Small cars in India's global
future By Priyanka Bhardwaj
NEW DELHI - Can India emerge as a hub for
car manufacturing? In this year's government
budget, Finance Minister P Chidambaram reduced the
excise duty on small cars from 24% to 16% and said
he hoped that "industry will seize the opportunity
to make India a hub for the manufacture of small
and fuel-efficient cars".
Observers have
said that the 8-percentage-point excise-duty cut
for small cars, defined as vehicles up to 4 meters
in length and with displacements of up to 1,200
cubic centimeters for gasoline engines and 1,500cc
for diesels, is the first step in making India a
hub
for auto makers. The three main manufacturers of
small cars in India - Maruti, Hyundai and Tata -
have announced significant price cuts that have
already boosted demand. The rise in sales is
likely to usher in economies of scale that could
enable the industry to leap into the global
marketplace.
A senior official in the
Heavy Industry Ministry has said that the
government wants further "reorientation in duty
levels" to match tariff levels in Southeast Asia
and China. The excise duty on small cars in China
is just 1-2%.
After China's, the Indian
auto industry is the second-fastest-growing in the
world, currently producing about 8 million
vehicles annually. The industry is well on track
to turn India into the world's third-largest car
market, and 2005 saw it move in this direction
with a spree of overseas acquisitions. With auto
majors betting big on luxury vehicles and the
growing affluence of the Indian consumer, India is
expected to see 30 new models in 2006.
At
the same time, there is a quest to build a
meaningful passenger-car export business, with
about 160,000 units exported in 2004 (up from
fewer than 50,000 units in 2001). Hyundai Motor
India is the country's biggest auto exporter. By
2010, exports are expected to cross the US$10
billion mark, on the back of an upswing in demand
for small cars due to rising crude-oil prices. In
this context, while talking to journalists in
Prague, the European Union commissioner for
business and industry warned European companies
not to underestimate the competitive challenge
they face from India and China.
But there
is still some way to go. Indian streets are still
dominated by motorcycles (India is the largest
manufacturer-exporter of two-wheeled vehicles in
the world), but passenger cars represent a
high-growth segment. After double-digit growth in
2003 and 2004, passenger-car sales expanded by a
more modest 5.2% between April and November 2005.
Market forecasts, however, suggest a rate of about
10-12% for 2006.
Consulting firms
Booz-Allen Hamilton and McKinsey have estimated
that the Indian domestic market of 1 million
passenger cars (with 70% small cars) will double
by 2010 and cross 3.5 million by 2015. India is
also likely to grab 3-4% of the global auto-parts
market ($700 billion) by 2015. Foreign direct
investment in the sector is likely to touch $8
billion in the same year.
Though the
fledgling Indian car market is still concentrated
in the hands of a few players, big changes are
ahead. Maruti Udyog Ltd (MUL), 54% owned by Suzuki
Motor Corp of Japan, currently dominates the
small-car segment with a market share of about
50%, but it has strong plans to penetrate the
medium-and-large-vehicle segment. MUL is currently
operating close to its peak capacity of slightly
more than 500,000 passenger cars and light-duty
utility vehicles per year. The firm is in the
process of building a new manufacturing plant with
an initial production capacity of 100,000 cars per
year, with an ultimate capacity of up to 250,000.
The new plant will start production by the end of
this year.
The next-largest player is
Hyundai Motor India Ltd, a subsidiary of South
Korea's Hyundai Motor Co, and No 3 is the domestic
Tata Motors Ltd. Hyundai had sales of 252,851
units in 2005, up more than 17% from the previous
year. The company has added a third shift at its
Chennai plant, and is building a second factory
nearby with capacity of 300,000 units, taking
annual output in India to 600,000 units by 2007.
The company predicts the small-car market could
grow to 960,000 units a year by 2010 from about
60,000 units now.
US-German giant
DaimlerChrysler, in India since 1995, is
assembling Mercedes S-Class, E-Class, and C-Class
models in the country; production could be
expanded if demand grows from the current modest
level of 2,000 units in 2005. BMW AG is in the
process of establishing an assembly plant with an
investment of $23 million, and is expected to
begin assembly of 3-series and 5-series vehicles
in the first quarter of 2007. BMW's facility will
have a similar capacity to the existing
DaimlerChrysler plant.
SkodaAuto India, a
fully owned subsidiary of SkodaAuto of the Czech
Republic (a Volkswagen subsidiary since 1991), one
of the premium automobile manufacturers in India,
recently announced that the company sold 8,953
units last year, which represented growth of
almost 25% over 2004 (7,202 units).
General Motors India sales grew an
astounding 18% in 2005 with its Chevrolet Tavera
multi-utility vehicle (MUV) leading the chart with
18,622 units, nearly two and a half times the
figure from last year. Gearing up for increased
production, GM India's Halol facility in Gujarat
is undergoing expansion to 85,000 units this year.
GM India has said it will soon roll out a
"minicar".
In addition, Toyota-Kirloskar
Motor (TKM), a joint venture between Kirloskar
Group and Toyota Motor Corp (TMC) based near
Bangalore, has announced plans to enter the
small-car segment around 2010, and Honda and
Nissan are also targeting the small-car market.
In India's emerging auto industry,
profitability is strongest among Indian auto
makers, aided by good production efficiency and
strong profits from purchase financing. The
industry-average profit margin before
depreciation, interest and taxes has grown to
about 12%, from below 10%, over the past six
years. Indian companies have established close
links with Japan and South Korea, two major global
car hubs.
India is still mostly a
small-vehicle market, while China is becoming more
focused on bigger and higher-margin vehicles. But
strong growth lies in both countries' future.
China and India have populations of 1.3 billion
and 1.1 billion, respectively, and in both, fewer
than 10 in 1,000 driving-age inhabitants currently
own a car. Yet purchasing power in these two
countries continues to rise, as shown by 2006-20
annual gross domestic product growth forecasts of
5.5% in India and 5.2% in China.
However,
there is a lot more to do. According to Booz-Allen
Hamilton, India will have to invest more than $5
billion every two years to achieve optimum growth.
Indian companies need to cut costs further to turn
into enterprises able to take on global
competition. The government will have to make more
changes, including further reduction in excise
taxes. Indeed, Indian cars have come a long way,
but there is still a long road that needs to be
traveled.
Priyanka Bhardwaj is a
New Delhi-based writer.
(Copyright
2006 Asia Times Online Ltd. All rights reserved.
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