IT Adoption in the Indian Auto Component Industry

Transcription

1 IT Adoption in the Indian Auto Component Industry

2 IT Adoption in the Indian Auto Component Industry National Association of Software and Service Companies International Youth Centre, Teen Murti Marg, Chanakyapuri, New Delhi , India Phone: Fax: Website:

3 Copyright 2007 National Association of Software and Service Companies International Youth Centre, Teen Murti Marg, Chanakyapuri, New Delhi , India Phone: Fax: E mail: research@nasscom.in First Print: December 2007 Published by NASSCOM, New Delhi Designed & Produced by Creative Inc. Phone: Printed at P. S. Press Services Disclaimer The information contained herein has been obtained from sources believed to be reliable. The information contained in sections of the report reflects data that was derived from both public and confidential information collected during the conduct of the study by NASSCOM. Readers should note that NASSCOM has not independently verified all of the data and assumptions used in these analyses. Each reader of this report should conduct their own independent evaluation of the information provided herein. NASSCOM shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The material in this publication is copyrighted. No part of this can be reproduced either on paper or electronic media without permission in writing from NASSCOM. Request for permission to reproduce any part of the report may be sent to NASSCOM.

4 Table of Contents Chapter 1: Introduction The Indian Auto Component Industry IT adoption in the Auto Component Industry Study objectives and methodology Chapter 2: Business challenges and current state of IT adoption Challenges faced by business heads Challenges faced by IT heads Factors infl uencing IT adoption Measuring IT adoption effectiveness Criticality of business processes IT adoption implemented applications/systems IT budgets IT workforce and outsourcing Key features of IT adoption in auto component fi rms Chapter 3: Mapping supply chain strategies for auto component firms Linking capability levels to manufacturing practices Chapter 4: Evolving an IT strategy for different levels Aligning IT strategy with manufacturing capabilities The MSC perspective Chapter 5: Looking ahead Call for action: Strategies for stakeholders... 49

5 4 Foreword

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7 Foreword The Indian Auto Component Industry has been amongst the drivers of the renaissance in India s manufacturing sector, and given its strong performance over the last few years, it is rightfully considered a sunrise sector of the Indian economy. Years of sustained efforts by the auto component fi rms and a pro-active government policy framework have transformed a relatively small and unsophisticated domestic industry into one with world-class manufacturing practices and a global footprint. With success come greater challenges and expectations. To sustain and accelerate the current growth trajectory and develop new competitive advantages, the Indian auto component firms will need to continuously strive to increase their effi ciency, quality and value proposition. In this, IT will increasingly play a crucial role by helping the auto component fi rms achieve step changes in productivity benchmarks through the entire range of manufacturing processes and in enabling the fi rms to seamlessly integrate with their global and domestic customers and suppliers. Unfortunately, IT penetration in Indian manufacturing, especially among the SME segment, continues to lag behind comparator industries in other countries. In order to increase IT penetration, it is vitally important to understand the IT adoption challenges faced by the manufacturing industry fi rms and especially the SME segment. Developing this understanding is crucial to ensure that IT investments by the fi rms are deployed where they can result in the greatest impact on a fi rm s competitiveness and help the fi rm to derive positive outcomes from the IT investments. It is with this aim that this study has been undertaken. This report seeks to bring an understanding of IT adoption thresholds, challenges and processes in the different segments of the Indian auto component sector. This has been utilised to develop IT adoption strategies based upon the manufacturing capabilities of the different segments of the Auto Component Industry. This will enable the auto component fi rms to align their IT investments with the business objectives, while enabling the IT firms to develop solutions specific to the needs of the different segments of the industry. NASSCOM is deeply committed to the development of the domestic IT market, since a strong and vibrant domestic market is crucial to the continued growth of the Indian IT industry. We hope this report will stimulate useful discussions and more importantly, actions on how individual fi rms in the auto component and IT industries, as well as other ecosystem partners such as the government, industry bodies, academia and others, can together work to accelerate the adoption of IT by the Indian Auto Component Industry so as to further stimulate its growth. Kiran Karnik President, NASSCOM 6

8 Executive Summary The Indian Automobile Component Industry has emerged as a sunrise sector of the Indian manufacturing industry and a key stakeholder in the global automobile manufacturing industry. While India s share of the global auto components trade of US$ 185 billion (Rs 75,850 crores) is only 0.4 percent currently, India is estimated to have the potential to become one of the top fi ve auto component economies by By 2015, the global Auto Component Industry is expected to source goods worth US$ 700 billion (Rs 2,870,000 crores) from low-cost countries like India. According to the Auto Component Manufacturers Association (ACMA), the Indian auto component sector generated sales of about US$ 15 billion (Rs 61,500 crores) in fi scal year , including US$ 2.8 billion (Rs 11,480 crores) worth of exports. The industry has been experiencing a high growth rate of 20 per cent over the period and is expected to grow at a CAGR of 17 per cent over the period Similarly, while growth rate of exports has been 25 per cent during , the exports are expected to grow by a CAGR of 34 per cent during To sustain the current growth trajectory and face the increasing competition in the global and domestic markets, the Indian auto component fi rms will have to create a new set of competitive advantages based on value-capture rather than cost reduction. Achieving this will not be easy and the Indian firms will have to focus on moving up the value curve and relentlessly increasing fi rm level productivity through adoption of global manufacturing best practices. IT will be a key enabler for the Indian auto component fi rms to achieve these aspirations. An increase in IT adoption will provide the necessary productivity benefi ts only when the IT investments are made in business processes which contribute to a fi rm s competitiveness. Thus, it is important to evaluate IT adoption at the level of business processes instead of at the fi rm level. This understanding will fi rstly, help the automobile component fi rms to align their IT investments with business objectives and secondly, help the IT firms to develop solutions which are specifi c to the requirements of the Automobile Component Industry. The auto component manufacturing sector in India has seen tremendous growth in recent years and therefore one expects this sector to be ahead of others in IT adoption. An understanding of IT adoption processes in this sector can also be useful in defi ning effective IT adoption strategies for this as well as other sectors. Current status of IT adoption in the Indian Auto Component Industry Studies have shown that the adoption of information technologies can increase the performance of firms. Despite these advantages, IT adoption among manufacturing fi rms in India is rather low. The diversity in the Indian manufacturing sector is very high; apart from differences in fi rm size, sector specifi c peculiarities can also play a role in the processes of IT adoption. While policy initiatives to encourage adoption have been explored, it is equally important to understand the process of IT adoption by fi rms along with the constraints faced by them. 7

9 The need of the auto component fi rms to integrate various functions and processes has driven them to invest in IT, and as a result, in fi rms that have implemented IT, there has been a considerable increase in the productivity as well as revenues. However, very few fi rms have aligned their IT investments with business objectives or adopted a clutch of applications to maximise the potential of effi ciency gains and this obviously has an adverse effect on the effi cacy of IT adoption. The current study conducted by NASSCOM is based on an survey of 158 fi rms including small, medium and large automobile component manufacturers across the key automobile manufacturing clusters in Delhi, Mumbai, Chennai, Pune and Bangalore. Some key highlights of the current IT adoption in the Indian Auto Component Industry, identifi ed through the survey are as follows: Different fi rms appear to be devising differing strategies for IT adoption and size of the fi rm seems to be defi ning the trajectory that a fi rm will adopt for IT adoption. Firms are at very different levels of IT implementation and the IT strategy of many fi rms is not based on a judicious process improvement strategy. Supply Chain Management (SCM) has been ranked as the most critical challenge by Business Unit (BU) heads. Some of the other challenges include fl uctuations in raw material costs, meeting customer demands for product quality & timelines and procurement of raw materials, reiterating the importance of the supply chain. The three most critical business processes identifi ed by the fi rms are: 1. Order receipt and demand management 2. Production planning 3. Order processing Quick access to reliable business information is a key bottleneck as the auto component fi rms possess disparate systems including manual paper based processes that lead to disconnect amongst the supply chain constituents. This has two major impacts fi rstly, it impedes real-time decision making and secondly, it results in creation of ad-hoc sources of information which further exacerbate the problem of availability of accurate data. The survey reveals some variance in the criticality of business processes by fi rm size. While for medium and large fi rms the three processes mentioned above remain the most critical, for small fi rms, order processing is replaced by material handling. BU heads expect IT to play an important role in addressing their business challenges. The key expectations of the BU heads from IT are meeting customer requirements for timely delivery and product quality, tracking production costs and quick access to business information. The IT heads have identifi ed the lack of alignment between business goals and IT initiatives as a major challenge. The IT heads also fi nd it diffi cult to justify the current levels of investments in any IT initiative, as the time for the complete deployment of the initiative is quite long as compared to many other business function initiatives and the impact of these IT initiatives and their effectiveness is also felt after a period of time. 8

10 The most common measure of IT effectiveness, amongst the auto component manufacturers is increased productivity. While the measure of increased productivity for IT effectiveness is the most preferred one for both BU heads as well as IT heads of fi rms of all sizes, it is not entirely clear how it is measured. Increased customer satisfaction, is also a key measure for evaluating IT effectiveness by auto component manufacturers. However, in many fi rms, none of the metrics that were mentioned are actually used to measure the IT effectiveness. Broadly, large firms are ahead of small and medium firms in the adoption of all application systems and Enterprise Resource Planning (ERP) is the most widely adopted IT application among auto component fi rms. However, very few firms adopt a clutch of applications to maximise the potential of effi ciency gains and this obviously has an adverse effect on the effi cacy of IT adoption. In the adoption of networking and groupware systems also, large fi rms are generally ahead of the small and medium fi rms. The fi rms are undertaking IT investments to integrate the fi rm s production facilities with the other constituents of the supply chain, so that real-time accurate information on the inventory, production schedule and materials is available as and when required. In order to have better access to business information, many auto component firms have deployed intranets which are made available to all the relevant in-house business functions and enable effective planning and scheduling. During the year , a majority of the surveyed auto component manufacturers had their annual IT budgets to the tune of Rs.20 lakhs. Hardware forms the major proportion of the current IT investments. The annual IT budget is expected to increase for a majority (~90%) of auto component manufacturers in the coming years. Hardware maintenance appears to be the most outsourced IT service by the auto component fi rms. The outsourced activities related to hardware maintenance include management and functioning of office hardware such as PCs, laptops, etc. In a majority of auto component manufacturing companies that participated in the survey, less than 10 full time employees take care of the IT service and support function, across all locations. Most fi rms on average have 1-5 servers, workstations and network nodes. Aligning IT strategy with supply chain capabilities Firms in the Auto Component Industry grow by producing more complex products that have higher value add and the situation in India is no different especially with the changes in the product technology. The Indian Auto Component Industry comprises fi rms ranging from tiny and small producers to large fi rms who supply to both the OEM and replacement markets. As a result, there is enormous diversity in the intent and strategies of the fi rms in the auto component sector. 9

11 What firms require is a good understanding of how they can compete by building distinctive competitive capabilities. While there is no one answer to building their capabilities through adoption of world-class practices and IT, there is, however, a trajectory through which fi rms could look to building capabilities and develop distinctive competitive stances. This trajectory can be defi ned terms of various stages or Levels with each Level being defi ned by certain operational characteristics. Level I firms are essentially producers that perform job work. Level I firms receive material from their customers and they produce to the blueprint provided by them. Most often, these fi rms are tiny to small in size and turnover, and produce exclusively for their customer from a single facility. Very often, the process technology employed in these fi rms is old and the equipment is second-hand and obsolete. Level II fi rms are also Tier 3 suppliers and posses the same characteristics as Level I firms except that they have more experience in contract manufacturing and have a higher turnover as compared to their Level I counterparts. Level III fi rms are also often small in size but on the verge of entering medium scale. While Level I & Level II fi rms may be performing machining operations, the Level III manufacturers produce a part or whole of a component for the industry. Many of these fi rms may not be dedicated to a single customer and produce similar components for different customers. As a result, they need to develop systems for maintaining various designs as well as capabilities to manufacture for varying customer requirements. Level IV firms are medium size firms with multiple plants and customers and are beginning to make the fi rst entry into global supply chains. These manufacturers produce to order(s) as well as in anticipation of orders. These fi rms possess design capabilities and are capable of modifying blueprints, which becomes a core competence for becoming vendors for new customers. Since they supply to many customers, their manufacturing facilities are amenable to cellular manufacturing layout with single piece fl ow that helps them to reduce production lead times in a medium volume and medium to high product variety environment. Level V firms are upper-medium or large firms and supply to the automobile OEMs as well as in the replacement market and a large majority of these fi rms export and are part of a global supply chain. They produce to fi rm orders as well as to stock, i.e. in anticipation of orders from customers. They supply many customers from multiple manufacturing facilities located within the country and sometimes from manufacturing facilities located outside the country. The above categorisation of manufacturing capabilities defi nes the complexity of tasks that an auto component fi rm may be able to perform and consequently indicates the nature of IT solutions required. Low manufacturing capability fi rms are transaction oriented while those with high capabilities will deploy sophisticated technologies and high-end decision making tools. Most auto component fi rms (other than the Level V fi rms) are SMEs and are often low 10

12 in capability. As one moves up the pyramid of capability, the number of fi rms in those higher categories of capabilities become small. The IT strategy of auto component manufacturers at different Levels could be evolved from these requirements appropriately. It would be effective to recognise that firms at different Levels have varying needs and therefore it would be useful to design Level specifi c IT strategy. The key to successful IT interventions lies in recognising that the Indian Auto Component Industry comprises fi rms that are at different stages of industrial development. As a consequence, the fi rms possess a heterogeneous mix of IT capabilities, ranging from low-tech with no or little IT knowledge to very sophisticated, providing IT related services to its own fi rms and others. The challenge is to design appropriate interventions for these different categories of fi rms which are both cost-effective and result oriented. This objective gets further complicated by the fact that most fi rms in the auto component sector are tiny to small (and sometimes medium enterprises) whose ability and sometimes desire to invest in building capabilities through IT interventions is limited. In addition, strong IT systems are required to meet compliance and regulatory requirements either from governments or customers. Given that most auto component fi rms are tiny to small fi rms with low IT capabilities, and use PCs and simple software products, the challenge for large IT fi rms is to devise a service model that will generate revenues to cover its higher overheads while the challenge for small/mid sized IT fi rms is to convince auto component fi rms that they can deliver solutions which create strong capabilities in the auto component fi rms. Perhaps a hub and spoke model can be created where large IT firms could be involved in setting up network platforms for collaboration between large and small auto component fi rms while the last mile connectivity required for actual execution of IT implementation and after-sales service is done by small IT fi rms using the large fi rm s platforms, tools and design capabilities. Looking ahead The IT and Auto Component Industry must visualise themselves differently if they are to move to another stage of industrial development and consequently competitiveness. The goal must be to create a sector where IT is seen as integral to the competitiveness of the industry and not as a service often provided by external sources. Based on the current status of IT adoption in the Indian Auto Component Industry, firms may not have followed the manufacturing capability IT adoption trajectory and therefore may have over or under invested in IT. For example, fi rms that did not require ERP may have invested in ERP and so on. The IT and auto component fi rms will have to collaboratively think about future IT investments in order to create an environment where IT becomes an integral part of the manufacturing operation and becomes capable of delivering competitive advantage at various levels. 11

13 Acknowledgements Several persons and organisations have played a very important role in the creation of this report and we are very grateful for their contributions. We would like to thank all member companies of the Auto Component Manufacturers Association (ACMA) who participated in the primary research phase for sharing data and their valuable experiences with us. We would also like to take this opportunity to acknowledge the efforts of the AC Nielsen team during the primary research phase. We would also like to specially thank the following for their contributions and guidance which has made this report possible. Anil Varghese Head SME Cluster Development, Microsoft India Arvind Gupta Director, ACMA Deep Kapuria Chairman & Managing Director, Hi-Tech Gears Limited Neelam Dhawan Managing Director, Microsoft India Ravi Venkatesan Chairman, Microsoft India Rajesh Uppal Chief General Manager IT, Maruti Udyog Limited Rajeev Ranjan Chief, National Manufacturing Competitiveness Council Rajesh Rege Director Sales, Sun Microsystems India Vishnu Mathur Executive Director, ACMA Authors Pankaj Chandra Professor of Production & Operations Management and Director, Indian Institute of Management, Bangalore chandra@iimb.ernet.in Rakesh Basant Professor of Economics, Indian Institute of Management, Ahmedabad rakesh@iimahd.ernet.in Rajdeep Sahrawat Vice President, NASSCOM rajdeep@nasscom.org 52

14 NATIONAL ASSOCIATION OF SOFTWARE AND SERVICE COMPANIES International Youth Centre, Teen Murti Marg, Chanakyapuri, New Delhi , India Phone: , Fax: Website: