TNC-SME Cooperation The experience of India

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					               TNC-SME Co-operation: The experience of India

                                     by Dr. J. S. Juneja

I.     Small and Medium Enterprises (SMEs) - The Rationale for SME promotion

        The rationale for the promotion of SMEs emanates from the socio-economic
benefits, which accrue to the national economy. These enterprises need low capital
investment per unit of output, generate opportunities for direct and indirect employment,
can be located in far flung areas, use local natural resources and local skills and meet local
needs of a "limited market" for consumer goods and services, nurtures enterprising spirit
of the populace, prevent migration from rural areas to urban centres and thereby help
tackling social problems of urban slums and social tensions. Besides, with the increase in
population and inability of the agriculture sector to absorb a growing population, all
governments, whether of developed or developing countries, have adopted conscious and
well articulated policies for promotion of SMEs in view of the need to create self-
employment opportunities in this sector. These enterprises already form a significant part
of the overall industrial structure of United States, Europe, Japan and the developing world
of Asia and Africa. It is estimated that in the United States roughly 80 percent of the new
jobs are generated by smaller firms with 100 or fewer employees. SMEs are not only
established more easily than large firms but are also likely to be "spin-offs" from large
firms. Vice versa, SMEs vertical growth has also, in some cases, resulted in formation of
big groups through mergers of SMEs.

II.    Services Sector - Scope for TNCs

        With the growth of the economy, there are significant inter-sectoral shifts from
agriculture to industry and to the services sector. For example, in Japan, the share of
agriculture in the labour force has gone down from 68 percent to 7 percent, in the United
States from 44 percent to 3 percent and in the case of the United Kingdom from 20 percent
to 2 percent during the last century. In line with this trend, the Indian economy has also
undergone significant structural transformation during the last half century. This has been
corroborated by the just released Reserve Bank of India's report on Currency and Finance
for the year 1998-99. The share of industry, which was hovering in the range of 18-22
percent in the previous decades, increased significantly to over 25 percent during the
1990s. On the other hand, the contribution of the agricultural sector is now as low as
about 28 percent. The entire shift has taken place in favour of the services sector, which
has acquired a dominant position during this decade by increasing to 47 percent. The
spectacular growth in this sector has been registered by the segment of trade, transport,
communication as well as financial services such as banking and insurance. It is these
services which have tremendous potential for employment generation, more so keeping in
view the rapid developments in the information technology. The abundant supply of
educated and technically trained English speaking labour force is India’s most valued
asset. Indians have developed their niche in software development but because of recent
TNC-SME Linkages for Development

developments in telecommunications, India is likely to become a global service provider.
This trend is already evident with airlines reservation systems, billing and follow up
services and accounting support services already being shifted by overseas TNCs to India.
Other areas of services sector are secretarial work, accounting and legal work, engineering
and medical services. TNCs stand to gain enormously from these skills. This is an area
with immense potential for private sector enterprises. Over time, with India's advantage,
both TNCs and Indian SMEs will gain enormously from these skills by promoting
employment in knowledge-based industries.

III.   Recent Developments

        Changes have been brought about in recent years in government policies all over
the world for providing support to SMEs development in the national economies to meet
the challenges and opportunities in the emerging scenario of the new millennium. The
Indian Government also announced wide-ranging change in economic and industrial
policies in July 1991, in accordance with the winds of changes all over the world. A high
level committee, known as the Abid Hussain Committee, was set up in 1996 to review
small industries policies and make recommendations so as to help the Government of
India formulate a strong and innovative policy package for rapid development of SMEs in
order to provide resilience to the sector to face the challenges of emerging global
competitive scenarios. In accordance with the recommendations of this committee, the
Government of India has already brought about far reaching changes in policies for the
rapid and healthy growth of the SME sector in India with a view to enhance their

IV.    Indian SMEs - The Present Scenario

        Right from the beginning of the planning era, the Indian Government gave over-
riding priority to the promotion and development of village and small industries sector as
an integral part of the industrial policies. Because of the Government's conscious support,
this sector made rapid progress during the last five decades in terms of its contribution to
gross value of industrial output (40 percent), number of units (95 percent), exports of
manufactured goods (about 50 percent) and industrial employment (80 percent). Table I
presents the picture of SMEs progress in proper focus during the last decade.

        Table II shows that despite liberalisation policies, the SMEs achieved higher
growth rates compared to the overall industrial growth rates showing Indian SMEs
resilience to face the emerging global economic scene.

                                                          TNC-SME Co-operation : The Experience of India

                                           Table I
                          Over all Growth of SSI Sector since 1991-92

    Year       No. of units       Production at          Production at     Employment        Exports
               (million Nos.)     current prices         constant prices   (in millions)     (Rs.
                                  (Rs. billions)         (1990-91)                           billions)
                                                         (Rs. billions)
 1991-92       2.08               1786.99                1601.56           12.48             138.83
               (6.9)              (15.04)                (3.10)            (3.59)            (43.66)
 1992-93       2.24               2093.00                1691.25           13.40             177.85
               (7.88)             (17.12)                (5.6)             (3.28)            (28.10)
 1993-94       2.38               2416.48                1811.33           13.93             253.07
               (6.01)             (15.46)                (7.09)            (3.97)            (35.78)
 1994-95       2.57               2939.90                1994.27           14.65             290.68
               (7.98)             (21.66)                (10.1)            (5.13)            (14.80)
 1995-96       2.72               3562.13                2221.62           15.26             364.70
               (5.95)             (21.16)                (11.40)           (4.13)            (25.5)
 1996-97       2.85               4126.36                2473.11           16.00             392.49
               (4.88)             (15.83)                (11.30)           (4.84)            (7.61)
 1997-98       3.01               4651.71                2681.59           16.72             444.42
               (5.5)              (12.73)                (8.43)            (4.5)             (13.2)
 1998-99       3.12               5275.15                2947.34           17.15             494.81
               (3.55)             (13.40)                (9.91)            (2.61)            (11.35)

Figures in brackets give percentage increase over previous year.

                                            Table II
                           Growth Rate of Small Industries After
                        Liberalisation in 1991 (Overall Growth Rates)

            Year                           Small Industries                Total Industrial Sector
        (April-March)                         (percent)                           (percent)

            1991-92                                3.1                               0.6
            1992-93                                5.6                               2.3
            1993-94                                7.1                               6.0
            1994-95                                10.1                              9.4
            1995-96                                11.4                              12.1
            1996-97                                11.3                              7.0
            1997-98                                9.5                               4.7
            1998-99                                9.9                               4.0

TNC-SME Linkages for Development

V.     The Export Scenario of Indian SMEs

         Although Indian SMEs have achieved considerable progress in terms of growth of
number of units, gross output, employment generation and exports, yet it will be seen from
Table III that exports of manufactured goods from India from the small scale sector still
constitutes less than 10 percent of the total output of this sector. This is due to the vast
domestic market for manufactured goods in India; the Indian small entrepreneur hesitates
to venture into the export markets due to his inability to undergo risks of international
trade. It is in this context that tie-ups among TNCs and Indian SMEs in the emerging
scenario of the growth of the world economy assume a special significance. It also needs
to be emphasised that the modern sector of the Indian SMEs, which uses latest state-of-
the-art technologies, has already developed a niche in establishing sound subcontracting
arrangements among large enterprises in India in the automobiles, electrical, electronics,
chemicals, pharmaceuticals, software development and other sectors. Indian SMEs have
already attained a status, in terms of technologies and managerial skills, to enter into
supply arrangements for a number of intermediate products to support the output of TNCs
and large industries at costs and standards which are internationally competitive. TNCs
collaboration and joint ventures will greatly help the Indian SMEs sector to acquire
financial, technological and marketing capabilities to enter into a wide range of industries.
TNCs are interested in expanding their production base in India, where labour costs are
still low and marketing network is wide - a country of one billion population with vast
natural resources and a huge untapped market of middle and upper class consumers. It can
also be seen from Table III that SME’s contribution to exports is significant, more than 50
percent including indirect exports. Their contribution is particularly phenomenal and
more than 50 percent in marine products, processed foods, woollen garments and in
traditional products.

        One specific sector in which Indian SMEs have built inherent technical and
technological capabilities is the auto components sector. Hence, the auto component
industry is the best example of India's engineering capabilities. The success of the Indian
joint venture with Suzuki for the small car (Maruti) establishes beyond any shred of doubt
that Indian SMEs have developed capacities to conform to the requirements of
international price and quality standards. The other examples of successful multinationals
and Indian industries joint partnerships are TATA and Mercedes - Benz of Germany,
Indo-Italian venture of Fiat and many others. The recent examples of TNCs making an
aggressive attempt to find a foothold in the Indian auto market are Ford, Suzuki,
Mitsubishi, General Motors, Daewoo, Hyundai, Honda, Daimler Mercedes Benz etc.
Apart from the auto sector, Indian SMEs can also meet the needs for a wide variety of
intermediate parts and components in other mechanical, electrical and electronic

         Indian SMEs achievements in the auto sector, consumer durables industrial
electronics and software development have been acknowledged all over the world and
exports of electronic soft and hardware products from India have already achieved a niche
in the international markets.

                                              TNC-SME Co-operation : The Experience of India

                                    Table III

 Broad itemised Export performance and the share of SSI in total manufacturing
                        Exports in 1992- 93 & 1997- 98

    Product Group          Total exports             Share of SSI             Percentage
                           in Rs. billion               sector                   share
                                                     in Rs.billion           of SSI sector

                          1992-93   1997-98    1992-93        1997-98      1992-93   1997-98
Non-Traditional           64.5      163.76     19.5                  44    30.23      26.86
Engineering Goods
(including electrical
and electronics)
Basic Chemicals,          36.23     108.38     19.92           65.02       55         59.99
Chemicals & Allied        42.99      85.74     1.19                  4.8   2.81         5.59
Plastic Products          3.89       23.39     1.75             9.85       45.02      42.11
Finished Leather &        36.92      58.75     29.54           32.63       80         55.52
Leather products
Marine products           17.67      46.97     5.07            26.92       28.67      57.31
Processed Foods           12.93      71.08     8.4              46.2       65         64.99
Woollen Garments &        5.95       19.48     2.08            13.53       35         69.45
Sport Goods               0.94        2.41     0.94             2.41       100          100
Readymade Garments        88.4      183.89     79.57          165.51       90            90
Rayon & Synthetic         N.A.        37.5     0.15             0.13       __           36.4
Processed Tobacco,        5.08        10.6     2.4              3.58       47.3       33.75
Snuff & Bidi
Traditional Products
Cashew kernel and         74.92      14.27     64.24           14.27       85.75        100
Cashew nut shell liquid
Lac                       0.53        0.65     0.51             0.64       97.85         99
Spices, Spice Oils        3.82       14.08     0.1              0.14       2.61          10
Oleoresins, 382.06
Total                     326.66    840.97     177.51         444.42       54.44      52.84

TNC-SME Linkages for Development

VI.     Foreign Direct Investment (FDI) Policies in India

        Foreign direct investment (FDI) in capital and technology intensive sectors has
been accepted as part of the industrial investment policies right from the beginning. The
1956 Government of India Industrial Policy Resolution listed the industries in which
investment from large sector companies (both domestic and foreign) was encouraged
except in industries reserved for the public sector. The major industry sectors where
foreign direct investment helped India in setting up plants belong to the basic and core
sectors namely power, steel, heavy engineering, petroleum, pharmaceuticals, cement, etc.
These investments generated industrial activity on a massive scale, which acted as a
catalyst for a number of small-scale units to come up as ancillaries and sub-contracting
units for large undertakings. As part of the 1956 Industrial Policy, promotion of
ancillaries was specially encouraged to promote modern small-scale industries using
higher levels of technologies, while retaining the distinct priority for traditional industries
like handicrafts, handlooms, coir, village industries to sustain existing levels of

        In line with the winds of change all over the world, the Government of India
brought about major policy changes and announced comprehensive new industrial and
economic policies in July 1991 to provide competitive stimulus for accelerated industrial
growth. The thrust of the New Policy has been to provide free access to capital,
technology and market in order to induce greater industrial efficiency and international
competitiveness. The policy seeks to free Indian industry from excessive Government
regulation and control so as to allow freedom and flexibility in business decisions and for
responding market forces. The policy initiatives have focussed on the basic orientation of
industry to benchmark itself against global standards. To pursue these objectives, the
Government of India has been constantly reviewing the policy framework to bring about
improvements. The list of items requiring compulsory licensing has been reviewed from
time to time and now stands completely overhauled. At present there is only a short list of
strategic industries (e.g. in the areas of arms and ammunitions, defence equipment,
defence aircraft, warships, atomic energy and railway transport), which are reserved for
the public sector or are under compulsory licensing. All other industries are exempted
from licensing. Although at present, 812 items are reserved for production exclusively in
the small-scale sector, the policy is under view in pursuance of the recommendations of
the high-powered Abid Hussain committee, referred to earlier.

       Among the salient features of the FDI policy which need specific mention are the

-      Comprehensive guidelines for the consideration of FDI proposals by FIPB
       (Foreign Investment Policy Board) have been brought out with a view to lending
       transparency to decision making;
-      Full repatriation of original investment and returns except for dividend balancing
       and foreign exchange neutrality conditions in certain sectors;
-      Liberal access to foreign technology. Automatic approval to lump sum payment of
       up to US $ 2 million and royalty at 5 percent for domestic sales and 8 percent for
       exports subject to a total payment of 8 percent on sales for a period not exceeding
       7 years from the date of commercial production.

                                                 TNC-SME Co-operation : The Experience of India

       As mentioned earlier, these policies are reviewed from time to time keeping in
view the changing economic scenario. Some salient features of the policy are also given

-      Easy access to domestic credit. Foreign companies that invest in India have
       leverage in India by way of domestic credit from domestic financial institutions;
-      Liberal external commercial borrowings (ECB) and debt servicing norms;
-      No ceiling on raising Global Depository Receipts. (GDRs)/American Depository
       Receipts (ADR)/Foreign Currency Convertible Bonds (FCCBs), and
-      Joint ventures with small-scale enterprises through equity participation by large
       undertakings up to 24 percent.

        It may be appreciated that the Indian Government's decisions on FDI policies rest
on strong fundamentals. This has already been recognised by a number of global
investors-especially TNCs; many of them have already established a base in India. The
Government of India is committed to creating strong economic fundamentals and an
increasingly proactive FDI policy regime.

VII.   Reforms in the SMEs sector

        In line with the liberalised policies announced in 1991, and in pursuance of the
recommendations of the Abid Hussain Committee, referred to earlier, the Government of
India have taken major initiatives to improve the competitive strength of small-scale
industries. While the investment ceiling prescribed for the tiny sector enterprises has been
raised from Rs. 0.5 million to Rs. 2.5 million that for the modern small scale units has
been raised from the existing level of Rs. 6 million to Rs. 10 million. The primary aim is
to enable the SME sector to modernise/upgrade the technologies with a view to facilitate
them to expand/diversify their activities and become more competitive in terms of the
policy of equity participation up to 24 percent. In the case of export-oriented units, units
meeting export obligations of more than 50 percent, the equity participation by large
undertakings can be increased beyond 24 percent. It is strongly felt that TNCs joint
ventures with Indian SMEs through the FDI route will greatly help the Indian SME sector
to enter into a wide range of industries and promote both the interests of the TNCs in
expanding their subcontracting base to support their manufacturing base and marketing
network in India-a country of one billion population with vast natural resources and a huge
untapped market of middle and upper class consumers. In tune with the liberalised policy
of the Government of India, many joint ventures and a number of subsidiaries of TNC’s
come into existence especially in core sectors like power, transport, infrastructure
development, telecommunications, electronics, white consumer goods, etc. This has also
resulted in starting subcontracting arrangements by TNCs with a number of SMEs. The
subcontracting arrangement has facilitated SMEs to ensure better quality control,
improved management practice and facilitated technology transfer.

         Promotion and development of SMEs has also been adopted by all countries,
developed and developing, as tools for making a direct attack on poverty through creation
of employment opportunities and generating incomes for the less privileged. Five decades
of sustained policy support and setting up by government of a number of promotional and
institutional agencies has helped Indian SMEs to come of age. Apart from exports of
traditional items of handloom and handicraft sectors, India has developed a very sound
foundation for modern small industries using latest state of art technologies and producing

TNC-SME Linkages for Development

a wide variety of goods belonging to the consumer and industrial sectors. The SMEs
structure in India has already led to the development of sound subcontracting
arrangements among large modern undertakings in automobiles, electrical, electronics,
chemicals and pharmaceuticals. Indian SMEs have now attained a status in terms of
technologies and managerial skills to enter into supply arrangement for a number of
intermediate products to support the output of TNCs and large industries at costs and
standards, which are internationally competitive. The automobile industry is one such
sector, which typically demonstrates strength of linkages of TNCs and SMEs, apart from
its contribution to the economic development of a country.

VIII. Auto Industry in India

         The indigenous auto industry in India was started in the forties with technical
collaboration of the international car majors, viz. Morris and Standards of United
Kingdom, Studebaker and Chrysler Corporations of United States and Fiat SPA of Italy.
In 1950, the Government of India decided on the allocation of foreign exchange for the
import of cars and trucks for those assembling companies, which did not have a
manufacturing programme.        However, later it was realised that indigenous car
manufacture could not be started till the assembly is stopped. Thus, the Tariff
Commission recommended that India should create its own manufacturing facilities
instead of carrying out mere assembly operations. The Government of India also reserved
the domestic market for the units that had genuine manufacturing programme. The above
decisions paved the way for Telco, Hindustan Motors, Premier Automobiles, Mahindra
and Mahindra for four-wheelers and Bajaj Auto for two-wheelers. Since then, the industry
has made tremendous progress in all aspects. With a set of policy guidelines, the Indian
auto ancillary industry was promoted and several components of passenger cars and
commercial vehicles were manufactured in a phased manner in ancillary units (sub-
contracting). Some of the first components, which were taken for local production, were
piston rings, thin walled bearings, radiators, propeller shafts, fuel injection pumps and
shock absorbers. Successive five-year plans have laid down guidelines and targets for
capacities and production. In general, the pace of growth of auto components has been in
line with other vehicle industry to maintain phased manufacturing programmes of cars,
trucks or tractors and also to cater to the replacement market. The auto component
industry has acquired the technical/technological expertise, which enabled them to absorb
latest technology with much ease as it happened in the eighties.

        The year 1980 marked an important watershed in the history of the Indian
automotive industry. The joint venture between Suzuki Motor Corporation and
Government of India-Maruti Udyog Ltd. opened the floodgates to Japanese technology in
the Indian market. This prompted the leading car manufacturers in India, Premier
Automobiles and Hindustan Motors to go in for vehicles fitted with Nissan and Isuzu
engines to compete with the technology brought by Maruti from Suzuki. A number of
other Indo-Japanese joint ventures were also set up in private sector such as Honda,
Toyota and Mitsubishi, Mercedes of Germany, Ford and General Motors from USA,
Daewoo and Hyundai from South Korea also made entry into this field. The following
table shows the major players in Auto industry in India.

                                                 TNC-SME Co-operation : The Experience of India

                           Indian Auto Industry-Major Units

 Indian Partner                  Foreign Partner             Vehicle produced

 Tata Engineering and            Mercedes Benz AG            Mercedes Models
 Locomotive Co. Ltd              Germany                     E.200, E. 220 E 230, E 250
                                                             Diesel and petrol version
                                                             Indica (small car)
                                 development                 Commercial vehicle 3-3.9 T
 Ashok Leylan Ltd                Iveco, Italy                1.6 Litre petrol and Diesel
 Mahindra and Mahindra Ltd       Ford, USA                   version,
                                                             Escort cars
 100% subsidiary                 Fiat, Italy                 Palio cars
 Premier Automobiles Ltd         Fiat, Italy                 1 Litre UNO Diesel/Petrol
 Birla Group of Company          General Motors, USA         cars
 100% subsidiary                 Daewoo Motor                Opel Astra and Corsa cars
 Honda Siel Cars (I) Ltd         Corporation                 Cielo/Matiz
 100% subsidiary                 Honda, Japan                Honda city
 Hindustan Motors Ltd            Volvo                       22-25 T Trucks
 100% subsidiary                 Mitsubishi Corporation      Lancer
 Kirloskar group                 Hyundai Motor               Santro
 100% subsidiary                 Corporation                 Utility vehicle
                                 Toyota Motor                Tractors
                                 Ford New Holland

       TELCO has launched an indigenous small car recently in 1998. From table VI, it
can also be seen that the interaction of TNCs with the host government is through FDI in
entering into joint.

IX.    Auto Component Industry

        The setting up of the indigenous auto industry in India has led to the growth of a
healthy auto component manufacturing enterprises in the SME sector. Prior to the setting
up of the Maruti Udyog with the Japanese Suzuki TNC, the Indian auto manufacturers,
namely TELCO, Hindustan Motors, Premier Automobiles and other four and two-wheeler
manufacturing units, including those in the tractor manufacturing sector, had already
promoted a number of sub-contracting SMEs for procuring their requirements of parts,
components and accessories. However, the success of the Indian joint venture with Suzuki
for the small car (Maruti) established beyond any shred of doubt that Indian SMEs have
developed capacities to conform to the requirements of international price and quality
standards. The recent examples in this sector are the Daewoo, Hyundai, Honda, and a few
others. Apart from the auto sector, Indian SMEs can also meet the needs for a wide
variety of intermediate parts and components in other mechanical, electrical and electronic

TNC-SME Linkages for Development

       The following paragraphs give the case study of Maruti Udyog Ltd., a joint venture
with Suzuki and its impact on auto industry in India and linkages with SMEs:

X.     Maruti Udyog Ltd:

        Maruti Udyog Ltd. was set up in 1980s as a joint venture between the Government
of India and Suzuki Corporation in Japan. The collaboration was for manufacture of the
Maruti Suzuki 800-cc car initially with the establishment of a contemporary automotive
industry, which would use components manufactured under a phased manufacturing
programme. Maruti diversified into 1000 cc models and other middle segment models
over the period. Maruti has established 170 main subcontractors and 11 joint ventures for
component manufacturing in collaboration with the suppliers to Suzuki in Japan. As on
date, 90 percent of components are locally made for different models of Maruti. This has
been achieved with a well developed and researched vendor development programmes.
Some engineers and managers of the vendors have been trained and exposed to Japanese
manufacturing practices with the Suzuki's vendors in Japan. As on date, Maruti purchases
components worth of IRS 30 billion. More than half of the suppliers of Maruti are from
the SME sector. Maruti's policy of development of ancillary units is developing them
within their vicinity so components can be procured “just in time”. Over a period of time,
Maruti has also developed vendors in other parts of India. Joint ventures established by
Maruti manufactures seats, sheet metal components, instrument panels, bumpers and
grills, muffler components, glasses, steering system, axles and different assemblies,
aluminum radiators, alternators, thermostats etc. Maruti's approach was development of
vendors through "Globlocalisation" i.e. localisation coupled with technological and
management standards into Global markets. Maruti practices Japanese philosophy and
subcontracts three-fourth of its total components. It is transparent to vendors and caters to
the specific needs of the small entrepreneurs especially relating to prompt clearance of
their dues. It also facilitates transfer of technology by bringing together the Indian
vendors with Japanese counterparts for pursuing the desired goals, particularly with
respect to production methods and quality control. addition, Maruti gives regular orders
and yearly schedules to vendors. In order that vendor capabilities do not deteriorate,
Maruti Udyog Ltd. periodically sends engineers to monitor manufacturing processes at
vendor locations and help them to overcome technical and managerial problems. It has
developed a certification programme for its vendors and holds training programmes for
them. Even the established manufactures such as Sundaram Fastners, Autolec, Sona
Steering enhanced their capabilities with regular interaction with Maruti Udyog Ltd.,
collaborating with vendors with a problem solving attitude and an underlying trust in them
is the key for Maruti's success. The supply chain management of Maruti Udyog Ltd
enabled them to achieve cost effective management and achieve what they call "customers
delight" providing through better price-value offering.

        Supply chain management strategies encompasses all processes from 'Mother
Barth to point of sale' and consists of the following:

       a.      JIT

       Seamless flow of material and information has been the key for supply chain. This
helped in reducing inventory, which in turn leads to low costs and increases flexibility,
improving price-value offerings. This resulted in reducing the indigenous inventory level
at Maruti Udyog Limited to 2.9 days in 1998-99 from nine days in 1995-96.

                                                  TNC-SME Co-operation : The Experience of India

       b.      Integrated approach

       Through the integrated supply chain management approach, Maruti Udyog Limited
has achieved this more by developing long-term relationships with the vendors, better
information management resulting in real time information exchange, modularization, tiers
and vendor consolidation and vendor proximity.

       c.      Extended enterprise

       Maruti Udyog Limited developed a long-term relationship with the vendors by
looking at them as extended enterprises. It trusted its vendors to the extent of asking them
to do self-inspection of parts supplied by them and by not going in for a second quality
check at the factory point. This has resulted in minimising duplication of work and thus
avoids performance of non-value adding activities.

       d.      Vendors selection

        Much attention has been paid by Maruti Udyog Limited in the selection of its
vendors as most of them have been identified as OEMs avoiding Tier-I category. This has
led to an effective percolation of all SCM practices across the organisation.

       e.      Modularization

        This has been the key area of focus for Maruti Udyog Ltd. It encouraged
proximity warehousing by locating most vendors near by the factory unit at Gurgaon.
Modularization of vendors has helped MUL in addressing the specific problems of a
particular set of vendors.

       f.      Material transportation

        This is the most tangible form of logistic cost and this has been achieved by a
milk-run system. This unique method of pooling supplies of various vendors of one area
in a truck has resulted in a drastic cut in this cost. MUL identified the vendors located in a
particular area, classified their production pattern and achieved transportation of supplies
from them at one go.

       g.      Material handling and storage

        This is being effectively managed by using recyclable packaging with plastic bins
and metal trolleys. This has done away with the job of unpacking the supplies at the
factory unit. It also aids decentralised unloading near the assembly line and uses gravity
conveyors using no electric power or manpower.

XI.    Lessons from the Indian Experience

        The Indian experience of TNCs like Suzuki-Maruti collaboration clearly indicates
that external manufacturing experience can be successfully fused to Indian environment
for SME development. Maruti's approach of supply chain management leading to the
development of vendors has been based on the principle of partners in progress and not a
mere manufacturer-vendor relationship. Such a relationship was existing to a certain

TNC-SME Linkages for Development

extent among manufacturers and vendors in pre Maruti era. But the approach was more of
master-supplier relationship rather than partner relationship. Indian auto makers such as
TELCO, Ashok Leyland, Bajaj Auto and several others have been motivated by the new
approach of Maruti Udyog Ltd. Maruti Udyog Ltd, through its approach has also
facilitated horizontal transfer of technology for various components among their suppliers
in Japan and Indian SMEs. The mere fact that the majority of the vendors have acquired
ISO 9000, indicates the quality awareness created by Maruti Udyog Ltd. Involvement of
engineers and managers in day-to-day operation of suppliers created awareness among
SMEs that need to adhere to systems and produce quality products. Maruti also facilitated
procurement of machinery and equipment for their suppliers from reliable sources abroad
and participated in equity of these enterprises.

       Maruti's success in SME development is due to the following:

      Willingness on the part of Suzuki to part with technology and encourage vendor
       development through active involvement.
      Suzuki's associate Maruti Udyog's assistance in facilitating technology transfer
       among their associate suppliers and Indian SMEs.
      Favourable Government policy for penetrating into the market.
      Favourable and enduring cordial relationship between management and workforce
       with common approach to problem solving related to production, marketing, etc.
      The forward linkages maintained by Maruti with their distributors, service stations
       and auto parts dealers, in educating them and facilitating their timely action in
       after-sales service and supply of spare parts.
      Frequent interactive meetings with dealers and end users to assess their goodwill to
       the products.
      The backward linkages consist of supply of raw materials, assistance in
       procurement of suitable machinery and equipment, assistance in establishing
       quality control norms testing laboratories and tie up with parent company for their
      The training of technical personnel of suppliers and frequent interaction facilitated
       generation of goodwill.

       With the entry of large number of TNCs in the auto sector, the contribution of this
industry to GDP has reached a level of approximately 4 percent. However, according to
estimates made by the Indian Automobile Manufacturers, the car production in India will
be 2.5 million by the year 2010 compared to half a million at present. Production of two
wheelers is expected to go up to 13 million and of commercial vehicles to 0.60 million
during the same period from the present levels of 4 million and 0.15 million respectively.
The investment in auto sector is estimated at $ 36 billion, which provides direct
employment to 450,000 persons and indirect employment to 10 million.

       The above case study of auto industry in India is only illustrative of the Indian
SMEs capabilities to meet the technical and quality standards of TNCs. Other areas where
Indian SMEs have established not only an equal but an improved niche are the electronics
and computer software and hardware, telecommunications, consumer durables etc., where
TNCs and SMEs can build long-term sustainable linkages leading to economic
development of India.

                                                  TNC-SME Co-operation : The Experience of India

XII.   Conclusions:

        TNCs have contributed immensely to the SME development worldwide. Even in
developed countries, SMEs owe their development to TNCs operating in the country. With
favourable investment climate in India, FDI by TNCs can be increased many times
resulting in creation of employment through SMEs. TNCs form joint ventures to facilitate
transfer of technology and to set up cost effective manufacturing facilities of finished
products. As in the case of Suzuki-Maruti, other TNCs can also help change the
manufacturing culture of SMEs through active involvement as partners in progress rather
than as manufacturer-vendor. The approach of Suzuki is mainly responsible for the
quality auto products that are being made by Indian SMEs. Capacity building by Maruti-
Suzuki in this area is mainly responsible for attracting other TNCs from Japan, South
Korea, Germany, United Kingdom, United States and other countries to source auto
components from India. Today SMEs in the auto segment have developed expertise and
are in a position to cater to the needs of leading auto majors who have set up joint ventures
or wholly-owned subsidiaries in India. Indian experience with TNCs is an eye opener to
other developing countries for attracting FDIs through TNCs and thereby ensuring
industrial development.