ENTREPRENEUR DEVELOPMENT THROUGH INDUSTRY CLUSTER APPROACH Dr. T. Sivalingam. Ph.D., Reader in Commerce, Presidency College, Chennai-5

Er. E. Bhaskaran. B.E., M.B.A., (PhD) Research Scholar, Presidency College, Chennai-5 E-Mail: [email protected] ___________________________________________________________________________

ABSTRACT: Liberalization, Globalization and Free Trade (LGFT) and the WTO agreements, pays way for many of the existing, Small Medium Enterprises (SMEs) for closing down, specially when multinationals and big business houses backed by a wide resource potential and proven track record of market reputation making entry in the domestic production sector. The objective of the study is to know the Entrepreneurs perspectives on UNIDO’s Industrial Cluster Development Approach for the development of Automotive Industry Cluster at Chennai also called as Detroit of India with Original Equipment Manufacturer (OEMs) like 3 major Car manufacturers, 1 Heavy / Medium Transport Vehicle Manufacturer, 1 Tractor and 1 two-wheeler Manufacturer with turnover of Rs.10, 000 crores & Chennai Auto Ancillaries Industrial Infrastructure Upgradation Company (CAAIIUC) registered under section 25 of Indian Companies Act 1956 which has 340 Small Medium Enterprises (SMEs) and 15 Large Scale Industries (LSI) as stake holders manufacturing Automotive Components, with turnover of Rs.1900 crores, market share of 30%, providing direct and indirect employment of 48,000, is a major destination for component outsourcing of leading automobile manufacturers in USA, Europe, Germany, Australia, Japan and OEMs in India. The methodology of study is by collection of primary data from 102 SMEs and 8 LSIs out of 340 SMEs and 15 LSIs through well-structured questionnaire using random sampling technique and secondary data from associations like SAE, CII, AIEMA, ACMA, TANSTIA and from Government Departments. The data collected were tested using correlation and ranking test by framing the hypothesis. To conclude, by SCOT analysis, Industry Cluster Approach is a critical element for Entrepreneur Development under Public Private Partnership (PPP) concept and SMEs Co-operation are important in the Value Chain Analysis of Clusters as a Business Development Service (BDS) provider to meet the global challenges under WTO scenario.

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1. INTRODUCTION The WTO agreements opening the gates for the entry of multinationals and free trade on a global level may be neutralizing the potential strength aspect of the Indian Automotive Sector. (Liberalization, Globalization and Free Trade –LGFT). The possibility of many of the existing Small Scale manufacturing units closing down, specially when multinationals and big business houses backed by a wide resource potential and proven track record of market reputation making entry in the domestic production sector. Only the fittest can survive 1. So the latest productivity techniques will be increased to face the challenge of WTO by decreasing the price of the Auto components. This is possible only if Auto components Manufacturing Industries at Chennai should adopt the Cluster Approach.

2.CLUSTER APPROACH An Industrial Cluster is basically a local agglomeration of small, medium and large enterprises, which are producing and selling a range of related and complimentary products and services. The enterprises in a cluster have similar needs and support requirements; they are faced with common opportunities and threats. The importance of efficient local business systems that is clusters, in determining competitiveness of a nation is now well recognized. Enduring competitive advantage in global economy lies increasingly in local factorsknowledge, relationships and motivation. By being near to the source of raw material, labourforce and availability of customized business development services from institutions like NSIC, clusters derive a clear competitive advantage.2 An industrial Cluster (Porter 1990) is a set of industries related through buyer-supplier and supplier buyer relationships, or by common technologies, common buyers or distribution channels, or common labor pools. Industry Clusters are concentrations of competiting and 1

Report on Cluster Development by UNIDO, New Delhi, 2002.

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Cluster Development and Sectoral Programmes, Ministry of SSI, Government of India

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related firms, bringing together both the firms producing final goods and their suppliers and contractors. 3. ADVANTAGES OF CLUSTER APPROACH Clusters favour the emergence of specialized technical, administrative and financial services. Clusters create inter-firm and intra-firm cooperation to promote local production, innovation and collective learning. It builds up a successful enterprise and as such has a better chance to succeed.  It facilitates process specialization among industrial units and improved quality. The internal rate of return (IRR) is higher compared with any other investment in the virgin area for infrastructure.  It develops strong roots in terms of improved local organization and Government structure (Public Private Partnership (PPP) Concept).  It develops strong wings in terms of necessary linkages with the external world (markets, competitors, regulatory frame work etc).  It facilitates the Government and Non-Government Organizations to implement their Intervention/ promotional programmes more effectively and efficiently.  Give rise to external economies. (i.e., specialized suppliers of raw materials, components and machinery, sector specific skills, business promotion etc) 3 4. SIGNIFICANCE OF CLUSTER APPROACH- LITERATURE SURVEY International experiences show that small firms are unable to face competitive pressure because of their isolation and ineffective linkages with relevant support organizations and commercial service providers. In developed countries like Italy, USA, France and Germany, clusters of SMEs bound together in strong and dynamic networks and relying upon strong linkages with relevant local / national support institutions have proved 3

Department of Industrial Policy and Promotion, Government of India, New Delhi

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competitive in the global context 4. In developing countries Cluster exists in Brazil, Peru & Mexico. According to UNIDO it is estimated that 400 modern SME clusters and 2000 artisan based rural clusters exists in India. According to UNIDO study there exists an Auto Components Cluster and Leather Cluster with more than Rs.1000 crore turnover at Chennai. 5

5.CURRENT STATUS OF AUTOMOTIVE CLUSTER AT CHENNAI Chennai has 3 major Car manufacturers, 1 Heavy/ Medium Transport Vehicle Manufacturer and 1 Tractor Manufacturer and 15 Large Scale and 340 SME Auto Component Manufacturers. Chennai is a major hub for the auto industry and its market share in India is around 30%. The Turnover is 1350 crores for SMEs and Rs.550 crores for Large Enterprises totaling 1900 crores per annum. The direct and indirect employment from the industries is 48,000(approximately). This leads to growth of Auto Components Industry in Domestic and International market, which is positive and progressive. Auto components industry in Chennai region is becoming a major destination for component outsourcing of leading automobile manufacturers in USA and Japan. The various types of Auto components manufactured by the Auto Ancillary units are Piston rings, Engine Values and guides, Cylinder liners, Tappets and Push Rods, Rocker arm, Radiator, Water Pump, Oil Pump, Fuel Injection Parts, Starter Motors and Parts, Alternator and Parts, Wiring Harness, Transmission Parts, Clutch Assembly and Pars, Steering Parts, Brake Assembly and Parts thereof, Shock Absorber, Heat Exchanger, Rubber Mounts, King Pin and Shackle Pins, Ball Joints and Parts, Axels and Parts, Wheel Rims, Forged Parts, Cast

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Cluster Development and Sectoral Programmes, Ministry of SSI, Government of India,

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www.unido.org, www.laghu-udyog.org & www.sidoonline.org

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parts, Aluminum Die Cast Parts, Plastic Molded Parts, Sheet Metal Pressed Parts, CNC Machined parts, Springs, Rubber parts, Oil Seals, Cable Parts, Friction Linings etc. 6

6. Objectives of Study The objective of the study is to know how entrepreneurship can be development through Industrial Cluster Development Approach. 1. To study the management perspectives on Industrial Cluster Development Approach for the development of industries to meet the global challenges. 2. To find out how far the Entrepreneurs realize the importance of Cluster Approach for the development of industries. 3. To assess how far Cluster Approach impact on Entrepreneurship Development. 4. To suggest the future entrepreneurs, the importance of Cluster Approach for the development of industries.

7. Methodology The methodology of study is by collection of primary data from Managing Director / Partner / Proprietor of 102 SMEs and 8 LSIs out of 340 SMEs with turnover of Rs.1350 crores and 15 LSIs with turnover of Rs.550 crores through well-structured questionnaire using random sampling technique and secondary data from associations like SAE, CII, AIEMA, ACMA, TANSTIA and from Government Departments. The data collected were tested using correlation and ranking test by framing the hypothesis.

8. Interpretation of the Data The industries participated in the study belonged to the product of water pumps, automotive oil pumps, air brake components, clutch assemblies, slip rings, brush holders, solenoids, rubber and plastic moulded parts, position rings for I.C.Engines, high tensile 6

TUV RHEINLAND INDIA PRIVATE LIMITED, Member TUV Rheinland Group, Germany project report on Automotive Cluster at Chennai.

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fasteners, wheels, starter motors, alternators, generators, wiper motor, axle shafts, manual and automatic slack adjuster, fan assemblies engine cooling, chilled grey iron castings of camshafts, tappets, rocker arms, machined aluminum components, bicycles, chains, roll form sections, tubes, rubber moulded components and value guide cam shafts etc.

Hypothesis-1: There is no positive correlation between employment as a dependant variable and production & sales as independent variable due to Cluster Approach. Table-1: Value of Output Statistics Report Details

Total units

No.

June- 2004 (Before Cluster) Dec- 2005 (After Cluster) Growth Rate Percentage

355 871 145.32

of Total Production & Sales Rs.in crores 1900 2700 42.10

Total Employment 48000 61000 27.08

Source: Department of Industries & Commerce The Table-1 is tested using regression analysis with Total Employment as dependent variable and total no. of units and production as independent variables. It is found that for every increase in no. of units there is much increase in employment and production. Hence H1 is rejected and there is positive correlation between employment as dependent variable and no. of units and production as independent variable.

Hypothesis: 2: There is no significance increase in the development of entrepreneur due to the Industry Cluster Approach.

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Table-2- INTERPRETATION OF DATA Activity Street lighting improved Roads improved Storm water drainage system improved Sewage treatment plant improved Solid Waste Management improved Logistics improved Landscaping improved Cost of Raw Material reduced

SA A UD DA 1. Physical Infrastructure 11 10 0 45 9 11 0 10

Mean

Rank

44 110 229 80 110 189

2.08 1.72

1 3

20 30 21 15 55

80 70 80 62 50

110 110 110 110 110

167 174 161 214 179

1.52 1.58 1.46 1.95 1.63

6 5 7 2 4

2. Production & R & D 101 9 0 0

0

110 541

4.92

2

7 6 5 11 1

3 2 2 1 2

0 2 2 21 2

SDA T

Wt.

Technology Upgradation done

30

19

0

40

21 110 327

2.97

4

Modernization of unit takes place

36

13

0

11

2.76

Cost of Testing in lab, Calibration & research center reduced Quality Certification obtained

105

5

0

0

50 110 304 0 110 545

4.95

5 1

100

10

0

0

0

110 540

4.91

3

0 110 545 50 110 298

4.95 2.71

1 2

30 110 360 0 110 480 22 110 353

3.27 4.36 3.21

5 1 6

5

110 475

4.32

2

3 6

110 459 110 453

4.17 4.12

3 4

11 110 469 10 110 390 0 110 530

4.26 3.55 4.82

2 3 1

3. Human Resource Development Technical and HRD training cost reduced 105 5 0 0 Technology transfer acquired with less cost 30 19 0 11 4. Marketing Export opportunities 50 10 0 20 International business center 50 50 10 0 Common display center-permanent 40 12 11 25 exhibition R & D Infrastructure like Material Analysis 52 52 0 1 and Research &Market Research Business / Information Centre & Library 45 52 3 7 International Marketing Infrastructure 52 40 3 9 5.Information Technology ICT & BPR improved 80 10 0 9 Common Website improves business 50 10 10 30 CAD / CAM/ CAE Cost reduced 90 20 0 0 6.Finance Cost of Working Capital reduced 105 5 0 0 Finance for Technology Upgradation 64 20 5 10 Cost of Finance reduced 100 9 1 0 Factor Analysis Initial Extraction Strongly Agree 1 0.917137715 Agree 1 0.65680309 Undecided 1 0.606709578 Disagree 1 0.669491742 Strongly Disagree 1 0.822381421

0 110 545 11 110 446 0 110 539 1 2 3 4 5 6

4.95 1 4.05 3 4.90 2 Mean 1.63 6 4.1 2 3.83 4 3.91 5 4.18 3 4.64 1 Source: Primary Data

From the Table-2, H2 is rejected i.e., there is significant increase in the development of entrepreneur due to Industry Cluster Approach.

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Figure-1: CHENNAI AUTOMOTIVE COMPONENT CLUSTER MAP

SIDBI, TIIC, NATIONALISED BANKS, EXIM BANK

Spare Parts Dealers

SAIL Raw mater ial suppli ers

Traders

LARGE SCALE UNITS (16)

SIDCO

SME’S (235)

Machinery supplies

Car, Scooter, Truck Dealers

TINY UNITS (620)

Vendors

Machining Service, Heat Treatment, Casting, Forging, Electrical Fitting, Painting, Metal Finishing, Non Metal Fittings.

OE Consumers

ACMA, AIEMA,SAE, TACT, TANSTIA,CII NSIC, SISI, RTC, DIC, EEPC, ITPO, MOI

Backward Linkages

C

Forward Linkages

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SCOT ANALYSIS OF THE AUTOMOTIVE CLUSTER STRENGTHS: 1.Presence of 3 major Car manufacturers, 1 Heavy/ Medium Transport Vehicle Manufacturer and 1 Tractor assembling plants that have been sourcing parts to “International standards” from local industries. 2. Large number of Auto Ancillary Industries with background of more than 25 years of manufacture of Auto Parts is strength to auto cluster. 3. Good subcontracting “Net work” for various processes is strength to auto cluster. 4. Abundant availability of qualified engineers as well as skilled workmen with good work culture is great strength to the auto cluster. 5. Natural “Sea Port” with good “Containership” connectivity to all parts of the world International airport with “Cargo-Flights is major strength to auto cluster.

CHALLENGES 1.Poor infrastructure in terms of Roads, Drainage, Water, Lighting communication facilities etc is a challenge needs improvement. 2. Only a few Test Laboratories with capability to test to International standards is available needs improvement. 3. There is no Technical Library to refer to various International Standards with internet facilities. 4. There is no facility that offers at affordable rate “CAD / CAM” or “Rapid Prototyping” services. Hence, CAD/CAM/CAE center is needed for design, development and manufacture of various components. 5. There is no good center to impart training to thousands of new recruit, particularly with reference to Quality and system needs with world-class standards.

OPPORTUNITIES

THREATS

1.U.S and European Car makers are not able to manage the onslaught of Japanese and Korean carmakers. They are desperately looking for sources particularly India that can deliver good quality parts at cheaper prices. 2.The “IT” revolution of nineties has created a good image of Indian Companies to be “Intelligent” and “Capable of working on cutting edge technologies”. The US and European Car makers now look at India even for their “Design” needs apart from manufacturing. 3.The capability of all Indian Entrepreneurs and firms to transact in “English” language is a great advantage when compared to china. 4.We have large source of qualified and skilled workers, who can easily adapt to latest needs 5. Abundant scope to cater to foreign majors setting up shop in India. 6. Growing domestic and international market.

1.Stiff competition from China, East European Nations, Turkey, Brazil and Thailand exist needs cluster approach to face WTO challenges. 2.Most of these countries have good infrastructure and ambience when compared to India. 3.Geographically China and Brazil are closer to USA and East European Countries and Turkey are part of the European Zone itself. 4.Most of these countries enjoy a substantially lower “Energy” cost, which has an impact on all other inputs. So there is urgent need of power captive generating units, transmission and distribution to face threats under WTO scenario. 5. Import of second hand automobiles and lack of brand image 6. Global sourcing philosophy

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Hypothesis-3: There is no significant increase in the performance of the SMEs before and after entering into the Cluster. SCOT (Strengths, Challenges, Opportunities & Threats) ANALYSIS Activity S Markets Technology Inputs Availability 1 Innovation Capabilities Skills 1 Business environment Score 2

Before Cluster C 1 1

O

After Cluster T 1

1 1

1 1 4

S 1 1 1

1

2

C

O 1 1 1

1 1 1 4

1 1 5

1

T

1 1 1 5

1

H3 is rejected. From the table 3 it is evident that there is significant increase in the performance of cluster. 9. Conclusion  An attempt was made to know how entrepreneurship could be development in Automotive Industries at Chennai through Industrial Cluster Development Approach.  From the study it is found that there is change in management perspectives on Industrial Cluster Development Approach for the development of industries to meet the global challenges.  The Entrepreneurs realized the importance of Cluster Approach and its impact on the development of industries.  This is role model for future entrepreneurs, who have no fear in opening an industry. 

UNIDO’s Industrial Cluster Development Approach is important element for Entrepreneurship Development to improve the international competitiveness of the auto ancillary industries located in Chennai and its peripheral regions providing, improving and developing a quality infrastructure.

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 To conclude, by SCOT analysis, Industry Cluster Approach is a critical element for Entrepreneur Development under Public Private Partnership (PPP) concept and SMEs co-operation are important in the Value Chain Analysis of Clusters as a Business Development Service (BDS) provider to meet the global challenges under WTO scenario. 10. References 1. Sanjay Upendram, Associate Director, KPMG Consulting, “Imperatives and Insights for Indian Automotive Industry-Towards Global Competitiveness “. 2. TUV RHEINLAND INDIA PRIVATE LIMITED, Member TUV Rheinland Group, Germany project report on Automotive Cluster at Chennai. 3. The Hindu, Dated 3-7-2004 regarding Auto Cluster at Chennai. 4. The Hindu, Survey of Indian Industry 2003. 5. Tamil Nadu- An Economic Appraisal- 2002-2003. 6. Restructuring and Modernisation of Small Medium Enterprise Clusters in India report by Mukesh Gulati, Focal Point Manager, Cluster Development Programme, UNIDO, New Delhi. 7. Dr. C.B.Gupta and Dr.S.S.Khanka, “Entrepreneurship and Small Business Management” Sultan Chand and Sons publications. 8. S.S.Khanka, “ Entrepreneurial Development”, S.Chand and Company Ltd. 9. “Entrepreneurship Development” prepared by Colombo Plan Staff College for Technical Education, Tata McGraw- Hill Publishing Company Limited. 10. Facts and Figures- 2003-04, Automotive Component Manufacturers Association of India (ACMA). ***********

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