The Coming Growth Surge in India and the Role of …The Coming Growth Surge in India and the Role of...

The Coming Growth Surge in India and the Role of Low Cost Cars

Tim ArmstrongDirector Forecasting – Asia, Middle East Africa

Paris

June 26th, 2008

Automotive Group

Copyright ® 2008 Global Insight, Inc. 2

Structure of Global Insight Presentation

� Macroeconomic Trends and Assumptions� Exposure to global downturn, inflation� Constraints to economic growth

� Taxation Policy and Influence on Segmentation� The Rise of the Low Cost Car in India

� Why the low cost car is driving vehicle growth � Raw Materials Super-Inflation and the Impact on the Nano

� OEM Small Car Strategies � Opportunities for Low Cost Cars in External Markets

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India Offers Very Attractive Risk-Growth Trade-off

Circle Size = Unit Sales in 2007

Turkey

PolandRussia

Mexico

Thailand

Iran

China

Brazil

India

Cluster ofUSA Can. Australia

Cluster of WE Big 5 Japan& S. Korea-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0 5 10 15 20 25 30 35 40 45 50 55 60

Overall country risk score - 5 year

LV

un

it s

ales

gro

wth

,C

AG

R %

, 200

7-12

Average GlobalOverall Country Risk

Average GlobalAutomotive Growth

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India: Key Demand Drivers - Summary

� The economy remains strong. But inflation is running high� IT and outsourcing sectors remain buoyant. � 2006 cut in excise duty on small cars resulted in lower prices and

has been stimulating demand. Occurred again in 2008. � Tata’s Nano will provide a significant boost from 2008/9. � Although there has been good progress with infrastructure

construction in recent years, there is a lack of adequate road infrastructure

� Limited scope for significant price cuts to boost demand. � Interest rates have been rising in the last two years and further

monetary tightening is expected. Credit is harder to obtain� Stock market declines were severe in January-February 2008� OEMS facing rising input costs – commodity prices� Oil price is starting to have an impact – inflation, monetary policy

tightening� Fuel subsidies being rolled back

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General Assumptions: Economy

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

GDP Growth GDP Per CapitaIndustrial Production Growth Private Consumption Growth

percent change year-on-year

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General Assumptions: Economy

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

ST Interest Rates % Unemployment rate Percent Consumer Price Growth rate

percent & percent change year-on-year

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India’s Economy Is Less Exposed to External Demand – But Real Issue is now Inflation

� Exposure to global trade one of the lowest in Asia, and domestic demand drives growth

� Share of consumer spending is a relatively high 60% and exports a relatively low 23%

� Overall credit risk remains low� Real GDP expanded 8.4% in Oct.–Dec. 2007 (only a mild deceleration

from previous quarters)…But significant global financial turbulence could spill over into India’s asset markets (equity, property)

� Inflation is shooting up in Q2 to 13 year high, interest rate tightens � Upcoming elections� Fuel subsidies rolled back –fuel prices rise 10% in June

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Stock Market Correction Rather than Collapse

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India Risks/Alternative Scenarios

� Any sharp retrenchment in U.S. growth will dent economic prospects, and any significant global fallout from the U.S. subprime loan crisis could impact India's economy, although fairly mildly.

� Oil prices spiraling to US$150/barrel or higher and remaining at elevated levels for three or more months as a result of supply disruptions from one or more major oil-exporting countries. Such sustained high energy prices would affect inflation, economic growth, and the current account.

� Withdrawal of fuel subsidies could lead to accelerating inflation, monetary tightening and slowdown in consumption

� Further changes in excise taxes or changes import duties� A worsening of the global economic and geopolitical backdrops and any renewed

military confrontation in Kashmir with neighboring Pakistan. Even if outright conflict is averted, fresh tensions would deter foreign investment.

� A hard landing in China would dampen economic prospects in Asia.

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Infrastructure Constraints Will Mean “Lost Growth” -Power

� India has the fifth largest electricity generation capacity in the world� Low per capita consumption at 606 units;

less than half of China � Electricity supply falls short — All India average

energy shortfall of 7% and peak demand shortfall of 12%

� Installed generation capacity of 122 GW in 2006� 57% coal, 25% hydro, 10% gas,

5% renewables, 3% nuclear� Growth in power supply of only 4.6% p.a. in last

four years� Will require an additional 90GW of power by

2012� Requires similar investment in distribution and

transmission networks

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� Congestion is becoming a serious constraint to motorization growth especially in big cities

� Most car growth in recent years has been in big cities� 15% of all car sales are made in Delhi

� Road infrastructure in tier 2 and 3 cities is still poor� Road building programmes will not relieve chronic

congestion in large cities and are not focused on improving roads in tier 2 and 3 cities where there is most potential for demand growth

� Further growth hot-spots will need to be targeted more carefully to cities that have good infrastructure� Bangalore, Hyderabad, Mysore, Bhopal, Jaipur

� Total of 3.3m kms of roads in India� Roads carry 61% of all freight and 85% of

passengers� Highways account for 66,000kms — 2% of all

roads– They carry 40% of all road traffic and 80% of

all freight� NHDP initiatives mainly cover main road and

highway investment

Congestion Is Increasing But National Highway Development Programme Will Do Little to Help

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Top Ten Fastest Growing Cities

6.2%

6.3%

6.6%

7.4%

7.8%

8.4%

8.5%

10.1%

10.3%

11.5%

Growth Rate

Agriculture300kWest BengalBardhaman

Automobile7.5mTamilNaduChennai

West Bengal

Maharashtra

Andhra Pradesh

Haryana

Maharashtra

Gujarat

Karnataka

Gujarat

State

Kolkata

Pune

Hyderabad

New Delhi

Mumbai

Ahmedabad

Bangalore

Surat

City

5m

Automobile industry4m

2006 per capita income of Andhra Pradesh was at Rs 25,625

7m

per capita income of Rs 53,976, which is more than double the national average

14m

Contributes 25 per cent of industrial output and 70 per cent of capital transactions to

India's economy

19m

Largest inland industrial centre in western India

5.6m

Largest number of household over 10lakh income

IT Industry

6.5m

90 % of world's diamonds are cut and polished here

4m

CommentPopulation

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Why Is India Suited to Low Cost Car Development?

� Long history of protectionism — more extreme than most developing countries� Tariff barriers have stimulated local investment and prevented used

cars undercutting small cars� Supply led segmentation

– The main model chosen for the first “national car programme”was a small car… the Suzuki Alto or Maruti 800

� Recent excise duty cuts for small cars is reinforcing the advantage of cars less than 4 meters in length

� Very large potential market is already visible — 2 wheeler riders� Consumer mindset geared to value-for-money cars that are cheap to run� Large local supplier base builds in cost advantage over entire supply

chain� Strong local engineering skills allows development of design-to-cost

cars� Large conglomerates have financial critical mass for investment

� And social conscience to bring transportation to the largest number

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Customs Duties and Excise Taxes in India – Pre Budget

10%n.an.an.an.a8704 Goods VehiclesCustoms Duties

10%n.an.an.aCKD8703 Passenger VehiclesCustoms Duties

100%n.an.an.aCBU8703 Passenger VehiclesCustoms Duties

24% (16% on CNG/LPG)

n.an.an.an.a8704 Goods VehiclesExcise Tax

24%>4000 mm>1.5l>1.2ln.a8703 Passenger VehiclesExcise Tax

16% * Now 12% from March 2008

< 4000 mm<1.5l<1.2ln.a8703 Passenger VehiclesExcise Tax

RateLengthDiesel ccmPetrol ccmFormCategoryType

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Motorization Will Be Spurred by Rise in Middle Class

0

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H'holds w / Income $150K and overH'holds w / Income $100 to 150KH'holds w / Income $90 to 100KH'holds w / Income $80 to 90KH'holds w / Income $70 to 80KH'holds w / Income $60 to 70KH'holds w / Income $50 to 60KH'holds w / Income $40 to 50KH'holds w / Income $30 to 40KH'holds w / Income $20 to 30KH'holds w / Income $15 to 20KH'holds w / Income $10 to 15K

Millions of Households

India > $10,000 pa(No. of Households by $US Nominal Income Bracket)

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Types of Low Cost Cars

1. 2004: Low Cost Car — Logan� Price under $10,000� C Segment size vehicle, B segment price� For selected developing markets (with Renault presence)� Engineered from existing technology in low cost location, requires moderate

engineering capabilities and moderately low cost base2. 2008: Ultra-Low Cost Cars — Nano, Nissan Bajaj, Hyundai

� Priced under $4000 � Specifically for India with potential for selected markets� Sub A segment size “passenger” engineered from scratch in low cost location,

requires good engineering capabilities and very low cost base3. 2008/9: Small Cars for India and Export — Hyundai i10, Suzuki A-Star, Nissan

� $8–10,000� A/B segment cars made in India with high potential for export to developed small

car markets � Targets Europe, rest of developed world

4. 2010: World Low Cost Cars — Toyota� Price $7–10,000� A/B segment size� Targets BRIC’s markets � Combines low cost base, and original engineering, but positioned above Nano

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Ultra Low Cost Cars Open Up Product Space

Passenger Utility

High Price

LowPrice

Ultra Low CostCars

B Segment

A Segment

C Segment

D Segment

E & F Segment

MPVs

CUVs

LifestyleSUVs

LuxurySUVs

LargeSUVs

Small Vans

Medium Vans

Micro Vans

HeavyVans

World Low Cost Cars

Thai EcoCars

Pickups

LoganCar

LoganSUV

LoganMUV

LoganPUP

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Tata’s Nano Opens Up Whole New Sub-A Segment

• Base version sold at 1 Lakh (before taxes) — close to half the price of Maruti 800 and twice the price of standard motor bike

• Two deluxe versions available• Designed for rural and semi-urban

areas and tier two cities

Attractive financing will play a key role in supporting salesTata expanding its vehicle finance network in rural areas

• 623 cc rear engine, 4 speed manual, 20 kms/litre, 105 kmh top speed, Euro IV, BS III and current safety norms compliant

• Will be modified for new emissions and safety norms

Automotive Group


0

200

400

600

800

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1400

1985

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Car

/Sal

es (

,000

uni

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0

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2,000

3,000

4,000

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7,000

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9,000

10,000

2 W

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Sal

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ts)

Demand for 2 Wheelers Is 6 Times Passenger Cars

Cars2 wheelers

Two Wheeler Sales of 1.1 million in 1985

Car Sales of 1.3 million in 2007

Two Wheeler Sales of 7 million in 2005

Car Sales of 3.8 million in 2017

Automotive Group


0

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Jan-98

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European Car in Euro's US Car in $ Nano in $ Nano in Rupees (RHS)

Pure Raw Material Cost in a Car

(Excludes Fuel, Processing and Transportation costs)

SteelAluminiumPlastic ResinsRubberGlassIron

Series based on Global Insights Cost Analysis Service

APRIL 08Based on Nano Curb weight of 600kg compared with

representative European Car of 1,300 kgs

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23%RM costs in 2008 as a % of total pre tax car price (1 lakh)

9.5%Increase in post tax on road Car Price if RM Costs Passed on

70.6%% increase in RM costs 2003-2008

23,088Raw Materials cost April 2008

13,530Raw Materials Cost January 2003

RupeesPer Vehicle - Nano

Implications of Current Cost IncreaseAssuming Full Material Cost Increases Are Passed On :

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Tata to Become First Emerging Markets Global Brand

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Thou

sand

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ts NEW INDIGONEW INDICANANOINDIGOINDICA

Tata Small Car Production in India

�New plant in Singur for Nano production with 350k capacity, expandable to 500k

�Trial production from July 2008, begins full production in October 2008

�Satellite plants/licensed production under consideration

�Light vehicle exports have been very low� 18,929 in 2006 and 16,829 in 2007

�Nano export potential to Brazil, South Africa, S.E. Asia, Europe

�First overseas plant to be in Thailand� FTA with India in place� “Eco Car” programme for luxury version� Begins in mid 2010� Output must exceed 100k within 7 years

� New Indica/Indigo models due in 2008

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Hyundai Small Car Programme – Export Hub for World Supply

I10

0

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Hyundai Small Car Production in India �Capacity at Chennai expanded to 300k in

2006�New 300k Chennai plant opened in

February 2008� i10 production started in late 2007

� World source for i10

� i20 production to follow�Exports building up

� From 30k in 2004 to 115k in 2007

�Exports in 2008 may be hindered by appreciation of the Rupee

� Export target for 2008 reduced from 265k to 212k

�$3,500 car to be made in India under consideration

Automotive Group


Suzuki Maruti Small Car Programme – Under Threat from Competition

0

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ZEN ESTILOZENWAGON RSPLASHNEW SWIFTA-STARALTO800

Maruti Small Car Production in India �Plant in Gurgaon produces 800, Alto, Wagon R, Zen Estillo, Omnivan, Versa

�New plant in Manesar opened in late 2006 produces new Swift, Dzire, SX4 Sedan

�A-Star coming in October 2008 and Splash

�Exports in 2006 were 36k, in 2007 43k, mostly Alto and 800. Increasing exports to Africa, Latin America and Middle East

�Large exports increase when A-Star comes on stream

�Future of the 800 is uncertain

Automotive Group


Renault-Nissan Small Car Programme –Growing Export Base and Logan Successor

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LOGANBAJAJX02AXO2BA_STAR

Renault Nissan Small Car Production in India

� Mahindra alliance being side-lined� Logan sales have been disappointing

� New 400k plant to come on stream in Oragadam in 2010

� Production shared between Renault and Nissan

� Nissan sub-Micra XO2A hatch (will supersede A-Star) and larger XO2B hatch

� Large export potential for sub-Micra to Europe

� Renault to transfer Logan to new plant� Samsung C Segment likely too� Tie-up with Bajaj for low cost car being

considered (at another plant)

Automotive Group


Toyota Small Car Programme – Late Starter, First Stage in BRICs Focus

0

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ts VIOSSMALL CAR

Toyota Small Car Production in India � Late entrant to India with conservative strategy

� Multi-utility entry first with Qualis/Innova then Corolla

� Will invest $340m in new plant in Bangalore

� Production of EFC (Economical Family Car) designed for BRICs for 2010

� Code 800L, will be priced at $7–10k� India is first production location� Moderate export potential� Production to follow in Russia� Corolla will also be produced at the new

plant� Vios production a possibility

� FTA with Thailand

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Small Car Growth Propels India Up the World Scale

0 500 1000 1500 2000 2500

INDIAJAPANCHINA

POLANDBRAZILCZECH

SOUTH KOREAIRAN

THAILANDMALAYSIAPAKISTAN

FRANCE

Thousands

0

1000000

2000000

3000000

4000000

5000000

6000000

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

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LCV

MPV

SUV

E/F

D

C

B

A

�� !�� "�#��

Light vehicle sales by country 2013

A segment production by country 2013 LV sales forecast by segment

0 5 10 15 20

UNITED STATES

CHINA

JAPAN

RUSSIA

INDIA

GERMANY

BRAZIL

UNITED KINGDOM

FRANCE

ITALY

SPAIN

Millions

Automotive Group


SUV10.1%

MPV6.4%

E20.2%

E10.2%

C21.4%

C17.8%

B18.4%

A54.8%

D10.5%

D20.3%

TATA24.3%

TOYOTA3.0%

VW3.6%

SKODA1.3%

HYUNDAI9.5%

HONDA5.5%

BAJAJ5.4%

CHEVROLET5.4%

FIAT1.7%

FORD2.5%

MARUTI30.0%NISSAN

4.0%

RENAULT4.0%

Small Cars Will Gain Share and Competition Will Increase

SUV9.3%

MPV4.9%

E20.2%

E10.2%

C21.1%C1

7.1%

B19.4%

A57.2%

D10.4%

D20.3%

TATA17.2%

RENAULT2.1%

CHEVROLET3.7% FORD

3.4%

HYUNDAI17.3%

MARUTI47.2%

OTHER9.1%

A/B Segment Share 2008 A/B Segment Share 2013

Segment Share 2008Segment Share 2013

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100

1000

10000

100000

1 10 100 1000

Ownership cars/000 population

GD

P/C

apita

$U

S

��$��"�#%�� "�&��!�� '() � ��!*�� +*,

Potential Markets for Low Cost Cars in Asia, Brazil & Russia

India

China

Pakistan

Indonesia

Singapore

Philippines

Thailand

Hong Kong

Australia

Japan

N Zealand

Malaysia

Taiwan

Brazil

Russia

Automotive Group


India’s Growth Surge — Summary

� India will be spared much of the doom and gloom of the global downturn

� But inflation is a very major concern now� Constraints to economic expansion and motorization are

significant and will result in lost growth potential� Low cost and small cars will drive vehicle demand� But cost increases will undermine performance potentially� India will become the small car hub for global supply� India is the most competitive small car market in the world

and this will intensify� Export potential for small cars is excellent, but exports of

very low cost cars is more limited� Low cost cars will sell in external markets but these

opportunities need to be assessed on a case-by-case basis

Tim ArmstrongDirector Asia & MEA Forecasting

+33 1 5545 [email protected]

Thank you

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