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India's high-octane car market

April 26, 2007 10:14 IST

India has been the scene of some of the most frenetic deal-making, big expansion announcements, and new car launches in the global auto industry. Consider that in the last 18 months alone General Motors, Fiat, Honda, Nissan, and Hyundai have announced Indian investments valued at roughly $1.5 billion.

Ask any auto executive, and he or she will tell you that outside of China, India is the most intriguing emerging market opportunity out there.

Recent visits by industry bigwigs such as Fiat Chairman Luca Cordero di Montezemolo, Renault-Nissan alliance Chief Executive Carlos Ghosn, and GM boss G. Richard Wagoner, Jr., who arrived in New Delhi on April 16 to help launch the company's Chevrolet Spark locally underscore the new focus on India's high-speed car market.

In early April, Ghosn was in India to inaugurate a plant in Nashik jointly run by Renault and Indian carmaker Mahindra & Mahindra that will produce an economy car called the Logan. The base model will cost $9,700, but Ghosn also hopes to launch an ultra-cheap model in India -- that will retail for about $3,000 -- later in the decade.

Production to Double

"In a way, the Indian car industry has arrived," says Jagdish Khattar, managing director of Maruti Udyog, the Indian subsidiary of Japan's Suzuki Motor. What once was a smallish auto market is starting to attract the kind of serious new investment that could help it emerge as a sizable one. Khattar notes that Maruti, Tata Motors, and Hyundai are starting to achieve serious manufacturing scale with each automaker now producing 200,000-plus units a year.

Right now, India's entire industry -- local producers and transplants -- collectively manufacture about 1.4 million vehicles a year. That's expected to double by 2008, and if it does, India will surpass Britain and Canada in total car production. However, it still will be light years behind China, which is on track to hit 10 million or so in 2007.

And India's growth dynamics look robust. It is home to a young population, and has rising income levels, an underserved rural market, and an economy galloping along at 9%-plus growth rates.

The Ultra-Cheap Challenge

And while India may be the fabled "back-office of the world", Prime Minister Manmohan Singh's government has big aspirations to boost the country's manufacturing sector. Duties on small cars fell from 24% to 16% in 2006, though taxes remain somewhat high compared to China. The government hopes to see India auto sales jump from last year's $34 billion to $145 billion in 2016. If they do, the domestic auto industry could represent about 10% of India's gross domestic product.

Still, the fastest growing car segment in India is ultra-cheap small cars, which requires cost-efficient manufacturing and careful cost management to maintain decent profit markets. Looking at the expansion plans of Toyota, Honda, Volkswagen, and even BMW, plenty judge themselves up to the challenge.

One critical factor to future growth will be whether some small car projects can really go mass market in India. Tata has audacious plans for a four-door, 33 horsepower engine that will go for $2,500 when launched in 2008. If it takes off, India's car sales could easily surpass 6 million units later in the decade. "A big unknown is what a product at the low end could do to the market size," says Ramesh Mangaleswaran, a partner who leads the auto practice at consulting firm McKinsey.

Talent Pool

Gathering small-car making expertise in India is key for automakers both to tap a thriving market for economy cars -- and also to export that know-how to other markets. By 2012, the market for vehicles priced under $10,000 is likely to reach 18 million cars, or a fifth of world auto sales, according to Roland Berger Strategy Consultants. That's up from 12 million today.

India also boasts a cheap, but high-quality labor force with considerable engineering and manufacturing skills -- and the country is starting to build up a big auto components and engineering and design outsourcing sector that is attractive for international players. The India auto parts business is expected to more than triple in annual revenues from $12 billion to $40 billion by 2014.

Meanwhile, global auto supply players such as Delphi, Magna International, and Visteon are expanding in India, too, to help big-car manufacturers build cheap small cars and also export them to other markets.

"In these times, customers are realizing that it's better to share products for different countries," says Prasen Agali, Magna's executive director for India.

Projections Too Rosy?

India's outsourcing sector, led by Tata Consultancy Services, Infosys Technologies, and Wipro is also benefiting from additional work from Detroit automakers for engineering services. That's not surprising given that you can hire qualified Indian engineers to design a car chassis for as little as $25 an hour. (Aerospace engineering outsourcing is another growing market for India outsourcing firms.) That one reason Renault plans to set up an engineering center in India.

What could go wrong? Short-term, there are some worries that India's economy could overheat and then contract -- a scenario that would probably lower some of the rosy projections ahead for auto demand and production. Yet few doubt that India will remain a critical emerging market in the years ahead. Just keep your eye on the money rolling in.

Nandini Lakshman, BusinessWeek