Group 3

07927816
07927827
07927863

SJMSOM, IIT Bombay

APPLIED INDUSTRIAL ORGANISATION | 12th Nov, 2008

Theory of Industrial Clusters

Defining Industrial Clusters

Classification of Clusters
Benefits of Cluster Formation
Significance of Clusters for SMEs
The Flowchart Model of Cluster Policy

Defining Industrial Clusters

Geographically proximate group of companies
and associated institutions in a particular field

Was introduced
and popularized
by Michael Porter

CLUSTER

Linked by
commonalities and
complementarities

Also known as a business cluster, competitive cluster,

or Porterian cluster

Identifying a Cluster
Sectoral
A cluster of
businesses operating
together within the
same commercial
sector

Vertical
Typically a supply
chain cluster

Geographical
Geographically
proximate group of
companies

Horizontal
Interconnections
between businesses
sharing resources

Types of Clusters
Techno - Clusters
High Technology Oriented
Well adapted to the Knowledge Economy
Comprise of renowned institutions and research centers
Silicon Valley
Historic Knowhow-based clusters
Maintain advantage of knowhow garnered over several years
London as a financial centre
Factor Endowment clusters
Creation linked to comparative advantage derived due to geographic location
Wine production clusters in France

Benefits of Cluster Formation

Agglomeration Effects

Increased productivity

More focused direction

and faster innovation
cycles

Agglomeration Effects involve those benefits that firms

obtain when locating near to each other

Cluster Benefits
Increased Productivity
Improved access to labor and suppliers
Existing pool of specialized and skilled labor
Reduces recruiting costs
Provides a deep and specialized supplier base
Improved access to specialized information
Preferred access to extensive market, technical, and competitive information
Access to institutions and public goods
Investments made by government or other public organizations
Easier to measure performance
Competitors share general circumstances

Cluster Benefits
Faster Innovation

Innovation visibility through proximity

Outcome of ongoing relationships
Allows manufacturers to learn early on about changing customer needs and
service concepts

Enhanced flexibility

Provide the capacity and flexibility to react rapidly to a customer request

Lower experimentation costs

Companies delay large commitments until they are more assured that a
particular innovation will be fruitful

Cluster Policy Kuchiki (2005)

Flowchart Model for Cluster Policy

Effect of Toyota on the Industrial

Policy of Guangzhou, China

Industrial Clusters in India

Pharma Cluster - Ahmedabad

IT Cluster - Bangalore

Evolution Gujarat Pharma Cluster

Early Starter
Strong Relation

Alembic Chemical Works, started in 1907

6 years after the first pharma firm in India
Chemical, Pharma machinery, IT
Support from academic field

High-growth
Segments

CRAMS, R&D, Generics, NCE

Capitalized early-on into these areas

Increasing
Contribution

10% of Indias pharma output in 2002-03

Increased to 42% of Indias output in 2005-06

SEZ Driven

Established pharma ecosystem with good infra

Zydus , Cadila Pharma, Jubilant, JB Chemicals

Pharma Cluster - Ahmedabad

Size & Growth of Pharma Exports
Gujarat vs India

Size & Growth of Pharma Industry

Gujarat vs India
12

10.6

10
8

5.2

CAGR 87%

6.4

4.4

4
3

CAGR 78%

2.5

2
1.1

0.7

0
India
2002-03

Gujarat

0.2

2005-06

India
2002-03

Gujarat
2005-06

Capital Investment in Gujarat has grown at around 54%

Number of units (directly owned and infused capital) increased from 1964 to 3462

Gujarats contribution to Indias total pharma turnover have risen from 10% to 42%

Contribution to Indias exports have increased from 8% to over 22%

Factors favouring Cluster formation

Raw Materials

Bulk Drugs
Excipients
Capsules
Glass Vials

Support
Institutions

B.V. Patel Center

FDC Laboratory
LM Pharma
College

Financial
Institutions

Industrial
Associations

SIDBI
ICICI
GSFC

IDMA-GSB
MDMA
ADMA

Strong linkages between

small & medium players
Proper ecosystem for
growth
Benign regulatory
environment
75-100 bulk producers
1000+ formulation units

Evolution Bangalore IT Cluster

Linkages
Related Industries

Educational Industry linkages

Favourable research climate, R&D hub of India
Defense PSUs, Electronics Industry natural extension
BEL, HAL, HMT, BHEL, ITI

Favourable
Environment

Exit of foreign firms left space of local firms

Trade Protection and Import Liberalization

Silicon Valley

Currently houses over 1500 IT firms

Infosys, Wipro HQ and Motorola, hp, Texas Instruments

Service Offerings

Firms started with Application Devl and Maintenance

Moving up value chain to provide Integrated packages

IT Cluster Factors and Benefits

Perceived benefits

Factors favouring formation

Policy initiatives of govt.

(both central and local)
Availability of large number
of skilled workers
Y2K problem a fortuitous
event for India
Role of the Indian Diaspora

Proximity Benefits with

R&D intensive firms
Innovation Systems
Knowledge flows &
Capability building
Intra firm linkages

Karnataka accounts for 37.6% of total software exports

from India and Bangalore accounts for 97% of it.

Benefits of Cluster vs. Non-cluster firms

Perceived Advantages
Access to skilled workers
Access to R&D Inst.

Blore
3.99

Pune/NCR Non-cluster B'lore vs Pune

3.74
3.29
Y

B'lore vs Non-cluster
Y

Access to information from comp

3.61
3.08

3.25
3.00

2.56
2.68

Y
N

Y
Y

Better infrastructure
Application Dev. Process (%)
Quality Process (%)

3.30
88.60
34.30

3.79
88.13
31.77

3.68
76.67
10.83

Y
N
N

Y
Y
Y

Key Observations

Access to labour, R&D, processes

Access to information from
competitors
Non-cluster firms seek better infra
Linkages nurture smaller firms
Higher employee productivity

180

60

160

50

140
120

40

100

30

80
60

20

40

10

20
0

Bangalore

Pune/NCR

No of employees

Non-cluster firms

Employee Productivity

Automobile Clusters in India

Evolution of Indian Automobile Sector

Study of two major Automobile Clusters in India

Analysis of Behavior & Performance of Cluster vs. Non Cluster Firms

Evolution of Automobile Sector

Timeline

Autocomponents

Passenger Cars

Pre 1985

Protected,
High import Tariff

Licensed, Closed market

Quantitative restriction

1985-1995

JV with OEM

Entry of Maruti

1995-2000

Localization of
products

Entry of Global Players

2000 onwards

Export focus

Indigenisation,
Thrust on exports

Industry has developed strong backward and forward linkages

Characterized by technically capable companies in OEM and autocomponents
Areas include manufacturing, design, testing, product development
Exports of autocomponents growing at CAGR of 40% over the last 5 years

Performance of Automobile Sector

Indias position

2nd in two wheelers

11th in passenger cars
13th in commercial vehicles

Passenger Vehicles (Mn Units)

2007
2006
2005
2004

Growth Targets: 2016

Automotive Industry

Total market $122 - $139 bn

Domestic market $82 bn
Exports ~ $35 bn

2002
0

Total market $40 45 bn

Domestic market
Exports ~ $25 bn
HHI = 527; CR4 = 34%

2005

400

600

800 1000 1200 1400

2007
2006

200

Autocomponents Turnover ($ bn)

Autocomponent Industry

CAGR 15.4%

2003

CAGR
28.9 %

2004
2003
0

10

12

14

16

Study of two major Indian Auto Clusters

References:
Industrial Clusters in India: Evidence from Automobile
Clusters in Chennai and the National Capital Region
Aya Okada and N.S. Siddharthan
April 2007

Chennai Auto Cluster [Chennai, Bangalore, Hosur]

Overview

50%
40%
10%

Leading Auto Cluster

Evolution

1950s: Initial Formation

21% of passenger cars

TVS & Std. Motors among first players

33% of commercial vehicles

Heavy dependence on imports

35% of auto-components

Active government support

>100 large & medium cos.

Genesis of large no. of auto

component firms laid early

Capabilities

1960 1990: Capacity Building

Valve assemblies

Fuel / Oil / Water Pumps

Large no. of technical schools setup

Motors & Engines

Mid-day meal program for schools

Steering gear & Wheel Rims

Airports & Seaports

Tires & shock absorbers

Bearings & Radiators

Financial incentives by state like

technology subsidies and trade fairs

State agencies setup to facilitate FDI

*% indicates Tamil Nadus share in overall manufacturing output

Chennai Auto Cluster

Overview

50%
40%
10%

Leading Auto Cluster

Evolution

1990s: Delicensing of Industry

21% of passenger cars

Hyundai, Mitsubishi & Ford set shop

33% of commercial vehicles

35% of auto-components

>100 large & medium cos.

Attracted by capabilities of auto

component manufacturing firms and
government support

Rise of local firms with IT capabilities

Capabilities

Valve assemblies

Fuel / Oil / Water Pumps

Motors & Engines

Steering gear & Wheel Rims

Tires & shock absorbers

Bearings & Radiators

*% indicates Tamil Nadus share in overall manufacturing output

Impact of smaller firms

Proliferation of industrial estates

providing cheap technical services

Guindy Industrial Estate in Chennai is

the largest and a typical example

Presently, in globalization mode

fuelled by IT and increase in
outsourcing

TVS Group

Wheels
India

Sundaram
Dynacast

Lucas TVS

Turbo
Energy

Brakes India

Nippon
Electricals

Sundaram
Clayton

TVS Cherry

Sundaram
Fasteners

TVS Motors

Major Players in the Chennai Auto Cluster

TVS Group

Rane Engine
Valves
Rane Brake
Linings

Global Players
Hyundai, Ford, Mitsubishi
Rane
Madras
Rane NSK
Steering
Systems
Rane TRW
Steering
Systems

100% subsidiary setup in 98

14 Korean Tier-1 suppliers
Capacity ramp-up to 4L p.a.
75% local content
Technology licensing (US firms)
Hub of global parts sourcing

30% local content

Focus on premium segment
JV with Hindustan Motors

Major Players in the Chennai Auto Cluster

Rane Group

Ashok
Leyland (AL)

Rane Engine
Valves
Rane Brake
Linings
Rane
Madras
Rane NSK
Steering
Systems
Rane TRW
Steering
Systems

Except Ashok Leyland, the lead firms

in the Chennai auto cluster are
component manufacturers which
paved the way for the entry of
foreign players like Ford & Hyundai in
the nineties into the cluster Global Players

Hyundai, Ford, Mitsubishi

This behavior is atypical of most auto
cluster formations across the world

Major Players in the Chennai Auto Cluster

Rane Group

Ashok
Leyland (AL)

Chennai Auto Cluster: Growth Drivers

Government
Infrastructure
Established business houses
Smaller Firms
Highly skilled workforce
IT Emergence
Global players

NCR Auto Cluster [Delhi, Gurgaon, Faridabad]

Overview

Cluster Zone

Need for Vendor Development

Haryana, Delhi & some UP districts

Major Players

Maruti Udyog Ltd. (MUL)

Started in 1982 as GOI + Suzuki JV

First greenfield plant in Gurgaon

Two more plants in Gurgaon & Noida

Largest car manufacturer in India

Daewoo Motors India Ltd.

GOIs Phased Manufacturing Plan

Foreign firms to promote localization

Suzukis MOU: 70% localization by 87

Government support to SSI

Dependence on outsourcing

80% components outsourced

Local supplier quality levels very low

Introduction of JIT + Taxes

Ceased operation after few years

Supplier close to plant was imperative

Insignificant contribution to cluster

Octroi significantly reduced margins

Honda Siel Cars Ltd.

Recently established (2000)

Low production volume

Yen Appreciation in 80s

High custom duty on CKD units

MULs Role in Vendor Development

MUL Suppliers:
Geographical Distribution
160

MULs major
suppliers are
located in NCR

140

No. of Firms

120
100
80
60

MUL
Vendor Development
Supplier

MULs Role

Bharat Seats

15% equity stake

JV with Howa, Japan

Macino Plastics

15% equity stake

Subros

15% equity stake

Technology from Denso

Asahi Safety Glass

15% equity stake

Sona Steering

15% equity stake

Technology from Koyo

Mark Auto Industry

24% equity stake

Jay Bharat

31% equity stake

Motherson Sumi

Aided in collaboration

40
20
0

Large Firms

Medium Firms

Small Firms

Analysis of behavior & performance of cluster

versus non cluster firms (Automobile sector)
Methodology
Results & Conclusions

Methodology

Data
19

Auto Component Sub sectors

85 Firms
Timeline: 5 years (2004 2008)
Classification
Plant

Location (Cluster firms of NCR, Maharashtra, Chennai vs. others)

Source:

Capitaline Database

Variables
RONW
Advertisement

Intensity
Inventory Turnover

Overall Performance Comparison

RONW = PAT/SALES x SALES/TOTAL ASSETS x TOTAL ASSETS/NET WORTH

Cluster firms are

clearly ahead of
non cluster
firms with regards
to total
performance

160
140
120
RONW

RONW is a
comprehensive
measure of
performance as it
accounts for profit
margin, asset
turnover and
leverage capacity

180

100
80
60
40
20

0
NC
C

2004
28.98
68.70

2005
39.73
96.47

2006
36.57
128.91

2007
36.91
159.64

2008
39.55
146.45

Comparison of Advertisement Intensity

1.4%

Advertisement as
a % of Sales is
higher for noncluster firms.

This demands
lesser expenditure
on advertisement
for a comparable
level of sales

Advertisement/Sales%

Cluster firms
benefit from the
agglomeration
effect

1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
NC
C

2004
0.51%
0.24%

2005
0.70%
0.24%

2006
1.16%
0.22%

2007
1.05%
0.22%

2008
0.71%
0.15%

Comparison of Inventory Efficiency

This indicates that

cluster firms
maintain higher
inventory
efficiencies
(possibly due to
location
proximity)

16
14
Inventory Turnover (days)

Inventory
Turnover is
higher for cluster
firms compared to
non cluster
firms.

12
10
8
6
4
2
0
Non - Cluster
Cluster

2004
8.20
13.63

2005
9.27
13.47

2006
13.27
13.28

2007
12.93
14.00

2008
12.48
13.52

Comparison of Employee Productivity

One reason for

this could be due
to employees in
cluster zones
being paid higher
wages and the
inherent use of
wages (rather
than no. of
employees) to
measure
productivity

25

Avg. Employee Productivity

Counter
intuitively, the
employee
productivity for
non cluster
firms is greater as
compared to
cluster firms

20

15

10

0
Non - Cluster
Cluster

2004
15.86
16.04

2005
17.25
17.19

2006
18.45
16.69

2007
21.96
17.67

2008
21.85
18.59

References
Industrial Clusters in India: Evidence from Automobile Clusters in Chennai and
the National Capital Region, Aya Okada and N.S. Siddharthan, April 2007

The Flowchart Model of Cluster Policy: The Automobile Industry Cluster in China,
Akifumi Kuchiki, April 2007

Bangalore Cluster: Evolution, Growth and Challenges, Rakesh Basant, May 2006

Gujarat Pharma Industry, KPMG Report

Indian Auto Component Industry, IBEF Report, Jan 2008

Data Source: Capitaline

Thank You
Your queries are welcome