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Indian Automotive Industry - Transformation from Oligopoly to Monopolistic Market
• Strategic Interaction - Reaction to competitor’s pricing and marketing strategies
• Product can be homogenous or differentiated
• Considerable barrier to entry for new firms
What is Oligopoly market? (contd..)
• Possibility of Collusion, leading to illegal price setting
• On the other hand, if no collusion, possibility of fierce competition among the few firms
What is Monopolistic market?
• Market structure characterized by many firms
• Product differentiation allows a Range of prices
• Monopoly over a small range of price
• Barriers to entry and exit very minor
• Branding, advertising and personal selling to differentiate the product
Earlier Indian Automobile Industry – The Oligopoly Market
• A few facts:
First car ran on India’s roads in 1897
Till 1930, Cars were imported in India
Indian automobile firms started forming in 1940s
The Indian Car Industry Oligopoly
• Hindustan Motors – the first Indian Car company to start production in India - founded in 1942 by Mr. B.M. Birla; Ambassador – The flagship car
• Establishment of other car manufacturing companies like Premier Automobiles(1944); Premier Padmini – The flagship car, now also used for cab services
Reasons for the Oligopoly structure
• Post 1947, Government of India and private sector launched efforts to create Automotive components manufacturing industry
• Slow growth in 1950s and 1960s; Reason: License Raj, Nationalization, Socialistic approach, MRTP Act
• The Industries (Development and Regulation) Act passed in 1951 to implement Industrial Policy Resolution of 1948 – one of the reasons for closed market
• The Act empowered Government to prescribe Prices, Methods, Volume of Production, Channels of Distribution
Reasons for the Oligopoly structure (contd..)
• License Raj – Upto 80 government agencies to be satisfied before private companies could produce something and, if granted, the government would regulate production
• MRTP Act – To control Monopolies and Monopolistic trade policies
• 1970s – Fair Growth but mainly towards Tractors, Commercial vehicles and Scooters
Impact of Oligopoly structure and License Raj
• Impact on Automobile industry – Growth very slow because of Low Demand and Low Economic Status of the country
• Government restrictions provided no motivation or incentive for firms to do technological upgradation.
• Supply was low and there weren’t many competitors
• Impact on Consumers –Consumers did not have many choices; the Demand was fairly low as Cars were still a Luxury and availability of same models
The Causes of Transformation – The First Big Step
• Sanjay Gandhi owned Maruti Technical Services Limited which was liquidated
• After his death, Indira Gandhi government collaborated with Suzuki Motors, a Japanese firm, for collaboration – Formation of Maruti Udyog Limited and renamed later Maruti Suzuki in 2007
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The Causes of Transformation
• Policy changes introduced in 2 doses:1. Partial de-regulation in 1985 – eased licensing requirements, allowed
selective capacity-expansion, partial relaxation of controls with regard to foreign collaboration, imports.
However, trade and investment regulations continued, constraining growth of big business houses.
2. 1991 policy changes – Dispensed with bulk controls and regulations
• Partial de-regulation allowed technology inflow into India
The Causes of Transformation (contd..)
• New Industrial Policy in July 1991 by Congress Government led by Mr. Narsimha Rao:
It unshackled Indian Industrial economy from cobwebs of unnecessary bureaucratic control
It introduced Liberalization policies – Abolishment of License Raj
• April 1993 – Government removed motor cars from list of industries reserved for compulsory licensing
Effects of the Transformation
• New firms, including foreign players, entered with modern engineering, efficient processes and modern shop-floor layouts
• Indian automobile industry grew at 14.31% per annum in post-1991 era compared to 8.56% per annum during 1985-91
• Delicencing of sector attracted many major Global OEMs (GM, Ford, Honda, Hyundai etc.) to start assembly in India
A few Government Initiatives..
• Finance Bill 2006 – reduction of excise duty on small motor vehicles, reduction in duty of raw materials from 10% to in-between 5%-7.5% - Infrastructure boost
• Extension of 150% weighted tax deduction on R&D expenditure – increase in budgetary allocation towards R&D
• Allowing automatic approval for foreign equity investment upto 100%, with no minimum investment criteria
More Favorable Factors
• NATRIP (National Automotive Testing and R&D Infrastructure Project) – The most critical intervention by the Government in the automotive sector
• Growth in Urbanization – currently 4th largest economy by PPP index
• Demand for small and compact cars by highly discerning, educated, well-informed Indian customers
• Easy Auto Finances attract the buyers leading to sharp rise in the demand
Indian Automobile Industry – The Monopolistic Market
Automobile Industries associated with India
• Quite a few Domestic Indian Automotive companies: Chinkara Motors, Tata Motors, Mahindra, ICML, Hindustan Motors, Premier Automobiles Ltd., San Motors etc.
• Foreign Automotive companies in India: Manufactured or assembled in India: BMW India, Ford India, General
Motors India, Chevrolet, Honda Siel, Hyundai Motor India
Imported to India: Audi, Bentley, BMW, Lamborghini, Land Rover, Mercedes Benz, Nissan etc.
Price Leadership Model
• Intense competition amongst various players
• 30th December 1998 - Indica launched by Telco for `2,59,000 (petrol) and `2,85,000 (Diesel)
• 31st December 1998 – Maruti slashes prices by 5-12%; Maruti 800 price slashed to `1,85,000 from `2,09,000
• Ratan Tata – “Even for those who do not own or buy an Indica, good news, we’ve triggered price drops in Maruti and made the car market a friendlier place”
Current Trends
• Tata has come up with ` 1 Lakh car – Tata Nano
• This again has created price war
• Nissan-Renault to develop a $3000 car using India’s “frugal engineering expertise”
• Bajaj to experiment with the idea of a small car
Market Share – Passenger Car Market
In the Passenger Car category, Maruti Suzuki is still the market leader with around 50% market share
Current Trends in the Current Monopolistic Automobile Market
• Considering huge market potential, production of passenger cars is projected to grow at CAGR of 11% between 2010-11 and 2013-14.
Comparison:• 1982
Number of manufacturers: 3Vehicle sales: 20000Number of models: 3
• 2009:Number of manufacturers: 15Vehicle sales: 19,80,000 approx.Number of models: 53