India’s sunrise sector

The Indian government is on a mission to make its booming automotive industry a world contender. The country is encouraging the development of affordable and efficient vehicles, and carmakers are responding with keen interest

The Indian market is experiencing a high rate of the growth thanks to a burgeoning car-buying population looking for low cost cars. While a new sector of $2,000 vehicles is expected soon, the $5,000 to $10,000 sector is witnessing fierce competition between domestic makes and global OEMs eager to grab a share of the growth. All this makes the automotive industry India’s “sunrise sector”.

Vehicle production will have averaged almost 12 per cent annual growth between 2001 and 2008 according to data from JD Power and Frost & Sullivan. Along with China it is one of the fastest growing markets in the world.

Since the year 2000 vehicle production in India (excluding two and three-wheelers) has grown from 800,000 units a year, to over two million units. Including two and threewheelers the figure has more than doubled from 4.76 million units to 11.07 million. It is important to include two-wheelers because today’s motorcyclists in India are considered to be tomorrow’s four-wheel buyers.

Framework for future growth

Early in 2007 the Indian government issued its Automotive Mission Plan, a forecast spanning the years 2006-2016. In it the government expects India to “emerge as the destination of choice in the world for the design and manufacture of automobiles and auto components.”

The forecast also says India will have “an output reaching a level of $145 billion, accounting for more than 10 per cent of the GDP and providing additional employment to 25 million people by 2016.”

Dr Surajit Mitra is Joint Secretary to the government’s Ministry of Heavy Industries & Public Enterprises. In his introduction to the report he explains that India is at the threshold for a major takeoff in the automotive sector.

He describes how the implementation of the Automotive Mission Plan, together with the establishment of world class testing, homologation and certification facilities, as well as the establishment of nine state-of-the-art R&D centres, “will ensure India’s automotive industry has a distinct edge on newly emerging automotive destinations of the world.”

These are ambitious goals given the rate of growth that has already taken place in the sector, and given past experience in countries such as Brazil and Turkey where economies have nose-dived. Given this, investors cannot view India as completely risk free. Nevertheless, the fundamentals all point to a positive future. The issue for global OEMs is how to tap into a market that appears to be already sewn up by a few dominant brands – namely the domestics and Hyundai. This is further exacerbated by the fact that India is developing in a different way to other emerging markets. Customers demand new, small, low-cost cars that Western OEMs just don’t make, not yet at least.

Statistics – where are we now

Total vehicle production grew 14 per cent in the 2006- 2007 financial year according to SIAM, the Indian automotive industry association, a slight slowdown in growth compared to the previous year. However, commercial vehicle and passenger vehicle production outpaced overall vehicle production growth and grew 33 per cent and 18 per cent respectively.

In India it is important to consider the vehicle market in its entirety, as there is a clear development in consumer segmentation. A new emerging middle class is starting to be able to trade two-wheelers in for four-wheelers, but there is still a lot of price sensitivity. That said, the government has supported the four-wheeler sector by cutting taxes on small cars from 24 per cent to 16 per cent.

The market is not like China’s where middle class car buyers are entrepreneurs or bankers with a significantly higher income than the norm. The emerging middle class in India consists of young and highly educated people working in call centres or software companies. And there are lots of them – around 450 million – according to one estimate. Furthermore, the middle class is growing fast, at a rate equivalent to the population of Holland each year.

As the chart below shows, the market for all vehicle types is expanding. Production of passenger vehicles was up 18 per cent in 2006-07 to over 1.5m units. Commercial vehicle demand reached a new peak of 520,000 units, almost 300,000 of which were medium or heavy trucks.

Export demand growing

The domestic market accounted for 89 per cent of passenger car demand in 2006-07 and 90 per cent of commercial vehicle demand. The Automotive Mission Plan nevertheless seeks to develop an export market for its industry’s products.

Maruti currently exports around ten per cent of its production, 70 per cent of those will be exported. The company expects to export a million cars a year by 2010.

Hyundai is developing India as a regional hub for small cars and, as other makers set up small car manufacturing operations in the country to feed demand from the emerging middle class, these cars could also be exported, albeit in relatively low volumes.

India earned $4 billion from exports in 2005-06, and not all of this from cars. Almost half, or $1.8 billion was revenue earned from exports.

There is a huge amount of optimism for developing India as a small carmaking hub. It would enable domestic and global vehicle manufacturers to capitalise on the market for small low cost cars, to some extent smaller and cheaper than those already manufactured elsewhere in the world. Supported by a strong domestic market, vehicle manufacturers are seeking to set up sizeable manufacturing operations from which they can also export. Export potential is significant. If manufacturers can get products right for India they are also likely to be suitable for China and other high growth emerging markets such as Brazil and Russia. According to Roland Berger Strategy Consultants, the market for vehicles priced below $10,000 is likely to reach 18 million cars by 2010, up from 12 million today. This would be equivalent to a fifth of world car sales.

Maruti fights corner

Market leader, Maruti, has built its business up on small cars, and is not going to lose its market leadership position easily. Company executives see a huge opportunity in enabling the emerging middle class to buy new cars, noting that there are 50 million two and three-wheelers on the road in India, and that owners of these vehicles are the potential buyers of new small cars. In fact, the company has in the past had a bike-to-car sales initiative, which accepted used two-wheelers in exchange for a new car.

Now a subsidiary of Suzuki (which owns 54.2 per cent of Maruti Udyog shares), Maruti opened its fourth car plant in the country earlier this year. The other three plants are all on a site 25km south of New Delhi in Gurgaon and have a stated capacity of around 500,000 units a year (although the company actually sold 675,000 cars in the latest financial year). Investment is taking place to increase total capacity to around a million cars a year by 2010. The newly opened plant in Haryana state, also near New Delhi, has a planned initial annual capacity of 100,000 units, but that is rising to 300,000 units by 2010. In total Maruti is planning to produce a million vehicles a year in India by 2010 and to export 200,000 of that number. The new plant builds the new SX4 saloon – Maruti’s first new sedan model for more than a decade – but from 2008/9 Suzuki is planning to source a new small hatchback from India for global markets. The hatchback may be named Alto for Europe, and is currently being developed in India and Japan.

Plans call for 50,000 of the cars to be rebadged by Nissan. The car is expected to be built solely in India.

Hyundai’s small car hub

India’s largest exporter is Hyundai. It too is seeking to make India a global hub for small car production.

Earlier this year the Korean carmaker started shipping its first Getz models to Europe. The Atos Prime is already exported to 67 countries in Europe, Latin America, Africa and the Middle East. Exports totalled 113,000 units in 2006, and this year the company is targeting 300,000 vehicle exports. Hyundai also exports the Accent from India.

HS Lheem, Managing Director of Hyundai Motor India Limited (HMIL), told the Times of India in early 2007 that: “Going by the current indication, we will soon be the hub for all small car exports for Hyundai. I think, by end next year, that should become a reality.”

HMIL has one plant near Chennai and is in the process of building a second to produce an additional 300,000 units per annum, raising HMIL’s total production capacity to 600,000 per annum by the end of year 2007. Hyundai is the fastest growing manufacturer in the country and to keep up this pace it is planning to increase the number of dealers from 183 in 2006 to 250 this year.

Tata’s small car eagerly awaited

Market leaders aside, industrial conglomerate Tata is attracting a huge amount of interest for its small car development plants. It is currently developing a car that will sell for less than half the price of cars currently on offer in India or around $2,200 (or 100,000 rupees, termed in India as one lakh). The so-called “one lakh car” is expected to go on sale in the second half of 2008 and could be unveiled as early as January at the New Delhi Motor Show. “The market fundamentals would be turned upside down,” notes V.G. Ramakrishnan of consultants Frost & Sullivan.

Details of the new car are still sketchy. In its last annual report the company said that “the styling and designing of the car have been completed and prototypes are being tested in the plant. It will be a rear engine, four to five seater, four-door car with about a 30 horsepower engine.”

At one point it was thought that dealers would complete the final assembly, but it now appears the cars will be produced in any one of up to four plants. The initial plant is in Singur, West Bengal, but the start of production has been delayed by disputes over land ownership. Another problem has been high steel and aluminium prices, which are expected to have added to costs. There appear to some doubts as to whether the car will actually retail at $2,000 mark, but even if the price were 50 per cent higher, it would still be well below competitors such as the basic Maruti 800, which retails for $5,700.

Tata is expected to keep the cost down with low assembly expenditure. It also intends to use a large amount of plastic in the body, allowing adhesives to be used in place of traditional welding. Indeed, the company already has some experience in the area of low-cost vehicle production: it sells the Ace light commercial vehicle for $2,290. 80 per cent of the production is outsourced.

Fiat joint venture

Elsewhere, Tata has formed a joint venture with Fiat to set up a new shared facility at Ranjangaon, in the State of Maharashtra. The plant will have capacity to produce at least 100,000 cars and 200,000 engines and transmissions yearly.

According to the companies, the plant will manufacture both Fiat and Tata vehicles for India and export markets, setting the stage for the fast-growing country to become an ‘export hub’ for two more automakers.

An assembly line for Fiat’s Palio and Adventure models is already in place and trial production has started. Fiat will also sell larger models including the Grande Punto and Linea in the country. The cars will be sold through a joint Tata-Fiat dealer network.

The engine manufacturing facility will make the Fiat 1.3 litre multi-jet diesel engine, the 1.4 litre and a new 1.2 litre petrol engine (both from the ‘Fire’ family), and Fiat transmissions. These will be used by both Fiat and Tata. These are not engines that would be suitable for the Tata low-cost car, which is more likely to receive a 660cc engine.

Room for revised Logan

The Dacia/Renault Logan is probably the world’s most successful low cost car to date, but in India it is considered a large car, and is marketed as “India’s first wide-body car”. The Logan was launched in India in April 2007 and is assembled by Mahindra Renault, a joint venture between agricultural vehicle specialist, Mahindra & Mahindra (51 per cent), and Renault (49 per cent). At the launch Renault said the Logan had been substantially revised for the Indian market and that is has been brought in 15 per cent below budget and one month ahead of schedule.

The car is priced at over $10,000 (base price), which is significantly more than the Maruti 800, or the Hyundai Santro, which are current market entry models. However, it is significantly less than best-selling cars of a similar size such as the Hyundai Accent or Honda City. Renault CEO Carlos Ghosn has said he wants to address the gap in the product line-up and offer a lower cost small car in India and other emerging markets.

Mahindra Renault has invested around $130m to set up a facility in Nashik to produce up to 50,000 cars a year.

The facility features a stamping shop, a paint shop and an assembly line specifically for the Logan. Local content is initially around 60 per cent.

Earlier this year Mahindra Renault announced it would build a new plant in Chennai. With 400,000 units capacity the plant will be the largest automotive assembly plant in the country. Nissan will also invest in the plant and together the three companies have formed a new joint venture, with Mahindra holding 50 per cent of the equity, and Renault and Nissan each holding 25 per cent. They will invest a total of $900m at the site over the next seven years. The plant will assemble cars for all three brands, and engines for Renault and Nissan. Production is due to start in the second half of 2009. Nissan sold just 190 units in India in 2006.

New local entrants getting in on act

According to local press reports, motorcycle manufacturer Bajaj Auto and Hero Honda, two of India’s largest twow heeler manufacturers, are so concerned that the Tata small car will take share away from two-wheelers that they are considering entering the low cost vehicle market themselves, encouraged by the Automotive Mission Plan.

Bajaj Auto does already make three-wheelers and reports suggest that a new four-wheel LCV, due on the market by 2009 depending on its success, may also be sold in a passenger car version. The proposed vehicle would be fitted with a 500-600cc engine and will be available in diesel, petrol and compressed natural gas (CNG) versions.

It is likely to cost around 1.5 lakh, or 50 per cent more than the Tata car.

The company has signed a memorandum of understanding to set up a Greenfield project at Chakan in Pune to produce a new range of three- and four-wheelers. This will be the company’s fifth plant, and will employ around 1,000 people.

Hero Honda may be tempted to enter the low-cost car race, but it is actually considering a low-cost two-wheeler. It wants to lower the market entry price to approximately $300-350, around half the current lowest priced motorcycle.

Another new entrant is rumoured to be Global

Automobiles of Kolkata. That company has tied up with China’s Guangzhou Motors to roll out a low-cost car.

Global Automobiles is backed by the Xenitis group, an IT and computer hardware company that counts motorcycle and automotive industries amongst its core sectors. According to local reports that car could be ready to go on sale by October 2008, shortly after the Tata car.

Chinese vehicle manufacturers seem to be ideally placed to target the one lakh car market, but this is not a segment that has yet developed in China. Instead, Chinese manufacturers are likely to continue to focus on larger cars that meet current Chinese demand. The compact car sector is one in which the Chinese are well placed.

Chery Automobiles is reported to be seeking an alliance with International Cars (ICML), makers of Sonalika Tractors, to make a small car in India. The car would likely be in the $6-8,000 range. ICML is reportedly planning to manufacture Chery products (possibly the Chery QQ, the design of which mimics that of the Daewoo Matiz) from its tax-free production facility in Himachal Pradesh.

There have also been reports that the 24 per cent excise break will translate into a major price gain for the ICMLChery alliance.

Global OEMs target compact car segment

Many of the global OEMs are developing competitors to Renault’s Dacia Logan that will be suitable for the Indian market. Thanks to the country’s low-cost supply structure they may well also use India as an export base. Companies developing low-cost cars for India include Toyota, Volkswagen, GM, Ford and Mitsubishi.

Toyota is developing a low-cost small car for India that will also be sold in China, Brazil and other emerging markets. It will be launched in 2010 and has a target price of around $6,500, enabling it to compete with the Maruti Alto, Hyundai Santro and Tata Indica in India. The car is expected to run on a 1,000cc engine.

The Japanese carmaker also markets the Innova MPV in India, which sells well as a taxi, but although it is part of Toyota’s emerging market vehicle family, it does not meet the needs of India’s newly emerging car-buying class.

Toyota has lagged some of its competitors, particularly Hyundai, in India, and knows that it cannot ignore the lowcost emerging market car if it wants to stay as the biggest selling car manufacturer in the world. Retaining market share with new entrants offering low-cost alternatives will be increasingly difficult. Similarly, having lost share to Toyota over the last 20 years, the likes of GM, Ford and VW know they too have to have products in this segment.

Profits from low cost cars may be low but all are targeting market share. Toyota wants 10 per cent of the Indian market, compared with 4 per cent today, and GM wants to increase its share from 3 per cent to 10 per cent by 2010.

Volkswagen is rumoured to be developing a new low-cost car for India, in addition to a replacement for the Fox, which is sold in South America and Europe. We would expect these to share underpinnings, to achieve cost targets, but in fact the Indian model may be a low-cost version of the Polo. The Fox would not be suitable for India because it has been developed and produced mainly for Brazil and the high value of the Brazilian currency means it is virtually impossible to export from there, particularly to India. So India needs a new low-cost car, which has been designed to achieve the lowest cost possible in India.

GM is planning to use its Chevrolet brand for its Logan rival. The new model will go on sale in Eastern Europe, Russia and India from around 2010 or 2011. It may also be suitable for China and South America. GM launched the Chevrolet Spark in India in April 2007. The base model retails at just over $7,500, less than the Tata Indica.

Standards and solutions

The downside to the low-cost car revolution is the compromise on safety. Many of the low-priced cars sold in India do not have ABS or airbags, safety equipment that is standard in developed markets, for example. Around 50,000 lives are lost each year in India due to road traffic accidents. This has been a major criticism of Tata’s ‘one lakh car’ project, although the company is now claiming that the car will pass European safety tests. Toyota says that part of the reason that it is delaying its low cost car until 2010, instead of offering a ‘decontented’ Daihatsu for example, is that it is looking for long-term, low-cost solutions such as new materials that do not compromise safety. According to Frost & Sullivan’s Ramakrishnan, quality in India is different: “Customers are not as discerning as they are in Europe so precision is not required,” he says.

Another concern is the environmental impact of all these cars and the cost of reducing it. At the moment 11 cities have Euro 3 standards. They account for over 50 per cent of sales. The rest of the country is still Euro 2.

Euro 4 standards are planned for 2010, but this deadline is likely to slip by a year or two says Ramakrishnan.

Nevertheless, most new models being introduced, such as the Suzuki SX4 sedan launched in May, do meet Euro 4 standards already. Although there is not much talk in India about carbon dioxide emissions, manufacturers are very aware that global demand for small fuel-efficient cars is expected to grow as fuel prices increase and consumers seek to reduce their impact on the environment. This can only increase the export potential for India – another reason to be optimistic about India’s plans to develop as a small car hub.