future of the automotive industry in India

18 December 2006

future of the automotive industry in India Rajeev Metha

The only way is up The Indian automotive market offers tremendous opportunities due to a strong GDP growth, increased urbanisation, an expanding middle class, an upward migration of disposable incomes and availability of easy financing options. The Indian automotive industry is dominated by two-wheelers, while cars account for about 10.7 percent of the total industry. The potential for growth is enormous. The Indian Governments Automotive Mission Plan 2006-2016 states that the Indian passenger car market is expected to reach 3 million by 2015, making India as one of the top 10 car markets in the world. India is also expected to remain as the second-largest two-wheeler manufacturer, the largest tractor and three-wheeler manufacturer and the fourth-largest truck manufacturer in the world by 2015 1 . The main considerations driving customer preference are mainly reliability and economy.
Segment-wise percentage contributions and growth rates
90 80 70 60 50 40 30 20 10 0 78.1

Passenger car projection estimates (2005-2015)

3.5 3 in Millions 2.5 2 1.5 1 0.5 0 2005 2010 2015 Number of Passenger Cars 1 2 3

in Percentage

25.6 16.7 1 0.7 2.7 Passanger Car MUV Market Percentage Contribution

24.6 15.5 4 CV Two-wheelers

19.5 4.5

Threewheelers CAGR (2001-02 to 2005-06)

Automotive Mission plan 2006-2016

Government commitment and support still likely in the future Post-liberalisation, the government has made specific attempts to reduce barriers and controls, such as allowing 100 percent foreign direct investment in the automotive sector and reducing customs tariffs on automotive components. The government has also set an ambitious target of increasing the revenue turnover derived from the automotive sector from about 5 to 10 percent of the GDP by 2016. The emphasis in the future is expected to be on exports of small cars, multi-utility vehicles, twowheelers and components. With regard to emission norms for passenger cars, the government has proposed the implementation of EuroIV emission norms from 2010 onwards, which is likely to lead to an increase in car prices. According to Avik Chattopadhyay Deputy General Manager, Marketing, of Maruti the Indian government is expected to continue the process of reforms even in the future 2 . Changing face of the passenger car industry The Indian passenger car industry is dominated by the small car segment, and more specifically the compact car segment, both in terms of growth rates as well as contribution to total passenger car sales. Due to the fact that India is a low-income market, the dominance of small cars is expected to continue even in the future. Tata Motors, a leading Indian OEM, has plans of launching a small car at USD 2,326 in 2008 3 . This is expected to convert a lot of two-wheeler prospects into passenger car customers. This is also expected to lead to other OEMs launching similar

1 2

Source: Automotive Mission plan 2006-2016 Source: Clearstate Primary Research Source: http://www.dancewithshadows.com/pub/tata-cheap-car.asp

3 3

products/reducing prices and the creation of a new segment (below even the mini-car segment). Rural customers are also expected to be likely target segments for this car.

The four-wheeler market (including commercial vehicles) is dominated by Asian OEMs, with American OEMs occupying only about three percent of the market. Hence, resurgence from the American OEMs seems likely in the future. Recently, the American OEMs have also announced their plans for capacity expansions however, the main difficulty is their lack of expertise for making fuel-efficient, small cars. General Motors (GM), in order to circumvent this, has recently announced the launch of a Daewoo small car (known as the Spark) in India in 2007.

The passenger car market as per sub-segments

The four-wheeler market according to manufacturers country of origin

45 40 35 30 25 20 15 10 5 0 39.0 41.8

140 120 100 80 60 40 20 0 -20

119 68.4 in Percentage

in Percentage

15.1 3.3

9.4 Mini-9.6

25.3 Compact

19.5 15.4 Midsize

2.2 Executive

0.5 0 Premium

0.8 Japanese European Korean

American

Indian

Percentage Contribution to Total Car Market CAGR (2001-02 to 2005-06) Percentage Contribution to Total Car Production

Passenger Car Sub-segments (Dimension/Cost): Mini: Up to 3400mm/ less than USD 6,500; Executive: 4,501-4,700mm/USD 17,100-28,950; Compact: 3401-4000mm/ USD 6,500-10,500; Premium: 4,701-5000mm/ USD 28,950+; Mid-size: 4001-4500mm/ USD 10,500-17,100 Automotive Mission plan 2006-2016, ACMA 4

The used-car market is also expected to grow in the future, especially considering the fact that the ratio of used-car sales to new-car sales is about 1:1 in India this is less than the global ratio of 2:1. The major OEMs, including Maruti, Hyundai, GM, etc., have already decided to enter this market as used car dealers. Increased market share for fuels other than petrol is expected in the passenger car segment, especially considering the rising prices for petrol. Diesel is expected to capture about 35 percent of the market share in 2010, the current share being 30 percent 5 . Maruti and Hyundai, two major gasoline players, have announced their plans to enter the diesel market as well. LPG as a fuel is also gaining popularity as it is cheaper than petrol and requires less maintenance and conversion costs as compared to CNG. Research work on bio diesel as a fuel for the future is also underway. The Indian manufacturing may go through periods of overcapacity as the vehicle capacity estimations are about three million passenger cars in the next five years. A recent trend observed is the sharing of manufacturing facilities for example, a deal between Maruti and Nissan, wherein the former is expected to produce cars on its assembly lines labeling them

Clearstate Primary Research

as Nissan. The use of Aluminum in automotives is expected to increase especially since this helps in boosting fuel economy, performance and safety, while reducing emissions. The use of electronics in manufacturing is also expected to increase. India: the soon to be small-car hub? Small cars constitute about 78 percent of the domestic demand, making India the thirdlargest producer of small cars after Japan and Brazil. Therefore, the government has decided to launch a programme to make India a small car hub in the future a recent reduction in excise duties from 24 percent to 16 percent exclusively for small cars being an initiative in this direction. The major players not present in this segment have also drawn up plans for entering this segment in the near future. Players with expertise in small car, such as Maruti and Hyundai, have formulated plans for ramping up production capacities. It is likely that with the small car volume increase (both due to domestic volumes and exports) in the next decade, domestic players, such as Tata Motors, would become strong global players. Commercial vehicles to continue strong growth This segment has shown strong growth over the last 5 years (at CAGR of over 20 percent), and the growth is likely to continue in the future as well as this is mainly dependent on economic progress and road-network availability, both of which are growing at a fast pace in the country. According to the National Highway authority estimations, the growth of highways is expected to proceed at a CAGR of about 6 percent during 2006-2015, in contrast to a growth of about 1.2 percent during 1951-1995.

Impact of road development on the market for commercial vehicles

1200 Truck Penetration MHCV/mn Population 1000 800 600 400 200 0 0 0.5 1 1.5
2

Commercial vehicle projections in India (2005-2010)

Dramatic Increase in Penetration in Initial Stages of Road Development

Germany France

0.9 0.8

CAGR 20%

0.81

Spain UK Korea Turkey Brazil China India

2 2.5

0.7 0.6

Japan

in Millions

0.5 0.39 0.4 0.3 0.2 0.1 0 2005-6 2009-10

Paved Highway Km/Area/Km

Autonews and www.artc.org

The future is also expected to witness more product sophistication with increasing power to weight solutions especially for the truck segment. Multinationals have already made an entry in the segment with MAN, Daimler Chrysler and Volvo already present in the market. Two-wheelers: Three players dominate This segment has been growing and is expected to continue at estimated growth rates of about 12 percent till 2010. The recent past has seen the motor cycle segment dominate, occupying about 80 percent of the entire market. Product life cycles have been shrinking,

with the emergence of new motor cycle segments based on style and performance capturing market share. The two-wheeler market is dominated by an Indo-Japanese joint venture company, Hero Honda, accounting for 40 percent of the share. The top 3 players in fact, including Hero Honda and the two Indian companies, Bajaj and TVS, account for about 88 percent of the market. Hero Honda and Bajaj have shown revenue increases of over 20 percent and profitability of over 15 percent each during the period of 2004 -2006. TVS Motors showed a revenue increase of over 7 percent and a negative profit growth in the same period. At present, approximately 65 percent of the twowheeler market is captured by the entry level segment of 100cc motorcycles. However, this segment has shown a decline in growth in the last year (-3.5 percent) with an increase in growth in the more powerful and stylish 125-250cc segment (36 percent). India firms venturing abroad Manufacturing occupies about 60 percent of the total direct overseas investments by Indian companies in various sectors. The Indian automotive companies, including both Indian OEMs and well as component manufacturers, have been investing mainly in the domains of forging and casting, particularly in European countries. So far, the industry has witnessed 16 acquisitions (five in 2005). The collapsing auto ancillary industry in these regions makes the deal extremely affordable for Indian companies, providing them market access and brand enhancement opportunities in a new region. Indian companies are also investing in emerging Asian economies such as China to establish a new sourcing base in the region. Global automotive players: sourcing parts & outsourcing R&D base to India The auto component exports sector is expected to show a strong growth with an estimated CAGR of 34 percent by 2014. All the leading OEMs in the world are already sourcing components from India, mainly in steering systems, casting products and electrical, such as motors and wiring, harnesses. The leading Indian manufacturers are aggressively aspiring to become Tier-I suppliers the OEM: aftermarket ratio in exports has changed from 35:65 in the last decade to 75:25 at present. According to a Government of India estimate, there are 400 large firms in the organised sector and about 10,000 firms in the unorganised sector. The entry of more foreign companies in the sector is expected to lead to greater regulation, pruning of the spurious market and the unorganised players ceasing to be stand-alone companies, and entering into either contract manufacturing or becoming ancillary units. India is also showing an increasing prowess in automotive design and development. Global MNCs, such as GM, Ford, Delphi, Visteon, etc., have already set up their R&D centres in India. The main advantage of these centres is the low development costs it takes 1/5th of the costs to develop or engineer products in India as compared to global rates. Substantial remaining marketing and retail challenges Indian OEMs, such as Mahindra, Bajaj and Tata Motors have ambitions of becoming global brands, and we expect to see further efforts, and hence increased advertising spends in this direction. As per an industry expert, Branding is a very important part of purchase criteria, and Indian companies spend less on branding activities as compared with global brands. Tatas, Mahindras and Bajaj are thinking of making themselves as global brands. So they would have to increase their spending on branding activities in the future.

The organised auto-retail sector employs 0.4 million people and has dealership strength of 6,500. The following challenges are expected to be faced by the sector in the future lower margins, problems related to availability and cost of land, younger target audience and customer loyalty issues. The above raises the following key questions: What could be the likely strategy of American OEMs in India especially considering that small cars is not their area of expertise? What could be the various pros and cons in opening up a design centre in India? How can the retail sector counter the challenges posed by changing demographics? When will domestic player become a treat to the global players? What aftermarket strategies are needed to reach 1 billion Indians? When will there be a market for luxury cars? What features do Indian customers expects to have in their cars?

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Rajeev Metha is an associate in the India office of Clearstate. He has advised Automotive companies regarding R&D, offshoring, market entry, supply chain, procurement and marketing strategies. You may contact the author via email at: thinking@clearstate.com
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