driving through bric markets lessons for indian car ... · 4 | lessons for indian car manufacturers...

December 2011 www.deloitte.com\in

Driving Through BRIC Markets Lessons for Indian Car Manufacturers

ons for Indian Car Manufacturers

Contents Executive Summary 4

Introduction 6

Overview 7

Brazil 10

Russia 15

India 19

China 24

Conclusion 29

Appendix 31

Sources 33

Contacts 34

4 | Lessons for Indian Car Manufacturers

Executive Summary

The BRIC block has emerged as the economic power house of growth for the automotive industry through the last decade. What started as an exploration of new/extra markets for car sales in the early 90s has gone on to become the mainstream market of the new millennium. Supported by attractive macro-economic factors such as growing economic activity, urbanization, rising household incomes, developing credit markets and very low car density, the BRIC countries currently make up for the top 7 automotive markets globally.

The BRIC block has been strongly growing for over 10 years; with 3 of 4 BRIC economies surging ahead even during the 2008 economic crisis. So that prompts us to ask how the dynamics have transformed over the years. What were the major drivers of growth in car sales in the last decade and into the future? Is the current slowdown a blip or is it here to stay? More importantly, what does the growth dynamics in China, Brazil and Russia mean to the Indian automotive market? We offer our perspective on the impact of macro-economic factors on car sales in the BRIC block between 2001 and 2011.

Below are the key findings of our analysis:

1. Car sales in Brazil, Russia, India and China grew at a CAGR of 8.8%, 5.7%, 14.5% and 34.3% respectively as against a globalcar sales average of 4.0% between 2001 and 2010.

2. In 2011, weak macro-economic conditions in Brazil and India resulted in the slowdown of car sales. On the other hand, China continued to exhibit attractive macro-economic conditions but sales were impacted by government measures. Russia sustained its growth momentum as government incentives continued for most of 2011.

3. India and Brazil have the highest player concentration with 4 and 5 players contributing to around 80% of market share respectively. Going forward, these markets are expected to actively accommodate more players for the same share.

4. Hatchbacks have a 60% market share in Brazil and India unlike China and Russia where sedans or SUVs dominate. The domination of relatively low household income groups (of category $3,000 - $10,000) in India coupled with the government's inclination to promote small cars through special tax measureshave resulted in hatchbacks becoming thepreferred choice amongst a majority of consumers. Road ahead will be characterised by transitions to higher household incomes that could result in surging demand forrelatively larger/pricier cars or second cars in India, in addition to the sustained demand for smaller cars.

5. The inflection points observed in car sales and identified by the higher growth in sales than the increase in prices (inflation rate) were:

− In India the sales started picking up from 2002 when the per capita disposable income was $399 in

nominal terms/$1381 in Purchasing Power Parity (PPP) terms. For Brazil & China, sales started

picking up since 2004 when per capita incomes were $2320(nominal)/$5260(PPP) and $698

(nominal)/$1691 (PPP) respectively. Since then car sales have not been majorly affected by

rise/decline in parameters such as inflation, interest rates and fuel prices.

6. In Brazil and Russia,household income groups with income > $5000 were the key drivers of car sales. This was $3000 and above household income groups in the case of India and China. However, China's car sales in the coming years will be strongly driven by $5,000 and above household income groups.

7. Urbanisation has been a major driver of car sales in BRIC through the decade. While current urbanization levels of 30% and 48% in India and China respectively are likely to continue driving sales, further urbanization in Brazil is unlikely to drive car sales in the coming years because of its higher urbanisation levels (87%). China's reported effort to control car sales in tier 1 cities will result in

Lessons for Indian Car Manufacturers | 5

increased effort by automakers to aggressively penetrate lower tier cities

8. Unusually, average age of population as a growth driver of car sales in India is less prominent a factor as compared to other macro-economic parameters such as disposable income, urbanization, and car density. The sheer magnitude of first time car buyers subdues the impact of average age on car sales.

9. Fuel prices have hardly impacted car sales trends in the BRIC block. However, going forward, it is expected that governmentpolicies and measures will play a significant role in powertrain and technology choices for cars sold in the BRIC block. Automakers in Brazil have already adapted to flex fuel powertrain technologies and it is likely that similar trends will be followed in China (hybrid, EVs) and eventually in India. Deregulation of fuel prices (petrol) in India have already resulted in diesel to petrol car sales ratio increase to 45:55 (from 23:77 in 2005) in 2011.

10. The key takeaways from the regression model were:

− Brazil: the top 3 individual parameters influencing car sales were Per Capita Disposable Income

(PCDI), average age and lending rates. A positive impact is observed on the sales of cars by both

PCDI and average age. Lending rates have a negative impact on the sales of the cars

− India and China: the top 3 individual influencers with about 90% confidence level were car density,

per capita disposable income and urban population. Sale of cars is impacted positively by all these

three factors.


Introduction

The automotive industry CEOs are often confronted with situations where they have to make decisions involving hundreds of millions of dollars. In most cases, they are required to commit investment dollars into markets that may be growing but are highly competitive or where the present growth looks attractive but questions loom large about sustaining volumes. As difficult as this may seem, not committing to investment may mean loss of opportunities and future cash flows and the cost of waiting could turn out to be higher.

To make sense of the high growth markets and provide some insights into what may be driving demand for passenger cars, we have tried to correlate some key macro-economic variables with the sale / consumption of cars in the BRIC countries. We have attempted to compare and contrast the particular drivers that determine the growth of car sales. We trust the accompanying data and analysis that are presented would be useful to the reader in understanding the BRIC markets. Further, we believe the understanding of demand drivers in these countries will help companies in making informed decisions in the future of the Indian market rather than go with just the buzz.

Research Methodology:

• The Macro-economic variables considered for analysis are: Inflation; Per Capita Disposable Income (PCDI); Global Crude Oil Prices; Lending Rates and Household Income groups. Only significant parameters from our initial analysis were used as factors for regression.

• Parameters used in the regression tests: Urban Population; Car Density; Average Age; Lending Rates; and Disposable Income.

Note: all ‘$’ symbols in the report refer to USD.


Overview

With the economic slowdown and recession in 2008-09, sales of cars plunged globally, except for a few emerging markets like Brazil, India and China. Hence, for global automobile players, it is imperative to buy some exposure into these emerging and rapidly growing markets. Besides offering an avenue for growth, the emerging markets can also help the automobile players to insulate themselves from the cyclicality of the global auto industry.

Growth Trends in BRIC Automotive Market: Car production in Brazil, Russia, India and China recorded a CAGR of 7.3%, 1.9%, 17.6% and 39.3% respectively between 2001 and 2010. The share of production of Brazil, Russia, India and China has risen at a great pace throughout the decade, from 11% in 2001 to 36% in 2010.

FIGURE 1: Market Share of the BRIC Countries for Passenger Car Production

*PCP – Passenger Car Production

Source: OICA, Deloitte Analysis

While the share of India has more than doubled and that of China has grown twelvefold, Brazil’s share has remained steady in a market where the rest of the world lost its market share. This is representative of the inherent growth potential that Brazil, India and China offer in passenger car production. On the other hand, Russia lost its market share in passenger car production primarily due to the slowing growth rate in car production as compared to its BRIC counterparts.

Brazil4%

Russia3%

India2%

China2%

South Korea

6%

Mexico2%

Rest of world81%

2001 Brazil4%

Russia2%

India3%

China7%

South Korea

7%

Mexico2%

Rest of world75%

2005

Brazil5%

Russia1%

India5%

China22%

South Korea

7%

Mexico2%

Rest of world58%

2009 Brazil5%

Russia2% India

5%

China24%

South Korea

7%Mexico

2%

Rest of world55%

2010

PCP*: 39.8mi PCP*: 46.8mi

PCP*: 58.2mi PCP*: 47.6mi


Sales of passenger cars Passenger car sales indicate a similar trend as seen in the production.

FIGURE 2: Passenger Car Sales in BRIC

The BRIC economies have been characterized by factors such as high economic growth; rapidly rising income levels; urbanization and very low per capita car consumption. These factors coupled with a slew of government measures in support of the domestic auto industry have accelerated growth of car sales in the region for over a decade now.

China and India registered double digit CAGR in GDP (13% and 10% respectively) between 2001 and 2010 and have also emerged as the most favoured low cost destinations for global car production. On the other hand, Russia and Brazil with an above average GDP growth through the decade (7% and 6% respectively) are homes to greater number of middle income households with higher disposable incomes.

2011 In Perspective: A Slowdown After a decade of growth and a strong post economic crisis recovery in 2010, three of the four BRIC economies seem to have apparently lost the growth momentum. Growth in car sales in Brazil, India and China has substantially slowed down compared to their respective CAGR and 2010 growth figures.

FIGURE 3: Car Sales Growth in the BRIC Markets

Source: OICA, EIU

One of the significant reasons for the slowing down could be attributed to the roll back in late 2010 of a number of incentives provided by the governments in each of the BRIC countries - after all such incentives

Brazil Russia India China

2001 1,197,700 1,401,000 675,120 754,000

2005 1,369,200 1,762,000 1,143,100 3,774,800

2009 2,474,600 1,465,700 1,977,000 10,171,000

2010 2,644,700 1,910,600 2,520,000 13,911,000

2011E 2,783,000 2,438,000 2,596,034 15,003,000

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CAGR (2001-2011) 9% 6% 14% 35%

2010 Growth 7% 30% 27% 37%

2011E Growth 5% 28% 3% 4%

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were introduced to provide the fillip for the automotive industry to meet the recession. Countries like China and Brazil have also imposed newer/reinstated pre-recession period taxes that have resulted in higher buying prices. India and Brazil have also tightened credit markets by increasing lending rates to contain inflation. Russia, on the contrary, is the only market to be sustaining a high growth rate in 2011 and this is because of the continuation of government incentives to the auto sector. However, growth levels of 2011 is unlikely to keep pace with that in the past in the upcoming years as the Russian market is also likely to feel the effect of rollback of incentives between 2011 and 2013.

However, on a positive note, the trends reflect the reality situation in each of the economies. It needs to be looked favourably for having registered a growth post a period that was heavily incentivized/subsidized by various governmental policies and schemes.

Critical Reasons Behind the Slow-down of Car Sales in B(R)IC:

Brazil Russia - an Exception India China

• Tightening monetary policieson concerns of credit defaults

• Hike in interest rates& down payment options

• Slowing Economic activity

• Inflationary pressures

• Raise in industrial production tax for cars with <65% local content meant higher stricker price

Reasons for continued high growth:

• Extension of state funded car scrappage scheme till July 2011

• Car loan subsidy scheme till 2013

• High fuel prices

• Close to decade high interest rates

• Slowdown in growth of real disposable income to 2.4% from 6.3% in 2010

• Labour unrest in country’s largest carmaker

• Roll back of Subsidy for rural purchases

• Removal of car scrappage schemes

• End of tax break for small cars - the re- introduction of 10% car purchase tax

• Expansion of lottery registration systems in key cities

In the upcoming sections, we presenta detailed country-wise analysis of the growth trends of the automotive industry in the BRIC group.


Brazil

Overview Brazil is globally the fifth largest automotive market. Volkswagen, Fiat, General Motors and Ford are locally called “THE BIG FOUR” - they accounted for approximately 75% of the vehicle sales in 2010. The clutch of French and Asian car manufacturersthat started local production in the last decade arereferred to as “THE NEWCOMERS”.

Automotive sector accounts for 5.5% of GDP in Brazil. Out of the 3.64 million units produced in 2010, 80% were passenger cars, registering a growth of 14.3% over the previous year. Exports constituted only a third of the output as companies focus on the domestic market.

Industry profile Brazil being the 5th most populous country and the 8th largest economy in terms of GDP (in PPP) had historically witnessed production being higher than the sale of passenger cars in the domestic market.

FIGURE 4: Passenger Car Production and Sales in Brazil

Sales in 2011 are estimated to be 2,783,000; Source: EIU

Looking at the CAGR in the period from 2001-10 we notice that growth in car sales has been slightly on the higher side (9.2%) when compared to that of production (7.3%), indicating that domestic car consumption is catching up with production.

The country’s GDP growth trajectory has been downgraded to 3.5% for 2011 (by Brazil’s central bank) as against a healthy 7.5% in 2010. Both production and sales have slowed down in 2011 for reasons as mentioned earlier.

Competitive Landscape The top 5 players namely Volkswagen, Fiat, GM, Ford and Peugeot make up for about 80% of the Brazilian automotive market. Despite being home to the highest proportion of high income households amongst the BRIC nations, Brazil has a strong preference for hatchbacks. This is partly explained by the fact that Brazil has always been a high interest economy with lending rates amongst the highest of the BRIC group. Thereby, even smaller cars are relatively costlier for consumers.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Production 1,501, 1,520, 1,505, 1,862, 2,009, 2,092, 2,391, 2,545, 2,575, 2,828,

Sales 1,197,7 1,218,5 1,168,7 1,258,4 1,369,2 1,556,2 1,975,5 2,193,3 2,474,6 2,644,7

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FIGURE 5: Market Share and Car Type Preference (2010)

Source: EIU

Income trends Car purchase, being a discretionary expenditure, it becomes necessary to view per capita disposable income and its impact on car sales.

FIGURE 6: Indexed Growth of Disposable Income, Inflation and Car Sales

Note: Base Indexed to 2001; all values in chart represent indexed value and not actual figures. Indexing is computed by dividing actual figures with the base year actuals. Source: EIU, Deloitte Analysis

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Per Capita Disposable Income Inflation Index Car Sales

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26%

20%

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10%

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2%3% 1%

2%

Volkswagen Fiat GMFord Peugeot RenaultHonda Toyota HyundaiNissan Others

60%

26%

7%4% 3%

Hatchback Sedan SUVMPV Other


Per capita disposable income in Brazil in 2010 was $6,850 (nominal) or $7,121 (PPP).In the year 2004 which marks the year sales started picking up, the per capita disposable income was $2,320(nominal) or $5260(PPP). During this period, we observe that PCDI has risen faster than inflation in average consumer prices (19% CAGR as against average price rise growth of 5%), leading to a strong increase in real income. This has contributed to an increasein car sales as seen by the constant growth during the period.

In 2011, inflationary pressures were relatively high (estimated at 6.7%) compared to that of last five years (averaging at 4.6%). As a result, the growth in real disposable income is expected to slow down (to 11% VS 14% in 2010) and impact the growth rate of car sales. Car sales are expected to slow down to 5.2% as against 7% growth in 2010.

FIGURE 7: Growth in Household Income Distribution Vs Car Sales

As mentioned earlier, Brazil has a very high proportion of high income households. Over the decade we observe the relative prominence of these households unlike India and China. Russia’sproportion of such households is next only to Brazil.

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Car Sales (1000 units, right axis)

Number of

Households

Source: EIU, Deloitte Analysis


FIGURE 8: Indexed Growth of $5,000 and Above Household Income Group VS Car Sales

Source: EIU

A strong negative correlation between number of households in the $3000-$5000 per annum income category, and positive correlation between all income groups above $5000 and car sales indicate that the sales of new cars are driven by households having annual income above $5000 per annum. The strongest positive correlation for cars sales is observed for households with income greater than $25,000. – suggesting a higher level of affluence being a requisite to owning a car as compared with its other BRIC counterparts.

Factors affecting sales

FIGURE 9: Indexed Growth of Crude, Lending Rates and Car Sales in Brazil

Source: EIU, Bloomberg, IMF WEO (April, 2011), Deloitte Analysis

About 90% ofnew car sales (2009) in Brazil have the capability to run on flex fuel - mostly powered by ethanol. As a result crude oil prices do not impact car sales in Brazil.

As expected, a decrease in the lending rates pushes up the car sales. In the year 2004 when the lending

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rates went down, we can see that it subsequently led to the increase in car sales.

In 2011, lending rates was raised by the central bank owing to inflationary pressures in the economy. Consequently, car sales slowed down drastically in the second half of the years.

Future Outlook Though the Brazilian market is expected to register higher growth rates in car sales than India and China in 2011, the ongoing global economic uncertainty, inflationary pressures coupled with the increase in Industrial Production Tax (IPT) on cars with less than 65% local content are expected to dampen demand in the upcoming year.

Factors that affect the sales of the passenger car-a regression analysis approach In order to understand the factors that affect the sales of passenger cars a regression analysis was carried out. It is observed that the top 3 independent factors influencing cars sales individually were per capita disposable income (PCDI), average age and lending rates. Car sales were positively impacted by increase in PCDI and average age.

Figure 10: Regression Analysis Results

Factors (with its impact increasing) P Value Adjusted R squared Relationship

Per Capita Disposable Income 4.77E-07 0.959 Positive

Average Age 3.48E-05 0.881 Positive

Lending Rates 0.0004 0.778 Negative

Source: Deloitte Analysis

As concluded earlier the regression analysis confirms the fact that lending rates have a negative impact on the sales of the cars.But this factor alone could predict car sales only with 78% confidence level as against the other two parameters that have relatively higher accuracy of prediction. Increasing urbanisation as a factor had relatively less influence on car sales given Brazil’s already high urbanization levels.

Note: Significance of Regression

A linear regression analysis has been carried out with a limited dataset for 10 years. Given that only limited number of datasets has been used for regression, independent parameters/variables were used individually for the regression run rather than using in combination with one another. Such a step was followed to ensure authenticity of the regression process and to develop a logical understanding of the factors driving car sales. The idea was to arrive at the most influential set of parameters that can most accurately predict the impact of car sales in a country. Further, as opposed to a classic regression model, where a large number of parameters are used, only six have been used in this case

In the regression analysis conducted, a positive relationship indicates a positive influence on growth of car sales as a result of the increase/rise in value of the parameter in consideration. For e.g. a positive relationship for disposable income means a rise in disposable income will positively impact car sales growth

A negative relationship indicates a de-growth/decline in car sales as a result of increase/rise in value of the parameter in consideration. For e.g. a negative relationship with the parameter ‘average age’ indicates slow down/decline in car sales as a result of rise in average age of a country.

A lesser P value and a higher adjusted R Squared value reflect the goodness of fit of a model.


Russia

Overview In the period 2005-2008 Russia witnessed phenomenal growth incar sales emerging as one of the fastest growing markets. The market then was on the verge of overtaking Germany and becoming the fourth largest car market in the world. The primary drivers of growth during this period were characterized by rising income, tax reforms and the development of the consumer credit market.

However, in 2009, the possible high dependence of the Russian economy on its natural resources negatively impacted growth as global crude oil prices fell by more than 70% from $140to $40 per barrel. It resulted in shrinking of consumer credit markets, household incomes and depreciation of currency which, in turn, cut car sales and imports by half to that of 2008 figures.

In 2010, the government raised import duty on new and used cars, introduced car scrappage and auto-loan subsidy schemes. These measures enabled the recovery of domestic production and passenger car market which has posed about 30% growth in the years 2010 and 2011.

Industry profile The slow growth of credit and real income post the crisishas led to a delayed market recovery. In the past decade, import sales have been higher than the production of cars. Sales have grown at a CAGR of 5.7% in the period from 2001 to 2011 as against production at CAGR of 1.9% in the period 2001- 2010.

FIGURE 11: Passenger Car Production and Sales in Russia

Source: EIU

*Sales in 2011 are estimated to be 2.4 million.

In the coming years the production versus sales gap is expected to close in further because of higher import tariffs that have prompted local production by even more global manufacturers.

Competitive Landscape More than 8 players make up for about 80% of the passenger car market. The top 5 players are LADA, GM, Ford, Hyundai and Renault-Nissan.There is a greater preference for sedans and big SUVs in Russia - partly owing to the fact that Russia (next only to Brazil) has a higher proportion of high income households. The sedan penetration has been also helped by the availability of home grown, low cost sedan brands.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Production 1,021, 980,06 1,010, 1,110, 1,068, 1,177, 1,288, 1,469, 599,26 1,208,

Sales 1,401,0 1,458,0 1,475,0 1,514,0 1,762,0 2,052,0 2,754,0 3,255,5 1,465,7 1,910,6

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FIGURE 12: Market Share and Car Type Preference (2010)

Income trends During 2001- 08 the per capita disposable income increased at a CAGR of 27%.



Post 2009 the per capita disposable incomes have risen back to the pre-crisis levels of US $6,000. As the price levels (inflation) have been rising at a high rate in Russia (around 11% CAGR), the real income has not risen much despite the 21% CAGR growth in the nominal disposable income.As a result,the sales of cars have not been able to maintain pace with nominal disposable income growth. In 2009, we see that the cars sales had fallen faster than the disposable income, but they rise slower than the disposable income in 2010.

However, as mentioned in the introduction, low inflation rate in 2011(lowest annual inflation growth of 6.5% since the Soviet collapse in 1991) has resulted in rise in real disposable incomes and growth in car sales.

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E

Per Capita Disposable IncomeInflation Index

Car Sales

Source: EIU

Indexed Valu

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24%

11%

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10%9%

5%3%

3%

29%

LADA GM - Daewoo Ford

Hyundai - Kia Renault - Nissan Toyota

Volkswagen Mitsubishi Others

23%

49%

21%

4% 3%

Hatchback SedanSUV MPVOther


FIGURE 14: Growth in Household Income Distribution VS Car Sales

Source: EIU, Deloitte Analysis A negative correlation between number of households in the $3000-$5000 per annum income category, and positive correlation between $5000 and above income categories and car sales indicate that the sales of new cars are driven by households having annual income above $5000 per annum.



A reduction in the number of households above $5000 per annum income category, during 2009, caused a greater fall in the number of car sold, indicating that the downside impact of falling incomes is greater than the upside gains of rising incomes on the sales of cars in the Russian context.

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Factors affecting sales

FIGURE 16: Indexed Growth of Crude, Lending Rates and Car Sales in Russia

Source: EIU, Bloomberg, IMF WEO (April 2011), Deloitte Analysis

We can see,from figure 16,the rise in lending rate decreases car sales.

Similar to 2010, in 2011, the government maintained lower interest rates and good liquidity levels for consumer borrowings that resulted in strong growth of car sales.

Future Outlook The future growth rate of car sales is expected to slow down in comparison to the astounding performance in 2011. This is partly attributed to the removal of a few of the government incentives such as the car scrappage scheme in late 2011 and for reasons owing to the prevailing global economic uncertainties. However, the continuation of loan subsidy scheme till 2013 is expected to at least ensure a healthy double digit growth levels in the near term.

Factors that affect the sales of the passenger car-a regression analysis approach The regression analysis could not be applied to Russia as none of the socio-economic variables considered could explain the trends in car sales with reasonable accuracy. The reason is that there has been a strong fluctuation in car sales in Russia (a steep fall and rise) within a time frame of six years (2004-2010) that would make any statistical analysis irrelevant on a ten year scale. Hence, any sense from regression analysis for Russia could only be obtained using datasets for a longer time frame as against a ten year dataset used currently.

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India

Overview Indian passenger car market has almost quadrupled over the decade as a result of good economic performance (10% CAGR in GDP PPP over the decade). Amongst the Asian countries, India is the fourth largest exporter of passenger cars with Chennai accounting for approximately 60% of the exports.

Industry profile In India, car production has been greater than sales over the decade. The CAGR of sales and production were 15.8% and 17.6% respectively for the period between 2001 and 2010.

FIGURE 17: Passenger Car Production and Sales in India

*Sales in 2011 are estimated to be 2,596,034; Source: EIU

Note: Car production and sales reported in India are for the Financial Year (FY) unlike the calendar year format for other BRIC countries reported here. For e.g., 2010 sales and production refer to April 2010-March 2011 figures.

Current Scenario: Sales in 2011 have slowed down substantially since the beginning of the fiscal year in April 2011. Car sales have declined, registering de-growth since July 2011 compared with the previous year and is not expected to recover unless the macro economic factors become attractive. In FY2011-12, car sales are expected to grow by a meagre2 - 3% as against 30% in 2010.

The drastic slowdown in car sales in India is attributed to the following issues:

• Continuous price revisions of fuel have led to highest retail petrol prices – prices increased up to 34% since deregulation in 2010

• Persistent inflationary pressures have resulted in continuous rise in lending rates by the banks – interest rates have been revised 13 times since March 2010 and are currently at 13%-14% for new car loans

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Production 654,55 703,94 907,96 1,178, 1,264, 1,473, 1,713, 1,846, 2,175, 2,814,

Sales 675,120 707,200 900,750 1,061,5 1,143,0 1,379,9 1,549,8 1,552,7 1,951,3 2,520,4

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• Huge production losses suffered by the country’s largest carmaker (about 48% share) owing to labour unrest resulted in delayed deliveries of their volume selling cars, thereby contributing to sales slowdown

Competitive Landscape: The top four players namely Suzuki, Hyundai, Tata Motors and Mahindra & Mahindra constitute 80% of the passenger car sales thereby making it a highly concentrated market.

FIGURE 18: Market Share of Passenger Car Sales by Manufacturers

Source: EIU

However, increasing competition across vehicle segment is expected to lower the concentration levels. As can be observed from the pie chart, new players are quickly gaining market share and it is expected that the passenger car market will have 5 or more players making up for 80% of the market in the upcoming years.

The government tax policies for the automotive industry encourage consumption of smaller cars and as a result hatchbacks have been the most preferred segment by consumers.

FIGURE 19: Preference of Car Type in India

Income trends Rising disposable income since the 2000s have led to increased discretionary spending which in turn have driven car sales throughout the last decade.

60%17%

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2010 Apr 2011 -Oct 2011




In 2002 when the sales started picking up, the per capita disposable income was $399 (nominal)/$1,381 (PPP). In India, the car sales have mostly followed the trends in per capita disposable income. Between 2002 and 2011, the per capita disposable income grew at a CAGR of 13% as against a CAGR inflation growth of 7% resulting in a real disposable income growth of 6%. However, since 2010, inflation has been substantially higher than the average mark which has resulted in the real disposable income growth to slow down in 2011, thereby, affecting car sales.


Source:EIU, Deloitte Analysis

Unlike Brazil & Russia, we see strong correlation between number of households in the $3000 and above income categories and car sales. It signifies that the sales of new cars are driven by the households with annual income of $3000 and above in India. It can also be inferred that cars are affordable to relatively lower income households in India as compared with those in Brazil and Russia. The higher proportion of middle income households ($3,000-$5,000) also explains the popularity of smaller cars (mini and micro segments are the most affordable) in India.

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The increasingly upward migration of lower income groups (less than $3,000 per annum) to higher income categories(primarily to income groups between $3,000-$5,000 and $5,000-$10,000) is pushing up car sales. This explains the foreign and domestic car makers’increased focus on mini & micro segment cars. It can also be observed from Figure 21 that the $5000 and above income group is growing faster at a CAGR of 35%. It implies that there will also be a surge in demand for larger cars (C1, C2 and D segments) in the upcoming years besides the sustained high demand for micro, mini segment cars.

Factors affecting sales FIGURE 23: Indexed Growth of Crude, Lending Rates and Car Sales in India

Source: EIU, Bloomberg, Deloitte Analysis

The car sales have been quite immune to fluctuations in global crude prices because of the reason that domestic fuel prices were subsidized by the government till June 2010. On the other hand, car sales have been influenced by interest costs. Interest rates were the highest in the decade in 2008 and there has been near stagnation in car sales growth (over 2007) during the period. Car sales grew sharply in 2009 and 2010 supported by lower interest rates. However, in 2011, both interest rates and crude oil are trading near the highest price points that had been registered for the decade and thereby car sales have seen a substantial slowdown by this dual effect.

Since deregulation, petrol prices shot up far in excess of the 3.6% rise in global crude prices. At the end of 2011, petrol prices were trading at record high prices in India and have started impacting car sales for the first time.

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Future Outlook Given the lower penetration of cars and above average economic growth forecast, India is likely to remain an attractive market for automotive OEMs. The current slowdown in auto sales is a reflection of poor macro-economic variables that are primarily driven by inflation and rising fuel prices. The RBI (Reserve Bank of India) expects inflation to moderate to 7% in 2012 and the moderating of interest rates shall once again make conditions attractive for automakers that are used to seeing India registering a double digit growth - more so because of most postponed purchases being executed as conditions become favourable.

Further inferences from India analysis and the learning from its other BRIC counterparts have been discussed in detail in the conclusion.

Factors that affect the sales of the passenger car-a regression analysis approach In order to determine the factors and its effect on the sales of the passenger car, a regression analysis was carried out. The 3 independent factors namely car density, PCDI and urban population were individually the top influencers with all these factors positively influencing car sales. Car density emerged as the single most influencer as it could predict car sales with 97% accuracy. Average age did not factor in the top 3 influencer list. The enormous number of first time car buyers, irrespective of age, possibly negated the effect of increase/decline in average age on car sales.


Factors (with its impact increasing)

P value Adjusted R squared Relationship

Car Density 9.73E-08 0.972 Positive

Per Capita Disposable Income 5.31E-07 0.958 Positive

Urban Population 4.59E-06 0.928 Positive



China

Current scenario In 2009 China became the largest global automotive market overtaking the U.S. Its growth and development has made it part of every auto manufacturer’sgrowth strategy. China’s entry into the World Trade Organization in 2001 andthe introduction of the new automotive policy in 2004 fuelled automotive growth in the country, not to mention the impact of economic reform.

The Chinese market is dominated by the local players who have formed joint ventures with MNCs like GM and Toyota.

Industry profile Rapid growth in economy with very low levels of car ownership clearly establishes the growth potential of the Chinese market. Over the decade both production and sales have grown at comparable levels.

FIGURE 25: Passenger Car Production and Sales in China

*Sales in 2011 are estimated to be 14,536,995; Source: EIU, Deloitte Analysis

After a tremendous run in 2009 and 2010 boasting a growth rate of 45% and 32% respectively, car sales slowed down to an estimated 4%-5% in 2011. Though the macro-economic conditions are attractive, growth in auto sales have slowed as a consequence of the following:

• withdrawal of tax breaks for purchase of new family vehicles – the full 10% car purchase tax have been reinstated

• Car scrappage schemes promoting compact vehicle purchase have been rolled back since the end of 2010.

• Subsidies to rural purchases were withdrawn

• Lottery system introduced in Beijing, similar to that in Shanghai, restricted annual car registrations to 240,000 as against 2010 sales levels of 900,000.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E

Production 703,5 1,101 2,018 2,480 3,078 5,233 6,381 6,737 10,38 13,89 14,45

Sales 754,00 1,225, 2,082, 2,421, 3,774, 4,946, 6,171, 6,635, 10,171 13,911 14,397

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Competitive Landscape In the new automotive policy the government continues to encourage the domestic players over the foreign OEMs. Global auto OEMs have been able to establish presence but primarily through joint ventures. As of 2010, the market was fairly fragmented with the top 7 players making up for only 60% of the market.

FIGURE 26: Market Share of Passenger Car Sales by Manufacturers and Car Type Preference (2010)

Source: EIU

Income trends FIGURE 27: Indexed Growth of Disposable Income, Inflation and Car Sales


Car sales have shown a clear upward trend from 2004 onwards with the introduction of government’s new auto industry development policy that led to increasing sale of compact cars and expanding the market share of domestic (non JV) manufacturers. When sales started picking up in 2002, per capita disposable income was $558 (nominal) and $1,415 (PPP). The disposable income has grown fourfold since then ($2,938 in nominal and $3,868 in PPP terms in 2011). Between 2001 and 2011, inflation and disposable income have grown at a CAGR of 2.6% and 16% respectively. In comparison, the car sales have grown at an astonishing CAGR of 34.9% during the same period. This outpaced sales growth is primarily explained by very low car penetration levels in the country and the pace was sustained through to 2010 by the slew of government schemes offered to the automotive industry as part of its massive RMB 4 trillion fiscal stimulus program in 2008. In 2011, car sales drastically slowed down primarily on account of a strong base number

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in 2010 that was heavily incentivised.

It can be observed that the significance of high income households in China was felt only after 2008 despite their presence since 2001.



Like India, sales of the new cars were driven by all the categories of household income over $3000 per annum.



Strong correlations between number of households in the $3,000 and above income categories and car sales signify that the sales of new cars are driven by the households having annual income over $3000. Though upward migration of lower income groups to $3,000-$5,000 income categories has been driving sales for most part of the decades, the proportion of this income group have shrunk in the last two years (2009 and 2010). Of late, (as can be observed in Figure 28) $5,000 -$10,000 household incomes have become the dominant group. Growing at a CAGR of 36%, this household income group is likely to become the key influencer of car sales in the coming years.

Factors affecting sales The sales increased significantly in the last two years. This has also been accompanied by increase in capacity, raising concerns about utilisation in the future.

FIGURE 30: Indexed Growth of Crude, Lending Rates and Car Sales in China

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The global movement of the crude oil prices does not seem to impact the sales of new cars due to China subsidizing its fuel price. The lending rates also have minimal effect on car sales and this is said to be because of the consumer loan market being under-developed. As little as 10% of the total car sales in China were purchased on credit in 2009as against an average of 70% in advanced economies.

Future Outlook Though 2011 has witnessed a slowdown in growth of car sales, it must be observed that the economy was able to sustain and grow beyond 2010 volumes irrespective of subsidies and implementation of the lottery registration system in Beijing. It only implies that the strong growth in real disposable income (CAGR 13.4%) has contributed significantly to growth of car sales in 2011.

Factors such as growing economy, rising income levels and lower car penetration only indicate strongcar sales growth in the coming years. However, according to Ministry of Environmental Protection of China, the government is expected to implement measures to slowdown the rapid pace of growth in car sales in view of uncontrollable congestion and pollution levels in urban centers. With plans to expand lottery registration systems to more cities, the growth rate of car sales in 2012 may not reflect the trends of 2009 and 2010 but it is likely to grow relatively faster than 2011.

Figure 31: List of Cities that Restrict Car Registration

Cities with Lottery Registration Systems License Limit (cars/month) Year Implemented

Shanghai 8,000 1994

Beijing 20,000 December 2010

Guiyang 2,000 exclusive plates with CBD access; unlimited normal plates 2011

Much of the sales growth in the coming years is expected to come from smaller cities and towns that neither face pollution norcongestion issues of the tier-1 cities. Hence, automakers are likely to continue their expansion in the Chinese hinterland to tap the wealth spread across these centers.

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Factors that affect the sales of the passenger car-a regression analysis approach In order to determine the factors which play a crucial role in determining the sales of cars, a regression analysis was done.


Factors (with its impact increasing)

P Value Adjusted R squared Relationship

Car Density 3.23E-09 0.988 Positive


1.7E-06 0.944 Positive

Urban Population 2.75E-05 0.888 Positive


Car density, per capita disposable income and urban population emerged as the top 3 factors that influenced car sales.


Conclusion

As varied these economies may be, they are bound by one common thing and that is, all these four countries are emerging economic powers. There is immense growth potential for the auto manufacturers in these countries. Given below is a summary of our understanding that the Indian auto market can take from its other BRIC counterparts.

Key Take away for India from the BRC markets:

• 5 and more players make up for 80% of the market in Brazil, Russia and China. It is likely that India which is currently made up of four players for 80% market share is expected to accommodate one or more new players within the 80% mark in the years to come. China and India had similar competitive pattern early in the decade with their state owned companies comprising for over 50% of the auto market. However, increasing competition has resulted in more than seven players contributing to 80% of the market in China. A similar trend is likely in India too

• While urbanisation has been a key driver for car sales in India and China, it has been relatively insignificant in Brazil and Russia, where urbanization is high (about 80%) and close to stagnation. For India, provided the rural to urban migration happens at the same rate as 1.22% (CAGR 2001-2011), it would take a long time (arithmetically,41 years) to breach the 80% urbanization levels so as to lose its significance as a key driver of car sales (refer figure 33 in appendix for analysis on urbanization & car ownership)

• In China there has been a general preference for sedans. While the availability of low cost sedans fuelled popularity for such car type in the past, more sophisticated and pricier sedans are gaining prominence in recent years as a result of phenomenal growth in real disposable incomes (CAGR 18%) between 2004 and 2011. As real disposable income rises faster in India, similar to that of China (as against a CAGR of 6% between 2002 and 2011 in India), there will be a surge in demand for larger cars

• In China and India, $1000-$3000 income households were the predominant groups as against $5000 -$10,000 income households in Brazil and Russia for most parts of the last decade. However, both India and China witnessed the proportion of $1,000-$3,000 income households steadily fall at an average rate of (4.0%) and (7.9%) respectively between 2001 and 2010. Simultaneously, the proportion of $3,000 and $5,000 income households rose sharply at a CAGR of 15.2% and 13.8% respectively, becoming the dominant groups driving car sales.

In the upcoming years, $5000-$10,000 household income groups will become the key drivers of car sales in China as against $3,000-$5,000 household group that has started contracting in the last two years. The former is growing at a CAGR of 36%and has become the dominant household income group of the Country in 2011.

In India, $3000-$5000 income group will continue to be the key segment for car sales. $5,000-$10,000 income households, which are growing faster at a CAGR of 24%, would gain significance and become the key drivers of sales growth post 2015 (provided it continues to grow at the same pace). Transition to this higher income group ($5000 and above) would lead to increasing demand for larger cars (premium compact and entry level sedans), besides the sustained demand for smaller/low cost cars in India (micro and mini segments)

• Contrary to the popular belief, average age of India’s population had relatively little impact as compared to other factors such as disposable income, car density and urbanisation which held much significance in influencing sales trends. Also in support is that a large proportion of first time car buyers in India have subdued the effect of average age. However, Brazil alone had a positive correlation with increase in average age which is explained in ways that increasing age has contributed to growth and dominance of higher income households which in-turn are driving car sales


• Fuel prices in all of BRIC countries were subsidized in one or the other way and hence have not had any considerable impact on car sales. However, in 2011, the deregulation of fuel prices in India has shown first signs of car sales being impacted by rise in fuel prices. The long term impact of the recent development, however, is unknown owing to absence of historical data for analysis. Brazil and China, on the other hand, have already rolled out plans toward future auto fuel policy - while Brazil has sought to promote the adoption of flex fuels (Ethanol), China is also looking to find its solution in hybrid technology penetration in time to come

• Rise in lending rates has generally had a negative influence with three of the four BRIC economies leaving alone China. While lending rate and development of credit markets have had significant impact on car sales in Brazil and Russia, India has been relatively less influenced partly because of the fact that real disposable incomes grew much faster in ways that it negated the effect of higher interest cost

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Vehicle density in urban areas can, to some extent, help us predict whether the sales of cars will accelerate or decelerate in a specific country. In India and China, the passenger car density is substantially low in urban areas (49 and 93 per 1,000 respectively as against 600 per 1,000 in developed economies). With further urbanization, we can presume that these two markets will hold huge growth potentials.

Brazil and Russia with about 86% and 73% urbanization will be only driven by the fact that their car density is lower (166 and 310 per 1,000 respectively) as compared to developed economies. These two economies are expected to hit saturation faster than China and India where the scope of opportunity is two dimensional i.e. low urbanization and car density.


Sources

1. Economic Intelligence Unit Automotive Database and Viewswire http://www.eiu.com/default.aspx

2. Bloomberg

3. http://www.reuters.com/article/2011/11/20/china-carsales-idUSL4E7MK02J20111120, 20 Nov 2011

4. http://www.mydigitalfc.com/companies/maruti-sales-down-185-india-demand-slows-249, 1 Dec 2011

5. http://articles.economictimes.indiatimes.com/2011-04-10/news/29403269_1_market-share-car-segment-passenger-car, 10 Apr 2011

6. "Participação de carros flex nasvendasvolta a bater 94%" 8 Sep 2009

7. http://en.mercopress.com/2011/11/04/october-car-sales-in-brazil-drop-10-surprising-dealers-and-the-auto-industry, 4 Nov 2011

8. http://www.nytimes.com/2011/09/05/business/global/china-changes-direction-on-car-sales.html?pagewanted=all 4 Sep 2011

9. http://www.bloomberg.com/news/2011-12-08/brazil-s-november-consumer-prices-increase-0-52-faster-than-expected.html 8 Dec 2011

10. http://www.guardian.co.uk/business/feedarticle/9938321 9 Now 2011

11. http://www.morningstar.com/advisor/t/47134386/russia-ministry-2011-inflation-seen-at-6-5-prime.htm, 18 Oct 2011

12. http://www.thetruthaboutcars.com/2011/01/chinas-best-selling-cars-of-2010/ 18 Jan 2011

13. http://www.siamindia.com/Media/Release/SiamViewMediaRelease.aspx?id=302, 9 Nov 2011

14. http://www.oica.net/

15. http://databank.worldbank.org/ddp/editReport?REQUEST_SOURCE=search&CNO=2&topic=16

16. http://www.reuters.com/article/2009/06/03/ethanol-summit-petrobras-gabrielli-idUSN037730120090603 3 Jun 2009


Contacts

Kumar Kandaswami Senior Director & India Manufacturing Leader Email: [email protected] Phone: +91 (0) 44 6688 5401

MS Mani Email: [email protected] Phone: +91 (0) 22 6619 8552

Vijay Iyer Email: [email protected] Phone: +91 (0) 22 6622 0504

Rajan Kamat Email: [email protected] Phone: +91 (0) 22 6667 9311

Ganesh Chandrasekar Email: [email protected] Phone: +91 (0) 44 6688 5472

Surendar Chandrasekaran Email: [email protected] Phone: +91 (0) 44 6688 5489

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

This material and the information contained herein prepared by Deloitte Touche Tohmatsu India Private Limited (DTTIPL) is intended to provide general information on a particular subject or subjects and is not an exhaustive treatment of such subject(s). None of DTTIPL, Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this material, rendering professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser.

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