Today, innovation is imperative in the global automotive industry. The grim rise in innovation costs, falling returns from those investments and changes in customer choices have all led to a turning point in the innovation cycle. And India can potentially gain from these changes.

The priority for automotive manufacturers is to make better products than their competitors; this requires sound R&D activities and innovations performed at the back end. A study by Asian Development Bank on the Asian automotive industry highlights the fact that the number of electronic functions in a vehicle manufactured in 2000 is double that of a vehicle manufactured in 1990.



While innovation has stepped up, the sales volume to support the costs of this product innovation has been lacking. In the US, for example, average annual sales per vehicle came down by one quarter between 1980 and 1999. Price and income trends suggest that it is improbable that these sales volumes can be regained in developed industrial markets—on the contrary, they are likely to slash further. The average market price of a new car has doubled over the last 20 years, but the average income has risen by only 50 per cent. This price-income gap will continue to widen, implying a further fall in sales volumes. The situation will arise if costs cannot be cut.

Automotive assemblers like General Motors Company have responded by globalising model platforms and increasing the proportion of shared-use components and functions in order to cut costs. Rajnish Tiwari, Research Associate, Institute of Technology and Innovation Management, Hamburg University of Technology, Germany, says, “The Indian auto market is highly competitive and price-sensitive, requiring firms to be innovative in their functioning. Therefore, we see a considerable amount of firm-level innovations in terms of marketing, organisational processes, production technology and the services offered.” His outlook for the Indian auto industry is generally positive. “As far as product innovations are concerned, we still lag behind global players. Most products offered so far are basically designed elsewhere. Worse, many models only offer stripped-down technologies to cater to a market that is considered extremely price-sensitive. The share of companies performing R&D in the components sector has in fact only increased from 28 per cent in 1995 to 39 per cent in 2007. However, I see a silver line emerging and I think many companies, domestic as well as foreign, are in the process of developing Indiaspecific models, especially in the small car segment,” he says.

The world automotive industry is living in an innovation-based phase. This implies relentless product innovation at an everincreasing cost, but with everdecreasing returns in terms of sales and customer recognition.

P Balendran, Vice President, General Motors India says,“As a part of its global R&D effort, GM has a systematic plan for promoting and managing innovation in the company. GM puts a lot of emphasis on innovations in the company’s products and processes and has created an elaborate but effective system to generate new ideas, evaluate them and act upon them so as to capture the intellectual property as well as implement those ideas in the company’s products and processes. The output can be seen in the number of Records of Inventions that GM has every year and the number of patents that accrue from these. The R&D and Tech Center in India have made a significant contribution to this global effort.”

India’s position
The automotive industry has to cut down costs. India is already marching some way down the road to be a global centre for the coming cost-reduction cycle. Auto innovation for the Indian market firmly focuses on the small-car sector. India is a small-car market unlike China, which has developed predominantly as a market for medium and large sedans. The long-term success earned by Maruti Suzuki’s Indian-built Maruti 800 and Maruti Alto has paved the way for a new generation of Indiandeveloped and manufactured ultra low-cost vehicles. Recently, the Tata Nano came into the limelight, when it was marketed as the world’s cheapest automobile.

India’s original equipment  manufacturers and component suppliers have realised that there is huge, but untapped, demand for low-cost mobility in India and elsewhere. Indian manufacturers can meet this need at a profit. Toyota and Volkswagen are reportedly planning new Indianbuilt small cars; Ford India recently announced that it is focusing on the small-car market in India; Renault-Nissan has forged an alliance with Bajaj Auto to manufacture a $3,000 car in the near future.

Indian product innovation can be driven by the global market. Global automotive manufacturers are dependent on the pace of product innovation they can deliver. This pace has accelerated over the last 10 years. Let’s take an example. The BMW7 series offered 14 extra functions on top of the base specifications in 1986, which rose to 92 extra functions in 2006. Ironically, global automakers have to cut the cost of research and development in order to maintain such a pace of product innovation. All this hints at renewed focus on markets that are rich in human skills but have a low labour cost relative to the US and Europe. In this respect, India stands in a winwin situation.



India vs the West

India still lags behind in R&D activities and innovations when compared with the western world.
Some of the reasons are:
􀂄 Unavailability of accurate data: Analysis of consumer data and repeated test marketing are very important for innovation. The connect with the consumers necessarily depends on how well the businesses are able to define the market segments and position their products appropriately in the target market. As compared to the western countries, the databases available to Indian companies/entrepreneurs are very limited

􀂄 Unavailability of the risk capital:  In the past, financial institutions and banks have been the only sources of capital for an entrepreneur. The pedigree of the applicant was considered more important for the lending parameters than the quality of the business idea. There has been an absence of an institutional framework that could assist in lending to technology innovators planning to set up shop in India. The real concern still remains whether the Indian government and corporates can provide micro financing infrastructure, which can be utilised by high-net-worth individuals to fund new ideas instead of investing in other areas.

􀂄 Few industrial clusters:  Innovation is heavily influenced by clusters—a regional concentration of a group of related and supporting firms. Clusters characterised by the presence of suppliers, customers and skilled resources are great promoters of innovation. After the number of firms in a cluster reaches a critical mass, owing to cross industry linkages, the degree of innovation grows exponentially

Restructuring mode
Since the early 1990s, Indian automakers have been restructuring their supply chains— increasing the proportion of manufacturing that is outsourced, and moving to closer and more innovation-focused relationships.

The development of supplier base for the low-cost Tata Nano vehicle has gained much attention. The process of restructuring is not new; it begun with the development by Maruti Udyog (now Maruti Suzuki India Limited) of the Maruti 800. This was the first example of how a small base of component suppliers can work to international quality standards, and the Maruti 800, with its successors, remains India’s bestselling car.

Mahindra & Mahindra took a significant step in 1994 by reorganising its manufacturing around the outsourcing principle. This allowed the company to produce a successful new product (the Scorpio SUV, released in 2002). The product was designed inhouse, and developed and manufactured using a network of 110 local suppliers at a very minimal cost.

The concept of an outsourced approach to manufacturing is established in India. However, the move towards more developmentfocused relationships with fewer suppliers is still at the initial stages. In recent years,many global vehicle manufacturers have cut their total supplier bases while increasing the development role of the remaining suppliers. Chrysler, for example, trimmed its approved-supplier list from 3,000 to 600 over 15 years, while Ford reduced its list from 2,400 to 1,200 over the same period. The Indian auto supply industry remains unorganised by international standards, with the great majority of companies with less than $10 million in sales: consolidation will have to continue and accelerate.

Tata Motors has already hinted that it may adopt a distributed manufacturing model for the Nano, in which modular components are allowed to be assembled under contract by a large pool of very small local manufacturers. Since 2000, Cummins India (an engine maker) has adopted a comparable model to this and has been manufacturing modular power generation units in India designed to lower distribution costs and allow customisation by dealers and customers.



Technological advancements
A few important technologies will dictate the development and production processes in the Indian automobile industry in the near future. Five of these are as follows:

1) Occupant and Pedestrian Safety measures (crash-worthiness of vehicles)—These include active airbags, electronic stability controls, speed control safety limits and crash-worthy front-end design. Firms, especially in developed nations, will turn to the aging customer. Demographic changes  will intensify the need to provide greater comfort while simplifying the usability. The focus will be on providing a top-notch driving experience without overstraining the driver. In emerging markets too, the disposable income of the elderly will grow at a fast pace, increasing their purchasing power and making them a significant target group.

2) CO2 reduction and fuel consumption—The major thrust is to improve the efficiency of the current diesel and gasoline engines through engine down-sizing and improving the performance of turbo-machinery. This means that today’s advanced 1.5 litre diesel engine can produce the power and torque of a 2 litre modern diesel engine, leading to a 12 per cent improvement in fuel consumption.

3) Use of aluminium or aluminium—alloy materials for the vehicle body; weight and topology  optimisation using CAE techniques and the use of high-pressure diecastings for key power train components. This will lead to a 3 to 4 per cent overall weight reduction, despite the weight increase due to safety measures.

4) Efficient transportation will require the development of smaller–volume vehicles and engines with both diesel and gasoline options. For example, the Tata Nano, Tata Ace, and Mahindra Maxximo can serve the transportation needs of the vast majority of Indian car buyers. With best-in-class fuel consumption and low costs, these vehicles can capture the burgeoning market of ‘bottom of the pyramid’ customers. The challenge is to develop such small engines and vehicles while meeting the Class-I limits of BS.III and BS.IV emission norms.

5) The development of gasoline and diesel hybrids and electrical vehicles (micro, mild and full hybrids). The micro hybrid gives about 3 per cent of fuel consumption benefits by the use of start-stop technology during vehicle idling, at stand-still traffic conditions. The mild hybrid offers a saving of about 14 to 25 per cent, depending on the base vehicle, on full swing development..

As the applications and volumes grow, the cost of vehicles will certainly come down. The maintenance cost will come down over a period of time as the alternate fuel vehicle penetration and electric grid infrastructure improves. Lighter vehicles mean more fuel efficiency and hence less emission.

Size matters
The pressure to increase fuel efficiency and reduce costs-to-run, coupled with the increasing need for mobility in emerging economies such as India, will give a major boost to the demand for costeffective yet safe small cars. The market, as well as the regulatory agencies, will demand better safety features than, for instance, those offered by the Tata Nano in its nofrills version. OEMs will increasingly turn to platform models.

Going electronic
The need for environmentally friendly and cost-effective fuel will drive the trend to electric autos, especially as a means for shortdistance (within-city) travel. Highcapacity batteries with features like safe and fast chargeability will drive technological innovations in this area. The main thrust would be to reduce the cost of such highperformance batteries and to make them chargeable at home with a runof-the-mill electricity connection.

Maintaining silence
A mobile Internet device (MID) is a multimedia-capable handheld computer providing wireless Internet access. They are designed to provide entertainment, information and location-based services for personal use, rather than for corporate use.

More and more cars will mute to mobile Internet devices (a multimedia-capable handheld computer providing wireless internet access which is designed to provide entertainment, information and location-based services for personal use, rather than for corporate use) thereby enhancing safety standards, for example, by enabling remote diagnostics. The real-time interaction between the board computer and a remote server will ensure better safety and offerings of location-based services.

Experiencing roads
The trend will move towards voicedriven services helping the driver remain focused on the road. Gadgets will be increasingly integrated and embedded in the board systems, reducing the need for plug and play hardware.This will help avoid unpleasant situations in which accidents cause such gadgets to literally fly in the face of the driver, posing added danger.



Challenges to Innovation
At present, automobiles are being largely developed and built by suppliers. Global OEMs act as assemblers—repositories of intellectual property—as well as brand and distribution managers. Research and development activities performed by automotive suppliers are a major factor in the global automotive chain.

To perform such an exercise requires a sufficient wealth mass.An Asian Development Bank estimate reveals that supplier development of just two automotive products of only moderate complexity requires 15,000 hours of engineering time, which typically needs to be supported by sales of $200 million in a developed economy, based on a benchmark of R&D spending of 3 per cent of pre-tax sales. Even after allowing for the fact that Indian direct engineering labour costs are only around 10–12 per cent of the US equivalent, fewer than 20 Indian auto suppliers have sufficient sales to support such innovation requirements. On the technical side there are major challenges in terms of energy efficiency, maintaining a clean environment, ensuring safety for people inside (passengers) and outside vehicles (pedestrians) and in creating manufacturing processes which will achieve this at an affordable cost. Advances in alternative fuels, light-weighting through novel materials and innovative designs, use of electronics and computers and developments in simulation technologies can be used to meet these challenges.



Auto policy needs a boost
The government can help the auto industry in several ways. The most important contribution from the government would be to help the auto industry become globally more competitive. This certainly includes tax incentives, for instance, lower excise duties and R&D incentives.

Rajan Wadhera, Chief of Engineering & Development, Automotive Sector, Mahindra & Mahindra Ltd, says, “Most OEMs continue to invest substantial resources and capital in developing technologies even without a viable business case or a guarantee of returns.

The government has provided incentives such as reductions in tax for selected greener mobility options to encourage greener mobility. However, we expect the government to extend the benefits to other technology options as well and quash the import tax on components used for technologies. This will make the advance technologies commercially viable, leading to increased market penetration.”

The government should encourage the ‘innovation culture’. Apart from monetary incentives for R&D, the government could play a pivotal role by creating advanced R&D infrastructure, which is usually very costly. The expense involved acts as a barrier to innovation, especially in the auto component sector. The auto industry also faces a crunch of skilled labour.

Many engineers tend to join the more lucrative IT industry. We therefore need to make concerted efforts to increase the supply of skilled manpower. As a measure against these two problems, collaborative innovation in partnership with publically-funded R&D institutions and universities should be encouraged.

Finally, the government should implement higher environment and safety standards. This will increase the competitiveness of Indian autos and will also reduce the scepticism and prejudices that domestic Indian OEMs often are faced with in overseas markets. Indian firms need not and actually should not compete on price alone and the government can encourage and support the industry in this endeavour.

India has developed itself as a well-integrated part of the world’s global automotive manufacturing in just 15 years’ time. The next phase of automotive development will focus more on innovation than development. The key focus will be cost reduction through process innovation—and extension of the low-cost market through business model innovation.