The Indian Auto Industry & The Role of Dealers

Dr V Sumantran

The global auto industry has been the subject of much analysis in recent years. While global capacity creation proceeds at a good clip on one hand, continued capacity creation in the face of sluggish sales have led to depressed levels of capacity utilisation. At the same time, driven by escalating customer expectations, aggressive competition as well as huge advances in regulations governing environmental considerations and safety, the levels of investment needed for new products continue to grow rapidly. This resulting squeeze on margins had eroded the profitability of several auto majors. Nothing manifests this sentiment better than the steady erosion of market cap of the aggregate of major auto companies.

However, in this picture of gloom, there is broad agreement that the bright spots for the industry globally remain the new markets of China, South East Asia and India. The last decade has seen the Indian industry gain in maturity and confidence. This industry is counted amongst the larger contributors to India's economic development, witnessed over the last decade.

Today, the Indian auto industry is one of the largest industrial sectors with a turnover that contributes to roughly 5 per cent of India’s GDP. More importantly, it contributes to employment of over 2 million people directly and indirectly to another 10 million. The industry is important for national policy in that it contributes 19 per cent of indirect taxes.

Indian Market Scenario

Until a decade ago, the auto sector in India had been a relatively protected industry limiting the entry of foreign companies with high tariffs against imports. Today, as part of a broader move to liberalise its economy, India has opened up the sector to Foreign Direct Investments, and since then has also progressively relaxed trade barriers. Today, almost all of the major global companies are present in India producing two-wheelers and passenger cars in almost all segments.

Dr V Sumantran Dr V Sumantran was the Executive Director-Passenger Car Business Unit and Engineering Research Centre at Tata Motors Limited during November 2001 to August 2005. He also served as President of the Automotive Research Association of India and as Chairman of Concorde Motors Limited. In 2005, Dr Sumantran, a fellow of Indian National Academy of Engineering, was inducted to the Scientific Advisory Council to the Prime Minister (SAC - PM). He holds a PhD degree in, Aerospace Engineering as well as a Master's degree in Management of Technology. Prior to joining Tatas, Dr Sumantran began his career at General Motors in 1985 in the R&D Centre in the USA. In 2000, he became Director, Advanced Engineering, SAAB Automobile AB, Sweden, on deputation from General Motors. Actively associated with the Board of SAE International, he has also served as editor for Passenger Car Journal from 1995 until 2001.

 
India produced over 7.6 million two-wheelers, 1.3 million passenger cars and utility vehicles in 2005-06. India is a global major in the two-wheeler industry and primarily produces motorcycles, scooters and mopeds of engine capacities below 200cc. It ranks second in the world in the production of two-wheelers and 13th in the production of passenger cars. Among the commercial vehicle makers, Tata figures at number six among the ten largest global manufacturers.

The two-wheeler industry in India has grown at a compounded annual growth rate of more than 10 per cent during the last five years and has also witnessed a shift in the demand mix, with sales of motorcycles showing an increasing trend. Indian two-wheelers comply with some of the most stringent emission standards worldwide.

For the passenger car market, this segment has been growing at a rapid pace - from over 650,000 vehicles sold during 2001 to over a million vehicles sold during 2004-05.

Industry Growth Drivers

▪	The passenger car penetration in India is at 8.5 vehicles per thousand people absolute terms. It is among the lowest in the world. As per capita GDP of a society grows, mobility needs for its population rapidly increase.
▪	The proportion of young people, who are economically active, is rising in the overall population. This has led to increasing urbanisation and the need for mobility which translates into a higher demand for two and four wheelers in India.
▪	Relatively good availability of money and a favourable interest rate regime has also been a strong contributor to sustained demand.
▪	The Indian auto industry is expected to get a boost from the road development programmes that the country has undertaken especially the Golden Quadrilateral programme and the NSEW corridors with feeder roads.
▪	India's competitiveness has enabled it to make a steady foray in International markets with passenger car exports crossing the 100,000 mark in 2004. Multinationals use India as a manufacturing hub for small cars in addition to growing exports from indigenous makers such as Tata Motors and furthermore, India's two-wheeler manufacturers have also stepped up their export plans and apart from export, have also announced CKD operations in many new markets outside India.
▪	As India forges free trade agreements (FTA) with Thailand, MERCOSUR and other trading blocs, the industry has the potential to emerge even stronger. However, against this optimism, the industry has felt the effects of cost pressure.
▪	The global movement of oil prices has dealt a setback to the country's economic policy. While the threat of inflation seems to have been temporarily brought under control, sustained fuel price hikes and the consequent hike in operating costs for vehicle owners can cause a depression in demand.
▪	The past two years have also seen considerable pressure for the industry from input costs. Prices of steel, which is a primary input for the industry, have doubled over the last three years. The situation has forced players to resort to innovative ways to control costs whilst meeting rising customer expectations.

 
Industry Performance

During the period 2005-06, sale of passenger vehicles in India registered a growth of 7.7 per cent. Continuing the tempo of explosive growth, two-wheelers registered a robust growth of 13.6 per cent. Within the segment, scooters registered a decline of 1.6 per cent, and motorcycles - a growth of 17 per cent, reflecting a continued movement from scooters to motorcycles. At the same time, the moped segment continues to see a shift from urban markets to rural markets and has grown by a modest 3 per cent.

The health of the commercial vehicle industry has also improved with the total industry reporting a growth of 10 per cent for this period. While the industry continues to see some structural trends with larger growth at the lower tonnage segments and the high tonnage segments, the Medium Commercial Vehicle (MCV) segment has been witnessing a decline. This is attributed to a migration to 'hub and spoke' patterns for freight movement and increasing competitiveness for road haulage even for longer distances compared to rail. A consequence has been a large increase in sales of vehicles with payload capacities of one-half to one tonne. At the opposite end of the product spectrum, a number of players including Tata, Volvo, Daimler-Chrysler and MAN have announced plans for new modern generation Heavy Commercial Vehicles, anticipating increased growth of large tonnage, long-haul movement with the new highways.

While the industry, particularly, the commercial vehicle segment, has been known to be cyclical, the secular trends for the industry are positive, bolstered by the overall growth of the Indian economy. The past couple of years of healthy demand have seen the industry players post positive financial results and by and large this is reflected in the stock market movement of the listed companies.

With environmental concerns gaining momentum in Indian society, a long-term roadmap has been charted by the Mashelkar committee, to drive the country faster down the road to low emission vehicles. With this, from 1st April 2005, all eleven major cities require to comply with the more restrictive Bharat Stage III (BS III) emission standards. At the same time, the rest of the country advanced from BS I to BS II levels of norms.

Future Trends

Buoyed by recent performance, many manufacturers have rolled out plans for increasing capacity. Prominent among them, Maruti, Hyundai and Tata - the passenger car makers - have announced plans for substantial scaling up of vehicle and engine production. Among two-wheelers, companies such as Honda and Suzuki have embarked on their own production facilities for scooters and motorcycles, separate from the activities from their current or erstwhile partners. Daimler-Chrysler and MAN have announced plans for small volume assembly of Heavy Commercial Vehicles in the country.

India is also emerging as a credible hub for R&D and vehicle development. Global majors (among OEMs) and several global Tier One suppliers have scaled up operations of their Indian technical centres and the quality and value of development in India is witnessing noticeable improvement. However, at this time, the most critical vehicle integration activities remain limited to the home centres of these overseas manufacturers.

As infrastructure improves, both the government and industry will need to pay even greater attention to road safety. The safety record of India, as far as fatalities and serious injury is concerned is dismal. This will need to be addressed at all points: products, infrastructure and user behaviour.

Dealer Role

The environment, looking ahead, is expected to greatly increase the importance of contact with customers. Every manufacturer will need to strive even harder to ensure that customer experience with every aspect of contact with the product (through sales, after-sales service and product use and ownership) will exceed their expectations. Here the role of the dealer and the network is invaluable. The increased emphasis on brand and the importance of relationship with the customer will further change the way' we conduct our business.

Increase in distribution reach will push up the sales of passenger cars, as it brings a large number of households into the target population. Typically, these households have the potential to purchase a car, but defer the decision due to the lack of sales and service infrastructure. With most urban centres covered by dealership networks, car manufacturers are looking for new dealerships in smaller towns to increase penetration and sales in semi-urban and rural areas. Current established dealers can help OEM's scale up their networks quickly by setting up satellite dealerships along with service facilities in the neighbouring semi urban/rural areas.

The vehicle parc in India has reached that critical level wherein secondhand vehicle business is expected to emerge in a more organised form than it is today. Availability of a good & credible secondhand vehicle market will not only help current owners upgrade to their next vehicle but will also bring a large number of new low budget customers into the vehicle ownership cycle. The time is ripe for dealerships to set up multi-brand secondhand vehicle trading and refurbishment facilities to expand the customer base in their respective locations.

We are also witnessing a period of affordable cost for loans and easy availability of vehicle financing. This too causes us to view the future with some optimism.

Conclusion

The growing mobility needs of the people in India augur well for two and four wheeler industry. The cost advantage that India offers with respect to product development is fast establishing the country as an R&D hub. In addition, the credibility that India has gained as a cost effective manufacturing base for both small cars and two-wheelers is fuelling creation of capacities by all major manufacturers in the country. Likewise, economic growth and the Golden Quadrilateral project will also increase demand for road freight movement and this is bound to sustain the commercial vehicle industry's growth.

The two-wheeler segments is expected to grow to 12 million units and passenger car segment to 2 million units by the end of this decade. However, this industry cannot be insulated from global trends where the state of industry provides pointers for caution. In conclusion, to survive and grow, the Indian Auto industry has to ensure product innovation and overall cost competitiveness.

Finally, the customer will reign supreme and the success of OEMs and dealers in this department will spell the difference between success and failure.