Tamil Nadu’s ‘Make in India’ model

In the last three decades, no other industry has made such spectacular strides in Tamil Nadu as the automobile industry. What are the factors that have contributed to the ‘accelerated’ growth of the auto sector in Tamil Nadu, a growth that has been much faster than in other parts of India?

In an article published in the BusinessLine some years ago (‘Automobile industry: Why assemble in Tamil Nadu?’, March 25, 2003), I had mentioned that President R Venkataraman, in his capacity as the State’s minister for industries, had been primarily responsible for placing Tamil Nadu on the country’s industrial map. ‘RV’, as the late President was popularly known, dreamt of making Tamil Nadu the Detroit of South India. But the automobile industry in Tamil Nadu has scaled greater heights than what RV might have ever imagined.

Top shop With six carmakers, namely, Ford, Hyundai, BMW, Renault, Nissan and Mitsubishi-HM, Chennai has now emerged as one among the world’s top 10 automobile manufacturing centres. Automobile exports have grown at a compounded annual growth rate of 30 per cent for the last five years and have reached a turnover of $8 billion. The growth in exports was led by Hyundai Motor India, followed by others such as MSIL, Mahindra, Renault, Fiat India Automobiles, General Motors India, and Honda Siel Cars India. During 2008-2009, Chennai exported 1,46,000 cars to 103 countries, mainly in the European Union.

The growth of the automobile industry in the State could be divided into two distinct periods. The first period of about 37 years, runs from the Second Five Year Plan period (1956-1961) to 1993. This period witnessed the setting up of industrial estates in Ambattur and Guindy, the establishment of the heavy vehicles factory in Avadi in the public sector, and Ashok Leyland at Ennore in the private sector, and a cluster of industries in the private sector by the TVS group headed by TV Sundaram Iyengar, the Anamalai Industries led by Pollachi Mahalingam, and the Madras Rubber Factory by Mammen Mapillai, to name a few. Between 1963 and 1994, Ashok Leyland and others set up their expanded units in Hosur.

The second phase started in 1994, when Ford Motors decided to set up its car manufacturing unit at Maraimalai Nagar near Chennai. Ford has completed two decades of business in the country. Starting operations in 1996 as a joint venture with Mahindra and Mahindra (M&M) in March 2005, Ford India became a wholly owned subsidiary of Ford Motor Company, after divestment of its crossholding portfolio with M&M. In the fourth quarter of 2005, Ford rolled out its new Ford Fiesta, a four-door sedan. With a network of 115 dealership facilities in 79 cities, Ford has an export facility to handle its export requirement exclusively by sourcing auto components locally and assembling kits for export to overseas markets.

The Hyundai story But the bigger success story is South Korea’s Hyundai. Hyundai Motor India Limited (HMIL) is the second largest and the fastest growing car manufacturer in India. HMIL now markets more than 30 variants of passenger cars across all segments. HMIL has rolled out 10,00,000 cars in just 90 months since its inception. It is also the largest exporter of passenger cars, with exports of over ₹1,800 crore. HMIL exports to over 60 countries globally and made a foray into the highly competitive UK market by exporting its first shipment of 820 cars. To cater to the rising demand, HMIL commissioned its second plant in February 2008; this produces an additional 300,000 cars a year, raising HMIL’s total production to 600,000 units annually.

But it was the entry of Ford which proved a breakthrough for the automobile industry in the State. It was the signal for several other manufacturers like Hyundai and Lancer Mitsubishi to come in. The significance of Ford’s entry lies in the fact that it marked the beginning of the modern automobile industry in the State. Though Maruti Udyog, with state of the art technology, had started production in Gurgaon much earlier, in the mid-eighties, rolling out its first Maruti car in December 1983, it was purely on CKD (completely knocked down) basis; there was no room for the development of ancillaries in the immediate future.

It should be remembered that even when Ford Motors started rolling out their cars from their Maraimalai Nagar outfit around 1996, Hindustan Motors and Premier Automobiles had continued manufacturing their time-honoured Ambassador and Fiat cars. On the other hand, the establishment of Ford and Hyundai became the source of inspiration to all Chennai-based automobile industries to go in for modernisation of their respective auto components on a massive scale, be it axles, brakes or brake linings, or steering wheels.

Pioneering modernisation Thus the Chennai-based auto industries pioneered a programme of modernisation. In this connection it should be placed on record that it was Chief Minister J Jayalalithaa who played the most critical role in bringing Ford to Chennai with various incentives. Besides making available 36.1 acres of land belonging to the Chennai Metropolitan Development Area (CMDA) at a total cost of ₹30 crore to Ford India to set up their plant, investment to the tune of ₹69 crore was made on providing infrastructural facilities such as filling up, drainage, culverts and transformer access roads.

While sales tax for input was exempted, refund of output tax up to limit of investment, capital subsidy of ₹1.5 crore, and power tariff discount on a tapering scale from 30 to 10 per cent during the first three years of operation of the plant were also extended. This attractive package of incentives was instrumental in attracting Ford to the State.

Since such a firm infrastructure has been created in Chennai and its environs for the modern automobile industry and its ancillaries, Chennai enjoys what one of the most influential of the classical economists of Britain, David Ricardo (1773-1823), would call “comparative advantage” in the automobile industry over the rest of India. This ecosystem will be the bait to attract future global investors, particularly in this sector.

(The writer is a former IAS officer and was a member of the State Planning Commission)

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