STRATEGIC MANAGEMENT ASSIGNMENT ON EXTERNAL AUDITING OF AUTOMOBILE INDUSTRY

SUBMITTED TOMr.GURCHARAN SINGH

SUBMITTED BYDEEPIKA DUGGAL ESHAN GUPTA SIMRAN PARVESHINDER

(PROFESSOR)

MBA II (C)

SCHOOL OF MANAGEMENT STUDIES PUNJABI UNIVERSITY, PATIALA

INTRODUCTION

The Indian Automobile Industry is manufacturing over 11 million vehicles and exporting about 1.5 million every year. The dominant products of the industry are two wheelers with a market share of over 75% and passenger cars with a market share of about 16% source (10th april financial express). Commercial vehicles and three wheelers share about 9% of the market between them. About 91% of the vehicles sold are used by households and only about 9% for commercial purposes. The industry has attained a turnover of more than USD 35 billion and provides direct and indirect employment to over 13 million people.

WHAT IS EXTERNAL AUDIT?

An external audit is an evaluation of an entity's operations, governance, internal controls and financial reporting. It is usually conducted by external auditors from public accounting firms, government agencies or consulting companies. The primary purpose of an external audit is to provide an independent and unbiased assessment of an organization's internal governance and financial health. Industry regulators review external audit reports to evaluate an entity's adherence to industry standards and principles. For instance, many companies listed on stock exchanges must file audited financial information with exchange regulators at the end of the quarter or year--this is the case for all firms listed on the New York Stock Exchange (NYSE) or the NASDAQ. Similarly, financial institutions operating in some capital markets--for instance, commodities futures markets--must file quarterly or annual reports with the Commodities Futures Trading Commission. External audit reports help an entity's senior management evaluate the adequacy and effectiveness of existing internal controls. The internal audit department also relies on external audit reports to plan, review and execute annual audit

programs. For instance, internal audits might allocate more resources on areas highlighted as risky by external auditors in prior examinations. Similarly, the entity's compliance department might use audit information prepared by outsiders to focus on areas where ethical issues have been raised. External audit reports are also incorporated in the firm's audit committee report presented to the board of directors.

Government Policies & Automotive Sector

The auto sector is one of the main drivers of the economy. Every commercial vehicle manufactured, creates 13.31 jobs, while every passenger car creates 5.31 jobs and every two-wheeler creates 0.49 jobs in the country. Besides, the automobile industry has an output multiplier of 2.24, i.e. for every additional rupee of output in the auto industry, the overall output of the Indian economy increases by Rs. 2.24. Realising this, successive governments have taken various measures to provide the much-required push to the auto sector. The road infrastructure, in particular, had been given special importance by the previous government of NDA with the 'Golden Quadrilateral' project and the 'North-South" and "East-West" corridor projects. This momentum has been maintained by the present Congress-led United Progressive Alliance (UPA) government with its continued support to road infrastructure development. The excise and customs duties on cars and auto-components have been continuously declining over the past five years. All these factors have contributed in providing the impetus to the auto sector. The government has chalked out a plan regarding Bharat Stage IV (equivalent to Euro IV) norms by 2010. The government is also planning to form auto clusters to improve international competitiveness of domestic industries. First such cluster will be set up in the Pimpri-Chinchwad area of Maharashtra at a cost of Rs. 67 crores. All these efforts are directed towards increasing the competitiveness of Indian auto industries and providing better, technologically advanced and environmental friendly products to the end user.

OUTLOOK The positive demographic factors, stable macro-economic environment and proreform policies of the government saw almost all major global auto players making their way into India. The intense competition has compelled the manufacturers to launch the latest global offering in India as early as possible. It has also enabled to keep the prices of the vehicles under check. The consumers, in turn, have benefited from wide choice of models, technologically advanced cars and better service from the car manufacturers. All this has led to vehicle sales crossing 1 million units in the calendar year 2004, growing at a pace of around 25%.

Demand Determinants Determinants of demand for this industry include vehicle prices (which are determined largely by wage, material and equipment costs) and exchange rates, preferences, the running cost of a vehicle (mainly determined by the price of petrol), income, interest rates, scrapping rates, and product innovation. Exchange Rate: Movement in the value of Rupee determines the attractiveness of Indian products overseas and the price of import for domestic consumption. Affordability: Movement in income and interest rates determine the affordability of new motor vehicles. Allowing unrestricted Foreign Direct Investment (FDI) led to increase in competition in the domestic market hence, making better vehicles available at affordable prices. Product Innovation is an important determinant as it allows better models to be available each year and also encourages manufacturing of environmental friendly cars. Demographics: It is evident that high population of India has been one of the major reasons for large size of automobile industry in India. Factors that may be augment demand include rising population and an increasing proportion of young persons in the population that will be more inclined to use and replace

cars. Also, increase in people with lesser dependency on traditional single family income structure is likely to add value to vehicle demand. Infrastructure: Longer-term determinants of demand include development in Indians infrastructure. Indias banking giant State Bank of India and Australias Macquarie Group has launched an infrastructure fund to rise up to USD 3 billion for infrastructure improvements. India needs about $500 billion to repair its infrastructure such as ports, roads, and power units. These investments are been made with an aim to generate long-term cash flow from automobile, power, and telecom industries. (Source: Silicon India) Price of Petrol: Movement in oil prices also have an impact on demand for large cars in India. During periods of high fuel cost as experienced in 2007 and first half of 2008, demand for large cars declined in favour of smaller, more fuel efficient vehicles. The changing patterns in customer preferences for smaller more fuel efficient vehicles led to the launch of Tata Motors Nano -one of worlds smallest and cheapest cars.

Conclusion
The key to success in the industry is to improve labour productivity, labour flexibility, and capital efficiency. Having quality manpower, infrastructure improvements, and raw material availability also play a major role. Access to latest and most efficient technology and techniques will bring competitive advantage to the major players. Utilising manufacturing plants to optimum level and understanding implications from the government policies are the essentials in the Automotive Industry of India. Both, Industry and Indian Government are obligated to intervene the Indian Automotive industry. The Indian government should facilitate infrastructure creation, create favourable and predictable business environment, attract investment and promote research and development. The role of Industry will primarily be in designing and manufacturing products of world-class quality establishing cost competitiveness and improving productivity in labour and in capital. With a combined effort, the Indian Automotive industry will emerge as the destination of choice in the world for design and manufacturing of automobiles.