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29 March 2024

India's auto sector set to get on fast track

Published
By The New York Times Syndicate

The Indian economy is booming. From 1998 through 2008, India's gross domestic product increased at an average rate of more than seven per cent per year. And despite the global recession, in the second quarter of 2009, India's economy grew by six per cent – even as the GDP in the US, Japan, Germany and other countries declined. This impressive growth will greatly change consumer spending patterns in the coming years, producing significant increases in sales of discretionary items and consumer durables, including [and perhaps especially] automobiles.

Indeed, India's auto industry has reached a pivotal moment. Although the nation's roads are still dominated by motorbikes and scooters, low-cost, stripped-down cars like the well-publicised Tata Nano are offering India's consumers another choice. Such vehicles could serve as a bridge between two-wheelers and compact cars, the latter of which will grow more popular as India's middle class continues to expand and individuals can upgrade to more substantial vehicles.

As consumers gravitate towards bigger and better cars, the Indian auto industry and the nation's policy makers will have to face certain challenges to help expand the market for new automobiles – including making consumer financing more accessible, upgrading infrastructure badly in need of modernising and repair, and improving safety and environmental standards. If these issues are addressed now, Indian auto manufacturers will be able to reap the benefits of a vibrant domestic market and, in time, export their products abroad. Roughly 75 to 80 per cent of motor vehicles on the road in India today are two-wheelers, used primarily for personal and family transport. For the past eight years, the two-wheeler market has grown at an average compound rate of 13 per cent. Over the next seven years, the number sold annually is expected to nearly double, to 15 million units per year.

Although the two-wheelers will continue to dominate the market for some time, the future is bright for automobiles, thanks to India's growing middle class. Today, 13 million households earn $10,000 (Dh36,730) to $50,000 a year; that segment is forecast to more than triple by 2012, according to data from the Economist Intelligence Unit. Meanwhile, income for average middle-class households will approximately double. Local and international banks, aware of the opportunities, are making consumer credit increasingly available to middle-class borrowers in India. This is spurring a new wave of consumer spending unprecedented in India's history. As the middle class expands, automobile ownership will increase.

Automobile market penetration has remained low because most cars are still too expensive for the vast majority of Indian motor vehicle buyers. But a pack of ultra-low-cost four-wheel vehicles – the so-called Sub-A segment – are entering the market to bridge the gap between $1,000 motorbikes and $5,000 cars. The rise of the Sub-A cars will allow the number of potential new-car buyers to quadruple, challenging the motorbike market even as it continues to grow. While the Sub-A segment gains traction, India's auto market remains dominated by cars in the small (Maruti 800) and compact (Tata Indica) segments, which cost between $5,000 and $10,000. Together, these categories account for about 65 per cent of sales. Global small-car players such as Hyundai, Suzuki and Honda now face stiff competition from new vehicles by local manufacturers such as Tata, Bajaj and Maruti Suzuki. And as the small-car market develops, Tata and Maruti are also making inroads into the entry midsized category [$20,000 vehicles], which represents particularly fertile ground – it is expected to grow by 27 per cent over the next five years. For the remarkable opportunities in the Indian automotive industry to develop significant challenges must be faced. For one, India's economy must continue to expand in an unstable global environment. Indeed, it has shown signs of a slowdown in recent months. Although interest rates have been reduced, the percentage of loan approvals has also declined. Consequently, many customers are 'trading down': choosing fewer frills or even lower-end models than they may have previously selected. To sustain sales growth, manufacturers, dealers and finance groups must work together to build innovative financing options for consumers.

Given that backdrop, the four-wheel passenger vehicle market is expected to grow by approximately eight to 10 per cent this year, far below the historic 21 per cent compounded annual growth rate in 2006 – but healthy nonetheless.

Meanwhile, higher commodity prices could also interfere with market development. Commodity prices may be depressed in a slowing worldwide economy, but most forecasters expect them to rise rapidly once global economic growth recovers. A return to high steel prices will affect sales of the new ultra-low-cost cars because automakers will have little option but to pass on cost hikes to low-wage consumers. Oil and other commodity price increases could also make automobiles less desirable.

To succeed in the Indian market, local manufacturers must further reduce the total cost of car ownership and bring financing and insurance models up to global standards. And to beat rising input costs, Indian automakers must improve their net cost position by increasing productivity and performance. Moreover, if Indian auto companies hope to compete effectively against their primarily Japanese and European rivals, they must increase global sales for faster recovery of fixed costs and match the product cycle times of international manufacturers.

To meet these challenges, the Indian government must get involved. For example, mandating higher fuel efficiency for passenger vehicles, setting anti-pollution policies and enforcing safety standards in line with those of Europe and North America will take older cars off the road and boost the image of the Indian auto industry so it can be taken seriously as an exporter. Also, the government must maintain spending on infrastructure.

This period represents a once-in-a-lifetime opportunity for Indian automakers to take advantage of a vast new market in their own backyard – a market that global companies thus far have enjoyed.


Writers are with Booz & Company. Courtesy the New York Times Syndicate's Global Business Perspectives

 

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