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COMPREHENSIVE PROJECT 1

Entitled On

AUTOMOBILE INDUSTRY (Passenger Car)

Submitted to

SANKALCHAND PATEL COLLEGE OF ENGINEERING

DEPARTMENT OF BUSSINESS MANAGEMENTAffiliated to

Hemchandracharya North Gujarat University

In Partial Fulfillment of the

Requirement of the Award for the Degree of

MASTER OF BUSINESS ADMINISTRATION

Under the Guidance of

Mr. Bhavesh PatelMr. Chirag Rathod

Presented by

Students of M.B.A Semester-III

Sadhu Jaimin 10 Gohil Divya

Parekh Sanket

37

Shah Kamil 54

INdex

Executive summary

The Indian automobile industry has come a long way since the first car ran on the streets of Mumbai in 1898. The initial years of the industry were characterized by unfavorable government policies. The real big change in the industry, as we see it today, started to take place with the liberalization policies that the government initiated in the 1991. The liberalization policies had a salutary impact on the Indian economy and the automobile industry in particular. The automobile industry in the country is one of the key sectors of the economy in terms of the employment opportunities that it offers. The industry directly employs close to around 0.2 million people and indirectly employs around 10 million people. The prospects of the industry also has a bearing on the auto-component industry which is also a major sector in the Indian economy directly employing 0.25 million people. The Indian automobile industry is a stark contrast to the global industry due to many of the characteristics, which are peculiar to India. The Indian automobile industry is very small in comparison to the global industry. Except for two wheelers and tractors segments, the Indian industry cannot boast of big volumes vis--vis global numbers.

The report covers the two segments, passenger cars and multi-utility vehicle segment. It contains an in-depth study of both the segments and the performance of the automotive industry in terms of production, sales, capacity, exports and imports. The major events and their impact on the industry and across the segments are discussed in detail. The report also looks into the factors that boost the revenue growth across segments and concludes with a look at the financial performance (in term of different ratios) of the major players in the industry. The Indian automotive industry is protectionist

Foreign companies have lobbied hardest for high tariff capsInterestingly, it is the companies that entered India after 1991 that have lobbied most strongly with the Government to maintain tariff caps of 25 per cent and 40 per cent. This affords them substantial protection. Similarly, they have persuaded the Government to hike the import duty on second-hand cars to 180 per cent. However, should tariff reductions be extended in the new round of WTO negotiations, the duty on second-hand car imports will drop to 25 per cent.

The Indian automobile industry is protectionist because few of its companies are commercially viable. India is the only country in the world with numerous car producers. Although consolidation seems imminent, it has not yet begun. A fundamental shake-out will do the industry considerable good.

Recent growth in the automotive sector

Car and MUV sales have doubled since 1995Segments of the Indian automotive industry have grown at varying rates since 1995. The sales of cars and multi-utility vehicles have almost doubled. Those of tractors and two-wheelers have grown at a slow, steady pace. The bus industry has shown no growth, and the truck and LCV industries have done badly.

The boom in the car market can be explained by the tremendous interest of global car companies. Within two years of liberalization, 60 per cent of all major car and vehicle companies had invested money in India, whether through joint ventures, equity participation, or technical collaborations. Companies saw huge potential in the Indian domestic market. Many companies also saw India as a potential manufacturing and exporting hub for the rest of the Asian region. Much of this enthusiasm has now faded, due to policy and infrastructural bottlenecks.

India now produces 6 lakh cars a year, up from 3 lakh cars in 1995. Currently, some 28, 000 cars are exported.

Move toward bigger carsA key trend of the last few years is the shift to bigger, more expensive cars. Until three years ago, small cars had a 57 per cent share of the market. Now, mid-size cars account for a half, and small cars for just a third of those on Indian roads. With the introduction of the Mercedes Benz, the Sonata, and the Accord in 2001 in India, it is the first time that cars over 4.5 metres long are being sold in the country.

Rise of second-hand car market...Another important development is the rise of a booming secondary market in automobiles. Today, most car purchase is occurring in this market, as scooter owners upgrade to cheap, four-wheel vehicles. Some second-hand Fiats and Maruti 800s are now even cheaper than a new two-wheel vehicle. In turn, many small car owners are looking to buy a bigger, second-hand car.

Causing drop in scooter salesAs a result, there has been a fundamental shift in the two-wheeler industry. In 1999, motorcycle sales overtook those of scooters for the first time. This is because second-hand cars have replaced scooters as the family vehicle of the middle class. Secondly, policy restrictions on motorcycles have been lifted, bringing in a range of powerful, emissions-controlled, branded, Japanese models, that are very popular with the young. Within the scooter market, there has been a shift away from heavy, metal-geared models to gearless, lighter, plastic-bodied ones.

Cars and two-wheelers have now become household essentials in India. There are currently close to 35 million two wheelers and 8 million cars in the country. In addition, there are 2 million trucks and 2 million other vehicles.

Despite the boom in some parts of the industry, there is need for considerable revitalization. Data drawn from the balance sheets of thirty-four companies shows a 2 per cent drop in turnover. Profitability has declined by 42 per cent.

Outdated policies pose key hurdles

Policy issues of key concern to Indian automotive sectorDomestic policies, rather than the global economic slowdown, are impacting the Indian automotive sector most heavily. What poses a particular drag are high and numerous taxes, customs tariffs and excise duties.

Although cars and two wheelers have become household essentials, policy makers continue to view and to tax them as luxury items. They disregard the fact that Indias automotive industry is the largest in the world and is a primary generator of employment in the country. Should the sector be relieved of its punitive tax burden, it could become a significant driver of economic growth and employment.

Taxes equal the value of each carPolicy makers also overlook the fact that car and vehicle owners present a significant vote bank. At the moment, they are forcing consumers to pay taxes equivalent to the value of every new car they purchase. This is because, for each car, there is a 35 per cent customs duty on the imported pack; a 40 per cent value-added tax; and a Modvat customs duty. There is then a 32 per cent excise duty and a 12 per cent sales tax. Many big cities impose their own taxes.

High tariffs constrain exportsIf the Government brings import tariffs down, it will boost exports. We see this from the recent experiences of Brazil, Mexico and Australia. It is not only important to bring down tariffs, but to do so in a public, scheduled manner so that industry is able to prepare and take full advantage. In India, tax and tariff reductions are announced arbitrarily in the budget, with no prior notice.

Auto policy should be abolishedMost importantly, the Government should stop controlling the automotive sector. This is a hangover from the early years of Independence. Automotives are consumer durables akin to washing machines, televisions or fridges. Since the Government does not feel compelled to draw up national policies for these sectors, it should not do so in the auto sector.

Global opportunities for the Indian automotive sector

India could become a major exporter of automotive componentsIf the Indian automotive sector positions itself correctly, it could become a major global exporter of automotive parts and components. The country has mature steel and ancillary industries. But this can only happen if the industry builds its capacity to meet global quality standards, delivery schedules, and prices.

Manufacturers will have to develop systems to efficiently manage labour, raw material, production and shipping. The Government will also have to be lobbied to rationalize and reduce tax rates across a number of sectors. Many foreign car companies have found it more convenient to operate out of Thailand, for instance, because there is a single tax rate and very little bureaucracy.

India is not yet ready to become a significant exporter of indigenous cars. Production costs are still too high. Cars are also becoming increasingly complex, with parts sourced from the best suppliers globally. Similarly, global marketing and advertising expenses constitute a considerable part of the cost of each car.

INTRODUCTIONIndustry:

Indian automobile industry in India is as well developed as any top industrial nations. Long years of License Raj and protectionism led to the development of various segments of automobile industry. There are a large number of well-entered players in all segments of the automobile industry as depicted in the following table.

There are also exists a huge market and production base fro specialty vehicles like Tractors, Earthmoving vehicles, Cranes etc. But despite having a well-developed industry and a large market, the industry still has not been able to realize its full potential owing to the following reasons.

Low purchasing power

Price sensitive market

Pent up/suppressed demand

Existence of a large middle class

Insufficient transportation infrastructure

India as a country has a per capita income of around US$318 per annum. That is very miniscule compared with that of developing nations like Japan or the USA, which is in the range of $20000. Hence the emphasis on large market size of a billion people quietly diminishes. Thereafter the existence of a large middle class and that too with a majority of them in the lower end ensures that the disposable income left with the masses is comparatively less. Hence the possession of an automobile is considered a luxury and often avoided by people.

But the scenario is after all not that bad and the industry as a whole is growing in terms of volume albeit the profitability and profit margin is of question. To have a better grasp of the situation let us review each segment individually.

Heavy commercial vehicles:

In India the commercial vehicles are graded according to their Gross Vehicle Weight (GVW). It is as under:

LCV: Intermediate commercial vehicle with GVW of 8 to 10 ton

MCV: Medium commercial vehicles with GVW of 10 to 15 ton.

HCV: GVW of 16 ton and above.

But the gradation apart, the segment is more recognizes by its utility such as the vehicles which carry passenger are called buses and those specializing in carrying loads as trucks. Since 80% of commercial vehicles are purchased on credit, the availability of credit is a major factor influencing demand. The credit squeeze affects the demand negatively. The other important factors influencing demand of CV are depreciation norms, diesel prices and changes in the Motor Vehicle Act.

Light commercial vehicles:

Like the Heavy vehicles segment, the LCV, which are also essentially freight carriers are equally important. Small freight loads over small distance are transported through these vehicles. In India in rural areas, these vehicles also ferry passengers over short distances. This segment is much more populated and competitive than the HCV. The liberalization of government policy with respect to foreign, technical and financial collaboration lead to a sudden spurt in technical collaboration in LCV segment.

The LCV segment is populated with six players with Telco being the traditional market leader by a wide margin.

Passenger car segment:

The first motorcar on the streets of India was seen in 1898. Mumbai had its first taxicabs in the early 1900. Then for the next fifty years, cars were imported to satisfy domestic demand. The Indian car industry can be classified, based on the price of the car into four segments. The demand for passenger cars can be segmented on the basis of the user segment as those bought by taxi operators, government/non government institutions, individual buyers etc. A major portion of the de4mand in India accrues mainly from personal vehicle owner.

The demand for cars is dependent on a number of factors. The key variables are per capita income, introduction of new models, availability & cost of car financing schemes, price of cars, incidence of duties and taxes depreciation norms, fuel cost and its subsidization, public transport facilities etc. The first four factors have positive relationship with the demand whereas others have an inverse relationship with demand for cars.

Two Wheelers Segment:

The two-wheeler segment like the passenger is very heterogeneous and could be split on basis of usage, load capacity, stroke engine, utility and appeal. In India it is generally sub-segmented into Motorbikes, Scooters, Scooterettes and Mopeds. The promotional and marketing outgo would rise steadily for the two-wheelers producers; the emphasis would now be on aesthetics, design, and product positioning and market segmentation. As a result, the consumer would be the ultimate beneficiary with the choice of more models with superior features.

Special Utility Vehicles:

This segment is also a very important segment but finds very less mention among the analysts in spite of its direct bearing on the economy. The probable reason for this trend is that the vehicle seems mundane and lacks the glamour of the luxury cars. The segment comprises of Tractors, Earth Moving Equipments and Material Handling. INDIAN AUTOMOBILE HISTORYThe origin of automobile is not certain. In this section of automobile history, we will only discuss about the phases of automobile in the development and modernization process since the first car was shipped to India. We will start automotive history from this point of time.

The automobile industry has changed the way people live and work. The earliest of modern cars was manufactured in the year 1895. Shortly the first appearance of the car followed in India. As the century turned, three cars were imported in Mumbai (India). Within decade there were total of 1025 cars in the city.

The dawn of automobile actually goes back to 4000 years when the first wheel was used for transportation in India. In the beginning of 15th century Portuguese arrived in China and the interaction of the two cultures led to a variety of new technologies, including the creation of a wheel that turned under its own power. By 1600s small steam-powered engine models was developed, but it took another century before a full-sized engine-powered vehicle was created.

The actual horseless carriage was introduced in the year 1893 by brothers Charles and Frank Duryea. It was the first internal-combustion motor car of America, and it was followed by Henry Ford's first experimental car that same year.

One of the highest-rated early luxury automobiles was the 1909 Rolls-Royce Silver Ghost that featured a quiet 6-cylinder engine, leather interior, folding windscreens and hood, and an aluminum body. It was usually driven by chauffeurs and emphasis was on comfort and style rather than speed.

During the 1920s, the cars exhibited design refinements such as balloon tires, pressed-steel wheels, and four-wheel brakes. Graham Paige DC Phaeton of 1929 featured an 8-cylinder engine and an aluminum body.

The 1937 Pontiac De Luxe sedan had roomy interior and rear-hinged back door that suited more to the needs of families. In 1930s, vehicles were less boxy and more streamlined than their predecessors. The 1940s saw features like automatic transmission, sealed-beam headlights, and tubeless tires.

The year 1957 brought powerful high-performance cars such as Mercedes-Benz 300SL. It was built on compact and stylized lines, and was capable of 230 kmh (144 mph).

This was the Indian automobile history, and today modern cars are generally light, aerodynamically shaped, and compact.

Automotive Industry, globally, as well in India, is one of the largest industries and key sectors of the economy. Due to its deep forward and backward linkages with several key segments of the economy, automotive industry has a strong multiplier effect and is capable of being the driver of economic growth. A sound transportation system plays a pivotal role in the countrys rapid economic and industrial development. The well-developed Indian automotive industry ably fulfils this catalytic role by producing a wide variety of vehicles: passenger cars, light, medium and heavy commercial vehicles, multi-utility vehicles such as jeeps, scooters, motor-cycles, mopeds, three wheelers, tractors etc.

Although the automotive industry in India is nearly six decades old, until 1982, only three manufacturers M/s. Hindustan Motors, M/s. Premier Automobiles & M/s. Standard Motors tenanted the motorcar sector. Owing to low volumes the sector perpetuated obsolete technologies and was out of synchronization with the world industry. In 1982, Maruti Udhyog Limited (MUL) came up as a Government initiative in collaboration with Suzuki of Japan to establish volume production of contemporary models. After the lifting of licensing in 1993, 17 new ventures have come up, of which 16 are for manufacture of cars. There are at present 15 manufacturers of passenger cars and MUVs, 9 manufacturers of Commercial Vehicles, 14 of two and three wheelers and 14 of tractors besides 5 manufacturers of engines.

The automotive industry comprising of the automobile and the auto component sectors has shown great advances since Delicensing and opening up of the sector to FDI in 1993. The industry had an investment of a sum exceeding Rs. 50,000 crore in 2002-03 which is slated to go upto 80,000 crore by a year 2007. The industry provides direct employment to about 4.5Lakhs persons and generates indirect employment of 1 crore. The contribution of the automotive industry to GDP has risen from 2.77% in 1992-93 to 8.7% in 2007-08.

INDIAN SCENARIO

Historical industry Development

It was in 1898 that the first motorcar steered down the Indian road. From then till the First World War, about 4,000 cars were directly imported to India from foreign manufacturers. The growing demand for these cars established the inherent requirements of the Indian market that these merchants were quick to pounce upon.

The Hindustan Motors (HM) was set up in 1942 and in 1944; Premier Autobackmobile (PAL) was established to manufacture automobiles in India. However, it was PAL, which came out with the first car in India in 1946. Hindustan Motors could only produce their first car in 1949 as they were concentrating on auto components more than the finished product.

It was left to another company, Mahindra and Mahindra (M&M) to manufacture sturdier utility vehicles, namely the American Jeep.

In the 50s, the Government of India granted approval to only 7 car dealers to operate in India - HM, API, ALL, SMPIL, PAL, M&M and Telco.

The protectionist policies continued to remain in place. The 60s witnessed the establishment of the two-three-wheeler industry in India and in the 70s things remained much the same.

Since the 80s, the Indian car Industry has seen a major resurgence with the opening up of Indian shores to foreign manufacturers and collaborators.

The 90s have become the melting point for the car industry in India. The consumer is king. He is being constantly wooed by both the Indian and foreign manufacturers. Though sales had taken a dip in the first few months of 1999, it is back to boom time. New models like Marutis Classic, Alto, Station Wagon, and Fords Ikon, the new look Mitsubishi Lancer are all being launched with an eye on the emerging market.

In these last years of the millennium, suffice it is to say that Indian cars will only grow from strength to strength.

Now let us look at the industry development in the chronological order:

1880's & early 1900's

About hundred years ago

The first motor car was imported

Import duty on vehicles was introduced.

Indian Great Royal Road (Predecessor of the Grand Trunk Road) was conceived.

First car brought in India by a princely ruler in 1898.

Simpson & Co established in 1840.

They were the first to build a steam car and a steam bus, to attempt motorcar manufacture, to build and operate petrol driven passenger service and to import American Chassis in India.

Railways first came to India in 1850's

In 1865 Col. Rookes Crompton introduced public transport wagons strapped to and pulled by imported steam road rollers called streamers. The maximum speed of these buses was 33 kms/hr.

From 1888 Motors Spirit attracted a substantial import duty.

In 1919 at the end of the war, a large number of military vehicles came on the roads.

1942 Hindustan Motors Ltd incorporated and their first vehicle was made in 1950.

In 1944 Premier Automobiles Ltd incorporated and in 1947 their first vehicle was produced.

Only seven firms namely Hindustan Motors Limited, Automobile Products of India Limited, Ashok Leyland Limited, and Standard Motors Products of India Limited. Premier Automobiles Limited, Mahindra & Mahindra and TELCO received approval. M&M was manufacturing jeeps. Few more companies came up later.

Government continued with its protectionism policies towards the industry.

AIA&AIA (association of the component manufacturers) came into being in 1959.

1960's

In sixties 2 and 3 Wheeler segment established a foothold in the industry.

Association of Indian Automobile Manufacturers formally established in 1960.

Standard Motors Products of India Ltd. moved over to the manufacture of Light Commercial Vehicles in 1965.

1970's

Major factors affecting the industry's structure were the implementation of MRTP Act, FERA and Oil Shocks of 1973 and 1979.

During this decade there was not much change in the four-wheeler industry except the entry of Sipani Automobiles in the small car market.

Oil Shock of 1973 quickened the process of dieselization of the Commercial Vehicle segment.

Three other companies, namely, Kirloskar Ghatge Patil Auto Ltd, Indian Automotive Ltd and Sen. & Pandit Engg. products Ltd entered the market during 1971-75. They ultimately withdrew in early eighties.

During the seventies the economy was in bad shape. This and many specific problems affected the Automobile Industry adversely.

1980's - The period of liberalized policy and intense competition

First phase of liberalization announced.

Unfair practices of monopoly, oligopoly etc slowly disappeared.

Liberalization of the protectionism policies of the Government.

Lots of new Foreign Collaborations came up in the eighties. Many companies went in for Japanese collaborations.

Hindustan Motors Ltd. in collaboration with Isuzu of Japan, introduced the Isuzu truck in early eighties.

ALL entered into collaboration with Leyland Vehicles Ltd. for development of integral buses and with Hino Motors of Japan for the manufacture of W Series of Engines.

TELCO after the expiry of its contract with Daimler Benz indigenously improved the same Benz model and introduced it in the market.

Government approved four new firms in the LCV market, namely, DCM, Eicher, Swaraj and Allwyn. They had collaborations with Japanese companies namely, Toyota, Mitsubishi, Mazda and Nissan respectively.

The Two Wheeler market increased. Since 1982 the Government had permitted foreign collaborations for the manufacturing of Two Wheelers up to 100cc engine capacity. Foreign Equity up to 40% was also allowed.

In 1983 Maruti Udhyog Ltd was started in collaboration with Suzuki, a Japanese firm.

Other three Car manufacturers namely, Hindustan Motors Ltd., Premier Automobiles Ltd., Standard Motor Production of India Ltd. also introduced new models in the market.

At the time there were five Passenger Car manufacturers in India - Maruti Udyog Ltd., Hindustan Motors Ltd., Premier Automobiles Ltd., Standard Motor Production of India Ltd., and Sipani Automobiles.

Ashok Leyland Ltd. and TELCO were strong players in the Commercial Vehicles sector.

Important policy changes like relaxation in MRTP and FERA, delicensing of some ancillary products, broad banding of the products, modifications in licensing policy, concessions to private sector (both Indian and Foreign) and foreign collaboration policy etc. resulted in higher growth / better performance of the industry than in the earlier decades.

1990's

Mass Emission Norms were introduced for in 1991 for Petrol Vehicles and in 1992 for Diesel Vehicles.

In 1991 new Industrial Policy was announced. It was the death of the License Raj and the Automobile Industry was allowed to expand.

Further tightening of Emission norms was done in 1996.

In 1997 National Highway Policy has been announced which will have a positive impact on the Automobile Industry.

The Indian Automobile market in general and Passenger Cars in particular have witnessed liberalization. Many multinationals like Daewoo, Peugeot, General Motors, Mercedes-Benz, Honda, Hyundai, Toyota, Volvo and Fiat entered the market.

Various companies are coming up with state-of-art models of vehicles.

TELCO has diversified in Passenger Car segment with Indica.

Despite the adverse trend in the growth of the industry, it is resolutely trying to meet the challenges. Various issues of critical importance to the industry are being dealt with forcefullyINTERNATIONAL SCENARIOUnderstanding global dynamics is vital for the Indian automotive sector.

1.1 Evolution of Automobiles in the World

Mans journey on the road of mechanized transport had begun right from the time when the wheel was invented in 4000 BC. Since then he has continually sought to devise an automated, labor saving machine to replace the horse.

However, it was not until 1885 when the first car rolled down the streets that man was truly able to come out with an automated devise to replace the horse. All the earlier attempts, though successful, were steam-powered road-vehicles.

A French man Nicolas Jacob Cugnot built the first self-propelled car in 1769, which could attain speeds of up to 6 kms/hour. It was in 1771 that he again designed a steam-driven engine for a car, which enabled it to run so fast that the car rammed into a wall, it was the first recorded accident in the history of cars.

Francois Isaac de Rivaz designed the worlds first internal combustion engine in 1807. He to develop the worlds first vehicle to run on such an engine, one that used a mixture of hydrogen and oxygen to generate energy, subsequently used this.

This subsequently gave way to a number of designs based on the internal combustion engine in the early 19th century with negligible degree of commercial success.

Thereafter in 1860, Jean Joseph Etienne Lenoir built the first successful two-stroke gas driven engine. In 1862 he again built an experimental vehicle driven by his gas-engine, which ran at a speed of 3 kms/hour. These cars became so popular that by 1865 many could be seen on the roads.

It was not until 1885 that a four-stroke engine was devised and a petrol engine introduced. Gottileb Damlier and Nicolas Otto worked together on the mission till they fell apart. Daimler created his own engines, which he used both for cars and for the first four-wheel horseless carriage.

Meanwhile, Karl Benz was in the process of creating his own advanced tri-cycle, which proved to be the first true car. This car first came to the roads 1886.

During the same decade in 1890 Henry Ford of the United States began work on a horseless carriage. He went several steps further and in 1896, came out with his first car-- the Quadricycle. This was an automobile powered by a two-cylinder gasoline engine.

Henry Ford then went on establish the Ford Motor Company, which was launched in 1903, and in 1908 he catapulted his vehicle, Model T Ford to the pinnacle of fame. Henry Ford did not stop here and continued with his innovations, he then went on to produce the Model T Ford on a moving assembly line, thereby introducing the modern mass production techniques of the automobile industry.

The modern car that we see on the roads today is an outcome of several innovations and discoveries over the ages; yet the car industry has still not stopped progressing and will continue to come out with better versions as decades pass by.

It is worth noting here that the first ever land-speed record was established in 1898. Count Gaston de Chasseloup-Laubat of France drove an electric car at a speed of 39.24 miles per hour in Acheres near Paris.

This flagged off the era of wheels race, which lasted till 1964, after which jet and rocket -propelled vehicles were allowed.

Ever since the invention of wheel, man has endeavored to create different modes of transport to suit his needs. But, automobile takes perhaps pride of place amongst all his contraptions. Merely because it has evolved over the years from an article of extravagance to the one of necessity. And, nowhere has this evolution been more visible than in our very own backyard. Remember the days of the ubiquitous Ambassador and the Fiat, which dominated the countrys roads, at a time when the Indian consumer had little option. However, since then, liberalization and the entry of competition have brought about a sea change in the Indian automotive sector, which has evolved as a major player in the Asian context. A fact reflected in the emergence of India as the 18th largest global car market with a share of a mere 0.80 per cent. Hence, imagine the underlying potential that India possesses.

Keeping this in mind, it becomes imperative for the Indian players to try and understand what they are up against on a global platform, as exports could well hold the proverbial -- key -- in terms of survival. With this objective in mind, the following is a preliminary analysis of the global vehicle car park.

Starting from the time when Henry Ford rolled out his first vehicle to now, the world passenger car park has grown to accommodate an estimated 524 million vehicles. This figure, although a ballpark estimate, is undoubtedly growing every single day. What with automotive plants the world over spewing out mutants of a particular design almost on a minute-to-minute basis. Accuracy in such an exercise is just not possible, as new cars are registered globally everyday, while some are abandoned and others are scrapped due to old age and accidents.

All these problems mean that putting a number to the global car park is a complex issue. Even more difficult perhaps understands the dynamics of change in the global automobile industry. But despite the rapid pace of change and the inherent problems of statistics, it is very important for Indian auto manufacturers to understand the dynamics of the global marketplace and the competition therein.

A dozen companies dominate worldwide. Roughly, one car in seven on the worlds roads is currently produced on a General Motors (GM) platform. Putting GMs Indian operations in perspective is the fact that this carmaker manufactures mere 60,000 vehicles in India, which is just a minuscule 0.075 per cent. There are estimated to be around 80 million such vehicles, including the Opel, Vauxhall and Saab variants from the GM stable.

Around one in eight cars are produced on the Ford/Mazda platform, which amounts to 67.1 million vehicles worldwide. Of this, Fords Indian operations are capable of producing mere 100,000 vehicles annually. One in 12 vehicles shares a Toyota or Lexus label. While almost 41 million vehicles come from the Volkswagen, Skoda and Audi combine. Then, there are 30 to 33 million each of Nissan, Fiat and Peugeot-Citroens cars on global roads, as well as 25-26 million, respectively, of Honda and Renault models. So, in effect, the top eight automotive brands account for almost three in every four cars on world roads, with companies like Mitsubishi, Chrysler and Hyundai adding another seven per cent, leaving 20 per cent of world car park in the hands of miscellaneous car makers like Daewoo, Suzuki, Isuzu, Lotus and Maruti.

Having roughly understood the players that dominate the global passenger car market, it is now imperative that we define the largest car parks in the world and also understand their operational dynamics.

United StatesThe US is the largest passenger car market in the world and is said to contain almost 150 million cars. Historically, car sales in this market have been controlled by the Big Two, namely General Motors and Ford (excluding Mazda).

However, statistics now show that the share of other Marques in the US market is on the rise. The fastest growth is in the Japanese brands, notably those of Toyota, Nissan and Honda, whose combined share on American roads was estimated to have increased to over 28 per cent in 1998. Most other brands surprisingly have smaller market shares in the US. A prime example of which is Volkswagen, which despite being the fourth largest manufacturer in the world, accounts for less than one vehicle in every 60 cars on American roads. Traditionally, up market brands like BMW and Mercedes Benz also account for less than a minuscule 1.3 per cent combined.

Western Europe

The so-called Big Six dominate the car park in Western Europe, accounting for almost three in every four cars on the regions roads. Interestingly, Volkswagen and its affiliates, which control a huge 15.6 per cent of the European car park, have dominated this region over the last decade. Now, compare this 15.6 per cent of Volkswagen, which is the market leader, and the 80 per cent share of Maruti Udhyog in India and what have you?

Coming back to Western Europe, Fiat is the second largest player there with 13.3 per cent of the total car pie. But analysts state that its share will fall as older Fiats are scrapped. This aside, perhaps the other aspect that is truly interesting and specific to Europe, is the long tail of other carmakers. After the Big Six, BMW, the top three Japanese firms and Mercedes Benz account for a huge chunk of cars on European roads. Then, there are firms like Volvo, Mitsubishi, Mazda, Suzuki, Lada, Proton, Rover, Maruti and Tata, all vying for a piece of the action. For these companies, supplying dedicated parts and maintaining a regional service network is unlikely to be economically viable in the medium term.

Japan The profile of the Japanese car park is very distinct from that of the US or Europe for several reasons. First, there are fewer imports due to policy restrictions, a la India! Secondly, there are very few older vehicles, mainly because of the draconian vehicle-testing regime, which results in many cars being replaced after a five-year period.

Furthermore, because of support to domestic industry, Toyota together with Daihatsu dominates the Japanese car park, accounting for almost 40 per cent of the market share. The other large manufacturers include Nissan and Honda, which together account for almost one third of the cars in use. Other manufacturers with a growing presence are Subaru and Suzuki, which have increased their sales significantly in the last few years, thanks to a number of innovative models and a growing popularity of mini cars. Does this trend resemble some other car markets?

Asia Toyota, Nissan, Honda and Mitsubishi have dominated the markets of the ASEAN region for more than a decade now. In India, however, Suzuki, through Maruti Udyog completely dominated the car park with a solid 80 per cent market share until recently. Interestingly, the ASEAN and Indian markets are quite diverse compared to Japan, despite the similarity in vehicles. In India and Southeast Asia, vehicles have much longer lives (often more than 20 years) due to the testing regimes which are absolutely rudimentary, to say the least.

In China, commercial vehicles and not passenger cars surprisingly dominate the park and new vehicular sales. The market for passenger cars until now has been very small with a mere 3.5 million vehicles, and Volkswagen and Daihatsu dominate it.

The South Korean market with around 7.5 million vehicles is also unusual. Almost every car on Korean roads is designed and built locally and will perhaps spend its entire life on Korean roads due to policy restraints. Even more interesting is the fact that this scenario looks set to continue. This is despite the pressure to increase exports to South Korea, which is being resisted vehemently by local carmakers, despite the collapse of the local currency and the economic problems that plague the region.

Rest of the worldFinally, the statistics for the rest of the world are very varied. In Eastern Europe, there are still many old cars from the erstwhile Soviet era, even though most of the auto-manufacturers have been driven out of business. There is also a large number of cars imported and often stolen from Western Europe that find their way into east European markets.

Elsewhere, Africa has a small market that is dominated mainly by French and Japanese, and in some cases Italian made cars. However, the trend here is changing with players like Daewoo and Hyundai finding it easier to penetrate.

Lastly, there is the South American market that has been controlled by European and US producers. There are an estimated 23 million vehicles in this region, most of which have been manufactured in Brazil or Argentina.

This completes the list of the main passenger car markets of the world. But, with the economic uncertainties that plague some of the regions above, a fall in demand is the most likely scenario that will slow down the pace of growth in the interim. There are some interesting trends that have surfaced, which also need a mention, as these will play a big role in augmenting or decelerating demand.Overview of Automotive Mission Plan:The Indian Automotive Industry after de-licensing in July, 1991 has grown at a spectacular rate on an average of 17% for last few years. The industry has now attained a turnover of Rs. 1, 65,000 crores (34 billion USD, assuming 1$ = Rs. 46) and an investment of Rs. 50,000 crores. Over Rs. 50,000 crores of investment is in pipeline in the vehicle industry alone. The industry is providing direct and indirect employment to 1.31 crore people. It is also making a contribution of 17% to the kitty of indirect taxes. The export of automotive sector has grown on an average 30% per year during the last five years. The export earnings from this sector is estimated at over 5 billion USD out of which the share of vehicle sector is 2.8 billion USD during the year 2006-07.

Even with this rapid growth, the Indian Automotive Industrys contribution in global terms is very low. This is evident from the fact that even though passenger and commercial vehicles have crossed the production figure of 2.0 million in the year 2006-07, yet Indias share is about 2.9 percent of world production of 66.46 million passenger and commercial vehicles. Indian automotive export constitutes only about 0.3% of global trade.

It is a well accepted fact that the automotive industry is a volume driven industry and certain critical mass is a pre-requisite for attracting the much needed investment in Research and Development and New Product Design and Development. R&D investment is needed for innovations which is the life-line for achieving and retaining the competitiveness in this industry. This competitiveness in turn depends on the capacity and the speed of the industry to innovate and upgrade. The most important indices of competitiveness are productivity of both labor and capital. The concept of attaining competitiveness on the basis of cheap and abundant labor, favorable exchange rates, low interest rates and confessional duty structure is becoming inadequate and therefore, not sustainable. In light of the above, it is felt that a greater emphasis is required on the development of the factors which can ensure competitiveness on a long-term basis.

India with its rapidly growing middle class (450 million in 2007 as per NCAER Report), market oriented stable economy, availability of trained manpower at competitive cost, fairly well-developed credit and financing facilities and local availability of almost all the raw materials at a competitive cost has offered itself as one of the favorite destination for investment for the automotive manufacturers. These advantages need automotive manufacture to be exploited in a manner to attain the twin objective of ensuring availability of best quality product at lowest cost to the consumers on the one hand and developing and assimilating the latest technology in the industry on the other hand. The Government recognizes its role as a catalyst and facilitator to encourage the companies to move to higher level of competitive performance. The Government wants to create a policy environment to help companies gain competitive advantage. The government policies target to encourage growth, promote domestic competition and stimulate innovation.

It is also felt that a general improvement in availability of trained manpower and good infrastructure is required for the sustainable growth of the industry. Besides, specialized and industry-specific initiatives can lead to competitive advantage. Keeping in view the above factors, the Government has launched a unique initiative of National Automotive Testing and R&D Infrastructure Project (NATRIP) to provide specialized facilities for Testing, Certification and Homologation to the industry. A similar initiative is required for creating specialized institutions in automotive sector for education, training and development, market analysis and formulation and dissemination of courses in automotive sector.

It has been noticed that the Auto Industry has grown in clusters of inter-connected companies which are linked by commonalities and complementarities. The major clusters are in and around Manesar in North, Pune in West, Chennai in South, Jamshedpur-Kolkata in East and Indore in Central India. The Ministry of Heavy Industries and Public enterprises is envisaging in the Eleventh Five-Year Plan period to create a National Level Specialized Education and Training Institute for Automotive Sector and to enhance the transportation, communication and export infrastructure facilities through concerned Ministries in and around these clusters. The Government will make attempts to streamline the relevant Government Institutions and Educational and Research Institutions in and around the clusters to meet the growing needs of the automotive sector.

The Automobile Industry - Wheels of ChangeThe transformation of the Indian market for passenger cars is remarkable. A few years ago you had a choice between three cars. Now the Indian car market has around thirty cars for the consumers. From a stage where the consumer had to wait for months to get a car, the market has turned in favor of the buyer. With new models and recession in the economy, manufacturers are doing everything to attract the consumers. In comparison with the kind of cars available in developed countries, Indias passenger cars may appear primitive even today, when a much wider choice is available than in earlier years.

Earlier, the choice was between three cars. The Ambassador from Hindustan Motors was phased out from the European market before 1960. This car is still used by all the government agencies and you still find that most taxis are of this make. For the urban employed class it was Premier Padmini, a Fiat version of the same vintage. Then came Maruti a 798 cc from Maruti Suzuki, which became the most popular car in the country.

The opening up of the economy and liberalization attracted investments form different parts of the globe. The result was wide range of cars in the Indian market. The joint venture between Government of India and Suzuki Motors of Japans produced Maruti 800 (798 cc), Omni E (796 cc), Maruti Zen (993 cc), Maruti 1000 (970 cc) and Maruti Esteem (1298 cc). Hindustan Motors offer Ambassador ISZ (1817 cc), Contessa GLX (1817 cc). Other than the older models like Premier Padmini (1366 cc) and Premier 118 NE, the market now has new cars, including Fiat Uno (999 cc (1171 cc), Daewoo Cielo (1498 cc), Peugeot 309 (1360 cc), Opel Astra (1597 cc), Ford Escort (1299 cc), Honda City (1343 cc), and Mercedes E220 (2199 cc).

Until the 1980s the automobile industry in this country had charted an uneventful course. The scenario showed a limited number of manufacturers, low levels of production and the use of anachronistic technology. Hindustan Motors, for example, have continued with the use of the old reliable Ambassador, making only cosmetic changes in the 1957-designed body. Premier Auto did the same with the Fiat body that was newly introduced in 1964.

For a long time, owning a personal four-wheeler was considered a luxury in India, and a limited road network with poor road surface did not help matters much. Production showed only a very gradual upward curve from the 1950s until the early 1980s before Maruti came into the scene.

Though the consumers are happy about the variety of cars available, the manufacturers are worried. The drop in the demand and the inventory pile-up in most of the production units are hitting the bottom line. Though all players claim that they are not in the market for short-term gains, they admit that the present condition is far from attractive.

With sales remaining stagnant or going down, car manufacturers have started going all out to win the customers. For the first time, car manufacturers in India offered heavy discounts. Easy finance offers, free accessories and attractive warranty offers are the other soaps offered now.Future Trends & OutlookFirst, the global automotive market is growing by just over two per cent a year, or a net of 10 million vehicles.

Secondly, the growth has slowed down considerably and is expected to slow down further due to the increasing levels of saturation reached in the larger car markets the world over. In fact, analysts from the Economist Intelligence Unit (EIU) state that this saturation in the larger markets could possibly turn into negative growth, given the recent trend among carmakers to opt for quality components, which will undoubtedly enhance the life of a vehicle.

This aside, the Asian economic crisis has further added to the woes of global automotive manufacturer, with the demand from the developing regions also now turning into a trickle.

Lastly, the global domination by the main automotive manufacturers is on the wane -- albeit very slowly as -- region centric products -- become the name of the game. Interestingly, it is these emerging trends and more importantly the concept of region centric products, which are said to be the main cause of the winds of change blowing across the automotive car parks the world over. Automakers that have been enjoying a generally prosperous spell until now have to look ahead to likely difficulties that could force a fundamental rethink in the way vehicles are designed, manufactured, distributed and sold.

Leading manufacturers have already put their research and engineering teams to work on new fuel and power-train technologies to meet the eco-friendly norms post 2000. Further downstream, companies such as Ford and General Motors of the US, Germanys Volkswagen and Toyota of Japan have begun to re-examine their dealer relationships and pricing strategies. They have all embraced a new customer focus, hoping to increase their exposure to areas such as insurance, finance, servicing and even recycling.

But, perhaps more significant is the fact that most manufacturers are now on the look out for new strategic tie-ups, mergers and acquisitions - that will drive out costs and keep pace with the impending price cuts. Examples of which are already visible in the Daimler Benz merger with Chrysler of the US. Ford has acquired Swedens Volvo Car Corporation and Renault of France has acquired an influential stake in debt-laden Nissan. In trucks, the Volvo group has finally secured control of Swedish archrival Scania and another merger with Mitsubishi has also been cemented. Meanwhile, General Motors has increased its stake in Suzuki of Japan and has also signaled the possibility of helping out the Korean cheabol Daewoo. Thus, while such deals and restructuring will certainly create an opportunity to cut costs, it remains to be seen whether they will create significant new opportunities for growth.

However, what remains uncertain is the timing of any downturn. Many economists predicted last year that European and US automotive markets would contract in 1999. Given the steep declines seen in Southeast Asia and Latin America, the scenario pointed to an industry struggling to remain profitable in the face of overcapacity, falling prices and weakening demand.

However, so far that gloomy outlook has not been realized. Low-cost finance and rising disposable incomes have helped confound most economic forecasts, with even the moribund East Asian markets showing a modest rebound. But the worlds manufacturers are not sanguine. The changing market scenario has forced most automakers to explore new ways to defend margins and market share. Thus, new automotive strategies will become clear over the next two years, but the manufacturers will have little option but to start moving now.

Unique characteristics of the Indian marketDuring our interaction with the industry people we came across several phenomenon, which struck us as unique to the Indian market and thus are worth mentioning here. Some of these are:

1. The Tax and Duty structure: 60% of the final showroom price comprises of various forms of duties and taxes. There is excise duty, import duties on components, Central Sales tax, state sales tax, Octroi, Road tax. All this heavily affects the pricing strategies of the automobile companies.

2. Differential taxation: The sales tax structure is not standardized across the country. At present it varies between 4% and 12% from state to state. This leads to a substantial difference in prices across different states. This has caused many a problem to dealers in states having higher rates of sales tax because customers who are in the know of things do not hesitate to buy vehicles from neighboring states, which have lower sales tax. Moreover, there are tax benefits in buying from Union territories also. The sales tax structure has just recently been standardized at 12%. This has resulted in price increase in some states, which had lower rates.

3. Reasons for buying: For many Indian buyers the reason for buying a car is not for transportation, utility or anything else. The primary motive is to use it as a tax saving device!!! Businesses in India get depreciation benefits on their assets. So purchasing of a car is done in order to save on taxation by claiming depreciation on the vehicles value. This leads to another characteristic of the market, which is the March, and September end buying rush. The tax system allows for 40% depreciation on the asset value if an asset is purchased before the 31st of March and 20% depreciation benefit if it is purchased before the 30th of September in a financial year. Nearing the end of these months demand spurts drastically and there is a mad rush to get delivery of the vehicles and get them registered before the month end. Dealers who have ready stock, and thus can give immediate delivery are in an advantageous position in these times. Even the Road Tax Office makes a quick buck by backdating registrations for those who could not procure their vehicles before the deadline.

4. Comparatively less evolution to the medium and premium segment: In the mid 1990s most of the new foreign players who came into the market, came in with mid-sized cars because they felt that the Indian market, like other developing markets, would evolve from the small cars to the mid-sized segment. This, however, has not happened and even today the strongest segment, both, in terms of volumes and growth is the small car segment. Growth in the mid-sized and premium segments has been sluggish and slow. These still remain small volume segments. This has led to manufacturers rethinking their strategies towards small sized cars.

5. Role of rumors and word of mouth: Buyers in India are a closely-knit group. The social system in India is also tilted towards joint families. Word of mouth and peer opinion play a very significant part in deciding which make of car to buy. Rumors about price discounts, mileage or quality problems in cars spread like wild fire and have seriously affect sales.

6. The Prices sensitive market: The buyer in India is very price sensitive. Demographics show that 20% of the Indian population is under poverty line and 60% consists of middle class. The segments are very price sensitive and always go for the economic options. That is why we see that most of the Indian automobile companies market their cars on price and have many upgraded versions in the A and B segment.

7. Most number of Players: The Indian automobile industry has the more number of players than any other country in the world. Whereas, in the other countries, there are normally six to seven players at a time.

8. Foreign Companies: Most of the Indian automobile companies are either wholly owned subsidiaries of any foreign company or a joint venture between an Indian Company and a foreign company.

9. High Growth rate: Indian automobile market is growing faster than the world automobile market. The world automobile market is growing at 2% per annum, whereas the Indian automobile market is growing at five to six percent per annum.

10. Domination of Compact cars: In other countries it is the mid-size segment that is dominating the market, whereas the compact size passenger cars dominate the Indian passenger car market.

11. Domination of Two-wheeler segment: In the automobile sector, worldwide, it the passenger car segment that drives the market, but in India, due to high percentage of middle class in the population, it is the two-wheeler segment that dominates the market.

Government PolicyThe policy of broad banding capacities in the eighties led to increased utilization of capacity for four-wheelers in the industry.

The liberal policy on foreign participation through technical and financial collaboration in early eighties led to substantial product up gradation and introduction of new models. But it was alleged that the policy was discriminatory in favor of MUL, while others like Telco, PAL, and HM were denied permission to produce cars in collaboration with Japanese companies.

The GOI controls the car sector by way of framing policies on depreciation norms, import duty on cars and parts used in it, petrol prices and import duty of steel.

During the era of socialist inspired controls, the government protected the car industry from new entrants by making effective use of licenses. However, after liberalization and with the consequent opening up of the auto sector in 1992-93, the license raj ceased to exist.

The perception of a car as a luxury good lead to heavy excise duty on cars. The excise duty doubled from 25% in FY87 to 55% in FY91. Till 1987, the GOI followed a discriminatory policy so as to charge lower duty on fuel-efficient car with engine capacity of less than 1000cc. This helped MUL to price its car at a lower price in comparison to others. But with lobbying from PAL and HM government withdrew the provision in 1987.

But with the onset of the liberalization process in the early nineties, the government has continually rationalized the excise duty regime. Presently, there is a duty of 40% (16% + 24%) on motor vehicles, designed for transport of not more than six persons (excluding the driver). On vehicles designed for transport of more than six persons, but not more than 12 persons, the duty is 32% (16% + 16%). Over and above the excise duty, cess by the Central Government, states are now charging a uniform sales tax of 12%. This came in being after the 15th of May 2000. Earlier, states used to charge sales tax varying from 3 to 14%. But MUL vehicles receive favorable treatment in terms of sales tax as well.

In line with its treatment for luxury items import duties for car have been maintained high. In the 80's, import duties varied between 150 to 200% based on the engine capacity of a car. The import duty on cars and components has come down in the last few years in line with general reduction in import tariffs. In the FY98 budget, the import duty on cars has also been further brought down from 50% to 40% ad valorem. Substantial reduction in import duty has been extended in the budget FY98 for import of certain items, which would help the industry to reduce the emission level of vehicles. The import duty on catalytic converters and parts thereof has been reduced from 25% to 5%. The duty on CNG kits and parts thereof has been reduced from 10% to 5%.

The import duty on auto components will be a key factor in deciding the final pricing of cars as new ventures start with about 50% indigenization levels. The reduction in import duty on steel in the last few years has helped the industry in reducing raw material costs as major steel requirement of car industry was imported. Even today, all CKD/SKD imports include metal pressed body panels.

Policy on petroleum products, auto emission and depreciationThe price of petrol and diesel was regulated till recently by the government as part of its policy on petroleum products management. However, since 1997, the prices of these fuels have been deregulated and linked to the movements in international prices. As a result, already, the price of diesel has been raised twice, the latest by a huge 40%. This dismantling of the Administered Price Mechanism (APM) of petroleum products will reduce the cost disadvantage of petrol driven cars.

On the vehicle emission front, judicial activism has goaded the government to take certain policy measures in the recent past, which has led to stricter emission norms for automobiles. As per a Supreme Court judgment, banning registration of all non-Euro I compliant cars within Delhi, all vehicles should become Euro I compliant by April 2000. (In the National Capital Region of Delhi, Euro II norms are now in operation) As a result, almost all the existing players and new entrants have started introducing models complying with the said norms. This development has led to an increase in the prices of cars, which by an estimate, could be anywhere between 10-15%.

The depreciation norms have effect on demand for cars as institutions purchase cars for use by managerial staff and claim depreciation in their books. With this the companies are benefited from tax shelter provided by depreciation. Therefore any changes in depreciation norms affect the demand from this segment. The depreciation benefits, which accrue to institutions & corporate buyers, were slashed from 33.33% to 20% in 1990. This led to decrease in demand from this segment for a short period. But with increase in depreciation rate to 25% in 1994, corporate demand was restored.

Automotive Policy

In a policy announcement in FY94, the government had permitted foreign car producers to invest in the automobile sector in India and hold majority stakes. The objective of the policy was to build automobile production capabilities in the country, with minimum foreign exchange outflows. The key conditions of the policy related to production, imports, exports, level of indigenization and foreign equity inflows.

Since all the new ventures involved the import of capital goods and CKD/ SKD kits, the promoters had to fulfill certain export obligations. They were also required to provide an indigenization program. However, these conditions were framed in the nature of MOUs, which the new ventures had to sign with the Directorate General of Foreign Trade (DGFT).

But, in the last three years many of the companies failed to live up to their export commitments, which made it difficult to obtain permission for importing additional CKD/ SKD kits.

In addition, the uncertainty regarding the threshold level for classifying imports as CKD/ SKD or component imports continues. Currently, the threshold level is set on a case-to-case basis where imports below a certain percentage of the total value of the car are being charged duty that is applicable to components (30%), while imports above this percentage are being charged at the rate applicable to CKD/ SKD (45%). The industry wants the threshold level to be at 70%, while the government wants it to be at 35%.

In November '97, the Cabinet Committee on Foreign Investment cleared a new policy for permitting new car ventures. It addresses the aspect of indigenisation level and exports by the new ventures. The main proposals of the new policy are:

The new ventures would have to indigenes up to 50% within 3 years and 70% by the end of seventh year of starting commercial production.

They will have to invest a minimum of $50 million as equity capital over a period of 3-4 years.

The venture will have to become foreign exchange neutral over a period of 5-7 years.

The ventures will be allowed to export components & ancillaries, apart from cars.

A moratorium of 2 years would be given to companies for meeting the export commitment.

The new policy is expected to provide development of ancillarisation and increase employment opportunities. But for some of the new car ventures, auto policy will be a speed barker as they have to sign a new MOU with the government and make necessary arrangement to meet the new policy.

Import Policy

The import of passenger cars and other automotive vehicles is restricted and an import license is required for these items. Import of capital goods and automotive components/parts are placed under Open General License (OGL) and hence, no Government approval is required. SKD/CKD Imports: Some of the joint ventures in the passenger car sector envisage initial import of cars in SKD/CKD kits. Import of cars in SKD/CKD kits requires a license from the Directorate General of Foreign Trade (DGFT). While the Government has decided to grant the required license in the case of joint ventures approved in the car sector, these are required to give details about import programmed, indigenization planned and export possibilities and sign a memorandum of understanding (MOU) with DGFT in this respect. The underlying idea for this is to discourage screwdriver technology and to have an assurance that the joint venture partners have long-term commitments to the projects.

Import Duty

In line with its treatment for luxury items import duties for car have been maintained high. In the 80's, import duties varied between 150 to 200% based on the engine capacity of a car. The import duty on cars and components has come down in the last few years in line with general reduction in import tariffs. In the 1997-98 Budget, the import duty on cars has also been further brought down from 50 per cent to 40 per cent ad valorem. Import of capital goods in the auto sector in general is attracting import duty of 25 per cent. However, under the Export Promotion Capital Goods (EPCG) Scheme, capital goods can be imported on payment of confessional duty of 15 per cent on taking export obligation of four times the c.i.f. value of imported goods, to be fulfilled in five years or zero duty payment on an export obligation of six times the c.i.f. value to be fulfilled in eight years where the c.i.f. value of imported goods is RS. 20 crores or more. The import duty on auto components will be a key factor in deciding the final pricing of cars as new ventures start with about 50% indigenization levels. The reduction in import duty on steel in the last few years has helped the industry in reducing raw material costs as major steel requirement of car industry was imported. Even today, all CKD/SKD imports include metal pressed body panels.

Excise Duty

The perception of a car as a luxury item leads to heavy excise duty on cars. The excise duty doubled from 25% in FY87 to 55% in FY91. Till 1987, the GOI followed a discriminatory policy so as to charge lower duty on fuel-efficient car with engine capacity of less than 1000cc. This helped MUL to price its car at a lower price in comparison to others. But with lobbying from PAL and HM government withdrew the provision in 1987.

But with the onset of the liberalization process in the early nineties, there has been continued rationalization of excise duty in respect of automobiles. In 1997-98 there was a duty of 40 per cent on motor vehicles, designed for transport of not more than six people (excluding the driver). On vehicles designed for transport of more than six people, but not more than 12 people, the duty was 25 per cent. In the case of public transport vehicles and vehicles for transport of goods, the duty was fixed at 15 per cent. The duty on two-wheelers varies from 15 per cent to 20 per cent depending upon engine capacity, Excise duty on auto components has been reduced from levels of 20 and 15 per cent to 18 and 13 per cent. Excise duty on electrically operated vehicles has been reduced from 10 to 8 per cent and bodies of motor vehicles from 20 to 18 per cent.

The car industry had been asking for reduction in excise duty so as to reduce the end prices of cars to customers and increase the sluggish demand. With continuation of liberalization and shift in the perception (of car being a luxury product) may lead to reduction in duties over a period of two to three years. This will reduce the prices of cars leading to further boost in demand.

The government policies have been instrumental in shaping up of the car industry right from the post-independence era.

1. The Government controls car sector with the help of policies on taxation, depreciation norms, import duty on cars and parts used in it, petrol prices and import duty of steel.

2. After liberalization and with opening up of the auto sector in 1992-93 the license raj ceased to exist.

3. The perception of car as a luxury good has lead to heavy excise duty for cars. The excise duty had doubled from 25% in FY87 to 55% in FY91. But with the liberalization process in early nineties, the government has brought down the excise duty to 40 per cent in 1992-93.

4. In line with its treatment for luxury items import duties for car have been maintained high. The import duty on cars and components has come down in the last few years in line with general reduction in import tariffs. Over the years the import duty has been decreased from above 200% to 103% on passenger cars. The current duty on Completely Knock Down / Semi Knock Down (CKD/SKD) kits is 103% (including 5% special duty) and for components 68% (including 5% special duty).

5. The reduction in import duty on steel in the last few years has helped the industry in reducing raw material costs as major steel requirement of car industry was imported.

6. The prices of petrol and diesel are regulated by the government as part of its policy on petroleum products management. This affects the operational cost of the car and hence the demand for them. The proposed dismantling of Administered Price Mechanism (APM) of petroleum products will reduce this disadvantage of petrol driven cars. Till last year diesel cars were considered as economy cars due to large price differential compared to petrol with former being subsidized. But last year the hike in diesel prices by as much as 40 % reduced the differential and in future we might see petrol and diesel price parity. This will result in more demand for petrol cars, as petrol cars are easy to handle and demand lesser maintenance compared to their diesel counterparts.

7. On the vehicle emission front, the government has taken an active role in the recent past, which has led to strict emission norms for the automobiles in the last few years. With all the cars will have to be Euro II compliant by April 2000 the new entrants and existing players will be forced to introduce latest models from their portfolio of cars. This will make the cars dearer by 15 to 20 per cent. Here one needs to focus on one important issue. The industry is geared to deliver the hardware to meet the prescribed norms and it shouldnt be difficult for any of the carmakers in the country to meet the norms. But the issue the Government hasnt addressed satisfactorily is the quality of fuel which is a prerequisite for automobiles to meet Euro I and Euro II norms. In the light of this Government should establish an infrastructure, which allows unadulterated fuel to be supplied from refineries to fuel filling stations. Without this the expensive hardware would just be emitting poisonous gases. So in this case the court ruling has been in the right direction but devoid of understanding of the ground reality.

8. The depreciation benefits, which accrue to institutions & corporate buyers, were slashed from 33.33% to 20 % in 1990.

9. The new ventures would have to indigenes up to 50% within 3 years and 70% by the end of seventh year of starting commercial production. EVALUATION OF THE AUTOMOBILE INDUSTRY

Technology And Manufacturing Process

The body panel and engine constitute a major portion of the total cost of car manufacture. A typical cost structure for car is as given below:

Parts/assembly% Of total cost

Glass5

Brakes/wheels/tyres6

Interiors7

Transmission system7

Ignition/exhaust system8

Steering/suspension9

Comfort fittings11

Engine16

Body18

Others13

Source: Probity Research

Car manufacturing is basically assembly of components procured from ancillaries or auto component manufacturers. Nearly the car manufacturers outsource 80% of auto components. This helps in reducing the capital cost needed to setup a car manufacturing plant.

Therefore, auto ancillaries play a key role in maintaining the quality and price of the product. But till the entry of MUL in the Indian car industry, vendor development was hardly seen as a part of automobile manufacturing in the country. With the setting up of auto component manufacturing facilities by Indian promoters, in collaboration with Japanese players for supply to MUL, the country was first introduced to the concept of out sourcing.

With the new entrants planning to start manufacturing facilities with a small capacity base in the country, the role of auto component players will substantially become important over the years.

Presently, some of the luxury car manufacturers import CKD/ SKD kits and just carryout assembly operations in the country. But with strict policy guidelines of the GOI in force, all manufacturers have to opt for 70% indigenization within five years of starting manufacturing operations in the country. This will further boost the operations of auto component manufacturers in the country.

Technology

As far as the changes in technology are concerned than one change will be that all the cars will have to be fitted with Multi Point Fuel Injection (MPFI a technology in which traditional carburetor is required and fuel is sprayed by different valves into the combustion chambers of an engine). Secondly due to change in consumer preferences there have been technological advancements in power steering, power windows and such other facilities, which are now available as a standard feature on the deluxe versions of almost all the cars. Developments too have taken place in the safety aspect of the car with cars becoming sturdier with side impact bars, air bags, collapsible steering etc. are becoming more and more popular due to foreign carmakers coming in India with these technologies.

Indian Automobile marketTrade

Demand

The demand for cars in the past was supply driven, as demand did not match supply. This led to high premium and long waiting periods for the cars. But change in government policies coupled with aggressive capacity additions and up gradation of models by MUL in the early nineties led to increase in supply and subsequently reduced the waiting periods for economy cars.

The demand for cars was suppressed by various supply constraints. The demand for cars increased from 15,714 in financial year 1960 to 30,989 in financial year 1980 at a compounded annual growth rate (CAGR) of only 3.5%. The entry of Maruti Udhyog Ltd (Government of India Suzuki Motors, Joint Venture) in 1983 with a "peoples" car and a more favorable policy framework resulted in a CAGR of 18.6% in car sales from financial year 1981 to financial year 1990.

After witnessing a downturn from financial year 1990 to financial year 1993, car sales bounced back to register 17% growth rate till financial year 1997. Since then, the economy slumped into recession and this affected the growth of theautomobile industry as a whole. As a result car sales remained almost stagnant in the period between financial year 1997 and financial year 1999. CAGR recorded during the financial year 1994 - financial year 1999 period was 14.4%, reaching sales of 409,624 cars in financial year 1999. However, during financial year 2000, with the revival of economy, the segment went great guns posting a sales growth of 56% year on year growth. But again in the financial year 2001 the car sales were seen declining, as there was a negative growth rate of about 5% in car sales. The market recovered in financial year 2002, but could not reach the figures achieved in financial year 2000. The data for this year is available up to November, which is also showing negative growth rate of 3.44%, against the same period last financial year.

The table below gives the production numbers of passenger cars in the past few years.

Now in financial year car sales bounced to 12%, 27%,17%,8%, 21% and 12% in 2002 to 2008 respectively. And CAGR of last 6 year is 16.12%.

The table below indicates the past sales trend for cars:

Automobile Domestic Sales Trends

Category

2002-032003-042004-052005-062006-072007-08

Passenger Vehicles707,198902,0961,061,5721,143,0761,379,9791,547,985

Commercial Vehicles190,682260,114318,430351,041467,765486,817

Three Wheelers231,529284,078307,862359,920403,910364,703

Two Wheelers4,812,1265,364,2496,209,7657,052,3917,872,3347,248,589

Grand Total5,941,5356,810,5377,897,6298,906,42810,123,9889,648,094

YearSalesYear on Year Growth (%)

2001-02632584-

2002-03707,19811.79511

2003-04902,09627.55918

2004-051,061,57217.67838

2005-061,143,0767.67767

2006-071,379,97920.72504

2007-081,547,98512.17453

CAGR = 16.12%Determinants of Demand

The demand for cars is dependent on a number of factors. The key variables are listed below:

1. Per capita income

2. Introduction of new models

3. Availability & cost of car

4. Financing schemes

5. Price of cars

6. Incidence of duties and taxes

7. Depreciation norms

8. Fuel cost and its subsidization

9. Public transport facilities

The first four factors viz, increase in per capita income, introduction of new models, availability & cost of car financing have positive relationship with the demand whereas others have an inverse relationship with demand for cars.

The demand for cars in the future can be estimated with the help of making use of macro economic variables like growth in GDP, per capita income etc. or house hold penetration technique. An attempt is made to estimate the potential demand for passenger cars based on the household penetration level of passenger cars.

The demand for cars in the future is expected to come predominantly from the existing two-wheeler owners who will be upgrading to a four-wheeler, due to rising income and necessity of car for personal transportation purposes. Therefore, excluding the owners of mopeds, the potential demand for cars in the next fifteen to twenty years can be taken as 50% of the existing two-wheeler population of around 28mn units.

But with the release of new models in the higher end of the economy segment, the supply of second hand economy cars is expected to increase substantially, which will be costing just about two times the price of premium range two-wheelers. This could affect the demand for first hand/new cars. Also, with cross demand from utility vehicles, availability of finance and other factors the above mentioned potential for cars will be difficult to realize. Growth in the segmentthus is expected to hover around 15-20%yoy.

The dominance of economy segment will continue in the future, as it will provide large volume to Indian car industry. This is because a majority of customers for cars will graduate from two-wheelers. The demand for mid-sized and premium cars is expected to rise as new models enter the market, income levels rise and present car owners upgrading from the economy segment to higher end cars.

Supply

The supply of cars in Indian industry till 1991 was dependent upon the production capacity of individual players. The production of cars has increased from 42,475 units to 181,420 units from 1981 to 1991 respectively. The growth in production of cars has varied in the last three decades from just 1% in 1970-80 to 21% in 1980-90 and above 15% in 1991- 96. The table below gives the production numbers of passenger cars in the past few years.

Now in financial year car Production bounced to 19%, 37%,22%,8%, 18% and 14% in 2002 to 2008 respectively. And CAGR of last 6 year is 19.38%.

Automobile Production Trends

Category2002-032003-042004-052005-062006-072007-08

Passenger Vehicles723,330989,5601,209,8761,309,3001,545,2231,762,131

Commercial Vehicles203,697275,040353,703391,083519,982545,176

Three Wheelers276,719356,223374,445434,423556,126500,592

Two Wheelers5,076,2215,622,7416,529,8297,608,6978,466,6668,026,049

Grand Total6,279,9677,243,5648,467,8539,743,50311,087,99710,833,948

YearProductionYear on Year Growth (%)

2001-02608851-

2002-03723,33019

2003-04989,56037

2004-051,209,87622

2005-061,309,3008

2006-071,545,22318

2007-081,762,13114

CAGR = 19.38%

From the above chart, it can be seen that the production of cars was increasing till 2003, with a steep increase in 2005-06, but thereafter, it was tipsy-topsy.

The major increase in production of cars in the 80's was due to the entry of Maruti Udyog Limited in 1983, which helped increase car production by 20,000 to 30,000 cars per annum till the early nineties.

With the entry of Maruti Udyog Limited, the face of the passenger car industry changed forever. Existing producers who had operated in a protected, high margin environment faced the prospect of not just diminishing market share, but a shift in focus from producing vehicles to selling them. But Maruti Udypg Limited made use of the opportunity open to its technologically superior product and increased its capacity from 100,000 cars in FY90 to 240,000 cars in FY96 and 350,000 cars in FY98.

The opening of economy in 1993, attracted world majors who joined hands with existing auto majors, to start their operations at the earliest. The first ones to enter the field were Mercedes Benz in joint venture with Telco to manufacture E220, E250D models, Peugeot in JV with PAL to manufacture Peugeot 309L, Fiat in JV with PAL to manufacture Fiat Uno.

This has helped in increasing the number of models available to the customer from 8 to 30 and hence provided a wide choice to him. This has also helped in reducing the average waiting period and premium on cars, which were a part and parcel of car cost in the eighties.

Exports

The passenger car exports in the eighties and early nineties had been very negligible as the companies were facing a capacity constraint that was not even sufficient to supply to the domestic market. The poor quality of cars compared to international standards led to poor quantity of exports from the country.

But now, the Indian automotive industry has found a ready and accepting global market because of the introduction of new vehicles and components with improved quality and performance.

In 1985, MUL started exporting cars to neutralize the impact of foreign exchange outflow. The exports of MUL increased from 100 cars in financial year 1987 to 6,000 cars in financial year 1990. The exports witnessed further momentum in the nineties to reach a volume of 37,161 in financial year 1997. But from financial year 1998 onwards, a southward trend was witnessed with declining sales of 20% 29,747 vehicles. The same continued in financial year 1999 with a further drop of 14% 25,464 units. Financial year 2000 too saw lackluster exports with a 9% fall in export sales that touched 23,271 units. The reason for sharp drop in car exports has been a drop in Maruti udyog Limited exports, which now accounts for 90% of the country's total exports. But in the last two years, the rise in the export of cars from India has been phenomenal. This is largely attributed to the quality of the cars produced by Indian automobile companies to remain competitive in the global car market. There has been great improvement in the quality of Indian cars to come to global terms.

Exports are expected to increase further in the near future as, new entrants like Hyundai, Honda Siel, GM and Ford are busy investigating options in the world markets. GM has commenced exports to Nepal and is further considering Sri Lanka as a potential export market. Further Ford is scheduled to commence exports by the end of the third quarter of the current fiscal.

In the longer run, as the industry matures, exports should increase as manufacturers strive to attain economies of scale, which will not be possible given the relatively small size of the domestic market.

Given below is the table showing the number of cars exported from India and a chart representing the same.

The table below gives the production numbers of passenger cars in the past few years.

Now in financial year car Exports bounced to 30%, 80%,29%,6%, 13% and 10% in 2002 to 2008 respectively. And CAGR of last 6 year is 25.78%.

Automobile Exports Trends

Category2002-032003-042004-052005-062006-072007-08

Passenger Vehicles72,005129,291166,402175,572198,452218,418

Commercial Vehicles12,25517,43229,94040,60049,53758,999

Three Wheelers43,36668,14466,79576,881143,896141,235

Two Wheelers179,682265,052366,407513,169619,644819,847

Grand Total307,308479,919629,544806,2221,011,5291,238,499

Year on Year Growth (%)

YearExport

2001-0255250-

2002-0372,00530.32579

2003-04129,29179.55836

2004-05166,40228.70347

2005-06175,5725.510751

2006-07198,45213.03169

2007-08218,41810.06087

CAGR = 25.78%

Capacity

The Automobile Manufacturers have put up a robust manufacturing capacity of 95 lakh plus vehicles per annum since 1993. Today India is the worlds second largest manufacturer of two wheelers, fifth largest manufacturer of commercial vehicles and manufactures largest number of tractors in the world.

The country offers fourth largest passenger car market in Asia today. A supplier driven market, having no more than a handful of vehicular models two decades ago, now offers more than 150 models and variants by way of customer options

The table below gives the production numbers of passenger cars in the past few years.

Now in financial year 2007-8 2.24million capacity of Four Wheeler. 12.69million of Two & three Wheeler, 0.79 million of Engine.Installed Capacities in the Indian Automobile Industry 2007-08

2006-072007-08

Installed Capacity (In Million)Installed Capacity (In Million)

a) Four Wheelers1.79a) Four Wheelers2.24

b) Two &Three Wheelers10.59b) Two &Three Wheelers12.69

c) Engines0.29c) Engines0.39

Segmentation of the IndustryThe Indian automobile industry can be classified, on the basis of price, in four different segments, into the 'small' car or the economy segment (up to Rs. 2.5 lakhs), mid-size segment (Rs. 2.75-4.0 lakhs), premium car segment which can be divided into lower premium (Rs. 5-7 lakhs) and upper premium segment (Rs. 7-10 lakhs) and Luxury car segment (above Rs1mn). One of the things to note here is that the models shown below have many variants so there will be a price overlapping, which can result in overlapping across segments. This segmentation is done according to prices of basic models. The models in the car market can be fitted to different segments as given below:

CategoryModelsFeatures of the segment

Economy segment (up to Rs. 2.5 lacs)Neno, Revo, Maruti Omni, Maruti 800, PadminiPrice, Fuel Efficiency

Mid-size segment (Rs. 2.75-4 lacs)Premier 118NE, Ambassador Nova, Fiat Uno, Zen, Hyundai Santro, Daewoo Matiz, Tata Indica, ContessaPrice, Performance

Premium Car Segment (Rs.5-10 lacs)Esteem, Cielo, Siena, Accent, Ikon, Corsa, Baleno, Lancer, Astra, Escort, Honda City, Swift Desire.Price, Performance, Diesel option

Luxury segment (Above Rs10 lakhs).Mercedes Benz and other imported modelsStatus value, performance, Product features

The demand for passenger cars can be segmented on the basis of the user segment as taxi operators, government, non-government institutions, and individual buyers. A major portion of the demand in India accrues mainly from personal vehicle owners.

The distribution in 2007-08 of car sales in terms of the above mentioned segments is as given in the chart below. Since, then share of sales in the economy segment has increased with a large number of entrants purveying their wares and with some degree of success.

SegmentMarket Share (%) (2006-07)Market Share (%) (2007-2008)

Economy49.7861.49

Mid Size41.6427.1

Premium8.411.24

Luxury0.080.15

Chart 1 - Relative market share of different segments

But there is also another view to segment the Indian Automobile Industry, i.e., on the basis of the type of vehicle compact, mid-size, utility wagons and station wagons. The table below shows the models featuring in different segments stated above:

SegmentModels

CompactMaruti 800, Alto, Indica, Matiz, Santro, Zen, Palio, Uno, Wagon R

Mid-SizeAccent, Viva, Accord, Ambassador, Astra, Baleno, Camry, Cielo, City, Contessa, Ikon, Esteem, Indigo, LancerMondeo, Octivia, Nexia, Corsa, Siena, Sonata

Utility VehiclesArmada, Commander, Gypsy, Bolero, MM550, Omni, Pajero, Qualis, Safari, Sierra, Scorpio, Sumo, Versa, Voyager

Station WagonsBaleno, Corsa, Palio (weekend), Siena (weekend)

Major Players

There are as many as 15 players in the Indian Automobile Industry, which shows that Indian Automobile industry is the biggest automobile industry in the world, in terms of numbers of players in the industry. The players in the Indian Automobile Industry are listed below:

TELCO

Mahindra & Mahindra Limited

Maruti Udyog Limited

Hyundai Motor India Limited

Honda Siel Cars India Limited

Fiat India Automobiles Pvt. Limited

Ford India Limited

General Motors India Pvt. Limited

Toyota Kirlosker Motor Limited