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Table of Contents
Serial No. 1 Chapter Title Introduction to Industry Page No
2 3 4 5 6 7 8
General Environment Industry Environment
CHAPTER 1: INTRODUCTION
The Indian automotive component industry is dominated by around 500 players which account for more than 85% of the production. The turnover of this industry has been growing at a mammoth 28.05% per annum from 2002-03 onwards as illustrated inFig.1 which clarifies its emergence as one of India's fastest growing manufacturing sectors.
During 1990s, the auto components market in India used to be dominated by supplies to the aftermarket with only 35% exports sourced by global Tier 1 OEMs (Original equipment Manufacturers). The industry made a sustained shift to the global Tier 1 market and today, the component manufacturers supply 75% of their exports to global Tier 1 OEMs and the remaining to the aftermarket. This is largely due to the growing capability of the Indian component suppliers in understanding technical drawings, conversance with global automotive standards, economically attractive costs (manufacturing costs are 25%-30% lower than its western counterparts), flexibility in small batch production and growing information technology application for design, development and simulation. Besides the burgeoning demand of auto components from global majors, the domestic automobile industry has been showing a sparkling growth caused by increasing customer base and affordable loans. Based on this, the turnover of the Indian auto component industry is expected to touch US$ 18.7 billion by 2009 and estimated to reach US$ 40 billion by 2014.
The liberalized policies of the Indian Government paved towards steady evolution of India as a stable and market driven economy with the real Gross Domestic Product growth in excess of 8%, foreign exchange reserves crossing the $150 billion mark, growing value of Indian Rupee compared to US dollar and reducing inflation rate. 100%Foreign Direct Investment, absence of local content regulation, manufacturing and imports free from licensing & approvals in the automobile sector coupled with customs tariff or auto components reducing to 12.5% resulted in increased number of multinationals establishing their bases in India and with export markets looking up, the Indian automobile industry is poised for a phenomenal growth. The automobile production in the sub-continent has been growing steadily @ 18.53% per annum from 2002-03 onwards with total vehicle production standing at a mammoth 1,00,31,296 nos. in 2005-06 as is shown in Fig.2.
Among the automobiles, 2 wheelers account for 75.77%, cars about 11.09%, 3 wheelers to the tune of 4.33%, tractors about 2.95%, buses & trucks constitute 2.19%, Multi Utility Vehicles (MUVs) to the tune of 1.96% and Light Commercial Vehicles (LCVs) about 1.71% of the total number of automobiles produced in the country. Presently, India is the second largest market after China for two & three wheelers. In tractors production, India is one of the two largest manufacturers in the world along with China. The subcontinent stands as the 4th largest producer of trucks in the world. Coming to the passenger car segment, the country is positioned 11th in car production in the world. The Indian passenger car market is far from being saturated leaving ample opportunity for volume growth since the per capita car penetration per 1000 is only
7 compared to 500 in Germany. The production of cars in the country has been growing at a mammoth 27.58% per annum from 2002- 03 onwards as is shown in Fig.3.
In general, cars are broadly classified as Mini, Compact, Mid-Size, Executive &Premium varieties. There has been a steady rise in compact car production from 333,000 in 2002-03 to 715,000 in 2005- 06, mid-size cars from 122,000 to 204,000 nos., executive cars from 2000 to 23,000 nos. and premium variety cars from 4000 in 2002-03 to 5000 nos. in 2005-06. The mini car segment production reduced from 150,000 in 2002-03 to 98,000 nos. in 2005-06. These statistics vividly reveal the increasing capacity of the Indian customer, thus driving the passenger car demand rapidly up the price ladder. Analysts speculate car production in the sub-continent to touch 1575,000 in 2009 and 2654,000 by 2014. Cars and MUVs exports rose from 72,000 in 2002-03 to reach 176,000 nos. in 2005-06 with growth @ 48.155 per annum from 2002-03 onwards.
Out of the two wheelers produced in India, motorcycles account for 81.59%, scooters about 13.42% and mopeds to the tune of 4.99% of the total production. The production statistics is shown inFig.4 which shows the growth of 2 wheelers @ 16.58% per annum from 2002-03 onwards. Out of this, motorcycles have
exhibited production growth @ 19.99% per annum, scooters @ 6.74% per annum & mopeds @ 2.65% per annum from 2002-03 onwards
Two wheeler production units in India constitute of Japanese OEMS (Original Equipment Manufacturers) which include Hero Honda Motors, Honda Motorcycle & scooter India (P) Ltd., Yamaha Motor India (P) Ltd. & Suzuki Motorcycle India (P) Ltd. and Indian OEMs consisting of Bajaj Auto L t d . , TVS Motor Company Ltd., LML Ltd., Kinetic Engineering Ltd., Majestic Auto Ltd., Kinetic Motor Company Ltd. and Royal Enfield of Eicher Ltd. Out of the aforementioned, Hero Honda accounts for 39.55%, Bajaj Auto about 26.87%, TVS Motors 17.98%, Honda Motors 7.94%, Yamaha Motors 3.27%, LML 1.41% and the remaining 2.98% of the total 2 wheelers production in the country. The exports of two wheelers made a significant growth from a level of 180,000 in 2002-03 to reach 513,000 nos. in 2005-06. The latest estimates put up production of 2 wheelers to 13.6 million by 2009.
CHAPTER 2: General Environment
PESTLE Analysis of Automobile Sector Political: 1. In 2002, the Indian government formulated an auto policy that aimed at Promoting integrated, phased, enduring and self-sustained growth of the Indian automotive industry. 2. Allows automatic approval for foreign equity investment up to 100% in the automotive sector and does not lay down any minimum investment criteria. 3. Formulation of an appropriate auto fuel policy to ensure availability of adequate amountof appropriate fuel to meet emission norms. 4. Confirms the government¶s intention on harmonizing the regulatory standards with the rest ofthe world. 5. Indian government auto policy aimed at promoting an integrated, phased and conductive growth of the Indian automobile industry. 6.Allowing automatic approval for foreign equity investment up to 100% with no minimum investment criteria. 7.Establish an international hub for manufacturing small, affordable passenger cars as well as tractor and two wheelers. 8.Ensure a balanced transition to open trade at minimal risk to the Indian economy and local industry. 9.Assist development of vehicle propelled by alternate energy source. 10.Lying emphasis on R&D activities carried out by companies in India by giving a weighted tax deduction of up to 150% for in house research and R&D activities. 11.Plan to have a terminal life policy for CVs along with incentives for replacement for such vehicles. 12.Promoting multi-model transportation and the implementation of mass rapid transport system.
Economic: 1.The level of inflation Employment level per capita is right. 2.Economic pressures on the industry are causing automobile companies to reorganize the traditional sales process. 3.Weighted tax deduction of up to 150% for in-house research and R & D activities. 4.Govt. has granted concessions, such as reduced interest rates for export financing. 5.The Indian economy has grown at 8.5% per annum. 6.The manufacturing sector has grown at 8-10 % per annum in the last few years. 7.More than 90% of the CV purchase is on credit. 8.Finance availability to CV buyers has grown in scope during the last few years. 9.The increased enforcement of overloading restrictions has also contributed to an increase in the no. of CVs plying on Indian roads. 10.Several Indian firms have partnered with global players. While some have formed joint ventures with equity participation, other also has entered into technology tie-ups. 11.Establishment of India as a manufacturing hub, for mini, compact cars, OEMs and for auto components.
Social: 1.Since changed lifestyle of people, leads to increased purchase of automobiles, so automobile sector have a large customer base to serve. 2.The average family size is 4, which makes it favorable to buy a four wheeler.
3.Growth in urbanization, 4th largest economy by ppp index. 4.Upward migration of household income level. 5.85% of cars are financed in India. 6.Car priced below USD 12000 accounts for nearly 80% of the market. 7.Vehicles priced between USD 7000-12000 form the largest segment in the passenger car market. 8.Indian customers are highly discerning, educated and well informed. They are price sensitive and put a lot of emphasis on value for money. 9.Preference for small and compact cars. They are socially acceptable even amongst the well off. 10.Preference for fuel efficient cars with low running costs. Technological: 1.More and more emphasis is being laid on R & D activities carried out by companies in India. 2.Weighted tax deduction of up to 150% for in-house research and R & D activities. 3.The Government of India is promoting National Automotive Testing and R&D Infrastructure Project (NATRIP) to support the growth of the auto industry in India. 4.Technological solutions helps in integrating the supply chain, hence reduce losses and increase profitability. 5.Customized solutions (designer cars, etc) can be provided with the proliferation of technology. 6.Internet makes it easy to collect and analyze customer feedback. 7.With the entry of global companies into the Indian market, advanced technologies, both in product and production process have developed. 8.With the development or evolution of alternate fuels, hybrid cars have made entry into the market. 9.Few global companies have setup R &D centers in India.
Environmental: 1.Physical infrastructure such as roads and bridges affect the use of automobiles. 2.If there is good availability of roads or the roads are smooth then it will affect the use of automobiles. 3.Physical conditions like environmental situation affect the use of automobiles. 4.If the environment is pleasant then it will lead to more use of vehicles. 5.Technological solutions helps in integrating the supply chain, hence reduce losses and increase profitability. 6.With the entry of global companies into the Indian market, advanced technologies, both in product and production process have developed. 7.With the development or evolution of alternate fuels, hybrid cars have made entry into the market. 8.Few global companies have setup R &D centers in India. 9.Major global players like Audi, BMW, Hyundai etc have setup their manufacturing units in India.
Legal: 1.Legal provision relating to environmental population by automobiles. 2.Legal provisions relating to safety measures. 3.Confirms the government¶s intention on harmonizing the regulatory standards with the rest ofthe world. 4.Indian government auto policy aimed at promoting an integrated, phased and conductive growth of the Indian automobile industry. 5.Establish an international hub for manufacturing small, affordable passenger cars as well as tractor and two wheelers. 6.Ensure a balanced transition to open trade at minimal risk to the Indian economy and local industry.
CHAPTER 3: Industry Environment
Competition from Substitutes The price customers are willing to pay for a product depends, in part, on the availability of substitute products. The absence of close substitutes for a product, as in the case of automobiles, means that consumers are comparatively insensitive
to price (i.e., demand is inelastic with respect to price). The existence of closesubstitutes means that customers will switch to substitutes in response to priceincreases for the product (i.e., demand is elastic with respect to price).
The extent to which substitutes limit prices and profits depends on the propensity of buyers to substitute between alternatives. This, in turn, is dependent on their price performance characteristics. The more complex the needs being fulfilled by the product and the more difficult it is to discern performance differences, the lower the extent of substitution by customers on the basis of price differences. Rivalry between Established Competitors For most industries, the major determinant of the overall state of competition and the general level of profitability is competition among the firms within the industry. In some industries, firms compete aggressively ± sometimes to the extent that prices are pushed below the level of costs and industry-wide losses are incurred. In others, price competition is muted and rivalry focuses on advertising, innovation, and other non price dimensions. Six factors play an important role in determining the nature and intensity of competition between established firms: concentration, the diversity of competitors, product differentiation, excess capacity, exit barriers, and cost conditions. Threat of Entry If an industry earns a return on capital in excess of its cost of capital, that industry acts as a magnet to firms outside the industry. Unless the entry of new firms is barred, the rate of profit will fall toward its competitive level. The threat of entry rather than actual entry may be sufficient to ensure that established firms constrain their prices to the competitive level. Economies of Scale: Since Indian automobile market is of order $ 350 billion, the economies of scale are very high. Thus, threat of new entrants is low. Product Differences: Since there is hardly any difference in the offerings of the various providers, so product differentiation is low. So threat of new entrants is high . Brand Identity: Since there is no big Retailer like Amazon.com or Wal-Mart in India. So threat of new entrants is high. Government Policy: Since the Government Policy has been quite restrictive till now with respect to the Retail market &FDI, so threat of new entrants is low. Capital Requirements: The capital requirements for entering in the automobile sector are substantially high( high fixed cost and cost of infrastructure), so only big names can think of venturing into this area So, in that respect threat of new entrants is low. Access to distribution: Since in India there is no well established distribution network. So threat of new entrants is low.
Bargaining Power of Buyers The firms in an industry operate in two types of markets: in the markets for inputs and the markets for outputs. In input markets firms purchase raw materials, components, and financial and labor services. In the markets for outputs firms sell their goods and services to customers (who may be distributors, consumers, or other manufacturers). In both markets the transactions create value for both buyers and sellers. How this value is shared between them in terms of profitability depends on their relative economic power. The strength of buying power that firms face from their customers depends on two sets of factors: buyer¶s price sensitivity and relative bargaining power. Product Differences: Since there is hardly any difference in the offerings of the various providers, so product differentiation is low. So bargaining power of buyers is high. Buyer Information: Today¶s customers are well educated about the various product offerings in the sector. So bargaining power of buyers is high. Buyer Switching Costs: Since customers don¶t have to pay a fat premium to be Registered for provision of services , so bargaining power of buyers is high. Brand Identity: High Brand Identity and trustworthiness reduce the bargaining power of buyers but, otherwise the bargaining power of buyers is high. Buyer Profits: Since dealers offers discounts and various bundling services like 0% insurance, old car sale, etc, on different items. Hence bargaining power of buyers is high. Bargaining Power of Suppliers Analysis of the determinants of relative power between the producers in an industry and their suppliers is precisely analogous to analysis of the relationship between producers and their buyers. The only difference is that it is now the firms in the industry that are the buyers and the producers of inputs that are the suppliers. The key issues are the ease with which the firms in the industry can switch between different input suppliers and the relative bargaining power of each party. Product Differences: Since there is hardly any difference in the offerings of the various suppliers, so product differentiation is low. So bargaining power of Suppliers is low. Supplier Information: Today¶s automobile manufacturers are well educated about different Suppliers. So bargaining power of Suppliers is low. Supplier Switching Costs: Since different Suppliers hold resources as per buyers requirements and a large inventory have to be maintained. So bargaining power of Suppliers is low as they would have to incur a huge cost on switching. But if they get automobile manufacturers for similar products who can pay higher Supplier switching cost is low. In such case, bargaining power of Suppliers is high .
Brand Identity: High Brand Identity and Trustworthiness of a Supplier increases the bargaining power of Suppliers. But, otherwise the bargaining power of suppliers is low.
CHAPTER 4: Internal Analysis Strengths
The internationalization strategy so far has been to keep local managers in new acquisitions, and to only transplant a couple of senior managers from India into the new market. The benefit is that Tata has been able to exchange expertise. For example after the Daewoo acquisition the Indian company leaned work discipline and how to get the final product 'right first time.' The company has a strategy in place for the next stage of its expansion. Not only is it focusing upon new products and acquisitions, but it also has a programme of intensive management development in place in order to establish its leaders for tomorrow. The company has had a successful alliance with Italian mass producer Fiat since 2006. This has enhanced the product portfolio for Tata and Fiat in terms of production and knowledge exchange. For example, the Fiat Palio Style was launched by Tata in 2007, and the companies have an agreement to build a pick-up targeted at Central and South America.
The company's passenger car products are based upon 3rd and 4th generation platforms, which put Tata Motors Limited at a disadvantage with competing car manufacturers. Despite buying the Jaguar and Land Rover brands (see opportunities below); Tat has not got a foothold in the luxury car segment in its domestic, Indian market. Is the brand associated with commercial vehicles and low-cost passenger cars to the extent that it has isolated itself from lucrative segments in a more aspiring India? One weakness which is often not recognised is that in English the word 'tat' means rubbish. Would the brand sensitive British consumer ever buy into such a brand? Maybe not, but they would buy into Fiat, Jaguar and Land Rover (see opportunities and strengths).
In the summer of 2008 Tata Motor's announced that it had successfully purchased the Land Rover and Jaguar brands from Ford Motors for UK £2.3 million. Two of the World's luxury car brand have been added to its portfolio of brands, and will undoubtedly off the company the chance to market vehicles in the luxury segments. Tata Motors Limited acquired Daewoo Motor's Commercial vehicle business in 2004 for around USD $16 million. Nano is the cheapest car in the World - retailing at little more than a motorbike. Whilst the World is getting ready for greener alternatives to gas-guzzlers, is the Nano the answer in terms of concept or brand? Incidentally, the new Land Rover and Jaguar models will cost up to 85 times more than a standard Nano! The new global track platform is about to be launched from its Korean (previously Daewoo) plant. Again, at a time when the World is looking for environmentally friendly transport alternatives, is now the right time to move into this segment? The answer to this
question (and the one above) is that new and emerging industrial nations such as India, South Korea and China will have a thirst for low-cost passenger and commercial vehicles. These are the opportunities. However the company has put in place a very proactive Corporate Social Responsibility (CSR) committee to address potential strategies that will make is operations more sustainable. The range of Super Milo fuel efficient buses are powered by super-efficient, eco-friendly engines. The bus has optional organic clutch with booster assist and better air intakes that will reduce fuel consumption by up to 10%.
Other competing car manufacturers have been in the passenger car business for 40, 50 or more years. Therefore Tata Motors Limited has to catch up in terms of quality and lean production. Sustainability and environmentalism could mean extra costs for this low-cost producer. This could impact its underpinning competitive advantage. Obviously, as Tata globalises and buys into other brands this problem could be alleviated. Since the company has focused upon the commercial and small vehicle segments, it has left itself open to competition from overseas companies for the emerging Indian luxury segments. For example ICICI bank and DaimlerChrysler have invested in a new Punebased plant which will build 5000 new Mercedes-Benz per annum. Other players developing luxury cars targeted at the Indian market include Ford, Honda and Toyota. In fact the entire Indian market has become a target for other global competitors including Maruti Udyog, General Motors, Ford and others. Rising prices in the global economy could pose a threat to Tata Motors Limited on a couple of fronts. The price of steel and aluminium is increasing putting pressure on the costs of production. Many of Tata's products run on Diesel fuel which is becoming expensive globally and within its traditional home market.
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