Automotive Aftershocks?

NEW DELHI - Despite India's newly shaky status in the world community after its muscle-flexing May nuclear tests, its throng of automakers aren't likely to feel any aftershocks.

No less than 15 vehicle makers, including the world's biggest, already are - or soon will be - fighting for a share of India's petite and increasingly cutthroat car market, which grew only 1% to 416,408 units in fiscal year 1997/98 ending last March 31.

Most are betting on the come, captivated by the automotive sales potential in a country of more than 960 million people, second in the world only to China in population.

"India will be one of the world's biggest vehicle markets in the future," predicts Sachio Yamazaki, managing director of Toyota Kirloskar.

Since socialism was discarded in 1991 and reforms were introduced, decades of doldrums have been replaced by brisk economic growth that exceeded 7% in each of the three preceding years before slipping back to a respectable 5.5% in FY 97/98.

Although poverty remains pervasive and per capita income is still less than $400 a year, the world's car producers are mesmerized by an emerging middle class, loosely defined yet tantalizing.

Two-wheel scooters and motorcycles remain the vehicle of choice for most Indians, but one analyst estimates 160 million "consumers" aim to trade in their two-wheelers for cars. And S.G. Shah, former adviser to the Association of Indian Automobile Manufacturers (AIAM), adds that "Fifty million Indian families now make 500,000 rupees ($12,500) a year. This is the market to tap."

Although the potential is exciting, the up-market movement to car ownership undoubtedly will be slow and the realities sobering.

"Our political circus produced three coalition governments in 18 months," says N. Srinivasan, deputy director general of the Confederation of Indian Industry, "and it's difficult to make economic decisions amid political uncertainty."

No party won a majority in the March general election and a fourth coalition government now in office is led by the Hindu nationalist Bharatiya Janata Party (BJP).

The AIAM's Mr. Shah offers a scathing critique of the new government's budget. "(It) has killed the initiatives to innovate, removed the incentives to modernize and destroyed the compulsions to become and remain competitive in cost and quality, reliability and performance. Its implications and effects are to provide protections to the outdated models, perpetuate the manufacturing technologies that should be discarded, and support management who refuse to change with the times. In one brief sentence, it had ruined the prospects for the emerging new automobile industry."

In May, the BJP made a controversial bid for the support of the masses here with the five nuclear tests, raising alarms and tensions, and prompting nuclear testing by neighboring Pakistan and economic sanctions against both countries.

A possible bruising from sanctions as well as new budget-boosting duties on imports are fresh concerns for automakers. But perhaps their most worrisome problem remains small numbers. Too many companies are competing in a tiny market of less than 800,000 in a good year, even when commercial vehicles and multi-utility vehicles are lumped in with cars.

The biggest names in the automotive world are involved in the struggle for sales and all insist they're here to stay, come what may.

"India's big attraction is a potential market for cars that may be as big as Europe - in five or 10 years," says Dr. Arindam Bhattacharya, an analyst with A.T. Kearney, management consultants, in New Delhi, "but foreign makers don't understand the Indian car market.

Price bands are the most critical element in segmentation and the 40% excise tax on cars must drop to 10% before a mass market can develop."

"The market is extremely price-sensitive with the big demand for economy cars costing 300,000 rupees ($7,500) or less," adds Rajat Nandi, executive director of the AIAM in New Delhi.

The AIAM seeks less ambiguous government auto policies and a drop in the excise tax, yet near-term action is unlikely.

For almost 20 years, Maruti Udyog, a joint venture between Suzuki Motor Co. Ltd. and the Indian government, has dominated the car market, snagging 82.5% of all car sales in the last fiscal year thanks to the continuing popularity of the little 800cc Maruti 800.

Today for the first time, however, with its installed capacity on the way up from 350,000 to 500,000, Maruti is about to be challenged in the critical small-car market segment it has "owned" until now.

Telco, an Indian truck maker, is investing $400 million in a greenfield plant in Pune, capacity 150,000, to make a 1.4L petrol and diesel hatchback. Called the Mint, it will be introduced in the third quarter with first-year output set at 50,000.

Hyundai Motor Co. Ltd. is putting the finishing touches on a $750 million greenfield plant near Madras capable of producing 50,000 units a year with one shift and 100,000 with two shifts. The 1L 4-door Santro will be launched this October, says A.N. Prakash Rao, general manager of sales. "We're prepared for a price war in the small-car sector and are after 30% of that market in the first year."

Daewoo Motor Co. Ltd.'s 800cc d'Arts, a Suzuki derivative renamed the Matiz, will be produced at the Surajpur plant about 60 miles (100 km) south of New Delhi. Start-up is scheduled for August, with planned output of 60,000 the first year and 100,000 the second year. Daewoo claims the price will be below that of India's best-selling Maruti 800.

"Daewoo is only surviving in India on a devalued (Korean) won," says Arun Nanda, executive director of Mahindra & Mahindra, a major vehicle maker based in Bombay.

All three challengers claim their cars will be priced to compete effectively with the Maruti 800, but analysts are not sure how many sales they can take away from the nation's best-selling car.

"Maruti is going to defend its bread and butter model, probably with price cuts, and we're definitely going to see blood in the streets," says Utpal Sheth, director of Insight Asset Management (India) in Bombay.

Other carmakers are concentrating on the overcrowded midsize market where Daewoo has been discounting heavily in a vain effort to revive sagging Cielo sales and competitors are offering such sweeteners as extended warranties, free maintenance and lotteries.

"Foreign automakers were fooled by the mathematics, focusing on the number of people here, not the demographics and income levels," says Mr. Srinivasan.

For example, dissect the year ending last March 31 and you find only around 45,000 car sales were in the midsize market. Yet competition in this segment continues to heat up.

Here, in brief, is what the main players are doing.

Fiat SpA has a controlling interest in IND Auto Ltd., a joint venture with Premier Automobiles currently producing the 1L Uno and the aged Premier, and is planning to invest $350 million in a new plant to make its Palio world car.

Opel Astra sales - an estimated 8,000 this year - have been far below installed capacity of 25,000 at the Halol plant in which General Motors India, a joint venture with the C.K. Birla Group, has invested $100 million. The Corsa will be added to the lineup in the second half of 1999, and capacity will expand to 30,000 by the year 2000 when GM expects demand for midsize cars to reach 75,000.

Honda Siel Cars India, a joint venture with the Siel Group, began producing 1.3L and 1.6L City sedans late last year in a new $110-million plant in Noida near New Delhi. Sales of 10,000 units this year are expected to rise to 30,000 within 3 or 4 years when investment will double.

A Toyota-Kirloskar Group joint venture is investing $170 million in a new plant in Bangalore where production of the Toyota Utility Vehicle (sold as the Kijang in Indonesia) is to begin in December 1999. Annual output, 20,000 in Phase 1, will rise to 50,000 in five years. The Phase 2 target is 100,000.

Mahindra Ford, a joint venture with Mahindra & Mahindra that began assembling and selling Escorts in August 1996, is building a $400 million greenfield plant near Madras to make a Fiesta derivative. Production will begin late in 1999, and initial capacity of 50,000 can be raised to 100,000.

Hindustan Motors, still making a thinly-disguised 1953 Morris Oxford badged as an "Ambassador," has a technical collaboration agreement with Mitsubishi Motors Corp. to assemble 1.5L gas and 2L diesel Lancers in a new plant in Tamil Nadu state. Production is scheduled to start in August with initial output planned at 8,000 units, rising to 30,000 in three years.

Volkswagen AG is appointing dealers to handle imported Audis as a first step in image-building here and is considering a $300- million investment in a greenfield plant to make 100,000 Skodas per year.

Mercedes-Benz and BMW, both minor players in India, are expected to have trouble meeting the revised rules introduced last year - a minimum investment of $50 million, 70% local content within five years and a neutral balance between imports and exports.

Chrysler Corp. has shelved plans for an Indian venture. Peugeot SA has written off an $80-million investment and pulled out of the country.

Analysts feel Daewoo may end up sourcing engines and components in India for worldwide use rather than making cars.

A bright spot is the components sector. As a result of GM, Ford, Honda Motor Co. Ltd. and others bringing in a stable of suppliers, standards have risen sharply. In the last three years, 160 companies have qualified for ISO 9000, 9001 and 9002 ratings and 20 have reached QS 9000.

The shakeout among assemblers that most observers see as inevitable is expected to claim more victims, possibly three or four within the next 12 months.

"There's no way so many brands can survive," says Mr. Bhattacharya.

To make matters worse, excess capacity will soon aggravate the overcrowding. Calculations vary, but if the major automakers proceed with their ambitious plans, installed capacity could reach 2 million units, double or more the vehicle sales projected for the year 2000 or 2002.

This year, analysts foresee flat automotive sales; a recovery isn't expected to begin until early 1999.

"It's going to be a long grind and no one is going to make profits for a while," says Bharat Iyer, associate director of UBS Securities (India) in Bombay, who expects newcomers will have to pay a stiff price of admission.

"It's now a game of deep pockets. Each major player will lose $25 million to $30 million each year for the next five years," predicts Maitreya Doshi, managing director of Premier Automobiles Ltd.

What the game amounts to is simply this: How many companies are willing to lose how much for how long to sink firm roots in India?

"Everyone rushed into India on an 'emerging market' bandwagon. We'll see mergers and acquisitions. Only half the players can survive," predicts Rajiv Dube, general manager (commercial) of Telco's passenger car division.