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Indian Automobile Industry An Analysis Introduction Automotive industry, globally, as well in India, is one of the key sectors of the economy. Due to its deep forward and backward linkages with several major segments of the economy, the industry has a strong multiplier effect. Therefore the industry is recognized as one of the drivers of economic growth as it contributes significantly to the overall GDP of the nation. The automotive industry in India happens to be ninth largest in the world. The Indian automotive industry has flourished after economic liberalization in 1990s like never before. This extra-ordinary growth of the industry is mainly due to higher disposable incomes of the middle class and resultant increase in their living standards. This is well supported by the economic conditions particularly in the financial sector, which has played a big role in boosting the demand and sustaining a long-term growth in the industry.

Automotive

Automobile

Auto components Three Wheelers

Passenger Vehicles Passenger Cars Utility Vehicles

Commercial Vehicles

Two Wheelers

Multi Purpose Vehicles

In our subject of study i.e. Passenger Vehicles (PVs) segment India is set to overtake Brazil to become the sixth largest passenger vehicle producer in the world, growing 1618 per cent to sell around three million units in the course of 2011-12. Automobile industry in India: Passenger Vehicles Segment 1. Number of Firms There are currently 13 firms operating in the PVs segment in Indian automobile market. This list excludes companies which do not have a production unit in the country.
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1. Maruti Suzuki 2. Tata Motors 3. Hyundai Motors 4. Mahindra & Mahindra 5. Honda Siel 6. Toyota Kirloskar 7. Fiat India 8. Ford 9. General Motors 10. Hindustan Motors 11. Force Motors 12. Skoda Auto 13. Diamler Chrysler 2. Market Concentration In order to examine the level of concentration in the PVs segment of the Indian automobile market, we have used both the Four Concentration Ratio (CR 4) and Hirschman Herfindahls Index (HHI). CR4 = 83.17% HHI = 2688 Both the results indicate that the market for PVs is highly concentrated. 3. Demand Side Factors Sale of PVs Domestic Sale of PVs in Numbers
1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 2004-05 2005-06 2006-07 2007-08 2008-09 1,143,076 1,061,572 1,549,882 1,551,880 1,379,979

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The domestic sale of PVs in India has been steadily rising over the years. The segment achieved an almost 21 percent growth in the year 2006-07. Market Share of Passenger Vehicles in 2008-09

4.44%

12.39%

Maruti Suzuki Tata Motors

6.50% 14.15%

46.07%

Hyundai Motors Mahindra & Mahindra Honda Siel Others

16.45%

As can be seen Maruti Suzuki holds the largest share in the PVs segment. It is followed by Tata Motors, Hyundai Motors and Mahindra & Mahindra. Passenger Vehicle Segmentation 2007-08
6.21%

15.14% Passenger Cars Utility Vehicles Multi Purpose Vehicles 78.66%

Passenger Cars dominate the PVs segment. According to the Society of Indian Automobile Manufacturers (SIAM), annual car sales are projected to increase up to 5 million vehicles by 2015 and more than 9 million by 2020. By 2050, the country is

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expected to top the world in car volumes with approximately 611 million cars on the nation's roads. Company wise segmentation of the passenger car market follows almost the same trend like what we have seen in the PVs as a whole. The exception here is Mahindra & Mahindra, which has an insignificant percentage in this segment. Passenger Cars Segmentation 2007-08
3.70% 5.52% Maruti Suzuki Hyundai Motors 16.63% 51.04% Tata Motors Honda Siel Ford 18.10% Others 5.01%

But when it comes to UVs, Mahindra & Mahindra holds the largest share at 40.75 percent of the entire market. This is shown in the chart below. Utility Vehicles Segmentation 2007-08
3.86% 3.93%

9.93% 40.75% 19.78%

Mahindra & Mahindra Tata Motors Toyota Kirloskar General Motors Force Motors Others 21.75%

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To sum it up most of the growth in the PVs segment has been from passenger cars which hold a sizeable 79 percent share. Price Indices Price Indices of Automobile and All Commodities
140 120 100 80 60 40 20 0 2005-06 2006-07 2007-08 2008-09 2009-10 Automobile All Commodities

The above figure shows that the gap between Wholesale Price Index (WPI) of automobiles and the WPI of all commodities was narrower during the year 2005-06. Beyond that the gap has been widening. This can be explained by various tariff reductions happening as a part of the govt. policy to boost the sector. Determinants of demand in the sector Determinants of demand for this sector include vehicle prices (which are determined largely by wage, material and equipment costs) and exchange rates, consumer preferences, the running cost of a vehicle (mainly determined by the price of petrol or diesel), income, interest rates, scrapping rates, and product innovation. Exchange Rate: Movement in the value of Rupee determines the attractiveness of Indian products overseas and the price of import for domestic consumption. Affordability: Movement in income and interest rates determine the affordability of new motor vehicles. Allowing unrestricted Foreign Direct Investment (FDI) led to increase in competition in the domestic market hence, making better vehicles available at affordable prices. Product Innovation is an important determinant as it allows better models to be available each year and also encourages manufacturing of environmental friendly cars.
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Demographics: It is evident that high population of India has been one of the major reasons for large size of automobile industry in India. Factors that may be augment demand include rising population and an increasing proportion of young persons in the population that will be more inclined to use and replace cars. Also, increase in people with lesser dependency on traditional single family income structure is likely to add value to vehicle demand. Infrastructure: Longer-term determinants of demand include development in Indians infrastructure. India needs to build and repair its infrastructure such as ports, roads, and power units. These investments are being made with an aim to generate long-term cash flow from automobile sector. Price of Petrol: Movement in oil prices also have an impact on demand for large cars in India. During periods of high fuel cost as experienced in 2007 and first half of 2008, demand for large cars declined in favour of smaller, more fuel efficient vehicles. The changing patterns in customer preferences for smaller more fuel efficient vehicles led to the launch of Tata Motors Nano one of worlds smallest and cheapest cars. 4. Supply Side Factors

Production of PVs in Number

2,000,000 1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 2004-05 2005-06 2006-07 2007-08 2008-09

Production of PVs shows a similar trend to its domestic sale. As we can see the industry experienced a steep growth rate of about 18 percent in the year 2006-07. Breaking up the total input into various cost components is useful to analyze the cost structure of an industry. We analyze this by considering four cost components: materials consumed (expenses on raw materials and intermediate inputs), capital cost

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(expenditure on rents, depreciation and interest), emoluments (salaries, wages and welfare expenses for the workers) and power and fuel costs. Composition of Input Cost
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2005-06 2006-07 2007-08 2008-09

Materials consumed Fuels Consumed Emoluments Cost of Capital

The above figure shows that materials consumed have increased its cost shares in the total cost in the recent years. While the share of cost of capital has remained more or less same, the other two, fuels consumed and emoluments have reduced their shares in the total cost. From this a major observation should be the falling share of emoluments in the sector. 4. Export - Import

Export of PVs in Number

400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 2004-05 2005-06 2006-07 2007-08 2008-09

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As can be seen export of PVs in the automobile sector has been steadily growing over the years, with 2008-09 showing an impressive growth rate of around 54 percent. Market Share of Export Destinations 2008-09

8.75 USA 24.95 52.56 10.53 Europe Africa UAE Others

3.21

The above chart shows that Europe accounts for around 25 percent of our total exports in the PVs segment. This is followed by emerging economies in Africa which contributed around 632 mn USD to the total export earnings in the PVs segment during the year 2008-09. Company wise Market Share in Export of PVs 2008-09
1.50% 0.70% 0.70%

Hyundai Motors 33.10% Maruti Suzuki Tata Motors 64.00% Mahindra & Mahindra Others

A look at the company wise market share in exports show that Hyundai Motors contributes almost 64 percent to the total exports earnings in the PVs segment. Apart from Hyundai Motors and Maruti Suzuki, other firms contribute insignificantly to the exports earnings in the PVs segment.
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6. Competition Automotive industry is a volume driven industry. Hence in the short the most important indices of competitiveness are low cost and high productivity of both labor and capital. However the concept of attaining competitiveness on the basis of low cost and abundant labor and low interest rates is becoming inadequate and therefore, not sustainable. A greater emphasis is therefore now being put on the development of the factors like innovation which can ensure competitiveness on a long-term basis. India with a rapidly growing middle class (450 million in 2007 as per NCAER Report), market oriented stable economy, availability of trained manpower at competitive cost, fairly well-developed credit and financing facilities and local availability of almost all the raw materials at a competitive cost has emerged as one of the favorite investment destinations for the automotive manufacturers. 7. Substitution and Compliments The market for PVs is a highly concentrated market. The relatively small number of firms and almost similar product category (substitutability high) refers the sector to be having certain oligopolistic behavior. Hence product differentiation becomes absolutely important for a firm operating in the long term. In the present scenario this can be explained by frequent new product launches by all the firms in the sector. Steel, iron, aluminum, rubber, plastics, glass and electronics and insurance are some of the sectors that can be considered as complimentary to this sector. 8. Nature of the goods In a developing economy like India automobiles and especially PVs have always been considered to be luxurious in nature. This can be better explained by the low PVs density in India. Though things are changing a great deal now, a lot still needs to be done before we can be compared to developed economies.

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Passenger Vehicle Density (No. of Pvs per 1000 Population)

1400 1200 1200 1000 800 600 400 200 0 USA Germany U.K. Japan Russia Brazil China India 188 158 45 13 500 463 445

9. Elasticity factors Elasticity factors in this sector behave differently for a firm and the industry as a whole. For the PVs industry price elasticity of demand can be very low due to absence of close substitutes for the product. However this depends on the nature of the good. PVs being considered as a luxury product in Indian context, its price elasticity of demand are relatively high. In the case of a single firm, due to the oligopolistic nature of the industry where products are almost similar, price elasticity of demand is considered to be high. To sum up the demand curve for PVs for a single firm will be relatively flatter than the demand curve of the industry as a whole. 10. Govt. regulation In India most of the regulations in the PVs sector are related to driving license, registration of the vehicle, control of traffic, construction and maintenance of the vehicle, etc. All these are governed by Motor Vehicles Act, 1988 and Central Motor Vehicles Rules 1989. In addition to these various ministries of the govt. of India also have regulation for the sector relating to emissions, noise, fuels and alternative fuel vehicles.

Sandeep K Biswal.

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