Gaurav Singhal Vmu Project Feb 2013

7/29/2019 Gaurav Singhal Vmu Project Feb 2013

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PROJECT REPORT

ON

AUTOMOBILE SECTOR IN INDIA

A report submitted to Ch. Charan Singh Polytechnic,

NARELA, New Delhi

As a part fulfillment of

BCOM

SUBMITTED TO SUBMITTED BY

Dimple Saini GAURAV SINGHAL

FACULTY (M.B.A.) Reg No. 104091100191

VINAYAKA MISSIONS UNIVERSITY,

SALEM


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DECLARATION

I, GAURAV SINGHAL Enrollment No. 104091100191 class BCOM finalyear of Ch. Charan Singh Polytechnic, Narela , Delhi , hereby declare that the project

entitled AUTOMOBILE SECTOR IN INDIA is an original work and same has not

been submitted to any other institution for the award of any other degree. The interim

report was presented to the supervisor on Dimple Rani and the pre-submission was

made on _______________. The feasible suggestion has been duly incorporated in

consultation with the supervisor.

Countersigned

Signature of supervisor Signature of the Candidate


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ACKNOWLEDGEMENT

Acknowledgements are a bit like acceptance speeches; Predictable but from the

heart so here is some predictable prose direct from the heart.

A successful project can never be prepared by the single efforts of the person to

whom project is assigned, but it also demand the help and guardianship of some

conversant person who helped the undersigned actively or passively in the completion of

successful project.

I am grateful for finishing this project to many people.

First of all, I want to thank Mrs. Dimple Saini, Head of Department, Management

Studies. Secondly I wish to express my profound gratitude and sincere thanks to my

esteemed Professor Mr. Madan saini, Lecturer in Deptt. of Mgt. Studies at who wasalways there to help and guide me when I needed help. His perceptive criticism kept me

working to make this project more full proof. I am thankful to her for his encouragement

and valuable support. Working under his was an extremely knowledgeable and enriching

experience for me. I am very thankful to his for all of the productive discussions on

customers buying behavior. I am grateful to many anonymous experts working in the

turbulent environment of business, who provided me with better understanding of market

and customers. These insights helped me in explaining some of the empirical research

findings.

Without my friends it would have been difficult to balance between work and free time. I

would like to thank them .At last but not least, I want to thank God without whose

inspiration and guidance this herculean task would not have been accomplished.

GAURAV SINGHAL


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1.1: The Beginning of New Era

With the invention of the wheel in 4000 BC, mans journey on the road of

mechanized transport had begun. Since then he continually sought to devise an

automated, labor saving machine to replace the horse. Innumerable attempts reached

conclusion in the early 1760s with the building of the first steam driven tractor by a

French Captain, Nicolas Jacob Cugnot. It was however left to Karl Benz and Gottlieb

Damlier to produce the first vehicles powered by the internal combustion engine in 1885.

It was then that the petrol engine was introduced, which made the car a practical and safe

proposition. Then onwards, it has been one big journey...on the roads


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1.2: History of Automobile Industry

The automobile as we know it was not invented in a single day by a single inventor. The

history of the automobile reflects an evolution that took place worldwide. It is estimated

that over 100,000 patents created the modern automobile. However, we can point to the

many firsts that occurred along the way. Starting with the first theoretical plans for a

motor vehicle that had been drawn up by both Leonardo da Vinci and Isaac Newton.

In 1769, the very first self-propelled road vehicle was a military tractor invented by

French engineer and mechanic, Nicolas Joseph Cugnot (1725 - 1804). Cugnot used a

steam engine to power his vehicle, built under his instructions at the Paris Arsenal by

mechanic Brezin. It was used by the French Army to haul artillery at a whopping speedof 2 1/2 mph on only three wheels. The vehicle had to stop every ten to fifteen minutes to

build up steam power. The steam engine and boiler were separate from the rest of the

vehicle and placed in the front (see engraving above). The following year (1770), Cugnot

built a steam-powered tricycle that carried four passengers.

In 1771, Cugnot drove one of his road vehicles into a stone wall, making Cugnot

the first person to get into a motor vehicle accident. This was the beginning of bad luck

for the inventor. After one of Cugnot's patrons died and the other was exiled, the money

for Cugnot's road vehicle experiments ended.

Steam engines powered cars by burning fuel that heated water in a boiler, creating

steam that expanded and pushed pistons that turned the crankshaft, which then turned the

wheels. During the early history of self-propelled vehicles - both road and railroad

vehicles were being developed with steam engines. (Cugnot also designed two steam

locomotives with engines that never worked well.) Steam engines added so much weight

to a vehicle that they proved a poor design for road vehicles; however, steam engines

were very successfully used in locomotives. Historians, who accept that early steam-

powered road vehicles were automobiles, feel that Nicolas Cugnot was the inventor of

the first automobile.


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The automotive industry has certain trends it has to follow, just like fashion

designers and musical composers. In times of recession and decreasing sales there is less

room to take chances and manufacturers are prone to follow the common pattern as a

safer bet rather than releasing a controversial product or idea that might or might not be

successful. However throughout the automotive industry's history, great innovators have

"boldly gone where no man has gone before" to set new trends which have dynamically

altered the industry as a whole.

1880's & early 1900's

About hundred years ago-The first motor car was imported

-Import duty on vehicles was introduced.

-Indian Great Royal Road (Predecessor of the Grand Trunk Road) was conceived.

First car brought in India by a princely ruler in 1898.

Simpson & Co established in 1840.

-They were the first to build a steam car and a steam bus, to attempt motor car

manufacture, to build and operate petrol driven passenger service and to import

American Chassis in India.

Railways first came to India in 1850's

In 1865 Col. Rookes Crompton introduced public transport wagons strapped to

and pulled by imported steam road rollers called streamers. The maximum speed

of these buses was 33 kms/hr.

From 1888 Motors Spirit attracted a substantial import duty.

In 1919 at the end of the war, a large number of military vehicles came on the

roads.

In 1928 assembly of CKD Trucks and Cars was started by the wholly owned

Indian subsidiary of American General Motors in Bombay and in 1930-31 by

Canadian Ford Motors in Madras, Bombay and Calcutta In 1935 the proposals of

Sir M Visvesvaraya to set up an Automobile Industry were disallowed.


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1942 Hindustan Motors Ltd incorporated and their first vehicle was made in 1950.

In 1944 Premier Automobiles Ltd incorporated and in 1947 their first vehicle was

produced.

In 1947 the Government of Bombay accepted a scheme of Bajaj Auto to replace

the cycle rickshaw by the auto and assembly started in a couple of years under a

license from Piaggio. Manufacturing Programme for the auto and scooter was

submitted in 1953 to the Tariff Commission and approved by the Government in

1959.

In 1953 the Government decreed that only firms having a manufacturing

programme should be allowed to operate and mere assemblers of imported CKD

units be asked to terminate operations in three years.

Only seven firms namely Hindustan Motors Limited, Automobile Products of

India Limited, Ashok Leyland Limited, Standard Motors Products of India

Limited., Premier Automobiles Limited, Mahindra & Mahindra and TELCO

received approval. M&M was manufacturing jeeps. Few more companies came

up later.

Government continued with its protectionism policies towards the industry.

In 1956, Bajaj Tempo Ltd entered the Indian market with a programme of

manufacturing Commercial Vehicles, and Simpson for making engines.

1960's

In sixties 2 and 3 Wheeler segment established a foothold in the industry.

Escorts and Ideal Jawa entered the field in the beginning of sixties.

Association of Indian Automobile Manufacturers formally established in 1960.

Standard Motors Products of India Ltd. moved over to the manufacture of Light

Commercial Vehicles in 1965.

1970's

Major factors affecting the industry's structure were the implementation of MRTP

Act, FERA and Oil Shocks of 1973 and 1979.


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During this decade there was not much change in the four wheeler industry except

the entry of Sipani Automobiles in the small car market.

Oil Shock of 1973 quickened the process of dieselization of the Commercial

Vehicle segment.

Three other companies, namely, Kirloskar Ghatge Patil Auto Ltd, Indian

Automotive Ltd and Sen & Pandit Engg products Ltd entered the market during

1971-75. They ultimately withdrew in early eighties.

During the seventies the economy was in bad shape. This and many specific

problems affected the Automobile Industry adversely.

1980's - The period of liberalized policy and intense competition

First phase of liberalisation announced.

Unfair practices of monopoly, oligopoly etc slowly disappeared.

Liberalisation of the protectionism policies of the Government.

Lots of new Foreign Collaborations came up in the eighties. Many companies

went in for Japanese collaborations.

Hindustan Motors Ltd. in collaboration with Isuzu of Japan introduced the Isuzu

truck in early eighties.

ALL entered into collaboration with Leyland Vehicles Ltd. for development of

integral buses and with Hino Motors of Japan for the manufacture of W Series of

Engines.

TELCO after the expiry of its contract with Daimler Benz, indigenously improved

the same Benz model and introduced it in the market.

Government approved four new firms in the LCV market, namely, DCM, Eicher,

Swaraj and Allwyn. They had collaborations with Japanese companies namely,

Toyota, Mitsubishi, Mazda and Nissan respectively.

In 1983 Maruti Udyog Ltd was started in collaboration with Suzuki, a Japanese

firm.


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Other three Car manufacturers namely, Hindustan Motors Ltd., Premier

Automobiles Ltd., Standard Motor Production of India Ltd. also introduced new

models in the market.

At the time there were five Passenger Car manufacturers in India - Maruti Udyog

Ltd., Hindustan Motors Ltd., Premier Automobiles Ltd., Standard Motor

Production of India Ltd. and Sipani Automobiles.

Ashok Leyland Ltd. and TELCO were strong players in the Commercial Vehicles

sector.

In 1983-84 Bajaj Tempo Ltd. entered into a collaboration with Daimler-Benz of

Germany for manufacture of LCVs.

Important policy changes like relaxation in MRTP and FERA, delicensing of

some ancillary products, broad banding of the products, modifications in licensing

policy, concessions to private sector (both Indian and Foreign) and foreign

collaboration policy etc. resulted in higher growth / better performance of the

industry than in the earlier decades.

1990's

Mass Emission Norms were introduced for in 1991 for Petrol Vehicles and in

1992 for Diesel Vehicles.

In 1991 new Industrial Policy was announced. It was the death of the License Raj

and the Automobile Industry was allowed to expand.

Further tightening of Emission norms was done in 1996.

In 1997 National Highway Policy has been announced which will have a positive

impact on the Automobile Industry.

The Indian Automobile market in general and Passenger Cars in particular have

witnessed liberalisation. Many multinationals like Daewoo, Peugeot, General

Motors, Mercedes-Benz, Honda, Hyundai, Toyota, Volvo and Fiat entered the

market.


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Various companies are coming up with state-of-art models of vehicles.

TELCO has diversified in Passenger Car segment with Indica.

Despite the adverse trend in the growth of the industry, it is resolutely trying to

meet the challenges. Various issues of critical importance to the industry are being

dealt with forcefully.

.


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1.3: Preview of Automobile Industry

The automobile industry, one of the core sectors, has undergone metamorphosis

with the advent of new business and manufacturing practices in the light of liberalization

and globalization. The sector seems to be optimistic of posting strong sales in the next

couple of years in view of a reasonable surge in demand.

The Indian automobile market is gearing towards having international standards

to meet the needs of the global automobile giants and become a global hub. Players are

strategizing to consolidate their position and gradually increase market penetration with

the launch of new models, targeting different segments. Since the sector is price driven,

huge investment is envisaged to remain competitive through cost advantage, for whichindigenization is highly important. The product becomes dearer if it is manufactured

using imported parts. IT in the automobile sector plays a crucial role.. Some players are

working towards development of efficient production systems that control the entire

production process with high precision and accuracy. Such systems working on real time

operating systems allow efficient control of different parts of manufacturing and

production. It is essential to leverage skills of different engineering disciplines to build

these kinds of integrated systems.

Analysts foresee high scope in the electronics for auto sector and expect the

retailing of such electronics products to contribute a major chunk of future revenues. The

government is increasing the research and development (R&D) fund for the automobile

industry over and above the Rs 1400 crores earmarked for eight years. All laboratories in

the country researching on automobile technology, such as BHEL which is developing

cell technology as alternative fuel, have also been brought together through the setting up

of a national R & D working group. The group is working out a plan to link all major

laboratories across the country to give a thrust to automotive research.

Indian automobile sector being a driver of product and process technologies, and has

become a excellent manufacturing base for global players, because of its high machine

tool capabilities, extremely capable component industry, most of the raw material locally

produced, low cost manufacturing base and highly skilled manpower Not only a large


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number of world manufacturers have set up production bases in India but also a large

number of foreign companies are collaborating with the auto component suppliers and

vendors.

Indian Automobile Components Industry has been making rapid strides towards

achievement of world-class Quality Systems by imbibing ISO 9000/QS 9000 Quality

Systems whereby the Indian Automotive industry has become more competitive in the

export market due to its technological and quality advances, so much so that in quality

conscious markets such as Europe and America, it is emerging as a major player, based

on its performance. India today exports: Engine and engine parts, electrical parts, drive

transmission & steering pats, suspension & braking parts among others.

The sector is striding inroads into the rural middle class after its inroads into the

urban markets and rural rich. It is trying to bring in varying products to suit requirements

of different class segments of customers.

States like Rajasthan, Uttar Pradesh, Maharashtra, Andhra Pradesh and West

Bengal are vying to woo global players with proposals including heavy tax exemptions

and to create a more investor friendly regime, each state is proposing to provide all

regulatory clearances at express speed.

The Government should promote Research & Development in automotive

industry by strengthening the efforts of industry in this direction by providing suitable

fiscal and financial incentives.

The current policy allows Weighted Tax Deduction under I.T. Act, 1961 for

sponsored research and in-house R&D expenditure. This will be improved further for

research and development activities of vehicle and component manufacturers from the

current level of 125%.

In addition, Vehicle manufacturers will also be considered for a rebate on the

applicable excise duty for every 1% of the gross turnover of the company expended

during the year on Research and Development carried either in-house under a distinct


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dedicated entity, faculty or division within the company assessed as competent and

qualified for the purpose or in any other R&D institution in the country. This would

include R & D leading to adoption of low emission technologies and energy saving

devices.

Government will encourage setting up of independent auto design firms by

providing them tax breaks, concessional duty on plant/equipment imports and granting

automatic approval.

Allocations to automotive cess fund created for R&D of automotive industry shall

be increased and the scope of activities covered under it enlarged.


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1:4 Automobile industry Wheels of Change

India had its date with this wonderful vehicle first time in 1898. Then for the

next fifty years, cars were imported to satisfy domestic demand. Between 1910 and 20's

the automobile industry made a humble beginning by setting up assembly plants in

Mumbai, Calcutta and Chennai. The import/assembly of vehicles grew consistently after

the 1920's, crossing the 30,000 mark in 1930. In 1946, Premier Automobile Ltd (PAL)

earned the distinction of manufacturing the first car in the country by assembling 'Dodge

DeSoto' and 'Plymouth' cars at its Kurla plant. Hindustan Motors (HM), which started as

a manufacturer of auto components graduated to manufacture cars in 1949. Thanks to the

Licence Raj which restricted foreign competitors to enter the Indian car market, Indian

roads were ruled by Ambassador Car from Hindustan Motors and the Fiat from Premier

Auto Ltd. for many of the initial years.

In 1952, the GOI set up a tariff commission to devise regulations to develop an

indigenous automobile industry in the country. After the commission submitted its

recommendations, the GOI asked assembly plants, which did not have plans to set up

manufacturing facilities, to shut operations. As a result General Motors, Ford and other

assemblers closed operations in the country. The year was 1954 and this decision of the

government marked a turning point in the history of the Indian car industry. The GOI also


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had a say in what type of vehicle each manufacturer should make. Therefore, each

product was safely cocooned in its own segment with no fears of any impending

competition. Also, no new entrant was allowed even though they had plans of a full-

fledged manufacturing program. The restrictive set of policies was chiefly aimed at

building an indigenous auto industry. However, the restrictions on foreign collaborations

led to limitations on import of technology through technical agreements. In the absence

of adequate technology and purchasing power, the car industry grew at a snail's pace in

the 60s. The demand for cars in 1960 was to the tune of 15,714. In the next two decades

the number increased to 30,989 i.e. a CAGR of only 3.5 per cent.

The other control imposed on carmakers related to production capacity and

distribution. The GOI control even extended to fixation of prices for cars and dealercommissions. This triggered the start of a protracted legal battle in 1969 between some

carmakers and GOI. Simply put, the three decades following the establishment of the

passenger car industry in India and leading upto the early 1980s, proved to be the 'dark

ages' for the consumer, as his choice throughout this period was limited to two models

viz. Ambassador and Padmini. It was only in 1985, after the entry of Maruti Udyog, that

the car makers were given a free hand to fix the prices of cars, thus, effectively abolishing

all controls relating to the pricing of the end product.

In the early 80's, a series of liberal policy changes were announced marking

another turning point for the automobile industry. The GOI entered the car business, with

a 74% stake in Maruti Udyog Ltd (MUL), the joint venture with Suzuki Motors Ltd of

Japan. The very face of the industry was changed for ever in 1983 with the entry of

public sector Maruti Udyog in a joint venture with the Suzuki Corporation of Japan. Car

sales grew by 42 per cent yoy in 1985 after Maruti 800 was launched. Thanks to MUL

car sales registered a CAGR of 18.6 per cent i.e. from 1981 to 1990.

In 1985, the GOI announced its famous broadbanding policy which gave new

licenses to broad groups of automotive products like two and four-wheeled vehicles.

Though a liberal move, the licensing system was still very much intact. MUL introduced

'Maruti 800' in 1983 providing a complete facelift to the Indian car industry. The car was


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launched as a "peoples car" with a price tag of Rs 40,000. This changed the industry's

profile dramatically. Maruti 800 was well accepted by middle income families in the

country and its sales increased from 1,200 units in FY84 to more than 200,000 units in

FY99. However in FY2000, this figure came down due to rising competition from

Hyundai's 'Santro', Telco's Indica and Daewoo's 'Matiz'.

MUL extended its product range to include vans, multi-utility vehicles (MUVs) and

mid-sized cars. The company has single handedly driven the sales of cars in the country

cornering around 79.6% market share. With increasing competition from new entrants,

this market share has plummeted to almost 62% in FY2000.

A brief 3-year downturn till 1993 and car sales bounced back to register a 17 per

cent growth rate in 1997.Since then, the economy slumped into recession and sales of

cars remained quite stagnant FY97 and FY99. The Financial year 2000 has, however,

been the turnaround year for the Auto industry with the economy looking up. The

automobile industry, crossed the half million mark for the first time in FY2000.

Overwhelmed by newer models from new and existing players had led to an impressive

shift from a constrained supply situation to a surplus one. Within the past decade, about

30 models have entered the Indian market with a number of models still awaiting

launch. The de-licensing of auto industry in 1993 opened the gates to a virtual flood of

international auto makers into the country with an idea to tap the large population. Also

the lifting of quantitative restrictions on imports by the recent policy is expected to add

up to the flurry of foreign cars in to the country.

The Indian Automobile industry registered one of the strongest growth rates in

FY04. Aided by sustained economic recovery, the industry registered high growth rates

in all major segments.

The growth story was led by Medium and Heavy Commercial Vehicles

(M&HCVs) registering a 40% growth while Light Commercial Vehicles (LCVs)

recorded a 32% jump in total sales. Passenger cars also registered an impressive 34%

growth in FY04 and total sales volume crossed the 1 million mark for the first time.


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Interestingly, two wheelers registered the lowest but healthy growth rate of 13% in

FY04. While motorcycle volumes tripped on a high base, scooters registered a 10%

growth after 4 years of continuous decline. Three wheelers grew by 23% in FY04.

Apart from strong economic growth in all sectors, low interest rate regime, normal

monsoon, continued infrastructure investment, fiscal measures like cut in excise duty (in

case of cars), etc provided impetus for the growth. The year also saw a sharp 56% rise in

export volumes with all the sectors registering more than 40% growth, signalling the

rising international competitiveness of the industry.

Profitability improvements were recorded in companies across segments driven by

rise in volumes and lower interest costs to some extent, notwithstanding the rise in prices

of certain inputs like steel.

Though the peak customs duty had been reduced to 20% in January 2004 and

Special Additional Duty was abolished, the domestic industry still enjoys adequate

protection, with no import threats. The potential borne by the industry is well exhibited

by the growing number of international players setting up base in India and increasing

competitiveness in the industry.

Many companies have entered the car manufacturing sector, to tap the middle and

premium end of car industry.


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1.5: Background of Automobile Industry

The automobiles industry for many years operated in a seller's market. In such a

scenario the manufacturer could offer outdated models and also raise prices at will.

Little or no attempt was made to control costs or to offer new products. Lack of

innovation restricted the consumers options to the models offered by these

companies.

The number of manufacturers (domestic and foreign) increased dramatically after the

de-licensing of the sector. Increased competition has forced companies to focus on

cutting costs, improve technology and styling through research. It has also

constrained them to limit price increases.

Availability of easy credit facilities also resulted in creating demand for automobiles.

The car financing market has boomed from a turnover of Rs 7,000 m in FY95 to

nearly Rs 35,000 m in FY97.

Structure

The Indian automobile industry can be broadly classified into:

2 /3 Wheelers

Passenger Cars

Commercial Vehicles (LCV/HCV/MCV)

UV (Utility vehicles)

Tractors

The models in the car market can be fitted to different segments as given below:


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Category Models

Economy segment (upto Rs 0.25mn) Maruti Omni, Maruti 800 etc.

Mid-size segment (Rs 0.25-0.45 mn) Fiat Uno, Hyundai Santro, tata Indica,Maruti Alto etc.

Luxury car segment (Rs 0.45- 1mn) Tata Indigo, Honda City, MitsibushiLancer, Ford Ikon, Opel Astra, HyundaiAccent & others

Super luxury segment (above Rs 1mn) Mercedes Benz & other imported models

The economy segment has a very large foothold over the Indian automobile market ascompared to the mid-size and luxury segment.

Segment Market Share (%)

Economy 90.2

Mid-size and luxury 9.8

Source: SIAM/ Auto Car India

Increased urbanisation, low pricing policies, improvement in products and technology

have fuelled demand for 4-wheelers. The markets are clearly segmented between

economy models and premium models. The easy availability of finance and increased

levels of disposable incomes has led to higher demand for premium models. Rural

areas have also become an exciting market to cater to.

The growth of the economy has also resulted in a shift in consumer preferences in

each of the segment. Gradual shift can be seen in buyers from mopeds to economy

scooters, from economy scooters to premium and from premium to motorcycles

Figure -Structure of Passenger Vehicle Market (India)


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Trends in Passenger Car / Utiltity Vehicle Sales


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The passenger car segment has seen rapid growth on the back of rise in disposable

income, increased availability of consumer finance, and reduction in excise and

customs duties. Post-1991, this segment has seen maximum foreign investment.

There is a clear segmentation of passenger cars based on price and size. While the

lower and medium range cars (Maruti, Ford, Cielo) have been moderately successful,

luxury cars such as Mercedes have found the going tough.

The CV segment is directly linked to industrial production and foreign trade and is

therefore subject to cyclical fluctuations of the economy. The demand for CVs is

related to growth in movement of goods transported and freight rate levels, both of

which are linked to level of production.

Commercial Vehicle Sales Growth v/s IIP Growth

Demand for utility vehicles and tractors come from rural India. These vehicles have

witnessed steady demand growth over the past few years due to successive monsoons,

better procurement prices, improved irrigation facilities, and availability of finance.


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A strong in-house R&D capability allows a manufacturer to develop and introduce

products at lower prices, thus saving costs of importing technology. However, Indian

companies spend very little on R&D.

Availability of quality components is another factor that determines smooth production

without bottlenecks. High rejection rate of auto components has prompted several global

majors like Ford, to get their international suppliers


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1.6: Features of the automobile industry

The structure of the auto market has been changing at a faster pace along with the

global changes in the Industry. There are several global automobile companies who were

averse to come and invest in India ten years ago, now have kept India as a priority

destination for their investment. Along with the entry of multinational auto companies,

the profile of domestic auto companies too witnessed a structural change. The stiff

competition to access market prompted companies to go for different models with

differing qualities and efficiency. The market too expanded at a rapid pace with the entry

of soft financial assistance from several financial institutions to middle income

households.

MNCs need to carefully plan their entry into emerging markets. Early

commitment to a market often results in first mover advantages that are difficult to

replicate. On the other hand, later entrants have the opportunity to learn from the

mistakes of the first entrant. The Indian car market offers useful lessons in this context. In

the 1990s, the Indian Government removed several restrictions in a bid to attract foreign

investors into the automobile industry. Among the first to enter was Daewoo of South

Korea, with its model Cielo, targeted at the upper end of the market. Other MNCs such as

Ford and General Motors also entered the Indian market, followed by Hyundai, Honda,

Toyota, Volkswagen etc.

Most MNCs began their operations in India as joint ventures with local partners.

Examples include Suzuki, G.M, Ford and Daewoo. With the exception of Suzuki, these

joint ventures have become fully owned subsidiaries of the foreign partners. In all these

cases, the local partners have just not had enough resources to chip in whenever the

equity base has been expanded. Consequently, the foreign partners have pumped in the

additional capital and raised their equity stakes

With the liberalization of the India economy, the Rs 18,500 crore Indian car

market is being opened up to foreign investors. Several companies are setting up or have

already set up operations in India to cater to the Indian market. There are several


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strategies by which a foreign enterprise can set - up Indian operations. This module aims

to give the various entry options available to a foreign investor, especially for foreign

direct investment. This module does not deal with portfolio investments.

Broadly, entry strategies may be classified into two major types :-

1. A foreign investor may directly set up its operations in India through a branch

office or a representative office or liaison office or project office of the foreign

Company ; or

2. It may do so through an Indian arm i.e. through a subsidiary company set - up in

India under Indian laws.

Generally, setting up operations through an Indian arm is advisable, especially if

the quantum of investment is huge.

The impact of Indias initiatives in economic liberalization and globalization

(post 1991) is most apparent in the automotive sector. Automotive industry is a key

driver of economic growth contributing around four to five percent to the Indian GDP.

Introduction of reforms and entry of international companies has intensified competition

in the Indian automotive sector. This has resulted in the transformation of a sellers

market (created mainly due to the Indian governments protectionist policies) into a

buyers market. The changing structure of this industry has posed many challenges and

opportunities to the market participants.

Previously, Indian automotive market was characterized by weak air pollution

regulations. In addition, low labor cost of maintenance and the psyche of Indian

consumer to delay the discarding of the old vehicle reduced the scrap rate. All these

factors resulted in prolonged operational existence of vehicle on Indian roads. The benefit

of this practice is the comparatively higher revenues for automotive component suppliers,

due to increased demand in the aftermarket. But recent pronouncement of GoI to prohibit

polluting vehicles in the National Capital Region (NCR) is likely to force the old

polluting vehicles off road. This will reduce the average life span of vehicles on road and

the overall impact would be reduced per vehicle parts consumption.


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Two wheelers generate the highest volumes and are more popular in rural and

semi urban markets primarily due to lower income levels and poor road conditions.

Therefore, these could be classified as entry-level vehicles. Within two wheeler

segments, progressively mopeds are likely to be replaced by motorcycles. With the

growth in the family income of these rural and semi-urban buyers and the option of

numerous used cars, it is expected that a significant shift would take place from two

wheelers (mainly scooters) to four wheelers. Lucrative finance schemes have made the

purchase of mid-sized cars really affordable. The present owners of the small car are

likely to graduate to mid-size cars mainly due to declining importance of small car as

status symbol and the marginal increment in repayment installment in the finance

options.

Good performance of the economy has led to higher all round growth leading to

high GDP growth of 8%. Excise duty reduction on passenger vehicles helped to reduce

the ultimate price to the customer. Brisk activities on infrastructural development will

give a boost to the automobile industry. Softening of interest rates and improved

financing of second hand vehicles have made the purchasing of cars financially viable.

Availability of finance in rural and semi-urban areas have led the low-end customers to

put money in the purchase of vehicles. Emergence of India as a manufacturing hub for

the automobile industry is a good sign for the countrys future prospects.

The automotive industry performance is closely linked to industrial growth. It is

hoped that industrial growth would be around 7 per cent during the year 2003-04 as

against around 6.5% last year. Agriculture output during the year 2003-04 increased by

over 10% as compared to (-)3.2% in the previous year. Today we are fourth largest

economy (USD 2.5 trillion) in the world after USA, Japan and China in terms of

purchasing power parity. The outlook for the year 2004-05 is promising and it is expected

that the current growth rates of GDP and industrial output will be sustainable, which

would ensure robust growth in the automotive sector.

Good performance of the economy has led to higher all round growth leading to

high GDP growth


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1.7: The landmarks along the way...

1928- The first imported car was seen on Indian roads

1942- Hindustan Motors incorporated

1944- Premier automobiles started

1948- First car manufactured in India

1953- The Government of India decreed that only those firms which have a

manufacturing program should be allowed to operate

1955- Only seven firms, namely, Hindustan Motors Limited, Automobile Products of

India Limited, Ashok Leyland Limited, Standard Motors Products of India

Limited. Premier Automobiles Limited, Mahindra & Mahindra and TELCO

received approval.

1960 - 1970 - The two, three wheeler industries established a foothold in the Indian

scenario.

1970 - 1980 - Not much change was witnessed during this period. The major factors

affecting the industry were the implementation of the MRTP Act (Monopolies

and Restrictive Trade Practices Act), FERA (Foreign Exchange Regulation Act)

and the Oil Shock of 1973 and 1979.

1980 - 1990 - The first phase of liberalization was announced by the Govt. -With the

liberalization of the Government's protectionist policies, the advantages hitherto

enjoyed by the Indian car manufacturers like monopoly, oligopoly, slowly began

to disappear.

1991 - Under the Govt.'s new National Industrial Policy, the license raj was dispensed

with, and the automobile industries were allowed to expand freely.

1993 - With the winds of liberalization sweeping the Indian car market, many

multinationals like Daewoo, Peugeot, general Motors, Mercedes-Benz and Fiat

came into the Indian car market.


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1997 - The National Highway Policy was announced which will hopefully have a

positive impact on the automobile industry. The Government also laid down the

emission standards to be met by car manufacturers in India in the coming

millennium. There were two successively stringent emission levels to be met by

April 2000 and April 2005, respectively. These norms were benchmarked on the

basis of those already adopted in Europe, hence the names Euro I (equivalent to

India 2000) and the Indian equivalent of Euro II.

1999 - The Honble Supreme Court passed an order directing all car manufacturers to

comply with Euro I emission norms (India 2000 norms) by the 1st of May, 1999

in National Capital Region(NCR) of Delhi. The deadline was later extended to 1st

June, 1999

2004 - Tata Motors becomes the first Indian auto company to be listed on the New York

Stock Exchange.


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2.1: Auto policy of the Government of India

VISION

To establish a globally competitive automotive industry in India and to double its

contribution to the economy by 2010.

POLICY OBJECTIVES

This policy aims to promote integrated, phased, enduring and self-sustained growth of the

Indian automotive industry. The objectives are to:-

Exalt the sector as a lever of industrial growth and employment and to achieve a

high degree of value addition in the country;

Promote a globally competitive automotive industry and emerge as a global

source for auto components;

Establish an international hub for manufacturing small, affordable passenger cars

and a key center for manufacturing Tractors and Two-wheelers in the world;

Ensure a balanced transition to open trade at a minimal risk to the Indian economy

and local industry;

Conduce incessant modernization of the industry and facilitate indigenous design,

research and development;

Steer India's software industry into automotive technology;

Assist development of vehicles propelled by alternate energy sources;

Development of domestic safety and environmental standards at par with

international standards.

SIAM welcomed the announcement of Auto Policy, and feels that the policy would serve

as a reference document for all stake holders and other interested parties.

The Auto Policy has spelt out the direction of growth for the auto sector in India and

addresses most concerns of the automobile sector, including-

Promotion of R&D in the automotive sector to ensure continuous technology


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upgradation, building better designing capacities to remain competitive;

Impetus to Alternative Fuel Vehicles through appropriate long term fiscal

structure to facilitate their acceptance;

Emphasis on low emission fuel auto technologies and availability of appropriate

auto fuels and

encouragement to construction of safer bus/truck bodies - subjecting unorganised

sector also to 16% excise duty on body building activity as in case of OEMs

The policy has rightly recognised the need for modernising the parc profile of vehicles to

arrest degradation of air quality. The terminal life policy for commercial vehicles and

move toward international taxing policies linked to age of vehicles, are steps in the right

direction.

SIAM has always been advocating encouragement of value addition within the country

against mere trading activity. However, this aspect has not been fully addressed. The

Auto Policy allows automatic approval for foreign equity investment upto 100% in the

automotive sector and does not lay down any minimum investment criteria.

The recommendation of promoting passenger cars of length upto 3.8 meters through

excise benefits is not in line with the free market concept and may lead to marketdistortion.

However, with the Auto Policy in place, the automotive industry would get further fillip

to become vibrant and globally competitive. The industry would get the required support

from other Ministries and departments of Government of India in achieving the goals laid

down in the auto policy


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2.2: Role of Government in Automobile Industry

The government is making efforts to overcome the constraints at their research

centers for automobile industry. India can also learn from countries like Japan that are

already using these technologies for a wide number of applications. The Indian auto

industry should launch programmes for market development and a wider acceptance of

alternative energy-driven vehicles in India. It should also work in tandem with the

government to make India a world leader in this area.

Indian automobile industry is also consistently trying to meet the emerging

challenges of environmental pollution and better safety standard. According to a study,automobile exhaust contributes more than 60% of the atmospheric pollution in

metropolitan cities, with the growing number of vehicles, the pollution in the cities is

continuously increasing. Government initiated controls by notifying emission standard

from the year 1992 under which were furthers tightened in April 1996 under the Motor

Vehicles Act. Euro-I emission norms have already been made applicable throughout the

country and Indian is poised to induct Euro-II norms across the country by April 2005.

Form that date 7 metropolitan cities are going to switch over to EuroIII norms. To meet

this emerging challenges of newer emission norms Indian automobile industry has

already braced itself up with new investment and fresh technological induction.

With the growing number of vehicles, the pollution in the cities is ever increasing.

Government initiated controls by notifying emission standards from the year 1992 which

were further tightened under the Motor Vehicle Act. For meeting these norms, unleaded

petrol was also introduced in metropolitan cities from 1995, which enabled fitments of

catalytic convertors on new petrol driven vehicles. The norms are being further tightened

from April,2000 when Indias stage one norm equivalent to Euro-I will become effective.

For 2-wheelers, India has announced one of the tightest norms in the entire world. In the

national capital territory region of Delhi, Indias stage 2 norms equivalent to Euro-II


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norms, will be effective from April, 2000, as per the order of Honble Supreme Court.

This would apply to passenger cars.

The government seems most keen to hand over a huge replacement market on a

platter to the automobile industry without ensuring that manufacturers take responsibility

of the emission performance of the vehicles they produce for its useful life. In fact the

most important action point that was recorded after the ministerial consultation was that

manufacturers would have to give emissions warranty for two- wheelers from But

ultimately, the government could not muster enough courage to push the mighty

automobile industry and enforce it.

Government will encourage and assist establishment of specialized training

institutes for the automobile sector through the active association of interested

automobile industries. These institutes will be set up in Bidadi Industrial area and

Dharwad Growth center. The Institute will be managed by the participating automobile

industries and will train skilled category of auto workers, in specified skill areas such as

painting, welding, auto mechanical, etc. It also is making an effort abe to enlist the

support of multilateral aid institutions to provide part of the funding for this project,

which promises tremendous environment-improvement benefits for the vehicle, which

create pollution.

The policy of broadbanding capacities in the eighties led to increased utilization

of capacity for four-wheelers in the industry.

The liberal policy on foreign participation through technical and financial

collaboration in early eighties led to substantial product upgradation and introduction of

new models. But it was alleged that the policy was discriminatory in favor of MUL,

while others like Telco, PAL, HM were denied permission to produce cars in

collaboration with Japanese companies.

The GOI controls the car sector by way of framing policies on depreciation

norms, import duty on cars and parts used in it, petrol prices and import duty of steel.


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During the era of socialist inspired controls, the government protected the car

industry from new entrants by making effective use of licenses. However, after

liberalization and with the consequent opening up of the auto sector in 1992-93, the

license raj ceased to exist .

The perception of a car as a luxury good lead to heavy excise duty on cars. The

excise duty doubled from 25% in FY87 to 55% in FY91. Till 1987, the GOI followed a

discriminatory policy so as to charge lower duty on fuel efficient car with engine capacity

of less than 1000cc. This helped MUL to price its car at a lower price in comparison to

others. But with lobbying from PAL and HM government withdrew the provision in

1987.

But with the onset of the liberalization process in the early nineties, the

government has continually rationalized the excise duty regime. Presently, there is a duty

of 40% (16% + 24%) on motor vehicles, designed for transport of not more than six

persons (excluding the driver). On vehicles designed for transport of more than six

persons, but not more than 12 persons, the duty is 32% (16% + 16%). Over and above the

excise duty, cess by the Central Government, states are now charging a uniform sales tax

of 12%. This came in being after the 15th of May 2000. Earlier, states used to charge

sales tax varying from 3 to 14%. But MUL vehicles receive favorable treatment in terms

of sales tax as well.

In line with its treatment for luxury items import duties for car have been

maintained high. In the 80's, import duties varied between 150 to 200% based on the

engine capacity of a car. The import duty on cars and components has come down in the

last few years in line with general reduction in import tariffs. In the FY98 budget, the

import duty on cars has also been further brought down from 50% to 40% ad valorem.

Substantial reduction in import duty has been extended in the budget FY98 for import of

certain items which would help the industry to reduce the emission level of vehicles. The

import duty on catalytic converters and parts thereof has been reduced from 25% to 5%.

The duty on CNG kits and parts thereof have been reduced from 10% to 5%.


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The import duty on auto components will be a key factor in deciding the final

pricing of cars as new ventures start with about 50% indigenisation levels. The reduction

in import duty on steel in the last few years has helped the industry in reducing raw

material costs as major steel requirement of car industry was imported. Even today, all

CKD/SKD imports include metal pressed body panels.


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2.3: Impact of union Budget 2004-05

Budget Proposals / Measures

No change in basic excise duty on automobiles other than tractors Peak rate of customs duty to be maintained at 20%

Automobile companies entitled to 150% deduction of expenditure on in-house

R&D facilities

Reduction in customs duty for alloy and non alloy steel to 15% and 10%

respectively.

Excise duty on steel increased to 12% from 8%.

Indications of continuing benign interest rate regime.

Educational cess of 2% on excise, customs duties and Income Tax.

Likely implementation of VAT from April 1, 2005

Strong thrust towards sustainable rural economic growth.

Reduction in customs duty on copper as well as some other metals to 15%.

Consortium of banks formed to ensure speedy conclusion of loan agreements and

implementation of infrastructure projects.

Budget impact:

Tractor manufacturers will benefit from increased demand for tractors once they pass on

the benefits of excise duty exemption to the end consumers. The industry has just come

out of a three-year slump, having registered a volume growth of 10% in FY04. Thus, the

current exemption is likely to give a further boost to demand. The target of doubling the

agricultural credit in three years is also likely to make more funds available to the farmers

for investment in farm mechanisation.

With major auto companies spending sizeable amount on product development and in-

house R&D expenditure in recent times, deduction of 150% allowed on the same will

encourage further R&D investments. With cost efficiency no longer the domain of any

single player, future survival will depend upon the capability to offer more


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technologically competent products. From this perspective, the current move is a step in

the right direction.

The government has pushed for speedy implementation of infrastructure projects, which

is a good sign for the auto industry, especially the CV manufacturers. In line with the

international experience, improvement in road infrastructure will translate into increased

demand for higher tonnage CVs.

Reduction in customs duty on alloy and non alloy steel would have a positive impact on

the auto components and automobile industry. However, it would be nullified to some

extend by increase in excise duty on steel.

R&D sop will also boost investments in technology related areas. Cess of 2% may result

in increase in end product prices if the manufacturers decide to pass on the hike.

Rural thrust is likely to result in long term increase in demand of automobiles.

Favourable economic scenario, renewed impetus on infrastructure and thrust on rural

economy are likely to sustain healthy growth rates across segments.

Overall, no significant impact for the automobile industry (other than tractors).


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3: Demand

The demand for cars in the past was supply driven as demand did not match supply. This

led to high premium and long waiting periods for the cars. But change in government

policies coupled with aggressive capacity additions and upgradation of models by MUL

in the early nineties led to increase in supply and subsequently reduced the waiting

periods for economy cars.

The demand for cars was suppressed by various supply constraints. The demand for cars

increased from 15,714 in FY60 to 30,989 in FY80 at a CAGR of only 3.5%. The entry of

Maruti Udyog Ltd (GoI-Suzuki JV) in 1983 with a "peoples" car and a more favorable

policy framework resulted in a CAGR of 18.6% in car sales from FY81-FY90.

After witnessing a downturn from FY90 to FY93, car sales bounced back to register 17%

growth rate till FY97. Since then, the economy slumped into recession and this affected

the growth of the automobile industry as a whole. As a result car sales remained almost

stagnant in the period between FY97 and FY99. CAGR recorded during the FY94-FY99

period was 14.4%, reaching sales of 409,624 cars in FY99. However, during FY2000,with the revival of economy, the segment went great guns posting a sales growth of

56%yoy. The table below indicates the past sales trend for cars -

Cars FY94 FY95 FY96 FY97 FY98 FY99 FY2000

Volume 209,203 264,822 345,486 410,992 417,736 409,624 638,815

Growth %yoy 27.0 27.0 30.0 19.0 2.0 -2.0 55.8

Source : SIAM

The demand for cars is dependent on a number of factors. The key variables are per

capita income, introduction of new models, availability & cost of car financing schemes,


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price of cars, incidence of duties and taxes, depreciation norms, fuel cost and its

subsidization, public transport facilities etc. The first four factors viz, increase in per

capita income, introduction of new models, availability & cost of car financing have

positive relationship with the demand whereas others have an inverse relationship with

demand for cars.

The demand for cars in the future can be estimated with the help of making use of macro

economic variables like growth in GDP, per capita income etc. or house hold penetration

technique. An attempt is made to estimate the potential demand for passenger cars based

on the household penetration level of passenger cars as explained in Annexure 4 of the

report.

The demand for cars in the future is expected to come predominantly from the

existing two-wheeler owners who will be upgrading to a four-wheeler, due to rising

income and necessity of car for personal transportation purposes. Therefore,

excluding the owners of mopeds, the potential demand for cars in the next fifteen to

twenty years can be taken as 50% of the existing two-wheeler population of around

28mn units.

But with the release of new models in the higher end of the economy segment, the supplyof second hand economy cars is expected to increase substantially, which will be costing

just about two times the price of premium range two-wheelers. This could affect the

demand for first hand/new cars. Also, with cross demand from utility vehicles,

availability of finance and other factors the above mentioned potential for cars will be

difficult to realize. Growth in the segment thus is expected to hover around 15-20%yoy.

The dominance of economy segment will continue in the future as it will provide large

volume to Indian car industry. This is because a majority of customers for cars will

graduate from two-wheelers. The demand for mid-sized and premium cars is expected

to rise as new models enter the market, income levels rise and present car owners

upgrading from the economy segment to higher end cars.


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Supply

The supply of cars in Indian industry till 1991 was dependent upon the production

capacity of individual players. The production of cars has increased from 42,475 units to

181,420 units from 1981 to 1991 respectively. The growth in production of cars has

varied in the last three decades from just 1% in 1970-80 to 21% in 1980-90 and above

15% in 1991- 96. The table below gives the productionnumbers of passenger cars in the

past few years.

Cars FY94 FY95 FY96 FY97 FY98 FY99 FY2000

Production 207,658 264,468 348,146 407,539 401,002 390,355 577,243

Growth %yoy 27.2 27.4 31.6 17.1 (1.6) (2.7) 32.4

Source: SIAM

The major increase in production of cars in the 80's was due to the entry of MUL in 1983,

which helped increase car production by 20,000 to 30,000 cars per annum till the early

nineties.

With the entry of MUL, the face of the passenger car industry changed forever. Existing

producers who had operated in a protected, high margin environment faced the prospect

of not just diminishing market share, but a shift in focus from producing vehicles to

selling them. But MUL made use of the opportunity open to its technologically superior

product and increased its capacity from 100,000 cars in FY90 to 240,000 cars in FY96

and 350,000 cars in FY98.

The opening of economy in 1993, attracted world majors who joined hands with existing

auto majors, to start their operations at the earliest. The first ones to enter the field were

Mercedes Benz in joint venture with Telco to manufacture E220, E250D models, Peugeot

in JV with PAL to manufacture Peugeot 309L, Fiat in JV with PAL to manufacture Fiat

Uno.


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This has helped in increasing the number of models available to the customer from 8 to

30 and hence provided a wide choice to him. This has also helped in reducing the average

waiting period and premium on cars, which were a part and parcel of car cost in the

eighties.

Capacity

The present production capacities is detailed in the table below. This has increased from

an estimated 600,000 units in FY98 to the present 727,000 units in FY2000.

Car Capacity FY2000 Expected

Maruti Udyog 250,000 350,000

Hyundai 110,000 130,000

Telco 100,000 150,000

Daewoo 72,000 130,000

Ford India 50,000 70,000

Fiat India 60,000 60,000

General Motors 25,000 100,000

Honda Siel 30,000 30,000

Hindustan Motors 30,000 50,000

Total 727,000 1,070,000

Thus, capacity utilization in FY2000 stands at 79.4%. This is still better than utilization

levels the world over which stands at around 40%. Production capacities are expected to

increase in the next two years as players introduce new models. The major increase in

supply, as was witnessed in FY2000, will be in the mid-size and luxury segment. The

supply in the future, taking into account the plans announced by the car majors are

expected to grow to 1,070,000 cars by 2002.

The segment which has seen a number of new entrants in the recent past will see two new

models from the stable of Maruti namely the 'Alto', which will be available in the 800cc


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and 1000cc configuration. However, industry sources have indicated that after the hectic

action of the past two years, this segment will slowly witness some stability in terms of

sales volumes and prices. The entry of new players is expected to create a marketing

warfare in the car industry. A start has already been made by sharp reduction in prices of

Daewoo 'Cielo' and Maruti 800. Lately, the price of Wagon R was also lowered by MUL

to face the intensifying competition. However, with manufacturers having to comply with

Euro emission norms, car manufacturers have sold their products at lowered margins.

This is expected to affect their ability to reduce prices in the future.

Increased support through finance from auto manufacturers was quite evident in FY2000.

This has and will in the future induce existing owners of cars to go for technologically

superior products in the same segment leading to sharp drop in prices of second-handcars. This will also create a platform for upgradation of existing two-wheeler owners to

four-wheelers.

The luxury segment will see more new entrants namely Toyota of Japan, Skoda of Czech

Republic and Proton of Malaysia in the years to come. Recently, companies like MUL,

GM and Hindustan Motors have come out with new models to cover the present gap in

the segment. Therefore, the customer will be having a wider choice to choose depending

on his specific needs


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Indian Automobile Industry

An Indian car as one which has been conceived and designed in India, has at least

85% of its components 'Made in India', by an Indian company. The Indian passenger car

industry as we see today is relatively recent in origins. Except the ubiquitous Ambassador

and the Premier Padmini there was not much moving around with an Indian tag.

The official mascot of the Indian political system, the Triassic-era Ambassador

has little Indian-ness in it. To start with, the name isn't Indian and that's only the tip of the

iceberg. The design came from Morris Motors and the present petrol power plant and

drive train are Isuzu throwaways. The diesel version has a BMC engine. Of course

everything is made in India now, but do you call a tree your own if its roots are in

someones courtyard.

The other pre-Cambrian relic, the Premier Padmini, which till a few months back

was adorning showrooms throughout the country. Its in the market since my grandpa

learnt driving and at the time of its going to grave, the Padmini was a completely made in

India product. But again, there's very little Indian-ness about the car, except maybe the

name Padmini. The entry of Maruti Udyog Ltd, a GoI JV with Suzuki of Japan, in 1983

with a so-called "peoples" car and a more favorable policy framework resulted in a

growth rate of 18.6% in car sales from FY81-FY90. After witnessing a downturn from

FY90 to FY93, car sales bounced back to register 17% growth rate till FY97. Since then,

the economy slumped into recession and this affected the growth of the automobile

industry as a whole. As a result car sales remained almost stagnant in the period between

FY97 and FY99. However, with the revival in the economy, FY2000 turned out to be a

significant year for the industry in which it recorded volume sales of 638,815 units as

against 409,951 units in the previous year. Thus, the CAGR for the period FY96 -

FY2000 stands at 16.6%.

The present day stunner from HM is the Lancer. As with HM products from the

past, the Lancer is a borrowed from abroad product. The saving grace is only that this

Lancer is a contemporary model and not some. The erstwhile Premier Auto Ltd. no

longer exists. The nearest thing to it in the present is Ind Auto Ltd. Ind is an acronym for

India or Indian, but the products are all borrowed from Italy. The Uno came to India after


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the Mafiosi had their fill with it. The Siena is a very contemporary model. It being a good

car and all, but I always wonder why Fiat doesn't launch it in their motherland. What's

this 'special' car for India, Brazil, Africa, Latin America inc.

Ford did take the pains to design an India specific car, the Ikon. So does the quest

for an Indian car end with the Ikon. No I don't think so. First thing, the company is

American. Secondly, the Ikon's platform is that of the Fiesta, nothing else. So the only

thing Indian about the car is the 'Josh' advertising gimmick.

Starting with the official one, i.e. Maruti, the company, since its inception has

changed the automobile scene in India completely. It's has been the number one

manufacturer, churning out close to 300,000 cars last year. At last count it held a 64%

market share in the passenger car market with four out of every five cars . on Indian roads

being Marutis. Every year it rakes in multi-billion rupee profits, and, yet the company is

nothing more than Suzuki India Ltd.

Telco is a completely Indian carmaker with no major foreign collaborations. Their

Indica was much touted as 'The Indian car', but it was styled by I.D.E.A of Italy. The

engine technology had inputs from 'Moteur Modern' of France. In effect it was the case of

an Italian body being wrapped around Indian mechanicals. Frankly I would have

preferred an Indian body wrapping an Indian platform.

India is also the largest manufacturer of agricultural tractors, motor scooters and

the world's fifth largest commercial vehicle manufacturer. Each of these sectors

experienced rapid growth during the last three years Demand in these sectors is driven

by industrial, individual and agricultural consumers respectively. The increases have

resulted from improved overall economic trends in India including large doses of foreign

investment a more liberalized economy and higher productivity.

The fortune of the Auto component industry is inextricably linked with that of the

automobile industry which in turn is influenced by the general economic trends of the

country the country's economic growth is projected to grow at more than six percent per

annum in the coming years. The estimated growth will automatically emphasize the need

for better transport infrastructure facilities. This means demand for automobiles and

hence for auto components, is bound to grow accordingly. Therefore, good growth

prospects are assured for the automobile industry.


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World-wide, cars are segmented on the basis of their size. However, in India, price is

the main factor determining the choice of car. Hence, cars are segmented on the basis of

price into three segments :

Segment

Price

Range

(Rs. 000)Main Models

Features of

the segment

Approximate

Market Share of

the Segment

Economy < 250M-800, Omni,Uno,Ambassador

Price, FuelEfficiency

46.9%

Medium 250-500

Zen, Uno, 118-NE,Ambassador

1800 ISZ,Contessa,Indica, Santro,Matiz

Price,

Performance,DieselOption

43.1%

Premium500 &above

Lancer, Esteem,Cielo, Accent,City, OpelAstra, Ikon

Status Value,Performance,Features.

10.1%

Sources : various sources

Absence of adequate mass transportation system and rising income levels have resulted in

personal vehicles becoming an important mode of transportation in the urban and semi-

urban areas. By international standards however, the Indian car volumes remain small at

just over 1% of the world market with penetration rates of approximately 3.7 cars per

thousand people as against 24 in Thailand, 144 in Malaysia, 204 in Poland and 90 in

Brazil. Cars currently constitute approximately 12% of the total stock of personal

vehicles in India.

Rising household income, increased urbanisation, introduction of new models and

availability of cost effective finance are the key demand drivers in the industry. The

premium segment cars are mainly targeted at corporates or businessmen and are usually

bought on consumer finance.


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The midsize segment witnessed an increase of around 115% in sales volume during the

period April 1999-March 2000. Currently the economy, medium and premium segments

constitute 46.9%, 43.1% and 10.1% respectively of the market.


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4.2: Automobile Industry Performance during 2003 04

During the year 2003-04 the automobile industry has registered a growth of around 16.5

per cent in numbers and 24 per cent in value terms. Passenger cars saw a 35 per cent

growth in FY04 over the previous fiscal while medium and heavy commercial vehicles

witnessed a 46 per cent growth.

Segment-wise Performance

Passenger Vehicles

The excise duty reduction on passenger vehicles given in the union budget 2003-04 has

directly impacted the sales of passenger vehicles positively as it has reduced the

acquisition cost to the customer. The cumulative passenger vehicle sales in the domestic

market in April-March 2003-04 have grown by over 27% over the same period last year.

However, this is against relatively low and negative growth rates in the previous years.

Within the passenger vehicle segment, while passenger cars and utility vehicles have

grown at a brisk pace of 28.6% and 27.6% respectively, MPVs have grown at a lower

rate of around 14.5%. However, the growth of MPVs this year is significant as it was (-)

15.7% in the last year.

Passenger Cars & MUVs Annual Production

FY 2003 TO 2004 in Nos

MUV -16%;

CARS 84%


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Passenger Cars Sales Segment-Wise Market

Distribution FY 2002 TO 2003 in Nos

Upper C 3%3%

Misc 3%

Lower C 10%

Luxury D 2%

A Seg 32%32%%

Upper B 16%%

Lower B 34%

Commercial Vehicles

The performance of the commercial vehicle segment during the course of the year was

very satisfying. It has clocked over 30% growth rate in consecutive years. The growth

rate of all commercial vehicles during the year 2003-04 grew by 36.5%. M&HCV

segment has grown by 39.5% whereas LCVs grew by 32%.

With improved economic performance especially in the agricultural sector besides

expansion of the national highways and expressways, we are also witnessing fleet

rationalisation in the country. This has also led to increased penetration of multi-axle

vehicles on our roads. During the year 1998-99 sale of Multi axle vehicles was 4539.

Whereas, in the year 2003-04, 59251 multi-axle vehicles were sold. In percentage terms

an increase of 67% per annum over a five year period. The share of multi-axle vehicles

during the same period has gone up from hardly 5% to around 40%.

Commercial Vehicles Annual Production

FY 2002 TO 2003 in Nos

BUSES 10%

LCV 41%

TRUCKS 49%


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Exports

The performance of the automobile industry in exports is also encouraging. Passenger

vehicle exports have crossed the hundred thousand mark and clocked sales of around

1,30,000 and two & three wheelers have crossed three hundred thousand mark for the

first time clocking around 3,33,000. Commercial vehicle exports have also increased to

an all time high of over 17,000. In percentage terms the growth during the year over the

previous year have been almost 80% for passenger vehicles, over 49% for two & three

wheelers and over 40% for commercial vehicles.


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4.3: Indian Automobile Market

The Indian market confounds global carmakers simply because of the way it is

segmented. In the West, automobiles are generally segmented according to platforms --

that is chassis-engine combinations. Price plays a factor but only up to a point. In India,

though, price plays the primary role in segmentation.

Consider first the segments in the European or American market. At the bottom,

you have city cars' -- which include the Daewoo Matiz, the Hyundai Santro, the Maruti

800, Alto, Fiat Uno, the Zen as well as the Wagon R. Next come the budget minis --which would include cars like the Suzuki Swift (our own Esteem). The next segment, the

superminis, would take in cars like the Opel Corsa, the Ford Ikon. Above the superminis

are small family cars -- which include models like the Opel Astra and the Ford Escort.

Medium-sized family cars are bigger and include cars like the Opel Vectra and Peugeot

406. Compact executive cars are small but immensely prestigious and include the BMW

3 series and the Mercedes C class. Executive cars embrace their bigger brothers -- the

BMW 5 series and the Mercedes E class. Only a handful of cars are classified as true-

blue luxury cars namely-- Jaguar XJ8, the BMW 7 series. And of course there are the

niches like sports, sports utility, and exotics.

The Indian market, of course, is quite differently segmented. The Maruti 800 and

Zen fall in a class by their own -- and are referred to as the sub-Rs 2.5-lakh cars. The next

is the Rs 3-4 lakh segment -- which includes all the other cars that would normally be

classified as city cars in Europe. Strictly speaking, the Tata Indica should fall in the

super-mini category because of its specifications -- but because of price, it competes in

the same segment. Above Rs 4 lakh and all the way up to Rs 10 lakh is the luxury car

range. It is loosely divided into two halves -- with Maruti Esteem, Ford Ikon, Hyundai

Accent, Daewoo Cielo, Opel Corsa and Honda City 1.3 falling in the bottom layer, and

the Opel Astra, Honda City 1.5 and Ford Escort in the upper range. The last segment is of

premium car segment, which includes cars like Mercedes Benz and BMW.


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Scooters India Ltd (SIL), US-based Amerigon and Bangalore-based Maini Group

are negotiating a joint venture to manufacture an electrical passenger car. Priced at Rs

1.75 lakhs, the car will target the segment between two-wheelers and petrol/diesel based

cars. Assembly from imported Completely Knocked Down (CKD) kits will start as soon

as an agreement is finalised among the partners. This venture represents a major

manufacturing shift for SIL, a public sector enterprise, which so far has only produced

two- and three-wheelers. It also plans to introduce an electric three-wheeler model,

already in use in Nepal, into the Indian market.

Bajaj Auto has introduced its diesel three-wheeler in Hyderabad. The vehicle has

a 416 cc engine and is priced at Rs 83,000, lower than its nearest competitor the Greaves

Garuda, which is priced at Rs 85,000 (in Hyderabad). Bajajs petrol three-wheelersalready account for 85 per cent of the India market. Its new product, consequentially,

could erode its own base.

Indian Automobile industry has become more competitive in the export market

due to its technological and quality advances, so much so that in quality conscious

markets such as Europe and America, Indian automobile industry is emerging as a major

player judging by its performance. India today exports: Engine and engine parts,

electrical parts, drive transmission & steering pats, suspension & braking parts among

others.


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5.1: Strengths of the Automobile Industry

Low labor cost:

India enjoys a comparative cost advantage in labour as compared

to western countries.

Skilled Manpower:

India has vast pool of skilled manpower and qualified

engineers among the largest in the world.

On a scale of 1-10, 1 = low, 10 = high.

Availability of Skilled labour.

Sr No Country Points.

1 India 8.5

2 Brazil 7.5

3 US 7.4

4 Germany 6.6

5 Mexico 6.6

Availability of Qualified Engineers.

Sr No Country Points.

1 Germany 7.5

2 India 7.4

3 US 7.2

4 Brazil 6.4

5 Mexico 6.3

Reference: Competitiveness of Indian automotive industry Feb 2004.


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5.2: Weaknesses of the Automobile Industry

Low labor productivity:

Cost advantage in labor wages is nullified by the fact that we have lower labor

productivity.

Defect rates high:

We have a higher defect rate about 10 times the world average.

Low Investment in R & D:

The Industry has a very low investment in R & D as compared to their foreign

counterparts which will their sustainability in the future.

Not reached critical mass:

Indian companies are in nascent stage and hence not able to cater to the

requirements of OEMs. Our auto- ancillary industry is of 2.4 bn $ while Fords

outsourcing budget is 86 bn $.

Poor infrastructure :

Poor infrastructure like roads, ports, railways which lead to

higher logistics cost and lower reliability.


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5.3: Opportunities for the Automobile Industry

Global automobile companies are setting up manufacturing facilities in India.

Also, many Indian automobile manufacturers have announced their plans to increase the

export of vehicles from India. The year 2002-03 has already seen a significant 65%

increase in export volumes during the period April to March. This trend is expected to

continue with more global OEMs sourcing vehicles from their Indian plants.

Additionally, the introduction of newer technologies such as Electronic Diesel

Control Systems to reduce emission levels, safety devices such as Air Bags, Anti-lock

Braking Systems, etc. augur well for the Company and the automotive sector as a whole.

These technologies not only offer increased safety for drivers and passengers, but also

result in greater comfort and better drivability.

While there exist many opportunities for growth in business, there are also quite a

few factors, which act as an impediment.

In my last years speech I mentioned about the need for a well thought out and

clearly defined policy on emission norms. It is now fairly certain that Bharat Stage II

norms (equivalent of Euro II norms) will be implemented countrywide starting 2005. It is

important that this plan is implemented in time in the interest of a cleaner environment.

Technology is available to meet the advanced emission norms using gasoline and diesel

fuel; Bosch and many other companies have proved this worldwide. There is no need for

the authorities to specify the type of technical solution required for this purpose as long

as the end objectives are met.

The spurious and reconditioned goods market, which I also dealt with in detail in

my speech last year, continues to be a worrying factor as it directly affects our market

share. The Company on its part has intensified the anti-spurious operations by conducting

several raids across the country with the help of local regulatory authorities. Large


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quantities of spurious and fake products have been seized and legal action has been taken

against those indulging in such activities. The Company believes that continued focus

and concerted action against spurious activities would improve safety and fuel efficiency

of the vehicles and at the same time help in expanding our market share in the

Aftermarket. The Company is also continuously educating the users about the benefits of

using genuine spares in place of spurious and reconditioned spares.

The lack of any significant change in the labor law reforms also continues to be a

matter of concern. It is essential that legal reforms be put in place at the earliest to

provide more flexibility in manufacturing operations and enable the industry to quickly

adjust the work force in line with fluctuating market conditions.


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5.4: Challenges for the Indian automobile industry

As we move into the new millennium, the Indian Automobile Industry faces some

tremendous opportunities and also great challenges. The growth in automobile sales has

been impressive for the past ten years since liberalization began. However, with

liberalization, the Indian customer has been presented with a wide range of choices in

automobiles, to suit every requirement and budget. The market has turned into a buyers

market where the customer is being wooed by the manufacturers and the dealers with a

range of freebies unheard of before in India. Financing has become so easy that an

automobile is within every aspirant's reach.

Competition has meant that manufacturers' margins have been squeezed severely

and they are all under pressure to cut costs to be profitable and competitive. Some of the

older manufacturers like Premier Automobiles (manufacturers of Premier cars),

Automobile products of India (manufacturers of Lambretta scooters) and Ideal Jawa

(manufacturers of Jawa and Yezdi motorcycles) have closed shop. Hindustan Motors

(manufacturers of Ambassador and Contessa cars) is in trouble due to the declining sales

of its cars, as most customers prefer the newer models available in the market. Even the

dominant player Maruti has seen its market share decline rapidly due to its models being

old and jaded and is in addition facing labour problems in its plant.

To add to the problems, come April 2001, under the WTO agreement, India will

have to permit import of fully built automobiles, which hitherto was not permitted. The

foreign manufacturers such as GM, Ford and Daimler Chrysler will almost certainly

import vehicles from their large portfolio of models and makes, further segmenting the

market into niches, although how competitive they are in terms of price remains to be

seen.

The challenge before the industry is to figure out the strategy for survival and

growth. It is clear from the picture painted above that the industry will have to increase


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volumes in each segment to achieve lower cost of manufacture. One way to achieve this

will be to go for exports in a big way. Maruti is already exporting vehicles, as are

Mahindra, Telco, Daimler Chrysler and more recently Daewoo. The overseas markets

will have to be exploited more aggressively, but this will mean the companies will have

to invest more in Research and Development of new models with better features.

The second opportunity is to become contract manufacturers for overseas

companies. A number of Japanese and Korean companies have been following this

strategy very successfully. Hindustan Motors is said to be considering this option. The

third opportunity is to overcome the vulnerability of the automobile market to oil prices

by designing vehicles, which can offer lower fuel consumption. Recent reports suggest

the government is exploring the possibility of introducing Gasohol, which is a mixture ofPetrol and Alcohol. Gasohol has been very successful in Brazil. Since Alcohol is a by-

product of the Sugar industry (of which India has the worlds largest), this is a very logical

step that should have been taken many years ago. Even a small percentage reduction in

the consumption of petroleum per vehicle can make a big difference to the balance of

payments.

The industry must focus its R&D efforts in line with the global trends, which is to

build vehicles that are cons

Gaurav Singhal Vmu Project Feb 2013

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