Economics Assignment

Automobile Industry Analysis

INDIA

SUBMITTED TO : Prof. SHAILA SRIVASTAVA

SUBMITTED BY
SIDDHARTH GUPTA UTKARSH GUPTA SIPAK MOHANTA TUSHAR ANAND PAWAN BHARAMBE SWAPNIL PARAB

Automotive Industry In India

The Automotive industry in India is one of the largest in the world and one of the fastest growing globally. India manufactures over 17.5 million vehicles (including 2 wheeled and 4 wheeled) and exports about 2.33 million every year. It is the world's second largest manufacturer of motorcycles, with annual sales exceeding 8.5 million in 2009. India's passenger car and commercial vehicle manufacturing industry is the seventh largest in the world, with an annual production of more than 3.7 million units in 2010. According to recent reports, India is set to overtake Brazil to become the sixth largest passenger vehicle producer in the world, growing 16-18 per cent to sell around three million units in the course of 2011-12. In 2009, India emerged as Asia's fourth largest exporter of passenger cars, behind Japan, South Korea, and Thailand. As of 2010, India is home to 40 million passenger vehicles and more than 3.7 million automotive vehicles were produced in India in 2010 (an increase of 33.9%), making the country the second fastest growing automobile market in the world. According to the Society of Indian Automobile Manufacturers, annual car sales are projected to increase up to 5 million vehicles by 2015 and more than 9 million by 2020. By 2050, the country is expected to top the world in car volumes with approximately 61 million vehicles on the nation's roads. A chunk of India's car manufacturing industry is based in and around Chennai, also known as the "Detroit of India" with the India operations of Ford, Hyundai, Renault and Nissan headquartered in the city and BMW having an assembly plant on the outskirts. Chennai accounts for 60 per cent of the country's automotive exports. Gurgaon and Manesar in Haryana are hubs where all of the Maruti Suzuki cars in India are manufactured. The Chakan corridor near Pune, Maharashtra is another vehicular production hub with companies like General Motors,Volkswagen, Skoda, Mahindra and Mahindra, Tata Motors, Mercedes Benz, Land Rover, Fiat and Force Motors having assembly plants in the area. Ahmedabad with the Tata Nano plant, Halol again with General Motors, Aurangabad with Audi, Skoda and Volkswagen, Kolkata with Hindustan Motors, Noida with Honda and Bangalore with Toyota are some of the other automotive manufacturing regions around the country.

Overview

The Indian Automobile Industry is manufacturing over 11 million vehicles and exporting about 1.5 million every year. The dominant products of the industry are two wheelers with a market share of over 75% and passenger cars with a market share of about 16%. Commercial vehicles and three wheelers share about 9% of the market between them. About 91% of the vehicles sold are used by households and only about 9% for commercial purposes. The industry has attained a turnover of more than USD 35 billion and provides direct and indirect employment to over 13 million people. The supply chain of this industry in India is very similar to the supply chain of the automotive industry in Europe and America. This may present its own set of opportunities and threats. The orders of the industry arise from the bottom of the supply chain i. e., from the consumers and goes through the automakers and climbs up until the third tier suppliers. However the products, as channeled in every traditional automotive industry, flow from the top of the supply chain to reach the consumers. Interestingly, the level of trade exports in this sector in India has been medium and imports have been low. However, this is rapidly changing and both exports and imports are increasing. The demand determinants of the industry are factors like affordability, product innovation, infrastructure and price of fuel. Also, the basis of competition in the sector is high and increasing, and its life cycle stage is growth. With a rapidly growing middle class, all the advantages of this sector in India are yet to be leveraged. Note that, with a high cost of developing production facilities, limited accessibility to new technology and soaring competition, the barriers to enter the Indian Automotive sector are high. On the other hand, India has a well-developed tax structure. The power to levy taxes and duties is distributed among the three tiers of Government. The cost structure of the industry is fairly traditional, but the profitability of motor vehicle manufacturers has been rising over the past five years. Major players, like Tata Motors and Maruti Suzuki have material cost of about 80% but are recording profits after tax of about 6% to 11%. The level of technology change in the Motor vehicle Industry has been high but, the rate of change in technology has been medium. Investment in the technology by the producers has been high. System-suppliers of integrated components and sub-systems have become the order of the day. However, further investment in new technologies will

help the industry be more competitive. Over the past few years, the industry has been volatile. Currently, Indias increasing per capita disposable income which is expected to rise by 106% by 2015[18] and growth in exports is playing a major role in the rise and competitiveness of the industry. Tata Motors is leading the commercial vehicle segment with a market share of about 64%.[18] Maruti Suzuki is leading the passenger vehicle segment with a market share of 46%.[18]Hyundai Motor India and Mahindra and Mahindra are focusing expanding their footprint in the overseas market. Hero Honda Motors is occupying over 41% and sharing 26%[18] of the two wheeler market in India with Bajaj Auto. Bajaj Auto in itself is occupying about 58% of the three wheeler market. Consumers are very important of the survival of the Motor Vehicle manufacturing industry. In 2008-09, customer sentiment dropped, which burned on the augmentation in demand of cars. Steel is the major input used by manufacturers and the rise in price of steel is putting a cost pressure on manufacturers and cost is getting transferred to the end consumer. The price of oil and petrol affect the driving habits of consumers and the type of car they buy. The key to success in the industry is to improve labour productivity, labour flexibility, and capital efficiency. Having quality manpower, infrastructure improvements, and raw material availability also play a major role. Access to latest and most efficient technology and techniques will bring competitive advantage to the major players. Utilising manufacturing plants to optimum level and understanding implications from the government policies are the essentials in the Automotive Industry of India. Both, Industry and Indian Government are obligated to intervene the Indian Automotive industry. The Indian government should facilitate infrastructure creation, create favourable and predictable business environment, attract investment and promote research and development. The role of Industry will primarily be in designing and manufacturing products of world-class quality establishing cost competitiveness and improving productivity in labour and in capital. With a combined effort, the Indian Automotive industry will emerge as the destination of choice in the world for design and manufacturing of automobiles.

History The first car ran on India's roads in 1897. Until the 1930s, cars were imported directly, but in very small numbers. Embryonic automotive industry emerged in India in the 1940s. Mahindra & Mahindra was established by two brothers as a trading company in 1945, and began assembly of Jeep CJ-3A utility vehicles under license from Willys. The company soon branched out into the manufacture of light commercial vehicles (LCVs) and agricultural tractors. Following the independence, in 1947, the Government of India and the private sector launched efforts to create an automotive component manufacturing industry to supply to the automobile industry. However, the growth was relatively slow in the 1950s and 1960s due to nationalisation and the license raj which hampered the Indian private sector. After 1970, the automotive industry started to grow, but the growth was mainly driven by tractors, commercial vehicles and scooters. Cars were still a major luxury. Japanese manufacturers entered the Indian market ultimately leading to the establishment of Maruti Udyog. A number of foreign firms initiated joint ventures with Indian companies. In the 1980s, a number of Japanese manufacturers launched joint-ventures for building motorcycles and light commercial-vehicles. It was at this time that the Indian government chose Suzuki for its joint-venture to manufacture small cars. Following the economic liberalisation in 1991 and the gradual weakening of the license raj, a number of Indian and multi-national car companies launched operations. Since then, automotive component and automobile manufacturing growth has accelerated to meet domestic and export demands. Following economic liberalization in India in 1991, the Indian automotive industry has demonstrated sustained growth as a result of increased competitiveness and relaxed restrictions. Several Indian automobile manufacturers such as Tata Motors, Maruti Suzuki and Mahindra and Mahindra, expanded their domestic and international operations. India's robust economic growth led to the further expansion of its domestic automobile market which has attracted significant India-specific investment by multinational automobile manufacturers. In February 2009, monthly sales of passenger cars in India exceeded 100,000 units and has since grown rapidly to a record monthly high of 182,992 units in October 2009. From 2003 to 2010, car sales in India have progressed at a CAGR of 13.7%, and with only 10% of Indian households owning a car

in 2009 (whereas this figure reaches 80% in Switzerland for example ) this progression is unlikely to stop in the coming decade. Congestion of Indian roads, more than market demand, will likely be the limiting factor. SIAM is the apex industry body representing all the vehicle manufacturers, home-grown and international, in India.

Industry Definition This class consists of units mainly engaged in manufacturing motor vehicles or motor vehicle engines. Products and Services The primary activities of this industry are: Motor cars manufacturing Motor vehicle engine manufacturing The major products and services in this industry are: Passenger motor vehicle manufacturing segment (Passenger Cars, Utility Vehicles & Multi Purpose Vehicles) Commercial Vehicles (Medium & Heavy and Light Commercial Vehicles) Two Wheelers Three Wheelers. Supply Chain of Automobile Industry The supply chain of automotive industry in India is very similar to the supply chain of the automotive industry in Europe and America. The orders of the industry arise from the bottom of the supply chain i. e., from the consumers and goes through the automakers and climbs up until the third tier suppliers. However the products, as channeled in every traditional automotive industry, flow from the top of the supply chain to reach the consumers. Automakers in India are the key to the supply chain and are responsible for the products and innovation in the industry.

Key statistics The production of automobiles has greatly increased in the last decade. It passed the 1 million mark during 2003-2004 and has more than doubled since.

Year Car Production % Change Commercial % Change Total Vehicles Prodn. % Change

2010 2,814,584

29.39

722,199

54.86

3,536,783

33.89

2009 2,175,220

17.83

466,330

-4.10

2,641,550

13.25

2008 1,846,051

7.74

486,277

-9.99

2,332,328

3.35

2007 1,713,479

16.33

540,250

-1.20

2,253,999

10.39

2006 1,473,000

16.53

546,808

50.74

2,019,808

19.36

2005 1,264,000

7.27

362, 755

9.00

1,628,755

7.22

2004 1,178,354

29.78

332,803

31.25

1,511,157

23.13

2003 907,968

28.98

253,555

32.86

1,161,523

22.96

2002 703,948

7.55

190,848

19.24

894796

8.96

2001 654,557

26.37

160,054

-43.52

814611

1.62

2000 517,957

-2.85

283,403

-0.58

801360

-2.10

1999 533,149

285,044

818193

Year

2004-2005

2005-2006 9,743,503 26,969 806,222 2,231

2006-2007 11,087,997 30,507 1,011,529 2,552

2007-2008 10,853,930 32,383 1,238,333 3,008

2008-2009 11,175,479 33,342* 1,530,660 3,718*

Motor Vehicle Production[18] 8,467,853 Industry Revenue[18] Exports (Units)[18] Exports (Revenue)[18] 24,379 629,544 1,915

Exports

India's automobile exports have grown consistently and reached $4.5 billion in 2009, with United Kingdom being India's by Italy, Germany, Netherlands and South expected to cross $12 billion by 2014. largest export market followed Africa. India's automobile exports are

According to New York Times, India's strong engineering base and expertise in the manufacturing of low-cost, fuel-efficient cars has resulted in the expansion of manufacturing facilities of several automobile companies like Hyundai Motors, Nissan, Toyota, Volkswagen and Suzuki.

In 2008, Hyundai Motors alone exported 240,000 cars made in India. Nissan Motors plans to export 250,000 vehicles manufactured in its India plant by 2011. Similarly, General Motors announced its plans to export about 50,000 cars manufactured in India by 2011. In September 2009, Ford Motors announced its plans to setup a plant in India with an annual capacity of 250,000 cars for US$500 million. The cars will be manufactured both for the Indian market and for export. The company said that the plant was a part of its plan to make India the hub for its global production business. Fiat Motors also announced that it would source more than US$1 billion worth auto components from India. In July 2010, The Economic Times reported that PSA Peugeot Citron was planning to re-enter the Indian market and open a production plant in Andhra Pradesh with an annual capacity of 100,000 vehicles, investing EUR 700M in the operation. PSA's intention to utilise this production facility for export purposes however remains unclear as of December 2010.

In 2009 India (0.23m) surpassed China (0.16m) as Asia's fourth largest exporter of cars after Japan (1.77m), Korea (1.12m) and Thailand (0.26m) by allowing foreign carmakers 100% ownership of factories in India, which China does not allow. In recent years, India has emerged as a leading center for the manufacture of small cars. Hyundai, the biggest exporter from the country, now ships more than 250,000 cars annually from India. Apart from shipments to its parent Suzuki, Maruti Suzuki also manufactures small cars for Nissan, which sells them in Europe. Nissan will also export small cars from its new Indian assembly line. Tata Motors exports its passenger vehicles to Asian and African markets, and is in preparation to launch electric vehicles in Europe in 2010. The firm is also planning to launch an electric version of its low-cost car NANO in Europe and the U.S. Mahindra & Mahindra is preparing to introduce its pickup trucks and small SUV models in the U.S. market. Bajaj Auto is designing a lowcost car for the Renault Nissan Automotive India, which will market the product worldwide. Renault Nissan may also join domestic commercial vehicle manufacturer Ashok Leyland in another small car project. While the possibilities are impressive, there are challenges that could thwart future growth of the Indian automobile industry. Since the demand for automobiles in recent years is directly linked

to overall economic expansion and rising personal incomes, industry growth will slow if the economy weakens.
Top 20 Export destinations in 2007-2008 and growth from previous year

Rank

Country

2007-2008 (in USD Millions)

2008-2009 (in USD Millions)

Percentage Growth

United States of America 593.64

525.24

-11.52

Italy

332.35

359.68

8.22

Sri Lanka

249.14

216.11

-13.26

South Africa

224.93

188.57

-15.79

United Kingdom

165.57

246.32

48.77

United Arab Emirates

164.44

192.74

17.21

Algeria

147.34

265.63

80.28

Bangladesh

137.26

164.86

20.11

Egypt

134.43

143.54

5.99

10

Germany

133.52

409.63

206.8

11

Colombia

118.88

120.71

1.54

12

Nepal

111.33

98.13

-11.86

13

Mexico

93.80

94.10

0.32

14

Turkey

83.53

73.82

-11.63

15

Spain

81.01

56.96

-29.69

16

France

76.77

134.21

74.83

17

Nigeria

66.01

148.74

125.03

18

Greece

65.75

127.63

94.1

19

Netherland

65.19

163.66

151.05

20

Ghana

59.91

38.30

-36.07

Industry Conditions
Barriers to Entry Barriers to entry in this industry is high These barriers are study The cost of developing high volume production facilities. The ability to gain access to technology of major global operators. The relatively high competition between established domestic companies and foreign companies. The automobile manufacturing sector is characterised by a high cyclical growth patterns, high fixed cost and breakeven point levels, and an excessive number of participants. Barriers to entry into automobile manufacturing activity are formidable. Some of the barriers that need to be overcome by a new entrant include: the cost of developing high volume production facilities, in order to benefit from economies of scale; and the ability to gain access to technology of major operators, as the present incumbents include some of the largest multinationals, that have considerable claims to new technology. The relative large size of domestic market, together with high competition, has already seen significant rationalisation of this industry. Capital and Labour Intensity The level of Capital Intensity is high The level of Labour intensity in medium The motor vehicle manufacturing industry requires significant level of capital investment. Value is added through the automated manufacturing and assembly of costly components. Labour input is required in the manufacturing, assembly, and finishing processes. In order to achieve and retain competitiveness, vehicle manufacturing industry depends on its capacity and speed to innovate and upgrade. The most imperative indices for competitiveness in the industry are productivity in both labour and capital. Technology and Systems The level of technology change is high The rate of change in technology is medium Investment in technology by producers has been on the rise. The automobile industry in India has seen an enormous development in the engines which are being used. Carburettor engines have become obsolete and Multi Point Fuel Injection (MPFI) engines are the order of the days in patrol cars. The Diesel engines have also under gone a sea change from the time Rudolf Diesel invented it way back in the 1892. Today Common Rail Direct Injection (CRDI) is the order of the day.

Market Characteristics

Market Size The Indian Automotive Industry after de-licensing in July 1991 has grown at a spectacular rate on an average of 17% for last few years. The industry has attained a turnover of USD 35.8 billion, (INR 165,000 crores) and an investment of USD 10.9 billion. The industry has provided direct and indirect employment to 13.1 million people. Automobile industry is currently contributing about 5% of the total GDP of India. Indias current GDP is about $ 1.4 trillion and is expected to grow to $ 3.75 trillion by 2020. The projected size in 2016 of the Indian automotive industry varies between $ 122 billion and $ 159 billion including USD 35 billion in exports. This translates into a contribution of 10% to 11% towards Indias GDP by 2016, which is more than double the current contribution. Demand Determinants Determinants of demand for this industry include vehicle prices (which are determined largely by wage, material and equipment costs) and exchange rates, preferences, the running cost of a vehicle (mainly determined by the price of petrol), income, interest rates, scrapping rates, and product innovation. Exchange Rate:Movement in the value of Rupee determines the attractiveness of Indian products overseas and the price of import for domestic consumption. Affordability: Movement in income and interest rates determine the affordability of new motor vehicles. Allowing unrestricted Foreign Direct Investment (FDI) led to increase in competition in the domestic market hence, making better vehicles available at affordable prices. Product Innovation is an important determinant as it allows better models to be available each year and also encourages manufacturing of environmental friendly cars. Demographics: It is evident that high population of India has been one of the major reasons for large size of automobile industry in India. Factors that may be augment demand include rising population and an increasing proportion of young persons in the population that will be more inclined to use and replace cars. Also, increase in people with lesser dependency on traditional single family income structure is likely to add value to vehicle demand.

Infrastructure: Longer-term determinants of demand include development in Indians infrastructure. Indias banking giant State Bank of India and Australias Macquarie Group has launched an infrastructure fund to rise up to USD 3 billion for infrastructure improvements. India needs about $500 billion to repair its infrastructure such as ports, roads, and power units. These investments are been made with an aim to generate long-term cash flow from automobile, power, and telecom industries. (Source: Silicon India) Price of Petrol: Movement in oil prices also have an impact on demand for large cars in India. During periods of high fuel cost as experienced in 2007 and first half of 2008, demand for large cars declined in favour of smaller, more fuel efficient vehicles. The changing patterns in customer preferences for smaller more fuel efficient vehicles led to the launch of Tata Motors Nano one of worlds smallest and cheapest cars.

International Markets Analysis

The Indian automotive industry embarked a new journey in 1991 with de-licensing of the sector and subsequent opening up for 100% foreign direct investment (FDI). Since then almost all global majors have set up their facilities in Indian taking the level of production from 2 million in 1991 to over 10 million in recent years. The exports in automotive sector have grown on an average compound annual growth rate of 30% per year for the last seven years. The export earnings from this sector are over USD 6 billion. Even with this rapid growth, the Indian automotive industrys contribution in global terms is very low. This is evident from the fact that even thought passenger and commercial vehicles have crossed the production figures of 2.3 million in the year 2008, yet Indias share is about 3.28% of world production of 70.53 million passenger and commercial vehicles. Indias automotive exports constitute only about 0.3% of global automotive trade.

SWOT AUTOMOBILE INDUSTRY

STRENGTHS
Large domestic market Sustainable labor cost advantage Government incentives for manufacturing plants Strong engineering skills in design Able to achieve significant gains in productivity

OF

WEAKNESSES
Low labor productivity High interest costs and high overheads Rising cost of production Low investment in Research and Development

OPPORTUNITIES
Commercial vehicles Heavy thrust on mining and construction activity Increase in the income level Cut in excise duties Rising rural demand

THREATS
Rising interest rates Cut throat competition Lack of technology for Indian Companies

Life Cycle The life cycle stage is growth Life Cycle Reasons The market for manufacturing motor vehicles is consistently increasing. The products manufactured by this industry are profitable. Companies have been consistently opening new plats and employing over the past five years. Japanese and European manufacturers of motor vehicles have entered the market. Industry value added has been rising, along with the rise in GDP. Life Cycle Analysis General improvement in availability of trained manpower and good infrastructure is required for sustainable growth of the industry. Keeping this in view, the Indian Government has launched a unique initiative of National Automotive Testing and R&D Infrastructure Project (NATRIP) to provide specialised facilities for Testing, Certification and Homologation to the industry. A similar initiative is required for creating specialised institutions in automotive sector for education, training and development. The auto industry has grown in the clusters of interconnected companies which are linked by commonalities and complementarities. The major clusters are in and around Manesar in North, Pune in West, Chennai in South, Jamshedpur-Kolkata in East and Indore in Central India. The Government is planning to create a National Level Specialises Education and Training Institute for Automotive Sector and to enhance the transportation, communication and export infrastructure facilities. The contribution of automotive sector in the GDP of India is expected to double by 2016[18] through major spotlight on export of small cars, Multi-Utility Vehicles, Two and Three wheelers.

FUTURE PROSPECT OF INDIAN AUTOMOBILE SECTOR

Automobile industry expert predicts that by 2050 every sixth car in the world will be for Indians. By 2010 India will take over Germany in sales volumes and Japan by 2012

The Indian automobile component industry is estimated to triple from USD 63 billion to USD 190 billion within a span of six years by 2012. Industry analysts predict this industry to touch USD 13000 million mark by 2010, a cumulative growth of 9.5% annually. It is said that for every Re 1 spent, the auto sector returns Rs. 2.24 to the Indian economy. Industry's Challenge:

The

Even though the automotive industry is robust, car manufacturers are complaining that the government's frequent change in policies is not encouraging the industry. Changing the policies and guidelines frequently severely hurts the companies plans. It also affects investment decisions in the country.

Future

Plans:

The Government has prepared a ten-year Automotive Mission Plan (AMP) to draw a future plan of action and remove obstacles in the way of competition, such as that required infrastructure be put in place well in time to alleviate its constraining impact on the growth. The plan envisages a tax holiday for the industry on investments exceeding $225,000, 100% tax deductions of export profits, and deductions of 50% on foreign-exchange earnings. It also calls for a one-stop clearance for foreigndirect-investment proposals in the sector and deductions of 30% of net income for 10 years for new industrial undertakings. To bring down the cost of power and fuel, which accounts for 6% of the manufacturing costs in the auto sector, captive power generation would be encouraged to enable industries to access reliable, quality and cost-effective power.

Key Success Factors

The Key Success factors in the Motor Vehicle Manufacturing industry are: Efficiency factor - Improve labour productivity, labour flexibility, and capital efficiency Resource Availability - Quality manpower availability, infrastructure improvements, and raw material availability Effective cost controls - Close relationship with supplies and goods distribution channels. Establishment of export markets - Growth of export markets Having an extensive distribution/collection network - Goods distribution channels Successful industrial relations policy - Ethical and tactical industrial relations Access to the latest available and most efficient technology and techniques - The degree of investment in technological improvements and product development Optimum capacity utilisation - The level of plant utilisation Management of high quality assets portfolio - Understanding implications from Government policies.

The Indian Auto Industry- Its An Electric Future

The Indian automobile industry finally seems to be waking up to the environment. Major infraction point being Mahindra & Mahindra capturing 52.2% controlling stake of electic car manufacturer Reva, which will now be known as Mahindra Reva Electric Based Company. Reva was Indias first electric car and did not do too badly for itself. While the car itself is not much to look at, it sells in 24 countries and has till date sold 3,500 vehicles. Not a bad job for something that the Hulk would use as weights. One might almost dismiss this as M&M auto climbing on the environmental wave of automobiles, but this is indeed a very promising move for Indian Auto makers. While India as a nation still sits on the fence, not being sure of whether it wants to listen to big brother America with regard to its environmental norms, the wheels of change are turningslowly, but surely. We saw Honda launch the Prius in India. And with all the hype of that car from the US markets, the Prius is seen as a bit of a status symbol, Jeff Dunham jokes not with standing. And this move further cements the fact that the next generation of Indian car buyers are environmentally responsible. According to its press release, Mahindra has been working years on developing green technologies for about 10 years now. It currently deploys diesel hybrid technology on the Scorpio and hydrogen Alfa three wheelers. Besides, Bijlee (electric three wheeler) developed in 1999, it is also currently working on an electric version of its mini-truck Maxximo. Revas EV technology should prove very useful for Mahindra. Now, dont expect people to be going gaga over the new Reva, not until it can improve on the look of the car, and it receives more infrastructure support from government authorities.

Reva will now have access to decent car technology from Mahindra too, so it looks like a win-win-win situation. The last win is for the environment. Electric car manufacturers in India

Ajanta Group Mahindra Hero Electric REVA Tara International Tata

Thus, Industry across countries will have to meet challenges of newer technologies, alternative fuels and affordability of automobiles by people at large through constructive cooperation. The earlier we are able to achieve this the better,it would be for the world performance.