A market worth fighting for
The automotive industry in India is not a small one. The sixth largest manufacturing base in the world, India is currently producing over three million passenger vehicles and over 19 million 2-wheelers. The last 5-year CAGR of sales in the component industry has been 11.1 percent. So profit pressures notwithstanding, this will be an important market in the future. Important for any large global player.

However, vehicles are changing and changing fast. Just as the telecom industry went through a revolution, so is the automotive industry. Through a combination of regulation and more so consumer demand, features that were not seen in Indian cars five years ago are rapidly becoming standard.

These are altering the sophistication of components, for example styling and materials, and is also altering the technologies in use. Passenger comfort and infotainment systems are creating a sea change in complexity. At a time like this, it is disturbing that Indian companies in the sector are investing only 0.5 percent of sales in R&D, compared with the 3-4 percent in US, Europe and China.

Diversification is fun
When such changes are afoot, it is hardly the time for auto component leaders to be distracted with diversification. Corporate strategy studies have shown that unrelated diversifications are inherently risky. They are fun and keep people occupied in a project style of working, but they really don't yield substantial shareholder value.

This is because, the industry models, the capabilities required and the management bandwidth needed to learn new areas are often underestimated. In a classic HBR article (From Competitive Advantage to Competitive Strategy, HBR May 1987), Michael Porter describes an analysis of unrelated diversification over a period of over 3 decades, done by companies with deep managerial talent, including companies like GE.

The story is not encouraging. He shows that 74 percent of unrelated acquisitions end up getting divested. It shows that building capability in one industry, does not easily translate to other industries. If it were that easy to learn a new industry, then it would be easy to enter and grow in auto components as well. In reality, shareholder value is actually reliant on the core, base business and not the diversification itself.

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