Procurement and the Automotive Sector
Published on : Sunday 02-04-2023
Amandeep Singh elaborates how procurement mandate changes are transforming India’s automotive sector.
Being recognised1 as the backbone of the economy with 12% of the Gross Value Added (GVA) in the manufacturing sector and a contribution of 49% to India’s manufacturing GDP, 7.5% to the GDP at large, and generating 32 million jobs, the Indian automobile industry is a matter of pride for every Indian citizen.
The Indian automobile industry has indeed magically transformed India’s Gross Domestic Product (GDP) and the overall economy. In terms of market size, the Indian passenger car market was valued2 at US$ 32.70 billion in 2021 and is expected to reach a value of US$ 54.84 billion by 2027 while registering a CAGR of over 9% between 2022-27. The electric vehicle (EV) market is estimated to reach Rs 50,000 crore (US$ 7.09 billion) in India by 2025.
The automobile industry has a multiplier effect on other sectors such as steel, rubber, and plastics, creating a ripple effect on the entire economy. The industry contributes significantly to the country's exports, helping to generate foreign exchange and improve the country's balance of payments. With significant investments in research and development leading to new products and technologies, the automotive industry is a key driver of innovation and technology development in the country.
As the Indian automotive industry is expected to remain a key pillar of the Indian economy, procurement is an integral part of the Indian automotive industry.
Procurement – An integral flywheel
Procurement plays a critical role in managing the supply chain, managing costs, ensuring quality, promoting innovation and sustainability, and ensuring regulatory compliance. The Indian Government’s revamping3 of the Preferential Market Access (PMA) policy to the Preference to Make in India (PMI), and implementation of the Goods and Services Tax (GST) has encouraged automakers to streamline their supply chain.
Before the implementation of the GST, the automotive industry was subject to a complex web of State and Central taxes, which led to inefficiencies in the supply chain. With the introduction of GST, the supply chain has become more streamlined, resulting in lower logistics costs and faster delivery times.
Also, procurement has undergone tremendous changes post-Covid as it disrupted the supply chains in India. As per the report4 by McKinsey & Company, the emergence of AI/ML and enhanced vehicle-connectivity innovations are the major industry-specific disruptions. These changes require new procurement capabilities, mainly in software and electronics.
Let’s have a look at how various changes in procurement mandates are transforming the Indian automotive industry.
Impact of changes
How exactly are the changes in procurement mandate driving transformation in the automotive industry?
The Indian automotive industry has come a long way in the past few years, and the changes in procurement mandate are expected to propel the industry to new heights in the years to come. The following are some of the ways this transformation is taking place:
1. Embracing innovation and sustainability
The change in procurement mandate has encouraged the Indian automotive industry to embrace innovation and sustainability. By working closely with suppliers to identify new materials, technologies, and processes, automotive manufacturers can create more sustainable products and stay ahead of the competition.
As the Indian government has set a target5 of achieving 100% EVs for public transport and 40% for personal mobility by 2030, the Indian automotive industry has been working towards developing more sustainable mobility solutions, including electric vehicles (EVs), hybrids, and fuel-efficient models.
2. Streamlining the supply chain
The new procurement mandate is helping to streamline the complex supply chain in the Indian automotive industry. For example, the Indian government's ‘Make in India’ initiative encourages the domestic production of goods, including automobiles, to reduce imports and boost exports. This has encouraged automakers to source more components locally, leading to a more streamlined supply chain, and creating greater opportunities for domestic suppliers to participate in this supply chain.
Leading automobile manufacturers like Tata Motors have increased the localisation of their vehicles. Livemint quoted6 Shailesh Chandra, Managing Director of passenger vehicles and passenger electric mobility, at Tata Motors as saying, “There is a good level of fungibility when it comes to the capacity we use for manufacturing our EVs in the personal mobility segment and the fleet segment”.
3. Managing costs and improving efficiency
Procurement is also helping to manage costs and improve the efficiency of the Indian automotive industry. By identifying opportunities for cost savings, negotiating better prices with suppliers, and improving the efficiency of the supply chain, procurement can help automotive manufacturers to achieve better profitability and remain competitive in the market
For example, Tata Motors is digitising7 its manufacturing system by leveraging Industry 4.0. As part of these efforts, it is focusing on data integration, identifying and capturing quality data, leveraging insights, and securing data. These digital interventions aim to shorten the cycle time, improve data visibility, improve overall efficiency, manage costs, and increase the quality and safety of all aspects of manufacturing.
4. Enhancing quality and compliance
The new procurement mandate is enhancing the quality and compliance standards of the Indian automotive industry. By working closely with suppliers to ensure that the raw materials and components meet the required quality and regulatory standards, procurement is playing a critical role in ensuring that the final product meets the desired quality and safety standards. The companies are also working to reduce their carbon footprint by sourcing more sustainable materials and developing more fuel-efficient vehicles.
Leading auto manufacturers like Tata Motors and Bajaj Auto have implemented various internal systems to meet the required quality standards and ensure compliance with environmental regulations.
5. Fostering collaboration
Collaboration between automotive manufacturers and suppliers can help foster innovation and bring transformation to the industry. For example, Maruti Suzuki partnered8 with Toyota Motor Corporation to develop and manufacture hybrid and electric vehicles. The collaboration is aimed at reducing costs and improving efficiency through the sharing of technology and expertise.
Procurement can also help drive innovation by identifying and selecting suppliers who can develop and supply new and innovative materials and components. For example, Tata Motors partnered9 with Renesas Electronics Corporation, a Japan-based premier supplier of advanced semiconductor solutions to accelerate the development of electric and connected vehicles and develop next-generation automotive electronics.
These collaborations are the results of the change in procurement mandate, which has encouraged companies to work together to reduce costs, improve efficiency, and enhance their capabilities. By fostering collaboration, the Indian automotive industry is better equipped to compete in the global market and meet the needs of consumers.
The road ahead
The automotive industry in India is undergoing a transformation driven by changes in procurement mandates. By embracing new procurement strategies and technologies, automotive manufacturers and suppliers can create more efficient and sustainable supply chains, reduce costs, and improve product quality. This, in turn, enables them to remain competitive in a rapidly evolving market. The increasing use of digital tools, such as blockchain and AI, is expected to play an even greater role in procurement in the future, further driving innovation and collaboration in the industry.
In light of the discussion, it is clear that procurement will remain integral to the success of the Indian automotive industry, and companies that can adapt and innovate will be well-positioned for success in the years to come. As the industry continues to evolve and transform, it will be interesting to see how procurement will continue to play a critical role in shaping its future.
References
1. https://www.cogoport.com/en/blogs/the-automobile-industry-a-growth-engine-for-indias-economy/
2. https://www.ibef.org/industry/automobiles-presentation
3. https://www.ey.com/en_in/tax/would-preferential-market-access-policy-aid-make-in-india
4. https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/indias-shifting-automotive-procurement-mandate
5. https://timesofindia.indiatimes.com/blogs/voices/vision-of-electric-vehicle-industry-by-2030/
6. https://www.livemint.com/companies/news/tata-motors-to-supply-25k-evs-for-uber-fleet-network-11676917255577.html
7. https://cio.economictimes.indiatimes.com/news/strategy-and-management/tata-motors-digitises-its-manufacturing-ecosystem/94310396
8. https://www.livemint.com/auto-news/maruti-suzuki-and-toyota-to-produce-hybrid-suv-in-india-11656091542642.html
9. https://www.cnbctv18.com/finance/tata-motors-renesas-semiconductor-solutions-across-automotive-iot-5g-systems-13975292.htm
Amandeep Singh Bhan is Senior Vice President, Strategic Partnerships at Moglix. A graduate in B.E, Electronics from VJTI, Mumbai (2000), and an alumnus of IIM Bangalore, MBA (2002), Amandeep Singh is a seasoned business leader with 18+ years of experience in functions of sales, strategic partnerships, and consulting across the globe. During his career, he has held several leadership positions such as in Ezetap where he was responsible for driving enterprise sales, bank alliances & retail business, and in SAP India, where he was the Director of Platform Solutions & Global Account Director responsible for all lines of business.
