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Home > Business > PTI > Report

Global carmakers to face bumpy ride in India

March 22, 2007 18:25 IST

Global carmakers are gearing up to tap emerging markets like India and China, but their path to hitting big profits may turn into a bumpy ride due to intense competition, vulnerability to oil prices and inflation, rating agency Standard and Poor's said today.

"The two markets also carry high credit risks for the established automakers because of intense competition, quality issues of manufacturing domestically, uncertain intellectual property protection and the inherent volatility of developing markets," S&P analyst Maria Bissinger said in a report.

An increasing reliance on oil makes Indian economy vulnerable to spikes in international crude prices and the economy would also suffer from a slowdown in global expansion. But a more immediate risk is domestic inflation, she added.

The fledgling Indian car market is significantly more concentrated than China, although foreign players are increasingly making inroads.

Foreign players are either setting up or expanding their existing production bases in India, but progress is slow. The report said these companies must avoid overcapacity to maintain satisfactory profits in the long run.

Already, a number of companies such as Japan's Suzuki and Honda, Korea's Hyundai and American carmakers General Motors and Ford have manufacturing presence in India.

S&P said the two countries, with population of more than a billion each, fewer than 20 in 1,000 driving-age inhabitants owned a car in 2006.

With purchasing power forecast to grow above 10 per cent per year in China and by more than seven per cent in India over the next five years, car sales would grow enormously, the report said.

The capacity utilization rate, which was a robust 75 per cent in India in 2005, is likely to deteriorate significantly until the end of the decade to levels similar to China, where less than 60 per cent of the capacity is being used.

"The recent consumption-led growth is shifting toward investment-led expansion and near 8 per cent growth for a fourth straight year in India. Simultaneously, the robust global economy has bolstered external demand for Indian goods and services, despite a rising rupee," the report said.

In India, among the fastest-growing auto markets in the world, passenger car sales grew by 16 per cent in 2006 compared with eight per cent a year earlier, fueled mainly by increase in the small-car segment boosted by tax benefits, new model launches and greater access to consumer financing.

However, the Indian auto industry is at an early development phase and it will take longer for new entrants to be able to reap rewards from the market as they are still at the initial stages of the investment cycle.

Though foreign players have made inroads in the Indian markets, domestic players like Maruti Udyog Ltd, which is 54 per cent owned by Suzuki Motor of Japan dominates with a market share of about 49 per cent in the car market.

At present, it specialises in the small car segment, but it has strong plans to penetrate the medium-and large-vehicle segment in the near future, the report noted.

Other key players are Hyundai Motor India Ltd, a subsidiary of Korean Hyundai Motor Co and India's Tata Motors Ltd, which held third position in midsize entry-level sedans (Indigo) and in the compact-car segment.

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