Indian OEMs Accelerate Pace to Meet Growth Potential

Unlike China's Explosion, the Auto Industry's expansion when it finally came to India was measured but determined; not an onslaught, but a steady stream, challenging the old guard with innovative products at competitive prices.

Today, most of the world's major auto makers build cars in India through joint ventures or wholly owned operations. Those that don't still sell them there, even super-luxury brands such as Lamborghini, Rolls-Royce, Bentley, Aston Martin, Ferrari and Maserati.

Indeed, many analysts say this BRIC nation, whose fellow emerging markets include Brazil, Russia and China, no longer is an emerging market. “India is out there,” notes one industry watcher.

Yet, up until 1984, the only 4-wheel passenger vehicles available were luxury cars; manufacturing was licensed; expansion was restricted; custom duties, excise and sales taxes were high; and the market was dominated by less than a handful of local car makers, says Deepak Kulkarni, deputy director of the Automotive Research Association of India (ARAI).

In 1985, Maruti Udyog Ltd., a joint venture between the Indian government and Japan's Suzuki Motor Corp., entered the scene and became a leader in small cars. In 1995, other global auto makers were allowed in, bringing increased competition, new technology, service networks, financing and environmental concerns.

There now are 64 vehicle manufacturers in India: 13 passenger-car and 12 utility/vehicle makers. Combined, they account for 16% of the 10.3 million-vehicle market, of which 75% is dominated by 2-wheelers.

“Two to three years ago, India was 20th (in world vehicle sales),” says Jay Ganatra, CEO of International Business Consultants. “If it keeps going, it could become one of the top five very, very, soon,” he tells attendees at a GlobalAutoIndustry.com conference in September.

Compared with China's 6.5 million, Russia's 3 million and Brazil's nearly 3 million annual vehicle deliveries, India has a long way to go. However, sales don't tell the whole story.

Rather, it's the country's rapid pace of development that offers promise. India's economy grew 9.2% in 2006-2007, and some studies suggest it will grow at least 8.5% this year.

Indeed, there are estimates that by 2010, there will be 40,000 families with an annual income of $250,000, helping the luxury-car segment grow 25% per year.

Between 2015 and 2020, India's gross domestic product is expected to average 5.7%, compared with Brazil's 3.8%, Russia's 3.4% and China's 5.0%, according to a study by Goldman Sachs.

Foreign direct investment in the domestic auto industry reached $441 million within the last year, and vehicle exports over the next three years are projected to soar 300%, according to various reports.

Nor is India expected to be among the casualties of the ongoing global financial crisis, propped up by its vast consumer demand, reports the TheEdgeDaily.com financial-and-investment website in Malaysia.

Yet, with 28 states and six union territories, each with separate tax systems and customs regulations, India's disparate auto market presents special challenges. Despite the wide spectrum of brands available, no auto maker can survive without an offering of entry-level subcompact cars.

The Society of Indian Automobile Manufacturers says car sales rose 2.8% in September to 108,823 over year-ago's 105,822, despite the country's mild economic downturn that began in July, as auto makers sought newer markets in rural areas.

A SIAM official says in interior regions most vehicles are bought with cash, without any financing, helping offset falling demand in urban areas.

But the rural areas also bring fear and loathing, as witnessed by farmers' violent protests over the state of West Bengal's land grab for the construction of Tata Motors Ltd.'s low-cost Nano car plant, forcing Tata to abandon the RR16.8 billion ($350 million) facility.

Analysts say such clashes are on the increase and could affect India's broader investment climate, deterring foreign investors and hurting economic development. That would be bad news for the auto industry, as India's goal is to become a global center for small-car exports, led by the $2,500 Nano.

“Unlike China, India is a small-car country and has developed the necessary skills to become a hub for manufacturing small cars for the rest of the world,” says a recent report by CSLA Asia-Pacific Markets, a regional provider of brokerage and investment-banking services.

South Korea's Hyundai Motor Co. Ltd. already exports 40% of its Indian small-car output, the report says, choosing India over China, where it's being forced to split profits with its Chinese joint-venture partner. Ford Motor Co. reportedly intends to invest $500 million in India to build small cars.

But while India's car exports reportedly have jumped five-fold in the last five years, it still is a small player, shipping 200,000 cars in 2007. That's about to change with the government's new Focus Market Scheme that provides exporters to 83 developing countries a cash incentive of 5%.

The goal is to help Indian auto makers grab a larger chunk of budding markets in Asia, Africa and Latin America. Industry Minister Kamal Nath recently told a SIAM convention that vehicle exports are expected to jump from RR134 billion ($2.8 billion) last year to RR1.2 trillion ($25 billion) by the middle of the next decade.

But before “Brand India” can become a global reality, ARAI's Kulkarni says the industry must upgrade its quality standards, tackle new technology, become cost competitive, develop research-and-development capability and target overseas markets.

Those who know India have no doubt this 5,000-year-old civilization, with its 18 official languages and 1,652 dialects, can meet these tectonic shifts in the global automotive market.

Nano's New Home in Gujarat on Fast Track subscribers.WardsAuto.com/ar/nano_home_gujarat_081010/

July May Signal Slowdown in India Auto Market subscribers.WardsAuto.com/ar/july_slowdown_india_080815/

Number of Vehicle Manufacturers

Passenger Cars: 13

Utility Vehicles: 12

Medium & Heavy Commercial Vehicles: 8

Lt. Commercial Vehicles: 7

Scooters: 6

Motorcycles: 8

Mopeds: 3

Three Wheelers: 7