DEMAND ANALYSIS

ASIA-PACIFIC: The 21st century clearly belongs to the Asia-Pacific, with it being the largest producer and consumer of the automobiles. The market contribution of Americas and Europe has gradually declined from 19.7 percent and 19.3 percent in 2007 to 16.9 percent and 15.1 percent in 2011 respectively. On the other hand, Asia-Pacific has grown from 60 percent market share in 2007 to 67.1 percent in 2011. It is slated to capture over 70 percent of the total market by 2016

Asia-Pasific's share of global production

74% 72% 70% 68% 66% 64% 62% 60% 58% 56% 54% 2007 2011 2016(Exp.) 60% 67.10% 71.90%

Source: KPMG 2012 Research INDIA: India comprises of approximately 20 percent of the Asia-Pacific market. In terms of the Auto industry, India is the sixth largest market after China, the US, Germany, Japan and Brazil. Overall the market includes cars, two wheelers, trucks & auto parts and India is expected to become #3 in the automobile market by 2015 as defined by sales volume growth. The world standings for the Indian automobile sector, as per the Confederation of Indian Industry in FY 2012, was as follows: Largest three-wheeler market Second largest two-wheeler market Tenth largest passenger car market Fourth largest tractor market Fifth largest commercial vehicle market Fifth largest bus and truck segment

35 30 25 20 15 10 5 0 FY05 FY11 FY 20 (EXP.) 1 0.3 6.2 2.5 0.6 11.7 23.5 5.3 1.6

Passenger vehicles Commercial Vehicles Two and three wheelers

Figure 1: Domestic sales, million units

40 35 30 25 20 15 10 5 0 1.2 0.3 6.5 2.9 0.7 13.3 28.4 6.7 1.8 Passenger Vehicles Commercial Vehicles Two and three wheelers

Figure 2 Domestic Production, million units

Source: KPMG 2012 Research The domestic market has witnessed significant growth in all the three key segments of the Sector namely Passenger, Commercial, and Two wheelers. Passenger vehicles have grown at a CAGR of 14.6percent in the last six years to 2.5 million units in FY11. Commercial vehicles have been the fastest growing with a CAGR of 15.1 percent in the last six years, though this segment is yet to achieve global scale on the back of growing middle class, standard of living and improving infrastructure, the overall domestic automotive market is estimated to grow at a CAGR of 9 percent to 30million units by Fy20.

CURRENT SITUATION: The year 2012 has been a tough year for the overall Indian Auto Industry. Despite several new launches in the passenger vehicle segment, there has been a significant slowdown in this segment which can be attributed to several factors ranging for rising oil prices, high inflation and overall pessimism about the Indian economy.

India is predominantly a two-wheeler driven market, but despite the heavy discounts and promotions during the October-November Diwali timeframe the sector has continued to disappoint. However the market is expected to climb out of slowdown now. Therefore, Having said all of the above the Auto sector is fundamentally robust and well positioned, and 2013 is expected bring a fresh wave of growth to the various sub-sectors within the auto industry. In the passenger vehicle segment, we will see a host of new launches and remodelled versions and a boom in the Luxury car segment as well. Product innovation, technology and plastic replacing metal components will be the key drivers of growth in the auto components segment as they will help decrease the weight of the vehicles making them more fuel efficient and more affordable As Indias road connectivity improves (Delhi-Mumbai Industrial Corridor, Golden Quadrangle, Delhi-Agra expressway etc coming on board) and infrastructure projects pick up momentum in the next year with interest rates coming down the Heavy, Medium and Light Commercial Vehicle segments will also witness better growth. The success story of the Tata-JLR deal, finally coming into full bloom in 2012, has also paved the way for future cross-border M&A in the Auto sector in the years to come.

CURRENT GROWTH SCENARIO of 4-wheeler industry o o Passenger vehicles & Commercial vehicles

A) Passenger Vehicles (PV) PV sales grew at sub-5 per cent levels for second consecutive year in 2012-2013 Domestic sales of cars and utility vehicles (UVs) grew by merely 2 per cent in 2012-13 despite a low base in 2011-12. Domestic car sales, which had increased by 3 per cent in 2011-12, declined by 7 per cent in 2012-13. Growth was impacted due to weak macroeconomic growth, uncertainty over income growth, increasing petrol prices, high interest rates and lower disposable income caused by high inflation. Additionally, a lockout at market leader Maruti Suzuki India Ltd's (MSIL) Manesar production facility, and the consequent disruption in production, impacted growth marginally. On the other hand, domestic utility vehicles (UVs), including vans, grew by 32 per cent during 2012-13 because of new model launches during the year and also due to increased preference for diesel vehicles. Domestic car and UV sales to recover slowly in 2013-14 CRISIL Research expects passenger vehicle sales to grow by 5-7 per cent in 2013-14 over a 2 per cent growth in 2012-13. Macroeconomic recovery and decline in petrol prices would aid a revival in small car sales. However, growth will be capped at 9-11 per cent on account of diesel price hikes. Long-term growth prospects will remain healthy until 2017-18, as passenger vehicle penetration is currently at low levels.

FORECAST FOR CARS AND UTILITY VEHICLES: 2011-12 Growth (%) Domestic Passenger Vehicle demand Cars Small cars Sedans Utility vehicles and Vans Export demand Source: Crisil Research Exports staged a recovery in 2012-13: Exports of cars & utility vehicles (UVs) grew by 9 percent in 2012-13 after a marginal decline of 0.4 per cent in 2011-12. Weak global demand, especially in Europe, one of the largest export markets, had impacted demand in 2011-12. In 2012-13, sluggish demand in Europe and increase in import and excise duty rates in Sri Lanka, which accounts for nearly 5 per cent of the total exports of players like MSIL, restricted growth to single digits. 5% 3% -1% 20% 13% 14% 2012-13 Growth (%) 2% -7% -10% 3% 32% 9%

PASSENGER VEHICLE EXPORT (000 units)

600 500 400 300 PV Export units in thousands 200 100 0

Source: Crisil Research B) Commercial Vehicles CV sales volumes decline in 2012-13, to revive in 2013-14 on higher GDP expectations.

Key macroeconomic indicators such as IIP, rail freight loading, mining, road awarding and execution, and growth in port traffic remained weak during 2012-13, thereby impacting CV sales. CV sales declined by 2 per cent (y-o-y) in 2012-13, after growing by 28.5 per cent and 18 per cent respectively in 2010-11 and 2011-12. Sales of medium and heavy commercial vehicles (MHCVs), which are directly linked to the level of economic activity, declined by 25.9 per cent in 2012-13 following deceleration in GDP growth to 5.0 per cent. Lower industrial and agricultural output, weak transporter sentiments weighed down by increase in fuel prices, high interest rates, inflation and higher vehicle prices continued to impact MHCV sales. Other factors that had a bearing on sales growth were availability of finance, and subdued freight rates. In contrast, LCV sales proved to be relatively resilient to the slowdown in GDP growth, and grew at 15.9 per cent.

SEGMENT-WISE growth Segments MHCVs goods LCV goods Buses 2011-12 Growth (%) 8.8 30.2 6.5 2012-13 Growth (%) -25.9 15.9 -4.1

The following section offers a snapshot on factors that affected growth of the various MHCV segments in 2012-13: Intermediate commercial vehicles (ICVs): In a decelerating economy, ICV sales typically slacken a while after the economy slows down, as movement of goods from the primary warehouse to the local distributor, for which these vehicles are used, slows down with a time lag. Therefore, in 2012-13, ICV off take fell at a relatively slower pace as compared with the other segments. Medium commercial vehicles (MCVs): Similar to ICVs, MCV sales volumes declined at a slower pace than HCV sales in 2012-13. This is because transporters typically limit purchases of higher tonnage vehicles during phases of economic slowdown. Multi-axle vehicles (MAVs): MAV sales declined sharply in 2012-13 owing to the weakness in freight rates (in spite of a diesel price hike), low freight availability and weak transporter sentiments. Tippers: In 2012-13, tipper sales declined sharply, affected by the ban on illegal iron ore mining and a sharp slowdown in the awarding of road projects during the year. Tractor trailers: Tractor trailer sales declined sharply in 2012-13 owing to subdued industrial GDP growth and slowdown in EXIM traffic. LCV sales relatively less impacted by economic slowdown:

Light commercial vehicles (LCVs) grew by 15.9 per cent in 2012-13 enabled by a 21 per cent increase in the sales of small commercial vehicle (SCVs; comprising sub-one tonne vehicles and pick-ups). Growth in the SCV segment was led by a sharp growth in the pick-up segment and a corresponding moderation in growth in the sub-one tonne category in 2012-13.

SELECT AREAS SPECIAL IMPORTANCE IN INDIAN MARKET: While there are numerous opportunities for the Indian Auto sector, both on the domestic market front as well as a manufacturing base, the following five areas will emerge as the ones in which India can strongly influence the global automotive market, on account of India having developed/or planning to develop global scale competencies: A) Leader in small cars The growing middle class in emerging markets favour a middle product segment, that of small cars. These cars typically have limited luxury features and are more functional, offering customers basic mobility and value for money. India is primarily a small car market and this has forced OEMs to develop and offer appropriate products at a relatively large scale of operation. This has also resulted in India emerging as an attractive exports source for small cars globally. India is currently the 4th largest exporter of cars with engine capacity less than 1000 cc and the 9th largest exporter of cars with engine capacities between 1000 cc to 1500 cc. Market scenario: India currently manufactures about 75 percent of small cars of South Asia and about 10 percent of the worlds. Within India ~ 80 percent of the passenger cars manufactured are small cars.

Production Volume for small cars (000 units)

30

25

20 2011 2020(Exp.) 10

15

0 World China India Brazil Russia

Source: LMC global automotive, KPMG in India analysis

B) Leader in light commercial vehicles India is currently the 6th largest producer of commercial vehicles with approximately 50:50 share of Medium & Heavy Commercial Vehicles (MHCV) and Light commercial vehicles (LCV). According to KPMG in India, the Indian light commercial vehicle industry is expected to gain momentum and emerge as a major contributor in the global commercial vehicle landscape.

Market scenario: India manufactured 0.46 million LCV in FY11. It is estimated to grow at a CAGR of 14.8 percent by FY20 to reach an annual volume of about 1.6 million LCV. This will ensure that India moves from the current ranking of 5th largest LCV manufacturing country in FY12 to 2nd largest by FY17/18.

Production volume for Light Commercial Vehicles (000 units)

10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 China USA Japan India Brazil Russia 2011 2020(Exp.)

Source: LMC global automotive, KPMG in India analysis CONCLUSION India is going to be an important market for this sector and it will experience steep growth once slowdown ends. The growth currently is disappointing because of the slowdown but it is expected to lift-off Growth drivers are price and innovation In terms of demand Small cars and Light Utility Vehicles are the star segments in India.

REFERENCES http://www.kpmg.com/IN/en/IssuesAndInsights/ThoughtLeadership/Auto_2012.pdf http://www.dinodiacapital.com/pdfs/Indian%20Auto%20Industry_Minor%20speed%20bump_but% 20smooth%20ride%20ahead_December_2012.pdf http://crisil.com/pdf/research/CRISIL-Research-cust-bulletin_may13.pdf