenger volumes.
It's in the thousands at most. So you cannot get any kind of scale with this. I mean, I'm sure at the auto expo, Tata's, Mahindra's, everybody's showcasing really interesting, attractive vehicles.
And most of them have the potential to do well internationally, right? But are we going to actually end up doing it? I don't think so.
Prototypes are one thing, you know, production is a different thing.
Puja Mehra: Yeah. On that not very exciting note, let me say thanks.
Raghavan Srinivasan: Thank you. Thank you once again.
