Analysis: Dr Pawan Goenka’s 7 pointers to drive India Auto Inc’s future growth story
Mahindra & Mahindra’s managing director on the continuing relevance of the IC engine, the march of EVs, lightweighting, the automotive value chain, eroding Indian cost competitiveness, the need to continually invest in technology, and two essential future growth enablers.
Dr Pawan Goenka, who is one of the most followed leaders in India’s automotive industry, is known for his clear and transparent outlook. One of the most active industry spokespersons, Dr Goenka was a key presence at the ACMA and SIAM annual conventions last week as well as the two-day MOVE Global Mobility Summit on September 7 and 8.
At this year’s ACMA annual session, Dr Goenka spoke about several factors that currently vex industry stakeholders. In summary, he clarified that demand for IC engines in the domestic market will continue to grow reasonably in the foreseeable future while also cautioning those who do not take EVs seriously.
In his message to the (Indian) automotive suppliers, who are known for their RFQ-driven culture, Dr Goenka stated that technology and innovation will drive the (suppliers’) business in the future. This can also be understood as an open directive from OEMs to the supplier community on multiple aspects, which include consistent investment in R&D without waiting for the OEM to award the order, offering competitive edge via new technologies and staying aligned with the global quality practices and industry-wide price benchmarks.
Here are some excerpts from Dr Goenka’s speech at the 58th ACMA annual session:
“The auto industry is clearly going through a churn of disruption like never before. Our vehicles are becoming safer and cleaner: electric vehicles are at the forefront of that. They are getting connected and intelligent. Most importantly, perhaps, the auto ownership is changing with the rise of shared mobility.
The government of India is putting a very high emphasis on safety and clean vehicles. What’s more important is that the customer now is willing to pay a premium for safety, which in itself is a new phenomenon. And also an equal emphasis is coming on the CO2 and the tailpipe emissions. So what does this mean for the auto OEMs and the suppliers in India?
I will put forth seven points that the industry may be required to take notice of. These points are going to impact the business in a significant manner.
1. There is a concern among those who are engaged in IC engines. I am talking about the suppliers and their suppliers. IC engines are not going to be dead by any stretch of the imagination. If you assume a 10 percent CAGR (a reasonable growth) in the auto industry to the year 2030 and if we assume that EVs will penetrate about 30 percent of the market (domestic), which is quite an aggressive scenario, even then the growth of the IC engines will be 7 percent. So 7 percent growth for the next 12 years is nothing to sneeze at.
If you are in the IC engine business and are not investing in future technology and future capacity, then you are doing so at your own risk. However, I must say that there is a need to make the IC engines more and more efficient and clean.
2. The second point that I want to make is the reverse of the first. There are people who still believe that EVs are all talk and therefore let us not take it seriously. In my view, it is not far from reality. The volume (of EV demand in India) so far has not been enough to justify, but we know that a new EV policy is underway.
The anticipated EV scheme is likely to be for five years and not for a year or two. The industry will see stability from the new scheme coming from the highest level, and I am sure that the industry is bound to become serious about it and the customers will take note.
I do believe, however, that in India EV growth will come from commercial applications and not from personal applications. We are just about Rs 5,000 per month away from EVs to become financially viable under commercial applications. This is my calculation.
A 10 percent reduction in the vehicle cost, the infrastructure under the financial schemes and the facilitation by many states will take us over the hump, I think, before the end of this financial year. From there onwards, the kick off (of EVs) will be very rapid. So those of you – OEMs and suppliers – who are not taking EVs seriously, are doing so at their own risk.
So this means that you cannot take your eyes off the IC engines and you cannot ignore the electric vehicles.
3. The regulatory environment will remain very aggressive. You have seen that already and it will not change whether it is about safety or emissions or even other areas.
At times this change(s) will be expected within a time period that we in this industry may not consider enough. For example, the BS VI norms, last-minute changes in the implementation date of the BS IV norms (1st April 2017), axle capacity increase, galvanised steel being talked about now and fuel efficiency norms are being redefined and many more will happen in the future.
Let’s remember, clean air and safety are very important societal needs. The auto industry must prepare for the same as we have already for the BS VI emission norms and we are doing for the new safety norms. We must put our resources and deliver for what is good for the society. There is no departure from that point.
Safety is now becoming a customer requirement. Now two airbags are not enough. The number (of airbags in a car) is increasing and it will grow. Back in 2009, I remember, when we first introduced the airbag in the Scorpio, it was a mere technology feature and a talking point for the customers; it was true when we first introduced ABS in 2006. Today, in 2018, the ABS and the dual airbags are basic customer needs.
An important point to note is that the rate of technology adoption has an impact on the percentage of localisation, and it directly impacts of the number of jobs that we (auto industry) create in India. The government of India needs to consider this fact while taking decisions. The only request for the government of India that I have is to provide a long-term roadmap to prepare for these changes. Every change that happens should not become a crisis for the industry.
4. The fourth point that I want to make is obvious for the industry and I want to emphasize on it – lightweighting. I think the priority that we are seeing for lightweighting now is much more that what we have seen in the last few years. There are at least three key factors contributing to this: need for higher fuel efficiency, preparing for the emission norms of the future and electric vehicles.
Each new model from any manufacturer is lighter in weight than the (existing) model that it replaces. There are three avenues for lightweighting: design optimisation, the lightweight materials (which often go north, which means higher costs and higher investments) and lightweighting processes such as hot stamping and others.
Today when you plan new products, the weight targets are getting the same emphasis among the auto OEMs as the cost targets. OEMs are paying higher costs for achieving lower weight.
5. My fifth point perhaps may worry the industry, OEMs as well as suppliers. It is the value chain proposition. Our internal analysis says that today in the total value chain for automobiles, 80 percent of the profit pool goes to the suppliers and the OEMs. Our estimate is that by 2030 that number will reduce to 60 percent. This means that 20 percent of the profit pool will go out of the group of people who are in this.
For OEMs, this means that they need to participate upstream and downstream. That will become necessary to continue to get profit margins, and same may also be true for the suppliers.
6. Protectionism is on the rise. Every country today wants an on-ground presence of the OEMs. For example, in Mahindra until 2 years ago, we did not have a single CKD or SKD plant outside India. In the past 2 years, we have set up 5 CKD and SKD plants otherwise we could not sell our vehicles in those countries. In the case of tractors, we had only one CKD plant in the USA. In the last 2 years, we have set up 4 more CKD plants globally.
Therefore, increasingly, there is the need for the suppliers to set up their operations closer to the CKD facilities.
7. This is something that I have said before. I believe that the Indian cost competitiveness is eroding. Technology will become the name of the game.
Years ago we won the game on the strength of our low cost (production capabilities). Low cost is no more a competitive advantage for us. The world is seeing the emergence of many more countries with low cost production capabilities.
You all know that our people costs – both white collar and blue collar – are approaching that of some of the advanced countries. Our cost of power and many other inputs are higher than many of the advanced countries. Hence, (low) costs will not be a competitive advantage (in the future).
The next game will be driven by the technology with global benchmarks; IPRs will drive the competitive advantage and profits.
I want to make one additional point here. The source of the technologies that we put in our products and in our processes, going forward, may not just be with the research establishments but also with the small startups. They will create new business models, new customer solutions, and new technology paradigms. So please do not ignore the startups.
In fact, in the old and matured businesses, as we are trying to do in Mahindra, there is a need to embed the startup culture, a culture that is lot more agile and a lot more aggressive.
For years at ACMA events, and I have done this many times, we talk about quality and personal risks. I think we must now stop talking about quality. If you cannot supply close to zero ppm (parts) and if your costs are not within a couple of percentage points of the industry benchmark, then you might as well exit the business.
The same goes for the OEMs unless of course if one has deep pockets. So an OEM will now pay a premium to the suppliers only if the supplier will provide the OEM a competitive edge. Where will that come from?
In my view, we need a lot more agility in our industry. The four-year product development cycle has to go. We will need to react to the regulatory changes and customer needs within months and not years. We need to lower the product development costs because we all know that the (time taken in) product development cycles are getting shortened. Investing high costs on shortened product development cycles is not affordable anymore.
Two major enablers of the future
There are two major enablers relevant to suppliers as well OEMs.
1. The trust (via partnership) between the suppliers and the OEMs has to go up the next level.
2. The war will be won with good talent. Do not let good people go. Good people, we all know, are very high- maintenance people. The time that you spend with good people is really worth in the long run. So it will pay off.
We are going to see more changes in the dynamics of the industry in the next 5 years than what we have seen the last 20 years. New winners will emerge and some (existing players) will disappear. No matter what happens, I have all the reasons to believe that the Indian auto industry has the desire and the capabilities to succeed. On our side, we have the entrepreneurial abilities, innovativeness. Add to it perseverance and will power and we will be on our way meeting or exceeding the aspirations of the Automotive Mission Plan 2026."
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