Localization will play a bigger role in the future of the auto Industry

Dieter Becker, member of the executive committee and advisory managing partner at KPMG AG, Zurich, speaks in an interview about the challenges and opportunities thrown up by the restructuring of the auto industry. Becker was in New Delhi last month for the 50th annual convention of the Society of Indian Automobile Manufacturers (Siam). Edited excerpts:

What are the potential challenges for global auto makers setting up operations in India and Indian auto makers going global?

For auto makers coming into India...it’s really about: do you need a partnership or you don’t, is it a long-term investment or a short-term investment, and the issues relating to the technology transfer. Do you want the local unit to absorb technology or are you merely looking at India as a low-cost base?

For the Indian players, they need to see what kind of role do they see (themselves) playing in the western European markets in comparison to the Chinese market.

The biggest challenge is, communicate to the people that you are really interested in long-term relationships so that you are able to build in productivity into your workforce. You just don’t replace the workers but you really have workers working on the technology for a long time.

Another challenge is to ensure that investment in the local market and investment in creating infrastructure by the government really takes place. Another challenge which is applicable for everyone in the automotive sector in India is the question: Which part of the value chain you are going to take over?

What are the lessons that the global auto industry can learn from Toyota Motor Corp., which faced several quality issues in the recent past?

Some day or the other, you will be in a situation when you have to increase labour costs. In that case you have two opportunities: Just retrench the workforce, which is the Chinese model, or what I would go for, at the same time do a lot of productivity improvement and keep the workforce trained. The latter seems to be a more sustainable investment. That’s the lesson to be learnt from the Western hemisphere, where even as labour costs have risen dramatically over the years, productivity has never been compromised...

Do you think the increasing number of product recalls is a fallout of globalization in the automotive industry?

Definitely, that’s especially true of sourcing components. In the past, people believed it’s best to source globally. I do believe localization and sourcing locally will play a bigger role in the future because people are now looking at labour costs. The logistical costs are going to be the second biggest influencing factor.

Hence it will be more in the direction of building a local supplier base. Global sourcing doesn’t mean there is no localization.

The supplier also has its network and globalization also happens for him.

Which are the key auto markets set to witness maximum consolidation in the next five years?

Consolidation is under way in China. In the next four years, you will see the number of OEMs (original equipment manufacturers) and suppliers reduce operations in that country as there are too many players.

As long as we have such growing markets, you will see increasing number of players in emerging countries. India has gone through liberalization, and I don’t see the consolidation trend here. However, with foreign companies getting into alliances with Indian companies—Nissan and Ashok Leyland, for instance—consolidation will happen automatically. It will depend on which part of the group companies are buying into. There will be more consolidation in Western markets, as there is over-capacity