Indian Auto-Component Supply Chain at the Crossroads

Abstract

We trace the evolution of the auto-component supply chain in India beginning with the opening of the economy in 1990 by using a combination of data on firm and sector performance, customer-satisfaction surveys, and interviews with experts. During the past decade, the industry has made remarkable progress on multiple fronts. This is particularly true with regard to quality—10 firms in this industry have won the coveted Deming prize during the past six years. Surprisingly, we first observe that the financial performance of the firms that won the Deming prize (i.e., Deming firms) shows no definitive differences from the performance in the rest of the industry. We then analyze the productivity growth at the firm level across two five-year intervals using a total-factor productivity model. Our results suggest that productivity improved much more during the second period, which is the interval in which most of the firms won the Deming prize. We also analyze the impact of winning the award on profitability and suggest that new firms were able to grow faster in the improving business environment. To “externally” validate our findings, we compare the auto sector in India with that in China. Despite a 10-year disadvantage because of costs that are beyond the control of the firm, the auto sector in India seems to be competitive with that sector in China on all firm-specific factors. In summary, we suggest that firms in this sector have taken the first step by becoming competitive in the areas of cost and quality. We suggest that they are now at a crossroads and must make several choices to leverage these quality gains into a profitable, global supply chain strategy.