PT-PGPM-April 2011

Imports of Parts from China to India

By

Rakesh Kumar Sehrawat 11-PT1-071

Under the guidance of Prof. Dr. Ashutosh Dash MDI, Gurgaon Jitender Mohil Manager Outsourcing Hero Motocorp

Management Development Institute

Gurgaon 122 001

Page 1

PT-PGPM-April 2011

Table of contents

Introduction...3

The Problem Statement ......... 4

Literature survey... 5

The Research Design ....6

Time Frame ..... 7

References .7

Page 2

PT-PGPM-April 2011

1 Introduction Until the 1990s, low incomes and pervasive protection and intervention by government constrained the economic development of China and India. Policy reforms, particularly greater openness of foreign investment, began in the 1980s and deepened in the 1990s. The effects of reform were particularly striking in the automobile industry, not least by increasing incomes and improving supporting industries and infrastructure. China has pulled ahead, with a per capital income roughly double that of India, largely because of its booming laborintensive manufacturing, supported by superior physical infrastructure and, partly as a result, greater attractiveness to direct foreign investment. Despite Indias current weakness, it may well have better long-term prospects because of its superiority in software and soft infrastructure, including a democratic political system, an independent judiciary, better (if still imperfect) financial system, and two aces in the hole: widespread proficiency in English, and better-managed companies largely free of political interference and full of experienced project managers with extensive international experience. Two countries are ranked close together, with China slightly ahead, is impressive. Tax revenues, historically a weak point in China, have surged in recent years, allowing China to spend far more on infrastructure while maintaining relatively sound government finances, and to cut tariffs, thus creating a more open and competitive economy. China and India are similar in another crucial way: the success of liberalization and reform over the last decade or two has convinced policymakers and public alike that further reform and growth are necessary and possible. A variety of public opinion polls show that Indians and Chinese (or at least the more easily surveyed urban residents in those countries) are the most optimistic peoples in all of Asia. Neither country seems to have carved out an unassailable lead in product quality. Suttons (2004) survey, one of the few studies directly comparing China and India, finds the leading firms in the two countries roughly equivalent. Balakrishnan et al. (2004) document the impressive progress made by Indias best auto firms, and note the large number of Deming prizes won by Indian firms. A closer examination suggests, however, that Deming prizes are an idiosyncratic indicator of quality. The Japan Union of Scientists and Engineers (JUSE) established the Deming awards in 1951and first awarded a prize to a foreign firm in 1989. From 1989 to 2000, foreign firms, including one Indian firm, won just four of the fifty application prizes awarded by JUSE. Then from 2001 to 2005 foreign firms earned 20 of 23 awards, suggesting that a structural transformation of the awards had occurred. Of the 20 foreign awards, 12 went to Indian firms, while Thai companies won the other 8 (compiled by author from data on the JUSE web site, KPMG and others (2005: 8) contend that while Chinese firms excel at mass production using standardized technologies, Indian firms have an advantage in parts requiring intensive inputs of engineering. This might give Indian firms an

Page 3

PT-PGPM-April 2011 advantage in the auto industry, with its reliance on tacit skills, particularly in niche markets, such as sales to small developing countries. However successful China and India are in dealing with the domestic consequences of rapid motorization, two implications for the rest of the world are clear. First, the pressures of rising demand on oil prices are unlikely to abate. Second, exports of both vehicles and parts from China and India are likely to concentrate increasingly on small, clean, fuel-efficient and reasonably safe passenger cars and light commercial vehicles. Indeed, some experts believe that China and India may become leading users of clean small cars, pushing global development of new automotive technological technology and occasionally contributing to it themselves. India, whose auto parts executives feared that high tariffs on steel and other imports handicapped them in competing against the relatively open and efficient markets in Thailand and potentially other ASEAN and Persian Gulf states with which India is negotiating FTAs. Indian auto-related firms also petitioned the government for anti-dumping relief against imports of Thai and Chinese bus and truck tires (not treated as auto parts in the data given in this paper), and expressed concern about the turn-around in the trade balance with China in the first two-thirds of 2005, when imports from China suddenly doubled Indias exports to China (Rediff.com January 17, 2006; note that these are preliminary data, and not necessarily compatible with the UN Comtrade data used elsewhere in this paper; in 2005, China emerged as Indias largest source of imports and within two years is expected to surpass the United States as its largest trade partner( Reserve Bank of India, 2006). These incidents serve as reminders that trade patterns may change rapidly as the Chinese and Indian auto industries develop, but as of mid-2006, the most important finding remains the limited nature of Chinese and Indian auto trade, particularly in Southeast Asia, and the relatively smooth progress of gradual trade liberalization throughout the region. Since 2006 Indian companies manufacturing auto components and automobile it become necessary to combat increasing pressures of cost cutting and find new and efficient manner to do that. This leads to sourcing form a country where cost of components comes lesser so as to produce vehicles at lower cost. We have examples of Japanese and Korean automobile makers getting Parts from China. But latest trend shows that Indian companies are also heading for dragon so as to keep cost of production of vehicles in control. We have Tata which is importing Parts for its ARIA SUV such as auto transmission due to non willingness of Indian component manufacturers for production of low volumes. Then we have Bajaj Auto and Hero Motocorp which are also trying to cope up with increasing pressures to reduce cost and market share. Reasons may be different for Hero Motocorp which is trying to establish itself as a new identity after separation from Japanese Auto maker and facing Japanese Cartel in Indian Market.

Page 4

PT-PGPM-April 2011

Problem Statement

With increasing pressures from global players, Demanding customer and decreasing margins there is a huge requirement to reduce costs on almost every industry in India. In this report I am trying to find out Indian companies of India heading for imports from China. I will get data of a renowned company name of which will not be published in my report. Biggest question for today is will this strategy help Indian companies to survive in long run? In this report we will study:A. Motivation and Reasons behind these Imports B. What will be cost savings by such Imports? C. Risks associated with these imports D. Long term perspective of such Imports E. Effect on economy for such Imports F. Effect on relation of both countries due to this trade G. Sensitivity analysis of various factors such as currency fluctuations on cost savings. H. Possible reasons of China being lowest cost producer.

3.

Literature survey

I will go through various economics and finance books, reports and literature available on internet which I will mention in my report. So that we can analyze long term and short term benefits, losses as well as risks associated with this strategy. What will be impact on economies of both countries due to such strategy applied by various companies?

Page 5

PT-PGPM-April 2011

4. The Research Problem

There are a large number of cost reduction tools available, the most useful of which are described in this section. They are mostly based on various types of financial and operational analysis but also include such simple concepts as idea generation and a variation on the standard budgeting system. Companies have used all of them with considerable success. A. Benchmarking Benchmarking is useful for deciding where to begin cost reduction activities. It provides information about the cost levels of other businesses, of other divisions of the same company, or simply of the company for earlier periods. Then match benchmark costs against current results and target unusually high variances for further analysis. Internal benchmarking against other divisions is particularly useful. Every division is bound to have some best practice area for which clearly identifiable improvements can be copied to other divisions. Further, the corporate headquarters staff can order divisions to assist each other (which is not the case with external benchmarking, where the other company is providing information solely as a favor).Differences in costs that are highlighted by a benchmarking review can result from a broad range of factors, such as plant layout, automation, employee training, management practices, and cultural issues. B. Breakeven Analysis A product line may generate such minimal throughput (revenue minus total variable expenses) that it cannot pay for the cost of the overhead that is directly linked to it, unless it produces at near - maximum capacity levels. Run a simple breakeven analysis on company operations to see where this problem arises and target cost reductions in those areas where product lines are clearly at risk of not exceeding their breakeven levels. C. Value Analysis Value analysis is the identification of unnecessary cost i.e. cost that neither provides quality, nor use, nor life, nor appearance, nor customer satisfaction. Thus value analysis attacks costs at production stage. D. Activity based cost management ABC assumes that resource-consuming activities cause costs. Its aim is to directly control the activities that cause costs, rather than cost. By managing activities that cause costs, costs will be managed in the long run. Cost causing activities designing, engineering, manufacturing, marketing, etc.
Page 6

PT-PGPM-April 2011

E. Supply Chain Management (SCM) SCM attempts to build a cost effective chain beginning with the ultimate customer and links all the previous suppliers under one platform. An effective SCM eliminates most of the activities in between customers and raw material suppliers along with associated costs. Most of the non-core activities are outsourced and hence fixed costs are kept minimal. Close interaction between the corporate R&D and the suppliers facilitates continuous improvements in product design, process methodologies, etc. resulting in customer value enhancement and cost reduction. A rupee spent on the supply chain can give more value than a rupee spent on marketing. The supply chain is part of the service offering. 6. The Research Design 1. Primary data: Questionnaire designed and hypothesis verification. 2. Secondary data: This data will be captured by referring various components manufactured in India and China. Cost of by exploring previous research done in the past.

7. Time Frame
Primary data collection : Complete by 31-Jul-2013 Secondary data collection : Complete by 21-Jul-2013 Interim report 1 : Complete by 04-Aug-2013, will cover both primary &secondary data and their analysis Interim report 2 : Complete by 07-Sep-2013, will cover the synthesis of analysis, the possibility of implementing the outcome as per the survey. A simulation trial may be planned if it suits the operation requirement Final report : It will cover the complete dissertation report including o Outcome of interim report 1 & 2 o A financial benefit due to implementation of target costing o Recommendations for costing philosophy, o Simulation results (if simulation is allowed by management before the final submission date)

Page 7