Ruling India's roads
India's economic progress pales when compared to China's stellar growth. But the crouching Indian tiger should not be ignored, according to automotive expert Dr. Thomas Sedran.
India has already entered the big league of Asian carmakers. If global OEMs want to rule India's roads, they will have to build world-class cars with Indian cost structures.
Considering India's size and turbo-charged growth, comparison with China is inevitable. All too often, however, India draws the shorter straw. When it comes to automotive production, India is not in the same league as China. Whereas India sold 1.2 million units last year, China sold more than 2 million passenger cars. Foreign direct investment provides a similar story.
Although India's foreign direct investment policy has become more generous since 2000, FDI is minuscule compared to China. India's FDI inflows jumped 25 percent during 2004 to USD 5.33 billion. But that's a trickle of the USD 60 billion FDI flowing into China, according to UNCTAD in its World Investment Report 2005.
Keeping an eye on India
Yet as attractive as China might be, European carmakers and suppliers would be wise to keep at least one eye pinned on India. They should also keep in mind that India's automotive market is not a cookie-cutter mold of China's car sector. The structure of India's auto industry is unique when compared to other developed economies. Besides a strong four-wheeler market, India also has a sizeable two-wheeler, three-wheeler and commercial truck market. The country rolled-out a total of 8.5 million automobiles in 2004, of which 1.2 million were passenger cars and multi-utility vehicles.
India has already entered the big league of Asian carmakers. If global OEMs want to rule India's roads, they will have to build world-class cars with Indian cost structures.
Considering India's size and turbo-charged growth, comparison with China is inevitable. All too often, however, India draws the shorter straw. When it comes to automotive production, India is not in the same league as China. Whereas India sold 1.2 million units last year, China sold more than 2 million passenger cars. Foreign direct investment provides a similar story.
Although India's foreign direct investment policy has become more generous since 2000, FDI is minuscule compared to China. India's FDI inflows jumped 25 percent during 2004 to USD 5.33 billion. But that's a trickle of the USD 60 billion FDI flowing into China, according to UNCTAD in its World Investment Report 2005.
Keeping an eye on India
Yet as attractive as China might be, European carmakers and suppliers would be wise to keep at least one eye pinned on India. They should also keep in mind that India's automotive market is not a cookie-cutter mold of China's car sector. The structure of India's auto industry is unique when compared to other developed economies. Besides a strong four-wheeler market, India also has a sizeable two-wheeler, three-wheeler and commercial truck market. The country rolled-out a total of 8.5 million automobiles in 2004, of which 1.2 million were passenger cars and multi-utility vehicles.
Dr. Thomas Sedran
By 2010, India will be a 2 million passenger car market and will become a 3 million market by 2015. If only India had previously developed an adequate road infrastructure, these volumes could have already been reached. Purchasing power for such volumes already exists today, but the road development is moving at a far slower pace.
Although the foundation for a strong passenger car industry was laid in the early 1990s, real momentum has only been building since 2000. That is when the government significantly changed its policies, taking steps to make manufacturing more internationally competitive by creating export promotion zones and expanding infrastructure. It also freed industry from excessive regulations five years ago.
Its stance toward foreign direct investment also became less restrictive. Unlike in China where a joint venture is required for domestic production, India's auto foreign direct investment policy allows global OEMs to have 100 percent ownership, which has created a healthy industry from the start. The Indian market is thus full of real players and not "aspirers."
Although the foundation for a strong passenger car industry was laid in the early 1990s, real momentum has only been building since 2000. That is when the government significantly changed its policies, taking steps to make manufacturing more internationally competitive by creating export promotion zones and expanding infrastructure. It also freed industry from excessive regulations five years ago.
Its stance toward foreign direct investment also became less restrictive. Unlike in China where a joint venture is required for domestic production, India's auto foreign direct investment policy allows global OEMs to have 100 percent ownership, which has created a healthy industry from the start. The Indian market is thus full of real players and not "aspirers."
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India's local heroes lose out
Given the potential of India's automotive market, it's worth taking a closer look at its structure. The future of the Indian market is in the hands of nine automakers, which command 98 percent of the total market. The Indian big three, Maruti, Tata and Mahindra & Mahindra, which boasted market share of 65 percent in 2004, are capable of designing, developing and producing indigenous vehicles.
Of the global OEMs, Hyundai has the outright lead with its 18 percent market share, and hot on its heels is fast-growing Toyota. Despite their clout, the big three Indian carmakers are losing market share. Their strengths primarily lie in the A and B segment. India however is experiencing considerable segment migration to C-segment vehicles (e.g. Honda City, Opel Corsa and Hyundai Accent). It's precisely in the C segment and above that global OEMs are strong. That's why we expect their market share to spike in coming years.
Ruling India's roads
To be successful in the Indian market, carmakers require a product that carries the highest customer value. In short: European quality cars at Asian prices. Price remains the crucial selling point in this market. But driving comfort and life-cycle costs, especially fuel economy, are becoming more important factors for potential car buyers in India. Since local diesel prices are 30 percent lower than gasoline, the demand for efficient diesel engines should grow even more strongly, and European carmakers should hold a distinct advantage in this area.
Given the potential of India's automotive market, it's worth taking a closer look at its structure. The future of the Indian market is in the hands of nine automakers, which command 98 percent of the total market. The Indian big three, Maruti, Tata and Mahindra & Mahindra, which boasted market share of 65 percent in 2004, are capable of designing, developing and producing indigenous vehicles.
Of the global OEMs, Hyundai has the outright lead with its 18 percent market share, and hot on its heels is fast-growing Toyota. Despite their clout, the big three Indian carmakers are losing market share. Their strengths primarily lie in the A and B segment. India however is experiencing considerable segment migration to C-segment vehicles (e.g. Honda City, Opel Corsa and Hyundai Accent). It's precisely in the C segment and above that global OEMs are strong. That's why we expect their market share to spike in coming years.
Ruling India's roads
To be successful in the Indian market, carmakers require a product that carries the highest customer value. In short: European quality cars at Asian prices. Price remains the crucial selling point in this market. But driving comfort and life-cycle costs, especially fuel economy, are becoming more important factors for potential car buyers in India. Since local diesel prices are 30 percent lower than gasoline, the demand for efficient diesel engines should grow even more strongly, and European carmakers should hold a distinct advantage in this area.
Global OEMs must build world-class cars with the Indian cost structure if they want to be successful in India. India exported 130,000 passenger cars in 2004. To achieve the necessary economies of scale, Indian operations will need to be used as regional export hubs to supply other markets. Carmakers here can only achieve fixed and variable costs economies if they have a good balance of domestic sales and export sales.
Additionally, Indian operations should be leveraged in the global value chain of OEMs. Those companies that integrate India's strengths – such as engineering and software development – into their worldwide operations are seeing tremendous success. They are also benefiting from their local Indian subsidiaries.
India potentially is the next red-hot market. OEMs that have their finger on the local pulse and manage to globally integrate their Indian operations have good chances of seeing a profitable and sustainable operation develop.
Dr. Thomas Sedran, Partner at Roland Berger Strategy Consultants, Munich.
If you have questions or comments regarding this article, please do not hesitate to contact us:
Additionally, Indian operations should be leveraged in the global value chain of OEMs. Those companies that integrate India's strengths – such as engineering and software development – into their worldwide operations are seeing tremendous success. They are also benefiting from their local Indian subsidiaries.
India potentially is the next red-hot market. OEMs that have their finger on the local pulse and manage to globally integrate their Indian operations have good chances of seeing a profitable and sustainable operation develop.
Dr. Thomas Sedran, Partner at Roland Berger Strategy Consultants, Munich.
If you have questions or comments regarding this article, please do not hesitate to contact us:
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