India's Emerging Diamond n Automobile Industry

Volvo-Eicher Vehicles'(VEV) decision to invest Rs 288 crore at its present facility in Pithampur, Madhya Pardesh augurs as more then an FDI investment. The investment would position India as the global manufacturing hub for Volvo's new medium-duty engine platform. The plant would be integrated with Swedish automaker's global supply chain and would be the country's largest commercial vehicle engine manufacturer and is expected to meet the global requirements for European and Asian markets(except Japan).

India would be second country after Japan to have such a manufacturing hub. This could well be the beginning of India being looked upon as a 'global manufacturing hub'. Does that mean that the relational comparative advantage in terms of competitive costs is shifting to India from her neighbouring China, fondly referred to as the world's factory.

According to the model, for a country to sustain competitive advantage in a particular industry, it must develop a dynamic advantage that is through is through broadening and extending the basis of its competitive advantage by innovation and upgrading. This dynamic set up is more influential then the initial resources that a Nation State is naturally endowed with, in determining its Sustainable Competitive Advantage.

The four factors in the Porter's Diamond model contemplating Nation's sources of Competitive advantage are: 1. Factor Conditions 2. Related and Supporting Industries 3. Demand Conditions and 4. Strategy, structure and rivalry.

In the light of Porter's Diamond model, an analysis of the Volvo-Eicher's investment decision would be insightful to know if India is inching a step closer to developing as the hub for global manufacturing in the Automobiles industry.

1. Factor Conditions: Factor conditions refers to the presence of factors that are important for the growth of a particular industry. The y could be 1. Home grown resources or 2. Highly specialized resources. It may be the presence or the lack of factor conditions that can contribute to the model. Japanese specialization in zero defect manufacturing and miniaturization is attributed to her lack of sufficient natural resources.
2. Related and Supporting Industries: A value chain involves many steps in the stage of production. A highly complicated product like automobile would requires thousands of parts as raw materials. The presence of relating and supporting industries provides incentive for growth of related industries. The reasons are not far to seek. Logistical and time efficiencies, increased co-ordination amongst related industries spur the growth of “cluster” industries. Clusters contribution to growth of sustainable competitive advantage for nations has been an important subject of study for Policy makers and Strategists. The Silicon Valley in USA or India's Silicon Valley 'Bangalore' and Silicon Glen in UK are great case studies of techno clusters of the IT industry. There is already an existing set up Pithampur and the investment is to increase production from the plant and integrate into the global supply chain giving it Economies of scale.
3. Demand Conditions: Supply is to meet the demand. That is the simple law of Economics and no rocket science to fathom. India is the second largest growing market for automobiles. This as explicitly articulated is one of the important reasons for VEV's investment.
4. Strategy, structure and rivalry: Competition is the best way to make an industry Competitive!! Rewind the clock of time to twenty-five years and Maruti Suzuki the only manufacturer of cars in India with efficient technology. It fed the nation endlessly with its Maruti 800 cc cars. There was time when cars was synonymous with Maruti 800 in India. Shift the focus to Japan. Intense domestic competition in the Japanese automobile industry due to the presence of 9 national major competitors Honda, Toyota, Suzuki, Isuzu, Nissan, Mazda, Mitsubishi, Subaru and Dastan, The competition in the Japanese markets was so strong that it acted as an impetus for world class innovation and efficiency and the Japanese cars became synonymous with the 'latest world class technology'.
   Likewise, India with an ever increasing demand, developing industry and increased FDI investment that is poised to bring not just financial investment but also technological breakthroughs as in the present VEV case, India could well be on her way to develop a sustainable advantage in the industry. The Government, as has been the Chinese case, can play an important catalyst role to encourage companies to higher levels of competitive performance. This can be through monetary and fiscal policy, incentives for FDI, tax breakthroughs, focus on creation of clusters, SEZs and strong anti-trust laws to encourage competition.