A Project Report On Training Undertaken at “Dalal & Broacha” Titled
“
Sectoral Analysis On The Automobile Industry” Submitted in partial fulfillment for the Award of degree of Post Graduate Diploma in Management Submitted By Harsh Agarwal: Roll No:02 Course: PGDM [E - Business] Batch: 2011-13 Mumbai Educational Trust
Student?s Declaration I, hereby declare that this report, submitted in partial fulfillment of the requirement for the award for the Post Graduate Diploma in Management, to Mumbai Educational Trust is my original work and not used anywhere for award of any degree or diploma or fellowship or for similar titles or prizes. I, further certify, that without any objection or condition subject to the permission of the company where I did my summer project, I grant the rights to Mumbai Educational Trust to publish any part of the project if they deem fit in journals/Magazines and newspapers etc without my permission.
Place : Mumbai Date : 23rd July, 2012 ___________________ Signature
Name : Harsh Agarwal Class : PGDM [E - Business] (Trimester – III) Roll No. : 02
Certificate
This is to certify that the dissertation submitted in partial fulfillment for the award of Post Graduate Diploma in Management, Mumbai Educational Trust; is a result of the bonafide research work carried out by Mr. Harsh Agarwal under my supervision and guidance. No part of this report has been submitted for award of any other degree, diploma, fellowship or other similar titles or prizes. The work has also not been published in any journals/Magazines.
Date: Place:
Industry guide Signature of the Industry Guide: ______________ Name of Industry Guide: Mr. Company : Dalal & Broacha Designation :
Acknowledgement Written words have an unfortunate tendency to convert genuine gratitude into stilted formality and no person has ever prayed heartily without learning something. These acknowledgements are one way through which I can thank the people who have been instrumental in the making of this project. Working on ‘Sectoral Analysis of the Indian Automobile Industry’, has been an enriching experience for me and for which I would like to thank a lot of people without whose co operation and support working on this summer project report would not have been as it is. I am deeply indebted to my industry guide, Mr. Nailesh Dalal and Mr.Abhas Kumar for guiding me and my other colleagues throughout at Dalal & Broacha ,for providing me with this opportunity to understand the intricacies of investment and allocation of wealth. I would also like to thank Prof. Naik, Core faculty, Met Educational Trust for helping me throughout my project, guiding and always motivating me to perform better. His advice and patience is appreciated. Without their encouraging support, valuable suggestions and timely inputs, this project would never have been possible and I would have been deprived of a vast treasure of knowledge. Also I would like to thank my family and friends who have been a constant support all throughout this project.
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TABLE OF CONTENTS Sr No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. Particulars
EXECUTIVE SUMMARY OBJECTIVE OF THE PROJECT PREFACE OVERVIEW HISTORY INDUSTRY OVERVIEW MARKET CHARACTERISTICS DETAILED ANALYSIS OF AUTOMOBILE INDUSTRY THE GLOBAL AUTOMOBILE SCENARIO VIS-À-VIS THE INDIAN AUTOMOBILE SCENARIO TRENDS IN GLOBAL AUTOMOTIVE INDUSTRY EXPORT COMPETITIVENESS OF INDIAN AUTOMOBILE INDUSTRY CHALLENGES FACED BY INDIAN AUTOMOBILE INDUSTRY STRATEGIES TO COUNTER THE CHALLENGES KEY COMPETITORS THE YEAR AHEAD – WHERE IS THE GROWTH? CONCLUSION BIBLIOGRAPHY
Page No. 6 7 8 9 11 13 19 27 38 47 52 55 61 66 72 73 74
EXECUTIVE SUMMARY The automobile industry, one of the core sectors, has undergone metamorphosis with the advent of new business and manufacturing practices in the light of liberalization and globalization. The sector seems to be optimistic of posting strong sales in the couple of years in the view of a reasonable surge in demand. The Indian automobile market is gearing towards international standards to meet the needs of the global automobile giants and become a global hub. A detailed analysis of the automobile industry has been covered in respect of past growth and performance. An E.I.C approach has been followed under Fundamental Analysis which covered effect of Recession, the impact of inflation, FDI?s, Export, GDP etc. on Automobile Industry. The Industry Analysis has been done with the help of five forces model, BCG Matrix, SWOT analysis, industry life cycle and the industry specific index. To give a brief about Company Analysis as a part of Fundamental tool, a comparative analysis of TATA Motors as our leading company with Maruti Suzuki India?s largest Car manufacturer. At the end, conclusion and recommendations have been specified, so as to make the research work more meaningful and purposeful. The project report is divided into 5 chapters. The first two chapters include Executive Summary & Objective of the Research. The third chapter deals with analysis of the automobile industry which entails fundamental analysis of Indian Automobile Industry. The fourth chapter deals with Conclusion & Recommendations and the last chapter includes Bibliography.
OBJECTIVE OF THE PROJECT
The objective of this project is to analyze the Indian Automobile Industry for investment purpose by monitoring the growth rate and performance on the basis of historical data. The main objectives of the Project study are: ? Detailed analysis of Automobile industry which is gearing towards international standards ? Analysis of the impact of qualitative factors on industry?s and company?s prospects ? Comparison of the Global automobile scene with its Indian counterpart ? Study of the challenges facing the Indian Automobile Industry ? Analysis of the implementable strategies to counter the effects of the discussed challenges
PREFACE The Automotive industry in India is one of the largest in the world and one of the fastest growing globally. The Indian Automobile Industry embarked on a new journey since 1991 with delicensing of the sector and subsequent opening up for 100 per cent FDI through automatic route. Almost all the global majors have set up their facilities in India taking the next level of production of vehicles from 2 million in 1991 to 110+ million in 2011. The Auto Sector in India is set to continue in its growth trajectory for the next five years and India is an increasingly favourite destination for Global Majors looking at emerging market. This in turn, has fuelled a boom in the domestic auto market, with close to 10mn vehicles sold in India in 2009-10 The automotive industry is increasingly becoming the cynosure of the manufacturing sector across the globe. Due to its intense forward and backward linkages with several key segments of the economy, the automotive industry has a strong multiplier effect and acts as one of the key drivers of growth across the globe. The attention and importance to the automotive industry in the economic development and planning policies of Government and its agencies has also witnessed significant uprise. The industry has been evolving over the years, meeting up with challenges as diverse as transitions, consolidations and restructuring, and thereby adapting to the new market conditions. As of 2010, India is home to 40 million passenger vehicles. More than 3.7 million automotive vehicles were produced in India in 2010 (an increase of 33.9%), making the country the second fastest growing automobile market in the world. According to the Society of Indian Automobile Manufacturers, annual vehicle sales are projected to increase to 5 million by 2015 and more than 9 million by 2020. By 2050, the country is expected to top the world in car volumes with approximately 611 million vehicles on the nation's roads.
OVERVIEW 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. The supply chain is similar to the supply chain of the automotive industry in Europe and America. Interestingly, the level of trade exports in this sector in India has been medium and imports have been low. However, this is rapidly changing and both exports and imports are increasing. The demand determinants of the industry are factors like affordability, product innovation, infrastructure and price of fuel. Also, the basis of competition in the sector is high and increasing, and its life cycle stage is growth. With a rapidly growing middle class, all the advantages of this sector in India are yet to be leveraged. With a high cost of developing production facilities, limited accessibility to new technology, and increasing competition, the barriers to enter the Indian Automotive sector are high. On the other hand, India has a well-developed tax structure. The power to levy taxes and duties is distributed among the three tiers of Government. The cost structure of the industry is fairly traditional, but the profitability of motor vehicle manufacturers has been rising over the past five years. Major players, like Tata Motors and Maruti Suzuki have material cost of about 80% but are recording profits after tax of about 6% to 11%. The level of technology change in the Motor vehicle Industry has been high but, the rate of change in technology has been medium. Investment in the technology by the producers has been high. System-suppliers of integrated components and sub-systems have become the order of the day. However, further investment in new technologies will help the industry be more competitive. Over the past few years, the industry has been volatile. Currently, India's increasing per capita disposable income which is expected to rise by 106% by 2015 and growth in exports is playing a major role in the rise and competitiveness of the industry.
Tata Motors is leading the commercial vehicle segment with a market share of about 64%. 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. Consumers are very important of the survival of the Motor Vehicle manufacturing industry. In 2008-09, customer sentiment dropped, which burned on the augmentation in demand of cars. Steel is the major input used by manufacturers and the rise in price of steel is putting a cost pressure on manufacturers and cost is getting transferred to the end consumer. The price of oil and petrol affect the driving habits of consumers and the type of car they buy. The key to success in the industry is to improve labor productivity, labor flexibility, and capital efficiency. Having quality manpower, infrastructure improvements, and raw material availability also play a major role. Access to latest and most efficient technology and techniques will bring competitive advantage to the major players. Utilizing manufacturing plants to optimum level and understanding implications from the government policies are the essentials in the Automotive Industry of India. Both, Industry and Indian Government are obligated to intervene the Indian Automotive industry. The Indian government should facilitate infrastructure creation, create favorable and predictable business environment, attract investment and promote research and development. The role of Industry will primarily be in designing and manufacturing products of world-class quality establishing cost competitiveness and improving productivity in labor and in capital. With a combined effort, the Indian Automotive industry will emerge as the destination of choice in the world for design and manufacturing of automobiles. The Indian market offers endless possibilities for investors.
HISTORY The first car which ran on Indian roads was in 1897. Until the 1930s, cars were imported directly, but in very small numbers. Embryonic automotive industry emerged in India in the 1940s. Mahindra & Mahindra was established by two brothers as a trading company in 1945, and began assembly of Jeep CJ-3A utility vehicles under license from Willys. The company soon branched out into the manufacture of light commercial vehicles (LCVs) and agricultural tractors. Following the independence, in 1947, the Government of India and the private sector launched efforts to create an automotive component manufacturing industry to supply to the automobile industry. However, the growth was relatively slow in the 1950s and 1960s due to nationalization and the license raj which hampered the Indian private sector. After 1970, the automotive industry started to grow, but the growth was mainly driven by tractors, commercial vehicles and scooters. Cars were still a major luxury. Japanese manufacturers entered the Indian market ultimately leading to the establishment of Maruti Udyog. A number of foreign firms initiated joint ventures with Indian companies. In the 1980s, a number of Japanese manufacturers launched joint-ventures for building motorcycles and light commercial-vehicles. It was at this time that the Indian government chose Suzuki for its joint-venture to manufacture small cars. Following the economic liberalization in 1991 and the gradual weakening of the license raj, a number of Indian and multi-national car companies launched operations. Since then, automotive component and automobile manufacturing growth has accelerated to meet domestic and export demands. Following economic liberalization in India in 1991, the Indian automotive industry has demonstrated sustained growth as a result of increased competitiveness and relaxed restrictions. Several Indian automobile manufacturers such as Tata Motors, Maruti Suzuki and Mahindra and Mahindra, expanded their domestic and international operations. India's robust economic growth led to the further expansion of its domestic automobile market which has attracted significant Indiaspecific investment by multinational automobile manufacturers. In February 2009, monthly sales of passenger cars in India exceeded 100,000 units and has since grown rapidly to a record monthly high of 182,992 units in October 2009.
From 2003 to 2010, car sales in India have progressed at a CAGR of 13.7%, and with only 10% of Indian households owning a car in 2009 (whereas this figure reaches 80% in Switzerland for example) this progression is unlikely to stop in the coming decade. Congestion of Indian roads, more than market demand, will likely be the limiting factor. SIAM is the apex industry body representing all the vehicle manufacturers, homegrown and international, in India.
INDUSTRY OVERVIEW This class consists of units mainly engaged in manufacturing motor vehicles or motor vehicle engines. Products and Services The primary activities of this industry are: ? Motor cars manufacturing ? Motor vehicle engine manufacturing The major products and services in this industry are: ? Passenger motor vehicle manufacturing segment (Passenger Cars, Utility Vehicles & Multi Purpose Vehicles) ? Commercial Vehicles (Medium & Heavy and Light Commercial Vehicles) ? Two-Wheelers ? Three-Wheelers Key Auto Segments – Growth Expected to moderate over the next 12 months
Financial Year 2012 was a landmark year - both in a positive and negative manner. It paved way for many breakthrough launches - saw the launch of segment defining Fluidic Verna, excellent value for money XUV 500, Hyundai's entry level offering Eon and many more. It also displayed its sudden love for MPV/MUVs in the Auto Expo - Maruti's Ertiga, Chevrolet's Enjoy and Nissan's Evalia were the most sought after showcase at the expo. We were now exposed to the hard truth as well - that how labour intensive the auto industry is... A labor strike can strike at Maruti shook the entire Auto Industry. The aftermath took its toll on the overall numbers. This was further catalyzed by inflation, consistent fuel hikes and rising auto interest rates. The world's fastest growing automobile market was now under analysts scanner for its sheer volatility. Demand for cars fell for the first time in three years last July and slumped by the most in over a decade in October. SIAM which had projected a growth of over 20% had to instantly lower its projections. The Industry's lackluster performance reflected in the overall performance of the country. In a recent report, S&P cut its outlook on India?s BBB- rating to negative from stable. This is surely not a good news for the Indian Industry in overall. The low-end hatchbacks were the ones to take the beating in FY12. For perhaps the first time in many years, small cars reported a decline in growth in 2011-12 (FY12), largely on account of Maruti Alto?s decline. Now, SIAM has forecast 1012 percent growth in overall passenger cars for this fiscal, but this number may be lower if small car growth is again hindered. SIAM data showed that the mini car segment – which comprises Maruti 800, Alto, A-Star, and WagonR, the Chevy Spark and Hyundai?s Santro and Eon – declined by about 7 percent to 6,42,009 units (6,90,812 units) last fiscal. Sales of the Alto, the single largest selling car in India, had fallen by about 11 percent between April and February 2012. Also, for the first-time ever, bigger diesel cars - the SUVs - are selling more and there is no slowdown in 'dieselisation'. India's largest automaker, Maruti Suzuki, expects car sales to increase by 10 per cent in the fiscal year beginning in April led by diesel models. Diesel car sales are expected to rise by 150,000 in 2012-13 while sale of petrol cars fall by 50,000, said the company.
Overall Highlights ? ? ? ? ? ?
* Car sales in India rose just 2.2 percent in FY2012 * Sales of motorcycles rose 12 percent in the previous fiscal year to 10.1 million vehicles ( 10,096,062 units). * Scooter sales shot up 24.5 per cent, to 2,562,841 units. * Total two-wheeler sales were 13,435,769 units in 2011-12 against 11,768,910 units in 2010-11, up 14.2 per cent. * Commercial vehicles, Siam said total sales in FY12 were 809,532 units, up 18.2 per cent. * Three-wheeler segment, that saw a decline of 2.4 per cent at 513,251 vehicles in FY12.
Projections for FY2013 ? ? ?
? ?
# SIAM has projected passenger car sales growth at 10-12 per cent in 201213. # Sales of trucks and buses, a key indicator of economic activity, rose 18.2 percent in 2011/12 and are seen growing 9 to 11 per cent in this fiscal year. # SIAM has pegged the motorcycle segment to grow 10-12 per cent in FY13 and scooters by 15-17 percent. Two wheeler segment is expected to have a growth of around 14-15%. # Commercial Vehicles is projected to grow by nine to 11 per cent in FY13. # SIAM has also projected five to seven per cent growth for Three Wheelers.
Domestic car sales – expecting growth to moderate next year
Supply Chain of Automobile Industry The supply chain of automotive industry in India is very similar to the supply chain of the automotive industry in Europe and America. The orders of the industry arise from the bottom of the supply chain. ie., from the consumers and goes through the automakers and climbs up until the third tier suppliers. However, the products, as channeled in every traditional automotive industry, flow from the top of the supply chain to reach the consumers. Automakers in India are the key to the supply chain and are responsible for the products and innovation in the industry. The description and the role of each of the contributors to the supply chain are discussed below. ? Third Tier Suppliers: These companies provide basic products like rubber, glass, steel, plastic and aluminum to the second tier suppliers. ? Second Tier Suppliers: These companies design vehicle systems or bodies for First Tier Suppliers and OEMs. They work on designs provided by the first tier suppliers or OEMs. They also provide engineering resources for detailed designs. Some of their services may include welding, fabrication, shearing, bending etc. ? First Tier Suppliers: These companies provide major systems directly to assemblers. These companies have global coverage to follow their customers to various locations around the world. They design and innovate to provide "black-box" solutions for the requirements of their customers. Black-box solutions are solutions created by suppliers using their own technology to meet the performance and interface requirements set by assemblers. First tier suppliers are responsible not only for the assembly of parts into complete units like dashboard, brakes-axle-suspension, seats, or cockpit but also for the management of second-tier suppliers. ? Automakers/Vehicle Manufacturers/Original Equipment Manufacturers (OEMs): After researching consumers' wants and needs, automakers begin designing models which are tailored to consumers' demands. The design process normally takes five years. These companies have manufacturing units where engines are manufactured and parts supplied by first tier suppliers and second tier suppliers are assembled. Automakers are the key to the supply chain of the automotive industry.
Examples of these companies are Tata Motors, Maruti Suzuki, Toyota, and Honda. Innovation, design capability and branding are the main focus of these companies. ? Dealers: Once the vehicles are ready they are shipped to the regional branch and from there, to the authorized dealers of the companies. The dealers then sell the vehicles to the end customers. ? Parts and Accessory: These companies provide products like tires, windshields, and air bags etc. to automakers and dealers or directly to customers. ? Service Providers: Some of the services to the customers include servicing of vehicles, repairing parts, or financing of vehicles. Many dealers provide these services but, customers can also choose to go to independent service providers.
Exports India's automobile exports have grown consistently and reached $4.5 billion in 2009, with United Kingdom being India's largest export market followed by Italy, Germany, Netherlands and South Africa. India's automobile exports are expected to cross $12 billion by 2014. According to New York Times, India's strong engineering base and expertise in the manufacturing of low-cost, fuel-efficient cars has resulted in the expansion of manufacturing facilities of several automobile companies like Hyundai Motors, Nissan, Toyota, Volkswagen and Suzuki. In recent years, India has emerged as a leading center for the manufacture of small cars. Hyundai, the biggest exporter from the country, now ships more than 250,000 cars annually from India. Apart from shipments to its parent Suzuki, Maruti Suzuki also manufactures small cars for Nissan, which sells them in Europe. Nissan will also export small cars from its new Indian assembly line. Tata Motors exports its passenger vehicles to Asian and African markets, and is in preparation to launch electric vehicles in Europe. The firm is also planning to launch an electric version of its low-cost car Nano in Europe and the U.S. Mahindra & Mahindra is preparing to introduce its pickup trucks and small SUV models in the U.S. market. Bajaj Auto is designing a low-cost car for the Renault Nissan Automotive India, which will market the product worldwide. Renault Nissan may also join domestic commercial vehicle manufacturer Ashok Leyland in another small car project.
While the possibilities are impressive, there are challenges that could thwart future growth of the Indian automobile industry. Since the demand for automobiles in recent years is directly linked to overall economic expansion and rising personal incomes, industry growth will slow if the economy weakens. Passenger car exports from India increased 34.16% in May, riding on the back of robust overseas sales by Hyundai Motor, Nissan Motor and Toyota Kirloskar in non-European countries. According to figures released by Society of Indian Automobile Manufacturers (SIAM), India exported 45,036 cars in the last month compared to 33,570 units in the year-ago period. "Europe still continues to be a worry, but the growth that we have seen is mainly on account of new markets that the companies have developed," SIAM Director General Vishnu Mathur said. In May, the country's largest exported Hyundai Motor India Ltd (HMIL) witnessed a growth of 42.16% at 23,659 units against 16,643 units in the same month last year. "On account of slackness in the domestic market in May, we took the opportunity to ramp up the back orders for the export market. We had higher sales of the Eon in Algeria, the i20 in South Africa and the i10 in South America, particularly in Mexico and Columbia," a spokesperson of HMIL said. However, rival and domestic market leader Maruti Suzuki India's overseas passenger car sales fell by 9.42% to 9,363 units from 10,337 units in May 2011, SIAM said. Car maker Nissan Motor India saw its exports from the country going up by over two-fold to 8,157 units last month from 3,937 units in the corresponding month last year. Toyota Kirloskar Motor, which started exports from April this year, sold 1,693 units in May in South Africa, SIAM said. Ford India's sales in overseas locations, however, dipped 15.81% to 1,693 units from 2,011 units in May 2011. Homegrown auto major Tata Motors' exports rose by 32.38% to 372 units from 281 units in the year-ago period. Exports of all categories of vehicles from India during May 2012 increased by 4.62% to 2,46,314 units from 2,35,429 units in the same month last year, SIAM said. The two-wheeler segment witnessed exports of 1,74,362 units in last month compared to 1,61,346 units in the year-ago month, up 8.07%, it added. The motorcycle segment's overseas sales went up by 5.16% to 1,63,446 units from 1,55,419 units in May 2011. SIAM said exports of scooters from India increased by 87.18% last month to 10,660 units from 5,695 units in the same month last year. However, exports of commercial vehicles decreased by 8.72% to 7,861 units in May 2012 from 8,612 units in the corresponding month last year, it added.
MARKET CHARACTERISTICS
? Market size The Indian Automotive Industry after de-licensing in July 1991 has grown at a spectacular rate on an average of 17% for last few years. The industry has attained a turnover of USD $35.8 billion, (INR 165,000 crores) and an investment of USD 10.9 billion. The industry has provided direct and indirect employment to 13.1 million people. Automobile industry is currently contributing about 5% of the total GDP of India. India's current GDP is about $1.4 trillion and is expected to grow to $3.75 trillion by 2020. The projected size in 2016 of the Indian automotive industry varies between $122 billion and $159 billion including USD 35 billion in exports. This translates into a contribution of 10% to 11% towards India's GDP by 2016, which is more than double the current contribution.
? Demand determinants
Interest rate (%) – cuts unlikely to spur demand
Determinants of demand for this industry include vehicle prices (which are determined largely by wage, material and equipment costs) and exchange rates, preferences, the running cost of a vehicle (mainly determined by the price of petrol), income, interest rates, scrapping rates, and product innovation. Exchange Rate: Movement in the value of Rupee determines the attractiveness of Indian products overseas and the price of import for domestic consumption. Affordability: Movement in income determine the affordability of new motor vehicles. Allowing unrestricted Foreign Direct Investment (FDI) led to increase in competition in the domestic market hence, making better vehicles available at affordable prices. Innovation: Product Innovation is an important determinant as it allows better models to be available each year and also encourages manufacturing of environmental friendly cars. Demographics: It is evident that high population of India has been one of the major reasons for large size of automobile industry in India. Factors that may be augment demand include rising population and an increasing proportion of young persons in the population that will be more inclined to use and replace cars. Also, increase in
people with lesser dependency on traditional single family income structure is likely to add value to vehicle demand. Infrastructure: Longer-term determinants of demand include development in Indian's infrastructure. India's banking giant State Bank of India and Australia's Macquarie Group has launched an infrastructure fund to rise up to USD 3 billion for infrastructure improvements. India needs about $500 billion to repair its infrastructure such as ports, roads, and power units. These investments have been made with an aim to generate long-term cash flow from automobile, power, and telecom industries. (Source: Silicon India) Price of Petrol: Movement in oil prices also have an impact on demand for large cars in India. During periods of high fuel cost as experienced from 2007, demand for large cars declined in favour of smaller, more fuel-efficient vehicles. The changing patterns in customer preferences for smaller, more fuel-efficient vehicles led to the launch of Tata Motor's Nano – one of the world's smallest and cheapest cars. Surprisingly, when overall passenger car sales have run into problems, the sales of luxury cars and SUVs, which are significantly more expensive in India than abroad due to high import taxes, have experienced encouraging growth. The Indian unit of BMW had to raise capacity at its factory four times during 2011, while sales of the high-end Jaguar Land Rover model owned by Tata Motors rose impressively during a period when more affordable passenger car sales were experiencing a downturn. ? International markets analysis The Indian automotive industry embarked a new journey in 1991 with de-licensing of the sector and subsequent opening up for 100% foreign direct investment (FDI). Since then almost all global majors have set up their facilities in Indian taking the level of production from 2 million in 1991 to over 10 million in recent years.[18] The exports in automotive sector have grown on an average compound annual growth rate of 30% per year for the last seven years. The export earnings from this sector are over USD 6 billion. Even with this rapid growth, the Indian automotive 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 figures of 2.3 million in the year 2008, yet India's share is about 3.28% of world production of 70.53 million
passenger and commercial vehicles. India's automotive exports constitute only about 0.3% of global automotive trade. ? Life cycle The life cycle stage is growth. The market for manufacturing motor vehicles is consistently increasing. The products manufactured by this industry are profitable. Companies have been consistently opening new plats and employing over the past five years. Japanese and European manufacturers of motor vehicles have entered the market. Industry value added has been rising, along with the rise in GDP. Life Cycle Analysis General improvement in availability of trained manpower and good infrastructure is required for sustainable growth of the industry. Keeping this in view, the Indian Government has launched a unique initiative of National Automotive Testing and R&D Infrastructure Project (NATRIP) to provide specialised facilities for Testing, Certification and Homologation to the industry. A similar initiative is required for creating specialised institutions in automotive sector for education, training and development. The auto industry has grown in the clusters of interconnected companies which are linked by commonalities and complementarities. The major clusters are in and around Manesar in North, Pune in West, Chennai in South, Jamshedpur-Kolkata in East and Indore in Central India. The Government is planning to create a National Level Specialises Education and Training Institute for Automotive Sector and to enhance the transportation, communication and export infrastructure facilities. The contribution of automotive sector in the GDP of India is expected to double by 2016 through major spotlight on export of small cars, Multi-Utility Vehicles, Twoand Three-wheelers. ? Industry assistance The automobile industry has a defined its target in the Automotive Mission Plan as “To emerge as the destination of choice in the world for design and manufacture of automobiles with output reaching a level of USD 145 billion accounting more than 10% of GDP and providing additional employment to 25 million people by 2016”. In order to achieve this plan interventions are required from both Industry and Indian Government. The Indian Government would play a key enabling role in facilitating infrastructure creation, promote the country's capabilities, create a favorable and predictable business environment, attract investment and promote
research & development. The role of Industry will primarily be in designing and manufacturing products of world-class quality standards, establishing cost competitiveness, improving productivity of both labor and capital, achieving scale and R&D enhancing capability and showcasing India's products in potential markets. In order to achieve these goals the following key recommendations have been made in the Automotive Mission Plan to the Indian Government and Industry: Manufacturing and export of small cars, multi-utility vehicles, two- and threewheelers, tractors, components to be promoted. Care to be taken of negative like and rules of the country with current negotiation of Free Trade Agreement and Regional Trade agreement with countries like Thailand, Singapore, Malaysia, China, Korea, Egypt, Gulf etc. Attractive Tariff Policy which may follow attractive investment. Specific measures will be taken for expansion of domestic market. Incremental investment of USD 35 to 40 billion to Automotive Industry during the next 10 years. National Road Safety Board to act as the coordinating body for promoting safety. Inspection and Certification system to be strengthened by encouraging public-private partnership. National level Automotive Institute for training on automobile at International Training Institutes (ITIs) and Automotive Training Institute (ATIs) to be set up. An Auto Design Centre to be established at National Institute of Design, Ahmadabad. National Automotive Testing and R&D Implementation Project (NATRIP) to act as Centre of Excellence for Technical Design Data. Integration of Information Technology in manufacturing to be promoted. R&D for product, process and technology to be incentivized. Road Map for Auto Fuel Policy beyond 2010 would be drawn. The profitability of motor vehicle manufacturers has been rising over the past five years, mainly due to rising demand and growth of Indian middle class. Major players of the industry, like Maruti Suzuki India and Tata Motors have been recording profits of 6% to 11% from the past five years. Whereas, earlier profit margins in the industry were only 1.5% to 3%. Cost of material has reduced from over 85% in the year 2001-2002 to under 80% in the year 2008-2009. Wages and salary as a percentage of revenue has been declining and with the increasing labor productivity this is expected to decline further in the coming years.
? Capital and labor intensity The level of Capital Intensity is high. The level of labor intensity is medium. The motor vehicle manufacturing industry requires significant level of capital investment. Value is added through the automated manufacturing and assembly of costly components. Labor input is required in the manufacturing, assembly, and finishing processes. In order to achieve and retain competitiveness, vehicle manufacturing industry depends on its capacity and speed to innovate and upgrade. The most imperative indices for competitiveness in the industry are productivity in both labor and capital. ? Technology and Systems The level of technology change is high. The rate of change in technology is medium. Investment in technology by producers has been on the rise. The automobile industry in India has seen an enormous development in the engines which are being used. Carburettor engines have become obsolete and Multi Point Fuel Injection (MPFI) engines are the order of the days in patrol cars. The Diesel engines have also undergone a sea change from the time Rudolf Diesel invented it way back in the 1892. Today Common Rail Direct Injection (CRDI) is the order of the day. Multi Point Fuel injection (MPFI): The fuel injects were used to meet stricter emission norms as it keeps pollutants to bare minimum and drives the maximum performance out of a vehicle by squeezing out the maximum mileage even from the last drop of fuel that goes into the engine. MPFI system injects fuel into individual cylinders after receiving command from the on board engine management system computer or Engine Control Unit (ECU). This technology results in superior fuel combustion, better fuel management, engine performance and reduced pollution. To get the maximum out from these types of engine one should use Premium petrol like XTRA Premium, Speed, and Power. Common Rail Direct Injection (CRDI): CRDI engine cars offer 25% more power than the normal direct injection engine with a superior pickup and torque, offering sometimes up to 70% more power than the conventional diesel engines. They are smooth, less strident, and immensely fuel efficient giving around 24 kilometres to a litre of Diesel. The fact that Diesel is cheaper than petrol in India
further attributes greatness to the engine. In a CRDI engine, a tube or a common rail connects all the injectors and contains fuel at a constant pressure. The high pressure in the common rail ensures that when injected, the fuel breaks up into small particles and mixes evenly with the air, thereby leaving little un-burnt fuel thus reducing pollution. The common rail principle has been used to reduce the noise which used to be a downside with earlier Diesel engines; the technology has been pioneered by the Fiat group, only to be adopted by other automobile companies around the world. However, these engines are 25% more costly than the conventional engines. They also require higher degree of maintenance and spares are also expensive. The Indian automotive industry is in the mindset of a major structural transformation in today's globalized scenario. “System Supplies” of integrated components and sub-systems has become the order of the day, with individual small components being supplied to the system integrators instead of vehicle manufacturers. In this process most of the Small Scale Industrial units, manufacturing smaller individual components, have become tier 2 and tier 3 suppliers, while the large companies including most Multi National Companies are being transformed into tier 1 companies who purchase from tier 2 and tier 3, and sell to the auto manufacturers. (Source: Department of Heavy Industry) Investment in new technology such as supply-chain management and collaborative forecasting (where members of the supply chain share forecasting data to reduce bottlenecks) will help make industry more competitive. ? Industry volatility The level of volatility is medium. Over the past few years, the Motor Vehicle Manufacturing industry has become more volatile. This has been the result of fluctuations in metal prices and fuel prices, as well as changes in legislation and assistance packages. India's increasing per capita disposable income and growth in exports is playing a major role in the rise and the competitiveness of the industry. As per the BRIC report India's per capita disposable income from current year will rise by 106% in 2015¹. This increase in the spending power has been a forefront of the economic development. According to the Economic Times of India, economic liberalization – allowing unrestricted Foreign Direct Investment (FDI) and removing foreign currency
neutralization and export obligations – has been also been one of the key to India's automotive volatility². Indian automobile industry has grown leaps and bounds since 1898, a time when a car had touched the Indian streets for the first time. At present it holds a promising sixth position in the entire world with being # 1 in two wheelers and # 4 in commercial vehicles. Withstanding a growth rate of 18% per annum and an annual production of more than 2 million units, it may not be an exaggeration to say that this industry in the coming years will soon touch a figure of 10 million units per year.
DETAILED ANALYSIS OF AUTOMOBILE INDUSTRY
Over a period of more than two decades the Indian Automobile industry has been driving its own growth through phases. With comparatively higher rate of economic growth rate index against that of great global powers, India has become a hub of domestic and exports business. The automobile sector has been contributing its share to the shining economic performance of India in the recent years. To understand this industry for the purpose of investment we analyzed it by the following approach: ? Fundamental Analysis (E.I.C Approach) a. Economy b. Industry c. Company A). ECONOMIC ANALYSIS Economic analysis is the analysis of forces operating the overall economy a country. Economic analysis is a process whereby strengths and weaknesses of an economy are analyzed. Economic analysis is important in order to understand exact condition of an economy. ? GDP and Automobile Industry
In absolute terms, India is 16th in the world in terms of nominal factory output. The service sector is growing rapidly in the past few years. This is the pie- chart showing contributions of different sectors in Indian economy. The per capita Income is near about Rs38,000 reflecting improvement in the living standards of an average Indian. Today, automobile sector in India is one of the key sectors of the economy in terms of the employment. Directly and indirectly it employs more than 10 million people and if we add the number of people employed in the auto-component and auto ancillary industry then the number goes even higher. Sector Overview The automobile industry in India is one of the country?s major sectors and is the seventh-largest in the world. It accounts for 22% of India?s manufacturing GDP. The Indian automotive industry comprises passenger cars, two-wheelers, threewheelers and commercial vehicles, with two-wheelers dominating the market. More than 75% of the vehicles sold are two wheelers. Collectively, India makes 17.5 million vehicles and exports 2.3 million annually. According to Ministry of Heavy Industry and Public Enterprises, the total turnover of the Indian automobile industry was estimated at USD 73 billion and exports were estimated to be USD 11 billion in the year 2010–11. The announced cumulative investments in this sector were USD 30 billion during this period. Total FDI inflow into the Indian automobile sector in 2010–2011 was USD 1,331 million. Cumulative FDI during the period April 2000 to March 2011 was USD 5.93 billion, according to the Department of Industrial Policy and Promotion (DIPP), which is a part of the Ministry of Commerce and Industry. Policy and Promotion The Indian government encourages foreign investment in the automobile sector and allows 100% FDI under the automatic route. It is a fully delicensed industry, freely allowing imports of automotive components. The main automobile hubs in India are based at Chennai, Gurgaon, Manesar, Pune, Ahmedabad, Halol, Aurangabad, Kolkata, Noida and Bangalore. Chennai is the biggest hub accounting for 60% of Indian auto exports. The auto components industry, although largely concentrated near automobile hubs, is fairly widespread in other parts of the country too. The government has made successive policy changes that allow for stronger growth in the automotive sector. Major among these are:
Automotive Mission Plan The plan has been prepared to accelerate and sustain growth in the automotive sector during the period 2006–2016. It aims to make India a global automotive hub. This will involve doubling the contribution of the automotive sector to the country?s GDP by taking its turnover to USD 145 billion and providing additional employment to 25 million people with special emphasis on the export of small cars, MUVs, two- and three-wheelers and auto components. National Automotive Testing and R&D Infrastructure Project This is a USD 400 million initiative of the Government of India and various state governments; it is aimed at creating a state-of-art, dedicated testing, validation and R&D infrastructure across the country. ? Recession All the major auto companies enjoyed the high growth ride till the mid 2008. But at the end of the year, industry had to face the hard truth and witnessed the fall in sales compared to last year. In December 2008, overall production fell by 22 % over the same month last year. Global recession has hit the Indian auto industry, India is strong and growing industry but the impact of recession is evident now on industry as sales & growth of automobile companies have declined. Passenger Vehicles segment registered negative growth. One of its supporting facts is that the sales in December 2008 for passenger vehicles fell by 13.86% over December 2007 Two Wheelers registered minor growth of 1.85 % during April – December 2008. However, two wheelers sales recorded 15.43 percent fall in December 2008 over the same month last year. Although the sector was hit by economic slowdown, overall production (passenger vehicles, commercial vehicles, two wheelers and three wheelers) increased from 10.85 million vehicles in 2007-08 to 11.17 million vehicles in 2008-09. Passenger vehicles increased marginally from 1.77 million to 1.83 million while two-wheelers increased from 8.02 million to 8.41 million. Total number of vehicles sold including passenger vehicles, commercial vehicles, twowheelers and three-wheelers in 2008-09 was 9.72 million as compared to 9.65 million in 2007-08.
? Inflation A moderate amount of inflation is important for the proper growth of an economy like India because it attracts more private investment. The fall in wholesale prices from a year earlier is mainly due to a statistical base effect and doesn’t suggest contraction in demand, the Reserve Bank of India said few week back, while revising its inflation forecast for the FY through March to around 5% from 4%. In last FY despite of skyrocketing oil prices (crude oil price has already up to $130 compared to $20 per barrel five years back), Indian automobile Industry was not as much affected and experts think that Indian automobile industry will continue to grow this year despite all obstacles- oil price hike, higher interest rates. However, the effect of inflation has affected every sector which is related to car manufacturing and production. The increase in the price of fuel and the steel due to inflation has led to a slower growth rate of the car industry in India. The effect of inflation has taken the rise in the price rate of the cars by 3-4% which in turn suffices the need to meet the rise in price of the raw materials to build a car. The car market and the car industry witnessed a fall of 8-9%. ? Foreign Exchange India holds the third largest stock of reserves among the emerging market economies after China and Russia. The overall approach to the management of India's foreign exchange reserves in recent years reflects the changing composition of the balance of payments and the 'liquidity risks' associated with different types of flows and other requirements. Source: rbi.org.in Taking these factors into account, India's foreign exchange reserves continued to be at a comfortable level and consistent with the rate of growth, the share of external sector in the economy and the size of risk-adjusted capital flows. Reserves came down because of recession all over the world, however, India still able to maintain its reserves hence a minor fall was seen compared to all other countries which shows great strength in long-term for Indian Economy.
? Export Automobile sales (including passenger vehicles, commercial vehicles, twowheelers and three-wheelers) in the overseas markets increased to 1.53 million units in 2008-09 from 1.23 million units in 2007-08. Export of passenger vehicles increased from 218,401 in 2007-08 to 335,739 units in 2008-09. There is a continuous increase in the export of automobiles since the financial year 2002-03, except for the decline in the export of commercial vehicles in the financial year 2008-09, which may be attributed to the global economic recession. Despite recession, the Indian automobile market continues to perform better than most of the other industries in the economy in coming future, more and more MNCs coming in India to setup their ventures which clearly shows the scope of expansion. B.) INDUSTRY ANALYSIS The current trends of the global automobile industry reveal that in the developed countries the automobile industries are stagnating as a result of drooping markets, whereas the automobile industry in the developing nations, have been consistently registering higher growth rates every passing year for their domestic flourishing domestic automobile markets. Being one of the fastest growing sectors in the world its dynamic growth phases are explained by the nature of competition, Product Life Cycle and consumer demand. The industry is at the crossroads with global mergers and relocation of production centers to emerging developing countries. The Indian automobile sector is far from being saturated, leaving ample opportunity for volume growth. Following is the segmentation that how much each sector comprises of the Indian Automobile Industry. Industrial Analysis of any industry can be done based on the following headings: 1. Five Forces Model 2. BCG Matrix 3. Industrial Life Cycle 4. SWOT Analysis
1.) Five Forces Model Michael Porter identifies five forces that influence an industry. These forces are as under: · Degree of Rivalry Despite the high concentration ratio seen in the automotive sector, rivalry in the Indian auto sector is intense due to the entry of foreign companies in the market. The industry rivalry is extremely high with any being product being matched in a few months by the competitors. This instinct of the industry is primarily driven by technical capabilities acquired over years of gestation under the technical collaboration with international players. · Threat of Substitutes The threat of substitutes to the automotive industry is fairly mild. Numerous other forms of transportation are available, but none offer the utility, convenience, independence and value offered by automobiles. The switching cost associated with using a different mode of transportation, may be high in terms of personal time, convenience and utility. · Barriers to entry The barriers to enter automotive industry are substantial. For a new company, the startup capital required to establish manufacturing capacity to achieve minimum efficient scale is prohibitive. Although the barriers to new companies are substantial, establishing companies are entering the new markets through strategic partnerships or through buying out or merging with other companies. However, a domestic company, with local knowledge and expertise, has the potential to compete its home market against the global firms who are not well established there. · Supplier’s power In the relationship between the industry and its suppliers, the power axis is tipped in industry?s favor. The industry is comprised of powerful buyers who are generally able to dictate their terms to the suppliers.
· Buyers’ Power In the relationship between the automotive industry and its ultimate consumers, the power axis is tipped in the consumers? favor. This is due to the fairly standardized nature and the low switching costs associated with selecting from among competing brands.
2.) BCG Matrix In an economy, different industries are present and different industries have different growth rate as compared to the growth of the economy. In an economy, there are a number of major industries and they all occupy different positions in the BCG matrix according to their growth and contribution towards the economy. In the Indian economy, some of the major sectors are FMCG, automobiles, banking and insurance, steel, telecom, software, pharmacology and retail sectors and these can be placed in the different positions in the matrix as shown below: INDUSTRY BCG MATRIX
BCG matrix is used to determine the relative position of the companies of an industry or different SBU?s of any institution, in terms of the market growth rate and the market share of the company in the industry. In the Indian automobile sector, the major players are Maruti Suzuki Limited, Mahindra and Mahindra, Tata Motors, Hero Honda and Bajaj auto. In the BCG matrix, the companies are placed in one of the following four categories: Stars, Cash Cows, Dogs and Question marks. Companies with high market growth and high market share are placed in the stars, cash cows are the companies which have low market growth rate and high relative market share, the category of the question marks include the companies with low relative market share and high market growth rate and dogs include the companies who have low relative market share and low market growth rate.
COMPANY BCG MATRIX
3.) Industrial Life Cycle
The industrial life cycle is a term used for classifying industry vitality over time. Industry life cycle classification generally groups industries into one of four stages: pioneer, growth, maturity and decline. In the pioneer phase, the product has not been widely accepted or adopted. Business strategies are developing, and there is high risk of failure. However,
successful companies can grow at extraordinary rates. The Indian automobile sector has passed this stage quite successfully. In the growth phase, the product market has been established and there is at least some historical guide to ground demand estimates. The industry is growing rapidly, often at an accelerating rate of sales and earnings growth. Indian Automotive Industry is booming with a growth rate of around 15 % annually.
Source: Business Today
The growth rate of the automobile industry in India is greater than the GDP growth rate of the economy, so the automobile sector can be very well be said to be in the growth phase. As the product matures, growth slows as penetration reaches practical limits. Companies began to focus on market share rather than growth. Industry demand tends to follow the overall economy, but the scope of growth of the automobile sector is very much possible in India due to the increasing income of the middle class and their income as well as standard of living.
4.) SWOT Analysis A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis. SWOT analysis of the Indian automobile sector gives the following points: ? Strengths · Large domestic market · Sustainable labor cost advantage · Competitive auto component vendor base · Government incentives for manufacturing plants · Strong engineering skills in design etc ? Weaknesses · Low labor productivity · High interest costs and high overheads make the production uncompetitive · Various forms of taxes push up the cost of production · Low investment in Research and Development · Infrastructure bottleneck ? Opportunities · Commercial vehicles: SC ban on overloading · Heavy thrust on mining and construction activity · Increase in the income level · Cut in excise duties · Rising rural demand ? Threats · Rising input costs · Rising interest rates · Cut throat competition
THE GLOBAL AUTOMOBILE SCENARIO VIS-À-VIS THE INDIAN AUTOMOBILE SCENARIO The automotive industry is increasingly becoming the cynosure of the manufacturing sector across the globe. The attention and importance to the automotive industry in the economic development and planning policies of Government and its agencies has also witnessed significant uprise. The industry has been evolving over the years, meeting up with challenges as diverse as transitions, consolidations and restructuring, and thereby adapting to the new market conditions. In the last few years, the world automotive industry has changed its locational preferences due to various reasons. Earlier, the automotive industry was largely confined to the triad - North America, Europe and Japan; however, with the emergence of some vibrant developing economies, like Brazil, India and China, the global automotive industry has been considering a different growth perspective, and has been relocating the operations. These growing developing economies has been evolving as the manufacturing hub, as also the newfound markets, for the global majors like Ford, General Motors, Chrysler, Toyota, Honda, Nissan and BMW, who are competing to enhance their market share in these markets. Increasing growth in GDP and the growing disposable income has catapulted these emerging economies as market for automotives, while the low cost of operations and skills in design and R&D made them as destinations for investment and manufacturing operations. The entry of global auto-majors into India has significantly altered the automobilemanufacturing scenario in the country. The changes in design and adaptation of international technologies have enabled the Indian automotive industry to compete globally, and thus are also exposed to global challenges. Alongside the challenges, the trend also presents a plethora of opportunities to Indian automotive industry, which needs to be capitalized, so as to emerge as a successful global player.
The Global Automobile Industry In the initial years, most of the manufacturing activities were concentrated in the USA and in some of the European countries. Though, these countries still account for a significant share in the production, more and more volume of production comes from other parts of the world, like China, Japan and Korea. For U.S. automakers and suppliers, the past year can best be described as 12 months of mixed results, leaving unanswered questions about the future direction of the industry and what is required for manufacturers and suppliers to thrive. In 2011, U.S. light car and truck sales will exceed 12.5 million, a nice bump from 11.6 million in 2010 and 10.4 million in 2009. And though the most optimistic analysts forecast that U.S. vehicle sales will rise to more than 14 million in 2012, that?s a far cry from 17.3 million at the turn of the millennium. Last year?s U.S. sales figures might have been higher if not for the tsunami and earthquake in Japan and flooding in Thailand, which forced Toyota, Honda, and, to a lesser extent, Nissan to curtail production in virtually all of their assembly plants around the world. Auto sales growth is far more rapid in emerging nations such as China and India, with average annual sales gains since 2001 of 23 percent and 15 percent respectively. All of this should be good news for U.S. automakers, which have restructured their operations to be profitable at lower volumes in the U.S. General Motors, Ford, and Chrysler gained market share at the expense of the Japanese manufacturers, and the Detroit Three have now posted several quarters of consistently strong operating performance. Whether these improved earnings are short-lived will depend on a number of unknowns:
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As their output returns to normal, will Japanese companies reclaim their market share? Will the Detroit Three maintain their focus on new vehicle development and launches and continue to practice pricing discipline, which favors maximizing profits over volume or marketshare growth? How will rapid introductions to the U.S. market of highly competitive new models from automakers around the globe, combined with slow growth, play out? How will automakers differentiate their vehicles and earn the pricing and volume they need? What will they do to ensure that each program delivers an attractive return on invested capital?
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How will automakers serving the U.S. market protect themselves against the risk of disruption (such as the supply chain disruptions we have seen in Japan and Thailand) and will they do it at an affordable cost?
Automakers will also face technological challenges. For example, advances in braking, parking assistance, propulsion, sensors, and other critical areas are bringing us closer and closer to the era of self-driving automobiles; indeed, Google has already logged well over 100,000 miles on its unmanned robotic vehicle. In urban areas, in particular, these innovations could improve traffic flow, provide revenues (through “smart tags” and traffic congestion pricing), and reduce accidents through vehicle-to-vehicle communication and coordination. Meanwhile, vehicle-based mobile communications technology continues to produce breakthroughs in voice-activated telephony, GPS, information, and entertainment. For example, GM customers can now use the automaker?s OnStar (driver communication) and RelayRides (vehicle location tracking) systems to rent their personal vehicles to others and charge fees based on usage. Both original equipment manufacturers (OEMs) and suppliers will have to anticipate which new technologies and add-on services will justify the cost of innovation. Clearly, anything that consumers are willing to pay for, that increases safety or functionality, or that reduces cost has the potential to be successful. At the same time, OEMs must be careful to integrate new technology into vehicles effectively and only when it is well perfected, or risk adding features that are annoying or, worse yet, prone to breaking down, which could negatively affect consumer perceptions about the quality of the automaker?s products. A return to competition based on innovation is a refreshing change from the dismal situation the industry faced just two years ago. And while the Detroit Three focus on producing more exciting and attractive vehicles, they can take comfort in having addressed a perennially problematic issue through a new and mutually beneficial four-year labor agreement with the United Auto Workers. By being able to pay newly hired workers at rates comparable to those paid by Asian transplants in the U.S., GM, Ford, and Chrysler have taken another important step in narrowing the gap with their rivals on manufacturing costs. Suppliers are also relatively well positioned after several difficult years. Many suppliers were very profitable in 2011; they have emerged from the recession with restructured balance sheets and lowered breakeven points. Moreover, supplier relationships with GM, Ford, and Chrysler have improved, according to the annual
Planning Perspectives OEM–Supplier Working Relations Index. But there is more work to do: Chrysler and GM still score in the “very poor–poor” range. There are some dark clouds for suppliers, though. Raw material prices, already elevated, may continue to rise, and many suppliers are struggling to find the capital to ramp up production to meet increasing demand. Moreover, most suppliers must continue to deal with what has become an endemic issue: a talent shortage, as topflight engineers willing to work in the auto industry are increasingly hard to find.
The global automotive industry is poised for continued growth in 2012, provided the European Union gets a handle on the debt crisis there. In an announcement last week, PwC?s automotive analyst group, Autofacts, said that it expects 2012 global light vehicle assembly will exceed 79 million units, an increase of 6.8 percent from 2011?s total. According to Autofacts, there are many factors contributing to the positive outlook. For instance:
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Local demand in the BRIC marketplace is on the rise. Monetary tightening and other policy shifts in Brazil, India and China caused slower growth in 2011. But inflationary fears in these markets are subsiding – prompting correspondingly looser monetary policy –and these markets could be poised for substantial growth once again. Russia is positioned for another year of strong local demand. Autofacts forecasts BRIC growth is likely to reach double digits (12 percent) in 2012 following only five percent growth in 2011. Japan and Thailand are poised for output recovery. Potential exists for strong output recovery in Japan and Thailand as the auto sectors in both countries work to satisfy pent-up demand, clear product backlogs and rebuild inventory in the wake of 2011?s natural disasters. Thailand?s eco-car program is also likely to provide assembly upside in 2012. North American industry outlook remains positive, too. Although volumes are not expected to achieve prior peaks, Autofacts predicts an 860,000 year-over-year increase in North America production predicated on healthier inventory, export growth, and US light vehicle sales of 13.6 million units in 2012.
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“The US region?s automotive sector is poised for continued growth in 2012,” said Rick Hanna, global automotive leader, PwC. “Automotive companies have ramped up vehicle inventories and growth markets are easing monetary policy. Although uncertainty persists, we anticipate the global automotive industry will run on all cylinders toward another record year as long as Europe?s issues don?t spill over to other regions.” Global Auto-Components Industry The trends in auto-components industry are dependent on the trends in the automobile industry, as the original equipment manufacturers are the principal customers for the auto components industry. Though there is a replacement market as well, the trends in automobiles industry still influences the growth of auto components industry. Since automobile industry is more concentrated in developed parts of the world, like US, Europe and Japan, the market for auto components is also concentrated in these countries. It is estimated that there are around 2500-3000 tier-I suppliers in the world, who account for more than 80% of the total value of production. The global auto components industry is in the process of undergoing a structural change. Industry is being influenced by strategies of OEMs, globalization, business and technology trends. In addition, the auto components industry is faced with rising input costs. Hence, there is a shift occurring in the industry with more and more companies moving to low-cost destinations, so as to be cost efficient. Due to this trend, countries like China, India and Thailand stand to gain significantly. Several global players have already established their bases in these countries while the local companies are also upgrading themselves to face the competition. Autocomponent industry is also witnessing mergers and acquisition trends. The large sized companies are acquiring small sized companies to grow even bigger as global presence is of extreme importance in this industry. There is a consolidation wave sweeping across the countries; most of the companies are hiving-off their peripheral businesses and concentrating on their core business. There is also a change in trend with more and more companies becoming as system integrators rather than being mere suppliers. The size of world auto components industry has grown in the last few years principally due to growth in automobile market and replacement market. However, the major portion of components production is meant to cater to the demand of OEMs and only a small portion goes towards replacement market.
The Indian Automobile Industry Indian automobile industry constitutes two types of sub industries --those involved in building automobiles and others who're involved in building automobile components. The latter is the one where SMEs come into picture and would be our focus area here. Automobile industry in India has huge potentials thanks to the growth of the middle class along with their overall economic growth. This is the reason of attraction for international brands who are trying hard to find new market for their products due to stagnated growth of auto sector in Europe, US, and Japan. Potential of Indian automobile industry can be best understood by following features: India is the second largest two wheeler market, fourth largest commercial vehicle market, eleventh largest passenger-car market, and fifth largest bus and truck market. With these facts in mind, let's talk about auto-component sector in particular. This segments is further divided into five sub segments --engine parts, drive transmission and steering parts, suspension and brake parts, electric parts, and body and chassis. According to the Automotive Manufacturers Association of India (AMAI), this sector is projected to grow at a CAGR of 10% till 2015-16; India is projected to be among top five automotive economies by 2025. The Indian automotive industry is largely classified in four clusters --Chennai, Pune, Pithampur, and NCR. In view of such huge potential, the Government of India has launched a 10-year plan –-Automotive Mission Plan (AMP), 2006-16 which aims to make automobile industries' contribution to GDP more than 10% while providing employment to 250 lakh people. Indian Automobile Industry at Global level: · India ranks 1st in the global two-wheeler market · India is the 4th biggest commercial vehicle market in the world · India ranks 6th in the international passenger car market · India ranks 5th pertaining to the number of bus and truck sold in the world · India is the 2nd largest tractor manufacturer in the world.
Volkswagen, Toyota, Nissan & Ford plan new cars to cash in on fastest-growing compact car section of car market in India. Source: Economic Times It is expected that the Automobile Industry in India would be the 5th largest automobile market by the year 2016. Projected Growth rate in Indian Automobile Industry: · Passenger vehicle sales in the country will grow at a CAGR of 12 per cent to touch 3.75 million units by 2014. · The domestic two-wheeler sales will grow at a CAGR of 8.8% by 2014 at 11.3 million units. · To emerge as the destination of choice in the world for design and manufacture of automobiles and auto components with output reaching a level of US$ 145 billion accounting for more than 10% of the GDP and providing additional employment to 25 million people by 2016.
Challenges in Automobile Industry Being a manufacturing vertical, usage of IT is always a challenge in this cluster. People especially those working at lower ranks are always skeptical about using IT
which makes implementation and then execution of packages like CRM or ERP a big challenge. Automotive parts manufacturers or auto components industry is highly dependent on OEMs. This leads to pressure from OEMs for implementation of stringent controls over quality of component and reliability of delivery. In modern competitive environment local manufacturers of component are under huge pressure to adapt to global standards so that delivery and quality can be controlled. To overcome these challenges IT has a huge part to play. Challenges of automobile industry can be categorized into three levels depending on the size of the company. There are those who have basic IT structure in place and are looking to implement complex packages to gain competitive edge and then there are those who have small or negligible IT budget to lack of understanding about how IT can actually be helpful to them. Indian Auto Components Industry According to Auto Component Manufacturers Association of India (ACMA), the size of the Indian auto components industry is estimated to be around US $ 18 billion in 2007-08. India is estimated to have the potential to become one of the top auto component economies by2020, according to a study by IBM. According to another study, the auto component industry in India has potential to grow at a CAGR of 13% to reach US $ 40 billion by 2015. India?s share in world autocomponents would thus grow from around 1%, at present, to over 2.5% by 2015. Domestic market is projected to grow at around 8-10% per annum in the next 10 years. Exports are projected to grow at over 30% per annum in the long term. The automotive market in India has grown significantly owing to the growth in income and in the living standards of the middle class population, and a significant increase in their disposable incomes. However, there has been a slowdown in demand for vehicles, in 2008-09, which is impacting the auto-component industry adversely. Responding to emerging scenario, Indian auto component sector has shown great advances in recent years in terms of quality, spread, absorption of newer technologies and flexibility. Availability of skilled manpower, reasonably priced workforce, together with the strengths gained by the country in IT and electronics, have built-up an environment for significant leap in the auto component industry. The turnover of the auto component industry, over a period of time, has grown impressively. During the year 1996-97, the turnover of the industry was US $ 3.3 billion, which
breached the US $ 10 billion mark, to reach US $ 12 billion, in 2005-06. In the year 2007-08, the turnover of the auto component industry has reached US $ 18 billion. Indian auto-component industry has a comprehensive range of products catering to the market. During the year 2007-08, engine parts accounted for the bulk of production in the Indian auto components industry, followed by transmission and steering parts. The combined production in these two categories was around 50% of the total value of the production. Export growth in Indian autocomponents industry was around 25% during the year 2007-08, with value of exports being US $ 3.6 billion. India is also an importer of auto-components; according to the Ministry of Heavy Industries, Government of India, the total imports of auto components by India in the year 2006-07 were US $ 3.3 billion (Rs. 14,644 crore). India has been emerging as a significant exporter of auto components since the last decade. From a level of US $ 330 million in 1997-98, exports of auto-components have reached to over US $ 3.6 billion in 2007-08. Export orientation of Indian auto-component industry has also increased from a level of 11% in 1997-98 to over 20% in 2007-08. Export of auto-components have grown at a CAGR of 24% during this period. India exports its auto components to almost every part of the world, the major markets being developed countries such as USA, Germany and UK. Some of the important Asian markets for autocomponents include Bangladesh, Sri Lanka and Nepal. According to ACMA, the export potential of auto components industry is expected to post a CAGR of around 24% to reach US $ 20-22 billion by 2015.
TRENDS IN GLOBAL AUTOMOTIVE INDUSTRY
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Addressing the Challenge of Volatility in Fuel Prices
One of the major challenges of the world automotive industry is the volatile oil prices. The year 2008 witnessed crude oil prices breaching the US $ 140 mark per barrel, and thereafter slipped below US $ 40, in the later part of the year. The volatility in oil prices does not directly affect the growth in automotive industry; however, volatility in oil prices is one of the influential factors in automobile demand. In order to address the challenge of volatility in oil prices, the automotive industry is innovating new technologies and inventing usage of alternative energy. Hydrogen cars, driven either by a combination of fuel cells and an electric motor; hybrid electric technology; electric vehicles with rechargeable batteries; or alternatively, compressed air technology to drive the pistons in a specially designed engine, are thought to be replacing fossil fuel-powered motors in the decades to come.
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Emergence of New Generation Automobiles
Innovation is expected to drive the automotive industry in future as the producers are involved in differentiating their products and services. There are already growing interface of electronics and IT in the automotive functionalities, such as entertainment, navigation and safety. According to a survey, conducted by IBM across the auto majors, majority of them felt that by 2020 the level of innovation would be greater in software and electrical systems of automobiles. It is also expected that by 2020 the vehicles may become another node on internet, connecting with other vehicles, the transportation infrastructure, homes and businesses. However, there are challenges associated with this trend, with regard to consumer acceptance, technological development and adoption of standards.
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Supply Chain Management in the World of Global Sourcing
Global auto-component firms are giving greater level of thrust in supply chain management to address the challenge of cost pressures. This is particularly important in the context of global sourcing. Though there is a perceived belief that global sourcing helps in reduction of cost of components, there are logistical challenges. Thus, it is being recognized that collaboration between the OEMs and component producers are crucial to develop capabilities and solve the challenges associated with global delivery, especially in the areas of inventory management,
scheduling, and timely delivery. In addition, both OEMs and suppliers view that the collaborative efforts in supply chain management enhances the capacity and performance visibility.
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Customer Management Systems
Earlier, automotive manufacturers had to get feedback from the customers through intermediaries, such as vendors or service workshops. This trend has been changing with the introduction of customer management systems through ICT interface. Even vehicle buyers are also browsing the net to know the features of a new model, evaluate them with the existing models, and compare the prices. IT firms are developing customer relationship management (CRM) tools that help the manufacturers to realise and optimize individual customer value, increase the postwarranty service retention, predict model demand and provide supply chain solutions.
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Growing Small Car Segment
The volatility in crude oil prices witnessed during the year 2008 re-emphasized the need for small and fuel-efficient vehicles. Some of the automobile majors have plans to hike their R & D budget for designing of small and fuel efficient vehicles. Added to this is the need for reduction in prices to target the middle income groups of population/ new buyers, especially in developing countries like India, where the vehicle penetration is low as compared to the population. An auto research firm CSM Worldwide Inc. has estimated that global demand for small cars would grow by 30% per annum to 27 million vehicles a year by 2013. The fast-growing small cars market has encouraged several global auto majors (such as Renault, Toyota, and Nissan) to plan for launch of small cars.
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Green Motoring
Automobile manufacturers are increasing the thrust on fuel efficiency than before; the initiatives are mainly through improvements in technology and introduction of new fuel variants, thereby reducing toxic emissions. It may be mentioned that China, the EU, Japan and the USA have already established fuel economy rules or agreements of varying stringency. The FIA?s1 declaration for green motoring has set a fuel economy target of 140 gCO2/km for passenger cars. Such a global fuel economy target could be used as an international Fédération Internationale de l?Automobile (FIA) benchmark to assess progress in the fuel efficiency of the global fleet of new motor vehicles. Some countries are also undertaking „Green Rating? of automobiles.
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Cross Border M&A Deals
The global automotive industry is increasingly getting more active in cross border mergers and acquisition (M&A) deals. On a global basis, the number of cross border deals has grown in the past few years, and this trend is expected to continue after the recovery of economic activity in the world. The expansion outside the home markets of some of the major automotive companies from traditional lowcost countries, such as China and India, is bringing in new capital and a fresh look at certain sectors of the automotive market. With the recession in the US market and its consequent impact in other markets, automotive assets in developed countries are becoming attractive to buyers from emerging economies, as well.
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Entry of Private Equity Players
The traditional funding model in the automotive industry is slowly being replaced with aggressive funding structures. There has been a structural change in the automotive industry with the entry of private equity players in the past. Traditional and family-owned businesses were taken over by the private equity players and hedge funds, which are expecting more profit or investment realization from the industry. Though the business activities of private equity players have come down, following the financial market meltdown, this is expected to be revived soon, either when the market sentiments improve or once consolidation happens among the private equity players.
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Growing Collaboration for Technology Enhancement
Technology-enhancing collaboration in the automotive sector helps in preserving design integrity, despite minor engineering adjustments. There are also softwares/ programs that make the global data sharing possible among designers, engineers, suppliers, partners and even customers. Such better and faster integration of design / engineering ideas help in necessary adjustments and adaptations in designs to suit the requirements.
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Trendy Cars, Shorter Life-spans
An automobile is a highly engineered collection of complex components, each of which has its own lifespan and longevity characteristics. While some components require frequent replacement, others that are relatively expensive are expected to have longer lifespan to justify the economics of a vehicle buyer. However, change in fashion and design trends may outweigh the pure economics, which may lead to planned obsolescence. In the world of changing fashion trends, auto manufacturers
are developing new designs meeting the changing consumer preferences. More frequently the new models are introduced, the shorter will be the life span of the old models.
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Preserving Brand Identity
With growing mergers and takeovers in automobile industry, players are carefully devising strategies to strengthen the backroom operational synergies, in terms of common logistics and supply chain management, but avoid losing the brand identities. A group owning different brands prefers not to use the same platform that has same kind of technology, management, and designers to preserve the brand identity. In this sense, the automobile sector is different from monolithic branding strategies of consumer goods.
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Design for Recycling
It is being increasingly realized that natural resources of the earth are depleting fast. Hence, there is a growing concern amongst manufacturers as also the consumers to conserve the resources; one such way is through recycling. The automobile industry is one of the pioneers in usage of recyclable materials. Also, the rising input prices are making the automobile manufacturers to design the vehicles that can be easily recycled.
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Emergence of Design Studios
As efficiency in design and manufacturing improves, vehicle manufacturers across the world are focusing on making models for niche market, though the sale would be in lower volume. This is in contrast to the earlier strategy of designing models for mass consumption. With the increase in number of models to be designed and developed, auto majors are outsourcing the designing jobs to independent design studios who take care of the design and execution of the process management in the value chain.
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Outsourcing
Stiff competition to enhance the market share forces the OEMs in developed countries to outsource their engineering requirements to low cost countries like India. Global auto-majors such as General Motors, Ford, Toyota, BMW are increasingly outsourcing the vehicle design and engineering services to developing countries such as India, either through their captive centers or through third-party
vendors. Long term trends indicate that global auto-component outsourcing from the US is expected to reach US $25 billion by 2015, and India, China and Mexico are likely to benefit the most from such trend. An online survey conducted by A T Kearney, revealed that around one-fourth of global auto-majors have considered India as a favorable destination for automobile-engineering outsourcing.
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Advanced RFID Practices in Auto Manufacturing
RFID has been in use in the automotive industry for several years, though to a limited extent. The trend is changing now with adoption of technology in wide variety of applications, the dominant being vehicle entry and security. According to a study by ABI Research, 40% of new cars manufactured in North America are equipped with RFID immobilizers and the worldwide revenue generated by this application alone was estimated to be US $ 3.7 billion. In addition, RFID solutions are increasingly being used in automobile manufacturing processes and supply chain applications.
EXPORT COMPETITIVENESS OF INDIAN AUTOMOBILE INDUSTRY The year-on-year growth rates in vehicles production achieved by the Indian automobile industry has been outstanding as compared to the growth rate achieved by the global automobile industry. In the year 2007, the automobile production growth rate in India stood at around 14% as compared to the world production growth rate of 5.4%. Except in the year 2000, when there was a slump, the Indian automobile industry has performed better than the global average, at the back of both domestic as well as global demand. In the auto-components segment, steered by the country?s high engineering skills, established production lines, and competitive manufacturing costs, global auto majors are increasingly ramping up the value of components they source from India. Over 20 OEMs have set up their International Purchase Offices (IPOs) in India to source their global component requirements. These include firms like General Motors, Ford Motors, Cummins International, Bosch, Volkswagen, BMW, MAN (trucks) and JCB (earthmoving equipment), among others. This number is expected to double by the year 2010. The auto-component industry was estimated to achieve an export level of around US $ 5 billion in 2008-09. However, the slowdown in demand for automobiles, both in India and in its export markets, may downsize the projections marginally. In such a scenario, it may be pertinent to analyse the export competitiveness of India in the international market. In this chapter, an attempt has been made to analyze the competitiveness of India in order to identify potential markets for Indian automotive industry in select markets/ regions. The markets / regions identified for this purpose were USA and Europe for auto-components, and developing countries of Africa, Asia and Latin America for automobiles. The competitiveness of Indian automotive industry in the identified markets have been analysed using some of the competitiveness indicators, such as penetration index, contribution index,and specialization index. ? Auto-components In the USA market, the penetration index for components such as bumpers, drive axles, and radiators have grown significantly indicating rise in share of India in USA?s total imports. The contribution index has also increased for bumpers indicating growing share of its exports in India?s total exports to USA. As a result of such trends, the specialization index has increased significantly for bumpers, drive axles, and steering wheels.
While the specialization index has decreased significantly for road wheels and parts, marginal decline has been witnessed for components such as brakes and parts, non-driving axles and parts, and suspension shock absorbers. In the European market, the penetration index has grown significantly for autocomponents such as bumpers, drive axles, suspension shock absorbers and radiators. The contribution index has also increased for bumpers and drive axles and radiators indicating growing share of its exports in India?s total exports to Europe. As a result of such trends, the specialization index has increased significantly for bumpers, drive axles, suspension shock absorbers and radiators. While the specialization index has decreased significantly for road wheels and parts, and parts and accessories of bodies, marginal increase has been witnessed for components such as brakes and parts, non-driving axles and parts, suspension shock absorbers, and steering wheels and parts. ? Automobiles The analysis of international competitiveness of Indian automobile sector in Africa market reveal that the penetration index has grown over the years, between 2001 and 2006, for sub-segments such as tractors, motor cars, transport vehicles for goods, special purpose vehicles, and chassis fitted with engines. The growth in penetration index, however, has not been much for public transport type passenger vehicles, while it has come down for motorcycles. The contribution index has also increased in these sub-categories (except the public transport type passenger vehicles, and motorcycles), indicating growing share of these categories in India?s exports to Africa. The share of import of identified categories of vehicles in total import of Africa has also increased over the years indicating growing African market. As a result of these trends, the specialization index has grown for all types of vehicles, except public transport type passenger vehicles and motorcycles. India?s automobile penetration into the Latin American region is slowly gaining momentum. The analysis of international competitiveness of Indian automobile sector in Latin America region reveals that the penetration index has grown, between 2001 and 2006, for sub-segments such as tractors, motor cars, and motor cycles. The growth in penetration index, however, has not been much for public transport type passenger vehicles, and special purpose motor vehicles, while it has come down for motor vehicles for goods transport and chassis fitted with engines. The contribution index has also increased in the sub-categories where penetration index has grown (and vice versa), indicating growing share of these categories in India?s exports to Latin America. The share of import of identified categories of vehicles in total import of Latin America has also increased over the years in most of the sub-categories, indicating growing Latin American vehicles market. As a
result of these trends, the specialization index has grown for all types of vehicles, except motor vehicles for transport of goods, chassis fitted with engines, and motorcycles. India?s automobile penetration in the developing Asian market has been quite modest across all the segments. This could be seen from the growing penetration index during the analysed period (years 2001 and 2006), in almost all segments. The contribution index has also grown in all vehicle segments (except motor vehicles for transport of goods, which has remained constant), indicating growing share of these vehicle segments in India?s exports to developing Asia. However, the share of import of identified categories of vehicles in total import of developing Asia has declined over the analyzed period, in most of the subcategories, indicating growing manufacturing and self-sufficiency in the region. In spite of such a trend, the specialization index has grown for all types of vehicles, with some categories, such as tractors, and chassis fitted with engines, well pronounced than the others.
CHALLENGES FACED BY INDIAN AUTOMOBILE INDUSTRY
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Rising Input Costs
Prices of core inputs in the manufacture of vehicles, like steel, non-ferrous metals and rubber, have grown over the last few years, which, in turn, has increased the production cost of vehicles. Though the raw material prices have cooled in the last few months, they still prevail more than the prices that have prevailed few years ago. Such cost escalation in input prices has impacted the growth of the Indian auto industry.
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Fuel Price Volatility
Volatility in fuel prices affects the growth of the automotive industry all over the world. The effects of volatility in fuel prices are multi-pronged. Firstly, the cost of inputs in car manufacturing increases with the increase in oil prices. Polymers, one of the inputs used in manufacture of vehicles, is a derivative of crude oil. Bulk commodities, such as steel and aluminium, are also used in manufacture of vehicles; the transportation cost of which is influenced by oil prices. Secondly, the oil price has an impact on inflation, affecting the saving and disposable income of the consumers, thereby affecting the demand for automobiles. Thirdly, the fuel price influences the overall running cost of the vehicle owners; there could be switch in demand among the vehicle variants, as also research in use of alternative fuels. Thus, the volatility in oil prices affects the prospects of the industry.
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Slowdown in Demand
As per the RBI?s data on sectoral deployment of gross bank credit, the automotive industry received gross bank credit of Rs. 29,152 crores in 2007-08, a growth of 39% over the corresponding period of the previous year. In addition, credit has been extended to transport operators and retail consumers (as vehicle buyers) to support the growth of sales by the automotive industry. However, the penetration rate of vehicle ownership in India (per thousand population) is estimated to be less than 10 for car owners and around 40 for two wheelers. This is low as compared to the world standards, and indicates the potential demand for automobiles in the country. Following the recent financial sector crisis, the euphoria of easier / better availability of auto finances in India has declined. The recent trends in vehicle sales also corroborate with this contention. During the period April-November 2008, the sales growth in passenger vehicles segment was marginally negative at (-
) 0.59% over the corresponding period of 2007-08; the growth in sales of commercial vehicles was negative at around (-) 9.23%. Similarly, three wheelers sales have also registered a negative growth (– 3.37%). The two-wheelers segment registered a positive growth of 3.76% during this period; however, the two wheelers sales in the month of November 2008 witnessed a negative growth (14.73%), over the corresponding month of 2007.
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Slowdown in USA
North America has been a traditional market for the Indian auto component manufacturers with exports to the region accounting for around 27% of Indian auto component exports. The region is affected by the global financial crisis, which led to the slowdown in demand for vehicles, especially in USA. As the global financial crisis makes consumers increasingly reluctant to part with cash and lenders unwilling to offer credit, carmakers across the world face challenges in finding buyers to keep their production lines running. It may be mentioned that industrywide auto sales in USA in the month of November 2008 were down nearly by 37%. In annualized terms, according to analysts, the US auto industry recorded sales of 10.2 million vehicles in November 2008, down from 16.07 million vehicles sold in the same month of last year. With the Detroit majors like, General Motors, Ford and Chrysler seeking a bailout from the Federal Government, the auto component industry in India is feeling the brunt with slack in demand. An emergency bail-out offering of US $ 17.4 billion loans to the three auto majors has been announced with the condition that within three months restructuring plans are prepared by them, including cutting down on costs. The restructuring plan and cost-cutting measures may affect the export prospects of Indian auto-component firms. The Indian auto components sector, which is one of the major vendors for the global auto majors, and to the US in particular, face the challenges of slowdown in the US automobile market.
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Production Cuts
The production activity in the automotive industry is poised to be on the lines of the economic growth in the world and it is likely that the momentum in production may slowdown in the year 2008-09. The slowdown in demand for vehicles, both in domestic and export market has led to the announcement of production cuts by many vehicle manufacturers. In the month of November 2008 (over the month of October 2008), there has been decline in production across all segments. Production of passenger vehicles have witnessed a negative growth (-8.50%), commercial vehicles production declined by 44.27%, three-wheelers production
declined by 5.65%, and two wheelers by 8.79%. Overall, the production in November 2008 (over October 2008) has come down by 9.94% (from 0.95 million units to 0.86 million units). Commercial vehicles producer, Ashok Leyland, has reduced its production of vehicles to around 1500 units in November 2008 (as compared to an average of 6400 units produced during April-October 2008). Another major vehicle manufacturer, Tata Motors has decided to cut production of medium and heavy commercial vehicles by around 50%, while its passenger cars segment is contemplating a production cut; as of now, Tata Motors is undertaking partial shutdownto match the production and demand for passenger cars. In the two-wheelers segment also, major producers are mulling over production cuts to reduce their inventory levels and match with the market demand trends. Bajaj auto has already announced a prolonged shut down as part of the exercise to reduce the inventory levels. Such trends also affect the market prospects of Indian autocomponent manufacturers. Several auto-component units that are catering to the demand of OEMs in India are also in line with the production cuts intended by these OEMs. Several auto-component manufacturers are scheduling maintenance holidays to tackle the situation. ? Growing Competition Competition in India?s automobile and auto-parts industry has been growing in the recent years. Earlier, the regulatory framework and market conditions positioned the Indian OEMs in monopolistic or oligopolistic market structure. As the automotive market in India is evolving through the dynamics of open market and deregulation, many new players have entered the market. Since liberalisation, over 20 new players entered the market in the passenger car segment alone. Though, there has been depletion of market share for Maruti Suzuki, it still dominates the passenger car segment. In the two-wheelers segment too, foreign majors have their presence through joint ventures as also through their wholly- owned subsidiaries. Hero Honda is the largest player in the two-wheeler segment, followed by Bajaj Auto and TVS Motors. In the commercial vehicles segment, though the market is dominated by home-grown companies such as Ashok Leyland and Tata Motors, competition is augmented through the entry of foreign players such as Nissan and Volvo. Indian players are entering into joint ventures with these companies to gain access to the technological advancement and design engineering. In the auto-parts segment, though there are vibrant units producing high-quality products and supplying to global OEMs, the market is attracting global players such as Delphi Systems, Visteon, Denso and Bosch, to mention a few. These global majors have been expanding their product portfolio and enhancing their production capacities, thereby increasing the competition among domestic players.
? Changing Consumer Preferences There has been continuous change in consumer demand in the motor vehicle industry, making the companies to focus on innovation continuously. With growing purchasing power among Indian consumers, the demand for better and comfort vehicles with greater efficiency is growing. Intense industry competition has led to design of hybrid vehicles and development of new vehicle concepts. Apart from customers, new technology also allows the designers to change every aspect of car design. According to a study2 by KPMG, product quality, cost reduction, new technologies and environmental issues, influences the consumer demand for vehicles and thereby innovation in the automotive industry. ? Chinese Competition Of late, low-cost imports from China threaten the business prospects of domestic auto-component manufacturers. According to ACMA, auto-component imports from China have grown rapidly in the last few years. From around 3.3% of share in all component imports in 2003- 04, China now accounts for close to 10%. Significant growth in component imports has been contributed by China in the last three years, while India?s exports to China have stagnated at around Rs 120-170 crores in the last 5 years. Such imports from China have set new benchmark prices and the component manufacturers from India face challenges in the scenario of rising input prices. ? Environmental Issues The automobile sector affects the environment in multiple ways, starting from the use of materials that causes environmental degradation, and ending with the management of scrap. However, it is estimated that much of the environmental damage during the lifespan of a car happens during driving, and thus is associated with fuel emissions. That is why many countries are discouraging sale of fuelinefficient cars, as also polluting cars, through suitable taxation policy. It is reported that Chinese Government has increased sales tax on cars with engine capacities more than 1 litre, and reduced on cars with engine capacity of less than 1 litre. EU is proposing to penalize cars that are emitting more than 130 gms of CO2 per kilometer. There are estimates that the automobile industry accounts for approximately one-fourth of global anthropogenic GHG emissions. Therefore, in order to combat the environmental challenge, firms (as well as environmentalists and national Governments) are focussing on avoidance of polluting substances in production, in addition to concentrating on fuel efficiency and emission standards.
The industry is also contributing to combat this challenge by undertaking research in improving fuel efficiency and reducing CO2 emissions. In the EU, an end-of life of vehicles Directive (2000/53/EC) is in force to prevent polluting substances in manufacture of vehicles. Also, a dialogue between regulators and the automotive industry in EU inspired a voluntary commitment for the industry to reduce emissions. ? Low R&D Orientation It is being realized all over the world that the competitiveness is not dependent on factors like availability of skilled labor, low-cost operations and infrastructure. The sustained competitiveness in the automotive industry comes through improvement in productivity, which calls for continuous innovation by the players. However, Indian automobile companies spend a relatively low amount on R&D; thus, their R&D orientation (R&D spending as a percentage of total sales) is low relative to the global standards. Developing new designs is an expensive proposition, unless the market for the new design is on a global scale. Indian firms are mainly focusing on, and designing the vehicles for domestic market or for other developing country markets, but not completely focusing on designing a vehicle for a truly global market, or to create a niche for them and compete with international brands. Also, the efforts of Indian automobile manufacturers are mainly oriented towards value engineering or modification in the existing models to improve performance, and are not focused on developing new models. ? Infrastructure Constraints Insufficient road infrastructure and traffic congestion could be a bottleneck in the growth of the automotive industry. In India, capacity addition in roads has been lagging behind the traffic growth. It is reported that China witnessed a phenomenal growth in automotive industry due to rapid development in road infrastructure. Poor port connectivity is another bottleneck faced by the industry, especially when it comes towards exports. The Chennai and Mumbai Ports handle bulk of the vehicle export. In addition to the insufficient porthandling infrastructure, there are also challenges associated with space especially for parking and setting up of repair shops in the port yard. According to a comparative analysis on cost structure of Indian automotive sector and that of Malaysia, the deficiencies in logistics and infrastructure adds about 1.1% to 2% in the total cost structure.
? Incidence of Levies / Duties On vehicle sales, currently taxes are levied at multiple levels – at city level (octroi), state level (sales tax) and at the central level (excise). It is estimated that the incidence of levies and taxes on a vehicle averages to be around 30% of the cost of vehicle. The incidence of taxes increases in cases where the octroi is also levied. The high incidence of taxes increases the cost of ownership of vehicles, thereby affecting the vehicle penetration level in India. ? Low ICT Interface The adoption of ICT in the Indian automotive sector is at low level as compared to international standards. According to a study by NASSCOM, many SME firms in the auto-component sector is facing the challenges of IT adoption, which is important for enhancing their productivity and competitiveness, and the growth of the industry. ? Human Resources Challenges One of the critical enablers for the growth in the Indian automobile industry would be adequate availability of trained manpower. It is estimated that the industry would require large numbers of trained personnel, if our country has to become an auto-manufacturing hub for the world. Countries in North America and Europe, which has been the hub for automotive industries over the years, are increasingly feeling the pinch of the aging workforce impacting employment levels from factory workers to middle and top-level management, thereby creating a talent vacuum in the industry. This crunch in manpower in these economies is slowly luring the much-required human capital from India. This challenge needs to be addressed on priority basis so that the country does not loose out on critical talent that may be important for positioning India as an automotive manufacturing hub of the world.
STRATEGIES TO COUNTER THE CHALLENGES
? Tackling the Rising Input Costs The increase in the cost of crucial raw materials (such as steel, aluminium, rubber) that are used in manufacture of vehicles has affected the margins of the Indian automotive industry. Though the raw material prices are cooling down, they are still higher than the prices that prevailed few years ago. In order to tackle this problem of rising input costs, and to improve margins and price realisations, players in the automotive industry need to adopt multi-pronged strategies. These include reallocation of product mix, cost reduction through better adoption of „lean manufacturing? solutions, and renegotiation with suppliers and vendors. Some automobile manufacturers have already strengthened their strategy in tweaking the product-mix, giving greater emphasize on product segments that is expected to provide better margins. Strengthening lean manufacturing solutions would help the Indian automotive industry to tackle the challenge of input cost escalations. Some automobile manufacturers in India have already established programmes to avoid wastage in production and thereby cut down the cost of production. Firms also need to renegotiate the prices (for purchases with the suppliers) and margins (for sales with the dealers), so that the hike in the end price at the hands of consumers is minimized due to hike in input prices. ? R&D on Alternate Energy Sources and Hybrid Vehicles The share of automobiles on road, using petroleum products as fuel, has almost remained the same (at over 95%) in the past several decades. This is despite the fact that the vehicles on road have been evolving in every other aspect. In other words, product development has happened in all other aspects, except in utilization of alternate energy sources. The industry, together with the Government, may provide greater thrust on development of products that uses alternate energy sources, and R&D on hybrid vehicles. ? Market Presence in All Segments Globalization is making every player in the industry to look beyond its borders. Ironically, in spite of the increasing number of models being manufactured, the PLC of the vehicles are decreasing everyday, thus putting pressure on the players to find ways to diversify their product offerings. Recently, Tata Motors had
acquired the Jaguar- Land Rover brands from Ford, thereby, making an imprint into the niche segment, eying the European and the developed country market. This has made the Tata Motors a truly global player in the automobile market with a diversified product offerings, ranging from the entry level segment Nano to the much-touted ownership of premier brands, like Land Rover and Jaguar, thus catering to all segments of the market. Market presence and product offerings need not be in one category of vehicles (say passenger cars) alone; it could also be across multiple vehicle categories. Such strategies build brands and visibility across segments, as also reduce the risks associated with market concentration and economic slowdown to some extent. ? Enhancing Competitiveness Cost efficiency is necessary for Indian automobile industry to enhance its global competitiveness. Many global auto-majors, especially from Japan, have initiated cost reduction exercises. Some firms have also shifted from standard costing to Kaizen costing and target costing. Some of them have even established targetcosting offices across the world and established office structure for implementing Kaizen. Cost containment strategies may also include working with suppliers to reduce the costs in their processes, implementing low-cost designs / segments of the product, or through reduction of wastage. Strengthening the lean manufacturing practices, being adopted in India as also across the world, would also help improve competitiveness of Indian industry. Such practices show greater efficiencies in machine utilization, fewer labor hours per machine, shorter machine setup times and identification of bottlenecks and cost reduction opportunities swiftly. Both the automobile and the auto-component industry are interlinked and are dependent on each other for survival, and hence the hub and spoke model may be another approach for both of them to contain the cost. In the hub and spoke model, the automobile industry help in establishment of auto-component units around its assembly plants, and help them in technological improvement, R&D, and identification of machinery and equipments. The auto-component units concentrate on on-time supply and servicing of orders and cost containment in production, and thereby promote competitive pricing among the industry players. ? Addressing Consumer Preferences The dynamics of Indian automobile market is changing with the changing consumer preferences. For example, earlier, the two-wheeler segment was dominated by scooter (with a market share of 70-80%), which has been taken over
by motorcycles. The change in consumer preference was mainly due to fuel efficiency, as also design and technological improvement. Though, the newer versions of scooters (scooty concept with ignition start) are slowly reviving the market for scooters, the market share may not reach to the previous level. Similarly, consumer preferences have changed the demand pattern in other vehicle segments too, driven mainly by design and technology. Indian auto-majors need to address the changing consumer preferences and suitably modify the design or technological improvement to augment their market share. Collaborative Product Development (CPD) is being adopted as a business strategy by global automobile majors to address the challenge of changing consumer preferences. Dealers are also need to be roped in the design or product development process as they are ideal gateway agencies between the customer and the firm. Hence, a stronger relationship is required to be established by the vehicle makers with the dealers. Synergies are to be created between the vehicle manufacturers and dealers though better communication and understanding in order to offer not only enhanced customer services but also to understand the trends in consumer preferences. ? Environmental Compliance Environmental challenges in automobile manufacturing does not relate to emission standards alone. There are also challenges associated with end-of-life in vehicles, especially waste management. Though sufficient steps are being taken in India towards achieving international emission standards, adequate steps are still required to be taken in environmental compliance in vehicle manufacturing. Significant amount of resources are required as investment to undertake R&D programmes to address these environmental challenges. ? Enhancing R&D Orientation Indian automotive industry needs to develop a proactive culture with regard to investments in R&D rather than responsive culture. This would help the industry to understand the complexities of vehicle users and bring in product innovation through changes in design and vehicle engineering. The R&D orientation in the Indian auto-component industry is not comparable with world standards. However, few firms that are having large operations are increasing their stake in innovation to compete in the global map. There is also a need to initiate a programme for research and development in the Indian automotive industry, concentrating on development of intelligent vehicles adhering to safety standards, energy efficiency and emission norms, and alternate fuels. The programme may also stretch down to component manufacturers with active involvement of OEMs.
? Infrastructure Development Infrastructure constraints are common to all industry; however there are few specific infrastructure constraints affecting the growth of Indian automotive industry. Poor road infrastructure and traffic congestion can be a bottleneck in the growth of vehicle industry. Therefore, in general, improvement in road infrastructure would help enhance the demand for automobiles in India. Secondly, road infrastructure associated with last-mile port connectivity would help enhance supply chain management strategies of the vehicle manufacturers. More importantly, there is a need for building vehicle terminals in India for smoother handling of vehicle exports. ? Supply Chain Management Supply chain management in the automotive industry helps in integration of the partners to improve operational performance, materials flow and manufacturing flexibility. Implementing supply chain solutions as one more module after Enterprise Resource Planning (ERP) is not enough. There?s a need for enterprisewide process improvement. This calls for inculcating mutual respect with the vendors, dealers and consumers. Just-In-Time (JIT) production processes, identification of shorter transportation routes, e-sourcing are some of the supply chain strategies that may be adopted in large scale by the Indian automotive industry. ? Enhancing ICT Interface IT sector has a major role to playing development of Indian automotive industry to achieve its global aspirations through enhanced productivity and product efficiency. In addition, ICT interface help the manufacturers to interact frequently with vendors and consumers also, and leverage their ideas / preferences into vehicle design. Increased IT adoption in the automotive industry not only enhances the competitiveness of the industry in the existing markets, but also creates new markets for the Indian automotive industry. ? Human Resources Development The cost pressure on global auto majors, who are mainly present in developed countries, viz., USA, Europe and Japan, is making the industry shift to developing nations. In addition, these countries are facing shortages of skilled manpower, which is expected to grow manifold in the years to come. India has large human
resource base; however, India needs to enhance the skill-sets that are required for the industry in order to become a global automotive hub. The Government and industry need to come together and address the challenges related to skill development and workforce shortages, both in terms of quantity and quality. In this regard, it may be mentioned that USA established, over three decades ago, a National Institute for Automotive Service Excellence, to provide training, testing, and certification of auto-service and repair-professionals to ensure continuous availability of trained technicians for the industry. Government of India, through the Automotive Mission Plan, has proposed the setting up of an Automotive Training Institute to train people for the automotive industry. The Society for Indian Automobile Manufacturers (SIAM) has plans to set up an online university, first of its kind in Asia, to cater to the education needs of the industry. SIAM is associating with US-based institute, Adayana, who will provide course content and certify these courses.
KEY COMPETITORS Tata Motors Market Share: Commercial Vehicles 63.94%, Passenger Vehicles 16.45%[18] Tata Motors Limited is India's largest automobile company, with consolidated revenues of USD 14 billion in 2008-09. It is the leader in commercial vehicles and among the top three in passenger vehicles. Tata Motors has winning products in the compact, midsize car and utility vehicle segments. The company is the world's fourth largest truck manufacturer, and the world's second largest bus manufacturer with over 24,000 employees. Since first rolled out in 1954, Tata Motors as has produced and sold over 4 million vehicles in India. Tata Motors is the first company from India's engineering sector to be listed in the New York Stock Exchange (September 2004), has also emerged as an international automobile company. Through subsidiaries and associate companies, Tata Motors has operations in the United Kingdom, South Korea, Thailand and Spain. Among them is Jaguar Land Rover, a business comprising the two British brands which was acquired in 2008. In 2004, it acquired the Daewoo Commercial Vehicles Company, South Korea's second largest truck maker. The rechristened Tata Daewoo Commercial Vehicles Company has launched several new products in the Korean market, while also exporting these products to several international markets. Today two-thirds of heavy commercial vehicle exports out of South Korea are from Tata Daewoo. In 2005, Tata Motors acquired a 21% stake in Hispano Carrocera, a reputed Spanish bus and coach manufacturer, and subsequently the remaining stake in 2009. Hispano's presence is being expanded in other markets. In 2006, Tata Motors formed a joint venture with the Brazil-based Marcopolo, a global leader in bodybuilding for buses and coaches to manufacture fully built buses and coaches for India and select international markets. In 2006, Tata Motors entered into joint venture with Thonburi Automotive Assembly Plant Company of Thailand to manufacture and market the company's pickup vehicles in Thailand. The new plant of Tata Motors (Thailand) has begun production of the Xenon pickup truck, with the Xenon having been launched in Thailand in 2008. Tata Motors is also expanding its international footprint by franchises and joint ventures assembly operations in Kenya, Bangladesh, Ukraine, Russia, Senegal and South Africa.
With over 3,000 engineers and scientists, the company's Engineering Research Centre, established in 1966, has enabled pioneering technologies and products. The company today has R&D centres in Pune, Jamshedpur, Lucknow, Dharwad in India, and in South Korea, Spain, and the UK. It was Tata Motors, which developed the first indigenously developed Light Commercial Vehicle, India's first Sports Utility Vehicle and, in 1998, the Tata Indica, India's first fully indigenous passenger car. Within two years of launch, Tata Indica became India's largest selling car in its segment. In 2005, Tata Motors created a new segment by launching the Tata Ace, India's first indigenously developed mini-truck. In January 2008, Tata Motors unveiled its People's Car, the Tata Nano, a development which signifies a first for the global automobile industry. Nano brings the comfort and safety of a car within the reach of thousands of families. The standard version has been priced at USD 2,200 or Rs.100,000 (excluding VAT and transportation cost). The Tata Nano has been subsequently launched as planned, in India in March 2009.
Maruti Suzuki India Market Share: Passenger Vehicles 46.07% Maruti Suzuki India Limited, a subsidiary of Suzuki Motor Corporation of Japan, is India's largest passenger car company, accounting for over 45% of the domestic car market. The company offers a complete range of cars from entry level Maruti800 and Alto, to stylish hatchback Ritz, A star, Swift, Wagon-R, Estillo and sedans DZire, SX4 and Sports Utility vehicle Grand Vitara. Since inception in 1983, Maruti Suzuki India has produced and sold over 10 million vehicles in India and exported over 500,000 units to Europe and other countries. The company's revenue for the fiscal 2010-2011 stood over Rs 375,224 million and Profits After Tax at over Rs. 22,886 million. In the last fiscal year, passenger vehicle sales grew a modest 5% due to a steep increase in interest rates, high fuel prices and weak consumer sentiment. Growth was also impacted partly due to supply disruptions at Maruti Suzuki because of a workers? strike. Further, we saw a significant shift towards diesel engines as the government subsidises diesel but not petrol. As supply of diesel engines were constrained, consumers were willing to wait for up to six months for diesel variants than to buy the petrol variant off the shelf. In December 2011, 55% of cars sold in India had diesel engines compared with 25% a year ago. While the overall growth for car sales was subdued, the sales of companies that launched new models (and had diesel engine variants) still grew strongly. We expect similar trends to continue in FY13E. However, this year we expect Maruti Suzuki to grow ahead of the industry on the back of the success of its models/upgrades as well as higher availability of diesel engines. We expect car demand growth to bounce but still remain slow at 14% as consumer sentiment is weak and we are not expecting any sharp decline in the cost of ownership, which is still very high.
Hyundai Motor India Market Share: Passenger Vehicles 14.15% Hyundai Motor India Limited is a wholly owned subsidiary of world's fifth largest automobile company, Hyundai Motor Company, South Korea, and is the largest passenger car exporter. Hyundai Motor presently markets 49 variants of passenger cars across segments. These includes the Santro in the B segment, the i10, the premium hatchback i20 in the B+ segment, the Accent and the Verna in the C segment, the Sonata Transform in the E segment. Hyundai Motor, continuing its tradition of being the fastest growing passenger car manufacturer, registered total sales of 559,880 vehicles in the year 2009, an increase of 14.4% over 2008. In the domestic market it clocked a growth of 18.1% as compared to 2008 with 289,863 units, while overseas sales grew by 10.7%, with export of 270,017 units. Hyundai Motor currently exports cars to more than 110 countries across European Union, Africa, Middle East, Latin America and Asia. It has been the number one exporter of passenger car of the country for the sixth year in a row. In a little over a decade since Hyundai has been present in India, it has become the leading exporter of passenger cars with a market share of 66% of the total exports of passenger cars from India, making it a significant contributor to the Indian automobile industry. In 2009, in spite of a global slowdown, Hyundai Motor India's exports grew by 10.7%. In 2010 Hyundai plans to add 10 new markets with Australia being the latest entrant to the list. The first shipment to Australia is of 500 units of the i20 and the total i20 exports to Australia are expected to be in the region of 15,000 per annum.
Mahindra & Mahindra Market Share: Commercial Vehicles 10.01%, Passenger Vehicles 6.50%, Three Wheelers 1.31% Mahindra & Mahindra is mainly engaged in the Multi Utility Vehicle and Three Wheeler segments directly. The company competes in the Light Commercial Vehicle segment through its joint venture subsidiary Mahindra Navistar Automotives Limited and in the passenger car segment through another joint venture subsidiary Mahindra Renault. In the year 2009, on the domestic sales front, the Company along with its subsidiaries sold a total of 220,213 vehicles (including 44,533 three-wheelers, 8,603 Light Commercial Vehicles through Mahindra Navistar Automotives and 13,423 cars through Mahindra Renault), recording a growth of 0.6% over the previous year. The company's domestic Multi Utility Vehicle sales volumes increased by 3.3%, as against a decline of 7.4% for industry Multi Utility Vehicle sales. A record number of 153,653 Multi Utility Vehicles were sold in the domestic market in 2009 compared to 148,761 MUVs in the previous year. Hence, Mahindra & Mahindra further strengthened its domination of the domestic Multi Utility Vehicle subsegment during the year, increasing its market share to 57.2% over the previous year's market share of 51.3%. Mahindra & Mahindra is expanding its footprint in the overseas market. In 2009 the Xylo was launched in South Africa. The company formed a new joint venture Mahindra Automotive Australia Pty. Limited, to focus on the Australian Market.
Ashok Leyland Market Share: Commercial Vehicles 22% Against the backdrop of the sharp slump in demand for commercial vehicles, during 2008-09, Ashok Leyland registered sales of 47,118 medium and heavy commercial vehicles (M&HCV), 37.5% less than in the previous year. This includes 16,049 M&HCV buses and 31,069 M&HCV trucks respectively, 8.7% and 46.3% less than in the previous year. The company lost 1.8% market share in the Indian medium and heavy commercial vehicle market during the financial year 2008-09, mainly due to loss of sales in the truck segment. This was because the Eastern Region, where the Company's presence had been historically weak, was relatively stable, whilst the market declined sharply in other regions. While total industry volume of the medium and heavy duty buses declined by about 8.7%, the Company's market share grew marginally and Ashok Leyland retained its number one position in this segment. The Company sold 6,812 vehicles in the overseas markets during 2008-09. This represents a decrease of approximately 6.5% over the previous year. Total industry volume related to overseas markets to which the Company exports (such as Sri Lanka, the Middle East) witnessed a reduction of about 25% over the previous year. To combat the impact of decline in CV sales, the Company focused on noncyclical businesses in the portfolio. The Company produced in all 54,049 vehicles during the year. To contain costs and conserve cash, the Company worked only about 50% of the working days in all its manufacturing units during the second half of the year.
THE YEAR AHEAD – WHERE IS THE GROWTH? After two years of strong growth (26% CAGR), auto sales growth slowed to 12% in FY12. We expect a further slowdown in growth to 10% in FY13 due to slowing rural income growth, weak consumer sentiment and high cost of ownership (tax hikes, fuel prices). Given the government?s fiscal situation, we think a 5-10% hike in diesel prices is inevitable. This will delay the recovery in M&HCV sales, which have been impacted by the slowdown in mining and industrial activities. While we expect an interest rate cut in CY12, it won?t be enough to improve sentiment, in our view. In the year ahead, we expect: a) Slower economic growth. We are expecting domestic GDP growth to slow to 6.9% in FY13E, from 6.9% in FY12E and 8.4% in FY11. b) Auto lending rates will likely remain high. We believe any cut in policy rates will not immediately be passed onto consumers. c) Fuel price hikes due to soaring crude oil prices. d) Price increases by the OEMs to pass-on cost inflation and tax hikes. In FY13, we expect commercial vehicle sales to grow by 10% (down from 18% in FY12), with M&HCV growing at 5% and LCV growing by 14%. We expect sales of two-wheelers to grow by 10% (14% in FY12), driven by 6.5% growth forecast for motorcycles and 23% growth forecast for scooters. We expect passenger vehicle sales to grow the fastest, ie,: 15% (5% in FY12), driven by 14% expected growth in cars and 23% growth for utility vehicles and vans. We expect tractor growth to remain muted as farmers? are coming-off two successive crop seasons with low income.
CONCLUSION It may be mentioned that the Indian automotive industry holds significant scope for expansion, both in the domestic market, where the vehicle penetration level is on the lower side as compared to world average, and in the international market, where India could position itself as a manufacturing hub. The current level of share, viz., less than 5% of global production and less than 1% of global trade, also corroborates the potential for expansion in this industry. At the same time, it should be recognized that India?s exports of automobiles have largely been confined to few countries in Asia and Africa, and to a very limited extent in Latin America. Indian automobile companies are required to accelerate their momentum and increase their penetration among other countries in these regions. Similarly, the auto components industry in India, which is now known across the globe for its quality deliverables, should try and capitalize on the European and the US market either through the process of acquisitions of firms in these countries or simultaneously enhancing their quality and augmenting the number of outsourcing businesses from these regions. Indian auto component industry distinguishes itself with winning more number of Deming prizes and adopting global quality management procedures, and thereby have an edge over other emerging economies, like China and Thailand. Indian economy, which benefits from strong fundamentals and sound regulatory framework, is expected to grow at a consistent rate in 2012-2013; the economy may rebound once the global economy recovers, and the domestic automotive industry would simultaneously regain its growth momentum. In the interim period, the Indian automobile and component industry needs to look out for opportunities to cut cost, undertake value engineering and enhance disciplines into the system. The industry may also use the interim period to upgrade the skills of the employees and enhance the focus on market research, product development and customer interactions. An institutional mechanism, under public-private partnership model, may be needed to address such requirements of the industry in the years of downturn, with the industry having a lead role to play.
BIBLIOGRAPHY ? ? ? ? ? ? ? ? ? ? ? ?
www.bseindia.com www.googlefinance.com www.yahoofinance.com www.google.co.in www.moneycontrol.com www.worldfact.com www.idef.com www.rbi.org.in FDI statistic government of India India Central Statistical Organization Economic Times Business Standard
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“
Sectoral Analysis On The Automobile Industry” Submitted in partial fulfillment for the Award of degree of Post Graduate Diploma in Management Submitted By Harsh Agarwal: Roll No:02 Course: PGDM [E - Business] Batch: 2011-13 Mumbai Educational Trust
Student?s Declaration I, hereby declare that this report, submitted in partial fulfillment of the requirement for the award for the Post Graduate Diploma in Management, to Mumbai Educational Trust is my original work and not used anywhere for award of any degree or diploma or fellowship or for similar titles or prizes. I, further certify, that without any objection or condition subject to the permission of the company where I did my summer project, I grant the rights to Mumbai Educational Trust to publish any part of the project if they deem fit in journals/Magazines and newspapers etc without my permission.
Place : Mumbai Date : 23rd July, 2012 ___________________ Signature
Name : Harsh Agarwal Class : PGDM [E - Business] (Trimester – III) Roll No. : 02
Certificate
This is to certify that the dissertation submitted in partial fulfillment for the award of Post Graduate Diploma in Management, Mumbai Educational Trust; is a result of the bonafide research work carried out by Mr. Harsh Agarwal under my supervision and guidance. No part of this report has been submitted for award of any other degree, diploma, fellowship or other similar titles or prizes. The work has also not been published in any journals/Magazines.
Date: Place:
Industry guide Signature of the Industry Guide: ______________ Name of Industry Guide: Mr. Company : Dalal & Broacha Designation :
Acknowledgement Written words have an unfortunate tendency to convert genuine gratitude into stilted formality and no person has ever prayed heartily without learning something. These acknowledgements are one way through which I can thank the people who have been instrumental in the making of this project. Working on ‘Sectoral Analysis of the Indian Automobile Industry’, has been an enriching experience for me and for which I would like to thank a lot of people without whose co operation and support working on this summer project report would not have been as it is. I am deeply indebted to my industry guide, Mr. Nailesh Dalal and Mr.Abhas Kumar for guiding me and my other colleagues throughout at Dalal & Broacha ,for providing me with this opportunity to understand the intricacies of investment and allocation of wealth. I would also like to thank Prof. Naik, Core faculty, Met Educational Trust for helping me throughout my project, guiding and always motivating me to perform better. His advice and patience is appreciated. Without their encouraging support, valuable suggestions and timely inputs, this project would never have been possible and I would have been deprived of a vast treasure of knowledge. Also I would like to thank my family and friends who have been a constant support all throughout this project.
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TABLE OF CONTENTS Sr No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. Particulars
EXECUTIVE SUMMARY OBJECTIVE OF THE PROJECT PREFACE OVERVIEW HISTORY INDUSTRY OVERVIEW MARKET CHARACTERISTICS DETAILED ANALYSIS OF AUTOMOBILE INDUSTRY THE GLOBAL AUTOMOBILE SCENARIO VIS-À-VIS THE INDIAN AUTOMOBILE SCENARIO TRENDS IN GLOBAL AUTOMOTIVE INDUSTRY EXPORT COMPETITIVENESS OF INDIAN AUTOMOBILE INDUSTRY CHALLENGES FACED BY INDIAN AUTOMOBILE INDUSTRY STRATEGIES TO COUNTER THE CHALLENGES KEY COMPETITORS THE YEAR AHEAD – WHERE IS THE GROWTH? CONCLUSION BIBLIOGRAPHY
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EXECUTIVE SUMMARY The automobile industry, one of the core sectors, has undergone metamorphosis with the advent of new business and manufacturing practices in the light of liberalization and globalization. The sector seems to be optimistic of posting strong sales in the couple of years in the view of a reasonable surge in demand. The Indian automobile market is gearing towards international standards to meet the needs of the global automobile giants and become a global hub. A detailed analysis of the automobile industry has been covered in respect of past growth and performance. An E.I.C approach has been followed under Fundamental Analysis which covered effect of Recession, the impact of inflation, FDI?s, Export, GDP etc. on Automobile Industry. The Industry Analysis has been done with the help of five forces model, BCG Matrix, SWOT analysis, industry life cycle and the industry specific index. To give a brief about Company Analysis as a part of Fundamental tool, a comparative analysis of TATA Motors as our leading company with Maruti Suzuki India?s largest Car manufacturer. At the end, conclusion and recommendations have been specified, so as to make the research work more meaningful and purposeful. The project report is divided into 5 chapters. The first two chapters include Executive Summary & Objective of the Research. The third chapter deals with analysis of the automobile industry which entails fundamental analysis of Indian Automobile Industry. The fourth chapter deals with Conclusion & Recommendations and the last chapter includes Bibliography.
OBJECTIVE OF THE PROJECT
The objective of this project is to analyze the Indian Automobile Industry for investment purpose by monitoring the growth rate and performance on the basis of historical data. The main objectives of the Project study are: ? Detailed analysis of Automobile industry which is gearing towards international standards ? Analysis of the impact of qualitative factors on industry?s and company?s prospects ? Comparison of the Global automobile scene with its Indian counterpart ? Study of the challenges facing the Indian Automobile Industry ? Analysis of the implementable strategies to counter the effects of the discussed challenges
PREFACE The Automotive industry in India is one of the largest in the world and one of the fastest growing globally. The Indian Automobile Industry embarked on a new journey since 1991 with delicensing of the sector and subsequent opening up for 100 per cent FDI through automatic route. Almost all the global majors have set up their facilities in India taking the next level of production of vehicles from 2 million in 1991 to 110+ million in 2011. The Auto Sector in India is set to continue in its growth trajectory for the next five years and India is an increasingly favourite destination for Global Majors looking at emerging market. This in turn, has fuelled a boom in the domestic auto market, with close to 10mn vehicles sold in India in 2009-10 The automotive industry is increasingly becoming the cynosure of the manufacturing sector across the globe. Due to its intense forward and backward linkages with several key segments of the economy, the automotive industry has a strong multiplier effect and acts as one of the key drivers of growth across the globe. The attention and importance to the automotive industry in the economic development and planning policies of Government and its agencies has also witnessed significant uprise. The industry has been evolving over the years, meeting up with challenges as diverse as transitions, consolidations and restructuring, and thereby adapting to the new market conditions. As of 2010, India is home to 40 million passenger vehicles. More than 3.7 million automotive vehicles were produced in India in 2010 (an increase of 33.9%), making the country the second fastest growing automobile market in the world. According to the Society of Indian Automobile Manufacturers, annual vehicle sales are projected to increase to 5 million by 2015 and more than 9 million by 2020. By 2050, the country is expected to top the world in car volumes with approximately 611 million vehicles on the nation's roads.
OVERVIEW 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. The supply chain is similar to the supply chain of the automotive industry in Europe and America. Interestingly, the level of trade exports in this sector in India has been medium and imports have been low. However, this is rapidly changing and both exports and imports are increasing. The demand determinants of the industry are factors like affordability, product innovation, infrastructure and price of fuel. Also, the basis of competition in the sector is high and increasing, and its life cycle stage is growth. With a rapidly growing middle class, all the advantages of this sector in India are yet to be leveraged. With a high cost of developing production facilities, limited accessibility to new technology, and increasing competition, the barriers to enter the Indian Automotive sector are high. On the other hand, India has a well-developed tax structure. The power to levy taxes and duties is distributed among the three tiers of Government. The cost structure of the industry is fairly traditional, but the profitability of motor vehicle manufacturers has been rising over the past five years. Major players, like Tata Motors and Maruti Suzuki have material cost of about 80% but are recording profits after tax of about 6% to 11%. The level of technology change in the Motor vehicle Industry has been high but, the rate of change in technology has been medium. Investment in the technology by the producers has been high. System-suppliers of integrated components and sub-systems have become the order of the day. However, further investment in new technologies will help the industry be more competitive. Over the past few years, the industry has been volatile. Currently, India's increasing per capita disposable income which is expected to rise by 106% by 2015 and growth in exports is playing a major role in the rise and competitiveness of the industry.
Tata Motors is leading the commercial vehicle segment with a market share of about 64%. 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. Consumers are very important of the survival of the Motor Vehicle manufacturing industry. In 2008-09, customer sentiment dropped, which burned on the augmentation in demand of cars. Steel is the major input used by manufacturers and the rise in price of steel is putting a cost pressure on manufacturers and cost is getting transferred to the end consumer. The price of oil and petrol affect the driving habits of consumers and the type of car they buy. The key to success in the industry is to improve labor productivity, labor flexibility, and capital efficiency. Having quality manpower, infrastructure improvements, and raw material availability also play a major role. Access to latest and most efficient technology and techniques will bring competitive advantage to the major players. Utilizing manufacturing plants to optimum level and understanding implications from the government policies are the essentials in the Automotive Industry of India. Both, Industry and Indian Government are obligated to intervene the Indian Automotive industry. The Indian government should facilitate infrastructure creation, create favorable and predictable business environment, attract investment and promote research and development. The role of Industry will primarily be in designing and manufacturing products of world-class quality establishing cost competitiveness and improving productivity in labor and in capital. With a combined effort, the Indian Automotive industry will emerge as the destination of choice in the world for design and manufacturing of automobiles. The Indian market offers endless possibilities for investors.
HISTORY The first car which ran on Indian roads was in 1897. Until the 1930s, cars were imported directly, but in very small numbers. Embryonic automotive industry emerged in India in the 1940s. Mahindra & Mahindra was established by two brothers as a trading company in 1945, and began assembly of Jeep CJ-3A utility vehicles under license from Willys. The company soon branched out into the manufacture of light commercial vehicles (LCVs) and agricultural tractors. Following the independence, in 1947, the Government of India and the private sector launched efforts to create an automotive component manufacturing industry to supply to the automobile industry. However, the growth was relatively slow in the 1950s and 1960s due to nationalization and the license raj which hampered the Indian private sector. After 1970, the automotive industry started to grow, but the growth was mainly driven by tractors, commercial vehicles and scooters. Cars were still a major luxury. Japanese manufacturers entered the Indian market ultimately leading to the establishment of Maruti Udyog. A number of foreign firms initiated joint ventures with Indian companies. In the 1980s, a number of Japanese manufacturers launched joint-ventures for building motorcycles and light commercial-vehicles. It was at this time that the Indian government chose Suzuki for its joint-venture to manufacture small cars. Following the economic liberalization in 1991 and the gradual weakening of the license raj, a number of Indian and multi-national car companies launched operations. Since then, automotive component and automobile manufacturing growth has accelerated to meet domestic and export demands. Following economic liberalization in India in 1991, the Indian automotive industry has demonstrated sustained growth as a result of increased competitiveness and relaxed restrictions. Several Indian automobile manufacturers such as Tata Motors, Maruti Suzuki and Mahindra and Mahindra, expanded their domestic and international operations. India's robust economic growth led to the further expansion of its domestic automobile market which has attracted significant Indiaspecific investment by multinational automobile manufacturers. In February 2009, monthly sales of passenger cars in India exceeded 100,000 units and has since grown rapidly to a record monthly high of 182,992 units in October 2009.
From 2003 to 2010, car sales in India have progressed at a CAGR of 13.7%, and with only 10% of Indian households owning a car in 2009 (whereas this figure reaches 80% in Switzerland for example) this progression is unlikely to stop in the coming decade. Congestion of Indian roads, more than market demand, will likely be the limiting factor. SIAM is the apex industry body representing all the vehicle manufacturers, homegrown and international, in India.
INDUSTRY OVERVIEW This class consists of units mainly engaged in manufacturing motor vehicles or motor vehicle engines. Products and Services The primary activities of this industry are: ? Motor cars manufacturing ? Motor vehicle engine manufacturing The major products and services in this industry are: ? Passenger motor vehicle manufacturing segment (Passenger Cars, Utility Vehicles & Multi Purpose Vehicles) ? Commercial Vehicles (Medium & Heavy and Light Commercial Vehicles) ? Two-Wheelers ? Three-Wheelers Key Auto Segments – Growth Expected to moderate over the next 12 months
Financial Year 2012 was a landmark year - both in a positive and negative manner. It paved way for many breakthrough launches - saw the launch of segment defining Fluidic Verna, excellent value for money XUV 500, Hyundai's entry level offering Eon and many more. It also displayed its sudden love for MPV/MUVs in the Auto Expo - Maruti's Ertiga, Chevrolet's Enjoy and Nissan's Evalia were the most sought after showcase at the expo. We were now exposed to the hard truth as well - that how labour intensive the auto industry is... A labor strike can strike at Maruti shook the entire Auto Industry. The aftermath took its toll on the overall numbers. This was further catalyzed by inflation, consistent fuel hikes and rising auto interest rates. The world's fastest growing automobile market was now under analysts scanner for its sheer volatility. Demand for cars fell for the first time in three years last July and slumped by the most in over a decade in October. SIAM which had projected a growth of over 20% had to instantly lower its projections. The Industry's lackluster performance reflected in the overall performance of the country. In a recent report, S&P cut its outlook on India?s BBB- rating to negative from stable. This is surely not a good news for the Indian Industry in overall. The low-end hatchbacks were the ones to take the beating in FY12. For perhaps the first time in many years, small cars reported a decline in growth in 2011-12 (FY12), largely on account of Maruti Alto?s decline. Now, SIAM has forecast 1012 percent growth in overall passenger cars for this fiscal, but this number may be lower if small car growth is again hindered. SIAM data showed that the mini car segment – which comprises Maruti 800, Alto, A-Star, and WagonR, the Chevy Spark and Hyundai?s Santro and Eon – declined by about 7 percent to 6,42,009 units (6,90,812 units) last fiscal. Sales of the Alto, the single largest selling car in India, had fallen by about 11 percent between April and February 2012. Also, for the first-time ever, bigger diesel cars - the SUVs - are selling more and there is no slowdown in 'dieselisation'. India's largest automaker, Maruti Suzuki, expects car sales to increase by 10 per cent in the fiscal year beginning in April led by diesel models. Diesel car sales are expected to rise by 150,000 in 2012-13 while sale of petrol cars fall by 50,000, said the company.
Overall Highlights ? ? ? ? ? ?
* Car sales in India rose just 2.2 percent in FY2012 * Sales of motorcycles rose 12 percent in the previous fiscal year to 10.1 million vehicles ( 10,096,062 units). * Scooter sales shot up 24.5 per cent, to 2,562,841 units. * Total two-wheeler sales were 13,435,769 units in 2011-12 against 11,768,910 units in 2010-11, up 14.2 per cent. * Commercial vehicles, Siam said total sales in FY12 were 809,532 units, up 18.2 per cent. * Three-wheeler segment, that saw a decline of 2.4 per cent at 513,251 vehicles in FY12.
Projections for FY2013 ? ? ?
? ?
# SIAM has projected passenger car sales growth at 10-12 per cent in 201213. # Sales of trucks and buses, a key indicator of economic activity, rose 18.2 percent in 2011/12 and are seen growing 9 to 11 per cent in this fiscal year. # SIAM has pegged the motorcycle segment to grow 10-12 per cent in FY13 and scooters by 15-17 percent. Two wheeler segment is expected to have a growth of around 14-15%. # Commercial Vehicles is projected to grow by nine to 11 per cent in FY13. # SIAM has also projected five to seven per cent growth for Three Wheelers.
Domestic car sales – expecting growth to moderate next year
Supply Chain of Automobile Industry The supply chain of automotive industry in India is very similar to the supply chain of the automotive industry in Europe and America. The orders of the industry arise from the bottom of the supply chain. ie., from the consumers and goes through the automakers and climbs up until the third tier suppliers. However, the products, as channeled in every traditional automotive industry, flow from the top of the supply chain to reach the consumers. Automakers in India are the key to the supply chain and are responsible for the products and innovation in the industry. The description and the role of each of the contributors to the supply chain are discussed below. ? Third Tier Suppliers: These companies provide basic products like rubber, glass, steel, plastic and aluminum to the second tier suppliers. ? Second Tier Suppliers: These companies design vehicle systems or bodies for First Tier Suppliers and OEMs. They work on designs provided by the first tier suppliers or OEMs. They also provide engineering resources for detailed designs. Some of their services may include welding, fabrication, shearing, bending etc. ? First Tier Suppliers: These companies provide major systems directly to assemblers. These companies have global coverage to follow their customers to various locations around the world. They design and innovate to provide "black-box" solutions for the requirements of their customers. Black-box solutions are solutions created by suppliers using their own technology to meet the performance and interface requirements set by assemblers. First tier suppliers are responsible not only for the assembly of parts into complete units like dashboard, brakes-axle-suspension, seats, or cockpit but also for the management of second-tier suppliers. ? Automakers/Vehicle Manufacturers/Original Equipment Manufacturers (OEMs): After researching consumers' wants and needs, automakers begin designing models which are tailored to consumers' demands. The design process normally takes five years. These companies have manufacturing units where engines are manufactured and parts supplied by first tier suppliers and second tier suppliers are assembled. Automakers are the key to the supply chain of the automotive industry.
Examples of these companies are Tata Motors, Maruti Suzuki, Toyota, and Honda. Innovation, design capability and branding are the main focus of these companies. ? Dealers: Once the vehicles are ready they are shipped to the regional branch and from there, to the authorized dealers of the companies. The dealers then sell the vehicles to the end customers. ? Parts and Accessory: These companies provide products like tires, windshields, and air bags etc. to automakers and dealers or directly to customers. ? Service Providers: Some of the services to the customers include servicing of vehicles, repairing parts, or financing of vehicles. Many dealers provide these services but, customers can also choose to go to independent service providers.
Exports India's automobile exports have grown consistently and reached $4.5 billion in 2009, with United Kingdom being India's largest export market followed by Italy, Germany, Netherlands and South Africa. India's automobile exports are expected to cross $12 billion by 2014. According to New York Times, India's strong engineering base and expertise in the manufacturing of low-cost, fuel-efficient cars has resulted in the expansion of manufacturing facilities of several automobile companies like Hyundai Motors, Nissan, Toyota, Volkswagen and Suzuki. In recent years, India has emerged as a leading center for the manufacture of small cars. Hyundai, the biggest exporter from the country, now ships more than 250,000 cars annually from India. Apart from shipments to its parent Suzuki, Maruti Suzuki also manufactures small cars for Nissan, which sells them in Europe. Nissan will also export small cars from its new Indian assembly line. Tata Motors exports its passenger vehicles to Asian and African markets, and is in preparation to launch electric vehicles in Europe. The firm is also planning to launch an electric version of its low-cost car Nano in Europe and the U.S. Mahindra & Mahindra is preparing to introduce its pickup trucks and small SUV models in the U.S. market. Bajaj Auto is designing a low-cost car for the Renault Nissan Automotive India, which will market the product worldwide. Renault Nissan may also join domestic commercial vehicle manufacturer Ashok Leyland in another small car project.
While the possibilities are impressive, there are challenges that could thwart future growth of the Indian automobile industry. Since the demand for automobiles in recent years is directly linked to overall economic expansion and rising personal incomes, industry growth will slow if the economy weakens. Passenger car exports from India increased 34.16% in May, riding on the back of robust overseas sales by Hyundai Motor, Nissan Motor and Toyota Kirloskar in non-European countries. According to figures released by Society of Indian Automobile Manufacturers (SIAM), India exported 45,036 cars in the last month compared to 33,570 units in the year-ago period. "Europe still continues to be a worry, but the growth that we have seen is mainly on account of new markets that the companies have developed," SIAM Director General Vishnu Mathur said. In May, the country's largest exported Hyundai Motor India Ltd (HMIL) witnessed a growth of 42.16% at 23,659 units against 16,643 units in the same month last year. "On account of slackness in the domestic market in May, we took the opportunity to ramp up the back orders for the export market. We had higher sales of the Eon in Algeria, the i20 in South Africa and the i10 in South America, particularly in Mexico and Columbia," a spokesperson of HMIL said. However, rival and domestic market leader Maruti Suzuki India's overseas passenger car sales fell by 9.42% to 9,363 units from 10,337 units in May 2011, SIAM said. Car maker Nissan Motor India saw its exports from the country going up by over two-fold to 8,157 units last month from 3,937 units in the corresponding month last year. Toyota Kirloskar Motor, which started exports from April this year, sold 1,693 units in May in South Africa, SIAM said. Ford India's sales in overseas locations, however, dipped 15.81% to 1,693 units from 2,011 units in May 2011. Homegrown auto major Tata Motors' exports rose by 32.38% to 372 units from 281 units in the year-ago period. Exports of all categories of vehicles from India during May 2012 increased by 4.62% to 2,46,314 units from 2,35,429 units in the same month last year, SIAM said. The two-wheeler segment witnessed exports of 1,74,362 units in last month compared to 1,61,346 units in the year-ago month, up 8.07%, it added. The motorcycle segment's overseas sales went up by 5.16% to 1,63,446 units from 1,55,419 units in May 2011. SIAM said exports of scooters from India increased by 87.18% last month to 10,660 units from 5,695 units in the same month last year. However, exports of commercial vehicles decreased by 8.72% to 7,861 units in May 2012 from 8,612 units in the corresponding month last year, it added.
MARKET CHARACTERISTICS
? Market size The Indian Automotive Industry after de-licensing in July 1991 has grown at a spectacular rate on an average of 17% for last few years. The industry has attained a turnover of USD $35.8 billion, (INR 165,000 crores) and an investment of USD 10.9 billion. The industry has provided direct and indirect employment to 13.1 million people. Automobile industry is currently contributing about 5% of the total GDP of India. India's current GDP is about $1.4 trillion and is expected to grow to $3.75 trillion by 2020. The projected size in 2016 of the Indian automotive industry varies between $122 billion and $159 billion including USD 35 billion in exports. This translates into a contribution of 10% to 11% towards India's GDP by 2016, which is more than double the current contribution.
? Demand determinants
Interest rate (%) – cuts unlikely to spur demand
Determinants of demand for this industry include vehicle prices (which are determined largely by wage, material and equipment costs) and exchange rates, preferences, the running cost of a vehicle (mainly determined by the price of petrol), income, interest rates, scrapping rates, and product innovation. Exchange Rate: Movement in the value of Rupee determines the attractiveness of Indian products overseas and the price of import for domestic consumption. Affordability: Movement in income determine the affordability of new motor vehicles. Allowing unrestricted Foreign Direct Investment (FDI) led to increase in competition in the domestic market hence, making better vehicles available at affordable prices. Innovation: Product Innovation is an important determinant as it allows better models to be available each year and also encourages manufacturing of environmental friendly cars. Demographics: It is evident that high population of India has been one of the major reasons for large size of automobile industry in India. Factors that may be augment demand include rising population and an increasing proportion of young persons in the population that will be more inclined to use and replace cars. Also, increase in
people with lesser dependency on traditional single family income structure is likely to add value to vehicle demand. Infrastructure: Longer-term determinants of demand include development in Indian's infrastructure. India's banking giant State Bank of India and Australia's Macquarie Group has launched an infrastructure fund to rise up to USD 3 billion for infrastructure improvements. India needs about $500 billion to repair its infrastructure such as ports, roads, and power units. These investments have been made with an aim to generate long-term cash flow from automobile, power, and telecom industries. (Source: Silicon India) Price of Petrol: Movement in oil prices also have an impact on demand for large cars in India. During periods of high fuel cost as experienced from 2007, demand for large cars declined in favour of smaller, more fuel-efficient vehicles. The changing patterns in customer preferences for smaller, more fuel-efficient vehicles led to the launch of Tata Motor's Nano – one of the world's smallest and cheapest cars. Surprisingly, when overall passenger car sales have run into problems, the sales of luxury cars and SUVs, which are significantly more expensive in India than abroad due to high import taxes, have experienced encouraging growth. The Indian unit of BMW had to raise capacity at its factory four times during 2011, while sales of the high-end Jaguar Land Rover model owned by Tata Motors rose impressively during a period when more affordable passenger car sales were experiencing a downturn. ? International markets analysis The Indian automotive industry embarked a new journey in 1991 with de-licensing of the sector and subsequent opening up for 100% foreign direct investment (FDI). Since then almost all global majors have set up their facilities in Indian taking the level of production from 2 million in 1991 to over 10 million in recent years.[18] The exports in automotive sector have grown on an average compound annual growth rate of 30% per year for the last seven years. The export earnings from this sector are over USD 6 billion. Even with this rapid growth, the Indian automotive 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 figures of 2.3 million in the year 2008, yet India's share is about 3.28% of world production of 70.53 million
passenger and commercial vehicles. India's automotive exports constitute only about 0.3% of global automotive trade. ? Life cycle The life cycle stage is growth. The market for manufacturing motor vehicles is consistently increasing. The products manufactured by this industry are profitable. Companies have been consistently opening new plats and employing over the past five years. Japanese and European manufacturers of motor vehicles have entered the market. Industry value added has been rising, along with the rise in GDP. Life Cycle Analysis General improvement in availability of trained manpower and good infrastructure is required for sustainable growth of the industry. Keeping this in view, the Indian Government has launched a unique initiative of National Automotive Testing and R&D Infrastructure Project (NATRIP) to provide specialised facilities for Testing, Certification and Homologation to the industry. A similar initiative is required for creating specialised institutions in automotive sector for education, training and development. The auto industry has grown in the clusters of interconnected companies which are linked by commonalities and complementarities. The major clusters are in and around Manesar in North, Pune in West, Chennai in South, Jamshedpur-Kolkata in East and Indore in Central India. The Government is planning to create a National Level Specialises Education and Training Institute for Automotive Sector and to enhance the transportation, communication and export infrastructure facilities. The contribution of automotive sector in the GDP of India is expected to double by 2016 through major spotlight on export of small cars, Multi-Utility Vehicles, Twoand Three-wheelers. ? Industry assistance The automobile industry has a defined its target in the Automotive Mission Plan as “To emerge as the destination of choice in the world for design and manufacture of automobiles with output reaching a level of USD 145 billion accounting more than 10% of GDP and providing additional employment to 25 million people by 2016”. In order to achieve this plan interventions are required from both Industry and Indian Government. The Indian Government would play a key enabling role in facilitating infrastructure creation, promote the country's capabilities, create a favorable and predictable business environment, attract investment and promote
research & development. The role of Industry will primarily be in designing and manufacturing products of world-class quality standards, establishing cost competitiveness, improving productivity of both labor and capital, achieving scale and R&D enhancing capability and showcasing India's products in potential markets. In order to achieve these goals the following key recommendations have been made in the Automotive Mission Plan to the Indian Government and Industry: Manufacturing and export of small cars, multi-utility vehicles, two- and threewheelers, tractors, components to be promoted. Care to be taken of negative like and rules of the country with current negotiation of Free Trade Agreement and Regional Trade agreement with countries like Thailand, Singapore, Malaysia, China, Korea, Egypt, Gulf etc. Attractive Tariff Policy which may follow attractive investment. Specific measures will be taken for expansion of domestic market. Incremental investment of USD 35 to 40 billion to Automotive Industry during the next 10 years. National Road Safety Board to act as the coordinating body for promoting safety. Inspection and Certification system to be strengthened by encouraging public-private partnership. National level Automotive Institute for training on automobile at International Training Institutes (ITIs) and Automotive Training Institute (ATIs) to be set up. An Auto Design Centre to be established at National Institute of Design, Ahmadabad. National Automotive Testing and R&D Implementation Project (NATRIP) to act as Centre of Excellence for Technical Design Data. Integration of Information Technology in manufacturing to be promoted. R&D for product, process and technology to be incentivized. Road Map for Auto Fuel Policy beyond 2010 would be drawn. The profitability of motor vehicle manufacturers has been rising over the past five years, mainly due to rising demand and growth of Indian middle class. Major players of the industry, like Maruti Suzuki India and Tata Motors have been recording profits of 6% to 11% from the past five years. Whereas, earlier profit margins in the industry were only 1.5% to 3%. Cost of material has reduced from over 85% in the year 2001-2002 to under 80% in the year 2008-2009. Wages and salary as a percentage of revenue has been declining and with the increasing labor productivity this is expected to decline further in the coming years.
? Capital and labor intensity The level of Capital Intensity is high. The level of labor intensity is medium. The motor vehicle manufacturing industry requires significant level of capital investment. Value is added through the automated manufacturing and assembly of costly components. Labor input is required in the manufacturing, assembly, and finishing processes. In order to achieve and retain competitiveness, vehicle manufacturing industry depends on its capacity and speed to innovate and upgrade. The most imperative indices for competitiveness in the industry are productivity in both labor and capital. ? Technology and Systems The level of technology change is high. The rate of change in technology is medium. Investment in technology by producers has been on the rise. The automobile industry in India has seen an enormous development in the engines which are being used. Carburettor engines have become obsolete and Multi Point Fuel Injection (MPFI) engines are the order of the days in patrol cars. The Diesel engines have also undergone a sea change from the time Rudolf Diesel invented it way back in the 1892. Today Common Rail Direct Injection (CRDI) is the order of the day. Multi Point Fuel injection (MPFI): The fuel injects were used to meet stricter emission norms as it keeps pollutants to bare minimum and drives the maximum performance out of a vehicle by squeezing out the maximum mileage even from the last drop of fuel that goes into the engine. MPFI system injects fuel into individual cylinders after receiving command from the on board engine management system computer or Engine Control Unit (ECU). This technology results in superior fuel combustion, better fuel management, engine performance and reduced pollution. To get the maximum out from these types of engine one should use Premium petrol like XTRA Premium, Speed, and Power. Common Rail Direct Injection (CRDI): CRDI engine cars offer 25% more power than the normal direct injection engine with a superior pickup and torque, offering sometimes up to 70% more power than the conventional diesel engines. They are smooth, less strident, and immensely fuel efficient giving around 24 kilometres to a litre of Diesel. The fact that Diesel is cheaper than petrol in India
further attributes greatness to the engine. In a CRDI engine, a tube or a common rail connects all the injectors and contains fuel at a constant pressure. The high pressure in the common rail ensures that when injected, the fuel breaks up into small particles and mixes evenly with the air, thereby leaving little un-burnt fuel thus reducing pollution. The common rail principle has been used to reduce the noise which used to be a downside with earlier Diesel engines; the technology has been pioneered by the Fiat group, only to be adopted by other automobile companies around the world. However, these engines are 25% more costly than the conventional engines. They also require higher degree of maintenance and spares are also expensive. The Indian automotive industry is in the mindset of a major structural transformation in today's globalized scenario. “System Supplies” of integrated components and sub-systems has become the order of the day, with individual small components being supplied to the system integrators instead of vehicle manufacturers. In this process most of the Small Scale Industrial units, manufacturing smaller individual components, have become tier 2 and tier 3 suppliers, while the large companies including most Multi National Companies are being transformed into tier 1 companies who purchase from tier 2 and tier 3, and sell to the auto manufacturers. (Source: Department of Heavy Industry) Investment in new technology such as supply-chain management and collaborative forecasting (where members of the supply chain share forecasting data to reduce bottlenecks) will help make industry more competitive. ? Industry volatility The level of volatility is medium. Over the past few years, the Motor Vehicle Manufacturing industry has become more volatile. This has been the result of fluctuations in metal prices and fuel prices, as well as changes in legislation and assistance packages. India's increasing per capita disposable income and growth in exports is playing a major role in the rise and the competitiveness of the industry. As per the BRIC report India's per capita disposable income from current year will rise by 106% in 2015¹. This increase in the spending power has been a forefront of the economic development. According to the Economic Times of India, economic liberalization – allowing unrestricted Foreign Direct Investment (FDI) and removing foreign currency
neutralization and export obligations – has been also been one of the key to India's automotive volatility². Indian automobile industry has grown leaps and bounds since 1898, a time when a car had touched the Indian streets for the first time. At present it holds a promising sixth position in the entire world with being # 1 in two wheelers and # 4 in commercial vehicles. Withstanding a growth rate of 18% per annum and an annual production of more than 2 million units, it may not be an exaggeration to say that this industry in the coming years will soon touch a figure of 10 million units per year.
DETAILED ANALYSIS OF AUTOMOBILE INDUSTRY
Over a period of more than two decades the Indian Automobile industry has been driving its own growth through phases. With comparatively higher rate of economic growth rate index against that of great global powers, India has become a hub of domestic and exports business. The automobile sector has been contributing its share to the shining economic performance of India in the recent years. To understand this industry for the purpose of investment we analyzed it by the following approach: ? Fundamental Analysis (E.I.C Approach) a. Economy b. Industry c. Company A). ECONOMIC ANALYSIS Economic analysis is the analysis of forces operating the overall economy a country. Economic analysis is a process whereby strengths and weaknesses of an economy are analyzed. Economic analysis is important in order to understand exact condition of an economy. ? GDP and Automobile Industry
In absolute terms, India is 16th in the world in terms of nominal factory output. The service sector is growing rapidly in the past few years. This is the pie- chart showing contributions of different sectors in Indian economy. The per capita Income is near about Rs38,000 reflecting improvement in the living standards of an average Indian. Today, automobile sector in India is one of the key sectors of the economy in terms of the employment. Directly and indirectly it employs more than 10 million people and if we add the number of people employed in the auto-component and auto ancillary industry then the number goes even higher. Sector Overview The automobile industry in India is one of the country?s major sectors and is the seventh-largest in the world. It accounts for 22% of India?s manufacturing GDP. The Indian automotive industry comprises passenger cars, two-wheelers, threewheelers and commercial vehicles, with two-wheelers dominating the market. More than 75% of the vehicles sold are two wheelers. Collectively, India makes 17.5 million vehicles and exports 2.3 million annually. According to Ministry of Heavy Industry and Public Enterprises, the total turnover of the Indian automobile industry was estimated at USD 73 billion and exports were estimated to be USD 11 billion in the year 2010–11. The announced cumulative investments in this sector were USD 30 billion during this period. Total FDI inflow into the Indian automobile sector in 2010–2011 was USD 1,331 million. Cumulative FDI during the period April 2000 to March 2011 was USD 5.93 billion, according to the Department of Industrial Policy and Promotion (DIPP), which is a part of the Ministry of Commerce and Industry. Policy and Promotion The Indian government encourages foreign investment in the automobile sector and allows 100% FDI under the automatic route. It is a fully delicensed industry, freely allowing imports of automotive components. The main automobile hubs in India are based at Chennai, Gurgaon, Manesar, Pune, Ahmedabad, Halol, Aurangabad, Kolkata, Noida and Bangalore. Chennai is the biggest hub accounting for 60% of Indian auto exports. The auto components industry, although largely concentrated near automobile hubs, is fairly widespread in other parts of the country too. The government has made successive policy changes that allow for stronger growth in the automotive sector. Major among these are:
Automotive Mission Plan The plan has been prepared to accelerate and sustain growth in the automotive sector during the period 2006–2016. It aims to make India a global automotive hub. This will involve doubling the contribution of the automotive sector to the country?s GDP by taking its turnover to USD 145 billion and providing additional employment to 25 million people with special emphasis on the export of small cars, MUVs, two- and three-wheelers and auto components. National Automotive Testing and R&D Infrastructure Project This is a USD 400 million initiative of the Government of India and various state governments; it is aimed at creating a state-of-art, dedicated testing, validation and R&D infrastructure across the country. ? Recession All the major auto companies enjoyed the high growth ride till the mid 2008. But at the end of the year, industry had to face the hard truth and witnessed the fall in sales compared to last year. In December 2008, overall production fell by 22 % over the same month last year. Global recession has hit the Indian auto industry, India is strong and growing industry but the impact of recession is evident now on industry as sales & growth of automobile companies have declined. Passenger Vehicles segment registered negative growth. One of its supporting facts is that the sales in December 2008 for passenger vehicles fell by 13.86% over December 2007 Two Wheelers registered minor growth of 1.85 % during April – December 2008. However, two wheelers sales recorded 15.43 percent fall in December 2008 over the same month last year. Although the sector was hit by economic slowdown, overall production (passenger vehicles, commercial vehicles, two wheelers and three wheelers) increased from 10.85 million vehicles in 2007-08 to 11.17 million vehicles in 2008-09. Passenger vehicles increased marginally from 1.77 million to 1.83 million while two-wheelers increased from 8.02 million to 8.41 million. Total number of vehicles sold including passenger vehicles, commercial vehicles, twowheelers and three-wheelers in 2008-09 was 9.72 million as compared to 9.65 million in 2007-08.
? Inflation A moderate amount of inflation is important for the proper growth of an economy like India because it attracts more private investment. The fall in wholesale prices from a year earlier is mainly due to a statistical base effect and doesn’t suggest contraction in demand, the Reserve Bank of India said few week back, while revising its inflation forecast for the FY through March to around 5% from 4%. In last FY despite of skyrocketing oil prices (crude oil price has already up to $130 compared to $20 per barrel five years back), Indian automobile Industry was not as much affected and experts think that Indian automobile industry will continue to grow this year despite all obstacles- oil price hike, higher interest rates. However, the effect of inflation has affected every sector which is related to car manufacturing and production. The increase in the price of fuel and the steel due to inflation has led to a slower growth rate of the car industry in India. The effect of inflation has taken the rise in the price rate of the cars by 3-4% which in turn suffices the need to meet the rise in price of the raw materials to build a car. The car market and the car industry witnessed a fall of 8-9%. ? Foreign Exchange India holds the third largest stock of reserves among the emerging market economies after China and Russia. The overall approach to the management of India's foreign exchange reserves in recent years reflects the changing composition of the balance of payments and the 'liquidity risks' associated with different types of flows and other requirements. Source: rbi.org.in Taking these factors into account, India's foreign exchange reserves continued to be at a comfortable level and consistent with the rate of growth, the share of external sector in the economy and the size of risk-adjusted capital flows. Reserves came down because of recession all over the world, however, India still able to maintain its reserves hence a minor fall was seen compared to all other countries which shows great strength in long-term for Indian Economy.
? Export Automobile sales (including passenger vehicles, commercial vehicles, twowheelers and three-wheelers) in the overseas markets increased to 1.53 million units in 2008-09 from 1.23 million units in 2007-08. Export of passenger vehicles increased from 218,401 in 2007-08 to 335,739 units in 2008-09. There is a continuous increase in the export of automobiles since the financial year 2002-03, except for the decline in the export of commercial vehicles in the financial year 2008-09, which may be attributed to the global economic recession. Despite recession, the Indian automobile market continues to perform better than most of the other industries in the economy in coming future, more and more MNCs coming in India to setup their ventures which clearly shows the scope of expansion. B.) INDUSTRY ANALYSIS The current trends of the global automobile industry reveal that in the developed countries the automobile industries are stagnating as a result of drooping markets, whereas the automobile industry in the developing nations, have been consistently registering higher growth rates every passing year for their domestic flourishing domestic automobile markets. Being one of the fastest growing sectors in the world its dynamic growth phases are explained by the nature of competition, Product Life Cycle and consumer demand. The industry is at the crossroads with global mergers and relocation of production centers to emerging developing countries. The Indian automobile sector is far from being saturated, leaving ample opportunity for volume growth. Following is the segmentation that how much each sector comprises of the Indian Automobile Industry. Industrial Analysis of any industry can be done based on the following headings: 1. Five Forces Model 2. BCG Matrix 3. Industrial Life Cycle 4. SWOT Analysis
1.) Five Forces Model Michael Porter identifies five forces that influence an industry. These forces are as under: · Degree of Rivalry Despite the high concentration ratio seen in the automotive sector, rivalry in the Indian auto sector is intense due to the entry of foreign companies in the market. The industry rivalry is extremely high with any being product being matched in a few months by the competitors. This instinct of the industry is primarily driven by technical capabilities acquired over years of gestation under the technical collaboration with international players. · Threat of Substitutes The threat of substitutes to the automotive industry is fairly mild. Numerous other forms of transportation are available, but none offer the utility, convenience, independence and value offered by automobiles. The switching cost associated with using a different mode of transportation, may be high in terms of personal time, convenience and utility. · Barriers to entry The barriers to enter automotive industry are substantial. For a new company, the startup capital required to establish manufacturing capacity to achieve minimum efficient scale is prohibitive. Although the barriers to new companies are substantial, establishing companies are entering the new markets through strategic partnerships or through buying out or merging with other companies. However, a domestic company, with local knowledge and expertise, has the potential to compete its home market against the global firms who are not well established there. · Supplier’s power In the relationship between the industry and its suppliers, the power axis is tipped in industry?s favor. The industry is comprised of powerful buyers who are generally able to dictate their terms to the suppliers.
· Buyers’ Power In the relationship between the automotive industry and its ultimate consumers, the power axis is tipped in the consumers? favor. This is due to the fairly standardized nature and the low switching costs associated with selecting from among competing brands.
2.) BCG Matrix In an economy, different industries are present and different industries have different growth rate as compared to the growth of the economy. In an economy, there are a number of major industries and they all occupy different positions in the BCG matrix according to their growth and contribution towards the economy. In the Indian economy, some of the major sectors are FMCG, automobiles, banking and insurance, steel, telecom, software, pharmacology and retail sectors and these can be placed in the different positions in the matrix as shown below: INDUSTRY BCG MATRIX
BCG matrix is used to determine the relative position of the companies of an industry or different SBU?s of any institution, in terms of the market growth rate and the market share of the company in the industry. In the Indian automobile sector, the major players are Maruti Suzuki Limited, Mahindra and Mahindra, Tata Motors, Hero Honda and Bajaj auto. In the BCG matrix, the companies are placed in one of the following four categories: Stars, Cash Cows, Dogs and Question marks. Companies with high market growth and high market share are placed in the stars, cash cows are the companies which have low market growth rate and high relative market share, the category of the question marks include the companies with low relative market share and high market growth rate and dogs include the companies who have low relative market share and low market growth rate.
COMPANY BCG MATRIX
3.) Industrial Life Cycle
The industrial life cycle is a term used for classifying industry vitality over time. Industry life cycle classification generally groups industries into one of four stages: pioneer, growth, maturity and decline. In the pioneer phase, the product has not been widely accepted or adopted. Business strategies are developing, and there is high risk of failure. However,
successful companies can grow at extraordinary rates. The Indian automobile sector has passed this stage quite successfully. In the growth phase, the product market has been established and there is at least some historical guide to ground demand estimates. The industry is growing rapidly, often at an accelerating rate of sales and earnings growth. Indian Automotive Industry is booming with a growth rate of around 15 % annually.
Source: Business Today
The growth rate of the automobile industry in India is greater than the GDP growth rate of the economy, so the automobile sector can be very well be said to be in the growth phase. As the product matures, growth slows as penetration reaches practical limits. Companies began to focus on market share rather than growth. Industry demand tends to follow the overall economy, but the scope of growth of the automobile sector is very much possible in India due to the increasing income of the middle class and their income as well as standard of living.
4.) SWOT Analysis A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis. SWOT analysis of the Indian automobile sector gives the following points: ? Strengths · Large domestic market · Sustainable labor cost advantage · Competitive auto component vendor base · Government incentives for manufacturing plants · Strong engineering skills in design etc ? Weaknesses · Low labor productivity · High interest costs and high overheads make the production uncompetitive · Various forms of taxes push up the cost of production · Low investment in Research and Development · Infrastructure bottleneck ? Opportunities · Commercial vehicles: SC ban on overloading · Heavy thrust on mining and construction activity · Increase in the income level · Cut in excise duties · Rising rural demand ? Threats · Rising input costs · Rising interest rates · Cut throat competition
THE GLOBAL AUTOMOBILE SCENARIO VIS-À-VIS THE INDIAN AUTOMOBILE SCENARIO The automotive industry is increasingly becoming the cynosure of the manufacturing sector across the globe. The attention and importance to the automotive industry in the economic development and planning policies of Government and its agencies has also witnessed significant uprise. The industry has been evolving over the years, meeting up with challenges as diverse as transitions, consolidations and restructuring, and thereby adapting to the new market conditions. In the last few years, the world automotive industry has changed its locational preferences due to various reasons. Earlier, the automotive industry was largely confined to the triad - North America, Europe and Japan; however, with the emergence of some vibrant developing economies, like Brazil, India and China, the global automotive industry has been considering a different growth perspective, and has been relocating the operations. These growing developing economies has been evolving as the manufacturing hub, as also the newfound markets, for the global majors like Ford, General Motors, Chrysler, Toyota, Honda, Nissan and BMW, who are competing to enhance their market share in these markets. Increasing growth in GDP and the growing disposable income has catapulted these emerging economies as market for automotives, while the low cost of operations and skills in design and R&D made them as destinations for investment and manufacturing operations. The entry of global auto-majors into India has significantly altered the automobilemanufacturing scenario in the country. The changes in design and adaptation of international technologies have enabled the Indian automotive industry to compete globally, and thus are also exposed to global challenges. Alongside the challenges, the trend also presents a plethora of opportunities to Indian automotive industry, which needs to be capitalized, so as to emerge as a successful global player.
The Global Automobile Industry In the initial years, most of the manufacturing activities were concentrated in the USA and in some of the European countries. Though, these countries still account for a significant share in the production, more and more volume of production comes from other parts of the world, like China, Japan and Korea. For U.S. automakers and suppliers, the past year can best be described as 12 months of mixed results, leaving unanswered questions about the future direction of the industry and what is required for manufacturers and suppliers to thrive. In 2011, U.S. light car and truck sales will exceed 12.5 million, a nice bump from 11.6 million in 2010 and 10.4 million in 2009. And though the most optimistic analysts forecast that U.S. vehicle sales will rise to more than 14 million in 2012, that?s a far cry from 17.3 million at the turn of the millennium. Last year?s U.S. sales figures might have been higher if not for the tsunami and earthquake in Japan and flooding in Thailand, which forced Toyota, Honda, and, to a lesser extent, Nissan to curtail production in virtually all of their assembly plants around the world. Auto sales growth is far more rapid in emerging nations such as China and India, with average annual sales gains since 2001 of 23 percent and 15 percent respectively. All of this should be good news for U.S. automakers, which have restructured their operations to be profitable at lower volumes in the U.S. General Motors, Ford, and Chrysler gained market share at the expense of the Japanese manufacturers, and the Detroit Three have now posted several quarters of consistently strong operating performance. Whether these improved earnings are short-lived will depend on a number of unknowns:
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As their output returns to normal, will Japanese companies reclaim their market share? Will the Detroit Three maintain their focus on new vehicle development and launches and continue to practice pricing discipline, which favors maximizing profits over volume or marketshare growth? How will rapid introductions to the U.S. market of highly competitive new models from automakers around the globe, combined with slow growth, play out? How will automakers differentiate their vehicles and earn the pricing and volume they need? What will they do to ensure that each program delivers an attractive return on invested capital?
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How will automakers serving the U.S. market protect themselves against the risk of disruption (such as the supply chain disruptions we have seen in Japan and Thailand) and will they do it at an affordable cost?
Automakers will also face technological challenges. For example, advances in braking, parking assistance, propulsion, sensors, and other critical areas are bringing us closer and closer to the era of self-driving automobiles; indeed, Google has already logged well over 100,000 miles on its unmanned robotic vehicle. In urban areas, in particular, these innovations could improve traffic flow, provide revenues (through “smart tags” and traffic congestion pricing), and reduce accidents through vehicle-to-vehicle communication and coordination. Meanwhile, vehicle-based mobile communications technology continues to produce breakthroughs in voice-activated telephony, GPS, information, and entertainment. For example, GM customers can now use the automaker?s OnStar (driver communication) and RelayRides (vehicle location tracking) systems to rent their personal vehicles to others and charge fees based on usage. Both original equipment manufacturers (OEMs) and suppliers will have to anticipate which new technologies and add-on services will justify the cost of innovation. Clearly, anything that consumers are willing to pay for, that increases safety or functionality, or that reduces cost has the potential to be successful. At the same time, OEMs must be careful to integrate new technology into vehicles effectively and only when it is well perfected, or risk adding features that are annoying or, worse yet, prone to breaking down, which could negatively affect consumer perceptions about the quality of the automaker?s products. A return to competition based on innovation is a refreshing change from the dismal situation the industry faced just two years ago. And while the Detroit Three focus on producing more exciting and attractive vehicles, they can take comfort in having addressed a perennially problematic issue through a new and mutually beneficial four-year labor agreement with the United Auto Workers. By being able to pay newly hired workers at rates comparable to those paid by Asian transplants in the U.S., GM, Ford, and Chrysler have taken another important step in narrowing the gap with their rivals on manufacturing costs. Suppliers are also relatively well positioned after several difficult years. Many suppliers were very profitable in 2011; they have emerged from the recession with restructured balance sheets and lowered breakeven points. Moreover, supplier relationships with GM, Ford, and Chrysler have improved, according to the annual
Planning Perspectives OEM–Supplier Working Relations Index. But there is more work to do: Chrysler and GM still score in the “very poor–poor” range. There are some dark clouds for suppliers, though. Raw material prices, already elevated, may continue to rise, and many suppliers are struggling to find the capital to ramp up production to meet increasing demand. Moreover, most suppliers must continue to deal with what has become an endemic issue: a talent shortage, as topflight engineers willing to work in the auto industry are increasingly hard to find.
The global automotive industry is poised for continued growth in 2012, provided the European Union gets a handle on the debt crisis there. In an announcement last week, PwC?s automotive analyst group, Autofacts, said that it expects 2012 global light vehicle assembly will exceed 79 million units, an increase of 6.8 percent from 2011?s total. According to Autofacts, there are many factors contributing to the positive outlook. For instance:
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Local demand in the BRIC marketplace is on the rise. Monetary tightening and other policy shifts in Brazil, India and China caused slower growth in 2011. But inflationary fears in these markets are subsiding – prompting correspondingly looser monetary policy –and these markets could be poised for substantial growth once again. Russia is positioned for another year of strong local demand. Autofacts forecasts BRIC growth is likely to reach double digits (12 percent) in 2012 following only five percent growth in 2011. Japan and Thailand are poised for output recovery. Potential exists for strong output recovery in Japan and Thailand as the auto sectors in both countries work to satisfy pent-up demand, clear product backlogs and rebuild inventory in the wake of 2011?s natural disasters. Thailand?s eco-car program is also likely to provide assembly upside in 2012. North American industry outlook remains positive, too. Although volumes are not expected to achieve prior peaks, Autofacts predicts an 860,000 year-over-year increase in North America production predicated on healthier inventory, export growth, and US light vehicle sales of 13.6 million units in 2012.
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“The US region?s automotive sector is poised for continued growth in 2012,” said Rick Hanna, global automotive leader, PwC. “Automotive companies have ramped up vehicle inventories and growth markets are easing monetary policy. Although uncertainty persists, we anticipate the global automotive industry will run on all cylinders toward another record year as long as Europe?s issues don?t spill over to other regions.” Global Auto-Components Industry The trends in auto-components industry are dependent on the trends in the automobile industry, as the original equipment manufacturers are the principal customers for the auto components industry. Though there is a replacement market as well, the trends in automobiles industry still influences the growth of auto components industry. Since automobile industry is more concentrated in developed parts of the world, like US, Europe and Japan, the market for auto components is also concentrated in these countries. It is estimated that there are around 2500-3000 tier-I suppliers in the world, who account for more than 80% of the total value of production. The global auto components industry is in the process of undergoing a structural change. Industry is being influenced by strategies of OEMs, globalization, business and technology trends. In addition, the auto components industry is faced with rising input costs. Hence, there is a shift occurring in the industry with more and more companies moving to low-cost destinations, so as to be cost efficient. Due to this trend, countries like China, India and Thailand stand to gain significantly. Several global players have already established their bases in these countries while the local companies are also upgrading themselves to face the competition. Autocomponent industry is also witnessing mergers and acquisition trends. The large sized companies are acquiring small sized companies to grow even bigger as global presence is of extreme importance in this industry. There is a consolidation wave sweeping across the countries; most of the companies are hiving-off their peripheral businesses and concentrating on their core business. There is also a change in trend with more and more companies becoming as system integrators rather than being mere suppliers. The size of world auto components industry has grown in the last few years principally due to growth in automobile market and replacement market. However, the major portion of components production is meant to cater to the demand of OEMs and only a small portion goes towards replacement market.
The Indian Automobile Industry Indian automobile industry constitutes two types of sub industries --those involved in building automobiles and others who're involved in building automobile components. The latter is the one where SMEs come into picture and would be our focus area here. Automobile industry in India has huge potentials thanks to the growth of the middle class along with their overall economic growth. This is the reason of attraction for international brands who are trying hard to find new market for their products due to stagnated growth of auto sector in Europe, US, and Japan. Potential of Indian automobile industry can be best understood by following features: India is the second largest two wheeler market, fourth largest commercial vehicle market, eleventh largest passenger-car market, and fifth largest bus and truck market. With these facts in mind, let's talk about auto-component sector in particular. This segments is further divided into five sub segments --engine parts, drive transmission and steering parts, suspension and brake parts, electric parts, and body and chassis. According to the Automotive Manufacturers Association of India (AMAI), this sector is projected to grow at a CAGR of 10% till 2015-16; India is projected to be among top five automotive economies by 2025. The Indian automotive industry is largely classified in four clusters --Chennai, Pune, Pithampur, and NCR. In view of such huge potential, the Government of India has launched a 10-year plan –-Automotive Mission Plan (AMP), 2006-16 which aims to make automobile industries' contribution to GDP more than 10% while providing employment to 250 lakh people. Indian Automobile Industry at Global level: · India ranks 1st in the global two-wheeler market · India is the 4th biggest commercial vehicle market in the world · India ranks 6th in the international passenger car market · India ranks 5th pertaining to the number of bus and truck sold in the world · India is the 2nd largest tractor manufacturer in the world.
Volkswagen, Toyota, Nissan & Ford plan new cars to cash in on fastest-growing compact car section of car market in India. Source: Economic Times It is expected that the Automobile Industry in India would be the 5th largest automobile market by the year 2016. Projected Growth rate in Indian Automobile Industry: · Passenger vehicle sales in the country will grow at a CAGR of 12 per cent to touch 3.75 million units by 2014. · The domestic two-wheeler sales will grow at a CAGR of 8.8% by 2014 at 11.3 million units. · To emerge as the destination of choice in the world for design and manufacture of automobiles and auto components with output reaching a level of US$ 145 billion accounting for more than 10% of the GDP and providing additional employment to 25 million people by 2016.
Challenges in Automobile Industry Being a manufacturing vertical, usage of IT is always a challenge in this cluster. People especially those working at lower ranks are always skeptical about using IT
which makes implementation and then execution of packages like CRM or ERP a big challenge. Automotive parts manufacturers or auto components industry is highly dependent on OEMs. This leads to pressure from OEMs for implementation of stringent controls over quality of component and reliability of delivery. In modern competitive environment local manufacturers of component are under huge pressure to adapt to global standards so that delivery and quality can be controlled. To overcome these challenges IT has a huge part to play. Challenges of automobile industry can be categorized into three levels depending on the size of the company. There are those who have basic IT structure in place and are looking to implement complex packages to gain competitive edge and then there are those who have small or negligible IT budget to lack of understanding about how IT can actually be helpful to them. Indian Auto Components Industry According to Auto Component Manufacturers Association of India (ACMA), the size of the Indian auto components industry is estimated to be around US $ 18 billion in 2007-08. India is estimated to have the potential to become one of the top auto component economies by2020, according to a study by IBM. According to another study, the auto component industry in India has potential to grow at a CAGR of 13% to reach US $ 40 billion by 2015. India?s share in world autocomponents would thus grow from around 1%, at present, to over 2.5% by 2015. Domestic market is projected to grow at around 8-10% per annum in the next 10 years. Exports are projected to grow at over 30% per annum in the long term. The automotive market in India has grown significantly owing to the growth in income and in the living standards of the middle class population, and a significant increase in their disposable incomes. However, there has been a slowdown in demand for vehicles, in 2008-09, which is impacting the auto-component industry adversely. Responding to emerging scenario, Indian auto component sector has shown great advances in recent years in terms of quality, spread, absorption of newer technologies and flexibility. Availability of skilled manpower, reasonably priced workforce, together with the strengths gained by the country in IT and electronics, have built-up an environment for significant leap in the auto component industry. The turnover of the auto component industry, over a period of time, has grown impressively. During the year 1996-97, the turnover of the industry was US $ 3.3 billion, which
breached the US $ 10 billion mark, to reach US $ 12 billion, in 2005-06. In the year 2007-08, the turnover of the auto component industry has reached US $ 18 billion. Indian auto-component industry has a comprehensive range of products catering to the market. During the year 2007-08, engine parts accounted for the bulk of production in the Indian auto components industry, followed by transmission and steering parts. The combined production in these two categories was around 50% of the total value of the production. Export growth in Indian autocomponents industry was around 25% during the year 2007-08, with value of exports being US $ 3.6 billion. India is also an importer of auto-components; according to the Ministry of Heavy Industries, Government of India, the total imports of auto components by India in the year 2006-07 were US $ 3.3 billion (Rs. 14,644 crore). India has been emerging as a significant exporter of auto components since the last decade. From a level of US $ 330 million in 1997-98, exports of auto-components have reached to over US $ 3.6 billion in 2007-08. Export orientation of Indian auto-component industry has also increased from a level of 11% in 1997-98 to over 20% in 2007-08. Export of auto-components have grown at a CAGR of 24% during this period. India exports its auto components to almost every part of the world, the major markets being developed countries such as USA, Germany and UK. Some of the important Asian markets for autocomponents include Bangladesh, Sri Lanka and Nepal. According to ACMA, the export potential of auto components industry is expected to post a CAGR of around 24% to reach US $ 20-22 billion by 2015.
TRENDS IN GLOBAL AUTOMOTIVE INDUSTRY
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Addressing the Challenge of Volatility in Fuel Prices
One of the major challenges of the world automotive industry is the volatile oil prices. The year 2008 witnessed crude oil prices breaching the US $ 140 mark per barrel, and thereafter slipped below US $ 40, in the later part of the year. The volatility in oil prices does not directly affect the growth in automotive industry; however, volatility in oil prices is one of the influential factors in automobile demand. In order to address the challenge of volatility in oil prices, the automotive industry is innovating new technologies and inventing usage of alternative energy. Hydrogen cars, driven either by a combination of fuel cells and an electric motor; hybrid electric technology; electric vehicles with rechargeable batteries; or alternatively, compressed air technology to drive the pistons in a specially designed engine, are thought to be replacing fossil fuel-powered motors in the decades to come.
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Emergence of New Generation Automobiles
Innovation is expected to drive the automotive industry in future as the producers are involved in differentiating their products and services. There are already growing interface of electronics and IT in the automotive functionalities, such as entertainment, navigation and safety. According to a survey, conducted by IBM across the auto majors, majority of them felt that by 2020 the level of innovation would be greater in software and electrical systems of automobiles. It is also expected that by 2020 the vehicles may become another node on internet, connecting with other vehicles, the transportation infrastructure, homes and businesses. However, there are challenges associated with this trend, with regard to consumer acceptance, technological development and adoption of standards.
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Supply Chain Management in the World of Global Sourcing
Global auto-component firms are giving greater level of thrust in supply chain management to address the challenge of cost pressures. This is particularly important in the context of global sourcing. Though there is a perceived belief that global sourcing helps in reduction of cost of components, there are logistical challenges. Thus, it is being recognized that collaboration between the OEMs and component producers are crucial to develop capabilities and solve the challenges associated with global delivery, especially in the areas of inventory management,
scheduling, and timely delivery. In addition, both OEMs and suppliers view that the collaborative efforts in supply chain management enhances the capacity and performance visibility.
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Customer Management Systems
Earlier, automotive manufacturers had to get feedback from the customers through intermediaries, such as vendors or service workshops. This trend has been changing with the introduction of customer management systems through ICT interface. Even vehicle buyers are also browsing the net to know the features of a new model, evaluate them with the existing models, and compare the prices. IT firms are developing customer relationship management (CRM) tools that help the manufacturers to realise and optimize individual customer value, increase the postwarranty service retention, predict model demand and provide supply chain solutions.
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Growing Small Car Segment
The volatility in crude oil prices witnessed during the year 2008 re-emphasized the need for small and fuel-efficient vehicles. Some of the automobile majors have plans to hike their R & D budget for designing of small and fuel efficient vehicles. Added to this is the need for reduction in prices to target the middle income groups of population/ new buyers, especially in developing countries like India, where the vehicle penetration is low as compared to the population. An auto research firm CSM Worldwide Inc. has estimated that global demand for small cars would grow by 30% per annum to 27 million vehicles a year by 2013. The fast-growing small cars market has encouraged several global auto majors (such as Renault, Toyota, and Nissan) to plan for launch of small cars.
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Green Motoring
Automobile manufacturers are increasing the thrust on fuel efficiency than before; the initiatives are mainly through improvements in technology and introduction of new fuel variants, thereby reducing toxic emissions. It may be mentioned that China, the EU, Japan and the USA have already established fuel economy rules or agreements of varying stringency. The FIA?s1 declaration for green motoring has set a fuel economy target of 140 gCO2/km for passenger cars. Such a global fuel economy target could be used as an international Fédération Internationale de l?Automobile (FIA) benchmark to assess progress in the fuel efficiency of the global fleet of new motor vehicles. Some countries are also undertaking „Green Rating? of automobiles.
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Cross Border M&A Deals
The global automotive industry is increasingly getting more active in cross border mergers and acquisition (M&A) deals. On a global basis, the number of cross border deals has grown in the past few years, and this trend is expected to continue after the recovery of economic activity in the world. The expansion outside the home markets of some of the major automotive companies from traditional lowcost countries, such as China and India, is bringing in new capital and a fresh look at certain sectors of the automotive market. With the recession in the US market and its consequent impact in other markets, automotive assets in developed countries are becoming attractive to buyers from emerging economies, as well.
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Entry of Private Equity Players
The traditional funding model in the automotive industry is slowly being replaced with aggressive funding structures. There has been a structural change in the automotive industry with the entry of private equity players in the past. Traditional and family-owned businesses were taken over by the private equity players and hedge funds, which are expecting more profit or investment realization from the industry. Though the business activities of private equity players have come down, following the financial market meltdown, this is expected to be revived soon, either when the market sentiments improve or once consolidation happens among the private equity players.
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Growing Collaboration for Technology Enhancement
Technology-enhancing collaboration in the automotive sector helps in preserving design integrity, despite minor engineering adjustments. There are also softwares/ programs that make the global data sharing possible among designers, engineers, suppliers, partners and even customers. Such better and faster integration of design / engineering ideas help in necessary adjustments and adaptations in designs to suit the requirements.
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Trendy Cars, Shorter Life-spans
An automobile is a highly engineered collection of complex components, each of which has its own lifespan and longevity characteristics. While some components require frequent replacement, others that are relatively expensive are expected to have longer lifespan to justify the economics of a vehicle buyer. However, change in fashion and design trends may outweigh the pure economics, which may lead to planned obsolescence. In the world of changing fashion trends, auto manufacturers
are developing new designs meeting the changing consumer preferences. More frequently the new models are introduced, the shorter will be the life span of the old models.
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Preserving Brand Identity
With growing mergers and takeovers in automobile industry, players are carefully devising strategies to strengthen the backroom operational synergies, in terms of common logistics and supply chain management, but avoid losing the brand identities. A group owning different brands prefers not to use the same platform that has same kind of technology, management, and designers to preserve the brand identity. In this sense, the automobile sector is different from monolithic branding strategies of consumer goods.
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Design for Recycling
It is being increasingly realized that natural resources of the earth are depleting fast. Hence, there is a growing concern amongst manufacturers as also the consumers to conserve the resources; one such way is through recycling. The automobile industry is one of the pioneers in usage of recyclable materials. Also, the rising input prices are making the automobile manufacturers to design the vehicles that can be easily recycled.
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Emergence of Design Studios
As efficiency in design and manufacturing improves, vehicle manufacturers across the world are focusing on making models for niche market, though the sale would be in lower volume. This is in contrast to the earlier strategy of designing models for mass consumption. With the increase in number of models to be designed and developed, auto majors are outsourcing the designing jobs to independent design studios who take care of the design and execution of the process management in the value chain.
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Outsourcing
Stiff competition to enhance the market share forces the OEMs in developed countries to outsource their engineering requirements to low cost countries like India. Global auto-majors such as General Motors, Ford, Toyota, BMW are increasingly outsourcing the vehicle design and engineering services to developing countries such as India, either through their captive centers or through third-party
vendors. Long term trends indicate that global auto-component outsourcing from the US is expected to reach US $25 billion by 2015, and India, China and Mexico are likely to benefit the most from such trend. An online survey conducted by A T Kearney, revealed that around one-fourth of global auto-majors have considered India as a favorable destination for automobile-engineering outsourcing.
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Advanced RFID Practices in Auto Manufacturing
RFID has been in use in the automotive industry for several years, though to a limited extent. The trend is changing now with adoption of technology in wide variety of applications, the dominant being vehicle entry and security. According to a study by ABI Research, 40% of new cars manufactured in North America are equipped with RFID immobilizers and the worldwide revenue generated by this application alone was estimated to be US $ 3.7 billion. In addition, RFID solutions are increasingly being used in automobile manufacturing processes and supply chain applications.
EXPORT COMPETITIVENESS OF INDIAN AUTOMOBILE INDUSTRY The year-on-year growth rates in vehicles production achieved by the Indian automobile industry has been outstanding as compared to the growth rate achieved by the global automobile industry. In the year 2007, the automobile production growth rate in India stood at around 14% as compared to the world production growth rate of 5.4%. Except in the year 2000, when there was a slump, the Indian automobile industry has performed better than the global average, at the back of both domestic as well as global demand. In the auto-components segment, steered by the country?s high engineering skills, established production lines, and competitive manufacturing costs, global auto majors are increasingly ramping up the value of components they source from India. Over 20 OEMs have set up their International Purchase Offices (IPOs) in India to source their global component requirements. These include firms like General Motors, Ford Motors, Cummins International, Bosch, Volkswagen, BMW, MAN (trucks) and JCB (earthmoving equipment), among others. This number is expected to double by the year 2010. The auto-component industry was estimated to achieve an export level of around US $ 5 billion in 2008-09. However, the slowdown in demand for automobiles, both in India and in its export markets, may downsize the projections marginally. In such a scenario, it may be pertinent to analyse the export competitiveness of India in the international market. In this chapter, an attempt has been made to analyze the competitiveness of India in order to identify potential markets for Indian automotive industry in select markets/ regions. The markets / regions identified for this purpose were USA and Europe for auto-components, and developing countries of Africa, Asia and Latin America for automobiles. The competitiveness of Indian automotive industry in the identified markets have been analysed using some of the competitiveness indicators, such as penetration index, contribution index,and specialization index. ? Auto-components In the USA market, the penetration index for components such as bumpers, drive axles, and radiators have grown significantly indicating rise in share of India in USA?s total imports. The contribution index has also increased for bumpers indicating growing share of its exports in India?s total exports to USA. As a result of such trends, the specialization index has increased significantly for bumpers, drive axles, and steering wheels.
While the specialization index has decreased significantly for road wheels and parts, marginal decline has been witnessed for components such as brakes and parts, non-driving axles and parts, and suspension shock absorbers. In the European market, the penetration index has grown significantly for autocomponents such as bumpers, drive axles, suspension shock absorbers and radiators. The contribution index has also increased for bumpers and drive axles and radiators indicating growing share of its exports in India?s total exports to Europe. As a result of such trends, the specialization index has increased significantly for bumpers, drive axles, suspension shock absorbers and radiators. While the specialization index has decreased significantly for road wheels and parts, and parts and accessories of bodies, marginal increase has been witnessed for components such as brakes and parts, non-driving axles and parts, suspension shock absorbers, and steering wheels and parts. ? Automobiles The analysis of international competitiveness of Indian automobile sector in Africa market reveal that the penetration index has grown over the years, between 2001 and 2006, for sub-segments such as tractors, motor cars, transport vehicles for goods, special purpose vehicles, and chassis fitted with engines. The growth in penetration index, however, has not been much for public transport type passenger vehicles, while it has come down for motorcycles. The contribution index has also increased in these sub-categories (except the public transport type passenger vehicles, and motorcycles), indicating growing share of these categories in India?s exports to Africa. The share of import of identified categories of vehicles in total import of Africa has also increased over the years indicating growing African market. As a result of these trends, the specialization index has grown for all types of vehicles, except public transport type passenger vehicles and motorcycles. India?s automobile penetration into the Latin American region is slowly gaining momentum. The analysis of international competitiveness of Indian automobile sector in Latin America region reveals that the penetration index has grown, between 2001 and 2006, for sub-segments such as tractors, motor cars, and motor cycles. The growth in penetration index, however, has not been much for public transport type passenger vehicles, and special purpose motor vehicles, while it has come down for motor vehicles for goods transport and chassis fitted with engines. The contribution index has also increased in the sub-categories where penetration index has grown (and vice versa), indicating growing share of these categories in India?s exports to Latin America. The share of import of identified categories of vehicles in total import of Latin America has also increased over the years in most of the sub-categories, indicating growing Latin American vehicles market. As a
result of these trends, the specialization index has grown for all types of vehicles, except motor vehicles for transport of goods, chassis fitted with engines, and motorcycles. India?s automobile penetration in the developing Asian market has been quite modest across all the segments. This could be seen from the growing penetration index during the analysed period (years 2001 and 2006), in almost all segments. The contribution index has also grown in all vehicle segments (except motor vehicles for transport of goods, which has remained constant), indicating growing share of these vehicle segments in India?s exports to developing Asia. However, the share of import of identified categories of vehicles in total import of developing Asia has declined over the analyzed period, in most of the subcategories, indicating growing manufacturing and self-sufficiency in the region. In spite of such a trend, the specialization index has grown for all types of vehicles, with some categories, such as tractors, and chassis fitted with engines, well pronounced than the others.
CHALLENGES FACED BY INDIAN AUTOMOBILE INDUSTRY
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Rising Input Costs
Prices of core inputs in the manufacture of vehicles, like steel, non-ferrous metals and rubber, have grown over the last few years, which, in turn, has increased the production cost of vehicles. Though the raw material prices have cooled in the last few months, they still prevail more than the prices that have prevailed few years ago. Such cost escalation in input prices has impacted the growth of the Indian auto industry.
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Fuel Price Volatility
Volatility in fuel prices affects the growth of the automotive industry all over the world. The effects of volatility in fuel prices are multi-pronged. Firstly, the cost of inputs in car manufacturing increases with the increase in oil prices. Polymers, one of the inputs used in manufacture of vehicles, is a derivative of crude oil. Bulk commodities, such as steel and aluminium, are also used in manufacture of vehicles; the transportation cost of which is influenced by oil prices. Secondly, the oil price has an impact on inflation, affecting the saving and disposable income of the consumers, thereby affecting the demand for automobiles. Thirdly, the fuel price influences the overall running cost of the vehicle owners; there could be switch in demand among the vehicle variants, as also research in use of alternative fuels. Thus, the volatility in oil prices affects the prospects of the industry.
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Slowdown in Demand
As per the RBI?s data on sectoral deployment of gross bank credit, the automotive industry received gross bank credit of Rs. 29,152 crores in 2007-08, a growth of 39% over the corresponding period of the previous year. In addition, credit has been extended to transport operators and retail consumers (as vehicle buyers) to support the growth of sales by the automotive industry. However, the penetration rate of vehicle ownership in India (per thousand population) is estimated to be less than 10 for car owners and around 40 for two wheelers. This is low as compared to the world standards, and indicates the potential demand for automobiles in the country. Following the recent financial sector crisis, the euphoria of easier / better availability of auto finances in India has declined. The recent trends in vehicle sales also corroborate with this contention. During the period April-November 2008, the sales growth in passenger vehicles segment was marginally negative at (-
) 0.59% over the corresponding period of 2007-08; the growth in sales of commercial vehicles was negative at around (-) 9.23%. Similarly, three wheelers sales have also registered a negative growth (– 3.37%). The two-wheelers segment registered a positive growth of 3.76% during this period; however, the two wheelers sales in the month of November 2008 witnessed a negative growth (14.73%), over the corresponding month of 2007.
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Slowdown in USA
North America has been a traditional market for the Indian auto component manufacturers with exports to the region accounting for around 27% of Indian auto component exports. The region is affected by the global financial crisis, which led to the slowdown in demand for vehicles, especially in USA. As the global financial crisis makes consumers increasingly reluctant to part with cash and lenders unwilling to offer credit, carmakers across the world face challenges in finding buyers to keep their production lines running. It may be mentioned that industrywide auto sales in USA in the month of November 2008 were down nearly by 37%. In annualized terms, according to analysts, the US auto industry recorded sales of 10.2 million vehicles in November 2008, down from 16.07 million vehicles sold in the same month of last year. With the Detroit majors like, General Motors, Ford and Chrysler seeking a bailout from the Federal Government, the auto component industry in India is feeling the brunt with slack in demand. An emergency bail-out offering of US $ 17.4 billion loans to the three auto majors has been announced with the condition that within three months restructuring plans are prepared by them, including cutting down on costs. The restructuring plan and cost-cutting measures may affect the export prospects of Indian auto-component firms. The Indian auto components sector, which is one of the major vendors for the global auto majors, and to the US in particular, face the challenges of slowdown in the US automobile market.
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Production Cuts
The production activity in the automotive industry is poised to be on the lines of the economic growth in the world and it is likely that the momentum in production may slowdown in the year 2008-09. The slowdown in demand for vehicles, both in domestic and export market has led to the announcement of production cuts by many vehicle manufacturers. In the month of November 2008 (over the month of October 2008), there has been decline in production across all segments. Production of passenger vehicles have witnessed a negative growth (-8.50%), commercial vehicles production declined by 44.27%, three-wheelers production
declined by 5.65%, and two wheelers by 8.79%. Overall, the production in November 2008 (over October 2008) has come down by 9.94% (from 0.95 million units to 0.86 million units). Commercial vehicles producer, Ashok Leyland, has reduced its production of vehicles to around 1500 units in November 2008 (as compared to an average of 6400 units produced during April-October 2008). Another major vehicle manufacturer, Tata Motors has decided to cut production of medium and heavy commercial vehicles by around 50%, while its passenger cars segment is contemplating a production cut; as of now, Tata Motors is undertaking partial shutdownto match the production and demand for passenger cars. In the two-wheelers segment also, major producers are mulling over production cuts to reduce their inventory levels and match with the market demand trends. Bajaj auto has already announced a prolonged shut down as part of the exercise to reduce the inventory levels. Such trends also affect the market prospects of Indian autocomponent manufacturers. Several auto-component units that are catering to the demand of OEMs in India are also in line with the production cuts intended by these OEMs. Several auto-component manufacturers are scheduling maintenance holidays to tackle the situation. ? Growing Competition Competition in India?s automobile and auto-parts industry has been growing in the recent years. Earlier, the regulatory framework and market conditions positioned the Indian OEMs in monopolistic or oligopolistic market structure. As the automotive market in India is evolving through the dynamics of open market and deregulation, many new players have entered the market. Since liberalisation, over 20 new players entered the market in the passenger car segment alone. Though, there has been depletion of market share for Maruti Suzuki, it still dominates the passenger car segment. In the two-wheelers segment too, foreign majors have their presence through joint ventures as also through their wholly- owned subsidiaries. Hero Honda is the largest player in the two-wheeler segment, followed by Bajaj Auto and TVS Motors. In the commercial vehicles segment, though the market is dominated by home-grown companies such as Ashok Leyland and Tata Motors, competition is augmented through the entry of foreign players such as Nissan and Volvo. Indian players are entering into joint ventures with these companies to gain access to the technological advancement and design engineering. In the auto-parts segment, though there are vibrant units producing high-quality products and supplying to global OEMs, the market is attracting global players such as Delphi Systems, Visteon, Denso and Bosch, to mention a few. These global majors have been expanding their product portfolio and enhancing their production capacities, thereby increasing the competition among domestic players.
? Changing Consumer Preferences There has been continuous change in consumer demand in the motor vehicle industry, making the companies to focus on innovation continuously. With growing purchasing power among Indian consumers, the demand for better and comfort vehicles with greater efficiency is growing. Intense industry competition has led to design of hybrid vehicles and development of new vehicle concepts. Apart from customers, new technology also allows the designers to change every aspect of car design. According to a study2 by KPMG, product quality, cost reduction, new technologies and environmental issues, influences the consumer demand for vehicles and thereby innovation in the automotive industry. ? Chinese Competition Of late, low-cost imports from China threaten the business prospects of domestic auto-component manufacturers. According to ACMA, auto-component imports from China have grown rapidly in the last few years. From around 3.3% of share in all component imports in 2003- 04, China now accounts for close to 10%. Significant growth in component imports has been contributed by China in the last three years, while India?s exports to China have stagnated at around Rs 120-170 crores in the last 5 years. Such imports from China have set new benchmark prices and the component manufacturers from India face challenges in the scenario of rising input prices. ? Environmental Issues The automobile sector affects the environment in multiple ways, starting from the use of materials that causes environmental degradation, and ending with the management of scrap. However, it is estimated that much of the environmental damage during the lifespan of a car happens during driving, and thus is associated with fuel emissions. That is why many countries are discouraging sale of fuelinefficient cars, as also polluting cars, through suitable taxation policy. It is reported that Chinese Government has increased sales tax on cars with engine capacities more than 1 litre, and reduced on cars with engine capacity of less than 1 litre. EU is proposing to penalize cars that are emitting more than 130 gms of CO2 per kilometer. There are estimates that the automobile industry accounts for approximately one-fourth of global anthropogenic GHG emissions. Therefore, in order to combat the environmental challenge, firms (as well as environmentalists and national Governments) are focussing on avoidance of polluting substances in production, in addition to concentrating on fuel efficiency and emission standards.
The industry is also contributing to combat this challenge by undertaking research in improving fuel efficiency and reducing CO2 emissions. In the EU, an end-of life of vehicles Directive (2000/53/EC) is in force to prevent polluting substances in manufacture of vehicles. Also, a dialogue between regulators and the automotive industry in EU inspired a voluntary commitment for the industry to reduce emissions. ? Low R&D Orientation It is being realized all over the world that the competitiveness is not dependent on factors like availability of skilled labor, low-cost operations and infrastructure. The sustained competitiveness in the automotive industry comes through improvement in productivity, which calls for continuous innovation by the players. However, Indian automobile companies spend a relatively low amount on R&D; thus, their R&D orientation (R&D spending as a percentage of total sales) is low relative to the global standards. Developing new designs is an expensive proposition, unless the market for the new design is on a global scale. Indian firms are mainly focusing on, and designing the vehicles for domestic market or for other developing country markets, but not completely focusing on designing a vehicle for a truly global market, or to create a niche for them and compete with international brands. Also, the efforts of Indian automobile manufacturers are mainly oriented towards value engineering or modification in the existing models to improve performance, and are not focused on developing new models. ? Infrastructure Constraints Insufficient road infrastructure and traffic congestion could be a bottleneck in the growth of the automotive industry. In India, capacity addition in roads has been lagging behind the traffic growth. It is reported that China witnessed a phenomenal growth in automotive industry due to rapid development in road infrastructure. Poor port connectivity is another bottleneck faced by the industry, especially when it comes towards exports. The Chennai and Mumbai Ports handle bulk of the vehicle export. In addition to the insufficient porthandling infrastructure, there are also challenges associated with space especially for parking and setting up of repair shops in the port yard. According to a comparative analysis on cost structure of Indian automotive sector and that of Malaysia, the deficiencies in logistics and infrastructure adds about 1.1% to 2% in the total cost structure.
? Incidence of Levies / Duties On vehicle sales, currently taxes are levied at multiple levels – at city level (octroi), state level (sales tax) and at the central level (excise). It is estimated that the incidence of levies and taxes on a vehicle averages to be around 30% of the cost of vehicle. The incidence of taxes increases in cases where the octroi is also levied. The high incidence of taxes increases the cost of ownership of vehicles, thereby affecting the vehicle penetration level in India. ? Low ICT Interface The adoption of ICT in the Indian automotive sector is at low level as compared to international standards. According to a study by NASSCOM, many SME firms in the auto-component sector is facing the challenges of IT adoption, which is important for enhancing their productivity and competitiveness, and the growth of the industry. ? Human Resources Challenges One of the critical enablers for the growth in the Indian automobile industry would be adequate availability of trained manpower. It is estimated that the industry would require large numbers of trained personnel, if our country has to become an auto-manufacturing hub for the world. Countries in North America and Europe, which has been the hub for automotive industries over the years, are increasingly feeling the pinch of the aging workforce impacting employment levels from factory workers to middle and top-level management, thereby creating a talent vacuum in the industry. This crunch in manpower in these economies is slowly luring the much-required human capital from India. This challenge needs to be addressed on priority basis so that the country does not loose out on critical talent that may be important for positioning India as an automotive manufacturing hub of the world.
STRATEGIES TO COUNTER THE CHALLENGES
? Tackling the Rising Input Costs The increase in the cost of crucial raw materials (such as steel, aluminium, rubber) that are used in manufacture of vehicles has affected the margins of the Indian automotive industry. Though the raw material prices are cooling down, they are still higher than the prices that prevailed few years ago. In order to tackle this problem of rising input costs, and to improve margins and price realisations, players in the automotive industry need to adopt multi-pronged strategies. These include reallocation of product mix, cost reduction through better adoption of „lean manufacturing? solutions, and renegotiation with suppliers and vendors. Some automobile manufacturers have already strengthened their strategy in tweaking the product-mix, giving greater emphasize on product segments that is expected to provide better margins. Strengthening lean manufacturing solutions would help the Indian automotive industry to tackle the challenge of input cost escalations. Some automobile manufacturers in India have already established programmes to avoid wastage in production and thereby cut down the cost of production. Firms also need to renegotiate the prices (for purchases with the suppliers) and margins (for sales with the dealers), so that the hike in the end price at the hands of consumers is minimized due to hike in input prices. ? R&D on Alternate Energy Sources and Hybrid Vehicles The share of automobiles on road, using petroleum products as fuel, has almost remained the same (at over 95%) in the past several decades. This is despite the fact that the vehicles on road have been evolving in every other aspect. In other words, product development has happened in all other aspects, except in utilization of alternate energy sources. The industry, together with the Government, may provide greater thrust on development of products that uses alternate energy sources, and R&D on hybrid vehicles. ? Market Presence in All Segments Globalization is making every player in the industry to look beyond its borders. Ironically, in spite of the increasing number of models being manufactured, the PLC of the vehicles are decreasing everyday, thus putting pressure on the players to find ways to diversify their product offerings. Recently, Tata Motors had
acquired the Jaguar- Land Rover brands from Ford, thereby, making an imprint into the niche segment, eying the European and the developed country market. This has made the Tata Motors a truly global player in the automobile market with a diversified product offerings, ranging from the entry level segment Nano to the much-touted ownership of premier brands, like Land Rover and Jaguar, thus catering to all segments of the market. Market presence and product offerings need not be in one category of vehicles (say passenger cars) alone; it could also be across multiple vehicle categories. Such strategies build brands and visibility across segments, as also reduce the risks associated with market concentration and economic slowdown to some extent. ? Enhancing Competitiveness Cost efficiency is necessary for Indian automobile industry to enhance its global competitiveness. Many global auto-majors, especially from Japan, have initiated cost reduction exercises. Some firms have also shifted from standard costing to Kaizen costing and target costing. Some of them have even established targetcosting offices across the world and established office structure for implementing Kaizen. Cost containment strategies may also include working with suppliers to reduce the costs in their processes, implementing low-cost designs / segments of the product, or through reduction of wastage. Strengthening the lean manufacturing practices, being adopted in India as also across the world, would also help improve competitiveness of Indian industry. Such practices show greater efficiencies in machine utilization, fewer labor hours per machine, shorter machine setup times and identification of bottlenecks and cost reduction opportunities swiftly. Both the automobile and the auto-component industry are interlinked and are dependent on each other for survival, and hence the hub and spoke model may be another approach for both of them to contain the cost. In the hub and spoke model, the automobile industry help in establishment of auto-component units around its assembly plants, and help them in technological improvement, R&D, and identification of machinery and equipments. The auto-component units concentrate on on-time supply and servicing of orders and cost containment in production, and thereby promote competitive pricing among the industry players. ? Addressing Consumer Preferences The dynamics of Indian automobile market is changing with the changing consumer preferences. For example, earlier, the two-wheeler segment was dominated by scooter (with a market share of 70-80%), which has been taken over
by motorcycles. The change in consumer preference was mainly due to fuel efficiency, as also design and technological improvement. Though, the newer versions of scooters (scooty concept with ignition start) are slowly reviving the market for scooters, the market share may not reach to the previous level. Similarly, consumer preferences have changed the demand pattern in other vehicle segments too, driven mainly by design and technology. Indian auto-majors need to address the changing consumer preferences and suitably modify the design or technological improvement to augment their market share. Collaborative Product Development (CPD) is being adopted as a business strategy by global automobile majors to address the challenge of changing consumer preferences. Dealers are also need to be roped in the design or product development process as they are ideal gateway agencies between the customer and the firm. Hence, a stronger relationship is required to be established by the vehicle makers with the dealers. Synergies are to be created between the vehicle manufacturers and dealers though better communication and understanding in order to offer not only enhanced customer services but also to understand the trends in consumer preferences. ? Environmental Compliance Environmental challenges in automobile manufacturing does not relate to emission standards alone. There are also challenges associated with end-of-life in vehicles, especially waste management. Though sufficient steps are being taken in India towards achieving international emission standards, adequate steps are still required to be taken in environmental compliance in vehicle manufacturing. Significant amount of resources are required as investment to undertake R&D programmes to address these environmental challenges. ? Enhancing R&D Orientation Indian automotive industry needs to develop a proactive culture with regard to investments in R&D rather than responsive culture. This would help the industry to understand the complexities of vehicle users and bring in product innovation through changes in design and vehicle engineering. The R&D orientation in the Indian auto-component industry is not comparable with world standards. However, few firms that are having large operations are increasing their stake in innovation to compete in the global map. There is also a need to initiate a programme for research and development in the Indian automotive industry, concentrating on development of intelligent vehicles adhering to safety standards, energy efficiency and emission norms, and alternate fuels. The programme may also stretch down to component manufacturers with active involvement of OEMs.
? Infrastructure Development Infrastructure constraints are common to all industry; however there are few specific infrastructure constraints affecting the growth of Indian automotive industry. Poor road infrastructure and traffic congestion can be a bottleneck in the growth of vehicle industry. Therefore, in general, improvement in road infrastructure would help enhance the demand for automobiles in India. Secondly, road infrastructure associated with last-mile port connectivity would help enhance supply chain management strategies of the vehicle manufacturers. More importantly, there is a need for building vehicle terminals in India for smoother handling of vehicle exports. ? Supply Chain Management Supply chain management in the automotive industry helps in integration of the partners to improve operational performance, materials flow and manufacturing flexibility. Implementing supply chain solutions as one more module after Enterprise Resource Planning (ERP) is not enough. There?s a need for enterprisewide process improvement. This calls for inculcating mutual respect with the vendors, dealers and consumers. Just-In-Time (JIT) production processes, identification of shorter transportation routes, e-sourcing are some of the supply chain strategies that may be adopted in large scale by the Indian automotive industry. ? Enhancing ICT Interface IT sector has a major role to playing development of Indian automotive industry to achieve its global aspirations through enhanced productivity and product efficiency. In addition, ICT interface help the manufacturers to interact frequently with vendors and consumers also, and leverage their ideas / preferences into vehicle design. Increased IT adoption in the automotive industry not only enhances the competitiveness of the industry in the existing markets, but also creates new markets for the Indian automotive industry. ? Human Resources Development The cost pressure on global auto majors, who are mainly present in developed countries, viz., USA, Europe and Japan, is making the industry shift to developing nations. In addition, these countries are facing shortages of skilled manpower, which is expected to grow manifold in the years to come. India has large human
resource base; however, India needs to enhance the skill-sets that are required for the industry in order to become a global automotive hub. The Government and industry need to come together and address the challenges related to skill development and workforce shortages, both in terms of quantity and quality. In this regard, it may be mentioned that USA established, over three decades ago, a National Institute for Automotive Service Excellence, to provide training, testing, and certification of auto-service and repair-professionals to ensure continuous availability of trained technicians for the industry. Government of India, through the Automotive Mission Plan, has proposed the setting up of an Automotive Training Institute to train people for the automotive industry. The Society for Indian Automobile Manufacturers (SIAM) has plans to set up an online university, first of its kind in Asia, to cater to the education needs of the industry. SIAM is associating with US-based institute, Adayana, who will provide course content and certify these courses.
KEY COMPETITORS Tata Motors Market Share: Commercial Vehicles 63.94%, Passenger Vehicles 16.45%[18] Tata Motors Limited is India's largest automobile company, with consolidated revenues of USD 14 billion in 2008-09. It is the leader in commercial vehicles and among the top three in passenger vehicles. Tata Motors has winning products in the compact, midsize car and utility vehicle segments. The company is the world's fourth largest truck manufacturer, and the world's second largest bus manufacturer with over 24,000 employees. Since first rolled out in 1954, Tata Motors as has produced and sold over 4 million vehicles in India. Tata Motors is the first company from India's engineering sector to be listed in the New York Stock Exchange (September 2004), has also emerged as an international automobile company. Through subsidiaries and associate companies, Tata Motors has operations in the United Kingdom, South Korea, Thailand and Spain. Among them is Jaguar Land Rover, a business comprising the two British brands which was acquired in 2008. In 2004, it acquired the Daewoo Commercial Vehicles Company, South Korea's second largest truck maker. The rechristened Tata Daewoo Commercial Vehicles Company has launched several new products in the Korean market, while also exporting these products to several international markets. Today two-thirds of heavy commercial vehicle exports out of South Korea are from Tata Daewoo. In 2005, Tata Motors acquired a 21% stake in Hispano Carrocera, a reputed Spanish bus and coach manufacturer, and subsequently the remaining stake in 2009. Hispano's presence is being expanded in other markets. In 2006, Tata Motors formed a joint venture with the Brazil-based Marcopolo, a global leader in bodybuilding for buses and coaches to manufacture fully built buses and coaches for India and select international markets. In 2006, Tata Motors entered into joint venture with Thonburi Automotive Assembly Plant Company of Thailand to manufacture and market the company's pickup vehicles in Thailand. The new plant of Tata Motors (Thailand) has begun production of the Xenon pickup truck, with the Xenon having been launched in Thailand in 2008. Tata Motors is also expanding its international footprint by franchises and joint ventures assembly operations in Kenya, Bangladesh, Ukraine, Russia, Senegal and South Africa.
With over 3,000 engineers and scientists, the company's Engineering Research Centre, established in 1966, has enabled pioneering technologies and products. The company today has R&D centres in Pune, Jamshedpur, Lucknow, Dharwad in India, and in South Korea, Spain, and the UK. It was Tata Motors, which developed the first indigenously developed Light Commercial Vehicle, India's first Sports Utility Vehicle and, in 1998, the Tata Indica, India's first fully indigenous passenger car. Within two years of launch, Tata Indica became India's largest selling car in its segment. In 2005, Tata Motors created a new segment by launching the Tata Ace, India's first indigenously developed mini-truck. In January 2008, Tata Motors unveiled its People's Car, the Tata Nano, a development which signifies a first for the global automobile industry. Nano brings the comfort and safety of a car within the reach of thousands of families. The standard version has been priced at USD 2,200 or Rs.100,000 (excluding VAT and transportation cost). The Tata Nano has been subsequently launched as planned, in India in March 2009.
Maruti Suzuki India Market Share: Passenger Vehicles 46.07% Maruti Suzuki India Limited, a subsidiary of Suzuki Motor Corporation of Japan, is India's largest passenger car company, accounting for over 45% of the domestic car market. The company offers a complete range of cars from entry level Maruti800 and Alto, to stylish hatchback Ritz, A star, Swift, Wagon-R, Estillo and sedans DZire, SX4 and Sports Utility vehicle Grand Vitara. Since inception in 1983, Maruti Suzuki India has produced and sold over 10 million vehicles in India and exported over 500,000 units to Europe and other countries. The company's revenue for the fiscal 2010-2011 stood over Rs 375,224 million and Profits After Tax at over Rs. 22,886 million. In the last fiscal year, passenger vehicle sales grew a modest 5% due to a steep increase in interest rates, high fuel prices and weak consumer sentiment. Growth was also impacted partly due to supply disruptions at Maruti Suzuki because of a workers? strike. Further, we saw a significant shift towards diesel engines as the government subsidises diesel but not petrol. As supply of diesel engines were constrained, consumers were willing to wait for up to six months for diesel variants than to buy the petrol variant off the shelf. In December 2011, 55% of cars sold in India had diesel engines compared with 25% a year ago. While the overall growth for car sales was subdued, the sales of companies that launched new models (and had diesel engine variants) still grew strongly. We expect similar trends to continue in FY13E. However, this year we expect Maruti Suzuki to grow ahead of the industry on the back of the success of its models/upgrades as well as higher availability of diesel engines. We expect car demand growth to bounce but still remain slow at 14% as consumer sentiment is weak and we are not expecting any sharp decline in the cost of ownership, which is still very high.
Hyundai Motor India Market Share: Passenger Vehicles 14.15% Hyundai Motor India Limited is a wholly owned subsidiary of world's fifth largest automobile company, Hyundai Motor Company, South Korea, and is the largest passenger car exporter. Hyundai Motor presently markets 49 variants of passenger cars across segments. These includes the Santro in the B segment, the i10, the premium hatchback i20 in the B+ segment, the Accent and the Verna in the C segment, the Sonata Transform in the E segment. Hyundai Motor, continuing its tradition of being the fastest growing passenger car manufacturer, registered total sales of 559,880 vehicles in the year 2009, an increase of 14.4% over 2008. In the domestic market it clocked a growth of 18.1% as compared to 2008 with 289,863 units, while overseas sales grew by 10.7%, with export of 270,017 units. Hyundai Motor currently exports cars to more than 110 countries across European Union, Africa, Middle East, Latin America and Asia. It has been the number one exporter of passenger car of the country for the sixth year in a row. In a little over a decade since Hyundai has been present in India, it has become the leading exporter of passenger cars with a market share of 66% of the total exports of passenger cars from India, making it a significant contributor to the Indian automobile industry. In 2009, in spite of a global slowdown, Hyundai Motor India's exports grew by 10.7%. In 2010 Hyundai plans to add 10 new markets with Australia being the latest entrant to the list. The first shipment to Australia is of 500 units of the i20 and the total i20 exports to Australia are expected to be in the region of 15,000 per annum.
Mahindra & Mahindra Market Share: Commercial Vehicles 10.01%, Passenger Vehicles 6.50%, Three Wheelers 1.31% Mahindra & Mahindra is mainly engaged in the Multi Utility Vehicle and Three Wheeler segments directly. The company competes in the Light Commercial Vehicle segment through its joint venture subsidiary Mahindra Navistar Automotives Limited and in the passenger car segment through another joint venture subsidiary Mahindra Renault. In the year 2009, on the domestic sales front, the Company along with its subsidiaries sold a total of 220,213 vehicles (including 44,533 three-wheelers, 8,603 Light Commercial Vehicles through Mahindra Navistar Automotives and 13,423 cars through Mahindra Renault), recording a growth of 0.6% over the previous year. The company's domestic Multi Utility Vehicle sales volumes increased by 3.3%, as against a decline of 7.4% for industry Multi Utility Vehicle sales. A record number of 153,653 Multi Utility Vehicles were sold in the domestic market in 2009 compared to 148,761 MUVs in the previous year. Hence, Mahindra & Mahindra further strengthened its domination of the domestic Multi Utility Vehicle subsegment during the year, increasing its market share to 57.2% over the previous year's market share of 51.3%. Mahindra & Mahindra is expanding its footprint in the overseas market. In 2009 the Xylo was launched in South Africa. The company formed a new joint venture Mahindra Automotive Australia Pty. Limited, to focus on the Australian Market.
Ashok Leyland Market Share: Commercial Vehicles 22% Against the backdrop of the sharp slump in demand for commercial vehicles, during 2008-09, Ashok Leyland registered sales of 47,118 medium and heavy commercial vehicles (M&HCV), 37.5% less than in the previous year. This includes 16,049 M&HCV buses and 31,069 M&HCV trucks respectively, 8.7% and 46.3% less than in the previous year. The company lost 1.8% market share in the Indian medium and heavy commercial vehicle market during the financial year 2008-09, mainly due to loss of sales in the truck segment. This was because the Eastern Region, where the Company's presence had been historically weak, was relatively stable, whilst the market declined sharply in other regions. While total industry volume of the medium and heavy duty buses declined by about 8.7%, the Company's market share grew marginally and Ashok Leyland retained its number one position in this segment. The Company sold 6,812 vehicles in the overseas markets during 2008-09. This represents a decrease of approximately 6.5% over the previous year. Total industry volume related to overseas markets to which the Company exports (such as Sri Lanka, the Middle East) witnessed a reduction of about 25% over the previous year. To combat the impact of decline in CV sales, the Company focused on noncyclical businesses in the portfolio. The Company produced in all 54,049 vehicles during the year. To contain costs and conserve cash, the Company worked only about 50% of the working days in all its manufacturing units during the second half of the year.
THE YEAR AHEAD – WHERE IS THE GROWTH? After two years of strong growth (26% CAGR), auto sales growth slowed to 12% in FY12. We expect a further slowdown in growth to 10% in FY13 due to slowing rural income growth, weak consumer sentiment and high cost of ownership (tax hikes, fuel prices). Given the government?s fiscal situation, we think a 5-10% hike in diesel prices is inevitable. This will delay the recovery in M&HCV sales, which have been impacted by the slowdown in mining and industrial activities. While we expect an interest rate cut in CY12, it won?t be enough to improve sentiment, in our view. In the year ahead, we expect: a) Slower economic growth. We are expecting domestic GDP growth to slow to 6.9% in FY13E, from 6.9% in FY12E and 8.4% in FY11. b) Auto lending rates will likely remain high. We believe any cut in policy rates will not immediately be passed onto consumers. c) Fuel price hikes due to soaring crude oil prices. d) Price increases by the OEMs to pass-on cost inflation and tax hikes. In FY13, we expect commercial vehicle sales to grow by 10% (down from 18% in FY12), with M&HCV growing at 5% and LCV growing by 14%. We expect sales of two-wheelers to grow by 10% (14% in FY12), driven by 6.5% growth forecast for motorcycles and 23% growth forecast for scooters. We expect passenger vehicle sales to grow the fastest, ie,: 15% (5% in FY12), driven by 14% expected growth in cars and 23% growth for utility vehicles and vans. We expect tractor growth to remain muted as farmers? are coming-off two successive crop seasons with low income.
CONCLUSION It may be mentioned that the Indian automotive industry holds significant scope for expansion, both in the domestic market, where the vehicle penetration level is on the lower side as compared to world average, and in the international market, where India could position itself as a manufacturing hub. The current level of share, viz., less than 5% of global production and less than 1% of global trade, also corroborates the potential for expansion in this industry. At the same time, it should be recognized that India?s exports of automobiles have largely been confined to few countries in Asia and Africa, and to a very limited extent in Latin America. Indian automobile companies are required to accelerate their momentum and increase their penetration among other countries in these regions. Similarly, the auto components industry in India, which is now known across the globe for its quality deliverables, should try and capitalize on the European and the US market either through the process of acquisitions of firms in these countries or simultaneously enhancing their quality and augmenting the number of outsourcing businesses from these regions. Indian auto component industry distinguishes itself with winning more number of Deming prizes and adopting global quality management procedures, and thereby have an edge over other emerging economies, like China and Thailand. Indian economy, which benefits from strong fundamentals and sound regulatory framework, is expected to grow at a consistent rate in 2012-2013; the economy may rebound once the global economy recovers, and the domestic automotive industry would simultaneously regain its growth momentum. In the interim period, the Indian automobile and component industry needs to look out for opportunities to cut cost, undertake value engineering and enhance disciplines into the system. The industry may also use the interim period to upgrade the skills of the employees and enhance the focus on market research, product development and customer interactions. An institutional mechanism, under public-private partnership model, may be needed to address such requirements of the industry in the years of downturn, with the industry having a lead role to play.
BIBLIOGRAPHY ? ? ? ? ? ? ? ? ? ? ? ?
www.bseindia.com www.googlefinance.com www.yahoofinance.com www.google.co.in www.moneycontrol.com www.worldfact.com www.idef.com www.rbi.org.in FDI statistic government of India India Central Statistical Organization Economic Times Business Standard
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