INDIAN PASSENGER VEHICLE INDUSTRY: GROWTH MOMENTUM TO

CONTINUE

SUMMARY
- With expected sales of ~2.5 million passenger vehicles in FY11e,
Indias passenger vehicle market ranks as worlds seventh largest;
larger than markets like United Kingdom, France and Spain by
volume
- India has been one of the few markets globally to buck the
recessionary trend and record a strong 25.6% volume growth in
FY10. The growth momentum continues to be on track with first
eleven months of FY11 registering a growth of 29.8% over the
corresponding period in the previous year
- Strong economic growth, rising disposable income levels, favorable
demographics, easy financing environment and relatively low car
penetration have been the prominent growth drivers for the
industry
- While at the one end, the growing domestic market is attracting
foreign OEMs, on the other, established players are positioning
themselves as strong contenders to offer low-cost car
manufacturing capabilities to the world
- So far, most foreign car makers, barring Hyundai have focused on
the sedan and premium segment cars, shying away from the highly
competitive small-car segment; with these players now launching
small-cars that too designed keeping in mind specifically the Indian
consumer, the small-car segment, which has so far been dominated
by three players commanding over 80% of the volumes is likely to
see increase in competitive intensity
- Some of the newly launched models have had good initial response
and have been aggressively priced, indicating new entrants
strategy to grab market share while sacrificing profitability
- Large established incumbents in the Indian passenger vehicle
market derive strength from their low-cost manufacturing
capabilities (especially in the small-car segment), strong brand
recognition and wide distribution & servicing reach, something
which can be difficult to replicate
- We believe, while the incumbents will have these competitive
advantage over newer entrants, these are likely to diminish in the
long-run as new players with global experience gain brand
recognition and expand their network and product offerings
- Superior small-car portfolio, a wide distribution and service
network and competitive pricing on the back of locally sourced
auto components are going to be the key factors in determining the
success of a foreign OEM in the Indian market


































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Contacts:

Anjan Ghosh
aghosh@icraindia.com
+91-22-3047 0006

Subrata Ray
subrata@icraindia.com
+91-22-30470027

Shamsher Dewan
shamsherd@icraindia.com
+91-124-4545328



























www.icra.in

ICRA Rating Feature Indian Passenger Vehicle Industry: An ICRA Perspective
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FY
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11M
FY11
Trend in Domestic Passenger Vehicle Volumes
Domestic Passenger Vehicles (in Millions) Growth (%)
- While competitive pressures are likely to intensify, we believe that strong GDP growth, rising
disposable income levels, easy availability of finance and more particularly Indian consumers
aspiration to own cars, especially given the state of public transport, would ensure that the
industry will experience strong growth in the foreseeable future
- We estimate the Indian passenger vehicle industry will reach ~4.85 million in annual sales by
FY16, representing a growth of 10.8% CAGR over the next five years
- Notwithstanding the strong long-term outlook, the industry faces certain near term challenges in
form of rising commodity prices, interest rates, tightening liquidity scenario and increased
competitive intensity
- We believe that rising labour costs is also likely to see cost increases across the supplier network,
though it is likely to be mitigated by greater scale economies and higher degree of automation
- Within the lower priced segment (mini/compact), the price band is widening, with higher priced
but better value products achieving higher volumes than some of the lower priced models. The
price range may widen further depending on the success of the Nano segment

Strong growth drivers augur favourable prospects for the Indian passenger vehicle market
The domestic passenger vehicles industry has been on a relatively steady growth phase over most of the
last decade and has registered a 10 years CAGR of 10.3% during the period. It has been one of the few
markets worldwide which saw growing passenger car sales during the liquidity crisis and recessionary
phase witnessed during FY09. Buoyant economic growth, rising disposable income levels, favourable
demographics, strong growth from tier II/III cities and rural India, together with improving availability
of vehicle financing at competitive interest rates have been the key factors fuelling growth in the Indian
passenger vehicle market. Among the emerging markets, India continues to have one the lowest car
density, estimated at 13 cars per 1,000 people compared to other markets such as China (45), Brazil
(160), and Indonesia (42). The growth has also been supported by OEM led initiatives like whole host of
new model offerings from both from existing companies as well as new entrants in the market.
Furthermore, in India, the car prices have remained relatively flat over the years (adjusted for the
decline in duties) compared to steadily rising per capita income levels.

In addition to the strong domestic demand, the OEMs have also been positioning themselves as
competitive small-car makers, benefitting from Indias technological capabilities in the manufacturing
small-cars, scale economies and a well-established component supplier base. Over the past 10 years,
export of vehicles have grown at a CAGR of 31.7% to achieve volumes of 0.45 million units in FY10. ICRA
expects overall growth momentum to be sustained driven by strong domestic demand and increased
thrust on exports.













Source: SIAM, ICRAs estimates
ICRA Rating Feature Indian Passenger Vehicle Industry: An ICRA Perspective
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Passenger Vehicle Sales and GDP Growth
Indian PV Sales (in '000s) Real GDP Growth Rate (%)
7.0%
9.0%
11.0%
13.0%
15.0%
17.0%
19.0%
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Trend in average borrowing rates
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e
Trend in India's per capita GDP
GDP per capita, PPP (in US$)
Growth drivers in place to support demand
Source: Indian Planning Commission, World Bank, IRF, SIAM, Industry, ICRAs estimates

Steady economic growth and favourable demographic profile Barring marginal blips during the
last couple of years, the Indian economy has moved into higher growth (8.5%+) trajectory which is
likely to be sustained over the medium term. In addition to steady economic growth, the passenger
vehicle industry is also benefitting from Indias favourable demographic profile, which is reflected by its
very young population (50% of population under the age of 25), steadily improving dependency ratio,
growing urbanization and trend towards smaller, nuclear families. These trends in turn results in higher
savings and increased ability to purchase vehicles, as well as explaining the preference for smaller-cars.

In addition to favourable demographic profile, rising per capita GDP levels is also resulting in
improvement in vehicle affordability in India, which is estimated to amongst the lowest when compared
to other major automotive market. In India, the per capita GDP has almost doubled to US$ 3,270
between 2000 and 2009, while car prices (adjusting for the decline in duties) have remained almost at
the same level as they were five years back, thereby increasing flexibility to own cars.

Relatively low-penetration levels In terms of current market size (estimated at ~2.5 million units in
FY11e), the Indian passenger vehicle market is relatively small compared to other emerging auto
markets like China, South Korea and Brazil. Despite strong growth witnessed for a nearly a decade,
penetration of cars in India continues to remain the lowest (refer to table above) among emerging
markets. As growth in passenger vehicle has been more secular in nature, supported by both major
cities and tier II/III cities, we expect that car penetration levels would continue to improve mirroring the
Current Estimate
Passenger vehicle density
(per 1,000 persons)
Germany 500
U.K. 463
USA 1,200
Japan 445
South Korea 246
Russia 188
Brazil 158
Turkey 85
China 45
India 13
ICRA Rating Feature Indian Passenger Vehicle Industry: An ICRA Perspective
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33%
56%
73%
78% 79% 78%
86%
90%
94% 94% 92%
0%
20%
40%
60%
80%
100%
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 YTD FY
10
YTD FY
11
Total Exports Small Car Exports % of small car exports
trend witnessed by some of the other markets, particularly China, which witnessed 5x increase in car
density between 2002 and 2009.

Availability of finance at competitive rates With over 65-70% of cars being financed in India,
availability of financing options at competitive rates has also been one of factors driving growth. In
India, the vehicle financing penetration has been steadily rising over the years, facilitated by competition
amongst banking and NBFC participants. In comparison to China, where vehicle penetration rates are
much lower (~10-15%), India scores in terms of higher vehicle financing availability, which combined
with increasing disposable income levels provides an ideal platform for strong growth going forward.
Barring few instance of rise in interest rates, vehicle financing cost has declined over a longer period of
time supported by favourable interest rate regime and relatively healthy performance of the asset class
amongst various consumer finance categories. This has also encouraged lengthening of tenure of
financing and LTVs, further facilitating consumer flexibility.

Favourable demand scenario from smaller towns and rural areas In addition to demand from
urban areas, smaller towns and rural India have been incrementally driving demand for passenger
vehicles in India. For instance, the share of sales from top-10 cities has fallen to 40-45% from 60%-65%
over the last five-to-six years. Maruti Suzuki, also for instance now generates nearly 19% of its sales
from non-urban areas compared to just 4-5% about five years back. This has largely been prompted by
rising disposable income levels in smaller towns and rural areas, improving road connectivity and
higher no. of earning members in the family. Industry estimates suggest that approximately 60% of the
rural economy now depends on non-agricultural income such as trading, remittances from cities,
employment in the manufacturing sector etc. That apart, substantial increase in crop prices, which has
been moving up over the past three years, has also resulted in higher disposable income. Additionally,
the increase in land prices across the country, and the implementation of the sixth pay commission has
collectively helped in supporting the growth in the rural and semi-urban cities/tier III cities. The OEMs
have also helped expand demand by targeting these markets with greater financing availability and
better service & distribution reach.

India is likely to emerge as a small-car production hub
In addition to strong domestic demand, India is well on its path of becoming a global production hub for
small-cars. In 2009, it surpassed Japan to become the largest small-car market in the world, accounting
for the sale of around 900,000 small-cars, as compared to 700,000 sold in Japan. India is also now the
second-largest exporter of small cars, behind only Japan. In FY10, India shipped out nearly 450,000
vehicles, registering a CAGR (%) of 26% between FY06-10. Exports now form a considerable part of the
Indian industry, accounting for 18.6% of the total PVs sold in FY10, compared to 7.3% in FY02, with
small cars comprising over 90% of total passenger car exports in FY10.

Chart 3: Trend in export volumes, reflecting increasing share of small-cars










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Attractive domestic market
& proximity to other
markets
Political & Business
Environment
Low production cost &
efficient supply chain
Technological capabilities
in a particular class of
vehicles
in becoming a
auto hub
6%
13%
10%
54%
33%
0%
10%
20%
30%
40%
50%
60%
-
100,000
200,000
300,000
400,000
500,000
FY 06 FY 07 FY 08 FY 09 FY 10
Passenger Vehicles Growth Y-o-Y (%)
Maruti
Suzuki,
33.1%
Hyundai,
64.0%
Tata
Motors,
1.5%
M&M, 0.7%
Others,
0.7%
The growth in export volumes was particularly strong in FY09 and FY10, benefitting from the demand
arising largely from scrappage schemes offered by most European nations. While the export growth in
the current year has the affected by higher base effect and repeal of scrappage scheme, the long-term
prospects continue to remain strong. While Hyundai Motors and Maruti Suzuki are leading exporter
accounting for over 90% of export volumes, other global players who have recently marked presence in
India are pursuing opportunities set-up India as their manufacturing hub. Nissan is expected to start
exporting Micra to Europe. India has become the largest export hub for Hyundai (outside Korea) with
over 40% of its small car production catering to export demand from India.

Chart 4: Trend in export volumes Chart 5: OEM-wise market share in exports segment
Source: SIAM, ICRAs estimates

What it takes to become a global automotive production hub?
In addition to low-cost manufacturing
capabilities, other factors that determine a
countrys competitiveness in emerging as a
global production hub include an attractive
domestic market, its governments favourable
trade policies, presence of an established and
technologically-advanced component supplier
base, an efficient supply chain and movement
in exchange rates. In terms of cost
competitiveness, India has built up the scale
and significant competencies and cost
advantages in the production of small cars. It
benefits from lower development and labour costs, and improving auto component manufacturing base.
However, poor infrastructure, resulting in higher logistics costs and changes in international duty
agreements (i.e. FTA between Korea and EU) with competing manufacturing locations remain a
significant factor in determining export potential from India. However, increased focus on fuel efficiency
and international demand moving towards small-cars also augurs well for India. The industry is also
witnessing a trend towards alliances or platform sharing in the exports segment.

Considering the auto makers quest for lower production cost, we expect India to compete increasingly
with countries across markets that offer lower production costs and benefit from favourable
government policies. Some of examples of nations that are likely to compete with India are Thailand and
Indonesia (for exports to Asian markets), Czech Republic, Slovakia and Poland (for European markets)
and Mexico (for North American markets).

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9

1
4

1
7

2
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6

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3
5

-
5
10
15
20
25
30
35
40
FY 07 FY 08 FY 09 FY 10 FY 11 FY 12eFY 13e
Number of Small Car Offerings
Interestingly, China which has emerged as the worlds largest automotive markets in the last decade is
yet to establish itself as a global production hub, something that Japan achieved during the 1970s and
South Korea in 1990s when these markets witnessed an upsurge in automotive production. In contrast
to India, ownership restrictions in China make its less attractive for foreign OEMs to develop it as an
export base though Chinas robust domestic market has attracted a large number of joint ventures and
contributes to ~50% of domestic capacity. However several local Chinese manufacturers are now fast
acquiring global scale and skill levels and have aspirations to establish strong presence in the developed
markets.

Competition set to rise in the small car segment; higher priced small-cars gaining traction
The strong growth reported by the industry and critical mass that achieved by the domestic market has
attracted most of the global OEMs to the Indian market. Most global OEMs targeting India now have
strong local strategies, India specific platforms/models, and view to establish India as one of their
sourcing hubs. In terms of product launches in India, OEMs are now developing models specifically to
meet Indian consumers preferences and market conditions compared to the past, where most global
majors have chosen models from their existing platforms. Toyotas Etios and Hondas Brio (to be
launched) are some of models that have been developed clearly keeping the Indian consumer in mind.
Over the past two years, nearly 50% of the capacity addition has been by international OEMs. Barring
Hyundai, foreign OEMs such as Toyota, Honda, Ford and General Motors have so far been present largely
in the mid and upper end segment cars while shying away from the highly competitive small-car
segment. However, recognizing the significance of entry level in India, now almost of all the OEMs
including the recent entrants such as Volkswagen and Nissan are focusing on tapping the high volume
small car segment in India.

The number of new model launches has increased substantially, particularly in the higher
priced/premium end of the segment. Being the largest segment by volumes, the small-car segment has
witnessed the highest numbers i.e. 11 new launches in the last three years (of which five were launched
in 2010) with major ones being Ritz, A-Star, Zen Estilo (from Maruti Suzuki), i10, i20 (from Hyundai),
Indica Vista (from Tata Motors), Ford Figo, Chevrolet Beat, Polo (from VW) and Etios (from Toyota). In
the near term, Honda is also expected to enter the small-car segment (with launch of Brio) and Toyota is
expected to launch the hatchback version of Etios.

Chart 6: Small car offerings in Indian market Table 1: Planned launches in the small car segment
Source: ICRA Research

The new models viz. Fords Figo, VWs Polo, and GMs Beat have made some inroads in the market with
good initial response, while other players such as Nissan and Toyota with their recent launches are in
the ramp-up phase. More importantly, the new models have been priced at fairly aggressive price points
and as new entrants ramp-up their volumes and other players enter the market, we expect that the
Impending launches in the small car
segment
Expected in
Honda Brio 2011
Toyota Etios (Hatchback) 2011
Hyundai New small car 2011
Maruti Suzuki - Swift Refresh 2011
General Motors - (through SAIC JV) 2012
Renault Nissan 2012
Bajaj Renault Small car 2012
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95.5% 94.5%
91.9%
86.0%
4.5% 5.5% 8.1%
14.0%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
FY 08 FY 09 FY 10 11M FY11
Top 3 Players Other Players
small car segment is likely to see some fragmentation with incumbent players likely to face competitive
pressures. Further, General Motors plans to introduce cars from its Chinese JV with SAIC also marks the
beginning of a new trend, which could result in more Chinese players enter the Indian market in the
long-run. Apart from SAIC (along with GM), BYD, Chery International, JAC and Brilliance Auto are some
of the other Chinese auto-makers that have announced plans of exploring opportunities of entering the
Indian market.

Small car portfolio and extensive marketing & servicing network key to succeed in India
Typically during the initial launch phase, new
models gain market share owing to heightened
interest among buyers but we expect that
sizeable market share gain for new entrants
will only be in the long-run as these players go
through a phase of establishing recognition for
their brand, expanding their distribution and
service network. We believe that a wide
product portfolio, competitive pricing,
expectation of high fuel efficiencies, presence
of diesel versions and modern designing have
been some of the factors that have helped
players to compete successfully in this segment. The market share of the new players in this segment
has been steadily increasing; in the current year, barring the top three players, the share of other players
now stands at 14.0%.














Supported by efforts to increase localisation
Interestingly most of the international OEMs, barring the established ones have had volatile earnings
profile in India. Low economies of scale, high import content and exposure to foreign currency
fluctuation have been the key factors affecting profitability. Now, with most OEMs targeting the highly
competitive small-car segment, thrust on localisation of key components forms an integral part of
international OEMs strategy to compete on cost. More particularly in the small car segment, where
competitive pressures are relatively higher compared to other segments. Typically, localization levels
are low (during the launch phase) and increases gradually over the years with pick-up in volumes. While
localisation appears to be a straightforward route in achieving cost competitiveness, it is only
meaningful at large volumes, involving large investments in capacity building. M&M-Renault JV in
contrast had adopted a low investment (higher import dependence) strategy with its initial launch,
enabling it to test the market response with limited investments. Besides cost advantage arising from
Everyones eyeing a pie of the Indian market some announcements by OEMs
Volkswagen
- Aims at achieving 10% market share in India
General Motors
- Aims at scripting its success in China with Shanghai group in the Indian markets
- Has plans to introduce some of its already established models from its Chinese JV
Renault
- Plans to launch five models between 2011-13
Nissan
- Plans to expand its offering to nine models by 2012; aims to capture 10% of the market
- Targeting India a global hub for outsourcing small cars as well auto components
Toyota
- Plans to double its sales volume by next year with the launch of its small car Etios
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63%
70%
72%
74%
73%
60%
64%
68%
72%
76%
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
FY09 FY10 FY11e FY12e FY13e
Source: ICRA Estimates
Chart 8: Trend in Capacity Utilisation
Installed Capacity (in Lacs) Utilisation (%)
lower duties and logistics costs, localization also helps in reducing fluctuation arising on account of
currency volatilities.

In terms of technological positioning, although the Indian auto component manufacturers may lack
design know-how in certain product categories, their overall capability in manufacturing auto
components, with consistent quality and reliability is now well acknowledged by global OEMs and
component manufacturers alike. This is evident from the trend of increased localisation levels in most
new models. Additionally, most auto global players are setting up capacities to locally develop and
manufacture engines & transmissions in India with vendor development forming a key part of their
strategy. Some of the international auto suppliers by virtue of their established vendor relationship with
international OEMs have also set-up JVs with local players, benefitting the domestic auto suppliers with
new technologies/platforms. Some of the OEMs have also set up their R&D centres in India, which are at
present confined to providing basic localisation of imported components and research services.

New small car entrants also have aggressive dealership expansion plans
Most of the new small car
entrants have aggressive plans to
expand dealerships in coming
years. However, we believe that
incumbents wide distribution
and service network will act as
their competitive advantage for
some time to come as attracting
new dealers for new players will
not be easy. Typically, a dealer
generates 60-70% of its income
from car servicing and spares and
with current vehicle population in
favour of the top three players, OEMs will have to structure their sales commissions appropriately to
attract investments by dealers.

Demand Supply Scenario: managing
constraints at suppliers end and finding
enough skilled labour gaining priority
over anything else
In line with the strong growth witnessed by the
industry and strong prospects, capacity creation
has been at the core of each OEMs strategy for
the Indian market. In fact at this stage, OEMs
have been more concerned about managing
production levels amid bottlenecks at suppliers
end and labour shortages. Given the capacity
expansion plans, we expect capacity addition in
excess of 50% between FY09-13e. Between FY09-11e over 50% of the incremental capacities have been
added by international OEMs who have entered the Indian market over the last 2-3 years. Although
manufacturing capacities are fairly flexible, majority of the capacity creation has been keeping in mind
opportunities in the small car segment and exports market. In the medium-to-long run, although strong
domestic demand and export potential is likely to keep capacity utilization over ~70%, we expect
Table 2: Dealership addition plans by various OEMs

Company
Cities
covered
Existing Dealer
Network
Network Expansion
Plans
Maruti Suzuki 805 869 N.A
Hyundai 290 300 320
Tata Motors

250 N.A
General Motors

210 250
Honda 71 120 150 (by 2012)
Toyota N.A 117 150 (by 2012)
Ford 100 159 N.A
Volkswagen 56 67 N.A
Nissan 23 23 N.A
Source: company releases, media articles, ICRA Research
ICRA Rating Feature Indian Passenger Vehicle Industry: An ICRA Perspective
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increasing competitive intensity to restrict the pricing power with OEMs and subsequently put pressure
on their profitability indicators particularly in the current inflationary scenario.

Trends in JVs/ collaborations
Globally, the automobile industry is going through a phase of consolidation and collaboration, triggered
by stagnating demand, industry-wide overcapacity, increasing commoditization/ reducing pricing
power and rising cost of implementing safety features and emission norms. As more global players enter
the Indian market, the impact of this trend of partnership would be increasingly visible in this market
too. Some of the active alliances in India include Fiat-TML (manufacturing JV and distribution sharing
arrangement); Renault-Nissan (proposed facility share); SAIC-GM (Indian operation under JV, to bring
products from SAIC stable), VW-Suzuki (likely collaboration in small car), Renault-Bajaj (small car). The
number and scope of such alliances are expected to increase going forward as OEMs aim to rationalise
their investments and maximise reach through alliances spanning technology, manufacturing and
distribution.

Unlike the Chinese automotive market, where leading passenger vehicle players are mostly Joint
Ventures (JVs) between global OEMs and local players due to ownership constraints, in the Indian
context most of the JVs in the passenger vehicle space have not been able to make meaningful presence
in the Indian market. These JV entities have either parted ways or restructured their product portfolio
and business plans to meet Indian consumers preferences. In contrast however most of the Global OEMs
now have a direct presence in India.

In addition to contract manufacturing, the industry is also witnessing other collaborative arrangements
such as sharing engines/platforms and distribution and service network. For instance, Fiats diesel
engines are being used in some of Maruti Suzukis and Tata Motors cars. Similarly, Tata Motors
manages the service and distribution facilities for Fiat in India. Furthermore, developments at global
level, such as acquisition by Volkswagens of 20% stake in Suzuki reflect some further potential
collaborative arrangements given Volkswagens increasing focus and Suzukis strong presence in the
Indian market. We expect such alliances to gain momentum driven largely by the need to access
technology (as we move towards developing hybrid vehicles) and distribution and service network.
However, at the same time, consolidation in the form of entire companies being acquired as has been
seen globally is unlikely.

GST roll-out to benefit the industry with reduced outgo
In addition to the fundamental
factors driving demand, the likely
roll-out of Goods and Services Tax
(GST) would create one time
spurt in passenger car volumes as
the average duties would come
down substantially (refer to
table). At present, the effective
tax rates (including excise duty,
CST, and VAT) applicable on
passenger vehicles range
between 21-38% depending on the size of the car. With implementation of GST, we expect OEMs to pass
on the benefit of lower taxes at least some extent to induce higher volumes.

Table 3: Impact of implementation of GST on vehicle prices

Under VAT Under GST
Assuming Average Car Price at OEM 400,000 400,000
Add: Excise Duty @ 10% 40,000 -
Add: Central Sales Tax @ 2% 8,800 -
Add: VAT @ 12.5% 56,100
Add: Expected GST @ 16% - 64,000

Tax Component in the final prices 104,900 64,000
Tax as a % of Final Price 21% 14%
Source: ICRAs estimates
ICRA Rating Feature Indian Passenger Vehicle Industry: An ICRA Perspective
ICRA Rating Services Page 10

Utility Vehicles Segment: New model launches likely to pick-up
With volumes of 275,556 units in FY10, the Utility Vehicles (UVs) accounted for little over 13% of the
total market with growth averaging around 9% over the past five years. In India, the UV segment is
primarily dominated by SUVs priced in the Rs. 7-11 lacs range. In line with the passenger car segment,
top three players in the UV segment account for over 85% of the market, of which two are domestic
players. A sizeable part of the UV market also caters to the people mover segment, which has also been
one of the key growth drivers striving on demand from the growing IT/ITES sector. In this segment, the
industry is witnessing an increasing preference towards smaller MUVs such as Maruti Suzukis Eeco for
intra-city movement. More players are expected to launch models in this segment with major ones being
Tata Motors (Venture) and GM (through its collaboration with SAIC).

Table 4: M&M dominates the market with presence in the mass segment
FY 06 FY 07 FY 08 FY 09 FY 10 YTD FY10 YTD FY11
M&M 43.2% 40.8% 42.4% 47.1% 55.2% 55.8% 52.6%
Toyota 18.9% 19.8% 19.7% 17.0% 19.7% 19.6% 20.3%
Tata Motors 19.5% 21.8% 20.3% 18.5% 13.0% 12.9% 13.4%
Others 18.4% 17.7% 17.7% 17.4% 12.1% 11.7% 13.7%
Source: SIAM Data; * Till February 2011

With the acquisition of Land Rover (by Tata Motors) and Ssangyong (by M&M), we expect Indian OEMs
to consolidate their position in the UV segment with launches in the premium segment, leveraging on
the platforms and technological expertise of the acquired entities. While Land Rover would largely cater
to high-end segment, given the product profile, synergies with M&Ms existing models, Ssangyong is
likely to compete in the upper-end segment, which is currently dominated by GMs (Capitva), Fords
(Endeavour) and Hondas (CR-V). Both Tata Motors and M&M have expressed intentions not just to
launch models from the foreign acquisitions in the domestic market but also pursue opportunities to
locally assembly the vehicles. Similar to the passenger car segment, the premium SUV segment has also
been of interest to the international OEMs with nine players entering the premium segment over the
past six years.

Competitive pressures and cost-based headwinds to restrict profitability indicators
The profitability indicators of passenger cars OEMs is influenced by a confluence of factors with
predominant ones being fluctuation in input material prices, manpower costs, competitive intensity in
the underlying market impacting the ability to pass on cost increases, and volatilities in foreign
exchange. For OEMs in India, in addition to fluctuation in key commodity prices, fluctuation in foreign
exchange movement has also impacted profitability indicators of OEMs as almost all the players have
some import content and some of them significant export dependence. In India, leading OEMs derive
cost competitiveness from their economies of scale and relatively high localisation content backed by
efficient supply chain system. The profitability of OEMs without a meaningful presence in the entry level
segment has been particularly volatile due to poor scale economies. In this context, some of the foreign
players have had volatile earnings profile in their Indian operations driven largely by foreign exchange
exposure, large one-time costs (related to platform development, marketing/launch expense) not being
spread over large volumes and high import content. Now, with most OEMs targeting the highly
competitive small-car segment, thrust on localisation of key components forms an integral part of
international OEMs strategy to compete on cost.




ICRA Rating Feature Indian Passenger Vehicle Industry: An ICRA Perspective
ICRA Rating Services Page 11

3,000
6,000
9,000
12,000
15,000
18,000
21,000
J
a
n
-
0
7
A
p
r
-
0
7
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l
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O
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1
0
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1
1
Trend in Domestic Rubber Prices
Rubber Prices (Rs./Quintal)
30,000
35,000
40,000
45,000
50,000
1,000
1,500
2,000
2,500
3,000
3,500
J
a
n
-
0
7
M
a
y
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0
7
S
e
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0
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y
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0
8
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e
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9
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9
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e
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1
0
M
a
y
-
1
0
S
e
p
-
1
0
J
a
n
-
1
1
Trend in Key Commodities - Steel & Aluminium
LME Prices of Aluminium (Average) HR+CR Average Prices
60.0%
65.0%
70.0%
75.0%
80.0%
85.0%
Q1
FY09
Q2
FY09
Q3
FY09
Q4
FY09
Q1
FY10
Q2
FY10
Q3
FY10
Q4
FY10
Q1
FY11
Q2
FY11
Q3
FY11
Trend in RMC/OI (%)
Maruti Suzuki Tata Motors M&M
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
18.0%
21.0%
Q1
FY09
Q2
FY09
Q3
FY09
Q4
FY09
Q1
FY10
Q2
FY10
Q3
FY10
Q4
FY10
Q1
FY11
Q2
FY11
Q3
FY11
Trend in OPBDIT Margins (%)
Maruti Suzuki Tata Motors M&M
Chart 9: Trend in prices of key material prices and profitability indicators of OEMs
Source: Industry analysis services, company releases

Given the commodity-based headwinds being witnessed at present, rising labour cost (which results in
cost increases across the supplier network) and limited flexibility to raise prices owing to increasing
competitive pressures, we expect the profitability indicators of OEMs to remain under pressure.
Although the impact of some these cost-based headwinds could be mitigated by greater economies of
scale and higher degree of automation.

Outlook
The passenger vehicle market size in India is now comparable to some of the developed economies of
the world and ranks seventh globally. The presence of global players, introduction of global
platforms/technologies and stricter emission norms indicate that the market is gradually attaining
maturity. A buoyant economic growth, growing middle class population, rising disposable income levels,
relatively low penetration of cars and adequate availability of financing are likely to provide an ideal
backdrop for a sustained long term demand growth for the sector. However, with increasing interest
from foreign players, competitive intensity is likely to become a key challenge for OEMs. With most
major markets facing excess capacity and demand saturation, the Indian market is likely to remain a key
destination for global majors over the medium term. With most of the international players eyeing the
small car market, we expect the competitive intensity to increase in this segment resulting in greater
fragmentation of market share, especially over the long-term. Apart from pricing pressure that is likely
to increase with competition, the rising quality expectations and tightening regulatory norms on
emission and safety are likely to push up cost pressures on OEMs. We estimate the Indian passenger
vehicle industry will reach 4.86 million in annual sales by FY16, representing a growth of 10.8% CAGR
over the next five years.
ICRA Rating Feature Indian Passenger Vehicle Industry: An ICRA Perspective
ICRA Rating Services Page 12

With global demand shifting to smaller cars, global players are likely focus on strategies of producing
cars of the same platforms in low-cost countries like India, Thailand and Mexico. In terms of cost
competitiveness, India has built up the scale and significant competencies and cost advantages in the
production of small cars. It benefits from lower development and labour costs, and improving auto
component manufacturing base. Maruti Suzuki and Hyundai have already establish meaningful presence
in exports out of India, and now many other global players including Renault-Nissan, VW, Ford have
either adopted strategy or are in the process of exploring opportunities to develop India as part of their
global manufacturing hub. Interestingly, China despite being known for its low-cost manufacturing
capabilities and large automotive market supported by presence of international players is yet to
establish a meaningful presence in exporting cars, though the situation may change over the medium
term, especially considering rising capabilities and aspirations of its large local players.

With most of the global players targeting the most competitive, small car segment, increasing
localization remains critical for OEMs to establish profitable business given the competitive intensity in
the small car segment. As a result, most OEMs are focused on increasing localization content to reduce
costs and thereby compete with market leaders. Additionally, auto ancillaries will have to ramp-up their
capital investment as OEMs continue to develop new platforms and increase their localization contents.

Besides localisation of components, key challenges facing new entrants would be establishing a strong
service/ distribution network, which has become increasingly prohibitive due to rising real estate costs
in many markets. Going forward sharing and co-operation on distribution network and service facilities
could play a significant role in rationalising cost structures. In terms of product launch, while most
global majors are likely to choose from their existing portfolio for launch in India, key to success would
be the ability to incorporate changes necessary to meet Indian preferences and market conditions.























ICRA Rating Feature Indian Passenger Vehicle Industry: An ICRA Perspective
ICRA Rating Services Page 13

8
2
%
8
2
%
7
7
%
7
5
%
7
5
%
7
7
%
7
7
%
7
7
%
7
8
%
7
8
%
1
6
%
1
7
%
2
0
%
2
1
%
2
1
%
1
8
%
1
9
%
2
0
%
1
8
%
1
8
%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 YTD FY
11
Passenger Car Volumes: Segment-wise concentration
A4-A6: Executive, Premium, Luxury A3 Segment: Mid-Size A1-A2 Segment: Small Car
Annexure I: Industry Composition
Passenger cars and utility vehicles are the main segments of the Indian passenger vehicle industry with
the former accounting for 78% of total volumes. India has primarily been a small-car market, mainly due
to the high demand for a cost-effective mode of transportation. Within the passenger car segment, small
cars comprising A1 and A2 segment account for almost 80% of total volumes.















Source: SIAM, ICRAs estimates; YTD till February 2011

Unlike some of the other emerging markets where market shares are more fragmented, the Indian
passenger vehicle industry has been dominated by three major players Maruti Suzuki, Hyundai Motors
and Tata Motors, which collectively accounted for over 80% of total volumes in FY 2010. These players
with their strong product portfolio, particularly in the small car segment, extensive distribution and
servicing reach and strong brand franchise (created over several years) have maintained their market
position for years together. However, as the Indian market has attracted several international OEMs, this
trend is likely to undergo a change especially as most of the OEMs are now targeting the small car
segment, the largest segment by volumes. Most OEMs are launching models keeping the Indian
consumer in mind. In fact, most of the models being launched in India are either being launched for the
first time in the world, or simultaneously in some other markets. Despite concentrated market share, the
industry has been highly competitive, especially in the small car segment where incumbent players by
virtue of their large volumes, facilitating economies of scale and established vendor base have
competitively priced their models.














ICRA Rating Feature Indian Passenger Vehicle Industry: An ICRA Perspective
ICRA Rating Services Page 14

Annexure II: Industry Statistics

Table 5: Trend in market share of leading OEMs in the domestic passenger vehicle market
OEMs FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10
YTD*
FY 11
Maruti Suzuki 50.4% 46.7% 46.7% 45.9% 46.1% 46.1% 45.9% 46.5% 44.7% 44.9%
Hyundai Motors 13.0% 14.6% 14.4% 13.4% 13.9% 14.1% 14.0% 15.7% 16.2% 14.4%
Tata Motors 13.2% 14.7% 15.5% 16.9% 16.5% 16.4% 14.7% 14.9% 14.7% 14.0%
M&M 6.6% 7.4% 7.6% 7.5% 7.4% 6.5% 8.4% 7.7% 8.0% 7.2%
General Motors 1.3% 1.2% 2.0% 2.7% 2.7% 2.8% 4.3% 4.0% 4.5% 4.3%
Ford 2.2% 2.2% 2.4% 2.6% 2.5% 3.0% 2.2% 1.8% 1.9% 3.9%
Toyota Motors 3.7% 4.3% 4.7% 4.1% 4.1% 3.7% 3.6% 3.0% 3.3% 3.1%
Honda Motors 1.6% 1.9% 2.4% 3.5% 3.7% 4.4% 4.1% 3.4% 3.2% 2.5%
Source: SIAM, ICRAs estimates; Note: Passenger vehicle volumes includes UVs and MPVs; * Till February 2011

Table 6: Trend in market share of leading OEMs in the export segment
OEMs FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10
YTD
*FY 11
Hyundai Motors 10.2% 12.4% 32.6% 49.3% 58.1% 58.2% 66.1% 75.5% 64.0% 52.0%
Maruti Suzuki 23.0% 44.8% 39.6% 29.4% 19.8% 19.8% 24.3% 20.9% 33.1% 31.5%
Nissan

10.4%
Ford 57.2% 38.3% 18.6% 13.6% 9.2% 11.6% 1.1% 0.2% 0.3% 2.6%
Tata Motors 8.7% 3.7% 8.6% 6.6% 11.4% 9.1% 6.8% 2.1% 1.5% 1.9%
Source: SIAM, ICRAs estimates; * Till February 2011

Table 7: Trend in segment-wise growth
Segment-wise
YoY growth (%)
FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10
YTD*
FY 11
A1 + A2 Segment - Small 5.5% 21.3% 14.1% 8.1% 25.7% 11.6% 0.7% 27.4% 30.2%
A3 Segment - Mid 10.1% 50.8% 26.4% 5.8% 5.7% 14.6% 7.1% 14.2% 33.3%
A4 Segment - Executive 133.0% 553.2% 78.9% 7.3% 49.0% 2.9% -20.3% 37.8% 14.3%
A5 Segment - Premium -7.1% 29.5% 8.7% 7.4% -3.5% 2.8% 45.8% 26.7% 38.3%
A6 Segment - Luxury 14.5% 35.2% 61.5% -41.3% 361.5% 105.2% 26.8% 15.7% 37.6%
Passenger car 6.4% 28.6% 17.8% 7.6% 22.0% 11.8% 1.4% 25.1% 30.3%
Utility vehicles 9.0% 28.8% 20.5% 10.3% 13.3% 11.3% -8.0% 20.9% 19.7%
Source: SIAM, ICRAs estimates; * Till February 2011

Table 8: Trend in composition of domestic passenger car market
Composition FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10
YTD*
FY 11
A1+A2 Segment - Small 82% 82% 77% 75% 75% 77% 77% 77% 78% 78%
A3 Segment - Mid 16% 17% 20% 21% 21% 18% 19% 20% 18% 18%
A4 Segment - Executive 0% 0% 2% 3% 3% 4% 4% 3% 3% 3%
A5 Segment - Premium 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%
A6 Segment - Luxury 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Source: SIAM, ICRAs estimates; * Till February 2011






ICRA Rating Feature Indian Passenger Vehicle Industry: An ICRA Perspective
ICRA Rating Services Page 15











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