Inside India

Inside India

Indians view their automotive future

Bruce M Belzowski, Allan Henderson and Penny Koppinger

What do Indian industry executives and experts consider as the real issues and challenges for the Indian automotive industry? To answer that question, the Automotive Analysis Division at the University of Michigan Transportation Research Institute (UMTRIAAD), along with the IBM Institute for Business Value, interviewed 29 Indian automotive executives and experts from government, industry, and academia. The questions covered a wide range of issues, including India's future market and industry structure, relationships between domestic auto companies and their foreign joint venture (JV) partners, as well as the challenges in the areas of infrastructure, air quality, and oil security.

The study results have been categorized into three major areas: India's automotive market; India's production capabilities; and External challenges that impact India's automotive industry. This report covers the major findings of the study with regard to India's Automotive Market.

GDP growth drives industry growth

India's automotive market is driven by overall GDP growth, which has been about 7 to 9 per cent for the past three years. One estimate predicts GDP growth will level off at 6 per cent annually and remain at that rate until 2020. As a developing automotive economy, India today ranks very low in terms of vehicles per 1000 people, but past experience in other markets suggests that as GDP per capita grows, the automotive market should also grow, as shown in Figure 1.

A GDP per capita of US$3,000 is considered the inflection point where four-wheeler sales begin growing at a faster pace. However, one executive notes that there are 40 million Indian households that can afford a four-wheeler today but are not buying one. This executive lists a combination of issues that are dissuading potential buyers in India from actually buying a car:

▪	They are uncertain about the cost of operation.

▪	Roads are not good enough.

▪	Congestion makes driving unappealing.

▪	Parking space is not sufficient.

▪	They don't know how to drive.

▪	They are unsure whether some manufacturers will last as long as the vehicle, creating a "trust" gap.

Any combination of these issues may cause people to delay purchasing a vehicle, but it is unclear which solutions would cause reluctant buyers to change their minds. Several interviewees highlight the dampening effect of recessions on their fragile economy. One executive explains it this way: "The last five years have shown continued growth, and everything is great now. But people worry about the end of the cycle. In general, a recession comes every seven or eight years." Recessions create cautionary spending. One executive describes this as India's "scarcity use" economy, one in which families find ways to continually reuse products until the products completely wear out.

The domestic market forecast is cautiously optimistic

The recent optimism concerning the Indian automotive market is based on a compound annual growth rate (CAGR) since 2001 of 15.4 per cent for four-wheelers and 13.3 per cent for two-wheelers. Our Indian industry interviewees expect a doubling and tripling of four-wheeler sales by 201 0 and 2015, respectively. The number of four-wheelers sold in 2006-2007 was about 1.4 million, and a doubling (2.8 million) or tripling (4.2 million) of that figure would make India one of the top ten countries in terms of vehicle sales. The interviewees also see 2005's sales of nearly 7 million two-wheelers increasing 60 per cent to 11 million by 2010 and by 240 per cent to 17 million by 2015.

But Indian optimism is tempered by the low number of four-wheelers India sells domestically compared to domestic sales numbers in the rest of the world, especially its neighbour China, which has a similarly sized population yet about four times the four-wheeler sales and nearly three times the two-wheeler sales. The gap between China and India is not expected to close in the near future, despite one forecast that has India becoming one of the top five automotive economies by 2025.

The impact of infrastructure on the market is crucial

Infrastructure permeates almost every discussion with our interviewees about the current and future market. It impacts the types of vehicles sold both now and in the future. For both domestic sales and exports, many interviewees see a direct relationship between infrastructure improvements and growth of the auto industry. Roads in India's large cities continue to be plagued by overcrowding, with large delivery trucks, small cars, three-wheelers, two-wheelers, pedestrians, and the occasional cart drawn by a cow, all sharing the same road. Today, the combination of fuel cost and insufficient infrastructure has led Indian consumers to purchase primarily two-wheelers and small cars. So, even though some people can afford larger cars, many purchase smaller ones.

Financing systems are strong

One of the key differences between India and China today is their respective financial institutions and systems. While China's systems are still in the process of modernizing, India's financial institutions are already mature. India has a financial loan system for purchasing vehicles that can serve as the basis for the development of India's automotive industry for years to come. In developed economies, 60 to 80 per cent of vehicle buyers use financing for their purchases. Our interviewees estimate that, in India, 77 per cent of four-wheelers and 50 to 60 per cent of two-wheelers are currently financed.

Forty per cent of the interviewees think financing already plays a major role in vehicle sales and will change only marginally in the future. However, they cited two areas that may affect future growth: the ability of financial institutions to assess risk of potential countryside buyers and lowering interest rates to match Western countries (which improves the ratio of interest rate to earnings of Indian households, making vehicle ownership more affordable).

The dealer body is underdeveloped

In general, our interviewees do not see the dealer body as being very successful today, with brands largely selling themselves rather than dealers selling the brands. Dealers currently own their franchises, but there are few multiple-franchise dealers selling more than one brand at one location. One executive thinks that the Indian market will some day resemble the US market, which has nearly 20,000 dealers across the country. Another executive thinks that networks of 'service only' workshops will manage a large part of after-sales service. A number of interviewees envision consolidation of current dealers into groups of dealers, creating large dealer groups. Based on these diverse opinion~, it looks like buyers will need to make some important decisions about their relationships with dealers, and their final decisions will help shape the future of the dealer body.

The most significant market-related themes from our interviews focus on three points:

▪	Will the small car be India's automotive destiny?

▪	Understanding India's consumers will be key to future market success.

▪	Exporting to the world market will be a challenge.

Will the small car be India's automotive destiny?

Two aspects of the future domestic vehicle market stand out when speaking to our Indian interviewees. First, the target of four-wheeler sales is the large number of two-wheeler owners. And second, the bulk of four-wheeler sales will be small cars.

A significant migration from two- to four-wheelers is expected. The two-wheeler market is composed of motorcycles, scooters, and mopeds and represents 75 per cent of India's annual new vehicle sales.10 Interviewed executives believe that many of these buyers will migrate to four-wheelers not only because of increases in GDP per capita, but also because of the development of small, inexpensive four-wheelers. The expected delivery of the Tata Group's "1 lakh car" (a price of approximately US$2,500) is the prime example interviewees use to describe the potential affordability of four-wheelers and India's developing expertise in small cars. There are differing predictions about the introduction of the "1 lakh car" into the vehicle market. One executive thinks, "If they really come out with a US$2,500 car, there will be, at a minimum, a 10 to 15 per cent shift from two-wheelers to four-wheelers." Other predictions are much greater - some say a million consumers will migrate.

In most developed countries, used vehicles are transition vehicles for buyers who are not ready to migrate to new vehicles. But because Indians tend to keep their vehicles until they are no longer usable, India lacks a large stable of newer-model used vehicles. Hence, India's used vehicle market is very immature and is not expected to grow, adding more reason for interviewees to predict that buyers will move from two-wheelers to new, inexpensive four-wheelers.

Small cars dominate

Practically all of India's manufacturers (domestic, foreign, and JV) offer a variety of small cars in different price ranges. But the "1 lakh car" is priced close to that of a high-end two-wheeler, making it easier for buyers to migrate. The competition has always been fierce in this ultra-low-price segment, with local JVs such as Maruti Udyog (the Maruti-Suzuki JV) selling the 2007 model of its very popular Maruti 800 for about US$5,000,along with three other low-priced models.

Many of India's best-selling vehicles are small and inexpensive
Maruti 800	US$5,093
Tata Indica	US$5,945
Maruti Alto	US$6,093
Hyundai Santro	US$7,100
Maruti Wagon R	US$8,299
Sources : Maruti Udyog Web site; DriveInside.com Car Pricing Website. Note : Prices as of May 2007.

Foreign competition is also gearing up. Renault recently formed a JV with M&M Ltd to build its low-cost Logan car as well as an even less expensive vehicle. Other global manufacturers such as Hyundai already offer low-priced vehicles or are coming to India with the expressed purpose of building and selling inexpensive, small vehicles.

The small car strategy promotes Indian automotive industry growth

Interviewees report that the demand for two-wheelers and small cars has focused Indian and foreign manufacturers and suppliers on making India the center of expertise for these small, inexpensive vehicles. Fuel-efficient, small vehicles support India's long-term goal of energy independence, and from a safety perspective, they move people from two-wheelers, which are generally considered less safe, into four-wheelers. Smaller vehicles also typically provide a higher level of emissions control than two-wheelers. And if India becomes home to the recognized global experts in two-wheelers and small cars, it will position India to export more globally.

But there are some potential drawbacks to this strategy. The introduction of very inexpensive four-wheelers to the Indian market might trigger the migration of two-wheeler buyers to four-wheelers before the nation's infrastructure is improved and expanded. This could cause even more congestion in the short term. Fuel consumption could also increase dramatically. And the low levels of safety and emissions equipment on these vehicles might make them attractive exports only to developing economies rather than developed economies. Exports to developed economies will face formidable competition from global manufacturers with their own inexpensive small cars. In the final analysis, the Indian automotive industry's aspiration of growing through the development of small, inexpensive cars is a reasonable one, built on the desire to improve India's economy now rather than wait for incomes to reach levels of developed economies. But there are potential unintended consequences that Indians must be aware of as they pursue this strategy.

Is there a market for larger vehicles?

Though India is similar in geographic size to the United States, it seems to be following the Japanese market model, where the most popular vehicles are small. As India's GDP per capita grows and its infrastructure develops and improves the intercontinental driving experience, will Indian buyers begin to purchase largervehicles or will they continue to focus on smaller vehicles because of fuel prices? This is a question that manufacturers must consider when planning to serve India's future market.

Understanding India's consumers will be key to future market success

Understanding how to market to India's diverse consumers is very important for success in this marketplace. Interviewees described today's top-priority vehicle purchasing factors as price, fuel economy, brand image, and after-sales service (quality and styling were not at the top of the list as they are in developed markets):

▪	Price and fuel economy: Considering the current state of India's economic development, it is not surprising that price and fuel economy are the top purchasing factors for buyers. The Indian government currently offers an 8-per cent excise tax reduction on the cost of vehicles that have low engine displacement «1200 cubic centimeters). It also controls the cost of gasoline. In India, fuel purchases represent a larger proportion of a family's income than in Western countries.

▪	Brand: Interviewees ranked brand second only to price and fuel economy. Buyers tend to purchase vehicle brands based on their perceptions of what a vehicle says about them.

▪	After-sales service: Indian consumers generally keep their vehicles until they are no longer usable, making after-sales service capabilities a crucial factor in buying decisions. As a consequence, it is not only price and vehicle characteristics but also the reputation for superior after-sales service that helps sell new vehicles. One executive observes the importance of the dealer network in this process, "Manufacturers need a dispersed service network with quality manpower and superior capabilities for obtaining replacement parts and handling customers. Today, dealers are only half as efficient as they need to be in this area. They need to handle customers without rupturing the relationship."

Vehicle purchase factors will change in the future

A very different picture emerges when interviewees predict the main vehicle purchasing factors over the next five to ten years. Executives clearly see greater emphasis on brand image and status as well as increased buyer sophistication in evaluating what a vehicle has to offer. They believe consumers will strike a balance in terms of performance, features, and safety, while at the same time considering the price and fuel efficiency of a vehicle. The increasing importance of status and brands may signal a developing car culture.

A number of interviewees think vehicle prices will not rise in the future. They believe competition will remain keen among strong domestic and foreign manufacturers, creating continual price pressures throughout the system. Several executives focused on the effect of taxes on the final price of the vehicle. One executive suggested that taxes represent as much as 40 per cent of the final price of the vehicle, with taxes cascading on top of other taxes.

In India, taxes make up a significant portion of the final price of a passenger car.
24%	A 16 per cent excise tax for gasoline-powered vechicles that are less than 4,000 centimeters in length and less than 1200 cubic centimeters in engine displacement. All other passenger cars have a 24 per cent excise tax.
12%	Sales tax on the price of the vehicle which can vary by state.
2%	Value Added Tax which can vary by state.
1%	National Calamity Contingent Duty.
0.125%	Automobile Tax.
2%	Education Tax.
+10%	Road taxes, insurance, and registration fees, which together total approx. 8 to 10 per cent.
51.125%

Key Implications for India's Automotive Market

Interviewees from all parts of the Indian automotive industry express optimism about their country's automotive future, yet they also draw the following conclusions about major market challenges:

Steady economic growth may lead to success in the domestic market, but India must overcome significant challenges to succeed in the global market. Steady rather than exponential growth may provide time for the Indian government to complete the infrastructure improvements necessary to support the expansion of its domestic automotive market. But significant growing pains must be overcome if India is to become a dominant exporter to the world.

The small car and the "1 lakh car" are key growth strategies. Indians view development of small cars, in general, and inexpensive cars, in particular, as their country's contribution to the global automotive industry. They consider design, development, and manufacturing of these vehicles as their country's global niche, as well as a way to fulfill the needs of Indian buyers. However, global manufacturers could challenge India's claim by leveraging the economies of scale of their global platforms to compete in these two areas.

Attracting untapped buyers in India is a matter of understanding them. Teasing out the real reasons preventing qualified buyers from purchasing new vehicles will take some work because there are so many possibilities.

The impact of infrastructure on the domestic market is significant. Government needs to address the overarching future needs of India's automotive infrastructure to support the industry's development in the near and long term. Infrastructure drives the choices of buyers and the designs of manufacturers. Understanding the timeline of large-scale infrastructure projects could help companies anticipate the timing of market growth.

The role of "status" in Indian buying patterns is important for sales. Though the purchase decision for Indian buyers is primarily tied to objective matters, such as price, fuel economy, and after-sales service, there is a large part of the Indian psyche that is focused on the level of status a vehicle offers. Understanding how each vehicle fits into the status spectrum could provide a competitive advantage to manufacturers and dealers.

India's financial system provides an important building block for a developing industry. As is the case in developed economies, strong financial systems support India's automotive industry. In India, the cost of a vehicle comprises a larger portion of earnings, so the ability to negotiate loans becomes invaluable. Having mature financial systems should serve the country well in its automotive development.

Improving dealer performance may confer a competitive brand advantage in the future. Though interviewees have a low opinion of the current dealer body, this may be a reflection of the limited amount of effort manufacturers put into supporting their dealers. Manufacturers that can raise the level of professionalism of its dealers have the opportunity to reverse these negative views.

Exporting to the world market will be a Challenge

One of the most serious issues that Indian automotive manufacturers and suppliers face is the export of low-cost vehicles and components. One executive summarizes the realistic attitude of most of our interviewees, "There is a happy picture where everyone is euphoric about the positive side of Indian exports [exporting more] and then there is a sad picture where we have not done really well [total is still low relative to other markets]." Interviewees estimate a significant increase in vehicle (-20 per cent) and component (-30 per cent) exports in both 2010 and 2015, but this is not a dramatic overall change considering India's low beginning point.

Exporting creates an additional burden on Indian companies as they develop their products and their local market. Interviewees report that India has important advantages, such as low-cost manufacturing and design, English language proficiency, adequate intellectual property protection, government support, a young and talented workforce, availability of raw materials, and the potential to build world-class quality at low prices. But interviewees also report a significant number of challenges that could potentially outweigh these advantages, including the need to:

▪	Understand export markets, which involves understanding foreign consumers and developing a range of models, a stronger brand presence, and dealership networks.

▪	Develop products that can succeed in developed as well as developing economies.

▪	Manage difficult global supply chain logistics.

▪	Increase manufacturing scale to global levels.

▪	Build resources to survive a large recall campaign.

▪	Improve technology development, such as technology features that differentiate the company, or engines that conform to global norms.

▪	Upgrade Indian port facilities to support high export volumes.

These are significant challenges that may delay expected export growth, especially for vehicles. They may also force Indian manufacturers and suppliers to establish JVs with larger global companies to reach global scale more quickly.