India’s Economic Recovery Pushed by Global Auto Makers’ Fresh Investments

Special Coverage

State of the Industry: Int’l

Experts view the future of India with a mix of optimism, skepticism and pessimism.

The country was not hurt too badly by the global recession, although growth of about 9% annually in the prior three years slowed to 6.7% in fiscal-2009.

The central government has spent several billion dollars in past months on three stimulus packages to get the economy moving, which included a drop in general excise taxes from 10% to 8% welcomed by the domestic car makers. But a new “borrow-and-spend” budget may deliver an all-time high deficit.

That gloomy outlook is considered temporary, and auto makers in India are upbeat. Estimated sales growth ranges from at least 5% for fiscal-2010, ending March 31, from the Society of Indian Automobile Manufacturers to 12% from J.D. Power & Associates for the calendar year.

Additionally, more than $8.2 billion in new automotive investment is planned or under way to serve the domestic and export markets.

“The economy is recovering now,” says Deepesh Rathore, managing director-India for IHS Global Insight. “The global downturn has been good to India because new investors like Nissan (Motor Co. Ltd.) and Volkswagen (AG) are going to focus more on (the market), and more and more auto makers are turning to India as a hub for car production.”

Ammar Master, a senior analyst with J.D. Power, agrees. “India offers good-value engineering and relatively cheap production costs and the supplier base has improved considerably.”

Hyundai expected to sell about 110,000 i10s in India and export more than 180,000 units, mostly in Europe.

Indeed, a surprising number of global auto makers are upping their ante in India or starting from scratch.

A new $847 million VW plant with annual capacity of 110,000 units came on line a few months ago, while Nissan is expected to begin production early next year at a new $925 million facility to be shared with alliance partner Renault SA. Nissan says it will use its share of the 400,000-unit capacity, while Renault’s plans are on hold.

Honda Motor Co. Ltd.’s new $123 million operation to make engine components launched a year ago, but a new car-assembly unit has been delayed until 2011. Toyota Motor Corp. is spending $658 million on a new plant with an annual capacity of 70,000 units, which will start building subcompacts in 2011.

Ford Motor Co., determined to transform India into a global production hub for engines and small cars, is investing $500 million to double vehicle capacity to 200,000 units with a second plant and will begin exporting regionally from a new engine facility in 2010.

General Motors Co. is investing $500 million over the next three years to automate its Indian plants, launch new models and construct a new factory to build 160,000 gasoline and diesel engines annually.

“GM and Ford have been in India for many years and basically have not done much,” Master says. “Now, with their home market collapsing and their need to find major sales elsewhere, both are putting big plants in India. But their plans look too optimistic. I’m not sure how they will be able to use all that capacity anytime soon.”

Older, established Indian auto makers are not holding back on investment, either.

In 2007, Maruti Suzuki Co. Ltd. began a 5-year, $2.4 billion investment program to upgrade facilities, rationalize production, expand capacity, develop new models and build a 700-acre (283-ha) research and development center.

Tata Motors Ltd. is earmarking capital expenditures of $1.65 billion for the next two to three years, primarily for its car division but also to develop future models for its World Truck program. These outlays do not cover spending on Jaguar Land Rover.

Mahindra & Mahindra Ltd. is investing $616 million in a new plant and development of mini and heavy-duty trucks, plus a low-cost SUV.

How will all the new capacity and new models fit in a market where total domestic light-vehicle sales this year likely will not top 2 million units, mostly minicars and subcompacts? In a word, exports, which are, or soon will be, more important than domestic sales for many auto makers, at least initially.

Hyundai Motor Co. Ltd., now No.2 in sales with 14% of India’s passenger-car market, illustrates the new winning formula. “This year, Hyundai is expected to sell about 110,000 i10s in India and export more than 180,000 units, mostly to Europe,” Global Insight’s Rathore says.

“Nissan is shifting Micra production from the U.K. to India and will export far more cars back to the U.K. than they sell in India,” he adds. “GM is going to make the new Spark here and a substantial volume is likely to be exported.”

It’s difficult to understate how important exports are becoming for many auto makers in India in order to expand production volume and reduce costs and increase profits.

For example, Maruti Suzuki’s exports, mostly to Europe, could nearly double this year to 130,000 units, representing 14% of total production. Mahindra & Mahindra, which already is exporting pickup trucks to Australia, Brazil and South Africa, plans to enter the U.S. market in early 2010, hoping for first-year sales of 10,000-12,000 units.

“M&M will be hard-pressed to meet U.S. quality standards,” says Rathore. “But in the long run, company executives believe the U.S. could become their biggest export market. There are rumors they plan to buy an assembly plant there, possibly an empty GM or Ford (facility).”

He also notes the next-generation Nano, due in 2014 or 2015, will be slightly bigger and designed for the U.S.

Says Masters: “Tata has a Nano in the works that meets European standards and is seriously considering exports to that market. My feeling is they will try to leverage their partnership with Fiat (Auto Group), using Fiat’s retail network in Europe.

There also are reports of possible Nano exports to Latin America, he says.

Whether all the new-investment bets on the future of India’s export and domestic demand pay off is difficult to predict, depending in larger measure on how quickly and well both the Indian and world economies recover. There are no guarantees, but the odds are considered favorable.

“So far, only Hyundai, Maruti and Nissan are looking at exports in a big way,” Master says. “Yet, we estimate exports will be a record 437,315 units this year and reach 591,719 by 2016, as other auto makers join in.”

But the big prize for most car companies will be India’s domestic market. Vehicle ownership is in its infancy, with only 10-11 cars per 1,000 people in a country with a population of 1.2 billion.

Maruti Chairman R.C. Bhargava reasons that anyone with a 2-year income of at least Rs240,000 ($4,800) is a potential customer, which theoretically means about 120 million Indians could be in the market for a new car.

Four auto makers currently account for 86% of light-vehicle sales in India, leaving a dozen or so competitors with small fractions, but this could change.

J.D. Power forecasts light-vehicle deliveries will grow from 1.95 million in 2009 to 3.3 million in 2016. Maruti-Suzuki is expected to remain firmly in first place and increase sales. But it also will lose share as competitors nibble deeper into the market.

Master estimates the auto maker’s share of passenger-vehicle sales, including SUVs and MPVs, will drop to 42% this year and stabilize at about 33% in 2013-2015, while Tata’s share expands from 16% this year to about 19% in 2013.

Hyundai with its 14% and Mahindra with 10% have less to lose, but all of the top four will have to remain vigilant. “The battling will be fierce in the next few years,” Master predicts. “A second generation of car buyers will want to move up to Toyotas and Hondas. Indian auto makers like Maruti, Tata and Mahindra will have to improve to stay in the game.”

Although India has come a long way economically and industrially since 1991, when Nehru socialism was discarded, it still is divided by religion, culture and region. Analysts say the country has a long way go before becoming a global power that reflects the size of its population and geography.

The election victory in May of the Congress Party and the new coalition government are generating optimism and rekindling hopes that a “new India” is entering a new era.

However, the problems of the “old India,” ranging from poverty, outdated labor laws and inadequate infrastructure to an obstructive bureaucracy, barriers to foreign competition and entrenched corruption, continue to overshadow dreams of a nation where higher incomes and modest prosperity will be widely shared.

“The Congress Party has been given a clear mandate and can now focus on problems,” Rathore says. “Incomes have not gone up in the rural sector, so the gap between rich and poor has widened a lot in the last 10 years.”

Says Bhargava: “The political limitations are not what they were earlier. New ministers, known for dynamism and performance, have been appointed to key ministries and we’re seeing progress already in highways and education.”

Master says people hope the Congress Party will be able to accelerate the much-needed reforms it has tried to introduce in the last four years. “But India being India, even a minority party can thwart progress.”

No one knows how much longer it will take India to shuck its feudal past and evolve into an advanced industrial country, but many are optimistic about where the automotive industry is headed.

“Global auto makers are now looking at India as they did China 10 years ago,” says Rathore, who predicts consistent growth. “The passenger-car market could double in size in the next seven to eight years.”