Comparison of the global auto-component industry :
The global auto-component industry constitutes an important part of the global automotive industry with a constantly rising revenue development. From 2000 to 2014, the turnover and cumulative revenue share increased at the same time. There is a special power distribution within the automotive industry. A small number of giant OEMs (Original Equipment Manufacturers) “carry out most aspects of product design, the production of most engines and transmissions and nearly all vehicle assembly within their own facilities. They have substantial coordination and buying power in the chain. But, since the early 1990s, outsourcing has led to the creation of large global suppliers, which have taken on a more extensive role in the areas of design, production and foreign investment. Automotive OEMs have been increasing their global activities due to large demand in emerging economies “in Asia (mainly China, the Republic of Korea and India), Latin America (mainly Mexico and Brazil) and Eastern Europe.
The German auto-component industry:
The automotive industry is one of the most important sectors in the German economy ensuring both innovative growth and employment. European Economic Research (ZEW) describes the German automotive industry as very innovative: “Vehicle construction remains the most innovative sector in the German economy. No other industry spends more on innovation and generates higher revenues with new products. The automotive industry accounts for one-third of Germany’s total RD activities. This is also reflected in the high innovation intensity of the industry, whereas in India we were not that much focused on the research side.
The Indian auto-component industry
In the period from Independence (1947) until the early 1980s, the automotive industry in India was strongly regulated. Companies had to act within a complex system of industrial licences and permits which the Indian government introduced to protect the domestic industry-leading, however, to relatively low prices and low-quality of products. In the 1980s, a modernization program for the industry was initiated bringing new foreign competences to the country. But it was only after a severe economic crisis hit India in 1990/91 that a major economic liberalization programme started resulting in a dynamic development of the industry. The overall industry turnover has increased by a compounded annual average growth rate.
Based on the identification and a subsequent comparison of innovation pathways in the German and Indian auto-component industry we have identified certain characteristics in innovation pathways that might be particularly useful in creating frugal solutions. These could possibly also provide German auto-component suppliers with some insights about developing and implementing a strategy for frugal innovations in the future. The German automotive and auto-component industry has despite its traditional strength a number of weaknesses, such as high personnel and energy costs, risk of over-engineering, demanding high price positioning, a poor product portfolio for enabling affordable small cars and generally a low market presence in Asia. Due to changing global market conditions and the great future potential of the emerging economies, these weaknesses constitute threats to the competitiveness of German companies. For Indian companies, too, the innovation pathways of their German counterparts may contain some useful insights. For example, Indian companies can also try to engage in anticipating innovation trends and thus to co-shape the emerging future trends in technological domains of their expertise. Many Indian companies from the auto-component sector have invested abroad, especially in Germany, and are integrating open innovation across national and firm boundaries. German companies should also show greater openness for externally-generated knowledge and seek complementary synergies in the emerging lead markets of frugal innovation. While many German firms have invested in the emerging economies, they often restrict their activities to marketing/distribution, to some extent production and to a lesser extent product adaptation. Very few firms actually attempt to integrate these locations in their innovation value chains. They could potentially reap rich benefits from the socio-cultural diversity, first-hand knowledge of the market-specific demand patterns and the technological expertise of a vast pool of skilled professionals. The resulting innovations would also create positive external effects for the innovation system of the host nations (e.g., India), leading to a win-win situation, since innovations are not merely a “zero-sum game”. Summarizing, we have analysed how an alternative frugal approach to innovation may look like. The results indicated that successful companies will probably pursue a hybrid strategy, a combination of both approaches – “pursuing technological advancement, while ensuring frugality”. Frugal innovation pathways provide a number of potential advantages for companies:
Development of new sources of revenues in growing global markets as well as in the home market
Customer-oriented quality and functionality
Reduced “time-to-market” as well as increased flexibility of business processes
Increased resource efficiency