Automotive industry in India

The automotive industry in India is one of the largest in the world and one of

the fastest growing globally. India's passenger car and commercial vehicle

manufacturing industry is the sixth largest in the world, with an annual production

of more than 3.9 million units in 2011. According to recent reports, India overtook

Brazil and became the sixth largest passenger vehicle producer in the

world (beating such old and new auto makers as Belgium, United Kingdom, Italy,

Canada, Mexico, Russia, Spain, France, Brazil), growing 16 to 18 per cent to sell

around three million units in the course of 2011-12. In 2009, India emerged as

Asia's fourth largest exporter of passenger cars behind Japan, South Korea, and

Thailand.In 2010, India beat Thailand to become Asia's third largest exporter of

passenger cars. The Indian Automobile Industry manufactures over 11 million

vehicles and exports about 1.5 million each year.[ The dominant products of the

industry are two-wheelers with a market share of over 75% and passenger cars

with a market share of about 16%. Commercial vehicles and three-wheelers

share about 9% of the market between them. About 91% of the vehicles sold are

used by households and only about 9% for commercial purposes. The industry

has a turnover of more than USD $35 billion and provides direct and indirect

employment to over 13 million people.??? Tata Motors is leading the commercial

vehicle segment with a market share of about 64%.Maruti Suzuki is leading the

passenger vehicle segment with a market share of 46%. Hyundai Motor India

Limited and Mahindra and Mahindra are focusing expanding their footprint in the

overseas market. Hero MotoCorp is occupying over 41% and sharing 26% of the

two-wheeler market in India with Bajaj Auto. Bajaj Auto in itself is occupying

about 58% of the three-wheeler market.

Key players in the automobile industry

• Mahindra & Mahindra Ltd.

• Tata Motors

• Maruti Suzuki India Ltd.

• Hyundai Motor India Ltd.

• Hindustan Motors

• TVS Motors

• Toyota Kirloskar Motor Private Ltd.

• Ford Motor Co.

• Hero Honda Motors Limited

• Ashok Leyland

• General Motors India Private Ltd.

• LML

• Kinetic Engineering Ltd.

• Bajaj Auto Ltd.

• Hero Honda Motors Ltd.

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MarutiSwift.Maruti Suzuki, a subsidiary of Japan's Suzuki Motor, is the largest

automobile manufacturer in India.

Mahindra Scorpio, one of India's best selling indigenously developed SUV.

The Tata Nano - the cheapest car made in India

A Tata Safari on display in Poznan,Poland.

SWOT Analysis - Tata Motors Limited

• The company began in 1945 and has produced more than 4 million vehicles. Tata

Motors Limited is the largest car producer in India. It manufactures commercial and

passenger vehicles, and employs in excess of 23,000 people. This SWOT analysisis

about Tata Motors.

Strengths

• The internationalisation strategy so far has been to keep local managers in new

acquisitions, and to only transplant a couple of senior managers from India into the new

market. The benefit is that Tata has been able to exchange expertise. For example after

the Daewoo acquisition the Indian company leaned work discipline and how to get the

final product 'right first time.'

• The company has a strategy in place for the next stage of its expansion. Not only is it

focusing upon new products and acquisitions, but it also has a programme of intensive

management development in place in order to establish its leaders for tomorrow.

• The company has had a successful alliance with Italian mass producer Fiat since 2006.

This has enhanced the product portfolio for Tata and Fiat in terms of production and

knowledge exchange. For example, the Fiat Palio Style was launched by Tata in 2007,

and the companies have an agreement to build a pick-up targeted at Central and South

America.

• · The Nano is Tata‟s iPod. Great engineering and design in a rules-breaking product

that has generated global awareness and admiration

• · The brand is very well established in the economy segment

• · Tata‟s management is strengthened by the collective experience of its partners and

acquired companies – this includes general management, marketing, sales and

operations

• · Tata‟s buying power is enhanced and leveraged through its size

• · Tata is making smart acquisition and partnering decisions so far. Local management

teams remain in place vs. installing Tata leaders from afar.

Weaknesses

• The company's passenger car products are based upon 3rd and 4th generation

platforms, which put Tata Motors Limited at a disadvantage with competing car

manufacturers.

• Despite buying the Jaguar and Land Rover brands (see opportunities below); Tata has

not got a foothold in the luxury car segment in its domestic, Indian market. Is the brand

associated with commercial vehicles and low-cost passenger cars to the extent that it

has isolated itself from lucrative segments in a more aspiring India?

• One weakness which is often not recognised is that in English the word 'tat' means

rubbish. Would the brand sensitive British consumer ever buy into such a brand? Maybe

not, but they would buy into Fiat, Jaguar and Land Rover.

• Tata Motors is not well positioned in the luxury segment. This is not a problem during

recessionary times but a lack of diversification can hurt during better times

• Most of the automobiles Tata manufactures are based on older platforms

• The Company‟s manufacturing practices trail competitors

Opportunities

• In the summer of 2008 Tata Motor's announced that it had successfully purchased the

Land Rover and Jaguar brands from Ford Motors for UK £2.3 million. Two of the World's

luxury car brand have been added to its portfolio of brands, and will undoubtedly off the

company the chance to market vehicles in the luxury segments.

• Tata Motors Limited acquired Daewoo Motor's Commercial vehicle business in 2004 for

around USD $16 million.

• Nano is the cheapest car in the World - retailing at little more than a motorbike. Whilst

the World is getting ready for greener alternatives to gas-guzzlers, is the Nano the

answer in terms of concept or brand? Incidentally, the new Land Rover and Jaguar

models will cost up to 85 times more than a standard Nano!

• The range of Super Milo fuel efficient buses are powered by super-efficient, eco-friendly

engines. The bus has optional organic clutch with booster assist and better air intakes

that will reduce fuel consumption by up to 10%.

• The Nano could sell well in other geographic markets. Expanding markets such as

China may find the Nano just the answer

• Jaguar and Land Rover provide Tata with an opportunity to establish itself in the luxury

segment

Threats

• Other competing car manufacturers have been in the passenger car business for 40, 50

or more years. Therefore Tata Motors Limited has to catch up in terms of quality and

lean production.

• Sustainability and environmentalism could mean extra costs for this low-cost producer.

This could impact its underpinning competitive advantage. Obviously, as Tata globalises

and buys into other brands this problem could be alleviated.

• Since the company has focused upon the commercial and small vehicle segments, it has

left itself open to competition from overseas companies for the emerging Indian luxury

segments. For example ICICI bank and DaimlerChrysler have invested in a new Pune-

based plant which will build 5000 new Mercedes-Benz per annum. Other players

developing luxury cars targeted at the Indian market include Ford, Honda and Toyota. In

fact the entire Indian market has become a target for other global competitors including

MarutiUdyog, General Motors, Ford and others.

• Rising prices in the global economy could pose a threat to Tata Motors Limited on a

couple of fronts. The price of steel and aluminium is increasing putting pressure on the

costs of production. Many of Tata's products run on Diesel fuel which is becoming

expensive globally and within its traditional home market.

• Powerful competitors for the luxury market including Honda, Toyota, Ford and

Mercedes-Benz are beginning to push into the Indian market

• Tata‟s competitive price advantage will be under pressure as environmental regulations

are tightened

• Rising material costs will create pressure to increase prices

• There is a trending rise in diesel fuel costs which will hurt Tata‟s line of products

SWOT Analysis: Hindustan Motors

Strengths:

• Hindustan Motors was the first Indian Car Company to start production in India in 1942.

• HM has become a vast company, manufacturing cars like the sturdy Ambassador, the

elegant Contessa, and in collaboration with Mitsubishi of Japan now manufactures the

new Mitsubishi Lancer.

• HM started production of the Landmaster in 1954, and in 1957 began the production of

the Ambassador. Later tie-ups with General Motors Corporation of USA, Vauxhall

Motors, UK, Marion Power Shovel Co, USA led to new products being launched.

• In 1963 commenced the production of the Ambassador Mark2 Later versions and more

forays in related vehicle segments followed.

• Export has been steadily increasing, mainly in the British and Japanese markets. Trucks

are being exported to Bangladesh, Egypt, New Zealand, Sri Lanka and Mauritius. The

Earth moving Equipments are being exported to Oman, Jordan, Iraq, Bangladesh,

Mauritius and Libya.

• HM has a vast service network. The Passenger Car and Utility Vehicle market is being

attended by a 115 strong dealer network, 50 Service and Parts dealers and additional 60

exclusive Parts dealers. 4 Regional Offices and Nation-wide Territory Offices support it.

Weaknesses:

• The license Raj before 90‟s, lead to lack of product activity in the Indian market was

mainly due to the Indian government‟s complex regulatory system that effectively

banned foreign-owned operations. Within this system (referred to informally as the

“license raj”), any Indian firm that wanted to import technology or products needed a

license/permit from the government. The difficulty of getting these licenses stifled

automobile and component imports, creating a low volume high cost car industry that

was inefficient, unprofitable, and technologically obsolete.

• The dominant product Ambassador, although customized to the poor road conditions in

India, were based on a stale design concept (with outdated features), and were also fuel

inefficient.

• Inefficiency of Employees, output of each employee was less due to Union interference.

• Inefficient management principles.

Opportunities:

• Efficiency through management principles.

• Exports

• Acquisitions for strengthening its distribution tie-ups.

• Entry into other related diversification categories like Truck parts manufacture, and

other parts automotives.

• Can bring out more sophisticated cars with high technology standards.

Threats:

• Emergence of strong players in the market mainly overseas competitors.

• Lack of employee motivation.

• Lack of design for cars (mainly new age look for cars).

SWOT ANALYSIS-ASHOK LEYLAND

• Strength of the company

• Good Training System

• Good Organisational Climate

• High Market Share

• Skilled Employees.

• Strong Functional Structure.

• Standard Quality Product

Weakness of the company

• Low margin

• High price

• Sales representatives are less.

• There is no proper mechanism to handle the grievance of the customers

Opportunities for the company

• Due to liberalization, demand for heavy vehicle havesteeped up all over the globe.

• National market through good advertisement.

• Company provides better credit facility to dealers

• Company introduces promotional programmes

Threats faced by the company

• High competition Liberal credit policy of other brand Promotional programmes of other

brand. Complicated national market Good replacement facility if other brands.

SWOT Analysis-Mahindra & Mahindra

Strength

• 1. Mahindra has been one of the strongest brands in the Indian automobile market

2. Mahindra group give employment to over 110,000 employees

3. Excellent branding and advertising, and low after sales service cost

4. Sturdy SUV‟s good for Indian roads and off-road terrain

Weakness

• 1. Mahindra‟s partnership with Renault did not live up to international quality standards

through their brand Logan

Opportunity

• 1. Developing hybrid cars and fuel efficient cars for the future

2.Tapping emerging markets across the world and building a global brand

3.Fast growing automobile market

4.Growing in the market through electric car Reva (controlling stake) and entry into two-

wheeler segments

Threats

• 1. Government policies for the automobile sector across the world

2. Ever increasing fuel prices

3. Intense competition from global automobile brands

4. Substitute modes of public transport like buses, metro trains etc

• The auto industry is considered to be an oligopoly.

• Today there are 15 companies in production of which 5 are automotive producers and

10 are commercial vehicle producers. The automotive industry is one of the four largest

exporters.

Significant contribution to:

- National production and development

- Employment

- Level of technology

Competitive analysis between Mahindra and Mahindra and Tata

motors

Auto major Mahindra & Mahindra is gearing up to intensify competition in the mini truck segment

with homegrown rival Tata Motors, which is currently leading the market with its Ace model.The

company, which launched a CNG variant of its mini truck 'Maxximo' - priced at Rs 3.99 lakh (Ex

showroom Delhi), said it is looking to expand customer base through its "superior product

offering".

With its new truck segment it was able to build a good share in the market which was dominated

by tata ace for a long time and due to its superior product offering,it was believed that more

customers will get attracted to it.

Mahindra‟s share was 22% in the load segment while that of Ace was 68%. In the load

segment, Maxximo had 29% share while that of Ace was over 60%.

With the CNG variant of the Maxximo, M&M is optimistic that it would be able to add more

customers from the Delhi and National Capital Region as compared to Tata Ace.

M&M is the second largest passenger cum utility vehicle manufacturer in India (after Tata

Motors) with current market capitalization of about Rs.41,600crores. It posted net margins (11%

in 2011) more than twice that of its nearest competitors i.e. Tata Motors (4%) and Ashok

Leyland (5.5%).

Mahindra XUV500 was chosen as the most reputed car from a list of 200 different models from

19 different car manufacturers. Following the Mahindra XUV500 is the Tata Nano, ranked

second most Reputed car model in India, followed by Maruti Suzuki Swift Dzire on third position.

Mid priced segment targeted by the Automobile industry

Tata Motors

• Tata motors has targeted on themid priced segment through its new Tata Indigo. Tata

Indigo has an innovative design. Inspiring front frame and bright headlamps make the

car look exclusive. In the back end, the vehicle has a trendy taillights bunch. Its

comfortable seats provide you more reliable driving. Even with being a compact car, it

provides enough leg and head room for both front and rear seat passengers. Tata indigo

has well-appointed interiors. Its steering is very comfortable. Tata Indigo is available in

both diesel and petrol engine. The petrol variants of the car are GLX, GLE and, GLS

while the diesel versions come in two models LS and LX . The models are in the price

tag of approximate Rs 4.75 lakhs to Rs 5.90 lakhs.

Mahindra and mahindra motors

• Hindustan motors have targeted the mid priced segments through its „Verito‟ – the

Logan. The new Verito retains the famed strengths of the Logan, while adding a new

style with some key changes. Now equipped with several rugged and sporty styling

elements, the Verito is all set to be the most exciting buy in the entry level sedan

category for Indian consumers. It is competitively priced at Rs. 4.82 lakh (petrol BS3

version) & 5.62 lakh (Diesel BS3 version). The BS4 compliant version is also available

for BS4 markets.

Powered by the Renault engine, the Verito is a sedan which remains true to itself and the

consumer by offering the unique proposition of space, mileage and performance along with

style. The exterior of this car is quite unique with ski racks and side cladding, which are

available for the first time on a sedan in the Indian market.

• Other 1 is the Bolero -Base model is priced at Rs. 6.19 lakhs (Ex-showroom New Delhi)

(September, 2011) Will be available in four variants: SLE, SLX, and ZLX (New variant

introduced). Features are revised front grille and new bumpers which include the all-

new hawk-eye head lamps.It consists of a new gear knob and leather wrapped steering

wheel in top model,all-new digital instrument cluster,new rear wiper and defogger, new

beige coloured interiors, new body decals/graphics.

Tata indigo

Mahindra and mahindraverito

Mahindra bolero

Ashok leyland truck

MARKET STRUCTURE

CHARACTERISTICS OF OLIGOPOYMARKET

• Profit maximisation conditions: An oligopoly maximises profits by producing where

marginal revenue equals marginal costs

• Ability to set price: Oligopolies are price setters rather than price takers

• Entry and exit: Barriers to entry are high.The most important barriers are economies of

scale, patents, access to expensive and complex technology, and strategic actions by

incumbent firms designed to discourage or destroy nascent firms. Additional sources of

barriers to entry often result from government regulation favoring existing firms making it

difficult for new firms to enter the market

• Number of firms: "Few" – a "handful" of sellers There are so few firms that the actions

of one firm can influence the actions of the other firms.

• Long run profits: Oligopolies can retain long run abnormal profits. High barriers of entry

prevent sideline firms from entering market to capture excess profits.

• Product differentiation: Product may be homogeneous (steel) or differentiated

(automobiles).

• Perfect knowledge: Assumptions about perfect knowledge vary but the knowledge of

various economic actors can be generally described as selective. Oligopolies have

perfect knowledge of their own cost and demand functions but their inter-firm information

may be incomplete. Buyers have only imperfect knowledge as to price, cost and product

quality.

PRICE LEADERSHIP IN OLIGOPOLISTIC MARKETS

Oligopolies may pursue the following pricing strategies:

• Oligopolists may use predatory pricing to force rivals out of the market. This means

keeping price artificially low, and often below the full cost of production.

• They may also operate a limit-pricing strategy to deter entrants, which is also called

entry forestalling price.

• Oligopolists may collude with rivals and raise price together, but this may attract new

entrants.

• Cost-plus pricing is a straightforward pricing method, where a firm sets a price by

calculating average production costs and then adding a fixed mark-up to achieve a

desired profit level. Cost-plus pricing is also called rule of thumb pricing.

• There are different versions of cost-pus pricing, including full cost pricing, where all costs

- that is, fixed and variable costs - are calculated, plus a mark up for profits, and

contribution pricing, where only variable costs are calculated with precision and the

mark-up is a contribution to both fixed costs and profits.

• Cost-plus pricing is very useful for firms that produce a number of different products, or

where uncertainty exists. It has been suggested that cost-plus pricing is common

because a precise calculation of marginal cost and marginal revenue is difficult for many

oligopolists. Hence, it can be regarded as a response to information failure. Cost-plus

pricing is also common in oligopoly markets because it is likely that the few firms that

dominate may often share similar costs, as in the case of petrol retailers. However, there

is a risk with such a rigid pricing strategy as rivals could adopt a more flexible

discounting strategy to gain market share.

• Cost-plus pricing can also be explained through the application of game theory. If one

firm uses cost-plus pricing - perhaps the dominant firm with the greatest market share -

others may follow-suit

DEMAND CURVE

Above the kink DC is relatively elastic because all other firms price remain unchanged,

below the kink, demand is relatively inelastic because all other firms will introduce a

similar price cut ,eventually leading to a price war ,therefore the best option for an

oligopolist is to produce at point E which is equilibrium point and the kink point.

Contribution of automobile industry to GDP

Role of Automobile Industry in India GDP-Sales Trends

• In the year 2006-07 the number of Passenger Car sold were 10,76,408

• In the year 2006-07 the number of Passenger Vehicles sold were 13,79,698

• In the year 2006-07 the number of Commercial Vehicles sold were 4,67,882

• In the year 2006-07 the number of Three Wheelers sold were 4,03,909

• In the year 2006-07 the number of Two Wheelers sold were 78,57,548

• In the year 2006-07 the number of automobile sold were 1,01,09,037

Role of Automobile Industry in India GDP-Growth

•

The growth rate of the Passenger Cars in the year 2007 is 13.50%

• The growth rate of the Utility Vehicles in the year 2007 is 10.10%

• The growth rate of the Multi Purpose Vehicles in the year 2007 is 24.40%

• The growth rate of the Light Commercial Vehicles in the year 2007 is 16.05%

• The growth rate of the Commercial Vehicles in the year 2007 is 3.43%

• The MarutiUdyog Ltd is the largest car manufacturer in the country and the rate of

growth in the year 2007 was 20.7%

• The Mahindra & Mahindra Ltd's cumulative sales for the year 2007 was 1,06,094 units

and the rate of growth was 35.8%

• The Honda Siel Cars India Ltd, the leaders in India pertaining to the manufacturing of

premium cars, registered a growth of 16.1 % during the year 2007 and sold 41,638 units

• The Daimler Chrysler sales for the year 2007 was 1,681 units in India and the growth

rate was more than 22%

• The General Motors India, registered a 114% increase in the national sales in the

August of 2007

• The Hero Honda sold more than 2 million units in the Jan-Aug period of the year 2007

• The export pertaining to the motorbikes was 3,21,321 units in the year 2007

THE DEMAND SIDE ANALYSIS

Law of demand

• states that the relationship between a good‟s price and thequantity demanded of that

good is negative. This is referred to as a “change inquantity demanded”. Own-price

changes cause movements along a givendemand curve. The demand for automobiles

for is dependent of certain factors

• The demand function for X:

• XD= f (PX, Ps, Pc, I, T&P, Pop, A, O, PPP, R, SP, Av, In, Tr, F)

• Where: XD= quantity demanded

• PX= X‟s price; the price of a car

• Ps= the price of substitutes

• Pc= the price of complements

• PPP=Purchasing Power parity of the consumers

• R= Rising income level of the consumer

• I= Inflation of the country

• A=after sales service cost

• T&P=tastes and preferences

• Pop=population in market or market size

• O=Oil prices

• SP= Price of Spare Parts

• Av= Availability of nearby service station

• In=Lack of proper roads

• Tr= Traffic Condition on the Roads

• F=Financing options available in the marke

The supply side analysis

2.1 Law of supply

The Law of Supply states that the relationship between a good‟s price and the quantity

suppliedof the good is positive. Own-price changes cause movements along a given supply

curve.The supply of cars e.g. Honda city is dependent on certain factors.The supply function

for X:X

• S= g (PX, Pfop, Poc, S&T, N)

• Where:

• XS= quantity supplied

• PX= X‟s price

• Pfop= prices of factors of production

• Poc= opportunity costs (alternatives in productions)

• S&T = science and technology

• R= Price of raw materials like Steel, tyre, plastics for making dashboards, etc.N =

number of firms in the market

Changes in this causes movements along the demand curve:

• Price

• A change in the quantity demanded is a movement along the demand curve.

• A movement along the demand curve for X would be caused by a change in Px.

• When price increases, the quantity demanded by consumers falls at every price and

when price decreases, the quantity demanded by consumers rises at every price.

Changes in these shift the demand curve:

• Number of buyers

• Tastes and preferences

• Income of the consumers

• Purchasing Power Parity

• Change in Fuel Prices

• Change in Financing Options

• After sales servicing cost

• Availability of spare parts

• Lack of Infrastructure Facilities like Roads, etc.

• Price of substitutes or complements

• Expectation of future prices

• Shift of the entire demand curve is caused by a change in one of the “ceteris paribus”

demand variables.

• This is referred to as an increase or decrease in demand.

• An increase in demand is a rightward shift in the entire curve. A decrease in demand is a

leftward shift in the entire curve.

• Number of buyers

Demand is originating from new segments of the market; Apart from the usual clientele like

industrialists, film stars and chairpersons of companies, an increasing number of young

professionals like doctors, chartered accountants, lawyers and software professionals owning

start-ups do not mind splurging on our cars.

• Tastes and preferences

The surge in demand for compressed natural gas (CNG) and liquid petroleum gas (LPG)

vehicles in India is driven by the increasing price of petrol and diesel, as well as by the fact that

CNG prices are relatively low compared to prices for more traditional fuels.

Demand is driven by growing environmental concern and the Indian government's proactive

measures to implement Euro-II emission norms.

• Price of substitutes or complements

Substitutes: Goods that can serve as replacements for one another: when the price of one

increases, demand for the other goes up.

When the price of a Honda city goes up, the demand for its substitute the Hyundai car goes

up.

• Complements/complementary goods: Goods that “go together”, i.e. a decrease in the

price of one results in an increase in demand for the other.

If the price of petrol increases, the demand for car and its complementary good will fall. if the

price of Cars were to rise dramatically, less people would chose to buy and use cars, switching

perhaps to public transport - trains perhaps !. It follows that under these circumstances the

demand for the complementary good - Petrol - would also decrease.

• Expectations of future Price Changes

Just as an actual increase in the price of a product may reduce demand, so the expectation

that prices are about to rise will increase demand, as people buy more now, in order to avoid

paying a higher price latter.

For example if price of automobiles is expected to increase after the budget the people

would prefer buying their vehicles before the budget is put to effect in anticipation of high prices

in future.

• Changes in income

There are two ways an increase in the level of income can affect the demand of cars. On the

demand side, typically an increase in income would mean an increase for the demand of cars.

However, this may not apply to low end cars such a maruti. Since people have more money,

they most likely would buy a nicer car, so low-end cars may see a decrease in demand.

• Purchasing Power Parity

Though there is increase in income level of the consumers but that does not mean that his

purchasing power has increased. Due to the rising inflation prevailing in the country the value of

the money decreases and that decrease the purchasing power of the consumers. This willaffct

the demand of the cars in country.

• Rising fuel Price

As we know that when the fuel prices increases the sales of premium vehicles decreases as

Fuel Prices and Cars are complementary goods. In the case of complementary goods the price

of one product affects the demand of other complementary good. So there has to be a proper

decision in the price of complementary goods.

Lack of infrastructure facilities:

• Lack of infrastructure facilities also affects the buying decision of the consumers. Since

there is no proper infrastructure facility like roads, so due to this there can occur traffic

jams, so consumer in that condition postpone their decision to buy a new car and that

decreases the demand for the automobiles.

• Changes in this causes movements along the supply curve:

Price

• A change in the quantity supplied is a movement along the supply curve.

• A movement along the supply curve for X would be caused by a change in Px.

• When price increases, the quantity supplied by suppliers rises at every price and when

price decreases, the quantity supplied by suppliers falls at every price.

Example:

When price increases from $1000 to $5000, the quantity supplied rises from 3 units of cars to 5

units of cars.

• Changes in these shift the supply curve:

• Price of resources(labor, land, Capital, Raw materials)

• Management skills

• Technology

• Marketing

• Production techniques

• Expectations

• Price of other commodities-There are two types

Competitive supply-If a producer switches from producing A to producing B, the price of A will

fall and hence the supply will fall because it's less profitable to make A.

Example- if the car producers switches from producing luxury car, Honda city to producing

small segment car, the price of Honda city will fall and hence the supply will fall because it is

less profitable to make Honda city.

Joint supply-A rise in one product may cause a rise in another.

Example- a rise in the price of cars may cause a rise in the price of car accessories and car

gear. This means supply of car accessories and car gear will rise because it is more profitable.

• Costs of production-If production costs rise, supply will fall because the manufacture of

the product in question will become less profitable.

• Change in availability of resources-If steel becomes scarce; fewer cars can be made, so

supply will fall.

• Research and Development: R&D cost increases the price of the vehicles, regular

products

The consumer equillibrium analysis

• The equilibrium price (and quantity) is determined from the intersection of the supply and

demand curves.

Imbalance

• Surplus: the amount by which quantity supplied exceeds quantity demanded when the

price in the market is too high.

• Shortage: the amount by which quantity demanded exceeds quantity supplied when the

price in a market is too low

• Less wealthy buyers will be largely prevented from entering the market because of

substantially higher ERP and fuel costs.

• Existing owners who can afford these usage cost increases will replace their cars after

six to seven years - up from the current four to five years

• The new measures to contain vehicle growth and improve public transport are likely to

weed out the marginal car owners, force others to keep their cars longer...… And

eventually stabilize the car population

Price elasticity of demand

• Proportion of income spent;

Since buying an automobile involves a large proportion of income being spent, thedemand

for automobiles is elastic. Consequently even a little increase in price would affect the demand

for cars.

• Closeness of substitutes;

Automobiles have a large number of substitutes available , for e.g. Honda city,Hyundai Accent,

etc in

luxury segment of cars, consequently the demand for automobiles is elastic, as consumers

have the option of buying from a variety of substitutes if the price of the product increases.

• Nature of goods

Automobile are luxury goods the demand for which is price elastic as changes in price level

affect the luxury goods comparatively more than the necessary goods.

INCOME ELASTICITY OF DEMAND

How would the demand for a good change if income increased or decreased? This is known

asthe income elasticity of demand.For example, how much would the demand for a luxury

car increase if average income increased by 10%? If it is positive, this increase in demand

would be represented on a graph by a positive shift in the demand curve. At all price levels,

more luxury cars would be demanded.

The income elasticity of automobiles is greater than 1as automobiles are luxury goodsand

consequently their demand increases with an increase in the income of the consumer.For e.g. if

a person earns 10 million p.a. and owns a Hyundai Santro, on a rise of incometo 20 million p.a.,

the consumer shall buy more and costlier cars.

The promotional elasticity of demand;

The influence of advertising and promotional activities on the demand for automobiles is very

high. The type of, segment, accessories, color, model of the car purchased are affected by the

ads and sales promotion, thereby making the advertising elasticity for automobiles high.

The cross elasticity of demand of automobiles:

Another elasticity sometimes considered is the cross elasticity of demand, which measures

the responsiveness of the quantity demanded of a good to a change in the price of another

good. This is often considered when looking at the relative changes in demand when studying

complementary and substitute goods

Individual elasticity curve

Automobile Industry elasticity curve

Economies of scale

Economies of scale are the cost advantages that a business can exploit by expanding their

scale of production in the long run. The effect is to reduce the long run average (unit)

costs of production over a range of output. These lower costs are an improvement in

productive efficiency and can feed through to consumers in the form of lower market prices.

But they can also give a business a competitive advantage in the market. They lead to lower

prices but also higher profits, consumers and producers will both benefit.There are many

different types of economy of scale and depending on the particular characteristics of an

industry:-

Internal economies of scale (IEoS)

Internal economies of scale arise from the growth of the firm itself. Examples include:

• Large-scale businesses can afford to invest in expensive and specialist capital

machinery.

• Specialisation of the workforce: Within larger firms they split complex production

processes into separate tasks to boost productivity.

• Marketing economies of scale and monopsony power

• Managerial economies of scale

• Network economies of scale:

• External economies of scale

• External economies of scale occur outside of a firm, within an industry. Thus, when

an industry's scope of operations expand due to for example the creation of a better

transportation network, resulting in a subsequent decrease in cost for a company

working within that industry, external economies of scale are said to have been

achieved.

• Diseconomies of scale

• A firm may eventually experience a rise in long run average costs caused by

diseconomies of scale. Diseconomies of scale a firm may experience relate to:

• Control – monitoring the productivity and the quality of output from thousands of

employees in big corporations is imperfect and costly – this links to the concept of the

principal-agent problem – how best can managers assess the performance of their

workforce when each of the stakeholders may have a different objective or motivation?

• Co-operation - workers in large firms may feel a sense of alienation and subsequent

loss of morale. If they do not consider themselves to be an integral part of the business,

their productivity may fall leading to wastage of factor inputs and higher costs.

Operating leverage

• The degree of operating leverage (DOL) is a measure, at a given level of sales of how

a percentage change in sales volume will effect profits.

• Degree of operating leverage (DOL) = Contribution margin ÷ Net operating income

• Declining sales volume is a big problem for automakers like Ford and General Motors

considering that both motor companies are highly leveraged. In other words, they

exhibit high operating leverage. Without getting into the technicalities. Low operating

leverage exhibits low fixed costs and high unit variable costs, while high operating

leverage exhibits high fixed costs and low unit variable costs. A higher operating

leverage indicates that a change in sales volume will have a relatively greater impact on

profits. This is desirable for a company who is operating above the breakeven point, or

where revenues exceed costs. As sales volumes increase, fixed costs remain the same

and variable costs are low so increasing sales volume does not drastically impact costs.

Both Ford and General Motors are operating below the breakeven point and because

they exhibit high operating leverage their profits have suffered by a larger degree due

the burden of high fixed costs. High operating leverage is the reason why sales volume

is such a crucial factor for the survival of these U.S. automakers. Revenues must

exceed costs so profits remain respectively less effected by higher fixed costs.

Revenue in the oligopoly markets

• Marginal revenue

The change in total revenue resulting from a change in the quantity of output sold.

Marginal revenue indicates how much extra revenue a firm receives for selling an extra

unit of output.

Marginal revenue= change in total revenue

change quantity

• Average revenue

The revenue received for selling a good per unit of output sold, found by dividing total

revenue by the quantity of output.

average revenue= total revenue

quantity

• Market control means these market structures face negatively-sloped demand curves.

As such, the price received is not fixed, but depends on the quantity of output sold, and

so too does average revenue.In an oligopoly firm, marginal revenue is less than average

revenue and price, all three of which decrease with larger quantities of output. The

constant or decreasing nature of marginal revenue is a prime indication of the market

control of a firm.

• Marginal cost

The change in total costs arising from a change in the managerial control variable.

In the short run, fixed costs do not vary with output, so marginal costs can also be

written as:... where δTVC is the change in total variable cost. If the total cost function is

known or has been estimated, marginal cost would be the derivative of total costs with

respect to output.

Marginal revenue and average revenue is the same for market structures like monopoly,

oligopoly, and monopolistic competition, because these firms are price makers rather

than price takers, there are a few key differences.

CONCLUSION

• The Indian Automotive Industry after de-licensing in July, 1991 has grown at a

spectacular rate of 17% on an average for last few years. The industry has now attained

a turnover of Rs. 1,65,000crores (34 billion USD) and an investment of Rs. 50,000

crores. Over of Rs. 35,000 crores of investment is in pipeline. The industry is providing

direct and indirect employment to 1.31 crore people. It is also making a contribution of

17% to the kitty of indirect taxes. The export in automotive sector has grown on an

average CAGR of 30% per year for the last five years. The export earnings from this

sector are 4.08 billion USD out of which the share of auto component sector 1.8 billion

USD Even with this rapid growth, the Indian Automotive Industry‟s contribution in global

terms is very low. This is evident from the fact that even though passenger and

commercial vehicles have crossed the production figure of 1.5 million in the year 2005-

06, yet India‟s share is about 2.37 percent of world production as the total number

of passenger and commercial vehicles being manufactured in the world is 66.46 million

against the installed capacity of 85 million units. Similarly, export constitutes only about

0.3% of global trade.

• It is a well accepted fact that the automotive industry is a volume driven industry and a

certain critical mass is a pre-requisite for attracting the much needed investment in

Research and Development and New Product Design and Development. R&D

investment is needed for innovations which is the life-line for achieving and retaining the

competitiveness in the industry. This competitiveness in turn depends on the capacity

and the speed of the industry to innovate and upgrade. No nation on its own can make

its industries competitive but it is the companies which make the industry competitive.

The most important indices of competitiveness are the productivity both of labor and

capital

• Areas to Focus

• The future challenge for Indian automobile industry would be to develop a supply base

with emphasis on lower costs and economies of scale, develop technical and human

capabilities, overcome infrastructural bottlenecks, stimulate domestic demand and

exploit export and international business opportunities. The key to success is to achieve

the critical mass that would make India competitive and profitable for sustained

investments. Keeping these in view the identified challenges and interventions are in the

areas of competitiveness in manufacturing and technology, demand, brand building and

infrastructure; export and international business, environmental and safety standards,

and human resources development. A key deficiency that needs to be addressed for

attaining the vision is to improve competitiveness in manufacturing. Systemic

deficiencies could be overcome through along-term and stable policy regime that will

support the industry to fulfill its‟ potential.

• Competitiveness in manufacturing

• The share of manufacturing sector (within the Industry sector) has shown only a

marginal improvement from 16.6% in 1991 to 17% of Indian GDP 2003. In comparison in

some East Asian economies the share of manufacturing has ranged from 25% to 35% of

their GDP. It is known that stagnation of manufacturing as a proportion of G has adverse

impact on employment generation. Therefore it is imperative to boost manufacturing

given the huge anticipated increase in the workforce over the next years. Demand

creation, brand building and infrastructure In order to raise the contribution of automotive

industry to GDP from 4.4% to10%, there has to be a focus both on the domestic market

as well as exports. Domestically the focus should be on developing and selling

appropriate products for the large population of the country. These products could

include cost effective small carriers, strong, rugged, low cost vehicle for the rural market,

USD 300-350 motorbikes and small, safe four wheelers for family transport. For exports,

the focus should be on new geographies for growth beyond traditional markets. India‟s

GDP is expected to grow from USD 650 billion to USD 950 billion in2010 and USD 1390

billion in 2016. Automotive industry‟s contribution in these years is expected to rise from

USD 34 billion to USD 69 billion and to USD 145 billion respectively. These translate into

a contribution to GDP to grow from the current 5.2%to 7.2% and 10.4% in 2010 and

2015. Secondly, the challenge lies in developing appropriate infrastructure to sustain this

growth. Also, important would be to establish a brand image not only in the domestic

market but internationally also. An appropriate policy for attracting investment would

ensure realization of the potential. Government is aiming for creating suitable stable,

predictable, and sustainable policy environment and partnering with industry to look

beyond borders.

BIBLIOGRAPHY

• http://www.carwale.com/

• http://www.mahindra.com/

• http://en.wikipedia.org/wiki/Automotive_industry

• http://economictimes.indiatimes.com/topic/automobile-industry

• https://www.google.co.in/