future of automotive industry

7/28/2019 Future of Automotive Industry

1/6

future of the automotive industry in India18 December 2006

2


2/6

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 andavailability 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 carmarket is expected to reach 3 million by 2015, making India as one of the top 10 car markets in theworld. India is also expected to remain as the second-largest two-wheeler manufacturer, the largesttractor and three-wheeler manufacturer and the fourth-largest truck manufacturer in the world by20151. The main considerations driving customer preference are mainly reliability and economy.

Segment-wise percentage contributions and growth rates Passenger car projection estimates (2005-2015)

78.1

2.7

1 0.7

4 4.5

16.719.5

24.625.6

15.5

0

10

20

30

40

50

60

70

80

90

Passanger Car

Market

MUV CV Two-wheelers Three-

wheelers

inPercentage

2

1

3

0

0.5

1

1.5

2

2.5

3

3.5

2005 2010 2015

inMillions

Number of Passenger CarsPercentage Contribution CAGR (2001-02 to 2005-06)

Automotive Mission plan 2006-2016

Government commitment and support still likely in the futurePost-liberalisation, the government has made specific attempts to reduce barriers and controls, suchas allowing 100 percent foreign direct investment in the automotive sector and reducing customstariffs on automotive components. The government has also set an ambitious target of increasing therevenue 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, two-wheelers and components. With regard to emission norms for passenger cars, the government hasproposed the implementation of EuroIV emission norms from 2010 onwards, which is likely to leadto 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 future2

.

Changing face of the passenger car industryThe Indian passenger car industry is dominated by the small car segment, and more specifically thecompact car segment, both in terms of growth rates as well as contribution to total passenger carsales. Due to the fact that India is a low-income market, the dominance of small cars is expected tocontinue even in the future. Tata Motors, a leading Indian OEM, has plans of launching a small car atUSD 2,326 in 20083. This is expected to convert a lot of two-wheeler prospects into passenger carcustomers. This is also expected to lead to other OEMs launching similar

1

Source: Automotive Mission plan 2006-20162Source: Clearstate Primary Research

33 Source: http://www.dancewithshadows.com/pub/tata-cheap-car.asp

3


3/6

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, withAmerican 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 alsoannounced their plans for capacity expansions however, the main difficulty is their lack ofexpertise for making fuel-efficient, small cars. General Motors (GM), in order to circumventthis, has recently announced the launch of a Daewoo small car (known as the Spark) inIndia in 2007.

The passenger car market as per sub-segments The four-wheeler market according to manufacturers

country of origin

9.4

68.4

19.5

2.2 0.525.3

15.4

119

0

-9.6-20

0

20

40

60

80

100

120

140

Mini Compact Midsize Executive Premium

inPercentage

Percentage Contribution to Total Car Market

CAGR (2001-02 to 2005-06)

39.0

0.8

15.1

3.3

41.8

0

5

10

15

20

25

3035

40

45

J apanese European Korean American Indian

inPercentage

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, ACMA4

The used-car market is also expected to grow in the future, especially considering the factthat the ratio of used-car sales to new-car sales is about 1:1 in India this is less than theglobal ratio of 2:1. The major OEMs, including Maruti, Hyundai, GM, etc., have alreadydecided to enter this market as used car dealers.

Increased market share for fuels other than petrol is expected in the passenger carsegment, especially considering the rising prices for petrol. Diesel is expected to captureabout 35 percent of the market share in 2010, the current share being 30 percent5. Marutiand Hyundai, two major gasoline players, have announced their plans to enter the dieselmarket as well. LPG as a fuel is also gaining popularity as it is cheaper than petrol andrequires less maintenance and conversion costs as compared to CNG. Research work onbio diesel as a fuel for the future is also underway.

The Indian manufacturing may go through periods of overcapacity as the vehicle capacityestimations are about three million passenger cars in the next five years. A recent trendobserved is the sharing of manufacturing facilities for example, a deal between Maruti andNissan, wherein the former is expected to produce cars on its assembly lines labeling them

5Clearstate Primary Research

4


4/6

as Nissan. The use of Aluminum in automotives is expected to increase especially sincethis helps in boosting fuel economy, performance and safety, while reducing emissions. Theuse 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 third-largest producer of small cars after J apan and Brazil. Therefore, the government hasdecided to launch a programme to make India a small car hub in the future a recentreduction in excise duties from 24 percent to 16 percent exclusively for small cars being aninitiative in this direction. The major players not present in this segment have also drawn upplans for entering this segment in the near future. Players with expertise in small car, suchas Maruti and Hyundai, have formulated plans for ramping up production capacities. It islikely that with the small car volume increase (both due to domestic volumes and exports) inthe next decade, domestic players, such as Tata Motors, would become strong globalplayers.

Commercial vehicles to continue strong growthThis 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 oneconomic progress and road-network availability, both of which are growing at a fast pace inthe country. According to the National Highway authority estimations, the growth ofhighways is expected to proceed at a CAGR of about 6 percent during 2006-2015, incontrast to a growth of about 1.2 percent during 1951-1995.

Impact of road development on the market for commercial

vehicles

Commercial vehicle projections in India (2005-2010)

0

200

400

600

800

1000

1200

0 0.5 1 1.5 2 2.5

Paved Highway Km/Area/Km2

TruckPenetrationMHCV/mnPopulation

0.39

0.81

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

2005-6 2009-10

inMillions

Autonews and www.artc.org

Dramatic Increase in Penetration in InitialStages of Road Development

Spain

GermanyCAGR 20%France

UK

Korea J apan

China

Brazil

Turkey

India

The future is also expected to witness more product sophistication with increasing power toweight solutions especially for the truck segment. Multinationals have already made an entryin the segment with MAN, Daimler Chrysler and Volvo already present in the market.

Two-wheelers: Three players dominateThis 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,

5


5/6

with the emergence of new motor cycle segments based on style and performancecapturing market share. The two-wheeler market is dominated by an Indo-J apanese jointventure 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 andTVS, account for about 88 percent of the market. Hero Honda and Bajaj have shownrevenue increases of over 20 percent and profitability of over 15 percent each during theperiod of 2004 -2006. TVS Motors showed a revenue increase of over 7 percent and anegative profit growth in the same period. At present, approximately 65 percent of the two-wheeler market is captured by the entry level segment of 100cc motorcycles. However, thissegment has shown a decline in growth in the last year (-3.5 percent) with an increase ingrowth in the more powerful and stylish 125-250cc segment (36 percent).

India firms venturing abroadManufacturing occupies about 60 percent of the total direct overseas investments by Indian

companies in various sectors. The Indian automotive companies, including both IndianOEMs and well as component manufacturers, have been investing mainly in the domains offorging and casting, particularly in European countries. So far, the industry has witnessed 16acquisitions (five in 2005). The collapsing auto ancillary industry in these regions makesthe deal extremely affordable for Indian companies, providing them market access andbrand enhancement opportunities in a new region. Indian companies are also investing inemerging Asian economies such as China to establish a new sourcing base in the region.

Global automotive players: sourcing parts & outsourcing R&D base to IndiaThe auto component exports sector is expected to show a strong growth with an estimatedCAGR 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 asmotors and wiring, harnesses.

The leading Indian manufacturers are aggressively aspiring to become Tier-I suppliers theOEM: aftermarket ratio in exports has changed from 35:65 in the last decade to 75:25 atpresent. According to a Government of India estimate, there are 400 large firms in theorganised sector and about 10,000 firms in the unorganised sector. The entry of moreforeign companies in the sector is expected to lead to greater regulation, pruning of thespurious market and the unorganised players ceasing to be stand-alone companies, andentering into either contract manufacturing or becoming ancillary units.

India is also showing an increasing prowess in automotive design and development. GlobalMNCs, such as GM, Ford, Delphi, Visteon, etc., have already set up their R&D centres inIndia. The main advantage of these centres is the low development costs it takes 1/5th ofthe costs to develop or engineer products in India as compared to global rates.

Substantial remaining marketing and retail challengesIndian OEMs, such as Mahindra, Bajaj and Tata Motors have ambitions of becoming globalbrands, and we expect to see further efforts, and hence increased advertising spends in thisdirection. 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.

6


6/6

The organised auto-retail sector employs 0.4 million people and has dealership strength of6,500. The following challenges are expected to be faced by the sector in the future lowermargins, problems related to availability and cost of land, younger target audience andcustomer loyalty issues.

The above raises the following key questions:

What could be the likely strategy of American OEMs in India especially considering thatsmall 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?

Problems Clearstate solves:

We are Growth Engineers and Innovation Architects. We are devoted to work side by sidewith our clients to outpace competition, close growth gaps, and deliver breakthroughimprovements in performance and profitability. Our clear focus on Asia Pacific provides ourclient a better understanding of intrinsic regional strategic issues.

To subscribe to more Clearstate essays and to learn more about the firm, visit theClearstate website at www.clearstate.com

Rajeev Metha is an associate in the India office of Clearstate. He has advised Automotivecompanies regarding R&D, offshoring, market entry, supply chain, procurement andmarketing strategies.

You may contact the author via email at: [email protected]

Clearstate DisclaimerThe information contained herein has been obtained from sources believed to be reliable. Clearstate disclaims all warranties as to the accuracy,completeness or adequacy of such information. Clearstate shall have no liability for errors, omissions or inadequacies in the information contained herein orfor interpretations thereof.

7
http://www.clearstate.com/mailto:[email protected]:[email protected]://www.clearstate.com/

future of automotive industry

Documents