1.1 : The Beginning of New Era… With the invention of the wheel in 4000 BC, man’s journey on the road of mechanized transport had begun. Since then he continually sought to devise an automated, labor saving machine to replace the horse. Innumerable attempts reached conclusion in the early 1760s with the building of the first steam driven tractor by a French Captain, Nicolas Jacob Cugnot. It was however left to Karl Benz and Gottlieb Damlier to produce the first vehicles powered by the internal combustion engine in 1885. It was then that the petrol engine was introduced, which made the car a practical and safe proposition. Then onwards, it has been one big journey...on the roads 1
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1.1: The Beginning of New Era…
With the invention of the wheel in 4000 BC, man’s journey on the road of
mechanized transport had begun. Since then he continually sought to devise an
automated, labor saving machine to replace the horse. Innumerable attempts reached
conclusion in the early 1760s with the building of the first steam driven tractor by a
French Captain, Nicolas Jacob Cugnot. It was however left to Karl Benz and Gottlieb
Damlier to produce the first vehicles powered by the internal combustion engine in 1885.
It was then that the petrol engine was introduced, which made the car a practical and safe
proposition. Then onwards, it has been one big journey...on the roads
1.2: History of Automobile Industry
The automobile as we know it was not invented in a single day by a single inventor. The
history of the automobile reflects an evolution that took place worldwide. It is estimated
that over 100,000 patents created the modern automobile. However, we can point to the
many firsts that occurred along the way. Starting with the first theoretical plans for a
motor vehicle that had been drawn up by both Leonardo da Vinci and Isaac Newton.
In 1769, the very first self-propelled road vehicle was a military tractor invented by
French engineer and mechanic, Nicolas Joseph Cugnot (1725 - 1804). Cugnot used a
steam engine to power his vehicle, built under his instructions at the Paris Arsenal by
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mechanic Brezin. It was used by the French Army to haul artillery at a whopping speed
of 2 1/2 mph on only three wheels. The vehicle had to stop every ten to fifteen minutes to
build up steam power. The steam engine and boiler were separate from the rest of the
vehicle and placed in the front (see engraving above). The following year (1770), Cugnot
built a steam-powered tricycle that carried four passengers.
In 1771, Cugnot drove one of his road vehicles into a stone wall, making Cugnot
the first person to get into a motor vehicle accident. This was the beginning of bad luck
for the inventor. After one of Cugnot's patrons died and the other was exiled, the money
for Cugnot's road vehicle experiments ended.
Steam engines powered cars by burning fuel that heated water in a boiler, creating
steam that expanded and pushed pistons that turned the crankshaft, which then turned the
wheels. During the early history of self-propelled vehicles - both road and railroad
vehicles were being developed with steam engines. (Cugnot also designed two steam
locomotives with engines that never worked well.) Steam engines added so much weight
to a vehicle that they proved a poor design for road vehicles; however, steam engines
were very successfully used in locomotives. Historians, who accept that early steam-
powered road vehicles were automobiles, feel that Nicolas Cugnot was the inventor of
the first automobile.
The automotive industry has certain trends it has to follow, just like fashion
designers and musical composers. In times of recession and decreasing sales there is less
room to take chances and manufacturers are prone to follow the common pattern as a
safer bet rather than releasing a controversial product or idea that might or might not be
successful. However throughout the automotive industry's history, great innovators have
"boldly gone where no man has gone before" to set new trends which have dynamically
The demand for cars is dependent on a number of factors. The key variables are per
capita income, introduction of new models, availability & cost of car financing schemes,
price of cars, incidence of duties and taxes, depreciation norms, fuel cost and its
subsidization, public transport facilities etc. The first four factors viz, increase in per
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capita income, introduction of new models, availability & cost of car financing have
positive relationship with the demand whereas others have an inverse relationship with
demand for cars.
The demand for cars in the future can be estimated with the help of making use of macro
economic variables like growth in GDP, per capita income etc. or house hold penetration
technique. An attempt is made to estimate the potential demand for passenger cars based
on the household penetration level of passenger cars as explained in Annexure 4 of the
report.
The demand for cars in the future is expected to come predominantly from the
existing two-wheeler owners who will be upgrading to a four-wheeler, due to rising
income and necessity of car for personal transportation purposes. Therefore,
excluding the owners of mopeds, the potential demand for cars in the next fifteen to
twenty years can be taken as 50% of the existing two-wheeler population of around
28mn units.
But with the release of new models in the higher end of the economy segment, the supply
of second hand economy cars is expected to increase substantially, which will be costing
just about two times the price of premium range two-wheelers. This could affect the
demand for first hand/new cars. Also, with cross demand from utility vehicles,
availability of finance and other factors the above mentioned potential for cars will be
difficult to realize. Growth in the segment thus is expected to hover around 15-20%yoy.
The dominance of economy segment will continue in the future as it will provide large
volume to Indian car industry. This is because a majority of customers for cars will
graduate from two-wheelers. The demand for mid-sized and premium cars is expected
to rise as new models enter the market, income levels rise and present car owners
upgrading from the economy segment to higher end cars.
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Supply
The supply of cars in Indian industry till 1991 was dependent upon the production
capacity of individual players. The production of cars has increased from 42,475 units to
181,420 units from 1981 to 1991 respectively. The growth in production of cars has
varied in the last three decades from just 1% in 1970-80 to 21% in 1980-90 and above
15% in 1991- 96. The table below gives the production numbers of passenger cars in the
past few years.
Cars FY94 FY95 FY96 FY97 FY98 FY99 FY2000
Production 207,658 264,468 348,146 407,539 401,002 390,355 577,243
Growth
%yoy
27.2 27.4 31.6 17.1 (1.6) (2.7) 32.4
Source: SIAM
The major increase in production of cars in the 80's was due to the entry of MUL in 1983,
which helped increase car production by 20,000 to 30,000 cars per annum till the early
nineties.
With the entry of MUL, the face of the passenger car industry changed forever. Existing
producers who had operated in a protected, high margin environment faced the prospect
of not just diminishing market share, but a shift in focus from producing vehicles to
selling them. But MUL made use of the opportunity open to its technologically superior
product and increased its capacity from 100,000 cars in FY90 to 240,000 cars in FY96
and 350,000 cars in FY98.
The opening of economy in 1993, attracted world majors who joined hands with existing
auto majors, to start their operations at the earliest. The first ones to enter the field were
Mercedes Benz in joint venture with Telco to manufacture E220, E250D models, Peugeot
in JV with PAL to manufacture Peugeot 309L, Fiat in JV with PAL to manufacture Fiat
Uno.
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This has helped in increasing the number of models available to the customer from 8 to
30 and hence provided a wide choice to him. This has also helped in reducing the average
waiting period and premium on cars, which were a part and parcel of car cost in the
eighties.
Capacity
The present production capacities is detailed in the table below. This has increased from
an estimated 600,000 units in FY98 to the present 727,000 units in FY2000.
Car Capacity FY2000 Expected
Maruti Udyog 250,000 350,000
Hyundai 110,000 130,000
Telco 100,000 150,000
Daewoo 72,000 130,000
Ford India 50,000 70,000
Fiat India 60,000 60,000
General Motors 25,000 100,000
Honda Siel 30,000 30,000
Hindustan Motors 30,000 50,000
Total 727,000 1,070,000
Thus, capacity utilization in FY2000 stands at 79.4%. This is still better than utilization
levels the world over which stands at around 40%. Production capacities are expected to
increase in the next two years as players introduce new models. The major increase in
supply, as was witnessed in FY2000, will be in the mid-size and luxury segment. The
supply in the future, taking into account the plans announced by the car majors are
expected to grow to 1,070,000 cars by 2002.
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The segment which has seen a number of new entrants in the recent past will see two new
models from the stable of Maruti namely the 'Alto', which will be available in the 800cc
and 1000cc configuration. However, industry sources have indicated that after the hectic
action of the past two years, this segment will slowly witness some stability in terms of
sales volumes and prices. The entry of new players is expected to create a marketing
warfare in the car industry. A start has already been made by sharp reduction in prices of
Daewoo 'Cielo' and Maruti 800. Lately, the price of Wagon R was also lowered by MUL
to face the intensifying competition. However, with manufacturers having to comply with
Euro emission norms, car manufacturers have sold their products at lowered margins.
This is expected to affect their ability to reduce prices in the future.
Increased support through finance from auto manufacturers was quite evident in FY2000.
This has and will in the future induce existing owners of cars to go for technologically
superior products in the same segment leading to sharp drop in prices of second-hand
cars. This will also create a platform for upgradation of existing two-wheeler owners to
four-wheelers.
The luxury segment will see more new entrants namely Toyota of Japan, Skoda of Czech
Republic and Proton of Malaysia in the years to come. Recently, companies like MUL,
GM and Hindustan Motors have come out with new models to cover the present gap in
the segment. Therefore, the customer will be having a wider choice to choose depending
on his specific needs
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Indian Automobile Industry
An Indian car as one which has been conceived and designed in India, has at least
85% of its components 'Made in India', by an Indian company. The Indian passenger car
industry as we see today is relatively recent in origins. Except the ubiquitous Ambassador
and the Premier Padmini there was not much moving around with an Indian tag.
The official mascot of the Indian political system, the Triassic-era Ambassador
has little Indian-ness in it. To start with, the name isn't Indian and that's only the tip of the
iceberg. The design came from Morris Motors and the present petrol power plant and
drive train are Isuzu throwaways. The diesel version has a BMC engine. Of course
everything is made in India now, but do you call a tree your own if its roots are in
someone’s courtyard.
The other pre-Cambrian relic, the Premier Padmini, which till a few months back
was adorning showrooms throughout the country. Its in the market since my grandpa
learnt driving and at the time of its going to grave, the Padmini was a completely made in
India product. But again, there's very little Indian-ness about the car, except maybe the
name Padmini. The entry of Maruti Udyog Ltd, a GoI JV with Suzuki of Japan, in 1983
with a so-called "peoples" car and a more favorable policy framework resulted in a
growth rate of 18.6% in car sales from FY81-FY90. After witnessing a downturn from
FY90 to FY93, car sales bounced back to register 17% growth rate till FY97. Since then,
the economy slumped into recession and this affected the growth of the automobile
industry as a whole. As a result car sales remained almost stagnant in the period between
FY97 and FY99. However, with the revival in the economy, FY2000 turned out to be a
significant year for the industry in which it recorded volume sales of 638,815 units as
against 409,951 units in the previous year. Thus, the CAGR for the period FY96 -
FY2000 stands at 16.6%.
The present day stunner from HM is the Lancer. As with HM products from the
past, the Lancer is a borrowed from abroad product. The saving grace is only that this
Lancer is a contemporary model and not some. The erstwhile Premier Auto Ltd. no
longer exists. The nearest thing to it in the present is Ind Auto Ltd. Ind is an acronym for
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India or Indian, but the products are all borrowed from Italy. The Uno came to India after
the Mafiosi had their fill with it. The Siena is a very contemporary model. It being a good
car and all, but I always wonder why Fiat doesn't launch it in their motherland. What's
this 'special' car for India, Brazil, Africa, Latin America inc.
Ford did take the pains to design an India specific car, the Ikon. So does the quest
for an Indian car end with the Ikon. No I don't think so. First thing, the company is
American. Secondly, the Ikon's platform is that of the Fiesta, nothing else. So the only
thing Indian about the car is the 'Josh' advertising gimmick.
Starting with the official one, i.e. Maruti, the company, since its inception has
changed the automobile scene in India completely. It's has been the number one
manufacturer, churning out close to 300,000 cars last year. At last count it held a 64%
market share in the passenger car market with four out of every five cars . on Indian roads
being Marutis. Every year it rakes in multi-billion rupee profits, and, yet the company is
nothing more than Suzuki India Ltd.
Telco is a completely Indian carmaker with no major foreign collaborations. Their
Indica was much touted as 'The Indian car', but it was styled by I.D.E.A of Italy. The
engine technology had inputs from 'Moteur Modern' of France. In effect it was the case of
an Italian body being wrapped around Indian mechanicals. Frankly I would have
preferred an Indian body wrapping an Indian platform.
India is also the largest manufacturer of agricultural tractors, motor scooters and
the world's fifth largest commercial vehicle manufacturer. Each of these sectors
experienced rapid growth during the last three years Demand in these sectors is driven
by industrial, individual and agricultural consumers respectively. The increases have
resulted from improved overall economic trends in India including large doses of foreign
investment a more liberalized economy and higher productivity.
The fortune of the Auto component industry is inextricably linked with that of the
automobile industry which in turn is influenced by the general economic trends of the
country the country's economic growth is projected to grow at more than six percent per
annum in the coming years. The estimated growth will automatically emphasize the need
for better transport infrastructure facilities. This means demand for automobiles and
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hence for auto components, is bound to grow accordingly. Therefore, good growth
prospects are assured for the automobile industry.
World-wide, cars are segmented on the basis of their size. However, in India, price is
the main factor determining the choice of car. Hence, cars are segmented on the basis of
price into three segments :
Segment Price Range (Rs. ‘000)
Main ModelsFeatures of the segment
Approximate Market Share of the Segment
Economy < 250M-800, Omni, Uno, Ambassador
Price, Fuel Efficiency
46.9%
Medium 250-500
Zen, Uno, 118-NE,Ambassador 1800 ISZ, Contessa, Indica, Santro, Matiz
Price, Performance, Diesel Option
43.1%
Premium500 & above
Lancer, Esteem, Cielo, Accent, City, Opel Astra, Ikon
Status Value, Performance, Features.
10.1%
Sources : various sources
Absence of adequate mass transportation system and rising income levels have resulted in
personal vehicles becoming an important mode of transportation in the urban and semi-
urban areas. By international standards however, the Indian car volumes remain small at
just over 1% of the world market with penetration rates of approximately 3.7 cars per
thousand people as against 24 in Thailand, 144 in Malaysia, 204 in Poland and 90 in
Brazil. Cars currently constitute approximately 12% of the total stock of personal
vehicles in India.
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Rising household income, increased urbanisation, introduction of new models and
availability of cost effective finance are the key demand drivers in the industry. The
premium segment cars are mainly targeted at corporates or businessmen and are usually
bought on consumer finance.
The midsize segment witnessed an increase of around 115% in sales volume during the
period April 1999-March 2000. Currently the economy, medium and premium segments
constitute 46.9%, 43.1% and 10.1% respectively of the market.
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4.2: Automobile Industry Performance during 2003 – 04
During the year 2003-04 the automobile industry has registered a growth of around 16.5
per cent in numbers and 24 per cent in value terms. Passenger cars saw a 35 per cent
growth in FY04 over the previous fiscal while medium and heavy commercial vehicles
witnessed a 46 per cent growth.
Segment-wise Performance
Passenger Vehicles
The excise duty reduction on passenger vehicles given in the union budget 2003-04 has
directly impacted the sales of passenger vehicles positively as it has reduced the
acquisition cost to the customer. The cumulative passenger vehicle sales in the domestic
market in April-March 2003-04 have grown by over 27% over the same period last year.
However, this is against relatively low and negative growth rates in the previous years.
Within the passenger vehicle segment, while passenger cars and utility vehicles have
grown at a brisk pace of 28.6% and 27.6% respectively, MPVs have grown at a lower
rate of around 14.5%. However, the growth of MPVs this year is significant as it was (-)
15.7% in the last year.
Passenger Cars & MUV’s Annual Production
FY 2003 TO 2004 in Nos
MUV -16%;
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CARS – 84%
Passenger Cars Sales Segment-Wise Market
Distribution FY 2002 TO 2003 in Nos
Upper C 3% 3%
Misc 3%
Lower C 10%
Luxury D 2%
A Seg 32%32%%
Upper B 16%%
Lower B 34%
Commercial Vehicles
The performance of the commercial vehicle segment during the course of the year was
very satisfying. It has clocked over 30% growth rate in consecutive years. The growth
rate of all commercial vehicles during the year 2003-04 grew by 36.5%. M&HCV
segment has grown by 39.5% whereas LCVs grew by 32%.
With improved economic performance especially in the agricultural sector besides
expansion of the national highways and expressways, we are also witnessing fleet
rationalisation in the country. This has also led to increased penetration of multi-axle
vehicles on our roads. During the year 1998-99 sale of Multi axle vehicles was 4539.
Whereas, in the year 2003-04, 59251 multi-axle vehicles were sold. In percentage terms
an increase of 67% per annum over a five year period. The share of multi-axle vehicles
during the same period has gone up from hardly 5% to around 40%.
Commercial Vehicles Annual Production
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FY 2002 TO 2003 in Nos
BUSES 10%
LCV 41%
TRUCKS 49%
Exports
The performance of the automobile industry in exports is also encouraging. Passenger
vehicle exports have crossed the hundred thousand mark and clocked sales of around
1,30,000 and two & three wheelers have crossed three hundred thousand mark for the
first time clocking around 3,33,000. Commercial vehicle exports have also increased to
an all time high of over 17,000. In percentage terms the growth during the year over the
previous year have been almost 80% for passenger vehicles, over 49% for two & three
wheelers and over 40% for commercial vehicles.
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4.3: Indian Automobile Market
The Indian market confounds global carmakers simply because of the way it is
segmented. In the West, automobiles are generally segmented according to platforms --
that is chassis-engine combinations. Price plays a factor but only up to a point. In India,
though, price plays the primary role in segmentation.
Consider first the segments in the European or American market. At the bottom,
you have city cars' -- which include the Daewoo Matiz, the Hyundai Santro, the Maruti
800, Alto, Fiat Uno, the Zen as well as the Wagon R. Next come the budget minis --
which would include cars like the Suzuki Swift (our own Esteem). The next segment, the
superminis, would take in cars like the Opel Corsa, the Ford Ikon. Above the superminis
are small family cars -- which include models like the Opel Astra and the Ford Escort.
Medium-sized family cars are bigger and include cars like the Opel Vectra and Peugeot
406. Compact executive cars are small but immensely prestigious and include the BMW
3 series and the Mercedes C class. Executive cars embrace their bigger brothers -- the
BMW 5 series and the Mercedes E class. Only a handful of cars are classified as true-
blue luxury cars namely-- Jaguar XJ8, the BMW 7 series. And of course there are the
niches like sports, sports utility, and exotics.
The Indian market, of course, is quite differently segmented. The Maruti 800 and
Zen fall in a class by their own -- and are referred to as the sub-Rs 2.5-lakh cars. The next
is the Rs 3-4 lakh segment -- which includes all the other cars that would normally be
classified as city cars in Europe. Strictly speaking, the Tata Indica should fall in the
super-mini category because of its specifications -- but because of price, it competes in
the same segment. Above Rs 4 lakh and all the way up to Rs 10 lakh is the luxury car
range. It is loosely divided into two halves -- with Maruti Esteem, Ford Ikon, Hyundai
Accent, Daewoo Cielo, Opel Corsa and Honda City 1.3 falling in the bottom layer, and
the Opel Astra, Honda City 1.5 and Ford Escort in the upper range. The last segment is of
premium car segment, which includes cars like Mercedes Benz and BMW.
Scooters India Ltd (SIL), US-based Amerigon and Bangalore-based Maini Group
are negotiating a joint venture to manufacture an electrical passenger car. Priced at Rs
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1.75 lakhs, the car will target the segment between two-wheelers and petrol/diesel based
cars. Assembly from imported Completely Knocked Down (CKD) kits will start as soon
as an agreement is finalised among the partners. This venture represents a major
manufacturing shift for SIL, a public sector enterprise, which so far has only produced
two- and three-wheelers. It also plans to introduce an electric three-wheeler model,
already in use in Nepal, into the Indian market.
Bajaj Auto has introduced its diesel three-wheeler in Hyderabad. The vehicle has
a 416 cc engine and is priced at Rs 83,000, lower than its nearest competitor the Greaves
Garuda, which is priced at Rs 85,000 (in Hyderabad). Bajaj’s petrol three-wheelers
already account for 85 per cent of the India market. Its new product, consequentially,
could erode its own base.
Indian Automobile industry has become more competitive in the export market
due to its technological and quality advances, so much so that in quality conscious
markets such as Europe and America, Indian automobile industry is emerging as a major
player judging by its performance. India today exports: Engine and engine parts,
electrical parts, drive transmission & steering pats, suspension & braking parts among
others.
5.1: Strengths of the Automobile Industry
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Low labor cost:
India enjoys a comparative cost advantage in labour as compared
to western countries.
Skilled Manpower:
India has vast pool of skilled manpower and qualified
engineers among the largest in the world.
On a scale of 1-10, 1 = low, 10 = high.
Availability of Skilled labour.
Sr No Country Points.
1 India 8.5
2 Brazil 7.5
3 US 7.4
4 Germany 6.6
5 Mexico 6.6
Availability of Qualified Engineers.
Sr No Country Points.
1 Germany 7.5
2 India 7.4
3 US 7.2
4 Brazil 6.4
5 Mexico 6.3
Reference: Competitiveness of Indian automotive industry Feb 2004.
5.2: Weaknesses of the Automobile Industry
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Low labor productivity:
Cost advantage in labor wages is nullified by the fact that we have lower labor
productivity.
Defect rates high:
We have a higher defect rate about 10 times the world average.
Low Investment in R & D:
The Industry has a very low investment in R & D as compared to their foreign
counterparts which will their sustainability in the future.
Not reached critical mass:
Indian companies are in nascent stage and hence not able to cater to the
requirements of OEM’s. Our auto- ancillary industry is of 2.4 bn $ while Ford’s
outsourcing budget is 86 bn $.
Poor infrastructure :
Poor infrastructure like roads, ports, railways which lead to
higher logistics cost and lower reliability.
5.3: Opportunities for the Automobile Industry
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Global automobile companies are setting up manufacturing facilities in India.
Also, many Indian automobile manufacturers have announced their plans to increase the
export of vehicles from India. The year 2002-03 has already seen a significant 65%
increase in export volumes during the period April to March. This trend is expected to
continue with more global OEMs sourcing vehicles from their Indian plants.
Additionally, the introduction of newer technologies such as Electronic Diesel
Control Systems to reduce emission levels, safety devices such as Air Bags, Anti-lock
Braking Systems, etc. augur well for the Company and the automotive sector as a whole.
These technologies not only offer increased safety for drivers and passengers, but also
result in greater comfort and better drivability.
While there exist many opportunities for growth in business, there are also quite a
few factors, which act as an impediment.
In my last year’s speech I mentioned about the need for a well thought out and
clearly defined policy on emission norms. It is now fairly certain that Bharat Stage II
norms (equivalent of Euro II norms) will be implemented countrywide starting 2005. It is
important that this plan is implemented in time in the interest of a cleaner environment.
Technology is available to meet the advanced emission norms using gasoline and diesel
fuel; Bosch and many other companies have proved this worldwide. There is no need for
the authorities to specify the type of technical solution required for this purpose as long
as the end objectives are met.
The spurious and reconditioned goods market, which I also dealt with in detail in
my speech last year, continues to be a worrying factor as it directly affects our market
share. The Company on its part has intensified the anti-spurious operations by conducting
several raids across the country with the help of local regulatory authorities. Large
quantities of spurious and fake products have been seized and legal action has been taken
against those indulging in such activities. The Company believes that continued focus
and concerted action against spurious activities would improve safety and fuel efficiency
of the vehicles and at the same time help in expanding our market share in the
Aftermarket. The Company is also continuously educating the users about the benefits of
using genuine spares in place of spurious and reconditioned spares.
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The lack of any significant change in the labor law reforms also continues to be a
matter of concern. It is essential that legal reforms be put in place at the earliest to
provide more flexibility in manufacturing operations and enable the industry to quickly
adjust the work force in line with fluctuating market conditions.
5.4: Challenges for the Indian automobile industry
As we move into the new millennium, the Indian Automobile Industry faces some
tremendous opportunities and also great challenges. The growth in automobile sales has
been impressive for the past ten years since liberalization began. However, with
liberalization, the Indian customer has been presented with a wide range of choices in
automobiles, to suit every requirement and budget. The market has turned into a buyers
market where the customer is being wooed by the manufacturers and the dealers with a
range of freebies unheard of before in India. Financing has become so easy that an
automobile is within every aspirant's reach.
Competition has meant that manufacturers' margins have been squeezed severely
and they are all under pressure to cut costs to be profitable and competitive. Some of the
older manufacturers like Premier Automobiles (manufacturers of Premier cars),
Automobile products of India (manufacturers of Lambretta scooters) and Ideal Jawa
(manufacturers of Jawa and Yezdi motorcycles) have closed shop. Hindustan Motors
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(manufacturers of Ambassador and Contessa cars) is in trouble due to the declining sales
of its car’s, as most customers prefer the newer models available in the market. Even the
dominant player Maruti has seen its market share decline rapidly due to its models being
old and jaded and is in addition facing labour problems in its plant.
To add to the problems, come April 2001, under the WTO agreement, India will
have to permit import of fully built automobiles, which hitherto was not permitted. The
foreign manufacturers such as GM, Ford and Daimler Chrysler will almost certainly
import vehicles from their large portfolio of models and makes, further segmenting the
market into niches, although how competitive they are in terms of price remains to be
seen.
The challenge before the industry is to figure out the strategy for survival and
growth. It is clear from the picture painted above that the industry will have to increase
volumes in each segment to achieve lower cost of manufacture. One way to achieve this
will be to go for exports in a big way. Maruti is already exporting vehicles, as are
Mahindra, Telco, Daimler Chrysler and more recently Daewoo. The overseas markets
will have to be exploited more aggressively, but this will mean the companies will have
to invest more in Research and Development of new models with better features.
The second opportunity is to become contract manufacturers for overseas
companies. A number of Japanese and Korean companies have been following this
strategy very successfully. Hindustan Motors is said to be considering this option. The
third opportunity is to overcome the vulnerability of the automobile market to oil prices
by designing vehicles, which can offer lower fuel consumption. Recent reports suggest
the government is exploring the possibility of introducing Gasohol, which is a mixture of
Petrol and Alcohol. Gasohol has been very successful in Brazil. Since Alcohol is a by-
product of the Sugar industry (of which India has the worlds largest), this is a very logical
step that should have been taken many years ago. Even a small percentage reduction in
the consumption of petroleum per vehicle can make a big difference to the balance of
payments.
The industry must focus its R&D efforts in line with the global trends, which is to
build vehicles that are considerably more fuel efficient and less polluting. With growing
awareness among the public about pollution and the effective campaigns carried out by
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the NGO's, this will increasingly become an important selling feature. It was surprising to
see how the industry kept stalling the introduction of pollution norms for vehicles on the
pretext that they needed more time to get the technology. Even Maruti despite its foreign
affiliation was caught off guard when the Supreme Court finally ruled that all new
vehicles should strictly adhere to the Euro II norms.
The inadequacy of road infrastructure in India is well known. This is compounded
by the fact that traffic management is very poor or non-existent and the drivers are mostly
ill trained and in disciplined. As more vehicles come on the road, this will become a
major bottleneck. The industry will need take initiatives firstly to train all drivers in safe
driving and proper road discipline and manners. They will also need to assist government
agencies in better road design and in building of multilevel parking lots. Training of
police personnel in better traffic management and advising them on better equipping
themselves to deal with various problems will also have to be done.
In terms of the world averages, India's vehicle density is very low and if we have
to achieve those density levels, the industry can look forward to a bright future. However
in the industry's interest care must be taken to see that we also achieve the safety and
convenience levels of using automobiles.
The Challenges
External Level :
Integrating into Global Supply Chains
WTO – Multilateral trade regimes
FTA’s (i.e. Bi-lateral Trade)
Country Level :
Infrastructure
Cascading effect of Taxes
Cost of Capital
Cost of Power
Inflexible labor laws Inflexible labor laws
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Firm Level :
Export as a “mind set
QCDDM – equation taken for granted
Logistics
Warranties & Liabilities
Challenges for CEO’s
Dilemma of Investment
Addressing fast Global Business Environment
Changing mind set of teams
Developing & Employing people with “right “right skills” skills
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5.5: Appropriate Strategies – the key to success:
Government :
Flexible Labor laws : Stringent labor laws in India are hindering the over alldevelopment of the Industry. Changing these archaic laws will help in attractinginvestment and lead to expansion of the industry.
Cutting down R.M cost: Government should reduce import duty and taxes on raw materials for auto ancillary industry which will bring down their raw material cost to counter Chinese threat.
Corpus for R& D & expansion: Since most of auto ancillary companies are up coming their range of operation is limited to a few products. In order to encourage these companies to venture into new product categories Government should allocate Soft loans.
Auto expo zones: On lines on software technology parks, govt. should establish export zones of auto-ancillary industries, equipping them with infrastructure & offering them tax sops or holidays.
Research center:Government should establish a research center dedicated to automobile researchcalled “Indian institute of automobile research” which can work with autoindustry to develop cutting edge technology.
Industry :
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Marketing and Advertising in potential markets:
ACMA in collaboration with CII or FICCI should organize Trade fairs showcasing
Indian Auto ancillary industry both in India and abroad.
Acquiring Auto ancillary companies in potential markets:
Acquiring companies in overseas market gives a direct entry in that market to
Indian companies. For e.g. Bharat Forge acquired one of the largest forging companies in
Germany, Carl Dan Peddinghaus GmbH (CDP).
Moving up the value chain:
Automobiles companies are going for aggregate buying, hence company should try
to acquire tier I status and ultimately target OEM status.
Leveraging Software skills
Culture change:
Auto ancillary industry should adopt concepts like six sigma rather than continuing
with post Morton analysis.
R & D spending:
Industry should target at allocating at least 5 % of their revenues on R & D
expenditures for achieving cutting edge in technology.
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6.1: Competitive Scenario
The industry witnessed radical changes and entered a competitive phase with de-licensing
and liberalization in the 1990s. The two major developments during this period were a
strong growth in volumes between 1993 and 1997 and the entry of international car giants
into India, especially in the mid car segment. The attraction for these companies was the
largely untapped Indian market. However, these companies over-estimated the market in
the short term and set up larger than required capacities. This resulted in price wars and
thereby affected the expected margins.
The global automotive industry is currently undergoing consolidation phase and the
repercussions of this consolidation are likely to be experienced in India, too. The installed
capacity for passenger car production in India is likely to reach around 1.8mn by end-
2004, but the total passenger car sales is expected to be around 0.9mn. This explains an
over-capacity of around 50% as compared to the global over-capacity of around 30%.
The consolidation of the automotive vehicle industry is likely to have serious
implications on the automotive component industry too.
Most of the foreign companies entered India using the joint venture/collaboration route.
While many of these conglomerates have turned out to be mutually beneficial few tie-ups
weren’t as successful. For example, Mahindra & Mahindra pulled out of car joint venture
with Ford, General Motors bought over the stake of Hindustan Motors in its Indian car
venture. Mercedes Benz has decided to operate independently after suffering severe
losses with Indian partner Telco. Indian players are trying to maintain their hold on the
Indian market, not giving in to multinationals. But the very fact of Indian company’s
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reliance on foreign partners for technology is likely to drive the trend of collaborations
followed by consolidations.
Foreign companies are now all over the Indian market. There is a need for a level playing
field to bolster Indian auto industry.It is already a level playing field for companies
setting up shop in India. Even in the case of imports, entry barriers in commercial vehicle
industry are among the lowest, with tariff at half that of cars. However, on the global
plane, things are different. Though the Indian industry, in the last few years especially,
has gained considerably in internal efficiencies, in terms of external factors such as cost
of finance, infrastructure and labour legislation, we have a long way to go for parity with
the developed world
Competition is heating up in the sector with a host of new players coming in and
others like Porshe, Bentley, Audi, BMW all set to venture in the Indian markets. We take
a look at the key factors that are vital for gaining a stronghold in such a competitive
scenario.
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6.2: Competitive Edge
Manpower
The trends clearly indicate a huge opportunity for Indian manufacturers due to: Low cost advantage primarily on account of vast availability of low cost-
high skilled manpower Average wage rates are 8$ per hour as compared to 20$ in the developed
markets.
Highly Competitive at Lower Scales
Indian Auto Companies are highly cost competitive even at lower volumes due to:
Appropriate levels of automation Low cost automation Autonomation
High Quality & Productivity Indian Auto Companies have achieved a High level of Productivity by embracing Japanese Concepts and Best Practices:
TQM T P M Toyota Production Systems
In fact cost productivity is our key differentiator viz-a-viz competition fromother low cost economies.
Just-In-Time Delivery & Logistics
Indian Auto Companies have proven capability to supply on JIT basis out of Warehouses situated near the Customers
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Most Indian companies have arrangements with major Logistic Providers for JIT Supplies.
Adequate Warehousing support and onsite Engineering support
7.1: Global Scenario
The passenger car segment has emerged as a major driving force for upstream industries
like steel, iron, aluminum, rubber, plastics, glass, and electronics and down stream
industries like advertising and marketing, transport and insurance. The car industry
generates large amount of employment opportunities in the economy. For example in the
US, every sixth worker is involved in the making of an automobile.
The global automotive car market is growing at a rate of only 2 percent per annum and is
not expected to pick up in the near term. Growth has dropped due to the increasing levels
of saturation in the larger car markets of the world. Worldwide the trend is towards
ensuring that one's products are superior in terms of quality. This will enhance the useful
life of cars and, hence, slow down growth in sales.The world car production has
increased from 44.66 mn in 1996 to an estimated 48.3 mn cars in 1999. Japan, Canada
and USA brought about the major increases, which contribute to 53% of the world's car
production. The largest car market - the US market expects car sales to decline 8 to 9 per
cent to 16 million cars in 2001, as compared to 17.4 million cars sold in 2000.
The USA and Japan are the leaders with around 42% of the total world market. However,
since the last two to three years, the international passenger car industry has been
witnessing an over capacity of more than 30%. The trend suggests that industry volumes
may grow by just 2% or around 10 mn vehicles per year. If this situation continues for the
next few years the world car market may witness shakeout in the near future. Already
signs towards this are being observed as the phenomenon of mergers catches on. The
recent mergers in the international car market are Ford-Volvo, Renault-Nissan, Daimler-
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Chrysler. A few more players are expected to join the fray in the next few years so as to
strengthen their hold in the world market. Among the top car manufacturing companies
General Motors and Ford Motors group of USA lead with a contribution of 15.8% and
11.6%, of world car production, respectively. Volkswagen and Toyota stand third and
fourth with more than 9% contribution each to the world car production.
The global domination of the larger automotive manufacturers is slowly on the wane and
the trend in sales is shifting towards more "regio-centric" products. Automakers that have
been enjoying a generally prosperous spell would have to rethink on the way vehicles are
designed, manufactured, distributed or sold. Already, players like General Motors
Volkswagen and Toyota have begun to re-examine their dealer relationships and pricing
strategies. Car makers would now have to think in terms of a new customer focus and
provide better financing and servicing. Strategic tie-ups, mergers and acquisitions have
become the talk of the day. A few instances are Daimler Benz's tie-up with Chrysler of
the US, Ford's acquiring of Daewoo and tie up with Volvo Car Corporation and Renault
acquiring a stake in Nissan. Such deals will certainly lead to economy in terms of costs
but it remains to be seen whether they will also create significant new opportunities for
growth.
With global consolidation in the car industry, it is expected that more international
players will work closely to bring about operational efficiencies. By nature, the car
industry is highly capital-intensive and vast amounts of money are being spent on R&D.
With the players getting together to produce more technologically superior cars, they can
derive greater benefits from their R&D efforts. Profits, which are under pressure due to
wafer thin margins will be boosted due to greater economies of scale. Moreover, bigger
capacities among players means lesser fixed costs per car produced. Even if mergers are
not on the cards in the near future (one can see that the Daimler-Chrysler merger has not
brought about synergies as expected by automobile experts), technology-sharing and the
offering of equity stakes is inevitable.
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In India, the car market has become extremely competitive and come April 2001, India's
automobile market will be thrown open to imports of completely built up vehicles, which
hitherto was prohibited. With the international acquisitions and alliances, one can expect
to see a dramatic change in the auto market. If GM were to acquire Daewoo in Korea,
then GM would be in a commanding position in India with its alliance with FIAT and
Suzuki motors as well. Already Daimler Chrysler and Ford are contemplating introducing
new models in India from their various associate companies through their local
subsidiaries. The situation could become very difficult for the purely Indian automakers
such as Telco, Mahindra and Hindustan Motors unless they rethink their strategy. It can
easily be seen why TELCO has been in the news on rumors that it wants to hive off its
car division and bring in an overseas partner. Reports suggest that HM is thinking of
exporting parts from its manufacturing units and also assembling and distributing other
makes of vehicles who may wish to enter into India, but cannot enter full scale
manufacture due to the small market sizes.
Clearly exports will be the big opportunity for Indian automobile companies if they can
control costs and deliver good quality output. Already Maruti, Hyundai and Ford as well
as Mercedes Benz have started exports in a small way and this can grow. Majors like
TELCO and Ashok Leyland are already exporting their products in reasonable volumes.
Availability of easy financing options has been a major reason for the dramatic growth
the automobile market has witnessed in recent times. Maruti has set up a separate
financing unit in association with banks. GM has one of the largest financing companies
in the US and can easily bring them into India should it so decide. Clearly the customer is
in for some good times with a wide range of models to choose from, better quality and
prices and easy financing options - a far cry indeed from the days when one had to book a
Premier car and wait for years after paying an advance.
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7.2: Key Driver – Global Business
Step 1 : CKD/SKD Assembly
Step 2 : Localisation
Step 3 : Future already on horizon
- Natural follow-thru is global sourcing.
Most Global OEMs have Indian operations with global platforms and world cars.