Localization By Global Manufacturers Should Not Be Mandated

Hyundai Motor India Ltd, a key player in India’s automotive landscape, has reportedly saved about Rs. 5,700 crore in foreign exchange (forex) since 2019 by manufacturing or sourcing over 1,200 components locally, including critical elements like battery packs for electric vehicles (EVs). It has achieved a localization rate of 92 per cent. However, the policy framework—characterized by mandatory domestic content requirements—ignores this reality. Hyundai’s experience is not episodic. A study by the Indian Institute of Management, Bangalore, found that “the advantages leveraged through localization have a direct influence on the sales volume of the cars. Localization also helps in ensuring that high degree of service quality is maintained which yields to greater customer satisfaction, customer loyalty, and increased sales.” Such policies are often designed to support domestic industries, reduce dependence on imports, and enhance the overall economic value generated within a country. Global EV manufacturers must achieve 50 per cent domestic value addition (DVA) within five years of starting operations in India.

As regards the wind energy sector, Niti Aayog had in March 2024 suggested that manufacturers should source at least 60 per cent of their components by value from within India. Mandatory localization requirements, though well-intentioned, can have grim unintended consequences. They can thwart foreign investment, as overseas companies may not be aware of the potential of domestic manufacturing. It is well-known that India has a robust entrepreneurial class, technical know-how, financing mechanisms and institutional support to meet most of the requirements of global manufacturers. Once they enter the domestic market, they would inevitably choose local factories for inputs. Against this backdrop, mandatory provisions give foreign manufacturers the impression that they may be compelled to work with local suppliers who lack the necessary expertise or capacity, resulting in quality concerns or supply chain inefficiencies. The localization mandates may increase production costs if local suppliers are few and therefore charge a premium. Instead of imposing strict local sourcing conditions, policymakers should consider creating an enabling environment that naturally incentivizes localization by way of tax benefits for local sourcing, infrastructure development and skill enhancement programs for local suppliers.

There is enough empirical evidence to suggest that manufacturers naturally gravitate towards domestic factories, primarily because of the cost advantages of local production and the proximity of suppliers. Market-driven localization allows manufacturers the flexibility to strike the right balance between local and global sourcing, fostering innovation and competitiveness. Moreover, voluntary localization often results in more sustainable outcomes. Manufacturers invest in building long-term partnerships with local suppliers, transferring technology and knowledge in the process. This leads to a more robust and globally competitive domestic supply chain. To foster a thriving manufacturing ecosystem, policymakers should enhance the capabilities of local suppliers through government-funded training programs and partnerships with global firms. A skilled supplier base naturally attracts manufacturers. The government should develop vibrant industrial clusters and logistics networks to support localized manufacturing. This will also help technology transfer. Eventually, it is not only multinational companies that should learn a lesson from Hyundai’s localization experience, eve our policymakers should realize that the essence of a free market is freedom of choice on the part of private enterprise. Freedom, rather than official directives, should be the bottom line.