india - global small car hub

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Ref. No.: MEBE0037

A nations competitiveness depends on the capacity of its industry to innovate and upgrade.1

The launch of Nano has further highlighted the capabilities of a low cost automotive manufacturing ecosystem in India. It will encourage continued emphasis on product developments in the low cost cars category by other manufacturers across the world, with India as a focal point.2 Sachin Mathur, Head, CRISIL Research

India has the foundations in place and is rapidly establishing itself as a global small car manufacturing hub with significant potential to further increase exports and penetration of overseas markets.3 Dilip Chenoy, Director General, SIAM

In 2009, Tata motors launched the worlds cheapest car Nano at a price of less than $2500. A car at that price point was a revolution in the industry, not just in India but even globally. The company received an unprecedented response with a total of more than 200,000 bookings for Nano, in just a month.4 By 2009, 72 small car models (including variants in respective models) (Annexure I) were launched in India, most of them by Maruti. Along the way, India overtook Brazil and has become the second-largest maker of small cars after Japan.5

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Porter E. Michael, The Competitive Advantage of Nations, Harvard Business Review, March 1990 Nano reinforces India as small car hub,, March 23 rd 2009 Revving up! Indian automotive industry - a perspective, The_Indian_automotive_industry/$FILE/Industry_Automotive_Revving_up.pdf, 2009 Tata Nano draws over 2.03 lakh bookings, index.php?option=com_content&task=view&id=289&Itemid=207, April 2009 A small-car hub,, September 25th 2009




This case study was written by T. Sai Vijay and Saradhi Kumar Gonela under the guidance of Dr. Nagendra V. Chowdary, IBSCDC. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources. 2009, IBSCDC. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.


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Indian Automobile Industry: Is it Going to be the Global Small Car Hub? Michael E. Porter

Indian Automobile Industry: Is it Going to be the Global Small Car Hub?

In 2008-2009, total cars sold in India were 1,551,8806 and small cars represented 80% of the domestic sales.7 According to the Society of Indian Automobile Manufacturers (SIAM), exports of small cars increased by 53% between April and September 2009 to 197,249 units against 129,090 units for the same period in the previous year.8 H.S. Lheem, chief executive of Hyundai Motor India, the countrys second-largest manufacturer, told Japanese daily Nihon Keizai Shimbun, that his company is ready to unveil a $5,000 to $6,000 800 cc small car from its Chennai plant. The car will be sold in India as well as exported. Nissan, too, is readying with big investment in an export-focused plant in India and is ready to launch its new mini-car that will debut in India before the Europe, US and even Japanese market, after Honda has launched it Jazz.9 We are making a $600 million investment in a second car plant in India and by end of December 2010 or early January 2011, Toyota will be ready to unveil its new compact car designed by Toyota Japan and developed for the Indian market. It will be launched in India first and will have a lot of Indian-ness, including the fact that it will have an Indian platform. It will be manufactured by Indians for Indians. says, Mr. Sandeep Singh, deputy managing director, Toyota Kirloskar Motors. 10 Small cars from India are gaining in European markets where people are moving from gas guzzlers to fuel-efficient cars and are taking the scrappage incentive launched by various European governments. The key growth markets include the UK, the Netherlands, Germany, Italy and Spain.11 According to European Automobile Manufacturers Association, the total passenger car market in Europe is over 14 million units. According to their estimates, share of small car market would be 23% and the total market size for small cars in Europe will be nearly 500,000 units, of which over 80% would be met by Hyundai and Maruti alone.12 According to Stephen R DArcy, global head (automotive practices), PricewaterhouseCoopers, Nearly 75% of the total vehicles sold in the US earlier were bigger cars and trucks. Now 40% of the US population is moving towards more fuel efficient cars and this has forced players like Ford Motors to think of introducing its small car Fiesta into the US market for the first time.13

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Automobile Domestic Sales, BaggonkarSwaraj, Indias small car market drives the global biggies,, November 9th 2009 Ibid. Driving Ambition: Indias Emergence as a Hub for Compact Cars, article.cfm?articleid=4417, October 8th 2009 Ibid. Arora Simran and Seth Yogima, Small cars, big haul,, October 31st 2009 Ibid. Ibid.

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Indian Automobile Industry: Is it Going to be the Global Small Car Hub?

Indian Automobile Industry: Pre-economic LiberalisationIndias first car manufacturing facility started its operations in 1942 under the name Hindustan Motors, headed by C.K.Birla. In order to develop a home-grown automobile industry, the Indian government, on the recommendation of the tariff commission permitted only those firms that were into manufacturing and discouraged the ones which were mere assembling units. As a result only six automakers namely; Hindustan Motors Ltd., Premier Automobiles Ltd., Standard Automobiles Ltd., Telco Ltd., Ashok Leyland Ltd., and Mahindra and Mahindra Ltd., dominated the entire automobile industry. The government also imposed quantitative restrictions (QRs)15 on imports of raw materials, components and equipments. Due to the licence raj16, the Indian automobile industry confronted a number of challenges, most prominent being production limits. The government fixed the upper limit of production at 40,000 units per annum for nearly three decades.17 These limits severely crippled the industry for investments and due to less investment India lacked domestic proficiency in R&D to improve the quality. Importing scientific knowhow and advanced components was not possible due to import restrictions. Employing foreign technical experts was also not possible due to government restrictions.18 All these impositions reduced output to miniscule proportions and customers had to wait for months, sometimes years to own a car, after booking. As a consequence car remained a luxury product for the upper strata and prohibitive to middle class. However, situation changed for good during early 1980s.

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Driving Ambition: Indias Emergence as a Hub for Compact Cars, op.cit. Quantitative Restrictions (QRs) are specific limits imposed by countries on the quantity or value of goods that can be imported or exported. Licence Raj, also called as the Permit Raj refers to the elaborate licences, regulations and the accompanying red tapism that were required to set up, run and even liquidate businesses in India between 1947 and 1990. Automobile Industry,, 2008 Ibid.


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With changing customer preferences towards small fuel-efficient cars, in the developed countries, it is clearly an advantage for the developing nations. Every big automobile player in the world is ready to invest in the Indian automobile sector, especially the small car segment. This can provide India a competitive edge over other nations. But the question to be asked is whether the competitive advantage that India has is sustainable over a long period of time. Major concerns, such as rising wages, expensive raw material and inadequate infrastructure, will have to be addressed effectively to help the nation thwart competition from other countries in the region. The journey of Indian auto industry till 2009 suggests that India has the competency to retain competitiveness with proper regulatory assistance.

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Ford Motor Co. has launched its version of a small car Figo that will be produced locally early next year. Ford CEO Alan Mulally, who was in India for Figos September launch, believes that the Indian small-car segment will double over the next 10 years. About 60% of the vehicles worldwide will be smaller vehicles like the new one here, Mulally said at the time. Ford is investing $500 million to double its capacity to 200,000 cars annually at its Chennai plant in southern India.14

Indian Automobile Industry: Is it Going to be the Global Small Car Hub?

Hindustan Motors with its only brand Ambassador the top selling car lost its position to MUL and M800 became Indias largest-selling car in just few months of its launch and continued to be the largest selling car for over two decades from then. The sales of Maruti 800 were about 2,520,020 units till 2008.20 Economic liberalisation, initiated during 1991 and the following regulatory changes challenged the numero-uno status of Maruti 800, thanks to the entry of


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