NEW DELHI — A new pecking order is emerging in India's overcrowded automotive industry and a shakeout is under way. Three years ago, Maruti Udyog Ltd. — a 50/50 joint venture between Japan's Suzuki Motor Corp. and the Indian government — owned 83% of the passenger car market.

Then last year, Maruti's market share plummeted to 56.8% as several competitors gnawed away at the underpinnings of the industry leader. Korea's Hyundai Motor India slipped into second place with 14.2% of car sales, followed by TELCO — maker of Tata vehicles — in third with 8.5%, and Daewoo Motors India close behind.

But the rankings are by no means fixed. Toyota Motor Corp.'s Kirloskar Motor Ltd. joint venture is muscling deeper into the market with its new Qualis multi-utility vehicle (MUV). Ford Motor India is forging ahead with a combination of domestic sales and exports, while Daewoo's future now is clouded by the bankruptcy of its South Korean parent.

As the lines between market segments blur, no less than 14 producers of passenger cars and MUVs are hustling for sales in a country where socialism still colors government policy and it's still politically correct to treat such vehicles as a luxury most Indians neither want nor need.

Demand has been growing by fits and starts in recent years, with sales of cars and MUVs rising from 411,455 units in fiscal 1995-’96, ending March 31, 1996, to 762,104 in 1999-’00. A modest total, nevertheless, for a country of 1 billion people, with an estimated four cars per 1,000 people and a parc (total vehicles in operation) of about 5 million 4-wheelers, each expected to last 15 years.

With per-capita income under $400 a year, no one talks about the automotive age arriving in force here anytime soon. The idea of a billion Indians behind the wheel of a car is mind-boggling to motorists already sharing India's dizzying city streets, highways and byways, clogged with everything from shiny new cars and ancient trucks to holy cows and working elephants.

Instead, automakers are pinning their hopes on India's emerging middle and upper-middle class, estimated at 200 million to 250 million. With annual household incomes of $4,000 to $8,000 and more, these are individuals who can move from a motorcycle or scooter, the vehicles most upwardly mobile Indians have settled for, to a small car such as the entry-level Maruti 800, selling for as little as $4,700.

The numbers are telling. In 1999-’00, for example, sales in India of 5,165,593 vehicles included 3,775,000 2-wheelers, 205,000 3-wheelers and 251,600 tractors — 82% of the total — with trucks, buses, MUVs and passenger cars making up the balance. The middle class still buys 2-wheelers, but the upper-middle class now is purchasing cars, says General Motors India President Aditya Vij. “We estimate affordable buyers at 1.5 million households,” says Teruo Fujisaki, president of Honda Siel Cars India.

Easier financing offered by GMAC, Ford Credit and other newcomers is helping to sell more automobiles. Although terms are stiff, some 70% of sales now are financed, typically with a 20% down payment and the balance financed over three years at interest rates around 17%, down sharply from 25% and more in the past.

Tastes are changing as well. Demand for midsize cars is accelerating, while the growth rate of mini models lags. “Indians want as large a car as possible,” says Hormazd Sorabjee, editor of Autocar India, a magazine for car enthusiasts. “India is not a small-car market; it's a cheap car market,” he adds, noting that two major factors drive the market — affordability and value.

Among India's major players, Maruti, the industry standard bearer, began production in 1984, breaking the decades-old duopoly of Premier Automobiles Ltd. and Hindustan Motors Ltd. by introducing cars with modern technology. The government has caused much speculation about Maruti in recent months by deciding to sell its share in the oft-contentious venture, part of an effort to disinvest itself from public sector companies.

While the exact terms of the sale are not yet decided, Suzuki has the right to approve any new partner. The betting here is that General Motors Corp., which holds a 20% share of Suzuki, will end up with some or all of the government's share, possibly before the end of the year. Such a conquest investment would increase GM's bragging rights by adding all of the Indian automaker's sales to its regional total, moving the world's biggest car company closer to its goal of 10% of the Asian/Pacific market by 2005.

Although Maruti posted its first-ever loss in the recently ended fiscal year, new models continue to broaden its lineup far beyond the entry-level Maruti 800. Sales in calendar year 2000 slipped to 341,323 units, down 11% from 1999, but says President Jagdish Khattar: “Our competitors are bound to make gains, and there will be additional declines in our market share, but Maruti will keep 50% for the next few years.”

Next comes Hyundai, whose largest overseas investment is the $614 million spent on a greenfield plant near Chennai, where production began in September 1998. A $400 million expansion now under way will boost annual capacity of the wholly owned subsidiary from 120,000 units to 200,000 by 2003. The best-selling 1L Santro and 1.5L Accent are rolling off the line. Analysts credit the company's local success — 85,451 cars sold last year — more to clever marketing than outstanding product. This year, Hyundai foresees domestic sales of 95,000, plus exports of 10,000 cars to nine neighboring countries.

In March 1999, Tata Engineering & Locomotive Co. (TELCO) introduced the 1.4L Indica, garnering much attention as the first car ever designed and built in India. Rajit Dube, TELCO's car chief, discounts ramp-up problems at the $400 million greenfield plant and ranking last in a J.D. Power survey of eight small cars made here. He is encouraged by sales of 100,000 units in the first two years of operation and foresees a total this fiscal year of 70,000, reportedly the Indica's break-even point.

His optimism, however, is not widely shared. SMIFS Securities analyst Rajesh Kothari says TELCO, a privately held company that does not disclose earnings, is “bleeding from its car project.” Analysts doubt whether TELCO can succeed with only one car model and are not impressed by a possible licensing arrangement with French automaker PSA Peugeot Citroen now under study.

Daewoo India could be the tiebreaker in GM's negotiations to buy its bankrupt parent. Although three new models were introduced here in March, auto analysts discount claims by Daewoo executives that the Indian subsidiary can be restructured and run independently. All drivetrains for the front-wheel-drive 0.8L Matiz subcompact car, they say, must be imported from South Korea, as Daewoo's Indian engine and transmission plant (capacity 150,000) was not designed to make transaxles.

The automaker's investment in that facility, plus an assembly plant that can turn out at least 72,000 cars annually, is estimated at nearly $1 billion, yet industry experts feel no one would be willing to pay more than a fraction of the original investment, and few would be interested at any price.

Ironically, says Zafar Momin, an analyst with A.T. Kearney management consultants in Singapore: “The Matiz is the best small car in India. There's nothing comparable in General Motors' inventory. The Matiz has tremendous market potential in Southeast Asia, South Africa and a lot of other places.” Mr. Momin speculates that GM might try to sweeten the deal-making in Seoul by asking Daewoo to toss in its Indian subsidiary for little or nothing, plus possibly spin off the part of Daewoo Heavy Industries that makes Matiz transaxles.

India boasts other hungry contenders. After a false start with the poor-selling Escort, Ford India launched the Fiesta-based Ikon in late 1999 and has not looked back. Domestic sales this year are expected to increase 17% to 20,000 units, with an additional 30,000 complete-knocked-down (CKD) kits exported to South Africa and Mexico. “Exports give us critical mass and make us satisfy global standards,” says President Phil Spender, who foresees the midsize segment, in which the Ikon fits, growing around 16% by 2005 to 140,000 units. “Still woefully small for 10 or 11 producers,” he says.

Toyota is taking a different tack, hooking up in an 89%/11% partnership with India's Kirloskar group to make the 2.4L diesel Qualis, which competes with five other MUVs. Production at the $170 million Bangalore plant began in December 1999. First-year sales were 21,785 units, with a 47% jump to 32,000 forecast for this year. “We have a long-term commitment to India,” says President Sachio Yamazaki, who expects to sell 50,000 Qualis annually by 2005.

With India's recent removal of a ban on completely-built-up (CBU) vehicles, Toyota plans to import a few hundred Land Cruisers and Camrys annually, but its main opportunity will be a 1.3L or 1.4L small car still under study, which will require a substantial plant expansion to meet annual sales projections as high as 300,000.

GM and Honda for the time being remain bit players, offering premium products at the market's high end, where buyers are scarce. GM India sales peaked in 1997 at 10,245 units, falling to a low of 2,483 in 1999, never getting near the 25,000 yearly capacity of its Halol assembly plant. Corsa and Astra sales this year are pegged at 10,000, with 20% annual gains projected in future years. In view of such tiny volumes, many wonder why GM bothers. Says Chief Executive Vij: “India cannot be ignored. GM is establishing a brand image while waiting for industry consolidation.”

The story is much the same for Honda, assembling six versions of its City car and planning to add the Accord in July. Despite fine products, sales have been hobbled by high prices and barely reached one-third of the New Delhi-area assembly plant's 30,000 capacity.

Given the fierce competition by so many producers in such a small market, it's hardly surprising that profits are rare. “The small-car industry in India is a blood bath,” notes Ford's Mr. Spender. “Most companies are emphasizing volume for volume's sake, not profit. No one can make money at the prices their cars sell for.”

The gap between prices and what Indian buyers can afford to pay is exacerbated by the government's tax bite — nearly two-thirds the total cost of a car, until early this year when a new budget cut the excise tax on cars from 40% to 32%. A further drop to 30% or less promised by the government in three to five years could yield permanent price reductions and give sales a substantial boost. Market experts calculate that for every 1% drop in price, automotive sales will increase from 1.5% to 3%.

Also, as part of India's acceptance of its World Trade Organization obligations, the government in April removed a long-standing ban on imports of CBUs and used cars. In a move to protect domestics, however, tariffs were hiked to 85.5% on CBUs and 181.24% on used cars, which were carefully saddled with additional restrictions as well.

Additionally, the 10% surcharge on CKD kits was removed, returning the duty to 35%, compared with 20% in Thailand and 7% in the Philippines. But the effective rate, including countervailing duty, is a hefty 86%.

The new, inflated tariffs are expected to discourage large-scale imports of either new or used cars. “Outsiders tend to see huge and unrealistic opportunities in India,” says Sundar Subramoney, vice president Research with Insight Asset Management in Bombay. Nevertheless, Fiat SpA is expected to introduce its Palio world car here in August, and Volkswagen AG's Czech subsidiary, Skoda, is seeking a license to assemble Felicias, even though the market is not large enough to support all the models already offered.

Automakers seem mesmerized by the market potential of a huge population, which demographers report will soon surpass that of China. “The good news is the Indian economy is growing 6% to 6.4% a year,” says a U.S. official in New Delhi. “That's the bad news, too, because it's not enough to lift more people above the poverty level.” Inflows of foreign investment only are a fraction of the $40 billion or so that lands in China each year, he says. That's because India still is perceived as a difficult investment destination.

Badly needed as well is improved infrastructure, from power and ports to airports and roads. “There's been a 10% shortage of power for 10 years,” says T.K. Bhaumik, a senior official with the Confederation of Indian Industry in New Delhi. Slow growth in agriculture and the rural areas, home to 70% of the population, is another concern. But government plans for a new highway system linking the major cities — New Delhi, Mumbai, Chennai and Calcutta — have aroused enthusiasm. “The government must help the industry grow by reducing taxes, making roads and getting out of the way,” says Arindam Bhattacharya, head of A.T. Kearney's New Delhi office.

Although most analysts foresee annual demand for passenger cars and MUVs growing 7% to 10%, they say India's new auto policy, which was expected in April, is unlikely to affect underlying trend lines, including the survival-of-the-fittest struggle under way. Peugeot has withdrawn and Premier Auto has ceased production.

Hindustan Motors eventually may follow suit, despite a link with Mitsubishi Motors Corp. Mahindra & Mahindra Ltd.'s share in the car-making JV with Ford has shrunk to 15%. “How long the shakeout lasts will depend on how much money some of our competitors are willing to lose,” says Maruti's Mr. Khattar.

No clear pattern emerges as to how the industry will change shape, but auto editor Mr. Sorabjee prophesies that in five years there will be no Indian carmakers left. Honda of India's President Mr. Fujisaki's timetable is shorter yet, predicting that within two years India's automotive industry will be reorganized into five or six groups. India can be sure of at least one thing — rougher roads lie ahead.