Is Indian Automobile Industry getting integrated with Asian Production Network?

Publication Type:

Conference Paper


Gerpisa colloquium, Puebla (2016)


Asian Integration, global value chain


International fragmentation of production generally refers to the spreading of production stages across countries. Slicing up the production process and carrying them out in different location allows production cost savings through cross-country differences in factor prices, resources, market sizes, infrastructures and institutional factors. A production network represents linkages within or among a group of firms in a particular value chain for producing specific products such as vehicle, apparel, computer or electronic goods. The literature mostly focuses on how lead firms organise a particular network of subsidiaries, affiliates and suppliers to produce a given product . This has a profound impact on the international trade especially in East and South East Asia. The investment and technology flow from Japanese companies promoted a both way trade between Japan and in these countries leading to product and process upgrading of the goods in most efficient way. International Production Network (IPN) has become an important feature in modern international trade.

Empirical evidence suggests that the emergence of international production networks in East Asia results from market-driven forces such as vertical specialization and higher production costs in the home countries and institutional-led reasons such as free trade agreements. The fragmentation of production requires a sophisticated organization, and involves trade in parts and components and/or trade in tasks. Because of the emergence of IPN as concept, many original equipment manufacturers (OEMs) are reducing their vertical linkage by shredding off completely or some of the operations. This ensures that networking among various suppliers and coordinating the operations are the principal work of the lead players and they act as ‘power centre’ in the production process. These firms set the product strategies, participate in product development and build their own production networks. IPN is a new trend in international trade and developing countries are increasingly getting integrated in the process (Athukorala, 2008).

The proliferation of deeper trade agreements in recent times, which go beyond tariff liberalisation and include the movement of capital, investment, intellectual property, competition policy, services trade and technical barriers to trade, play a critical role in raising the platform for IPN. Baldwin (2008) points out that international production sharing in Asia has developed from a simple North-South outward processing trade to a much broader phenomenon. Lawrence (1996) has indicated that certain national policies need to be harmonised in order to facilitate business activities spread across many countries. This generates demand for deeper forms of integration. There is a requirement of new forms of policies for smooth movement of intermediate goods (Antras and Staiger; 2008) as the value creation at each stage is small and components are more sensitive to trade costs (Nag; 2009 and Nag & De; 2011). Kimura (2006) noted active back-and-forth transactions of machinery parts and components in East and South East Asia among countries with different income levels. Kimura and Obashi (2010) identified that in post 2000 the region have begun to increase intra-regional exports of not only parts and components but also finished products, indicating a potential importance of intra-regional markets as an ultimate source of demand for their exports. Jongwanich and Kohpaiboon (2011) found that foreign and domestic firms in Thailand involved in production networks tend to engage actively in R&D activities, which contributes to achieving high productivity. As automobile industry in East and South East Asia is subject to an efficient IPN, it is now a research question how it is getting extended to other Asian countries such as in India.

The structure of the automobile industry specifically in India is influenced by competition and nature of customer demand. Product cycles continue to grow shorter as more companies adopt the simultaneous engineering approach pioneered by Japanese automakers while developing the product. India is now among the top 10 players in automobile manufacturing. In 2014-15, India has produced 23 million vehicles and out of these 3 million are passenger vehicles. It has experienced a growth of 8.68 per cent over during 2014-15. The automobile industry accounts for 7.1 per cent of the country's GDP. It is expected that by the end 2016, India will become the third largest automotive market in the world ahead of Japan, Germany and Brazil, riding on its domestic automotive sales . Because of high growth all global majors are now interested in Indian market. OEMs in India are buying parts from all kinds of suppliers and are overseeing a large and complicated distribution system De (2011). It has now robust component industry and many MNCs are also present in this segment. In 2014-15, the turnover of component industry has been around US$ 38.5 billion. Current trade pattern also indicates that India’s exports are rising steadily. In 2014-15, India exported around 622470 units of passenger vehicles, 85782 commercial vehicles and US$ 11.2 billion of components.

In light of these observations, this paper makes attempt to look into the following issues:

• The nature of evolving IPN in Indian automobile industry, how far Indian firms are participating in IPN, role of technology transfer, possibility of product and process upgrading, etc.

• Nature of foreign value added in India’s gross exports of automobile products • India’s domestic value added in foreign country’s gross exports of automobile products

• Whether trade agreements with Japan, Korea Rep and ASEAN is accentuating the integration among firms especially in automobile industry

• Role of FDI in India’s participation in IPN • India’s policy towards promoting automobile sector ( Analysis of Automotive Mission Plan, 2016)


Antràs, P. and Staiger R., (2008): "Offshoring and the Role of Trade Agreements" CEPR Discussion Papers 6966, CEPR. Discussion Papers
Athukorala, P. (2008), “China’s integration into global production networks and its implications for export-led growth strategy in other countries in the region”, ANU working paper on trade and development, No. 2008/04, Australian National University, Canberra Baldwin, R. E (2008), “Managing the Noodle Bowl: The Fragility of East Asian Regionalism”, Singapore Economic Review, vol. 53, No. 3; pp. 449-478 De. D. (2011) “Regional Trade and International Production Networks: The Context of Automobile Industry in Asia”, International Journal of Technology Management and Sustainable Development, Volume 10 Number 1, 2011, pp 77-98. Jongwanich, Juthathip and ArchanunKohpaiboon (2011) “Multinational Enterprises, Exporting and R&D Activities in Thailand,” paper prepared for an ERIA project the ERIA Project titled Globalization and Innovation in East Asia. Kimura, Fukunari (2006) “International Production and Distribution Networks in East Asia: Eighteen Facts, Mechanics, and Policy Implications,” Asian Economic Policy Review, volume 1, issue 2, pp. 326-344. Kimura, Fukunari and Ayako Obashi (2010) “International Production Networks in Machinery Industries: Structure and Its Evolution,” ERIA Discussion Paper Series, September 2010 Lawrence, R. Z. (1996), "Regionalism, Multilateralism and Deeper integration" Washington DC: Brookings Institution Nag B. and De, D., (2011), “Rules of Origin and Development of Regional Production Network in Asia: case Studies of Selected Industries”, ARTNeT Working Paper Series, No. 101, May 2011 Nag, B (2009): “Auto-component Industry in Asia: Structure, Trade patterns and Potential for Further Upgrading”, International Journal of Technological Learning, Innovation and Development, Vol. 2, Nos. 1/2

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