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IIMA Consult Club Newsletter - January 2011

IIMA Consult Club Newsletter - January 2011

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Published by Amber Maheshwari
The January 2011 issue of Panorama, the monthly newsletter of the Consult Club of IIM Ahmedabad. View the other issues on http://192.168.33.201/consult/. Visit our blog at http://iimaconsulting.blogspot.com/
The January 2011 issue of Panorama, the monthly newsletter of the Consult Club of IIM Ahmedabad. View the other issues on http://192.168.33.201/consult/. Visit our blog at http://iimaconsulting.blogspot.com/

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Published by: Amber Maheshwari on Jan 14, 2011
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01/28/2011

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History of the Automotive Industry
The evolution of the automotive industryin India can be broadly divided into threephases:
1947-1983This period was marked by unfavourablegovernment policies – steep excise dutiesand sales tax, and high customs duty onimport. There were only two majorplayers in this period – Hindustan Motorsand Premier Automobiles Ltd.
1983-1993In 1983, the government of India enteredinto a joint venture with Suzuki to formMaruti Udyog. The automobile industrywas de-licensed in 1991 with theannouncement of the New IndustrialPolicy; while the passenger car industrywas de-licensed in 1993. The automobilesector in India underwent ametamorphosis as a result of thesepolicies with a number of local playerscoming into prominence during thisperiod.
1993-2010 After the sector opened to foreign directinvestments in 1996, global majorsmoved into the Indian market.Measures such as relaxation of theforeign exchange and equityregulations, reduction of tariffs onimports, and refining the banking policies played a vital role in turning around the Indian automobile industry.This period also witnessed thediversification of manufacturers intorelated activities – fleet management,finance lease, insurance and the usedcar market.
Current Status
 At present, 100% FDI is permissible inthe automobile sector, including thepassenger car segment. Subsequent to theliberalization, the auto sector hasemerged as a sunrise sector for the Indianeconomy. As a result of favourablegovernment policies and its inherent costcompetitiveness, India has evolved as aglobal manufacturing hub in recenttimes. Automotive industry consists of theautomobile and auto component sectors,and a number of global and Indiancompanies are present in both sectors.Two-thirds of the auto componentproduction is directly consumed by themanufacturers. Being one of the largestindustries in India, the automotiveindustry has witnessed impressive growthin the past two decades.The period between April-August 2010saw a production growth of more than 30per cent over the same period last year,with the industry producing over 7Million vehicles during this period.Overall automotive production in Indiahas increased at healthy CAGR of closeto 9% in the period 2003-09.
Growth Drivers of Indian Automobile Market 
Rising industrial and agriculturaloutput, which contribute positively
 An Overview of the Automotive Sector
Panorama
 JANUARY 2011
ISSUE SEVEN
Overview of AutomotiveSector  Player profiles News updates
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 I nd ia  is  t he  la rges t  ma n u f ac t u re r o f   t rac to rs,  t wo- w hee le rs a nd  t h ree- w hee le rs  i n  t he  wo r ld.
 
to the GDP and thereby increasethe purchasing power
Increase in the middle class urbanpopulation; coupled with rising working population
Increasing disposable incomes inthe rural agricultural sector
 Availability of easy financeschemes
Greater affordability of vehicles
Cost efficiencies contributing tolower production costs
Favourable government policies
Growth in road infrastructureacross the country
Salient Features of India’s Positionin World Production
Cutting edge automobile testing andR&D centres
 Well developed, globally competitiveauto ancillary industry
Easy availability of low cost steel forproduction purposes
Largest manufacturer of tractors inthe world
Largest manufacturer of twowheelers in the world
Largest manufacturer of threewheelers in the world
Ninth largest car manufacturer inthe world
Segments in the Automobile Sector
The Indian automobile sector can bebroadly divided into four segments - twowheelers, three wheelers, passenger vehicles and commercial vehicles.Currently the two wheeler segment is byfar the largest in terms of market share.However, passenger vehicles segment isthe most rapidly growing segment; andhas witnessed a lot of activity by foreignplayers in recent years.
Two-Wheeler Segment 
The domestic two-wheeler industry hasgrown steadily at a CAGR of 8.5 percent from 4.2 million in 2001 to 7.43million in 2009. The motorcycle segmentcontinues to dominate the market;accounting for over 80% of the totalsales. It is interesting to note that whilethe demand for motorcycles is increasing,that of scooters has actually declined overthe years. CNG (compressed natural gas)fuelled bikes are a recent promising technological development in the two-wheeler market.Passenger Vehicles SegmentThis segment of the market is constitutedby passenger cars and SUVs. Thedomestic Indian passenger vehiclesmarket has grown at a CAGR of 12.6 percent over the last seven years. Passengercars, which accounted for 78.6 per cent of  volumes, grew at a CAGR of 15 per cent.The organised used car industry isgaining steady ground in the Indianmarket with sales fast reaching the levelsof new car sales. To benefit from theflourishing trend leading organizedmanufacturers like Automartindia Ltdand Maruti's TrueValue have made aforay into the used car business. Recently,Mercedes-Benz launched its global pre-owned car business for India branded“Proven Exclusivity.” BMW is also inplans to enter the Indian used carmarket .
Commercial Vehicles Segment 
This segment includes both goodscarriers and passenger vehicles. Thesetwo categories can be further subdividedinto light, medium and heavy vehicles.The domestic commercial vehiclesindustry clocked sales of more than384,000 vehicles in 2009. However, salesactually declined in 2009 as compared toprevious years. A possible reason for thiswas the global financial crisis, as a resultof which all commercial activity declined.The government has recently brought outa set of incentive schemes; in an attemptto boost sales.
Three Wheeler Segment 
Three-wheeler sales in India touched anew record of 0.4 million in 2006–07.However, the launch of four-wheel,sub-1-tonne vehicles such as Ace by TataMotors and Maxximo by M&M hasresulted in a segmental shift away fromthree-wheelers; leading to declining sales volumes.This segment includes both passengerand goods carrier vehicles. Theproportion of goods carriers in overallsales has doubled, indicating theincreased need for a low-costtransportation system across shortdistances.
The Auto Ancillary Industry
The evolution of auto ancillary industryin India can be classified into threephases with distinct features; similar tothat of the manufacturing sector. Thefirst one, before the entry of Maruti,which was characterized by small numberof auto players like Hindustan Motors,Telco, Bajaj etc. The second phase beganwith the entry of Maruti and marked thegrowth period for this industry, with theauto ancillary manufactures requiring tomeet stringent quality standards of Maruti’s Japanese collaborator Suzuki.Export of auto components from Indiaalso began during this period. Afterliberalization the third phase of evolutionbegan; with the entry of foreignautomobile manufacturers like MercedesBenz, Ford Motors. The auto ancillaryindustry witnessed huge capacityexpansions and modernization initiatives.However, the foreign players soonrealized the market was not as big as itappeared and soon their sales targetswent away. A tough competitive scenarioemerged, which resulted in a lot of consolidation in the industry, as continuesto be the scene even today. The industryhas transformed from being highlydomestic centric to a force ready to faceglobal competition. India is now asupplier of a range of high-value andcritical automobile components to globalauto makers such as Toyota, Ford andVolkswagen.The inherent strengths in the Indian autocomponent industry, such as costreduction in production, low labour costs,established quality standards, availabilityof raw materials, design; engineering andtechnical skills etc. provide impetus to thegrowth of the sector. Also, the entry of global Original EquipmentManufacturers (OEMs), making India astheir manufacturing base has given a big boost to the industry. The segment hasalso developed as a niche segment by
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diversifying into sectors such asaerospace, power segments andprosthetics.The turnover in 2009-10 is estimated ataround US $19.2 billion. 31% of theauto component industry is dominated byengine parts, 19% by drive transmissionand steering parts, and 12 % each bysuspension and braking parts and bodyand chassis, while equipments andelectrical parts capture 10 and 9%respectively. The potential growth in theancillary industry in FY11 is estimated tobe around 15-18%, and was around19.2% in 2009-10.
Regulatory Environment 
The Indian government is committed todeveloping the auto sector, and itformulated the India Auto Policy in 2002with the objective of promoting theintegrated and self-sustained growth of the Indian automotive industry. Salientfeatures of the policy include:
Providing fiscal incentives todomestic manufacturers and raising import duties to check dumping byforeign players.
Removal of the condition of minimum foreign direct investment(FDI) for the sector; which was fixedat $50 million dollars for car makers.
Focus on promotion of R&D in theautomotive sector to ensurecontinuous technology upgradationand building better designing capacities to remain competitive.
Providing an impetus to thedevelopment of alternative fuel vehicles through appropriate long term fiscal structure to facilitate theiracceptance.
Emphasis on low emission fuel autotechnologies and availability of appropriate auto fuels andencouragement to construction of safer bus/truck bodies.
The Indian emission regulationswould also be made compatible withthe rest of the world.The government also formulated India's10-year Automotive Mission Plan (AMP)2006-2016. The 25-point plan AMP aimsat making India a global manufacturing and export hub for small cars, multi-utility vehicles, two and three-wheelers,tractors and components. The planprovided for the setting up of NATRIP – National Automotive Testing and R&DInfrastructure Project to act as centres of excellence for technical design data andencouraged closer partnership betweenindustry and academia to fosterinnovation.
Future Prospects
Over the medium term, the prospects forthe automotive industry are extremelybright, with low car penetration andrising income being pegged as thedominant growth drivers. According tothe annual forecast of the SIAM,passenger vehicle sales in the country willbe 2.2 Million units in 2010-11 ascompared to 1.95 Million units in2009-10. According to a recent study by KPMG,any major consolidation is unlikely tooccur in the industry in the next few years. Depending on the need to accesstechnology, manufacturing facilities,services and distribution networks, someconsolidation could be expected in futurebut anything big in the form of brandsbeing bought or sold or companiesexiting the market is unlikely.The long term outlook of the sector isslightly fluid, since the globally evolving phenomenon of eco-friendly, hybrid vehicles is yet to take off in a big way inthe country. However, this can also be viewed as an opportunity for futuregrowth. India is well placed to leverageon its current status as a hub for smallcars and as a cost-efficient market tobecome an export hub for green cars andalso a sourcing hub for components forgreen vehicles.The challenges towards the developmentof hybrid vehicles are in the form of alack of regulatory support andinadequate fueling/charging infrastructure. Hence, policy makersshould encourage the same by offering subsidies to the manufacturers andconsumers of green vehicles. Increaseddialogue between manufacturers and oilcompanies is also required in order toprovide the necessary infrastructure.
Player Profiles
Tata Motors:
The second biggestpassenger car manufacturer, Tata Motorsis also ranked as fifth highest in thecategory of medium and heavycommercial vehicles at the internationallevel. It is the first company from theengineering industry of India to be listedunder the New York Stock Exchange inSeptember 2004. In 2009, the firmcreated a milestone in the automotiveindustry by introducing the world’s mostfuel efficient and cheapest car- TataNano. More than 3 million Tata cars andheavy vehicles are on the road today.British luxury brand Jaguar Land Rover(JLR) plans to increase presence in Indiaand will tap parent Tata Motors forassistance in areas like logistics andservice support.The company is the largest commercial vehicle manufacturer in the country.Having established a strong position inIndia, it has been rapidly expanding globally with a series of recentacquisitions such as Daewoo CommercialVehicle Co. Ltd. (2004) and HispanoCarrocera S. A., Spain, (2009) and joint ventures with Thonburi Automotive Assembly Plant Co., Thailand, (2006)apart from several other strategicalliances in the commercial vehiclesspace.
Mahindra and Mahindra:
Thisflagship company of the Mahindra groupwas set up to make general purpose utility vehicles for the Indian market and soon itstarted manufacturing agriculturaltractors and light commercial vehicles.They have opened a separate sector tofocus develop components and offerengineering services called MahindraSystems and Automotive Technologies(MSAT).The company formed a joint venturewith International Trucks in November2005 to manufacture medium and heavy vehicles trucks in India and has displaced Ashok Leyland Ltd. from second positionwith respect to market share. M&M hasrecently also launched its range of world-class trucks through its joint venture withNavistar of USA.In the passenger vehicle segment, M&Mhas portfolio of SUVs in the lower end – 
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