indian automotive survey 2011

Disclaimer: The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. The document has been prepared with the help of various sources believed to be reliable, but no representation or warranty is made to its accuracy, completeness or correctness. Whilst due care has been taken in the preparation of this publication and information contained herein, Mazars takes no ownership of or endorses any findings or personal views expressed herein or accepts any liability whatsoever, for any direct or consequential loss howsoever arising from any use of this publication or its contents or otherwise arising in connection herewith.

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ontentsIntroduction About this survey Foreword Executive summary Detailed review i. ii. iii. iv. v. Growth Profitability and predictions Expansion: new markets Challenges Consumer trends 11 21 25 31 35 41 3 4 5 8

About Mazars

Car sales zoom 26% to all-time high in January-- Hindustan Times, February 9, 2011

Auto sales scale a new high in February 2011-- Hindustan Times, March 10, 2011

Welcome to our first survey based report on the automotive sector in India. On the canvas of the Indian economy, the automotive industry has covered substantial ground to occupy a prominent place. Due to the subterranean forward and backward linkages with several other industry sectors, the automotive sector has a strong domino effect across various sectors and is further propelling inclusive growth in the Indian economy. The dynamic Indian automotive industry has ably demonstrated this catalytic ability by producing a wide variety of world class vehicles in the form of passenger cars, light, medium and heavy commercial vehicles, multi-utility vehicles such as off-roaders, scooters, motorcycles, mopeds, three wheelers, tractors etc., even at a time when the global economy was reeling under a depressed business environment. Continuous and somewhat irreversible economic liberalization since the early 1990s in India has resulted in making the country one of the prime business destinations for many global automotive players. The automotive sector in India is currently growing at around 18% per annum and the future prospects of the automotive sector are also reflective of the economic resilience of the country. As a part of its thought leadership initiatives, Mazars has analyzed some pertinent developments in the Indian automotive sector and conducted a survey to gauge the mood of a wide variety of automobile companies, on what lies in the road ahead for them. Our analysis of this survey also features perspectives of some extremely well respected entrepreneurs and professional experts from the automotive sector on various aspects such as growth, profitability, Merger & Acquisitions (M&A), structural changes, customer, technology, and workforce trends - aspects which are already transforming this industry in India. In publishing this report, we are deeply indebted to all respondents of the survey and other experts (who contributed with their views) for the generosity of their time, ideas and perspectives to see it through to a conclusion. In the process, through this publication, we have sought to bring to light some important aspects which will provide valuable information for automotive organisations both with a history and with future interests in India. I am confident that you will find this useful.

David ChapmanMazars India

INTRODUCTIONMazars Thought Leadership Series | 3

ABOUT THIS SURVEYA special task force from Mazars was formed to undertake research on the Indian automotive sector and conduct brainstorming sessions with several auto sector experts in order to identify and dwell deeper into factors and major areas of concern for the sector in India. Areas relating to growth, profitability and predictions, exports, expansion into new markets, market challenges and customer trends were identified as key in order to ascertain the progress, issues and future prospects. The survey questionnaire also encapsulated the troubled times of the global economic recession and its impact on the Indian automotive sector. It was designed to also bring out some key precautionary and corrective measures taken by the automotive companies in India to prevent the sector from the recent global economic meltdown. This publication has also been developed to provide clarity to some questions that are increasingly being asked and brings industry issues into perspective of future trends and challenges. Through the survey we reached out to over 300 companies in the automotive sector in various verticals like auto manufacturers, auto components, auto ancillary, auto dealers and Tractors. The survey questionnaire focused on 20 key aspects and the questionnaire was structured to address specific issues in various areas. Responses from the respondents (who included business heads, Chief Financial Officers, Chief Technology Officers and other key stakeholders) have been collated and analysed by Mazars to identify and highlight industry concerns and issues; and most importantly their expectations in the coming years. The adjacent charts provide a snap-shot of the respondent profiles, the number of years for which their organisations have been in existence in India and the size of their organisations. One-third of the respondents are from the auto component vertical and nearly one-fourth are from the automotive manufacturing vertical. Approximately half of the respondents are large auto sector players with turnovers in excess of Rs.1000 crore and 54% of them are from organisations who have been present in the Indian market for over a decade.

4 | Indian Automotive Industry Survey

FOREWORDStrong steps to de-license the automobile industry were made in India in July 1991 with the announcement of the New Industrial Policy. Within this, the passenger car industry was de-licensed in 1993. With such a thrust on progressive reforms, no special industrial license is currently required for setting up of units for manufacture of automobiles except in some special cases. The norms for Foreign Direct Investment (FDI) and import of technology too have been progressively liberalized over the years for manufacture of vehicles (including passenger cars), in order to make this sector competitive globally. At present, 100% FDI is permissible under the automatic route and this includes passenger cars. The import of technology/technological up-gradation with a royalty payment of 5% without any limit on the duration and a lump sum payment of USD 2 million is also allowed under the automatic route in the automotive sector. With the gradual liberalization of the automobile sector since 1991, the number of manufacturing facilities in India too has grown. India today has over 15 manufacturers of passenger cars & multi utility vehicles, over 10 manufacturers of commercial vehicles, over 15 manufacturers of two and three wheelers and over 5 manufacturers of tractors besides over 5 manufacturers of engines, all of global repute. The automotive industry had an investment of about USD 10 billion in 2002-03 which has gone up to more than USD 16 billion in the current year. The industry has already attained a turnover of more than USD 32 billion in 2009-10 and provides direct and indirect employment to over 13 million people. The contribution of the automotive industry to GDP has risen from 2.77% in 1992-93 to more than 5% in the recent years and the automotive industry is currently making a contribution of 17% to the overall indirect tax collection by the Government of India (GoI).Segment wise production trend of automobiles in India (in 000s)

Despite the economic slowdown in 2008 and 2009, the Indian automobile sector continued with its growth story, especially in the passenger cars segment.

Despite the economic slowdown in 2008, 2009 and for some part of the current year the Indian automobile sector continued with its growth story, especially in the passenger vehicles segment. The passenger vehicle market, which constitutes nearly 80% of vehicle sales, demonstrated immense growth potential as the passenger vehicles stock stood at around 11 per 1,000 people in 2008. Anticipating the future market potential, the production of passenger vehicles is forecasted by experts to grow at a Compounded Annual Growth Rate (CAGR) of around 10% from 2009-10 to 2012-13. India now occupies the seventh position globally in automobile productions at 1,40,49,830 units during 2009-10. In 2009 itself, India emerged as the Asias fourth largest exporter of automobiles, behind Japan, South Korea and Thailand. Production of passenger cars in India too has seen a tremendous growth at a CAGR of 18.4% over the last seven years. According to data obtained from the GoI, during the period from April to December 2009, the passenger vehicle segment, two-wheeler segment, three-wheeler segment and commercial vehicle segment have all recorded an impressive growth rate of 24.55%, 19.70%, 16.04% and 15.10% respectively over the corresponding period of the previous year. Industry experts predict a CAGR growth of around 14.5% in the domestic volume of sales of passenger vehicles in the ensuing five years. Other segments, such as twowheelers, multi-purpose vehicles and light commercial vehicles are also expected to witness fast growth in the coming 3-5 years. As India treads its path to become an export hub for Asia and Europe, it is also emerging as one of the favourite investment destinations for automotive manufacturers. The auto component market has also seen a major revival since the slowdown in 2009-10 and experts have projected that this is expected to grow at a rate of 18% to attain a turnover of USD 28 billion in the ensuing year, with about a 32% increase in exports. Investments in the component sector are also projected to cross USD 12 billion according to experts.

Mazars Thought Leadership Series | 5

FOREWORDSome startling facts about automotive industry in India - at a glance:l l l l l l l l

Second largest two wheeler and ninth largest car manufacturer in the world. Ranks fifth in the production of commercial vehicles. Largest three wheeler market in the world. Fourth largest passenger car market in Asia. Seventh largest automobile producer in the world. Asias fourth largest exporter of automobiles. Manufactures largest number of tractors in the world. Worlds largest manufacturer of two wheelers is located in India.

We expect the small car segment to grow by 20% year over year. That is the growth that is sustainable. We can expect doubledigit growth for the next 4-5 years. Then, you have to wait and see what the double-digit growth is: whether it is 10-15% or 15-20% or beyond that... it depends on a number of other factors. Michael Boneham President and Managing Director Ford India

The Market Players India has come a long way from the days of a handful of vehicle manufacturers to become a global hub for manufacturing. The ensuing table facilitates an objective assessment of significant automotive companies in India. Passenger cars Maruti Suzuki Tata Motors Hyundai Mahindra & Mahindra Honda Toyota Hindustan Motors General Motors Fiat Ford Volkswagen Audi BMW Mercedes-Benz Nissan Skoda Volvo Sonalika (ICML) Premier Motor Commercial vehicles Tata Motors Ashok Leyland Swaraj Mazda Volvo MAN AMW ITEC Force Motors Mercedes-Benz Hyundai Mahindra Navistar Eicher Motors Two wheelers Hero Honda TVS Bajaj Auto Royal Enfield Motors Kinetic Motors LML India Suzuki Yamaha Mahindra & Mahindra Honda Motorcycles Three wheelers Bajaj Auto Piaggio Mahindra & Mahindra TVS Motors Force Motors Scooters India Panchnath Auto Devendra Automobiles


The government aims to give full support to the automotive small and medium scale enterprises, and particularly to technology upgradation. The nation is fast becoming a manufacturing hub for passenger cars, especially small cars Jyotiraditya M. Scindia Minister of State for Commerce and Industry Government of India

Advantage Indiay India holds enormous potential in the automobile sector which includes the automotive and auto ancillary segments, owing to its technological, cost and manpower advantage. India has a well-developed, globally competitive auto ancillary sector and established automobile testing, research and development centers. Automotive companies can leverage on Indias acknowledged skills in information technology. India enjoys a natural advantage and is among the lowest cost producers of steel in the world. India is also geographically advantaged to have proximity to other Asian markets and emerging markets of Africa. Additionally, shipments to Europe are relatively cheaper than from countries like Brazil and Thailand. India is a favorite destination for investments owing to the low skilled labor cost compared to many developing economies in the world. Every year almost 0.4 million engineers graduate from different engineering colleges of India adding to its qualified manpower base. The GoI has earmarked nearly USD 200 million for human resource skill development initiatives across industry sectors with the formation of the National Skill Development Corporation. The total value of exports by 2015 is expected to touch USD 10 billion for vehicles and is likely to be between USD 20 billion and USD 25 billion for components. India has demonstrated a stable government, leading to greater security over policy initiatives.

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EXECUTIVE SUMMARYThe automobile industry is currently one of the fastest growing industries globally. The automobile industry made its silent entry in India in the late nineteenth century. Since the launch of the first car in 1897, the Indian automobile industry has come a long way. The industry has registered a growth of 28% year-on-year (YoY) during 2010-11. With more than 2 million new automobiles rolling out on the Indian roads each year, the industry is set to grow further. As far as the profit is concerned, experts expect a very good growth in the coming year. In the ensuing financial year alone, over 35 new cars and variants are lined up for launch in the domestic passenger vehicle segment. These launches would provide significant volumes to the growth of this segment which itself occupies 16% of total vehicle market in India, that is currently led by the two wheelers. India was marginally impacted by the global economic meltdown and even though this sector was severely impacted in some of the developed economies, the growth of the sector in India was inspiring. Though there were production closures in other countries, new product launches marked the Indian automotive business in past two years. About three-fourth of the respondents foresee a growth in the range of 15% to 30% in the coming financial year itself. This optimism is a result of certain unique factors that have so characteristically become the hallmark of the Indian consumers. Indias demographics indicate that about 60% of population is currently below 35 years of age. With rising income levels, consequent higher disposable income, availability of financing coupled with new product launches, strong growth in the passenger car market is imperative in the ensuing years. About 75% of the respondents are optimistic about the utilisation of capacity of their respective plants in the coming year as compared to the previous years, thus increasing their profitability. Auto component manufacturers are upbeat on their growth prospects and attribute the same to market drivers such as vehicle penetration and a favourable economy which is driving the demand growth. The survey results show that the growth of the market players would not only come through higher sales volume, but also through the expansion route both in India and abroad.

27%of the respondents had an average annual growth rate of 15 to 20% in the past three yearsConsidering the present enhancement in the buying power of an average Indian consumer, it is more likely that this figure is going to be much higher in the case of passenger car manufacturers. In fact, more than half of the respondents feel that the order booking in their respective organisations has increased this year compared to the same period last year.

52%of Indian respondents feel that, Indian firms will expand both domestically and globallyMore than half of the respondents indicated that their business will expand both domestically (capacity expansion, new plants, mergers etc.) and globally in the coming years.

Mazars has analyzed some key issues and policy initiatives while also examining trends and best practices (including those which can provide insights on what lies in the road ahead) in the Indian automotive industry, in order to produce this important publication Viraf Mehta Mazars India


EXECUTIVE SUMMARY

60%of the respondents feel that M&A and related investments in the sector will rise.The survey results show that almost 60% of the respondents were of the view that the expectations on account of M&A and investments have risen post the economic slowdown in the automotive sector. New joint ventures (JV)s and acquisitions are expected soon in the industry and this would result in India being one of the important markets for leading global players including the luxury segment passenger car manufacturers. The journey of growth is not a smooth drive but is marred by hurdles and challenges on its way which creep in time and again. In our survey, we tried to understand these challenges faced by the industry. About two-third of the respondents felt that inadequate infrastructure, technology (availability and cost of implementation) and likely roll back of the fiscal stimulus package are challenges that need to be addressed for the growth to be sustainable. Majority of the industry feels that the GoI should allocate more towards infrastructure development for the auto, auto component and ancillary manufacturers. Also, similarly, with improved road infrastructure in the country, the sale of vehicles would also get a thrust. Other fiscal incentives such as tax holidays, exemptions etc. would also help the industry to grow at a faster pace. It may be mentioned that the Automotive Mission Plan 2006-16 (AMP) of Ministry of Heavy Industries & Public Enterprise, GoI is a major initiative taken by the GoI for this sector in the recent times. The dynamics of the market and new trends of the consumers demand that such policies be thoroughly implemented in the true spirit for the objectives to be met. The consumers are the growth drivers of the automobile industry. India has the second highest population, but at the same time has one of the lowest vehicular penetration in the world. With a growing population and higher earnings, the potential of the auto market is huge. This is even supported by finance schemes available in the market. We analysed as to how the respondents perceive the Indian consumer trends to be in the coming times. This was based on parameters such as consumer preference,

desire, buying capacity and the demand-supply balance. It was seen that fuel efficiency is the major driver of customer preference for a particular vehicle in India. Consumers are inclined towards fuel efficient automobiles, followed by the brand value of the manufacturer. In the market where over two-thirds believe that the Indian consumer remain cost conscious and are driven by considerations of value-for-money, fuel efficiency and affordability are key decision making factors.

90%feel that the Indian passenger vehicle market would be dominated by the small and compact hatchbacks

About 90% of the respondents feel that going forward, the Indian passenger vehicle market would be dominated by small and compact hatchback cars and India would emerge as a hub to small car manufacturing. The respondents are optimistic about this segment and believe that this segment will grow at a higher rate of 35% in the next three years. At the same time around 69% of the respondents have a positive outlook towards a steady growth in the premium car segment in the Indian market.

Some of the important trends driving the overall growth of the automotive industry are good GDP growth, higher consumer confidence, increased spending on infrastructure and thrust on rural employment. We see the momentum to continue in the coming years Bharat Dhawan Mazars India


DETAILED REVIEW


THE GROWTH

Q1

What has been your organisations average annual growth rate (in terms of sales) in the past 3 years?

27%had an average annual growth rate of 15% - 20% in the last three years

While commenting on the growth in the auto components sector, Sunandan Kapur, Vice Chairman, Krishna Maruti Ltd. said the components industry is also expected to drive the growth of the engineering sector in view of its strong downstream and upstream linkages with many other segments of the engineering sector like raw materials, capital goods and intermediate products.

While 35% of the respondents reported a growth rate in the region of 10% - 15% for their organisations, 27% had grown by almost 20% Year on year (YoY), over the last three years. Such growth came at a time when for a considerable portion of past two years the global economy went through a severe recession and where large automotive manufacturing countries like Japan and USA reported a negative growth. 52% of the respondents who reported a strong growth rate, were from the auto components and ancillary sub segment. With a helping hand of the GoIs stimulus package, the automobiles industry has recorded a growth of 27%. The industry has already recorded sales of 12.3 million units, the highest ever, making the current financial year one of the most successful in its history. In February 2011 itself, domestic passenger car sales touched a record of 1,89,008 units beating the comparable previous sales records.


Q2

How was your organisation impacted during the recent recession?

49%feel the global recession had a marginal impact on their business

Commenting on the impact of recession in the Indian automotive Industry, Monish Chatrath, Mazars India said the last three years have been dramatic for the automotive sector worldwide. While the manufacturers in India did not have to go through closures and sell outs that we saw in some of the most developed economies, it is true they were under severe pressure to maintain a respectable bottom line and the growth that was being taken for granted did not seem to be certain any more.

Despite the recent recession creating turmoil for several economies including some developed ones which saw forced shutdowns, buyouts and significant restructuring, Indias automotive industry came into forefront for all the right reasons. These include the acquisition of global mega brands at one end of the spectrum and the production of the cheapest car in the world on the other. Indias automotive sector has responded to the challenging global scenario by reengineering its efforts, focusing on innovative marketing strategies and technical collaborations, while relying on the buoyant domestic demand. Such buoyancy was evident with 49% of the respondents stating that the global recession only marginally impacted their businesses.


Q3

What measures did your organisation take to steer through the recession?

34%of the respondents renegotiated vendor prices to cut costs during the slow down

While OEMs renegotiated vendor contracts and bargained for reduced prices as initial first measures to cut costs during the slowdown, for manufacturers like us the focus was clearly on management of overheads. This had to be undertaken in a planned and phased manner to ensure that we remain geared to seize market opportunities associated with the upturn said Rohan Talwar, Managing Director, Allied Nippon Ltd.

The automotive industry in India responded quickly and decisively to the global meltdown with several companies cutting down production targets and reducing offtakes, while also focusing on the order lead time and going back to their vendors to renegotiate prices. Several entrepreneurs not only questioned every item of expenditure before a decision to incur was taken but also worked towards ensuring that nothing would be spent simply because it was being done earlier or because it was budgeted. There are two reasons cited for this rationale - one, costs of various services had actually fallen or hence could be negotiated and secondly costs (in relation to exports) were the only aspect within their control. 34% of the respondents renegotiated vendor prices to cut costs during the slow down, thus sharing the cost burden with their suppliers. Unlike several developed economies (USA and the European countries) which witnessed large scale shutdowns, only 13% of the respondents actually downsized their staff in their respective organisations. None of our respondents reported shutting down any business units during the recessionary period in India. This was made possible due to the support from the GoI, its incentives and other policy measures which have all long helped nurture the development of the industry from a market that was once confined to a handful of outdated models. With high levies making imports unviable for most of the respondents, companies were encouraged to set up entire automotive ecosystems, complete with their accompanying flotilla of component firms, thus leading to the creation of hubs such as Gurgaon (Maruti Suzuki India Ltd, Hero Honda Motors Ltd), Sriperumbudur (Hyundai Motor Co. Ltd, Ford Motor Co.), Pune (Tata Motors Ltd, Mercedes-Benz) and Pantnagar (Tata Motors, Ashok Leyland Ltd).


Q4

How do you expect your organisation to grow (in terms of average annual sales) over the next three years?

30%anticipated an average annual growth over 20% in the next three years

The next big transformation could be the shifting of innovation in terms of research and development centers of excellence, to India, as the market grows in importance says Monish Chatrath, Mazars India, who has been advising several large automotive companies on their business strategy.

The Indian automobile sector is expected to hit the fast lane of growth driven by factors like a strong economic rebound, increase in availability of finance and new product launches both by existing domestic and global players an those entering the market. The models available in Indian showrooms are mostly the latest ones available anywhere in the world. Our research also illustrates positive expectations of growth as 30% of respondents anticipate a growth of over 20% showing signs of a healthy road ahead. At the same time 31% of the respondents are optimistic of a growth rate in the region of 15% - 20% in the next 3 years. According to various reports, the projected size of the Indian automotive industry for 2015 varies between USD 122 billion and USD 160 billion and this includes approximately USD 35 billion from exports itself. This will translate into a contribution of 10-11% to Indias GDP by 2015, which is double the current contribution. What is equally significant is that another significant pocket of the market which relates to outsourcing of engineering services is developing very rapidly and is expected to play a pivotal role in the growth of the Indian automotive industry.


Q5

At what rate do you expect the Indian automotive sector to grow in the next financial year?

73%are confident of a growth rate of 16% to 30% for the auto sector in India in the next financial year

The budget of 2011-12 had a marginal impact on the Indian auto sector. Following are some of the highlights of this budget for the Auto sector y y y Increase in MAT rate from 18% to 18.5% No change in Central Excise Duty and hence, it is very unlikely that prices of vehicles would go up due to the Budget. Surcharge rate reduced from 7.5% to 5% for domestic companies and from 2.5% to 2% for foreign companies having a turnover of more than Rs. 1 crore Dividends received from a foreign subsidiary proposed to be taxed at 15% (plus applicable surcharge and cess) in the hands of resident corporate taxpayers. Expenditure in relation to such income is not allowed to be deducted Contributions to approved scientific research programmes such as National Laboratories, Universities, and Institutes of Technology for Scientific Research, to get a weighted deduction of 200% as against 175% under section 35(2AA) Excise duty is reduced to 5% from 10% on kits for conversion of fossil fuel vehicles to hybrid vehicles

The Indian automobile sector is expected to hit the fast lane of growth driven by factors like a strong economy, increase in availability of finance and new product launches by existing and global players including those who have recently entered the market. Experts expect that the auto sector will report a sequential spurt in revenue growth on high volumes and innovative pricing in the near term. The substantial growth in volumes is expected to boost sales growth of the automotive sector. The level of success of new launches, rising income levels and availability of finance both in the two and four-wheeler segments, are likely to determine the sales trajectory of the auto players in the near future.

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Q6

How is your organisation faring today on the current order book size compared to last year?

53%felt that there will be a spurt in the order book size for vehicles in FY 2012 vis a vis the previous year

Speaking of the sectors growth, C Ramakrishnan, President and Chief Financial Officer, Tata Motors said the Indian auto Industry is currently growing at a remarkable pace and has emerged as a hot investment destination for global auto players. The automotive sector remains in a cycle for around five to six years of duration. We are standing at the beginning of one such cycle and hope this cycle sustains for a longer time and stays in a much better and stronger way.

The resurgence of the economy and the rising income levels have triggered a good growth in car sales. The calendar year of 2011 has already witnessed a robust growth in car sales, after the relatively moderate growth last year, especially in markets like Chennai, Delhi, Mumbai, Chandigarh, Ahmedabad, Bangalore and Pune. 53% of the respondents felt that there will be a positive growth in the order book size this year when compared to last year and this expectation holds good particularly for the Original Equipment Manufacturers (OEMs) and auto component manufacturers. The positive growth in the Indian auto sector can be attributed to some unique factors that define the Indian market. From availability of latest brands to higher disposable income of the Indian consumer, the market is fast changing. The consumer demographics are transforming and changing to a youth oriented society, with almost 65% of population below the age of 35 years. This is also making India one of the most favourable destinations to introduce latest vehicles that cater to the youth.


Q7

How is your organisation faring on capacity utilization in this quarter, compared with the same quarter last year?

75%are optimistic about their profitability to grow in this quarter as compared with the previous year

For most part of the recent slowdown, the Indian automotive component segment dealt with high inventory from decline in exports. At that stage, several auto component organisations were unsure of their expansion plans. Though clichd, that is now history. A shade over 75% of the respondents are now optimistic about the utilization of capacity of their respective plants when compared to last year. With the economy bouncing back and the OEMs stepping up production, it is back to business as usual, but with a difference. These companies have not only bounced back but have increased their production levels. In most cases where the respondents had resorted to cutting shifts and reducing the number of working days, not only are they back to peak production levels but have also increased the salaries and bonuses of their staff. Many of the other industries have also shown a definite sign of recovery, especially in the IT and general industries, and with this there is a perceptible increase in the disposable incomes. Consequently there is also a spurt in demand for passenger cars and two wheelers and respondents in the OEM segment have corroborated the same. The Indian passenger car sales have risen substantially and India today is among the top ten leading markets. This is despite the anxiety of an upward swing of inflation and the impact of the current policy intervention on interest rates.


According to projections for 2020, the passenger car segment of the Indian automobile market is likely to reach a size of 9.3 million units and it will become the third largest global car market, J D Power, March 15, 2011**press Release

*press Release

PROFITABILITY AND PREDICTIONS

Q8

In terms of business volumes, what is your perspective on the performance of organisations in your industry segment in the ensuing year?

58%feel that their industry segment will be stronger in the ensuing year

Addressing the factors fueling growth in the auto components sector, Jatinder Mehta, CEO, Omax Autos Ltd. elaborated thanks to Indias cost competitiveness in terms of labour and established manufacturing base the Indian auto components industry has made a specific niche in the global automobile world. Today, India is not only eyed as the hub for automobile production but also the epicenter to source components as well.

Given the high level of expectation owing to increase in demand in the auto sector, majority of the respondents felt that, their businesses would be stronger in the next financial year. The most optimistic sentiment was voiced by auto component manufacturers with 58% of them seeing a stronger growth. Among the sectors in the automotive Industry, the auto component sector is rapidly adding capacity to meet the growing demand in India. According to experts, while the auto component consumption in 2008-09 was impacted by the slowdown in the Indian economy, this vertical, has recovered smoothly and witnessed an upsurge in consumption, especially in the second half of the current fiscal year. Regulatory incentives by the GoI, increase in exports, introduction of new models as well as variants coupled with rising income levels of average middle class population and comfortable repayment options are expected to continue to drive demand in the automotive sector in the ensuing 2-3 years.


Q9

If you feel the performance of the industry would be stronger in the ensuing year than present, what according to you is the main reason for the improvement?

35%believe that the increase in revenue growth in the following year will be driven by an increase in the market demand

While commenting on the industry performance, Anil Kulkarni, Mazars India said many joint ventures have been set up in India with foreign collaboration, both technical and financial with leading global manufacturers. There is little doubt therefore that the next 3 years would see a number of automotive companies developing and executing strategies for sustainable growth and value creation on an International platform.

Almost 35% of the respondents believe that the increase in their revenue growth in the following year will be due to an increase in the market demand driven by an enhanced level of vehicle penetration, and greater disposable incomes. At the same time, most of the respondents were not so optimistic about a rise in exports as only 18% of the respondents felt that exports will lead to growth in the following years. Availability of skilled manpower with engineering and design capabilities has resulted in many global players leveraging on this advantage by increasingly outsourcing activities like design and Research & Development (R&D) to their Indian arms. According to industry estimates, automobile manufacturers have invested more than USD 2.3 billion on R&D alone in the last five years. This also leads to greater profitability and one of the best examples is the success of the latest offering from the Japanese car manufacturer Toyota which has been designed for India. The GoI has made significant recent announcements relating to the National Automotive Testing R&D Infrastructure Project (NATRIP), in which the GoI plans to invest USD 17 billion to strengthen the automotive R&D infrastructure in India. These feature tax holidays for investments exceeding Rs. 500 crores, one-stop clearance for FDI proposals and 100% tax deductions for export profits.


EXPANSION: NEW MARKETS

Q10

What is your outlook towards M&A in the Indian automotive industry in the next one year?

59%said that there will be a strong focus on M&A

Commenting on the trend Sumit Khosla, Mazars India said with the Indian automotive Industry fairing well globally, the new wave of Indian M&A is being powered by a desire for growth, usually rapid growth and often global growth.

While the year of 2009-10 may have been relatively weak in terms of overall transactions, the resounding auto sales in 2010-11 are an indicator of the good times ahead. Experts believe that we would see a number of automotive companies seeking expansion through M&A as part of their strategy for sustainable growth and value creation. Companies in India are also expected to continue to garner their financial muscle in order to make strategic and/or opportunistic cross-border acquisitions. The survey shows that expectations on account of M&A and investments have clearly risen. From a mere single JV between GoI and Suzuki in the 1980s India has come a long way today to have eleven large JVs relating to manufacturing of cars and related investments in the sector including Honda-Siel and Toyota-Kirloskar. The Indian automotive and the auto component sectors have also seen significant out-bound cross-border M&A activity in the recent past. 59% of the respondents expect to see that in entirety there will be a strong focus on investments and M&A activities in the ensuing year.


Q11

Are you looking to expand your reach to new overseas markets in the next 3 years?

52%respondents are bullish of their expansion plans in the next three years

Even as global markets recover, there is a resurgence in both distressed and noncore opportunities under discussion. That being said, deals are being envisaged with creative terms. For those with the ability to consummate transactions, the current market environment creates great opportunities for strategic buyers to gain product, geographic and customer extensions said Miguel DeFontenay, Global Consulting Leader, Mazars.

In pursuit of technological advances, several of the respondents have been in discussion for JVs, through which they can gain access to technical know-how and then apply it to their products. However, much of the interest from emerging markets has yet to translate itself into completed deals. Cash-strapped strategic buyers from overseas have, for most part of the downturn period, remained focused on survival, while private equity firms exercised caution and in some cases were unwilling to commit capital without debt financing. There has been an improvement in M&A activity in the current year, when compared with the previous year. Our research shows that of the automotive companies, the ones that are most likely to leverage M&As are those that have stronger operating models and cash positions. Several respondents have also expressed their need to develop a competitive advantage through consolidation of scale and expertise. As many as 52% respondents are optimistic of their expansion plans in the next three years. Regarding target markets, the respondents voiced that Indian companies are now aggressively looking at Europe, North America and some parts of Asia.


Q12

How are you looking at business expansion in the next three years?

54%are considering expansion to develop a competitive advantage through capacity expansion and setting up of new facilities

Given the dynamic growth we are seeing in the two wheeler and passenger car segments, the auto component manufacturers are stretching their current facilities to a maximum output while keeping an eye on costs and margins; this they are doing with a re-look into a make or buy strategy for components/ child parts and also through imports of raw materials where ever possible from best buy sources, primarily in china. The recent price hikes in steel are getting tougher to pass onto OEMs who are consistently demanding cost down efforts from suppliers with increasing volumes and therefore the suppliers are investing into new technologies and penetrating new markets for their products. We also see vertical integration as a strong trend and with this new opportunities for growth for component manufacturers, with some tier 2 and tier 3 suppliers integrating and transforming into tier 1 organisations commented Mr. Vidur Talwar, Joint Managing Director, QH Talbros Ltd.

Auto makers in India are putting capacity expansion plans back in top gear and on the back of a revival in the sales of cars, trucks and two-wheelers. Experts believe this is only the beginning of a trend that will see the country add 2-2.5 million units in manufacturing capacity in the next four years. However, massive expansion plans have also inevitably given rise to fears of an excess in production capacity, albeit in the short term. The GoI expects the auto sector, which includes component makers and ancillary units, to account for USD 35-40 billion in investment between 2006 and 2016. This is consistent with the Automotive Mission Plan (AMP), which lays down the sector initiatives and their impact for a period of 10 years till 2016. The AMP, which is prepared by GoI, is a document that sets out the goals of the industry and the work plan to achieve those targets. The respondents have also described that when it comes to M&A in automotive sector, major players in India are continuing to drive and build on their strengths and capabilities to manufacture products of global standards at competitive rates. The cost advantage that India has over the developed markets are driving these companies to expand both locally as well as globally.


Q13

How is this expansion likely to be funded?

60%plan for expansion through internal accruals

The respondents have indicated that the Indian auto sector is still relatively optimistic about its growth plans and prefers to rely on internal accruals for deals with 60% of them planning to use existing cash reserves whilst the remaining plan to fund their expansion partly by private equity funds and financial institutions. Engendered in this sentiment is a recoupling of M&A activity with supportive financing conditions and a return of confidence to the board room post the economic slowdown.



CHALLENGES


Q14

What are the major challenges being faced by the Indian automotive industry?

29%feel that the biggest impediment for growth of the sector is inadequate infrastructure facility in the country

Highlighting the issues which needs to be addressed to overcome these challenges, Mr. C K Dave of Maruti Suzuki India Ltd. said having quality manpower, infrastructure improvements, and raw material availability also play a major role in achieving value for money for the customers. Access to latest and most efficient technology and techniques will bring competitive advantage to the major players.

Along with the growth opportunities, the Indian automotive industry presents several challenges. About 29% of the respondents feel that the biggest impediment for growth of the sector is inadequate infrastructure facility in the country. Also, increase in competition from imported products mostly in the ancillary vertical and pricing were considered as significant challenges by about one-third of the respondents. Experts believe that the key to success in the industry lies in the ability to improve labour productivity and capital efficiency while being cost efficient and addressing the challenges of pricing pressures by competition at the same time. Also, infrastructure development in India must keep pace with the growth of the automotive industry. The GoI is drawing up the AMP that aims to make India a global automotive hub. The objective is to draw an innovative plan of action with full participation of the stakeholders and to implement it in mission mode to meet the challenges coming in the way of growth of industry. Through the AMP, the GoI also plans to provide a level playing field to the players in the sector and to lay a predictable future direction of growth.


Q15

What should the GoI focus on priority to drive the growth for the auto sector in India?

40%of the respondents believe the GoI should prioritize its investment to improve the infrastructure for the sector

40% of the respondents believe that the GoI needs to facilitate the development of infrastructure to further propel the growth of the sector. Most of these respondents feel that the GoI should prioritize its investment to improve the infrastructure. The biggest challenge for the sector by far is the poor road infrastructure. Indias road network, comprising of a modest national highway system (that is only 2% or less of the total roadway length) is inadequate and dilapidated which can barely keep pace with the auto industrys rapid growth. Most roads are single-lane roads built in the 1950s and 60s. Traffic laws are not well enforced leading to one of the highest per-capita accident rates in the world. Introduction of bigger and more powerful vehicles could further accentuate this situation if the infrastructure does not improve. There has been an increase in travel times due to increased traffic and bad roads in major cities. The respondents believe that their cost advantage will be eroded if Indias promised improvement in infrastructure fails to translate. 24% of the respondents feel that the GoI should also provide further tax incentives to promote and develop growth in the auto sector.



CONSUMER TRENDS


Q16

Do you believe that the Indian domestic market will be dominated by small/ compact hatchbacks in the next 3 years?

87%feel that India is poised to become a leader in small cars segment in the next 3 years

An overwhelming majority of respondents felt that the Indian auto market would develop as one of the worlds leading small car markets in the next three years. Technical know how, relatively lower costs, stable growth, favourable government policies, a large and integrated supplier base are some of the key aspects which are expected to foster Indias growth as a major small car manufacturer. A similar sentiment is highlighted in a recent report by experts who have gone to add that India will become the worlds largest producer of A-segment small cars by 2013. Prospects of small car exports have grown at a CAGR of 21% during the last 5 years and are expected to more than double by 2013-14. This growth has been enabled by increased manufacturing competitiveness across the board, driven by continuous improvement in quality and productivity


Q17

According to you, what are the parameters based on which the average Indian consumer decides on a particular vehicle?

66%feel that Indian consumers remain economical, cost conscious, and driven by valuefor-money and hence, fuel efficiency and affordability are their key decision factors

Valued added features, more lucrative ways for dealers to retain sales margin and guaranteed residual values of cars sold will emerge as some of the means to retain and increase market share in this extremely price sensitive market segment commented Yadur Kapur, Managing Director, Deutsche Motoren while talking about the emerging trends in the auto sector.

With the soaring fuel prices, consumers in India are more inclined towards fuel efficient cars and the survey results further validates this sentiment. 66% of our respondents reveal that Indian consumers are economical, cost conscious, and driven by valuefor-money and hence, fuel efficiency and affordability are their key decision factors. The survey also shows that buyers are becoming brand conscious specially those in the elite class. 23% of them feel that brand value plays an important role for the customers today for purchase of a vehicle. The survey also show that mass market consumers make product selections based on the price competitiveness, fuel efficiency and credit availability.


Q18

Do you see the demand for premium segment cars i.e. in the range of Rs. 20 Lac and above likely to increase in the next 3 years in India?

69%of the companies surveyed see a huge market for the premium car segments in the next 3 years

Commenting on the growth of the luxury car market in India Kamal Mokdad, from the global automotive expert team at Mazars said the luxury car market is poised for exponential growth. While India remains predominantly a cost-conscious market, profitable niches are available for products which address specific needs. Customers paying top money for fancy cars expect fancy service too. Premium car makers find that while its easy to serve the metro car buyer, those in the hinterland are a different proposition.

The luxury passenger cars segment in India has witnessed an impressive growth in demand, especially in recent years. The survey reveals that 69% of the respondents see a huge market opening for the premium car segments in the next 3 years . Luxury customers are no more confined to only the metros in India. Upcoming metros and several tier 2 and 3 cities are experiencing growth in the luxury car market in a big way. Growth in the luxury segment has been faciliated by the Indian economy which has grown at nearly 9 percent on average in the last four years. With the entry of new players and launches from the likes of BMW, Mercedes-Benz, Porsche and Audi, the luxury car market is on a continuous growth and experts believe that India is expected to become one of the worlds largest market for luxury cars. The total market for luxury cars was about 18,000 units last year, and is expected to double in the next two-to-three years. However, the introduction of higher import duties for luxury cars imported through the Completely Knocked Down (CKD) unit route in the Union Budget of 2011-12 may prove a dampener in the growth of this segment.


Q19

Which vehicle segments do you foresee maximum growth in the next 3 years?

35%of the respondents feel that the small car segment will witness maximum growth

Commenting on the growth of the tractor market in India, Mr. Nikhil Nanda, Joint Managing Director, Escorts Ltd. said the Indian Tractor industry is positioned in a market with over 700 million farmers. With India hitting GDP growth levels of 8-9% p.a., farming practices will be impacted significantly. In the years ahead, we see steady increases in tractor penetration and greater adoption of farm mechanization practices. The opportunities presented in this agricultural space will be huge as India modernizes and takes steps to enhance its food security for its people.

Several two-wheeler buyers are transitioning from two to four wheelers. With cheaper options like Tata Nano available in the market and a availability of loan facilities, India is marching towards being a four wheeler country. 35% of the respondents feel that the small car segment will witness maximum growth in next 3 years. Another interesting trend to note is that the tractor volumes are expected to grow in India. For the year 2011-12 the agricultural credit flow target has been set at Rs. 4,75,000 Crore. The Indian tractor market, thus, is expected to grow in future and remain one of the biggest tractor markets in the world. The results show that 19% of the respondents are expecting a growth in the tractor market in the next 3 years. Production of both two-wheelers and three-wheelers are expected to double to 2.2 crore units by 2015 and reach 3 crore units by 2020 driven by current low penetration levels, expanding rural sales and growth in exports. Experts believe that production of commercial vehicles will cross the 22 lakh-units mark in the same period. In addition, the four-wheeler passenger vehicle market has grown impressively as a result of the progressively changing requirements of the new middle class.


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