Japanese auto makers, with some noticeable exceptions, may remain bit players in the surging Indian light-vehicle market for some time to come, two industry analysts in Tokyo say.

On their first visit to the subcontinent, Seiji Sugiura and Sanshiro Fukao, of HSBC Securities (Japan), not only witnessed firsthand the sizzling growth in India’s passenger-car sales, but also the minor position and dim outlook for many of Japan’s biggest domestic players.

The dominant position of Suzuki Motor Corp.’s Maruti Udyog Ltd., a pioneer in the industry with roughly half of all passenger-vehicle sales, came as no surprise.

But it was unusual to see Toyota Motor Corp., Honda Motor Co. Ltd. and Mitsubishi Motors Corp. as laggards, the two analysts say.

The three auto makers saw combined sales in 2007 of 126,652 vehicles, 8% of the total Indian market and only slightly ahead of fourth-place Mahindra & Mahindra Ltd.

The HSBC analysts estimate the combined share of the Japanese trio in 2008 will be 7.8%, while Nissan Motor Co. Ltd. currently is not even numbered among India’s top-10 bestsellers.

But that could change in the coming years due to a $1 billion greenfield plant deal to build small cars that Nissan signed with alliance Renault SA and the Tamil Nadu government late last week.

"We perceived some disillusionment with the Indian auto market among Japanese auto makers for three main reasons," the two men write in a recent HSBC global research report.

These include production costs, which they say are not as low as generally believed; price competition that likely will intensify; and the fact Indian domestics increasingly are becoming competitive with non-Indian vehicle producers.

The HSBC analysts say they "doubt Japanese auto makers will be able to develop profitable businesses in India in the near term."

The newly introduced Tata Nano "people’s car," designed to sell for $2,500, is helping inspire their misgivings, based on its fragile sheet steel, weak suspension system, uncomfortable seats, anemic 33-hp engine and questionable profitability.

Plus, the minicar’s true market price may not be much lower than the popular Maruti 800, the report says.

Nevertheless, the two analysts conclude many of India’s billion-plus people will consider the Nano a step-up from scooters, 3-wheelers and motorcycles that currently make up the mass-vehicle market. The car may prove attractive to overseas markets, as well.

The HSBC report compares Tata Motors Ltd.’s evolution from commercial-vehicle producer to passenger-car maker with "a similar sequence of development followed by Toyota in its early years."

The report also notes Indian motorcycle maker Bajaj Auto Ltd.’s plan to move into the mass vehicle market (in a joint venture with the Renault Nissan Alliance in Pune to build a low-cost car) "resembles Honda’s early years."

Meanwhile, says the report, many Indian 3-wheel makers are aiming to enter the car market just as Mazda Motor Corp. and Daihatsu Motor Co. Ltd. did decades ago.

The report finds India’s low-production costs "illusory," noting about 15% of the 908 vehicle and component makers exhibiting products at the recent Delhi Auto Expo 2008 show were Chinese, "apparently because they have a cost advantage."

2007 Indian Passenger-Vehicle Sales by Brand
Maruti Suzuki 710,632
Hyundai 200,410
Tata 228,038
Mahindra 117,713
U.S. Makers* 99,473
Honda 60,387
Toyota 54,181
Mitsubishi 12,084
Skoda 12,596
Fiat 2,876
Total 1,507,966
* GM, Ford, Chrysler. Source: Society of Indian Automobile Manufacturers and HSBC estimates.

With average wages in India’s auto industry increasing about 20% per year and a domestic auto market still significantly smaller than China’s, Indian parts makers do not enjoy the same economies of scale as their Chinese competitors and are becoming less cost competitive, the HSBC report finds.

The result is Indian auto makers are buying more and more parts from Chinese suppliers.

Long term, demand for passenger cars in India will be influenced by regional loyalties, underdeveloped roads and limited safety perceptions.

"Safety is not likely to become a prime concern in India for some time, the report says. "The Indian government seems to place greater emphasis on environmental concerns than on safety."

Near-term negatives include rising interest rates for borrowers, an impending hike in fuel prices and new-vehicle launches concentrated toward the latter part of the year.

Still, the HSBC analysts are convinced most Indians want to own a car and estimate sales, including SUVs and multipurpose vehicles, will increase 12% to 1.68 million units in 2008. Deliveries easily should exceed 2 million units in 2010 and reach 4.2 million in 2015, they say.

The push already has started – Maruti is spending $1.75 billion to increase capacity and expects more sales momentum with the introduction of the Splash, Swift sedan and a diesel version of the SX4 by year’s end.

In an address to the Foreign Correspondents of Japan in December, a confident Osamu Suzuki, president of Suzuki, which holds a 54.1% share in Maruti, said: "We will maintain 50% of (the Indian) market forever."

That may be easier said than done given the ambition of Tata, Bajaj and others to change the character and size of the vehicle market in India, which is the third-largest economy in Asia with an 8.6% annual growth rate for the last four years.

Analysts Sugiura and Fukao expect the mass-market expansion will be fueled by models designed and built by Indian auto makers that will compete on price and function, while expanding exports as well as securing economies of scale and increasing returns on investment.

The analysts foresee the foreign transplants stuck with a relatively small part of the Indian market for high-grade passenger cars, adding the enthusiasm of global auto makers varies.

The Renault Nissan Alliance 50-50 joint venture with the state of Tamil Nadu, for example, reportedly calls for installed capacity of 400,000 vehicles annually within seven years at the new plant to be built near Chennai. Capacity will be divided almost equally between the two brands.

Hyundai Motor India Ltd., which the HSBC analysts say earlier looked as if it might slip from second to third place this year in passenger-vehicle sales, is expanding its plant in Chennai. Riding on the strength of its premium i10 hatchback, Hyundai sold more than 25,000 cars from November through January.

General Motors India Ltd. saw strong sales in January, jumping 46% to 5,517, led by its Spark hatchback, while Honda Siel Cars India Ltd.’s deliveries rose 29.2% to 7,767 in the month.

Honda has boosted annual capacity to 100,000 vehicles, with 40,000 units added last month. Plans are to increase dealerships to 100 in March, from 66 currently, but the HSBC report expects market share in 2008 to be a modest 4%, from 3.8% in 2007.

However, Honda’s new $255 million small-car plant, due to begin producing the Jazz (Fit) in late 2009, should boost its share to 5%, the HSBC analysts say.

Although Toyota’s joint venture in Bangalore is expanding, the auto maker stayed away from the Delhi auto show, strengthening the HSBC analysts’ view that its primary focus will continue to be on North America and China.

Concludes the report: "If the Indian auto market develops as we foresee, there will be little room for Japanese auto makers (other than Suzuki) to participate in growth."

– with Sudhakar Shah in Mumbai