Effects of Poor Transportation on Lean Production and Industrial Clustering: Evidence from the Indian Auto Industry

Conventional wisdom suggests that poor transportation systems adversely affect industrial competitiveness by raising the unit cost of freight. This study finds that freight is neither the only nor the most significant cost that poor transportation creates for auto firms in India. Poor transportation also raises the damages incurred in transit, total inventories, and ordering and overhead costs. Worse, it creates external diseconomies by introducing inefficiencies and unreliability in the supply chain, making it difficult for assemblers to implement lean production. These external diseconomies—rather than excessive freight prices or other direct costs—may be the more debilitating impact of poor transportation infrastructure on industrial performance. In India, transportation constraints and the imperatives of lean production are driving assemblers to create auto clusters.