Total Rewards Quarterly

Indian Auto Industry – Treading the Road with Cautious Optimism

The Indian automobile industry has played a significant role in the India growth story. The current economic conditions are creating a favorable environment for the industry through initiatives such as ‘Make in India’, the renewed emphasis on improving road infrastructure, impetus on electric and hybrid vehicles to name a few. All these efforts set the stage for a bright and strong future for the automobile industry in India.

India is expected to be the third largest automobile industry globally by the end of 2016. India is in a prime position being the second largest two wheeler manufacturer in the world with the production set to go up to 34 million by the end of FY2020 from the existing 18.5 million. Passenger vehicle production is set to more than triple from 3.2 million in FY2015 to 10 million in FY2020. In terms of sales, India's share in the global passenger vehicle market is expected to touch 8% by FY2020 from 2.40% in FY2015.

We carried out an Aon Hewitt research to see how organizations will manage the growth projections and align their HR and specifically rewards strategy to maximize productivity.

Industry Segmentation

The Indian automobile sector is broadly categorized into four segments:

  • Two-wheelers
  • Passenger vehicles
  • Commercial vehicles
  • Three wheelers

The total number of automobile units being produced in India can be categorized as shown below.

The break-up of different categories as a percentage of total production seems to have stayed fairly constant while the total production has grown at a CAGR of 10.57% for the mentioned time period. The sales for FY2015 for the entire industry stand at a sizeable USD 74 Billion.

Business Outlook and Linkage to Rewards

The industry body, Society of Automobile Manufacturers (SIAM) also believes that both the two wheelers & passenger vehicles segment is set to register an upward growth while the commercial vehicles segment on an overall basis will remain flat. Even though the market is vulnerable to productivity-related metrics, strong economic growth, low fuel prices should support an upward trend. Some factors that would additionally boost demand are the strong monsoon after two years of drought, government policies on scrapping of vehicles older than 10 years (in case of diesel vehicles) and 15 years (in case of petrol vehicles) and increase in salaries of government employees.

The unified GST regime is likely to bring in easier transportation of goods between states, increased efficiencies and abolition of multiple taxes levied at various stages of manufacturing and sales processes. Apart from the OEMs, the auto components organizations would also benefit from a more conducive business environment with the successful implementation of GST.

Salary Increase Projections as Compared to Business Growth

In terms of salary increases, the auto industry has been observed to follow the same trend as India salary increases. The new normal is being established with double-digit growth ranging from 10.0% to 10.5%.

In terms of linkages between increments and business fundamentals, since 2009-10, the correlation co-efficient between the industry growth and salary increases has been a strong 94%. In 2015, the growth was primarily fuelled by the commercial vehicle industry at 9.4% but with minimum salary increases at 10.1%. Two wheelers grew at 1.35% and had salary increase of 10.5%. Passenger vehicles industry saw the highest salary increase of 10.7% and grew at 8.1%.

Two Wheelers

The two wheeler industry has seen a sharp decline in sales growth as compared to last year. The salary increments have also come down from 11.04% to 10.5% this year. The two wheeler industry has a more competitive pay at a junior management level, but at senior levels of management, they are not very aggressive as compared to the rest of the auto industry.

Passenger Vehicles

Sales growth has improved for this sector from 3.9% in 2014-15 to 8.1% in 2015-16. Salary increase numbers also show a similar increasing trend of 0.3% as compared to last year. The passenger vehicles industry is competitive at entry levels and at middle management levels.

Commercial Vehicles

The commercial vehicles industry has come back from having a decline in sales last year to having 9.43% growth this year. Salary increases also have been the highest as compared to the last four years at 10.1%. There is highly competitive pay at top levels of management.

Double-digit salary increases have impacted compensation levels over the years. Across levels, we have observed a compounded four-year growth ranging from 16% to 40% across levels averaging out to be 23%. The highest growth is in top management level due to scarcity of talent.

Even though there is great focus on ‘Make in India’, we notice that businesses are treading the line with caution. This is evitable through the business outlook numbers captured in the Aon Hewitt Salary Increase Survey 2016 where there has been a marginal dip in the expectations for the financial year. The expectation of a fast paced growth appears to have pushed back a few quarters.

At the same time, we also see a number of challenges facing the industry such as cost controls and requirements for better talent management and differentiation. Also, there is a legacy impact of different policies/market conditions from the past which are still displaying a knock-on effect on profitability and business results.

Productivity and Employee Cost Analysis

When one looks to find a correlation between productivity and business performance, it emerges that productivity has decreased due to a decline in business performance. Amongst the categories, the two wheeler productivity is highest. There has majorly been a Y-o-Y de-growth in productivity per FTE as well as revenue per FTE, though 2015 saw a turnaround. There has been a compounded de-growth in productivity per FTE over the last five years in all three segments, though revenue per FTE has increased by 8% in commercial vehicles and 17% in two wheelers. The passenger vehicles segment has seen compounded de-growth of 2% here.

The employee cost as a percentage of revenue for commercial vehicles segment is the highest, followed by passenger vehicles and two wheelers.

Overall, the employee cost has been rising gradually which may lead to risk of losing cost arbitrage in the coming decade. There has been a CAGR growth of 2.2% in employee cost as a percentage of revenue; while the compounded overall five year figure sits at 12%. The CAGR growth for the passenger cars segment is the highest at 7.5%, followed by two wheelers segment at 5% and an overall decline of -0.3% for the commercial vehicles segment. Another concern that we see coming through is with regards to headcount and cost linkage. As per the graphs above, there is a difference in the pyramids for headcount and cost.

The pyramids bulging in the middle and narrowing at junior levels over the years depicts that the population is moving towards the mid management category and may become heavy at mid and senior levels in next few years. This in turn also leads to the problem of defining the career paths to the mid management employees.

Pay for Performance

Another factor that needs to be considered is the pay for performance culture. This has historically not been very strong in the automobile sector, but now seems to be creating a strong foothold for itself. 2014-15 increases are slightly higher than 2013-14 across top 3 ratings, but same or less for Partially Meets Expectations (PME) and Does not Meet Expectations (DME) category. This depicts that organizations are willing to pay negligible/inflationary hikes in case of poor performance.

Also, performance curve used to be skewed towards Far Exceeds Expectations (FEE) and Exceeds Expectations (EE), but it is moving towards the center over the last few years, depicting organizations willing to pay higher increases but only to performing employees. Another point to consider in the pay for performance scenario is that the upcoming trend of doing away with bell curves does not seem suited to auto organizations due to its prime strategy being driving operational excellence through high yield and low cost, and hence affordability will become an issue. Although organizations are doing their best to tighten the bell curves with the two-pronged approach of:

  • Rewarding high performers well (1.6 times of average performer)
  • Inflationary increases to the tune of 4-5 % to low performers.

Another piece of evidence in favor of the increasing influence of the pay for performance culture is the movement of variable pay. There is a definite upward trend in the variable pay award for both sales/non-sales roles, as can be seen in the graphs below.

Conclusion

In conclusion, the declining productivity has led to 2.2% CAGR on wage cost as a percentage of revenue on an average across segments. Median compensation has been growing at a CAGR of 5.3% jumping by 23% over the last four years. Salary increases are plateauing around 10% to 10.5%. Increasing mid management and senior management are posing challenges for managing compensation costs and career paths. The bell curve is getting sharper each year – key talent gets as high as 1.6 times of average performer.

These are situations that the automobile industry will need to address as soon as possible. There are multiple growth opportunities that are already rearing their heads. The organizations that will handle the factors outlined as quickly and effectively as possible will be best placed to reap the rewards of these opportunities. The next five years seem ready to catapult the industry to new heights. It remains to be seen who makes the most of the growth story.




Article by:

 

Seema Arora
Consultant,
Aon Hewitt



Purnima Dhar
Consultant,
Aon Hewitt

For more information, please write to us at total.rewards@aonhewitt.com
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