gp automobile 25th jan

8/3/2019 Gp Automobile 25th Jan

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In partial fulfillment of grand project at 2nd year of MBA programme.

Submitted to: Submitted By:

Prof. Yogesh Doshit Ashutosh Sharma(50)Apurva Shah (47)

Haresh Nayak (28)


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Executive summary

The Indian automobile industry has come a long way since the first car ran on the streetsof Mumbai in 1898. The initial years of the industry were characterized by unfavorablegovernment policies. The real big change in the industry, as we see it today, started to

take place with the liberalization policies that the government initiated in the 1991. Theliberalization policies had a salutary impact on the Indian economy and the automobileindustry in particular.

The automobile industry in the country is one of the key sectors of the economy in termsof the employment opportunities that it offers. The industry directly employs close toaround 0.2 million people and indirectly employs around 10 million people. Theprospects of the industry also has a bearing on the auto-component industry which is alsoa major sector in the Indian economy directly employing 0.25 million people.

The Indian automobile industry is a stark contrast to the global industry due to many of

the characteristics, which are peculiar to India. The Indian automobile industry is verysmall in comparison to the global industry. Except for two wheelers and tractorssegments, the Indian industry cannot boast of big volumes vis--vis global numbers.

The report covers the two segments, passenger cars and multi-utility vehicle segment. Itcontains an in-depth study of both the segments and the performance of the automotiveindustry in terms of production, sales, capacity, exports and imports. The major eventsand their impact on the industry and across the segments are discussed in detail. Thereport also looks into the factors that boost the revenue growth across segments andconcludes with a look at the financial performance (in term of different ratios) of themajor players in the industry.

The Indian automotive industry is protectionist

Foreign

companies

have lobbied

hardest forhigh tariff caps

Interestingly, it is the companies that entered India after 1991 that havelobbied most strongly with the Government to maintain tariff caps of 25 per cent and 40 per cent. This affords them substantial protection.Similarly, they have persuaded the Government to hike the import duty onsecond-hand cars to 180 per cent. However, should tariff reductions beextended in the new round of WTO negotiations, the duty on second-handcar imports will drop to 25 per cent.

The Indian automobile industry is protectionist because few of itscompanies are commercially viable. India is the only country in the worldwith numerous car producers. Although consolidation seems imminent, ithas not yet begun. A fundamental shake-out will do the industryconsiderable good.

Recent growth in the automotive sector


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Car and MUV

sales have

doubled since1995

Segments of the Indian automotive industry have grown at varying ratessince 1995. The sales of cars and multi-utility vehicles have almostdoubled. Those of tractors and two-wheelers have grown at a slow, steadypace. The bus industry has shown no growth, and the truck and LCVindustries have done badly.

The boom in the car market can be explained by the tremendous interest ofglobal car companies. Within two years of liberalization, 60 per cent of allmajor car and vehicle companies had invested money in India, whetherthrough joint ventures, equity participation, or technical collaborations.Companies saw huge potential in the Indian domestic market. Manycompanies also saw India as a potential manufacturing and exporting hubfor the rest of the Asian region. Much of this enthusiasm has now faded,due to policy and infrastructural bottlenecks.

India now produces 6 lakh cars a year, up from 3 lakh cars in 1995.

Currently, some 28, 000 cars are exported.

Move towardbigger cars

A key trend of the last few years is the shift to bigger, more expensivecars. Until three years ago, small cars had a 57 per cent share of themarket. Now, mid-size cars account for a half, and small cars for just athird of those on Indian roads. With the introduction of the MercedesBenz, the Sonata, and the Accord in 2001 in India, it is the first time thatcars over 4.5 metres long are being sold in the country.

Rise of second-

hand carmarket...

Another important development is the rise of a booming secondary marketin automobiles. Today, most car purchase is occurring in this market, asscooter owners upgrade to cheap, four-wheel vehicles. Some second-hand

Fiats and Maruti 800s are now even cheaper than a new two-wheelvehicle. In turn, many small car owners are looking to buy a bigger,second-hand car.

Causing dropin scooter sales

As a result, there has been a fundamental shift in the two-wheeler industry.In 1999, motorcycle sales overtook those of scooters for the first time. Thisis because second-hand cars have replaced scooters as the family vehicleof the middle class. Secondly, policy restrictions on motorcycles have beenlifted, bringing in a range of powerful, emissions-controlled, branded,Japanese models, that are very popular with the young. Within the scootermarket, there has been a shift away from heavy, metal-geared models to

gearless, lighter, plastic-bodied ones.

Cars and two-wheelers have now become household essentials in India.There are currently close to 35 million two wheelers and 8 million cars inthe country. In addition, there are 2 million trucks and 2 million othervehicles.

Despite the boom in some parts of the industry, there is need for


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considerable revitalization. Data drawn from the balance sheets of thirty-four companies shows a 2 per cent drop in turnover. Profitability hasdeclined by 42 per cent.

Outdated policies pose key hurdles

Policy issues of

key concern to

Indian

automotivesector

Domestic policies, rather than the global economic slowdown, areimpacting the Indian automotive sector most heavily. What poses aparticular drag are high and numerous taxes, customs tariffs and exciseduties.

Although cars and two wheelers have become household essentials, policymakers continue to view and to tax them as luxury items. Theydisregard the fact that Indias automotive industry is the largest in theworld and is a primary generator of employment in the country. Should thesector be relieved of its punitive tax burden, it could become a significantdriver of economic growth and employment.

Taxes equal thevalue of each

car

Policy makers also overlook the fact that car and vehicle owners present asignificant vote bank. At the moment, they are forcing consumers to paytaxes equivalent to the value of every new car they purchase. This isbecause, for each car, there is a 35 per cent customs duty on the importedpack; a 40 per cent value-added tax; and a Modvat customs duty. There isthen a 32 per cent excise duty and a 12 per cent sales tax. Many big citiesimpose their own taxes.

High tariffsconstrain

exports

If the Government brings import tariffs down, it will boost exports. We see

this from the recent experiences of Brazil, Mexico and Australia. It is notonly important to bring down tariffs, but to do so in a public, scheduledmanner so that industry is able to prepare and take full advantage. In India,tax and tariff reductions are announced arbitrarily in the budget, with noprior notice.

Auto policy

should beabolished

Most importantly, the Government should stop controlling the automotivesector. This is a hangover from the early years of Independence.Automotives are consumer durables akin to washing machines, televisionsor fridges. Since the Government does not feel compelled to draw upnational policies for these sectors, it should not do so in the auto sector.

Global opportunities for the Indian automotive sector

India couldbecome a

major exporter

of automotivecomponents

If the Indian automotive sector positions itself correctly, it could become amajor global exporter of automotive parts and components. The countryhas mature steel and ancillary industries. But this can only happen if theindustry builds its capacity to meet global quality standards, deliveryschedules, and prices.


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Manufacturers will have to develop systems to efficiently manage labour,raw material, production and shipping. The Government will also have tobe lobbied to rationalize and reduce tax rates across a number of sectors.Many foreign car companies have found it more convenient to operate outof Thailand, for instance, because there is a single tax rate and very little

bureaucracy.

India is not yet ready to become a significant exporter of indigenous cars.Production costs are still too high. Cars are also becoming increasinglycomplex, with parts sourced from the best suppliers globally. Similarly,global marketing and advertising expenses constitute a considerable part ofthe cost of each car.


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1 INTRODUCTION ...................................... 81.1 Industry: ..................................................................................................................... 81.2 Introduction to the Indian automobile industry: ......................................................10

1.3 The Automobile Industry - Wheels of Change ....................................................... 112 INTERNATIONAL SCENARIO .....................................13

2.1 Evolution of Automobiles in the World ...................................................................132.2 Future Trends & Outlook .........................................................................................17

3 INDIAN SCENARIO ..................................................................... 193.1 Historical industry Development ............................................................................. 193.2 Unique characteristics of the Indian market ............................................................ 223.3 Government Policy ..................................................................................................23

3.3.1 Policy on petroleum products, auto emission and depreciation ........................243.3.2 Automotive Policy ............................................................................................ 253.3.3 Import Policy ....................................................................................................26

3.3.4 Import Duty .......................................................................................................263.3.5 Excise Duty ....................................................................................................... 26

3.4 Technology And Manufacturing Process .................................................................283.4.1 Technology ....................................................................................................... 29

4 Indian Automobile market ................................................................................. 314.1 Trade ........................................................................................................................ 31

4.1.1 Demand .............................................................................................................314.1.2 Supply ............................................................................................................... 334.1.1 Exports ..............................................................................................................344.1.2 Import ................................................................................................................36

4.2 Capacity ...................................................................................................................36

4.3 Segmentation of the Industry ...................................................................................374.4 Major Players ...........................................................................................................384.4.1 Maruti Udyog Limited ...................................................................................... 394.4.2 Tata Engineering & Locomotive Company ......................................................414.4.3 Hyundai Motors India Limited .........................................................................424.4.4 Ford India Limited ............................................................................................434.4.5 Hindustan Motors Limited ................................................................................ 444.4.6 General Motors India Ltd..................................................................................464.4.7 Honda SIEL Cars India Ltd.............................................................................. 464.4.8 Fiat Automobiles India Ltd............................................................................... 47

4.5 Market Share ............................................................................................................ 47

4.6 Collaborations and Mergers .....................................................................................495 Key Issues in Automobile Industry .................................................................................525.1 Key Earning Drivers ................................................................................................ 525.2 Governments decision on second-hand car imports ............................................... 535.3 Will we ever get Affordable SUVs ..........................................................................535.4 Imported Cars that May soon be Available ............................................................. 545.5 The Luxury segment Shootout .................................................................................545.6 Hatchbacks still rule the Indian market ...................................................................54


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5.7 Changing Paradigms in a Competitive Market ........................................................545.8 New Models to be released ..................................................................................... 55

6 Industry Analysis ................................................................................................. 566.1 SWOT ANALYSIS: ................................................................................................ 566.2 PEST Analysis ......................................................................................................... 57

6.3 Porters Diamond Model ..........................................................................................606.4 Porters Five Force Analysis ...................................................................................616.5 Strategic Group Analysis ......................................................................................... 686.6 Value Chain Analysis .............................................................................................. 711.1 Margin ......................................................................................................................716.7 Comparative Analysis: .............................................................................................726.8 Financial Analysis of different players .................................................................... 75

7 Effect of Liberalization and WTO ..................................................................................827.1 Liberalization has changed the mindset ................................................................... 827.2 Effect of WTO .........................................................................................................82

7.2.1 Breathing in WTO's world ................................................................................ 82

7.2.2 WTO Regime and Its Impact on the Indian Automobile Industry ....................838 Auto Expo 2002 ..............................................................................................859 Future Outlook .....................................................................................................87


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Indian Automobile Industry

1 INTRODUCTION

1.1 Industry:Indian automobile industry in India is as well developed as any top industrial nations.Long years of License Raj and protectionism led to the development of various segmentsof automobile industry. There are a large number of well-entered players in all segmentsof the automobile industry as depicted in the following table.

There are also exists a huge market and production base fro specialty vehicles likeTractors, Earthmoving vehicles, Cranes etc. But despite having a well-developed industryand a large market, the industry still has not been able to realize its full potential owing tothe following reasons.

Low purchasing power

Price sensitive market

Pent up/suppressed demand

Existence of a large middle class

Insufficient transportation infrastructureIndia as a country has a per capita income of around US$318 per annum. That is veryminiscule compared with that of developing nations like Japan or the USA, which is inthe range of $20000. Hence the emphasis on large market size of a billion people quietlydiminishes. Thereafter the existence of a large middle class and that too with a majorityof them in the lower end ensures that the disposable income left with the masses is

ThreeWheelers

CommercialVehicles

Multi UtilityVehicles

GoodsCarriers

Passenger

Carriers

Two

Wheelers

Passenger

Cars

MopedsScootersMotor

Cycle


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comparatively less. Hence the possession of an automobile is considered a luxury andoften avoided by people.

But the scenario is after all not that bad and the industry as a whole is growing in terms ofvolume albeit the profitability and profit margin is of question. To have a better grasp of

the situation let us review each segment individually.

Heavy commercial vehicles:In India the commercial vehicles are graded according to their Gross Vehicle Weight(GVW). It is as under:

LCV: Intermediate commercial vehicle with GVW of 8 to 10 ton

MCV: Medium commercial vehicles with GVW of 10 to 15 ton.

HCV: GVW of 16 ton and above.But the gradation apart, the segment is more recognizes by its utility such as the vehicleswhich carry passenger are called buses and those specializing in carrying loads as trucks.Since 80% of commercial vehicles are purchased on credit, the availability of credit is a

major factor influencing demand. The credit squeeze affects the demand negatively. Theother important factors influencing demand of CV are depreciation norms, diesel pricesand changes in the Motor Vehicle Act.

Light commercial vehicles:Like the Heavy vehicles segment, the LCV, which are also essentially freight carriers areequally important. Small freight loads over small distance are transported through thesevehicles. In India in rural areas, these vehicles also ferry passengers over short distances.This segment is much more populated and competitive than the HCV. The liberalizationof government policy with respect to foreign, technical and financial collaboration lead toa sudden spurt in technical collaboration in LCV segment.

The LCV segment is populated with six players with Telco being the traditional marketleader by a wide margin.

Passenger car segment:The first motorcar on the streets of India was seen in 1898. Mumbai had its first taxicabsin the early 1900. Then for the next fifty years, cars were imported to satisfy domesticdemand. The Indian car industry can be classified, based on the price of the car into foursegments. The demand for passenger cars can be segmented on the basis of the usersegment as those bought by taxi operators, government/non government institutions,individual buyers etc. A major portion of the de4mand in India accrues mainly from

personal vehicle owner.

The demand for cars is dependent on a number of factors. The key variables are percapita income, introduction of new models, availability & cost of car financing schemes, price of cars, incidence of duties and taxes depreciation norms, fuel cost and itssubsidization, public transport facilities etc. The first four factors have positiverelationship with the demand whereas others have an inverse relationship with demandfor cars.


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Two Wheelers Segment:The two-wheeler segment like the passenger is very heterogeneous and could be split onbasis of usage, load capacity, stroke engine, utility and appeal. In India it is generallysub-segmented into Motorbikes, Scooters, Scooterettes and Mopeds. The promotional

and marketing outgo would rise steadily for the two-wheelers producers; the emphasiswould now be on aesthetics, design, and product positioning and market segmentation.As a result, the consumer would be the ultimate beneficiary with the choice of moremodels with superior features.

Special Utility Vehicles:This segment is also a very important segment but finds very less mention among theanalysts in spite of its direct bearing on the economy. The probable reason for this trendis that the vehicle seems mundane and lacks the glamour of the luxury cars. The segmentcomprises of Tractors, Earth Moving Equipments and Material Handling.

1.2 Introduction to the Indian automobile industry:India, the world's largest democracy, having a very large pool of scientific andengineering talent in the world has marched forward in critical areas of development - beit space or electronics. This pool of knowledge has enabled India to attain high levels ofachievement in diverse high tech areas. The country has an open economy in the processof integrating with the world economy.

Far reaching economic reforms aimed at deregulation and attracting foreign investmenthave moved India firmly into the front ranks of rapidly growing Asia-Pacific Region inthe automobile industry, the developing regions are the growth areas of tomorrow. In thedynamics of transition of the Indian economy, the automobile industry is emerging as a

leading industry. The automotive industry's strong linkages with the capital equipmentand the services industry, and, the potential for earning foreign exchange through exportsalso acted as an impetus for its growth.

The automobile sector comprises of all vehicles, including 2-3 wheelers, passenger carsand multi-utility vehicles, light and heavy commercial vehicles, and the alliedengineering sector comprises largely of the auto components sector. Agricultural tractorsand Earth Moving Machinery is an associated sector, which keeps the wheels of theagrarian economy moving. It is heavily reliant and aligned to the automobile and alliedengineering sector and plays a significant role in India. The Automobile and AlliedEngineering Industry may alternatively be termed the automotive industry.

The Automotive Industry in India is now working in terms of the dynamics of an openmarket. Many joint ventures have been set up in India with foreign collaboration, bothtechnical and financial with leading global manufacturers. The Government of India iskeen to provide a suitable economic, and business environment conducive to the successof the established and prospective foreign partnership ventures.


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The world automobile leaders have evinced keen interest in India and are making theirentry through joint ventures and technology cooperation agreements. RS.127 bn or US $3617 mn is the investment envisaged in the new vehicle projects.

If one looks at the joint venture's list, he or she can observes that the equity participation

in the joint ventures indicate a wide variation. The equity participation is not regulated byGovernment but is market driven. It depends upon the market perceptions of the jointventure partners and their business perceptions primarily in terms of technological,financial and market strengths of the partners.

With increased production and capacity creation in the passenger car sector, substantialgrowth in exports is envisaged. This tremendous growth in the vehicle sector is geared aswell to accelerate the continuous growth of the auto-component industry.

1.3 The Automobile Industry - Wheels of ChangeThe transformation of the Indian market for passenger cars is remarkable. A few years

ago you had a choice between three cars. Now the Indian car market has around thirtycars for the consumers. From a stage where the consumer had to wait for months to get acar, the market has turned in favor of the buyer. With new models and recession in theeconomy, manufacturers are doing everything to attract the consumers. In comparisonwith the kind of cars available in developed countries, Indias passenger cars may appearprimitive even today, when a much wider choice is available than in earlier years.

Earlier, the choice was between three cars. The Ambassador from Hindustan Motors wasphased out from the European market before 1960. This car is still used by all thegovernment agencies and you still find that most taxis are of this make. For the urbanemployed class it was Premier Padmini, a Fiat version of the same vintage. Then came

Maruti a 798 cc from Maruti Suzuki, which became the most popular car in the country.

The opening up of the economy and liberalization attracted investments form differentparts of the globe. The result was wide range of cars in the Indian market. The jointventure between Government of India and Susuki Motors of Japans produced Maruti 800(798 cc), Omni E (796 cc), Maruti Zen (993 cc), Maruti 1000 (970 cc) and Maruti Esteem(1298 cc). Hindustan Motors offer Ambassador ISZ (1817 cc), Contessa GLX (1817 cc).Other than the older models like Premier Padmini (1366 cc) and Premier 118 NE, themarket now has new cars, including Fiat Uno (999 cc (1171 cc), Daewoo Cielo (1498 cc),Peugeot 309 (1360 cc), Opel Astra (1597 cc), Ford Escort (1299 cc), Honda City (1343cc), and Mercedes E220 (2199 cc).

Until the 1980s the automobile industry in this country had charted an uneventful course.The scenario showed a limited number of manufacturers, low levels of production and theuse of anachronistic technology. Hindustan Motors, for example, have continued with theuse of the old reliable Ambassador, making only cosmetic changes in the 1957-designedbody. Premier Auto did the same with the Fiat body that was newly introduced in 1964.


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For a long time, owning a personal four-wheeler was considered a luxury in India, and alimited road network with poor road surface did not help matters much. Productionshowed only a very gradual upward curve from the 1950s until the early 1980s beforeMaruti came into the scene.

Though the consumers are happy about the variety of cars available, the manufacturersare worried. The drop in the demand and the inventory pile-up in most of the productionunits are hitting the bottom line. Though all players claim that they are not in the marketfor short-term gains, they admit that the present condition is far from attractive.

With sales remaining stagnant or going down, car manufacturers have started going allout to win the customers. For the first time, car manufacturers in India offered heavydiscounts. Easy finance offers, free accessories and attractive warranty offers are theother soaps offered now.


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2 INTERNATIONAL SCENARIO

Understanding global dynamics is vital for the Indian automotive sector.

2.1 Evolution of Automobiles in the WorldMans journey on the road of mechanized transport had begun right from the time whenthe wheel was invented in 4000 BC. Since then he has continually sought to devise anautomated, labor saving machine to replace the horse.

However, it was not until 1885 when the first car rolled down the streets that man wastruly able to come out with an automated devise to replace the horse. All the earlierattempts, though successful, were steam-powered road-vehicles.

A French man Nicolas Jacob Cugnot built the first self-propelled car in 1769, whichcould attain speeds of up to 6 kms/hour. It was in 1771 that he again designed a steam-driven engine for a car, which enabled it to run so fast that the car rammed into a wall, itwas the first recorded accident in the history of cars.

Francois Isaac de Rivaz designed the worlds first internal combustion engine in 1807.He to develop the worlds first vehicle to run on such an engine, one that used a mixtureof hydrogen and oxygen to generate energy, subsequently used this.

This subsequently gave way to a number of designs based on the internal combustionengine in the early 19th century with negligible degree of commercial success.

Thereafter in 1860, Jean Joseph Etienne Lenoir built the first successful two-stroke gasdriven engine. In 1862 he again built an experimental vehicle driven by his gas-engine,which ran at a speed of 3 kms/hour. These cars became so popular that by 1865 manycould be seen on the roads.

It was not until 1885 that a four-stroke engine was devised and a petrol engineintroduced. Gottileb Damlier and Nicolas Otto worked together on the mission till theyfell apart. Daimler created his own engines, which he used both for cars and for the firstfour-wheel horseless carriage.

Meanwhile, Karl Benz was in the process of creating his own advanced tri-cycle, whichproved to be the first true car. This car first came to the roads 1886.

During the same decade in 1890 Henry Ford of the United States began work on ahorseless carriage. He went several steps further and in 1896, came out with his first car--the Quadricycle. This was an automobile powered by a two-cylinder gasoline engine.

Henry Ford then went on establish the Ford Motor Company, which was launched in1903, and in 1908 he catapulted his vehicle, Model T Ford to the pinnacle of fame. HenryFord did not stop here and continued with his innovations, he then went on to produce the


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Model T Ford on a moving assembly line, thereby introducing the modern massproduction techniques of the automobile industry.

The modern car, that we see on the roads today is an outcome of several innovations anddiscoveries over the ages; yet the car industry has still not stopped progressing and will

continue to come out with better versions as decades pass by.

It is worth noting here that the first ever land-speed record was established in 1898.Count Gaston de Chasseloup-Laubat of France drove an electric car at a speed of 39.24miles per hour in Acheres near Paris.

This flagged off the era of wheels racing, which lasted till 1964, after which jet androcket -propelled vehicles were allowed.

Ever since the invention of wheel, man has endeavored to create different modes oftransport to suit his needs. But, automobile takes perhaps pride of place amongst all his

contraptions. Merely because it has evolved over the years from an article ofextravagance to the one of necessity. And, nowhere has this evolution been more visiblethan in our very own backyard. Remember the days of the ubiquitous Ambassador andthe Fiat, which dominated the countrys roads, at a time when the Indian consumer hadlittle option. However, since then, liberalization and the entry of competition, havebrought about a sea change in the Indian automotive sector, which has evolved as a majorplayer in the Asian context. A fact reflected in the emergence of India as the 18th largestglobal car market with a share of a mere 0.80 per cent. Hence, imagine the underlyingpotential that India possesses.

Keeping this in mind, it becomes imperative for the Indian players to try and understandwhat they are up against on a global platform, as exports could well hold the proverbial --key -- in terms of survival. With this objective in mind, the following is a preliminaryanalysis of the global vehicle car park.

Starting from the time when Henry Ford rolled out his first vehicle to now, the worldpassenger car park has grown to accommodate an estimated 524 million vehicles. Thisfigure, although a ballpark estimate, is undoubtedly growing every single day. What withautomotive plants the world over spewing out mutants of a particular design almost on aminute-to-minute basis. Accuracy in such an exercise is just not possible, as new cars areregistered globally everyday, while some are abandoned and others are scrapped due toold age and accidents.

All these problems mean that putting a number to the global car park is a complex issue.Even more difficult perhaps understands the dynamics of change in the global automobileindustry. But despite the rapid pace of change and the inherent problems of statistics, it isvery important for Indian auto manufacturers to understand the dynamics of the globalmarketplace and the competition therein.


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A dozen companies dominate worldwide. Roughly, one car in seven on the worlds roadsis currently produced on a General Motors (GM) platform. Putting GMs Indianoperations in perspective is the fact that this carmaker manufactures mere 60,000 vehiclesin India, which is just a minuscule 0.075 per cent. There are estimated to be around 80million such vehicles, including the Opel, Vauxhall and Saab variants from the GM

stable.

Around one in eight cars are produced on the Ford/Mazda platform, which amounts to67.1 million vehicles worldwide. Of this, Fords Indian operations are capable ofproducing mere 100,000 vehicles annually. One in 12 vehicles share a Toyota or Lexuslabel. While almost 41 million vehicles come from the Volkswagen, Skoda and Audicombine. Then, there are 30 to 33 million each of Nissan, Fiat and Peugeot-Citroens carson global roads, as well as 25-26 million, respectively, of Honda and Renault models. So,in effect, the top eight automotive brands account for almost three in every four cars onworld roads, with companies like Mitsubishi, Chrysler and Hyundai adding another sevenper cent, leaving 20 per cent of world car park in the hands of miscellaneous car makers

like Daewoo, Suzuki, Isuzu, Lotus and Maruti.

Having roughly understood the players that dominate the global passenger car market, itis now imperative that we define the largest car parks in the world and also understandtheir operational dynamics.

United StatesThe US is the largest passenger car market in the world and is said to contain almost 150million cars. Historically, car sales in this market have been controlled by the Big Two,namely General Motors and Ford (excluding Mazda).

However, statistics now show that the share of other marques in the US market is on therise. The fastest growth is in the Japanese brands, notably those of Toyota, Nissan andHonda, whose combined share on American roads was estimated to have increased toover 28 per cent in 1998. Most other brands surprisingly have smaller market shares inthe US. A prime example of which is Volkswagen, which despite being the fourth largestmanufacturer in the world, accounts for less than one vehicle in every 60 cars onAmerican roads. Traditionally, up market brands like BMW and Mercedes Benz alsoaccount for less than a minuscule 1.3 per cent combined.

Western EuropeThe so-called Big Six dominate the car park in Western Europe, accounting for almostthree in every four cars on the regions roads. Interestingly, Volkswagen and its affiliates,which control a huge 15.6 per cent of the European car park, have dominated this regionover the last decade. Now, compare this 15.6 per cent of Volkswagen, which is themarket leader, and the 80 per cent share of Maruti Udhyog in India and what have you?

Coming back to Western Europe, Fiat is the second largest player there with 13.3 per centof the total car pie. But analysts state that its share will fall as older Fiats are scrapped.This aside, perhaps the other aspect that is truly interesting and specific to Europe, is the


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long tail of other carmakers. After the Big Six, BMW, the top three Japanese firms andMercedes Benz account for a huge chunk of cars on European roads. Then, there arefirms like Volvo, Mitsubishi, Mazda, Suzuki, Lada, Proton, Rover, Maruti and Tata, allvying for a piece of the action. For these companies, supplying dedicated parts andmaintaining a regional service network is unlikely to be economically viable in the

medium term.

JapanThe profile of the Japanese car park is very distinct from that of the US or Europe forseveral reasons. First, there are fewer imports due to policy restrictions, a la India!Secondly, there are very few older vehicles, mainly because of the draconian vehicle-testing regime, which results in many cars being replaced after a five-year period.

Furthermore, because of support to domestic industry, Toyota together with Daihatsudominates the Japanese car park, accounting for almost 40 per cent of the market share.The other large manufacturers include Nissan and Honda, which together account for

almost one third of the cars in use. Other manufacturers with a growing presence areSubaru and Suzuki, which have increased their sales significantly in the last few years,thanks to a number of innovative models and a growing popularity of mini cars. Does thistrend resemble some other car markets?

AsiaToyota, Nissan, Honda and Mitsubishi have dominated the markets of the ASEAN regionfor more than a decade now. In India, however, Suzuki, through Maruti Udyogcompletely dominated the car park with a solid 80 per cent market share until recently.Interestingly, the ASEAN and Indian markets are quite diverse compared to Japan,despite the similarity in vehicles. In India and Southeast Asia, vehicles have much longer

lives (often more than 20 years) due to the testing regimes which are absolutelyrudimentary, to say the least.

In China, commercial vehicles and not passenger cars surprisingly dominate the park andnew vehicular sales. The market for passenger cars until now has been very small with amere 3.5 million vehicles, and Volkswagen and Daihatsu dominate it.

The South Korean market with around 7.5 million vehicles is also unusual. Almost everycar on Korean roads is designed and built locally and will perhaps spend its entire life onKorean roads due to policy restraints. Even more interesting is the fact that this scenariolooks set to continue. This is despite the pressure to increase exports to South Korea,which is being resisted vehemently by local carmakers, despite the collapse of the localcurrency and the economic problems that plague the region.

Rest of the worldFinally, the statistics for the rest of the world are very varied. In Eastern Europe, there arestill many old cars from the erstwhile Soviet era, even though most of the auto-manufacturers have been driven out of business. There is also a large number of cars


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imported and often stolen from Western Europe that find their way into east Europeanmarkets.

Elsewhere, Africa has a small market that is dominated mainly by French and Japanese,and in some cases Italian made cars. However, the trend here is changing with players

like Daewoo and Hyundai finding it easier to penetrate.

Lastly, there is the South American market that has been controlled by European and USproducers. There are an estimated 23 million vehicles in this region, most of which havebeen manufactured in Brazil or Argentina.This completes the list of the main passenger car markets of the world. But, with theeconomic uncertainties that plague some of the regions above, a fall in demand is themost likely scenario that will slow down the pace of growth in the interim. There aresome interesting trends that have surfaced, which also need a mention, as these will playa big role in augmenting or decelerating demand.

2.2Future Trends & Outlook

First, the global automotive market is growing by just over two per cent a year, or a net of10 million vehicles.

Secondly, the growth has slowed down considerably and is expected to slow downfurther due to the increasing levels of saturation reached in the larger car markets theworld over. In fact, analysts from the Economist Intelligence Unit (EIU) state that thissaturation in the larger markets could possibly turn into negative growth, given the recenttrend among carmakers to opt for quality components, which will undoubtedly enhancethe life of a vehicle.

This aside, the Asian economic crisis has further added to the woes of global automotivemanufacturer, with the demand from the developing regions also now turning into atrickle.

Lastly, the global domination by the main automotive manufacturers is on the wane --albeit very slowly as -- region centric products -- become the name of the game.Interestingly, it is these emerging trends and more importantly the concept of regioncentric products, which are said to be the main cause of the winds of change blowingacross the automotive car parks the world over. Automakers that have been enjoying agenerally prosperous spell until now are having to look ahead to likely difficulties that

could force a fundamental rethink in the way vehicles are designed, manufactured,distributed and sold.

Leading manufacturers have already put their research and engineering teams to work onnew fuel and power-train technologies to meet the eco-friendly norms post 2000. Furtherdownstream, companies such as Ford and General Motors of the US, GermanysVolkswagen and Toyota of Japan have begun to re-examine their dealer relationships and


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pricing strategies. They have all embraced a new customer focus, hoping to increase theirexposure to areas such as insurance, finance, servicing and even recycling.

But, perhaps more significant is the fact that most manufacturers are now on the look outfor new strategic tie-ups, mergers and acquisitions - that will drive out costs and keep

pace with the impending price cuts. Examples of which are already visible in the DaimlerBenz merger with Chrysler of the US. Ford has acquired Swedens Volvo CarCorporation and Renault of France has acquired an influential stake in debt-laden Nissan.In trucks, the Volvo group has finally secured control of Swedish archrival Scania andanother merger with Mitsubishi has also been cemented. Meanwhile, General Motors hasincreased its stake in Suzuki of Japan and has also signaled the possibility of helping outthe Korean cheabol Daewoo. Thus, while such deals and restructuring will certainlycreate an opportunity to cut costs, it remains to be seen whether they will createsignificant new opportunities for growth.

However, what remains uncertain is the timing of any downturn. Many economists

predicted last year that European and US automotive markets would contract in 1999.Given the steep declines seen in Southeast Asia and Latin America, the scenario pointedto an industry struggling to remain profitable in the face of overcapacity, falling pricesand weakening demand.

However, so far that gloomy outlook has not been realized. Low-cost finance and risingdisposable incomes have helped confound most economic forecasts, with even themoribund East Asian markets showing a modest rebound. But the worlds manufacturersare not sanguine. The changing market scenario has forced most automakers to explorenew ways to defend margins and market share. Thus, new automotive strategies willbecome clear over the next two years, but the manufacturers will have little option but tostart moving now.


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3 INDIAN SCENARIO

3.1 Historical industry Development

It was in 1898 that the first motorcar steered down the Indian road. From then till theFirst World War, about 4,000 cars were directly imported to India from foreignmanufacturers. The growing demand for these cars established the inherent requirementsof the Indian market that these merchants were quick to pounce upon.

The Hindustan Motors (HM) was set up in 1942 and in 1944, Premier Autobackmobile(PAL) was established to manufacture automobiles in India. However, it was PAL, whichcame out with the first car in India in 1946. Hindustan Motors could only produce theirfirst car in 1949 as they were concentrating on auto components more than the finishedproduct.

It was left to another company, Mahindra and Mahindra (M&M) to manufacture sturdier

utility vehicles, namely the American Jeep.

In the 50s, the Government of India granted approval to only 7 car dealers to operate inIndia - HM, API, ALL, SMPIL, PAL, M&M and Telco.

The protectionist policies continued to remain in place. The 60s witnessed theestablishment of the two-three-wheeler industry in India and in the 70s things remainedmuch the same.

Since the 80s, the Indian car Industry has seen a major resurgence with the opening up ofIndian shores to foreign manufacturers and collaborators.

The 90s have become the melting point for the car industry in India. The consumer isking. He is being constantly wooed by both the Indian and foreign manufacturers.Though sales had taken a dip in the first few months of 1999, it is back to boom time.New models like Marutis Classic, Alto, Station Wagon, and Fords Ikon, the new lookMitsubishi Lancer are all being launched with an eye on the emerging market.

In these last years of the millennium, suffice it is to say that Indian cars will only growfrom strength to strength.

Now let us look at the industry development in the chronological order:

1880's & early 1900's About hundred years ago

o The first motor car was imported

o Import duty on vehicles was introduced.

o Indian Great Royal Road (Predecessor of the Grand Trunk Road) was

conceived.

First car brought in India by a princely ruler in 1898.


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Simpson & Co established in 1840.o They were the first to build a steam car and a steam bus, to attempt

motorcar manufacture, to build and operate petrol driven passenger serviceand to import American Chassis in India.

Railways first came to India in 1850's

In 1865 Col. Rookes Crompton introduced public transport wagons strapped toand pulled by imported steam road rollers called streamers. The maximum speedof these buses was 33 kms/hr.

From 1888 Motors Spirit attracted a substantial import duty.

In 1919 at the end of the war, a large number of military vehicles came on theroads.

1942 Hindustan Motors Ltd incorporated and their first vehicle was made in 1950.

In 1944 Premier Automobiles Ltd incorporated and in 1947 their first vehicle wasproduced.

Only seven firms namely Hindustan Motors Limited, Automobile Products ofIndia Limited, Ashok Leyland Limited, Standard Motors Products of IndiaLimited. Premier Automobiles Limited, Mahindra & Mahindra and TELCOreceived approval. M&M was manufacturing jeeps. Few more companies cameup later.

Government continued with its protectionism policies towards the industry.

AIA&AIA (association of the component manufacturers) came into being in1959.

1960's

In sixties 2 and 3 Wheeler segment established a foothold in the industry.

Association of Indian Automobile Manufacturers formally established in 1960.

Standard Motors Products of India Ltd. moved over to the manufacture of LightCommercial Vehicles in 1965.

1970's

Major factors affecting the industry's structure were the implementation of MRTPAct, FERA and Oil Shocks of 1973 and 1979.

During this decade there was not much change in the four-wheeler industry exceptthe entry of Sipani Automobiles in the small car market.

Oil Shock of 1973 quickened the process of dieselisation of the CommercialVehicle segment.

Three other companies, namely, Kirloskar Ghatge Patil Auto Ltd, Indian

Automotive Ltd and Sen & Pandit Engg products Ltd entered the market during1971-75. They ultimately withdrew in early eighties.

During the seventies the economy was in bad shape. This and many specificproblems affected the Automobile Industry adversely.

1980's - The period of liberalized policy and intense competition

First phase of liberalization announced.

Unfair practices of monopoly, oligopoly etc slowly disappeared.


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Liberalization of the protectionism policies of the Government.

Lots of new Foreign Collaborations came up in the eighties. Many companieswent in for Japanese collaborations.

Hindustan Motors Ltd. in collaboration with Isuzu of Japan, introduced the Isuzutruck in early eighties.

ALL entered into collaboration with Leyland Vehicles Ltd. for development ofintegral buses and with Hino Motors of Japan for the manufacture of W Series ofEngines.

TELCO after the expiry of its contract with Daimler Benz indigenously improvedthe same Benz model and introduced it in the market.

Government approved four new firms in the LCV market, namely, DCM, Eicher,Swaraj and Allwyn. They had collaborations with Japanese companies namely,Toyota, Mitsubishi, Mazda and Nissan respectively.

The Two Wheeler market increased. Since 1982 the Government had permittedforeign collaborations for the manufacturing of Two Wheelers up to 100cc enginecapacity. Foreign Equity up to 40% was also allowed.

In 1983 Maruti Udyog Ltd was started in collaboration with Suzuki, a Japanesefirm.

Other three Car manufacturers namely, Hindustan Motors Ltd., PremierAutomobiles Ltd., Standard Motor Production of India Ltd. also introduced newmodels in the market.

At the time there were five Passenger Car manufacturers in India - Maruti UdyogLtd., Hindustan Motors Ltd., Premier Automobiles Ltd., Standard MotorProduction of India Ltd., Sipani Automobiles.

Ashok Leyland Ltd. and TELCO were strong players in the Commercial Vehiclessector.

Important policy changes like relaxation in MRTP and FERA, delicensing ofsome ancillary products, broad banding of the products, modifications in licensing policy, concessions to private sector (both Indian and Foreign) and foreigncollaboration policy etc. resulted in higher growth / better performance of theindustry than in the earlier decades.

1990's

Mass Emission Norms were introduced for in 1991 for Petrol Vehicles and in1992 for Diesel Vehicles.

In 1991 new Industrial Policy was announced. It was the death of the License Rajand the Automobile Industry was allowed to expand.

Further tightening of Emission norms was done in 1996. In 1997 National Highway Policy has been announced which will have a positive

impact on the Automobile Industry.

The Indian Automobile market in general and Passenger Cars in particular havewitnessed liberalization. Many multinationals like Daewoo, Peugeot, GeneralMotors, Mercedes-Benz, Honda, Hyundai, Toyota, Volvo and Fiat entered themarket.

Various companies are coming up with state-of-art models of vehicles.


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TELCO has diversified in Passenger Car segment with Indica.

Despite the adverse trend in the growth of the industry, it is resolutely trying tomeet the challenges. Various issues of critical importance to the industry arebeing dealt with forcefully

3.2 Unique characteristics of the Indian marketDuring our interaction with the industry people we came across several phenomenon,which struck us as unique to the Indian market and thus are worth mentioning here. Someof these are:

1. The Tax and Duty structure: 60% of the final showroom price comprises of variousforms of duties and taxes. There is excise duty, import duties on components, CentralSales tax, state sales tax, Octroi, Road tax. All this heavily affects the pricingstrategies of the automobile companies.

2. Differential taxation: The sales tax structure is not standardized across the country.

At present it varies between 4% and 12% from state to state. This leads to asubstantial difference in prices across different states. This has caused many aproblem to dealers in states having higher rates of sales tax because customers whoare in the know of things do not hesitate to buy vehicles from neighboring states,which have lower sales tax. Moreover, there are tax benefits in buying from Unionterritories also. The sales tax structure has just recently been standardized at 12%.This has resulted in price increase in some states, which had lower rates.

3. Reasons for buying: For many Indian buyers the reason for buying a car is not fortransportation, utility or anything else. The primary motive is to use it as a tax savingdevice!!! Businesses in India get depreciation benefits on their assets. So purchasing

of a car is done in order to save on taxation by claiming depreciation on the vehiclesvalue. This leads to another characteristic of the market, which is the March, andSeptember end buying rush. The tax system allows for 40% depreciation on the assetvalue if an asset is purchased before the 31 st of March and 20% depreciation benefit ifit is purchased before the 30th of September in a financial year. Nearing the end ofthese months demand spurts drastically and there is a mad rush to get delivery of thevehicles and get them registered before the month end. Dealers who have ready stock,and thus can give immediate delivery are in an advantageous position in these times.Even the Road Tax Office makes a quick buck by backdating registrations for thosewho could not procure their vehicles before the deadline.

4. Comparatively less evolution to the medium and premium segment: In the mid1990s most of the new foreign players who came into the market, came in with mid-sized cars because they felt that the Indian market, like other developing markets,would evolve from the small cars to the mid-sized segment. This, however, has nothappened and even today the strongest segment, both, in terms of volumes andgrowth is the small car segment. Growth in the mid-sized and premium segments hasbeen sluggish and slow. These still remain small volume segments. This has led tomanufacturers rethinking their strategies towards small sized cars.


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5. Role of rumors and word of mouth: Buyers in India are a closely-knit group. The

social system in India is also tilted towards joint families. Word of mouth and peeropinion play a very significant part in deciding which make of car to buy. Rumorsabout price discounts, mileage or quality problems in cars spread like wild fire and

have seriously affect sales.

6. The Prices sensitive market: The buyer in India is very price sensitive.Demographics show that 20% of the Indian population is under poverty line and 60%consists of middle class. The segments are very price sensitive and always go for theeconomic options. That is why we see that most of the Indian automobile companiesmarket their cars on price and have many upgraded versions in the A and B segment.

7. Most number of Players: The Indian automobile industry has the more number ofplayers than any other country in the world. Whereas, in the other countries, there arenormally six to seven players at a time.

8. Foreign Companies: Most of the Indian automobile companies are either whollyowned subsidiaries of any foreign company or a joint venture between an IndianCompany and a foreign company.

9. High Growth rate: Indian automobile market is growing faster than the worldautomobile market. The world automobile market is growing at 2% per annum,whereas the Indian automobile market is growing at five to six percent per annum.

10. Domination of Compact cars: In other countries it is the mid-size segment that isdominating the market, whereas the compact size passenger cars dominate the Indianpassenger car market.

11. Domination of Two-wheeler segment: In the automobile sector, worldwide, it thepassenger car segment that drives the market, but in India, due to high percentage ofmiddle class in the population, it is the two-wheeler segment that dominates themarket.

3.3 Government PolicyThe policy of broad banding capacities in the eighties led to increased utilization ofcapacity for four-wheelers in the industry.

The liberal policy on foreign participation through technical and financial collaborationin early eighties led to substantial product up gradation and introduction of new models.But it was alleged that the policy was discriminatory in favor of MUL, while others likeTelco, PAL, HM were denied permission to produce cars in collaboration with Japanesecompanies.

The GOI controls the car sector by way of framing policies on depreciation norms,import duty on cars and parts used in it, petrol prices and import duty of steel.


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During the era of socialist inspired controls, the government protected the car industryfrom new entrants by making effective use of licenses. However, after liberalization andwith the consequent opening up of the auto sector in 1992-93, the license raj ceased toexist.

The perception of a car as a luxury good lead to heavy excise duty on cars. The exciseduty doubled from 25% in FY87 to 55% in FY91. Till 1987, the GOI followed adiscriminatory policy so as to charge lower duty on fuel-efficient car with enginecapacity of less than 1000cc. This helped MUL to price its car at a lower price incomparison to others. But with lobbying from PAL and HM government withdrew theprovision in 1987.

But with the onset of the liberalization process in the early nineties, the government hascontinually rationalized the excise duty regime. Presently, there is a duty of 40% (16% +24%) on motor vehicles, designed for transport of not more than six persons (excludingthe driver). On vehicles designed for transport of more than six persons, but not more

than 12 persons, the duty is 32% (16% + 16%). Over and above the excise duty, cess bythe Central Government, states are now charging a uniform sales tax of 12%. This camein being after the 15th of May 2000. Earlier, states used to charge sales tax varying from3 to 14%. But MUL vehicles receive favorable treatment in terms of sales tax as well.

In line with its treatment for luxury items import duties for car have been maintainedhigh. In the 80's, import duties varied between 150 to 200% based on the engine capacityof a car. The import duty on cars and components has come down in the last few years inline with general reduction in import tariffs. In the FY98 budget, the import duty on carshas also been further brought down from 50% to 40% ad valorem. Substantial reductionin import duty has been extended in the budget FY98 for import of certain items, whichwould help the industry to reduce the emission level of vehicles. The import duty oncatalytic converters and parts thereof has been reduced from 25% to 5%. The duty onCNG kits and parts thereof has been reduced from 10% to 5%.

The import duty on auto components will be a key factor in deciding the final pricing ofcars as new ventures start with about 50% indigenisation levels. The reduction in importduty on steel in the last few years has helped the industry in reducing raw material costsas major steel requirement of car industry was imported. Even today, all CKD/SKDimports include metal pressed body panels.

3.3.1 Policy on petroleum products, auto emission and depreciationThe price of petrol and diesel was regulated till recently by the government as part of its policy on petroleum products management. However, since 1997, the prices of thesefuels have been deregulated and linked to the movements in international prices. As aresult, already, the price of diesel has been raised twice, the latest by a huge 40%. Thisdismantling of the Administered Price Mechanism (APM) of petroleum products willreduce the cost disadvantage of petrol driven cars.On the vehicle emission front, judicial activism has goaded the government to takecertain policy measures in the recent past, which has led to stricter emission norms for


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automobiles. As per a Supreme Court judgment, banning registration of all non-Euro Icompliant cars within Delhi, all vehicles should become Euro I compliant by April 2000.(In the National Capital Region of Delhi, Euro II norms are now in operation) As a result,almost all the existing players and new entrants have started introducing modelscomplying with the said norms. This development has led to an increase in the prices of

cars, which by an estimate, could be anywhere between 10-15%.

The depreciation norms have effect on demand for cars as institutions purchase cars foruse by managerial staff and claim depreciation in their books. With this the companiesare benefited from tax shelter provided by depreciation. Therefore any change indepreciation norms affect the demand from this segment. The depreciation benefits,which accrue to institutions & corporate buyers, were slashed from 33.33% to 20% in1990. This led to decrease in demand from this segment for a short period. But withincrease in depreciation rate to 25% in 1994, corporate demand was restored.

3.3.2 Automotive Policy

In a policy announcement in FY94, the government had permitted foreign car producersto invest in the automobile sector in India and hold majority stakes. The objective of thepolicy was to build automobile production capabilities in the country, with minimumforeign exchange outflows. The key conditions of the policy related to production,imports, exports, level of indigenisation and foreign equity inflows.

Since all the new ventures involved the import of capital goods and CKD/ SKD kits, thepromoters had to fulfill certain export obligations. They were also required to provide anindigenisation program. However, these conditions were framed in the nature of MOUs,which the new ventures had to sign with the Directorate General of Foreign Trade(DGFT).

But, in the last three years many of the companies failed to live up to their exportcommitments, which made it difficult to obtain permission for importing additional CKD/SKD kits.

In addition, the uncertainty regarding the threshold level for classifying imports as CKD/SKD or component imports continues. Currently, the threshold level is set on a case-to-case basis where imports below a certain percentage of the total value of the car are beingcharged duty that is applicable to components (30%), while imports above thispercentage are being charged at the rate applicable to CKD/ SKD (45%). The industrywants the threshold level to be at 70%, while the government wants it to be at 35%.

In November '97, the Cabinet Committee on Foreign Investment cleared a new policy forpermitting new car ventures. It addresses the aspect of indigenisation level and exports bythe new ventures. The main proposals of the new policy are:

The new ventures would have to indigenes up to 50% within 3 years and 70% bythe end of seventh year of starting commercial production.

They will have to invest a minimum of $50 million as equity capital over a periodof 3-4 years.


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The venture will have to become foreign exchange neutral over a period of 5-7years.

The ventures will be allowed to export components & ancillaries, apart from cars.

A moratorium of 2 years would be given to companies for meeting the exportcommitment.

The new policy is expected to provide development of ancillarisation and increaseemployment opportunities. But for some of the new car ventures, auto policy willbe a speed barker as they have to sign a new MOU with the government and makenecessary arrangement to meet the new policy.

3.3.3 Import Policy

The import of passenger cars and other automotive vehicles is restricted and an importlicense is required for these items. Import of capital goods and automotivecomponents/parts are placed under Open General License (OGL) and hence, noGovernment approval is required. SKD/CKD Imports: Some of the joint ventures in thepassenger car sector envisage initial import of cars in SKD/CKD kits. Import of cars in

SKD/CKD kits requires a license from the Directorate General of Foreign Trade (DGFT).While the Government has decided to grant the required license in the case of jointventures approved in the car sector, these are required to give details about importprogramme, indigenisation planned and export possibilities and sign a memorandum ofunderstanding (MOU) with DGFT in this respect. The underlying idea for this is todiscourage screwdriver technology and to have an assurance that the joint venturepartners have long-term commitments to the projects.

3.3.4 Import Duty

In line with its treatment for luxury items import duties for car have been maintainedhigh. In the 80's, import duties varied between 150 to 200% based on the engine capacity

of a car. The import duty on cars and components has come down in the last few years inline with general reduction in import tariffs. In the 1997-98 Budget, the import duty oncars has also been further brought down from 50 per cent to 40 per cent ad valorem.Import of capital goods in the auto sector in general is attracting import duty of 25 percent. However, under the Export Promotion Capital Goods (EPCG) Scheme, capitalgoods can be imported on payment of confessional duty of 15 per cent on taking exportobligation of four times the c.i.f. value of imported goods, to be fulfilled in five years orzero duty payment on an export obligation of six times the c.i.f. value to be fulfilled ineight years where the c.i.f. value of imported goods is RS. 20 crores or more. The importduty on auto components will be a key factor in deciding the final pricing of cars as newventures start with about 50% indigenisation levels. The reduction in import duty on steel

in the last few years has helped the industry in reducing raw material costs as major steelrequirement of car industry was imported. Even today, all CKD/SKD imports includemetal pressed body panels.

3.3.5 Excise Duty

The perception of a car as a luxury item leads to heavy excise duty on cars. The exciseduty doubled from 25% in FY87 to 55% in FY91. Till 1987, the GOI followed adiscriminatory policy so as to charge lower duty on fuel-efficient car with engine


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capacity of less than 1000cc. This helped MUL to price its car at a lower price incomparison to others. But with lobbying from PAL and HM government withdrew theprovision in 1987.

But with the onset of the liberalization process in the early nineties, there has been

continued rationalization of excise duty in respect of automobiles. In 1997-98 there was aduty of 40 per cent on motor vehicles, designed for transport of not more than six people(excluding the driver). On vehicles designed for transport of more than six people, but notmore than 12 people, the duty was 25 per cent. In the case of public transport vehiclesand vehicles for transport of goods, the duty was fixed at 15 per cent. The duty on two-wheelers varies from 15 per cent to 20 per cent depending upon engine capacity, Exciseduty on auto components has been reduced from levels of 20 and 15 per cent to 18 and 13per cent. Excise duty on electrically operated vehicles has been reduced from 10 to 8 percent and bodies of motor vehicles from 20 to 18 per cent.

The car industry had been asking for reduction in excise duty so as to reduce the end

prices of cars to customers and increase the sluggish demand. With continuation ofliberalization and shift in the perception (of car being a luxury product) may lead toreduction in duties over a period of two to three years. This will reduce the prices of carsleading to further boost in demand.

The government policies have been instrumental in shaping up of the car industry rightfrom the post-independence era.

The Government controls car sector with the help of policies on taxation,depreciation norms, import duty on cars and parts used in it, petrol prices andimport duty of steel.

After liberalization, and with opening up of the auto sector in 1992-93 the license

raj ceased to exist. The perception of car as a luxury good has lead to heavy excise duty for cars. The

excise duty had doubled from 25% in FY87 to 55% in FY91. But with theliberalization process in early nineties, the government has brought down theexcise duty to 40 per cent in 1992-93.

In line with its treatment for luxury items import duties for car have beenmaintained high. The import duty on cars and components has come down in thelast few years in line with general reduction in import tariffs. Over the years theimport duty has been decreased from above 200% to 103% on passenger cars. Thecurrent duty on Completely Knock Down / Semi Knock Down (CKD/SKD) kits is103% (including 5% special duty) and for components 68% (including 5% special

duty). The reduction in import duty on steel in the last few years has helped the industry

in reducing raw material costs as major steel requirement of car industry wasimported.

The prices of petrol and diesel are regulated by the government as part of itspolicy on petroleum products management. This affects the operational cost of thecar and hence the demand for them. The proposed dismantling of AdministeredPrice Mechanism (APM) of petroleum products will reduce this disadvantage of


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petrol driven cars. Till last year diesel cars were considered as economy cars dueto large price differential compared to petrol with former being subsidized. Butlast year the hike in diesel prices by as much as 40 % reduced the differential andin future we might see petrol and diesel price parity. This will result in moredemand for petrol cars, as petrol cars are easy to handle and demand lesser

maintenance compared to their diesel counterparts. On the vehicle emission front, the government has taken an active role in the

recent past, which has led to strict emission norms for the automobiles in the lastfew years. With all the cars will have to be Euro II compliant by April 2000 thenew entrants and existing players will be forced to introduce latest models fromtheir portfolio of cars. This will make the cars dearer by 15 to 20 per cent. Hereone needs to focus on one important issue. The industry is geared to deliver thehardware to meet the prescribed norms and it shouldnt be difficult for any of thecarmakers in the country to meet the norms. But the issue the Government hasntaddressed satisfactorily is the quality of fuel which is a prerequisite forautomobiles to meet Euro I and Euro II norms. In the light of this Government

should establish an infrastructure, which allows unadulterated fuel to be suppliedfrom refineries to fuel filling stations. Without this the expensive hardware wouldjust be emitting poisonous gases. So in this case the court ruling has been in theright direction but devoid of understanding of the ground reality.

The depreciation benefits, which accrue to institutions & corporate buyers, wereslashed from 33.33% to 20 % in 1990.

The new ventures would have to indigenes up to 50% within 3 years and 70% bythe end of seventh year of starting commercial production.

3.4 Technology And Manufacturing ProcessThe body panel and engine constitute a major portion of the total cost of car manufacture.

A typical cost structure for car is as given below:

Parts/assembly % Of total cost

Glass 5

Brakes/wheels/tyres 6

Interiors 7

Transmission system 7

Ignition/exhaust system 8

Steering/suspension 9

Comfort fittings 11

Engine 16

Body 18

Others 13

Source: Probity Research


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5%6%

7%

7%

8%

9%

11%16%

18%

13%

Glass

Brakes/wheels/tyres

Interiors

Transmission system

Ignition/exhaust system

Steering/suspension

Comfort fittings

Engine

Body

Others

Car manufacturing is basically assembly of components procured from ancillaries or autocomponent manufacturers. Nearly the car manufacturers outsource 80% of autocomponents. This helps in reducing the capital cost needed to setup a car manufacturingplant.

Therefore, auto ancillaries play a key role in maintaining the quality and price of theproduct. But till the entry of MUL in the Indian car industry, vendor development washardly seen as a part of automobile manufacturing in the country. With the setting up of

auto component manufacturing facilities by Indian promoters, in collaboration withJapanese players for supply to MUL, the country was first introduced to the concept ofout sourcing.

With the new entrants planning to start manufacturing facilities with a small capacity base in the country, the role of auto component players will substantially becomeimportant over the years.

Presently, some of the luxury car manufacturers import CKD/ SKD kits and just carryoutassembly operations in the country. But with strict policy guidelines of the GOI in force,all manufacturers have to opt for 70% indigenisation within five years of starting

manufacturing operations in the country. This will further boost the operations of autocomponent manufacturers in the country.

3.4.1 Technology

As far as the changes in technology are concerned than one change will be that all thecars will have to be fitted with Multi Point Fuel Injection (MPFI a technology in whichtraditional carburetor is required and fuel is sprayed by different valves into thecombustion chambers of an engine). Secondly due to change in consumer preferences


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there have been technological advancements in power steering, power windows and suchother facilities, which are now available as a standard feature on the deluxe versions ofalmost all the cars. Developments too have taken place in the safety aspect of the car withcars becoming sturdier with side impact bars, air bags, collapsible steering etc. arebecoming more and more popular due to foreign carmakers coming in India with these

technologies.


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4 Indian Automobile market

4.1 Trade

4.1.1 Demand

The demand for cars in the past was supply driven, as demand did not match supply. Thisled to high premium and long waiting periods for the cars. But change in governmentpolicies coupled with aggressive capacity additions and upgradation of models by MULin the early nineties led to increase in supply and subsequently reduced the waitingperiods for economy cars.

The demand for cars was suppressed by various supply constraints. The demand for carsincreased from 15,714 in financial year 1960 to 30,989 in financial year 1980 at acompounded annual growth rate (CAGR) of only 3.5%. The entry of Maruti Udyog Ltd(Government of India Suzuki Motors, Joint Venture) in 1983 with a "peoples" car and amore favorable policy framework resulted in a CAGR of 18.6% in car sales from

financial year 1981 to financial year 1990.

After witnessing a downturn from financial year 1990 to financial year 1993, car sales bounced back to register 17% growth rate till financial year 1997. Since then, theeconomy slumped into recession and this affected the growth of the automobile industryas a whole. As a result car sales remained almost stagnant in the period between financialyear 1997 and financial year 1999. CAGR recorded during the financial year 1994 -financial year 1999 period was 14.4%, reaching sales of 409,624 cars in financial year1999. However, during financial year 2000, with the revival of economy, the segmentwent great guns posting a sales growth of 56% year on year growth. But again in thefinancial year 2001 the car sales were seen declining, as there was a negative growth rate

of about 5% in car sales. The market recovered in financial year 2002, but could notreach the figures achieved in financial year 2000. The data for this year is available up toNovember, which is also showing negative growth rate of 3.44%, against the same periodlast financial year.

The table below indicates the past sales trend for cars:

Year Sales

Year on Year

Growth (%)

1994209,203 27.00

1995264,822 27.00

1996345,486 30.00

1997410,992 19.00

1998417,736 2.00


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1999409,624 -2.00

2000638,815 55.80

2001

605,62

8 -5.20

2002632,584 4.45

2003*381,574 -3.44

* Upto November 2002Source: SIAM

0

100,000

200,000300,000

400,000

500,000

600,000

700,000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

*

Year

S

ales

* Upto November 2002

4.1.1.1 Determinants of DemandThe demand for cars is dependent on a number of factors. The key variables are listedbelow:

1. Per capita income2. Introduction of new models3. Availability & cost of car4. Financing schemes5. Price of cars6. Incidence of duties and taxes7. Depreciation norms8. Fuel cost and its subsidization9. Public transport facilities

The first four factors viz, increase in per capita income, introduction of new models,availability & cost of car financing have positive relationship with the demand whereasothers have an inverse relationship with demand for cars.


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The demand for cars in the future can be estimated with the help of making use of macroeconomic variables like growth in GDP, per capita income etc. or house hold penetrationtechnique. An attempt is made to estimate the potential demand for passenger cars basedon the household penetration level of passenger cars as explained in Annexure 4 of thereport.

The demand for cars in the future is expected to come predominantly from the existingtwo-wheeler owners who will be upgrading to a four-wheeler, due to rising income andnecessity of car for personal transportation purposes. Therefore, excluding the owners ofmopeds, the potential demand for cars in the next fifteen to twenty years can be taken as50% of the existing two-wheeler population of around 28mn units.

But with the release of new models in the higher end of the economy segment, the supplyof second hand economy cars is expected to increase substantially, which will be costing just about two times the price of premium range two-wheelers. This could affect thedemand for first hand/new cars. Also, with cross demand from utility vehicles,

availability of finance and other factors the above mentioned potential for cars will bedifficult to realize. Growth in the segment thus is expected to hover around 15-20%yoy.The dominance of economy segment will continue in the future, as it will provide largevolume to Indian car industry. This is because a majority of customers for cars willgraduate from two-wheelers. The demand for mid-sized and premium cars is expectedto rise as new models enter the market, income levels rise and present car ownersupgrading from the economy segment to higher end cars.

4.1.2 Supply

The supply of cars in Indian industry till 1991 was dependent upon the productioncapacity of individual players. The production of cars has increased from 42,475 units to181,420 units from 1981 to 1991 respectively. The growth in production of cars hasvaried in the last three decades from just 1% in 1970-80 to 21% in 1980-90 and above15% in 1991- 96. The table below gives the production numbers of passenger cars in thepast few years.

Year Production Year on Year Growth (%)

1994 207658 27.20

1995 264468 27.40

1996 348146 31.60

1997 407539 17.101998 401002 -1.60

1999 390355 -2.70

2000 577243 32.40

2001 513514 -0.11

2002 564126 0.10

2003* 329955 -1.99

* Upto September 2002


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Source: SIAM

0

100000

200000300000

400000

500000

600000

700000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

*

Year

Prod

uction

* Upto September 2002

From the above chart, it can be seen that the production of cars was increasing till 2001,with a steep increase in 2001, but thereafter, it was tipsy-topsy.

The major increase in production of cars in the 80's was due to the entry of MUL in 1983,which helped increase car production by 20,000 to 30,000 cars per annum till the earlynineties.

With the entry of MUL, the face of the passenger car industry changed forever. Existingproducers who had operated in a protected, high margin environment faced the prospectof not just diminishing market share, but a shift in focus from producing vehicles toselling them. But MUL made use of the opportunity open to its technologically superiorproduct and increased its capacity from 100,000 cars in FY90 to 240,000 cars in FY96and 350,000 cars in FY98.

The opening of economy in 1993, attracted world majors who joined hands with existingauto majors, to start their operations at the earliest. The first ones to enter the field wereMercedes Benz in joint venture with Telco to manufacture E220, E250D models, Peugeotin JV with PAL to manufacture Peugeot 309L, Fiat in JV with PAL to manufacture FiatUno.

This has helped in increasing the number of models available to the customer from 8 to

30 and hence provided a wide choice to him. This has also helped in reducing the averagewaiting period and premium on cars, which were a part and parcel of car cost in theeighties.

4.1.1 Exports

The passenger car exports in the eighties and early nineties had been very negligible asthe companies were facing a capacity constraint that was not even sufficient to supply to


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the domestic market. The poor quality of cars compared to international standards led topoor quantity of exports from the country.

But now, the Indian automotive industry has found a ready and accepting global marketbecause of the introduction of new vehicles and components with improved quality and

performance.

In 1985, MUL started exporting cars to neutralize the impact of foreign exchangeoutflow. The exports of MUL increased from 100 cars in financial year 1987 to 6,000cars in financial year 1990. The exports witnessed further momentum in the nineties toreach a volume of 37,161 in financial year 1997. But from financial year 1998 onwards, asouthward trend was witnessed with declining sales of 20% yoy to 29,747 vehicles. Thesame continued in financial year 1999 with a further drop of 14%yoy to 25,464 units.Financial year 2000 too saw lackluster exports with a 9% fall in export sales that touched23,271 units. The reason for sharp drop in car exports has been a drop in MUL exports,which now accounts for 90% of the country's total exports. But in the last two years, the

rise in the export of cars from India has been phenomenal. This is largely attributed to thequality of the cars produced by Indian automobile companies to remain competitive inthe global car market. There has been great improvement in the quality of Indian cars tocome to global terms.

Exports are expected to increase further in the near future as, new entrants like Hyundai,Honda Siel, GM and Ford are busy investigating options in the world markets. GM hascommenced exports to Nepal and is further considering Sri Lanka as a potential exportmarket. Further Ford is scheduled to commence exports by the end of the third quarter ofthe current fiscal.

In the longer run, as the industry matures, exports should increase as manufacturers striveto attain economies of scale, which will not be possible given the relatively small size ofthe domestic market.

Given below is the table showing the number of cars exported from India and a chartrepresenting the same.

Year Export Figures Year on Year growth (%)

1996-97 37161 -

1997-98 29747 (19.95)

1998-99 25464 (14.40)

1999-2000 23271 (8.61)2000-01 28000 20.32

2001-02 48000 71.43


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0

10000

20000

30000

40000

50000

60000

1996-97 1997-98 1998-99 1999-

2000

2000-01 2001-02

Year

No.ofunits

4.1.2 Import

Transport equipment including auto parts and vehicles have long been a part of the

annual imports, primarily because of their superior technology. Though the absolutevalue of transport equipment imports have increased intermittently over the decades, theirshare in the total imports of the country has steadily declined. The transport equipmentimports valued Rs. 72 crores or US $151 million in 1960-61, a share of 6.4%. This sharehas fallen to 1.4% for the year 1999-2000, though the absolute value has risen to Rs.2571 crores or US $611 million.

In spite of the fetish foreign cars seem to enjoy, the import of auto components faroutnumbers the import of vehicles. In 1997-98 while Rs. 17 billion worth of autocomponents were imported, in comparison only Rs. 1.7 billion worth of vehicles orengines were imported.

4.2 CapacityIn 2001-02, in India, the total capacity of all automobile (passenger car) players (about 15automobile players) in the automobile industry has been estimated at 1.25 million unitsper annum. The individual capacities of major players in the Indian Automobile Industryis given below:

PlayersCapacity (units

per annum)

PAL N.A.

TELCO 360000

MUL 350000M&M 120200

Hyundai 120000

Honda 30000

HML 64000

GM 25000

Fiat 50000


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Ford 50000

DaimlerChrysler India Pvt. Ltd 9000

Daewoo 72000

Toyota 50000

Total 1300200

4.3 Segmentation of the Industry

The Indian automobile industry can be classified, on the basis of price, in four differentsegments, into the 'small' car or the economy segment (up to Rs. 2.5 lakhs), mid-sizesegment (Rs. 2.75-4.0 lakhs), premium car segment which can be divided into lowerpremium (Rs. 5-7 lakhs) and upper premium segment (Rs. 7-10 lakhs) and Luxury carsegment (above Rs1mn). One of the things to note here is that the models shown belowhave many variants so there will be a price overlapping, which can result in overlappingacross segments. This segmentation is done according to prices of basic models. Themodels in the car market can be fitted to different segments as given below:

Category ModelsFeatures of the

segment

Economy segment (upto Rs. 2.5 lacs)

Maruti Omni, Maruti 800, PadminiPrice, FuelEfficiency

Mid-size segment (Rs.2.75-4 lacs)

Premier 118NE, Ambassador Nova, FiatUno, Zen, Hyundai Santro, Daewoo Matiz,Tata Indica, Contessa

Price,Performance

Premium Car Segment(Rs.5-10 lacs)

Esteem, Cielo, Siena, Accent, Ikon, Corsa,Baleno, Lancer, Astra, Escort, Honda City

Price,Performance,

Diesel optionLuxury segment(Above Rs10 lakhs

gp automobile 25th jan

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