Passenger Car The automotive industry is one of the largest industries worldwide and in India as well.

The automotive sector drives upstream industries like steel, iron, aluminium, rubber, plastics, glass and electronics, and downstream industries like advertising & marketing, transport and insurance. The automotive industry can be divided into five sectors:

Passenger Cars Multi-Utility Vehicles (MUVs) Two-Wheelers Three-Wheelers Commercial Vehicles-Light Commercial Vehicles (LCVs) / Medium & Heavy Commercial Vehicles (M&HCVs) Tractors

Despite a head start since its beginning in the 1940s, the Indian automotive industry has been moving at a slow pace mainly due to the all-pervasive regulatory atmosphere prevailing till recently. Moreover, the industry was considered lowpriority as cars were thought of as unaffordable luxury for the masses. In the post-liberalisation period the passenger car sector witnessed a boom, owing to economic vibrancy, changes in government policies, increase in purchasing power, improvement in lifestyles, and availability of car finance. The industry was deregulated in 1993, and many companies, both Indian and foreign (Daewoo, Ford, General Motors, and DaimlerChrysler), entered the market. However, the smooth sailing was disrupted in the last quarter of 1996. The automotive industry, which contributed substantially to the industrial growth in FY1996 failed to maintain the same momentum between FY1997 and FY1999. The overall slowdown in the economy and the resultant slowdown in industrial production, political uncertainty and inadequate infrastructure development were some of the factors responsible for the slowdown in the automotive industry. Table 1 Profile of the Indian Automotive Industry*

FY 1995

FY 1996 FY 1997 FY 1998 FY 1999 4,223,469 4,275,264 Total TwoWheelers 80.1

Production (in numbers) 2,837,191 3,504,358 3,987,125 4,004,083 Sales inclusive of Exports (in numbers) 2,857,013 3,500,581 3,965,383 3,985,508 Other MHCVs LCVs Cars Pass. Vehicles FY2003 market shares in % (based on 1.9 1.3 9.7 2.7 no. of units sold)

FY 2000 Production (in numbers) Sales inclusive of Exports (in numbers)

FY 2001 4,858,625 4,915,572 Of which Motor cycles

FY 2002 4,744,371 4,811,758 ThreeWheelers 4.3

FY# 2003 5,370,468 6,304,558 5,421,089 6,304,688

FY2003 market shares in % (based on no. of 68 units sold)

*Tractors have been excluded for the sake of comparability, # Figures for FY2003 are based on the new classification of SIAM, hence not comparable with the figures of previous years. Source: Society of Indian Automobile Manufacturers While the passenger car segment, with the launch of many new models, posted positive growth rates in FY 2000 and FY 2001, the upturn was rather brief. In FY2002, the automotive sector especially the passenger car segment continued to reel under the pressure of over-capacity with low demand. FY2003 witnessed a healthy growth in the passenger car sales with the pick up in the economy. The passenger car sales in the first half of FY2004 were also buoyant. However, the contribution of the automobile sector to industrial output, number of cars per person, automobile sector employment as a percentage of industrial employment, number of months' income required to purchase a car, and penetration of cars are quite low. Low demand and lack of vision on the part of the OEMs and policymakers stunted the Indian automobile industry. However, major car manufacturers worldwide foresee future demand in India. The regulatory environment has been liberalized and demand has picked up. Global OEMs who enjoy scale economics both in terms of manufacturing and research and development have entered the Indian market, leading to a shift in the business operations of suppliers, assemblers and marketers. To Top EVOLUTIONARY PHASES OF THE INDUSTRY Market Size Passenger cars make the largest segment globally, accounting for over 50% of the total sales (units). But in India, it is the two-wheelers segment that dominates the automotive market, accounting for 80% market share in terms of units sold, while cars and MUVs account for 12% of the units sold (FY2003). The Indian passenger car segment accounted for around 42% of the size of the Indian Automobile Industry (that was around US$ 14 billion in the year 2001). Growth1 The domestic passenger car market (excluding MUVs) in India reported a compounded annual growth rate (CAGR) of 13.4% during FY1994-FY2002. After the economic liberalisation in 1993, the domestic passenger car market posted impressive growth rates till around FY1995. Between FY1994 and FY1997, the CAGR for the passenger car sales in India was 24%. While the annual growth rate declined in FY1997 to 18%, in FY1998, the growth rate fell to a meagre 3.7%. FY1999 witnessed marginal decline in the volumes. However, in FY2000, passenger car sales grew by over 60% to reach 0.62 million units. Some of the growth factors are introduction of new models, competitive pricing, easy availability of consumer loans, and rise in disposable income. Figure 1 Passenger Car sales in India (FY1994-2002)

Compiled by INGRES The recovery in 1999-2000 was short-lived, with domestic sales dipping to negative growth of 8% in 2000-01. The slowdown occurred despite the fact that the Union Budget for 2001-02 lowered the excise duty on passenger cars from 40% to 32%. (Although excise duty accounted for about 20-25% of the acquisition price of a car, this rationalisation led to a marginal reduction in the car prices because of the cost pressures on OEMs.) While the decline in real economic activity was the main reason behind the slowdown in the domestic passenger car industry, the developing second-hand car market has further dampened the growth of the new car market. The sales of passenger cars in India at 541,738 units marked a growth of 6.4% in FY2003 over the previous year. The growth was observed largely in the compact and mid-size segments, with models like Santro, Indica V2 and Palio leading the way. After the excise duty cut was announced in the Union Budget FY2003-04 and the resultant price cuts announced by the players, the sales in March were significantly higher. Buoyancy in sales of passenger cars in the domestic market continued during H1FY2004 with the sales growth of 23.7% over the corresponding previous. Key Demand Drivers Disposable income was perceived as the key factor driving passenger car demand. But over time, other factors included the need for greater mobility, non-availability of public transport services, availability of cheap finance, development of the used-car market, introduction of new technologically superior models, increasing levels of urbanisation, and changing consumer profiles.

Compiled by INGRES To Top Market Characteristics Product Penetration The penetration of passenger cars in India stood at five per thousand persons as against 27 for two-wheelers in 2000. Significantly, the Indian figures are lower than even those for economies like Indonesia (14 and 62). The relatively high penetration of two-wheelers in India reflects the population's need for mobility and their limited affordability. Table 2 Automotive Penetration (vehicles in use per thousand persons)*

Passenger Cars USA United Kingdom Japan Germany China Indonesia South Korea India

Two wheelers 478 373 395 508 3 14 167 5 14 12 115 36 8 62 59 27

*Source: World Bank

To Top Market Segmentation Considering that affordability is the most important demand driver in India, the domestic car market has been segmented on the basis of vehicle price till SIAM introduced the length-based2 classification of passenger cars since FY2003. The automobile industry in India is still concentrated around the mini and the compact segments which together account for around 81.8% of the automobile market in terms of units sold in FY2003. The following table presents various models in each segment of the domestic passenger car market.
2

SIAM classification of Motor cars is discussed in detail in following section

Table 3 Segment-Wise Classification of the Indian Car Market

Mini Compac Mid-Size Executive t Vehicle Length 3401 3400mm to 4001-4500 4000 Maruti Udyog Ltd. 800 Alto Zen Esteem Baleno Altura Omni Wagon R Hyundai Motor India Ltd Santro Accent Hindustan Motors Ltd. Ambassador Contessa Mitsubishi Lancer Fiat India Automobile Ltd. Palio Siena Adventure General Motors India Ltd. Opel Corsa Opel Corsa Sail Chevrolet Optra Honda Siel India Ltd. City Ford India Ltd. Ikon Tata Motors Indica Indigo DaimlerChrysler India Ltd Premium Luxury

4501-4700

4701-5000

>5001

Sonata Contessa

Opel Vectra Accord Mondeo Mondeo Mercedes-Benz C Mercedes Benz Class E Class Mercedes -Benz S class

Skoda Octavia Toyota Kirlosker Corolla Camry

Compiled by INGRES; * station wagon To Top Indian market in FY2004 During the first half of FY2004, the passenger car sales in the domestic market rose at a rate of 23.7% over the last corresponding period. Compact segment that accounted for 52% of the domestic sales reported growth of 10.6% in H1FY2004. Highest growth in this segment was reported by MUL (Zen, Alto and Wagon R) followed by Hyundai (Santro) and Tata Motors (Indica). The car sales in the mid-size segment increased its market share from 16.8% in H1FY2003 to 19.2% in H1FY2004 on strong growth of 41% in the period under study. Although Tata Motors - Indigo reported the highest sales in this segment during H1FY2004, General Motors (Chevrolet Optra, Opel Corsa) and Hyundai (Accent) also reported growth rate higher than the segment growth rate in the period under study. The higher end models (Executive, Premium and Luxury) that accounted for less than 1% of the total sales in India in H1FY2003 improved their market share to 2.6% in H1FY2004, largely due to introduction of new models during 2002-2003. The following chart presents the shift in the market share of the segments of the Indian passenger car market during H1FY2003-H1FY2004. Figure 2 Share of various segments in the Indian Passenger Car Market

H1FY2003

H1FY2004

Source: SIAM While Table 3 depicts the length-based classification, the price factor cannot be ignored. Each brand offers a range of models that span several price points. With multiple variants at different price points, the price of a car may fall in more than one price range. As a result, a higher-end variant may compete with a lower-end variant of a car in the segment above it, and in that sense price-based competition takes place in a continuum rather in segments. The following figure maps the different brands available on Indian roads across different price ranges. Figure 3 Car Models2 in India across Price Bands

Compiled by INGRES
3

The list of car models in Figure 3 may not be exhaustive. Prices of the models as prevailing in Mumbai market

in October 2003. To Top Supply The passenger car industry was dominated by Premier Automobiles Limited (PAL) and Hindustan Motors Limited (HM) before 1980. With the entry of MUL in 1982, the market structure of the passenger car industry in India changed dramatically. MUL captured a major share of the market as it offered a better product at a lower price. Subsequent to the

entry of MUL, the market share of PAL and HM declined rapidly even as they were able to sustain sales in volume terms. MUL continued to strengthen its dominance in the passenger car market and faced virtually no competition till the sector was opened up in 1993. MUL's market position was not affected even after the entry of many foreign players as none of the new entrants targeted the small car segment. MUL's pricing was very competitive as it had relatively higher indigenisation levels and established vendor base besides a depreciated plant, and none of the newer players could penetrate this segment. However, in the late 1990s, Hyundai, Tata Motors and Daewoo launched Santro, Indica and Matiz respectively, in the Rs. 0.3-0.4 million range. Although MUL continued to be the market leader, its share in the total passenger car sales has been declining and stood at 50.8% in FY2003 as against 54.5% in FY2002 accounted for by its models (Maruti 800, Omni, Zen, Alto, Wagon R, Esteem and Baleno, Versa, Grand Vitara) across different price ranges. The company has been able to strengthen its market share during H1FY2004 at 50.2% (up from 48.1% in H1FY2003). In just four years since the commencement of production, Hyundai Motors India has emerged the second largest player in the Indian automobile market. Figure 4 Market Share of Players in the domestic passenger car market

H1FY2003

H1FY2004

To Top The Players Most new car manufacturers have launched products in the Compact, Mid-range and the Premium segments. Table 4 Profiles of Select Players in the Indian Automobile Industry

Name Year of Indian Partner DailmerChrysler India Private Ltd Fiat India Automobiles Pvt Limited Ford India Limited Collaborator Foreign Equity incorporation None None Mahindra & Mahindra Ltd DailmerChrysler AG Fiat Auto SPA, Italy Ford Motor Company, USA 100% 100% 84.1% 1995 1997 195

General Motors India Limted Hindustan Motors Honda Siel Cars India Limited Hyundai Motor India Limited Maruti Udyog Limited Tata Motors Limited Toyota Kirloskar Motors Limited

CK Birla Group Siel Limited None Government of India Tata Group Kirloskar Group

General Motors Corporation, USA None Honda Motor Company Limited, Japan Hyundai Motor Company, Korea Suzuki Motor Company, Japan None Toyota Motor Corporation, Japan

100% 100% 99% 100% 54.2% 88.9%

1995 1940s 1995 1996 1982 1942 1997

The sales to capacity ratio for select players4 in the Indian passenger car industry has improved from 66% in FY1999 to 73% in FY2002.

In most mature markets, there are around half a dozen players dominating the passenger car industry. The volumes of most players are below 100,000-150,000 units a year, the level that is considered viable in the developing economies. With low volumes, the manufacturers are not able to realise economies. Further, with the new environmental norms being proposed, the cost of compliance may add to the cost of production. Some of the critical success factors for passenger car manufacturers in the emerging scenario are indigenisation levels, reach of dealer network, efficiency of after-sales service, volumes, and pricing.

With the liberalisation of the automobile sector in the early 1990s, most of the international players entered the Indian market through the joint venture (JV) route. While foreign manufacturers brought in the latest in automobile technology, the Indian partners contributed their understanding of the local market. This understanding of the local markets was particularly useful in building dealership and distribution networks.

However, with the Indian JV partners not able to pump in the requisite capital for expansion, some JVs have been converted into wholly owned subsidiaries of the foreign parent or the foreign parent has increased its stake in the JV significantly. Ford India and Toyota Kirloskar Motors are cases in point. With leading international players demonstrating increasing commitment to their Indian ventures, the market is likely to consolidate over time.
4

In this section, following players were considered for computing capacity utilisation : DaimlerChrysler, Fiat

India, Ford India, General Motors India, Hindustan Motors, Honda Siel Cars, Hyundai Motors India, Maruti Udyog, Tata Motors. To Top REGULATIONS The MoU Route In July 1991, industrial licensing was abolished for all types of automotive, except motor cars. Subsequently, licensing for motor cars was abolished in April 1993. There was no licence requirement for expansion of an existing project or creation of a new one if the project was located 25 km outside the periphery of a city with a population exceeding 1 million. However, this condition could be relaxed in the case of a designated industrial area. Initially, the Government imposed conditions for every new entrant on a case-to-case basis. In June 1995, with a view to develop the domestic automobile industry, the Commerce Ministry introduced the company-specific Memorandum of Understanding (MoU) route for manufacturers of cars and MUVs:

Minimum investment: New automobile manufacturers were required to invest at least US$50 million over a three-year period, if the company was majority owned by a foreign player Indigenisation of components: The policy stipulated that indigenisation of components up to a level of 50% had to be achieved in the third year and 70% in the fifth year, or earlier. Neutralisation of foreign exchange flows: The automobile companies were required to achieve broad neutralisation of foreign exchange over the entire period of the MoU, by balancing the actual value of imports and that of exports. However, with Quantitative Restrictions (QRs) being removed from April 1, 2001, automobile manufacturers do not need import licences either to import cars in the kit form or as completely built units (CBU). T

Product CBU CKD/SKD* Components

Basic Customs Duty 60% 25% 25%

hus, the logic underlying the MoU policy disappeared. The QRs, which have been phased out, have been replaced by tariff, and thus import duties will be critical. The duty structure is three-tiered: Table 5 Import Tarriffs To Top *Completely Knocked down Units/ Semi Knocked down Units With a 60% tariff on import of completely built units, the tariff structure is in favour of domestic manufacturers. The removal of QRs poses little challenge as far as second-hand cars are concerned. The Union Budget for 2001-02 announced an import duty of 105% (with the effective import duty of over 180%) on second-hand cars, thus mitigating any threat from the second hand car imports to the domestic passenger car industry. Further, the export-import Policy of 2001-02 imposed stiff non-tariff barriers on the import of second-hand cars, as listed here, further restricting any threat posed:

Maximum age of three years Conformity to Central Motor Vehicles Rules, 1988 Mandatory pre- and post-shipment certification Minimum residual life of five years Importer to ensure spares and service during the period Imports allowed only through customs port in Mumbai To Top

Excise As cars are still considered luxury items, the relative tax incidence is much higher for passenger cars vis-a-vis twowheelers or commercial vehicles. While the Union Budget for 2001-2002 reduced the excise duty on passenger cars from 40% to 32 % and further to 24% in current budget (2003-04) as part of the excise duty rationalisation, the duty rate is still high. Besides, the customer has to pay road and registration taxes. The excise cut of 8% undertaken in the Current

Union Budget (2003-04) was passed on to the consumers by the OEMs through immediate price reductions across the board. However, given the increasing cost pressures on manufacturers, these price cuts may be difficult to sustain in the medium term. To Top Environmental Standards: The National Auto Fuel Policy The principal environmental standards in India are the Euro I and Euro II norms, which regulate vehicular emission in terms of pollutants such as carbon monoxide, hydrocarbons, Nitrous Oxides and suspended particulate matter. While Bharat I (Euro I) norms were applicable for vehicles registered from June 1, 1999, after April 1, 2000, only Bharat II (Euro II) compliant vehicles could be sold in the National Capital Territory. Now, the Bharat II norms are applicable to Delhi, Mumbai, Chennai and Kolkata. The cost of developing an engine technology that met Bharat II standards was around Rs. 30,000-35,000 per vehicle. Coming in at a time of excess capacity and demand slowdown, automobile manufacturers were unable to pass on this high cost to customers, which in turn affected the manufacturers' margins. The National Auto Fuel Policy committee headed by R.A. Mashelkar recommended that Bharat II norms, which are in place in Delhi, Mumbai, Chennai and Kolkata, be extended to Bangalore, Hyderabad, Ahmedabad, Pune, Surat, Kanpur and Agra latest by April 1, 2003. It has also suggested that the norms be further extended to the entire country from April 1, 2005. The Mashelkar Committee recommended that Euro III equivalent emissions norms for all categories of vehicles be introduced in the seven mega-cities from April 1, 2005 and extended to other parts of the country from 2010. Estimates suggest that for producing vehicles that are compatible with the proposed emission norms, the automobile industry would be required to invest a significant amount (estimates range from Rs. 250 billion to Rs. 350 billion). Further, SIAM has also estimated that adoption of new technologies for compliance of norms for lower level of emissions may increase the cost of passenger cars. For instance, SIAM's estimate for increase in the cost of passenger cars (excluding taxes) to comply with the Euro III emission norm (from the current Euro II) is at Rs. 0.05 million per vehicle. To Top Auto Policy 2002 The Government approved a comprehensive automotive policy in 2002, which aims to promote an integrated automotive sector that can achieve sustainable growth. The policy seeks to:

Make India an international hub for manufacturing small, affordable passenger cars and a key centre for manufacturing tractors and two-wheelers for sales worldwide. Ensure a balanced transition to open trade at minimal risk to the Indian economy and the local industry. Provide a conducive environment for modernisation and facilitate indigenous design, research and development Assist development of vehicles propelled by alternative energy sources Develop safety and environmental standards at par with international standards.

Identifying lack of volumes as a major impediment constraining efficient production, the policy proposes a set of measures:

Foreign Direct Investment: Automatic approval to be granted to foreign equity investment up to 100% for the manufacture of automobiles and components. Import tariff: Import tariffs are proposed to be fixed in a manner so as to facilitate development of manufacturing capabilities as opposed to mere assembly. For motor cars and MUVs, the import tariff is proposed to be so designed as to give maximum fillip to manufacturing without extending undue protection.

Incentives for Research and Development (R&D): The weighted average tax deduction under the Income Tax Act, 1961, for automotive companies is proposed to be increased from the current level of 125%. Further, the policy proposes to include vehicle manufacturers for a rebate on the applicable excise duty for every 1% of the gross turnover of the company expended during the year on R&D.

Environmental Aspects: Adequate fiscal incentives are proposed to be given to promote use of low emission auto fuel technology (in line with the Auto Fuel policy). The auto policy states the 's intent to align domestic policy with the international practice of imposing higher road tax on used old vehicles so as to discourage their use. Further, recognising the need to support the development and introduction of vehicles propelled by alternate fuels (Hybrid vehicles, vehicles operating with batteries and fuel cells), the policy proposes a long term fiscal structure to be put in place to facilitate their acceptance.

Other measures: Recognising the importance of small cars not exceeding 3.80 metres in length in the domestic market and the potential India holds to become an international hub for the manufacture of small cars, the policy emphasises the need to spur growth in this segment through fiscal incentives. Considering the importance of the MUV segment in the rural and semi-urban areas, the policy states the need to provide fiscal incentives to this segment.

The Auto Policy, Government of India, 2002 has been discussed in this report with respect to the passenger

car and MUV segments To Top TRENDS IN THE INDIAN PASSENGER CAR MARKET Changing Face of the Indian Passenger Car Industry

To Top Changing OEM-Supplier Relationship

Many OEMs worldwide have undergone consolidation and restructuring. The OEMs relation with their suppliers and dealers is also changing. System supply of integrated components (in select cases) and sub-systems is gaining importance, with individual small components being supplied to the system integrators instead of vehicle manufacturers. With foreign players increasingly dominating the markets, there is a shift in the business operations of suppliers, assemblers and marketers. Changing OEM-Customer Relationship With competition among firms intensifying and new models being launched, the Indian car industry has transformed into a buyers market. There has been an increase in the bargaining power of buyers while the power of suppliers is on the decline. This led to the industry providing technologically superior models at competitive prices and consumers getting attractive finance schemes and various cars off the shelf. Further, there are opportunities for players to spot gaps in the market and cater to particular niches like sports utility vehicles. The key strategies in the Indian car market will be offering good-quality cars that provide value for money, running innovative marketing campaigns to attract potential buyers, and providing excellent after-sales service. Companies which have a range of vehicles in all the segments of the market, will be at a significant advantage because of their ability to cross-subsidise models. To Top Greater participation in downstream activities Many car manufacturers have forayed into car financing, leasing and fleet management, and second-hand cars business to complement their mainstay business of selling car, and offer better services to their customers. As financing is one of the key factors in the buying decision of a customer, various passenger car companies such as MUL are making finance available to customers through dealers. By tying up with a host of banks and finance companies, car manufacturers are offering their customers a wide range of financing options. Car manufacturers have also taken up leasing and fleet management to offer value-added services to their corporate clients. Fiat India has put in place a dedicated team and defined a competitive corporate sales policy for fleet management. MUL is marketing its leasing and fleet management services among its corporate clients under "Maruti N2N brand". Pre-owned car market is another area that has attracted quite a few car manufacturers. The pre-owned car market is dominated by the unorganised sector, where the concerns are lack of transparency in car valuation, absence on assurance on quality, and presence of significant documentation risks. The entry of organised players (such as MUL through its "True Value" scheme) may help existing car owners to sell their pre-owned cars in exchange for schemes with organised sector players (mostly car manufacturers) and at a fair value, thus providing a demand to new car. To Top PROSPECTS A comparison with other economies at similar levels of GDP shows lower vehicle penetration in India. ICRA expects that the demand for passenger cars may maintain the growth momentum in FY2004. In the first half of the current fiscal, passenger cars sales grew by 29% over the last corresponding period. Rainfall during June 2003-September 2003 was 2% above normal, evenly distributed across the country. Due to the good monsoon, there has been an upward revision in the FY2004 GDP growth rate to over 6%. Steps have been initiated to boost the demand:

Reduction in vehicle excise duties from 32% to 24% Reduction in peak rate of customs duty from 30% to 25% that may affect the cost of vehicles brought in through CKD/SKD route Proposed rationalisation of the tax structure (through implementation of Value-Added-Tax)

ICRA expects the demand for passenger cars (including exports) to grow at the CAGR of 8% during FY2004-2007. The growth trends, however, are likely to vary across segments. Although the Mini segment is expected to sustain volumes, it may continue to lose market share with growth in the medium term being led largely by the Compact and the Mid-range cars. Table 6 Demand Projection for Passenger Cars

FY2003 Passenger car sales (Actual) 611715

FY2004 (Forecast) 666248

FY2007 (Forecast) 838845

CAGR 8%