Small and Medium Enterprises (SMEs) form the backbone of the auto component industry in India. A scan of companies in the automotive industry reveals that large auto component groups/brands like Sona, Caparo, Rane, TVS, Amalgamation, RSB, are actually a cluster of smaller companies with a turnover of Rs 150–250 crore. These companies, however, leverage on the group's strength to grow in the auto components space. A more liberal interpretation of revenue norms of classification could lead to over 95 per cent of companies in the auto component being classified as either small or medium scale enterprises. This analysis, however, uses a revenue benchmark of less than Rs 100 crore and considers companies in this band as SMEs.
SME evolution in India
The first round of SME evolution in India probably occurred during the entry of companies like Honda, Suzuki, Piaggio, as JV partners with Indian
companies for the
manufacture of scooters and motorcycles. Additionally, the entry of Nissan, Mazda, and Toyota in the commercial vehicle segment provided an opportunity for new SMEs to be formed. These companies were predominantly formed by technocrats with strong product knowledge. Others included vendors for specific OEMs like Hero Honda. Not to be left behind, Suzuki's tie up with Maruti created a new breed of entrepreneurs forming technical and financial JVs in India. According to a recent study by D&B, SMEs have a very strong presence in the Northern part of India (over 150 companies), followed by West and South with over 130 and 80 companies, respectively. SMEs follow the automotive industry clusters of Gurgaon, Pune and Chennai. According to the study nearly 65 per cent of the companies have reported a turnover of less than Rs 25 crore.
Key challenges that SMEs need to address to benefit from the strong Indian growth story are outlined here.
Scale of output and investment
SMEs would be required to invest in product development, machinery and critical manpower to scale up to the next level of growth. The scale of operation and inability of many to come out of the operational workflow and working capital fund requirements leaves less time for strategic planning and building up of growth avenues.
Many SMEs are caught in the lower tiers of the component value chain. Moving to a higher level and catering to a broader customer base requires investment in managerial talent in marketing, R&D and production.
Companies in India operate at very low scale of production and this hinders their ability to cater to the international markets. Capturing a certain scale of operations is very critical in the SMEs growth path.
An industry wide challenge but one that impacts SMEs in India the most is the lack of managerial depth. SMEs are driven largely by entrepreneurial spirit. The lack of core middle and senior management impacts a company’s ability to grow in size. The entrepreneur’s core strength and customer relationships are key success factors that drive the business. In the absence of the next level of management the entrepreneur assumes multiple roles within the organisation diluting the core focus of developing and driving company's growth avenues.
This leads to larger issues of management vision and building sustainability of the business. SMEs with clear management vision have succeeded in building large business with a professional approach. For SMEs in India to sustain and grow, the key issue to be addressed is of management vision and depth.
Dependence on process and technical know how
Many SMEs were created as ancillary units of large automobile companies and modelled their business around OEMs. Similarly, the contract manufacturing route was adopted by companies. These companies received design and application engineering support from OEMs or OEM vendors through technical assistance programmes. Product range and customer base were restricted to servicing OEM requirements. The strengths of these companies are their strong manufacturing and production process and adherence to strict quality control of OEMs.
Many ancillary companies have realised that growth is essential from a long-term perspective, and the route is through product range expansion and broad basing customers and customer segments. Management building would also be essential for these companies to move away from a fairly protected environment of vendor-OEM relationships to competing for business with other customers.
Lack of understanding of global business dynamics
SMEs’ exposure to the global business dynamics is limited in comparison to large auto component manufacturers. The current institutional framework has taken initiatives to help the automotive industry through various knowledge sharing programmes and international exposure programmes. Awareness levels on many issues starting from the best of manufacturing processes, quality and process improvements, market intelligence, international practices among others is lower in SMEs. Institutional assistance specially focused on SMEs is required to improve overall skill and knowledge levels to move up the value ladder.
SMEs have their task cut out. Global integration of the Indian economy is moving ahead with India engaging many economies through free trade agreements (FTA). The India-Thailand FTA has the automotive and auto component industry waking up to the challenge of competing with Thailand. SMEs would face severe competition from unknown competitors across product lines. Survival would then depend on how well they create areas of expertise that increase entry barriers for new business to enter their customer gates.