GLOBAL PRESENCE OF AUTOMOBILE SECTOR

OverviewThe global automotive industry designs, manufactures, and markets the Worlds motor vehicles. Theglobal market for Automotive Electronics, estimated at US$191.3 billion in 2013 and forecast to be US$204.6 billion in 2014, is further projectedto reach US$314.4 billion by 2020,thereby maintaining a CAGR of 7.3% between 2012and 2020. OEM Automotive Electronics, accounting for an estimated shareof86.3% in 2013 equating to US$165.2billion in the overall Automotive Electronics market, is forecast atUS$177.2 billion in 2014 and expected to register a 2012-2020 CAGR of 7.6% in reaching a projectedUS$277.1 billion by 2020. The industry can be classified into 3 broad product segments, namely, commercial vehicles, passenger vehicles and two and three-wheelers. As their names suggest, commercial vehicles include goods and passenger carriers such as trucks and buses, while passenger vehicles are those we are all familiar with, from the luxury Rolls Royce to a 13-seater Toyota minivan to the modest Tata Nano. Two and three wheelers, of course, include motorcycles, scooters and the like.Given the breadth of the automotive industry (from backward linkages to raw materials such as metals and logistics to forward linkages with dealerships and gas stations), it is one of the largest industries by manpower, directly or indirectly employing managers, scientists, mechanics, technicians, salespeople and marketers, amongst others.

PerformanceUnfortunately, during the global meltdown in 2008, auto companies suffered a double whammy with rapidly rising oil prices and escalating raw material costs coupled with a drastic drop in demand of their fuel guzzling SUVs due to changes in consumer buying habits. As consumers tightened their purse strings, many looked for more fuel efficient, smaller cars while others re-evaluated their private vehicle usage, deciding to switch to public transport and delaying their auto purchases. As a result, many leading manufacturers, including the American Big Three (Chrysler, Ford and General Motors) and Japans Toyota suffered major losses and were forced to seek government assistance, shut down manufacturing plants, retrench large numbers of workers, re-organize their line-ups and offer substantial discounts across their existing ranges.Leveraging its burgeoning demand and domestic low cost production, China was one of few countries to experience significant growth in 2009, becoming both the largest automobile producer and market in the world. The Indian domestic market too, managed to escape the downturn relatively unscathed, due primarily to the relatively inelastic demand for compact vehicles and 2 wheelers, the launch of new variants by all major players and reduced excise duty in the 2008-09 Budget.The largest automotive companies in India are Maruti Suzuki, Hyundai Motor India, Tata Motors and Mahindra & Mahindra. The Indian automobile industry gathered momentum rapidly, with Indian Automotive citing April 2013's overall vehicle sales rising by up8.29 percent oversalesin2013 percent year-on-year. According to figures released by the Society of Indian Automobile Manufacturers, the domestic passenger car sales managed a growth of 17.15 percent.

Growth PotentialThe automotive industry remains one of the highest revenue-earning industries in India and contributed over 5% to Indias GDP in 2014, providing direct and indirect employment to more than 13 million people. The market outlook for the industry remains promising, especially in the small car segment. The Indian automobile market is currently dominated by the two-wheeler segment but with an expanding middle class population, growing earning power and industrial development, the demand for passenger cars and commercial vehicles will increase exponentially.

Also, the low vehicle presence (with passenger car stock of only around 11 per 1,000 population in 2008) indicates a very low base with significant growth potential. As per Just-Auto analyst reports, sales of passenger cars in 2008-2016 are expected to grow at a CAGR of around 10%.In addition to increased domestic demand, there is also likely to be increased investment by global auto manufacturers to India due to its strong technological capability and availability of trained manpower at competitive prices. Currently, the foreign auto companies with assembly plants in India include, General Motors, Ford, Hyundai, Honda, Suzuki, Nissan Motors, Toyota, Volkswagen, Audi, koda, BMW, Fiat and Mercedes Benz.

With the introduction of the Tata Nano, the cheapest car in the world at USD 2200, and FDI from Suzuki Motor Corp, Hyundai Motor Co, and Nissan Motor Co to make India their manufacturing hub for small cars, India has made huge inroads in the compact car segment. In fact, in 2009, India overtook China in the global auto exports of compact cars for the first time.

How are the industry and the market evolving? Globally, the automotive industry has recovered from the economic crisis. Industry profits in 2012 (EUR 54 billion) were much higher than in 2007 (EUR 41 billion), the last pre crisis year, and the prognosis for future growth is even better. By 2020, global profits could increase by another EUR 25 billion, to EUR 79 billion. That is good news, but the benefits will not be distributed equally across all geographies or all types of cars. Instead, some regions and segments will do much better than others. What is most striking about the recent past is how profoundly the source of profits has shifted. In 2007, the BRICs and RoW accounted for 30 percent of global profits (or EUR 12 billion). In 2012, that share rose to nearly 60 percent (EUR 31 billion), as sales in these regions rose 65 percent and outpaced growth in Europe, North America, Japan, and South Korea (Exhibit 1). More than half of this growth came from China (EUR 18 billion).

Growth continues to shift The automotive industrys economic center of gravity will continue to shift, as sales volumes and market share keep moving toward emerging markets. The global sales share of established markets will decline from 50percent in 2012 to 40percent in 2020; these will account for only about 25percent of future volume growth. The premium segment will account for more than half of future profit growth.

Upcoming challenges and opportunities?Complexity and cost pressure- The increase in regulations with respect to environmental and safety standards will raise costs but also increase complexity, as they need to be managed apart from domestic markets. The growing number of derivatives serving different vehicle segments and markets based on a single platform also raises complexity.Diverging markets- Emerging markets share of global sales will rise from 50 percent in 2012 to 60 percent by 2020, while their share of global profits is also set to rise by 10percentage points.Digital demands- When it comes to buying a car, research shows that digital channels are already the primary information source for customers. For many, the next step could be online purchasing. This might be an opportunity for OEMs, but it also means the potential threat of competition from online retailers and puts pressure on the existing dealership structure.Future ProspectsAll in all, this bodes very well for the industry outlook over the forthcoming years. As a result, the job opportunities in this sector are going to remain huge, especially for trained professionals involved in key production areas. Foreign firms looking to capitalize on the local talent are likely to offer attractive remuneration and provide accelerated growth prospects for ambitious individuals, and local firms hoping to grow their footprints are also likely to step-up their hiring and upward movement of staff.

Overall, evidence indicates that future opportunities will outweigh the challenges. However, those developments will significantly drive changes in the industry over the next decade. OEMs that understand and anticipate those future challenges and opportunities and address them proactively and early will be better positioned to succeed in this complex industry.