Driving into global mart in small cars

Iconic American car maker Ford’s Indian outfit Ford India, recently launched ‘Figo’, its compact car for the Indian market besides exhibiting interest in using India for its exports in the near future. Toyota and Honda are in the process of launching small cars and another popular US brand –– General Motors, has launched ‘Beat’ and ‘Spark’ under its Chevrolet brand.

Maruti Suzuki and Hyundai Motors have already been in the thick of things in this segment, both in terms of exports and domestic sales. Yes, the Indian small car segment and its export market is getting hotter even as you read this. There are many players in the Indian automotive industry today. Fiat, Tata, Skoda, GM and the aforesaid, name them and you’ll find them here –– many with plans to use the Indian manufacturing base to export small cars to the world.

The reason: With the south ward trend in international markets and looming overcapacities, the immediate challenge for most of the automotive companies is to increase their global reach. With an extremely low penetration rate and a rising middle class with high disposable income, India becomes the favourite destination for global car companies to expand their global operations. And surely, the country has swiftly grown into becoming the hub for exporters of such cars too.

Experts believe that there are many other reasons too. It is a result of the complex global economic dynamics, an extension of a gradual process of companies making their way into the country which had a huge potential and also the relative cost advantage.

However, the obvious cost advantage is not the only reason for big players to chose this country. There are other factors like a good base of component suppliers who come with the experience of having supplied to global car companies now (which was a gradual process) and besides, India’s domestic auto market is relatively small considering a population of at least 1.2 billion, with 19,49,776 passenger vehicles being sold last year (2009-10).

A hungry domestic market is very key for a success story with exports. This throws open a big market that provides the manufacturers the much desired economies of scale. Manufacturing cars being capital intensive, large volume of production for the domestic market helps in lowering the per unit fixed cost. Also, the government here provides concession in excise duty for small cars encouraging players to make large investments in plant and machinery.

Living up to the ‘projected’ potential, the domestic car sales reported a double-digit growth for the year ended March 31, 2010, even as the the auto market the world over was struggling under recessionary pressure. Domestic sales of compact cars for the year 2009-10 grew 27 per cent to 11.28 lakh units from 8.85 lakh in 2008-09, while domestic sales of overall passenger cars, which grew 21 per cent, stood at 15.27 lakh units during the year, up from 12.20 lakh in the previous financial year, Society of Indian Automobile Manufacturers (SIAM) data reveals. Likewise, even in the export market, compact car exports from India grew 30 per cent to 4.12 lakh units from 2.87 lakh while the overall passenger car exports grew by 25 per cent to 4.42 lakh units from 3.31 lakh.

Outward thrust

Pointing out that the compact car segment amounts to about 70 to 75 per cent of the total car sales in India, Maruti and Hyundai believe that small cars will fuel the automobile sector in the country in the coming years and say that besides India being a huge market, it is also a good base for exports. In the same line, other industry players also expressed their confidence on the potential of small cars in India.

Many players have also announced big plans for the current year. Both Maruti and Hyundai are stepping up production to export to more countries. Similarly, Toyota Motor Corp is designing a compact car for the Indian market and plans to make the country its small-car hub by 2012. General Motors plans to export 20 per cent of the output from its Maharashtra plant by 2011, once it reaches its full capacity of 1,40,000 units. Likewise, Nissan Motor India Pvt Limited, announced last week that it has begun export trials to Europe from India. Accordingly, the first consignment of six cars left for Barcelona, Spain, from its Orgadam plant.

Buttressing the fact that India is becoming the small car export hub is the most recent sales figures of car makers Hyundai and Maruti. The two big names in the segment currently are also the ones who’ve gone into 2010-11 strongly: Hyundai’s exports grew to 2.67 lakh units during 2009-10 from 2.28 lakh in the previous year with its i10 model selling the most. Similarly, Maruti’s exports jumped to 1.40 lakh against 54,115 in 2008-09 as it exported more than a lakh units of its popular A-Star model. (For company-wise data see table).

Further, the latter has announced an investment of Rs 1,700 crore and Rs 2,500 crore for enhancing capacity at its Manesar plant and for research and development, respectively, while Hyundai has started working three shifts, utilising its maximum capacity of 6,00,000 units annually.

Strong base

Expressing total belief in the small car market in India, PricewaterhouseCoopers leader, automotive practice, Abdul Majeed says that the small car trend and the export figures out of this is here to stay for a long time to come. “This will go on for longer than most people presume it would,” he said, observing that about 9 million bikes are sold in India annually and there are a lot of aspirants who want to convert to four-wheelers. So even if car makers get a five per cent conversion we are talking of a huge market. And as long as the domestic market keeps the demand coming, the export strategies of firms will continue.

Echoing this is KPMG Automotive Sector Head Yezdi Nagporewalla, who pointed out that Indian consumers preference for small cars is expected to remain strong as the market penetration in India is only 10 per 1,000 and most new buyers enter the market through a small car, he said, adding India has emerged stronger from recession. When rest of the world was showing de-growth of 10 per cent to 50 per cent, Indian passenger vehicle market actually grew in 2008-09 and 2009-10. India is expected to retain a 12 per cent growth rate over the next 5-6 years and a 8 per cent  to 10 per cent growth rate post 2015.

Besides, with several countries like Bangladesh, Sri Lanka et al., showcasing signs of being potential car markets, India which already has an edge in terms of suppliers and other mechanisms being in place, is becoming the automatic manufacturing choice for car makers to export. Maruti Suzuki Executive Officer (marketing & sales) Mayank Pareek said “it is not only the availability of a possible buyer (though one of the most important factors) that attracts companies into setting up units here. One has to keep in mind that India also has a huge pool of talent that comes at a relatively cheap price, and also that we have a good supplier base etc in place.” However, he pointed out that more needs to be more done on the infrastructure bit in the country as it still poses several logistical challenges to companies.

While Hyundai Motor India Ltd Director-Sales Arvind Saxena observed: “not only does India allow companies to produce products that are competent in terms of price but also has little quality issues now. So, while the huge domestic market allows us to attain the economies of scale, the talent and other things makes us competent at another level.” Speaking of the potential, Maruti, while observing that only 8 out of every 1,000 people in India own a car in comparison to around 500 to 600 out of  every 1,000 people in advanced nations owning a car, said “with the penetration level so low and a lot of aspirants with enhanced disposable income India is a huge market; and 70 per cent of the overall car sales coming from small cars speaks itself for the potential this segment has.”

The next five years, according to KPMG are going to see the industry challenged to compete both on technology and on cost. In technology, the industry has a huge challenge ahead of it in terms of stringent environment regulations. Furthermore, with increasing competition resulting from new players entering this segment, being cost competitive will be imperative for the players to maintain their market share.  Additionally, companies will have to target increased rural penetration to garner the volumes this segment promises. Moreover, in what is further evidence that success is not been elusive for these players, they are all eyeing newer export markets and some, like Maruti will soon start shipments to these new markets too. Currently, the main export markets include Europe, Latin America and some parts of Africa, but some players are now also eyeing countries like Nepal, Philippines, Indonesia, Sri Lanka, et al..