The Indian Four-Wheeler Industry

ICRA Sectoral Review 2006

The 4W industry in India has not quite matched up to the performance of its counterparts in other parts of the world. The primary reason for this has been the all-pervasive regulatory atmosphere prevailing till the opening up of the industry in the mid-1990s. The various layers of legislative Acts sheltered the industry from external competition for a long time. Moreover, the industry was considered low-priority as cars were thought of as "unaffordable luxury".

Initially in the post-liberalisation period, the automotive sector, especially the passenger car segment, saw a boom. The buoyancy in the sector was derived primarily from economic vibrancy, changes in Government policies, increase in purchasing power (especially of the upper middle class), improvement in life styles, and availability of car finance. The passenger car industry was finally deregulated in 1993, and many companies, both Indian and foreign (like Daewoo, Ford, General Motors, and DaimlerChrysler), entered the market. However, the smooth sailing was suddenly disrupted in the last quarter of FY1996. The automobile industry, which contributed substantially to industrial growth in FY1996, failed to maintain the same momentum between FY1997 and FY1999. The overall slowdown in the economy and the resultant slowdown in industrial production, political uncertainty and inadequate infrastructure development were some of the factors responsible for the slowdown experienced by the automobile industry. In FY2000, the sector experienced a turnaround, posted positive growth rates and witnessed the launch of many new models. But the spectacular growth in FY2000 was followed by a decline in FY2001 and only a marginal growth of 0.5% in FY2002.

 
However, since FY2003, industry sales have increased at a 3-year CAGR of 17.4% to 1.14 million in FY2006. Although there was a slowdown in FY2006, after the high growth in FY2004-05, the recent high growth has been on the strength of an increase in the disposable income of middle-income salaried people, release of pent-up demand, and easy availability of credit.

Low Penetration, but Rising Share of World Production

Although the Indian automobile industry has come a long way since the deregulation in 1993, India does not rank well among its global peers in many respects, viz., the contribution of the sector to industrial output, number of cars per person, employment by the sector as a percentage of industrial employment, number of months' income required to purchase a car, and penetration of cars.

 
However, the major car manufacturers worldwide consider India a good potential market and they foresee a large future demand here. As can be seen from the table below, India is now a major global producer of cars, with India's share in world production increasing from 1.6% in 2000 to 2.7% in 2005.

 
Two things that stunted growth of the Indian automobile industry in the past have been low demand and lack of vision on the part of the original equipment manufacturers (OEMs). However, the demand has picked up after the liberalisation of the regulatory environment, and global OEMs who enjoy scale economies both in terms of manufacturing and research and development (R&D) entered the Indian market. This has resulted in a significant shift in the way business is conducted by suppliers, assemblers and marketers.

Spending on Vehicles and Transport

India's private final consumption expenditure (PFCE) on transport was estimated at around Rs. 3,124 billion in FY2005, accounting for around 16.5% of total PFCE. This comprises three categories: personal transport equipment, operation of personal transport equipment, and purchase of transport services.

 
In terms of PFCE, the share of transport in total PFCE has witnessed rapid growth since the mid-1980s. By comparison, the share remained at around 3-5% till the mid-1980s.

The motor vehicles sector is also an important source of central excise duties. Central excise duty collections from motor vehicles were Rs. 54.70 billion during FY2005, accounting for 6% of central excise duty collections.

 
 
Taxes on vehicles, passengers and goods also form an important component of states’ tax collections, and formed 8.7% of states' own tax collections during FY2005.

Demand Characteristics

Passenger Cars

In developed markets, engine capacity and wheel-base are the bases of segmentation of passenger cars: price does playa role but only up to a point. Since affordability is the most important demand driver in India, the domestic car market has until now been segmented on the basis of vehicle price. Price-based competition takes place in a continuum rather than in segments since nearly all the models are launched in multiple versions at different price points. As a result, a higher-end variant may compete with a lower-end variant of a car in a segment above it.

 
MUVs

The MUV segment consists of vehicles that are suited to both rural and urban areas. In rural areas where the roads are usually bad, these vehicles are used as goods carriers and also for public transportation. Northern and Western India account for nearly two-thirds of the demand for MUV. Specifically, in States like Rajasthan, Madhya Pradesh, Uttar Pradesh and Maharashtra, the demand for MUVs is the largest. There are three segments of buyers for MUVs: the private market, Government, and the Defence. Until the 1990s, the Government and Defence segments accounted for the largest share of the market. The reduction in Government and defence spending since the 1990s has substantially reduced sales to these two segments. This has pushed private sector purchases into greater prominence.

 
There are three sub-segments of the UV / MUV segment: the hard-top, soft-top and pick-up. The hard-top version consists of the higher-end Sports Utility Vehicles (SUVs) that have been present in the Indian markets since FY1999. Following the success of the higher-end SUVs, the share of the hard top segment in total MUV sales has registered an increase. Soft-top MUVs, which are largely dependent on sales in the rural and semi-urban markets where the vehicles serve as modes of mass transportation (maxi taxi), have witnessed a contraction in volumes in recent years. The declining share of the soft-top sub-segment is attributable largely to the increasing acceptance of SUVs as an alternative to soft-tops (and even higher end-cars). That apart, soft-top sales have also been affected by a decline in rural income, increase in sales tax in some states, increase in diesel prices, enforcement of strict emission control norms, and restraints on the issue of licences to use soft-top vehicles as rural taxis.

Demand Structure

When the industry was deregulated in 1993, the global carmakers chose to operate in the high price-high value segment. However, the strategy did not work as the market for premium and luxury vehicles in India was not large enough. MUL was entrenched in the low price-low value segment, and given its scale economies, it could not be dislodged. In the latter half of the 1990s, foreign car manufacturers changed their strategy. It was still difficult to remove MUL from its market leadership in the dominant low price-low value segment as scale economies formed the basis of competition in this segment. Thus, the global players changed the price-value equation by offering superior value at a price that was still higher than that of the Maruti 800 and Omni, but significantly lower than of the cars in the high price-high value segment. The process gained momentum in FY2000 when the growth in the car market was led by the Compact segment.

Although the compact segment now accounts for 65% of domestic sales of passenger cars, in recent years, the mid-size segment has captured a rising share of the market, and since 2004, sales in the mid-size segment have exceeded sales in the mini-segment. The growth in this segment has been led by new launches, lower prices, and the significant success of four models - MUL's Esteem, Honda's City, HMIL's Accent, and TML's Indigo. Introduction of stripped down versions of the vehicles in the Mid-size segment, attractive pricing by manufacturers (who also offer sales incentives) coupled with lower rate of interests and easy availability of finance have facilitated the growth of this segment.

 
 
Low Penetration Levels

Although India’s 4W sales have increased in recent years, penetration levels are low at around 0.9%. Till the last decode, the industry was considered low­priority as cars were thought of as 'unaffordable luxury', and treated as such through Government policies. Although reduction in excise duties, favourable Government policies, and lower prices have resulted in significant increase in penetration, India's passenger car penetration is low by global standards-1.3% in Chino, 59% in EU, and 81% in the US. Estimates from Notional Sample Survey 58th Round (2002) indicates that ownership of four-wheelers (car or jeep) is restricted to about 4.4% of urban households, and 0.6% of rural households. During 2002-03, ownership of cars/jeeps was restricted to around 0.9 million households in rural areas, and 2.57 million households in urban areas. Car penetration is high in Chandigarh, Delhi, Goa, and Kerala. However, penetration is extremely low in the eastern states of Bihar, West Bengal, Orissa; and central states such as Madhya Pradesh and Chattisgarh.