KPMG report questions India's auto hub ambitions

The fast growing Indian auto sector could fail to become the global provider of vehicles and auto services that official targets envision — unless the government endeavours to provide more support and Indian companies themselves raise the bar.

A number of companies raised doubts that the government was able to recognise the size and scope of the challenge of building a manufacturing sector of global scale. Companies say that government needs to move faster in building domestic and export infrastructure, and in encouraging research and development investments. One concern raised by many companies was the fear that India could slip behind competitors in creating an alternative fuels sector.

These are the views of leading Indian auto companies, contained in a new report from KPMG International (KPMG) on the Indian auto-manufacturing sector. KPMG's 'India Automotive Study 2007 — Domestic Growth and Global Aspirations' states that the Indian automotive industry is worth around $34 billion a year and contributes about 5 per cent of India's GDP. It produces about 1.5 million vehicles and employs — directly and indirectly — in excess of 13 million people.

However, even as the sector grows some concerns are becoming more pressing. KPMG found that senior auto executives are also concerned about India's eroding cost advantage and the increasing challenges of rewarding and retaining talent, about the pace of consolidation in some parts of the industry, and about the challenge companies face in building Indian auto brands.

There are also some concerns expressed about government commitment to building the sector. Labour costs are becoming a big concern in an economy that historically was reliant on low wages.

Companies now report that a shortage of talent is driving up rates and increasing staff turnover. 'The turnover rate is already almost 20 per cent a year in many management levels,' says the chief financial officer of a leading auto component maker.

'Unless companies can learn to retain people for longer all the benefits of having talented people available will be lost,' the report adds.

Many companies believe that Indian manufacturers will have to work hard to increase productivity as labour costs rise.

Yet, automating India's production lines would require more capital than small companies can raise, says the CEO of Kalyani Lemmerz, another component company. 'Indian auto companies can't just imitate the developed country model, with high productivity through massive automation,' he says. 'It is still too costly to attempt that.'