automobile - microeconomics india

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By Manpreet Nimisha Pushpanjali Sharmita Sourav Goutam Microeconomics Automobile sector in India

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Brief Microeconomic analysis of Automobile industry in India

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Page 1: Automobile - Microeconomics India

ByManpreetNimishaPushpanjaliSharmitaSouravGoutam

MicroeconomicsAutomobile sector in India

Page 2: Automobile - Microeconomics India

• The Indian auto industry is one of the largest in the world with an annual production of 23.37 million vehicles in FY 2014-15, following a growth of 8.68 per cent over the last year.

• The automobile industry accounts for 7.1 per cent of the country's gross domestic product (GDP) and about 49% of manufacturing GDP

• Divided into 4 segments -passenger vehicles, 2-wheelers, commercial vehicles and 3 wheelers

• Two wheelers segment (with 81% market share) the leader of the Indian automobile market.

• The overall passenger vehicle segment has 13% market share. And the 3-wheeler and commercial vehicles constitute 6%

• Car, truck and two-wheeler sales are good indicators of consumers, corporate and farmer sentiment respectively. Hence the sector can be considered as one of the key indicators of economic vitality.

Automobile sector in India

13%

3%3%

81%

Domestic Market Share for 2014-15

Passenger Vehicles Commercial VehiclesThree Wheelers Two Wheelers

Page 3: Automobile - Microeconomics India

• In the two wheeler segment, before the opening of the Indian economy there only 2 major players in the market i.e Hero Honda and Bajaj auto with minor players like TVS, Enfield etc. These 2 players dictated the terms in the market, hence the economic state then was duopoly

• Similarly in the passenger vehicle segment before the advent of Maruti Udyog limited in 1981, the only 2 players in the segment were Hindustan motors(Ambassador) and Fiat. The vehicles produced by them though were different, served as close substitutes. However both behaved like rivals, hence had price wars. A classic case of duopoly was observed.

• Also in the commercial vehicle segment, the only two players were Tata and Ashok Leyland(Hinduja group) and as in the above cases, duopoly was notices in this segment too.

• In the 3 wheeler segment however, the only player in the market was Bajaj, they had absolute monopoly in this segment, and were unchallenged, before other foreign and domestic players entered the segment.

Historical Microeconomy of Indian automotive industry

Page 4: Automobile - Microeconomics India

Today’s Situation

Hero Moto Corp41%

Honda29%

TVS12%

Bajaj Auto10%

Yamaha3%

Suzuki2%

Royal Enfield2%

Others1%

Two - wheeler market

Maruti49%

Hyundai19%

Honda7%

M & M6%

Tata5%

Toyota5%

Others10%

Passenger vehicles market

Page 5: Automobile - Microeconomics India

Bajaj42%

Piaggio34%

M & M12%

Atul Auto6%

TVS3%

Force3%

Three wheeler market

Today’s Situation

Tata 47%

M & M25%

Ashok

Leyland15%

Eicher6%

Others7%

Commercial vehicles

Page 6: Automobile - Microeconomics India

• The automotive industry in each segment has many firms, some homegrown and others foreign with subsidiaries in India

• Each firm has many products and the firm serves as a brand for the various product lines available.

• For example in the two wheeler segment Hero Honda serves as a brand and the bike models such as passion, Karizma fall under its umbrella

• In the passenger vehicle segment the brand Hyundai for example have various models such as i20,i10 and Creta under its wings.

• The presence of multiple number of firms, gives the independence to the firms to set prices without engaging in price wars, and the action of 1 firm will have negligible impact on the market as a whole. For example a firm can cut the price of its cars, bikes or lorries and increase sales without much fear of retaliatory measures from the competetors

Factors determining micro-economy1. Number of firms

Page 7: Automobile - Microeconomics India

• If the automotive industry as a whole is considered, then based on the utilizes and excluding the inner and outer characteristics of the vehicle, we can say that the sector can be differentiated into the 4 segments as depicted earlier.

• If individual segments are considered then, with in each segment the product differentiation is very high

• The goods within each segment perform the same basic functions but have differences in qualities such as type, style, quality, reputation, appearance, and location that tend to distinguish them from each other

• For example in the commercial vehicle sector, Tata and Ashok Leyland produce the same products, however the lorries made by Tata are more frugal and easier to maintain, hence differentiating their product.

Factors determining a micro-economy2. Product differentiation

Page 8: Automobile - Microeconomics India

• As the products in the various segments of the automotive industry are highly differentiated, by the thumb rule we can say that the automotive industry on the whole is a ‘Price maker’ and not a ‘Price taker’

• Each company or a certain brand has its own market power, which helps it set its own price rather than becoming a price taker

• However the same does not hold true all the time. For example, if a certain brand prices its products higher than the customer expectation, or the market perception, then the people buying that product will be lower, hence the sales reduces.

• And in the case of the commercial vehicles, when supplying to large fleet operators or to government agencies, the price is determined to a certain extent by the buyer.

Factors determining a micro-economy3. Pricing power

Page 9: Automobile - Microeconomics India

• Barrier to entry are on the lower side for the automotive industry in terms of the regulatory and government norms.

• However it is a highly capital intensive industry. Finding the source of funding is one of the barriers

• Also for the automotive industry to setup a plant, the real estate required is very high, getting land allotted by the government agencies may also form barriers for the new entrants.

Factors determining a micro-economy4. Barriers to entry

Page 10: Automobile - Microeconomics India

Profit maximization condition

• In the short run, the profit maximization occurs for the condition MC=MR i.e. the marginal cost is same as the marginal revenue as shown in the figure 1 above. P is the price which can be fixed by the automotive firms and the profit will be in the area PACB.

• In the longer run, due to the entrants in the market, the existing products of the automotive industry, become more elastic and the demand curve shifts to the left driving down the price, hence the profits will decrease.

• In order to increase profitability innovation and introducing the new products is a solution which is adopted by the companies of the industry.

Page 11: Automobile - Microeconomics India

Elasticity of demand• The elasticity of demand, is very

high in the longer run for the auto mobile industry.

• The figure shown depicts a sample of the High elasticity in the automobile market.

• When the price of the automobiles increases, then the demand falls.

• For example, in January when the taxes on vehicles increased, the demand for them decreased and the same was reflected in the quarterly results of the manufacters.

Page 12: Automobile - Microeconomics India

Porters five forces model

Page 13: Automobile - Microeconomics India

• On the basis of the analysis done, the we can conclude that the Automobile market in India, is a combination of Oligopoly and monopolistic competition.

• Across the broad segments we can see that there are a number of competitors, but 1 or 2 firms have a larger market share.

• However due to number of competitors and lack of trust among competitors, cartelization is absent in the market.

Conclusion

Page 14: Automobile - Microeconomics India

Q and A