Inside India

Indians view their automotive future

Bruce M Belzowski, Allan Henderson and Penny Koppinger

This is the third part of major findings of the report brought out by the Automotive Analysis Division at the University of Michigan Transportation Research Institute (UMTRIAAD) along with the IBM Institute of Business Value after interviewing 29 Indian automotive executives and experts from government, industry, and academia on a wide-ranging 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. This report covers the study with regard to India's External challenges: Infrastructure, oil supply, and air quality.

External challenges: Infrastructure, oil supply, and air quality

The executives we interviewed see India's automotive industry as significantly impacted by its infrastructure, oil supply, and air quality. India's government-issued, ten-year Automotive Mission Plan, discussed earlier in this report, shares this view of infrastructure as a crucial factor in the success of the industry.

As part of our survey, we asked each interviewee to assess the top three external challenges the industry faces. They ranked infrastructure as, by far, the number one challenge, followed by oil security, with air quality as third. We believe these results indicate infrastructure is one area where executives feel India can act to solve issues. Oil security, on the other hand, is much more dependent on the global market for oil. And air quality is viewed as already being addressed, with India closing the gap with the European Union in adhering to Euro emissions norms

Despite the external challenges, the future appears bright to those we interviewed. They seem hopeful that each issue can be methodically overcome - either by government or private industry, or a partnership of both.

Infrastructure

Designing an automotive infrastructure for over one billion people is a daunting task for a developed economy, but developing economies must also contend with other challenges, including limited funds and inadequate roads. For India, the lack of roads may affect consumer-buying decisions. Lack of port capacity may restrict export growth. And lack of power availability may slow industry development

Transportation infrastructure is a vital element to the automotive industry

Most of the executives interviewed agreed - road construction is key, and it is a task only India's government can tackle. As one executive states, "There is a direct relationship between better connectivity of the metropolitan areas and the progress the industry can achieve, Roads are clearly the biggest bottleneck, both the quality and availability of roads."

 
As shown in Figure-1, the Golden Quadrilateral, 3,625 miles of national highways connecting 19 of the largest Indian cities, encircles the country. Additional east-west and north-south corridors are expected to eventually cross the interior countryside. Progress, however, is slower than planned (see Figure-2) For example, from April to June 2006, 986 kilometres of national highways were upgraded, undershooting the target by nearly 14 per cent.

 
Land acquisition slows road improvements

According to interviewees, laws governing land use and land reclamation hinder road development. And getting the governments for each state to cooperate in building cross-country roads is difficult. The Index of Economic Freedom ranks India 104th in the world with regard to property rights, which it says are "applied unevenly. Because of large backlogs, it takes several years for the courts to reach decisions." The New York Times observes that India's urbanization, compared to China, is more of a "saunter" due to economic policies that have "crimped" the kind of manufacturing that has spurred China's urban growth.

Lack of traffic-law enforcement is often cited as an inhibitor to growth

Traffic fatalities in India are 8.7 per 100,000 people, as compared to 5.6 in the UK, 5.4 in Sweden, and 6.7 in Japan. As congestion grows, enforcement becomes increasingly more critical. One interviewed executive says, "Driving and road discipline needs to be enforced both individually and by policy." A dealer we interviewed paints this picture: "There may be a pedestrian lane and four-wheeler lane but no two-wheeler lane or space. There is no enforcement to prevent shops from crowding sidewalks, forcing pedestrians into the street." Another interviewee estimates that 30 per cent of drivers have had no driver's education, do not understand signals or lane discipline and, as a result, are causing accidents on newly built highways. Executives acknowledge that progress in government education, national auto testing centres, licensing of individuals, and the reduction of varying velocity vehicles on the same roads are key to dealing with the problem. The executives we interviewed are generally satisfied with the progress on road improvements to date but feel India still may not meet the requirements for future expansion. "If you start building based on what is needed in India today, you will not build enough. You have to build to future levels of the vehicle population," expresses one interviewee.

India requires world-class port facilities to export vehicles and components

India's port system consists of 12 major ports and 187 intermediate ports under the jurisdiction of the respective state governments and handles over 90 per cent of its foreign trade along its 7,517-km coast line. During the 2004-05 fiscal year, the major ports handled record traffic of 384 million tons with a growth rate of around 11.3 per cent over the previous year, outpacing GDP growth.

Executives we interviewed are convinced that the current port facilities cannot support vehicle-based exports nor the oil import facilities required to meet India's automotive goals. "We need to improve on the oil tanking facilities at ports, oil terminals, and cross-country pipelines. Significant investment is required to provide a level playing field between public and private sector companies," says one manufacturer. Exports in the automotive sector have experienced an average CAGR of 30 per cent over the last five years. Executives we interviewed believe that past port traffic has primarily been container transport, but are hopeful that capabilities will be successfully expanded within the next three years to handle the increased export of four-wheelers.

India's freight transport system handles approximately one trillion ton-kilometres, with roads handling 60 to 65 per cent of the load and coastal shipping only 6 to 7 per cent, as shown in Figure-3. In comparison, the European Union utilizes coastal shipping for more than 40 per cent of its exports. The demand on India's ports will likely double in the next eight to ten years, requiring a plan to shift some freight to coastal shipping. Less freight transport will help ease road congestion and improve air quality. The Indian Department of Shipping's goal is to divert at least 5 per cent of the cargo moved by rail and road today to shipping over the next ten years.

 
India is struggling to meet its growing power requirements

Primary energy consumption is expected to rise an average of 2.8 percent per year between 2004 and 2030 compared with the world average of 1.8 percent. To address this growth, India plans to increase power production to create an additional 68,500 megawatts of electricity capacity from 2007 to 2012, and is working on renewable sources of energy such as wind power. GDP growth drives energy consumption - and when domestic supply can not keep pace, this results in greater energy dependence, as shown in Figure-4. When interviewed, both manufacturer and supplier executives reiterate that power availability is critical for industry expansion. "In the next five years, there will be difficulties because of the poor roads and power shortages," notes one manufacturer. India's inadequate power structure and fuel shortages increase the cost of doing business because companies are sometimes forced to provide their own power generation as a backup to the normal power grid. Natural gas shortages, for example, have reportedly left natural-gas-fired electric power plants and fertilizer plants underutilized in the past few years. To remedy the situation, the interviewed executives mention two options: foreign direct investment and energy industry deregulation. The regulatory changes of 2005 have already eased restrictions on new electricity generation JVs. However, regulation of foreign investments can vary widely from state to state -sometimes hindering progress. Executives anticipate additional regulatory changes including deregulation of electricity generation, elimination of subsidies, and phase out of price controls.

 
Oil supply

Increasing dependence on oil seems unavoidable in the near term

Forecasts estimate that India's transportation sector energy use will grow at an average rate of 3.3 per cent per year to 2030, compared with the world average of 1.7 per cent per year. Like most of the world, India will depend on oil for a long time. Figure-5 shows the widening gap between India's oil production and consumption. However, India's deepwater oil prospects are projected to provide additional production increases during this decade.

 
One major concern of the interviewed executives is the risk of unstable oil prices derailing growth in the auto industry. Another is that governmental fuel-price controls will limit private investment. Some executives we interviewed see deregulation as a way to create opportunities in energy. Some study participants also think vehicle alternatives such as hybrids are the answer. To focus the automotive industry on hybrids, the government may have to establish targets requiring, for instance, higher minimum gas mileage or a percentage of alternative fueled vehicles sold. One-interviewee points to a need for a government energy policy that includes unconventional sources of energy and gives incentives [such as tax exemptions] to companies that are doing this or working in this direction.

Air quality

Progress in emissions control is encouraging

Most interviewed executives understand the need to implement emission standards and feel that the government will succeed in improving air quality. Dealers we interviewed believe market forces will prod vehicle manufacturers to adopt better emission standards because being environmentally conscious sells. This is true not only because customers are concerned about emissions, but also because designing to these standards typically provides better fuel efficiency and a better engine. Serving the world market will also require India's OEMs to build vehicles with globally accepted emission controls.

Despite recent improvements, there is still work to be done. Executives agree that emission controls should be consistent for all types of vehicles. One expert states, "We need norms for the entire industry, not just for one segment. In the two-wheeler segment, only 25 per cent are emission compliant."

 
One success story is the way the government was able to increase the commercial vehicle segment usage of compressed natural gas (CNG), as described in the Centre for Science and Environment sidebar. Those interviewed feel that positive experiences like this give the government and the people the confidence to try new emission measures as well as new fuels and technologies.

Turning optimism into success: What India needs to do next

Underlying many of the responses from our interviews is the idea that the success of the Indian automotive industry depends on the strong partnership of India's government with India's automobile manufacturers, suppliers, and dealers.

Key Implications of External Challenges India has made strong progress in a short period of time in the areas Of infrastructure, air quality, and oil security. However, as the rate of economic expansion accelerates, it is critical that the infrastructure improvements accelerate to keep pace. The focus must be on future needs, not just today's needs. The central government is believed to be the key player in dealing with these external challenges. Most Indian automotive executives agree infrastructure is the most urgent challenge to its industry. Despite large investments in highways, connections between rural and urban cities are still lacking. Acceleration of road construction and traffic law enforcement is key areas for improvement because of the impact of traffic congestion on consumer purchasing patterns. Port capacity for exporting vehicles needs to be emphasized. Some executives believe electricity price deregulation will accelerate investment in power generation and allow the industry to meet domestic and global expansion goals. Combating air quality, oil dependency, and congestion issues should be a coordinated effort. Plans for urban environments must meet future needs. Early successes should be expanded to region specific actions such as the use of CNG. Upgrades to roads, rail, ports, electricity, and water supply infrastructure will help all vehicles in India to coexist as the vehicle population expands. Government's efforts to augment public transportation and port capacity enforce traffic laws, and support alternative fuels will allow it to address multiple problems including oil dependency, air quality, and road congestion. Attacking these problems may also expand India's research and development capabilities. The Indian government has a large and crucial role to play. The government's Automotive Mission Plan has created the industry vision and goals. Government and industry need to work together to build growth capabilities. It is vital that the government continue to recognize the auto industry as a crucial part of India's growth and success and support the industry by streamlining national and state government regulations and interactions between the two.

 
There are challenges that the industry can solve, others that only the government can solve, and some they can solve only by working together.

Build India's domestic vehicle market

To meet India's ambitious goals for its domestic automotive industry, India's government needs to build more and better roads to support future not just current growth, and hasten the vehicle friendliness of India's cities including wider roads and more parking spaces. Improved air quality is also critical. At the same time, the automotive manufacturers and suppliers need to understand and capture the small car segment of the domestic market, improve India's automotive supply base, and raise quality levels across all suppliers while keeping costs low.

Become a global player

To become major players in the global automotive industry, India's manufacturers and suppliers need to accelerate the perception that "quality vehicles" and "quality automotive components" come from India, and find their niches in the world vehicle market (perhaps small, inexpensive cars), and manage their businesses on a worldwide scale, which includes global logistics, sales, and distribution. In addition, India's government needs to expand the country's port capabilities even faster. As India's auto companies continue to grow, they need to increase their scale while' remaining financially strong -strong enough, for example, to withst and a global recall. Furthermore, the automotive industry and the government need to work in partnership to boost skilled labor availability and strengthen India's own R&D capabilities.

The automotive executives and experts we interviewed are optimistic about India's ability to reach its goals. Recent growth has been impressive. Some manufacturers and suppliers are already reaching global levels of quality, and the government seems committed to supporting the industry. However, India's domestic market is still relatively small; India's manufacturers and suppliers are not yet universally recognised as strong global players; and India's government has yet to complete its domestic infrastructure of roadways and ports. Despite these challenges, the recent industry growth and development, along with the government's commitment of support, are strong reasons for optimism about India's future automotive success.