Indian Automobile –Small Car Hub

The rush of global automobile giants into India to manufacture small cars is giving the country a new identity; Asia’s small car export hub.

With increasing environmental concerns and a need to minimize the fuel burden, the demand for small compact cars has reached new heights. India is now becoming a hot destination for huge investments by the top automobile giants across the globe, to meet the escalating demand for small cars, in both the Indian and overseas markets. The auto sales in the US plunged during the past couple of years. This situation was not just confined to the US car market alone. Car sales even in Europe declined significantly; mainly Western Europe sales fell considerably, signaling deterioration in the demand for bigger cars. Other countries like Japan are also facing similar problems. To meet customer demands, a number of global auto makers have started reintroducing small cars. Companies like Ford, Toyota, Nissan, and Honda, are all showing interest in the segment of small cars. In addition to the other advantages like being fuel-efficient and versatile, these cars have in fact become a fashion statement nowadays.

Why India?

Even though the Indian automobile industry is not as developed as its counterparts in the other countries, investments have started pouring into the small car segment. Korean car maker Hyundai, Japan’s Honda Motors and domestic companies such as Tata Motors and Maruti Udyog, are stepping forward to launch new small car models to target India’s emerging middle class and also the overseas markets. Heung Soo Lheem, Managing Director and CEO, Hyundai Motor India, says, “We have a very clear target. India will be our export hub, which means all our small cars will be produced here.” The rush of global car manufacturing companies into India is mainly to tap its low cost manufacturing base. India provides cheap and high quality labor force with significant engineering and manufacturing skills. Also the government’s incessant encouragement for the expansion of the auto industry by easing rules is fueling the growth of the sector. This sector received an immense boost when the government announced plans to trim down excise duties on small cars to stimulate investment, even though taxes are somewhat high, compared to that in China.

Moreover, the foreign auto manufacturers are permitted to set up fully-owned subsidiaries in India, enabling low cost production of components. This could certainly give the nation an edge over China, where local partners are compulsory. The government has also taken steps to build infrastructure and simplify foreign investment rules that would encourage foreign producing small cars.

Besides, India is now one of the fastest growing car markets after China, with the small car market accounting for a whopping 70% of India’s total car market, while in China, it accounts for 33%. The future thus looks bright, with small cars dominating the Indian market. Hence, the auto makers are looking at India not just as Asia’s small car export hub, but as a huge potential market of wealthy consumers to be captured.

Strategies on a Roll

Auto majors are now rolling out their strategies to implement their plans successfully. The $75 bn Hyundai Motor, the world’s fifth largest auto maker, has already shifted the complete production of its most popular compact, Atos Prime, to India. It is also planning to do the same for its other models also. “Our upcoming i20 Model, which will debut in the Paris Motor Show in September, will be solely manufactured in India,” said Heung Soo Lheem, Managing Director of Hyundai Motors India. Hyundai exports 40% of its small car production, mainly i10 and Santro, which sells as Atos in 97 countries across the globe. “Currently, India is a small car hub for Hyundai and we have a backlog of export orders too,” says Hyundai Motor, India Senior, VP Arvind Saxena. Hyundai has declared that Indian investments value at roughly $1.5 bn. Likewise, Suzuki Motors is planning to enhance its production in India, and also to manufacture its next world strategic model here. According to Osamu Suzuki, Chairman of Suzuki Motor Corporation, “Suzuki Motor Corp. attaches great importance to India”. Maruti Suzuki currently exports Alto, Omni, Wagon-R and Zen Estilo to non-European markets such as Chile, UAE, Algeria and East Africa.

Nissan is planning to buy 50,000 A-Star compact cars from its rival Maruti Suzuki and export them to European markets. Nissan is also planning to make a small car in India and start exporting it to Latin American and African countries, by 2010. The Japanese auto giant Toyota is the fourth car manufacturer which is eyeing India as a global export hub for small cars, after Hyundai, Maruti and Nissan, to meet the surging demand for some of its popular models. The company has been experiencing a deep fall in the sales of its prime models like the Prius Hybrid.

A step in right direction

 Toyota is planning to make India an export base. Tata Motors, which has already posed a serious challenge to other rivals by introducing its much awaited $2,500 Tata Nano, has now decided to consider issuing licenses to particular car makers in offshore markets, who would manufacture Nano. The company is setting up showrooms across Africa and has tied up with Italy’s Fiat to use its South American sales network. General Motors Corp. has already started producing small cars, including the Chevy Spark, a $7,200 compact, which is a big part of strategy for India. Honda Motor has began building a new plant for premium hatchbacks in Western India. In the meantime, international auto supply players such as Delphi, Magna International and Visteon are expanding in India, too, to facilitate big car manufacturers to build cheap small cars and also export them to other markets. “In these times, customers are realizing that it’s better to share products for different countries,” says Prasen Agali, Magna’s Executive Director for India.

Bumpy Road Ahead?

In spite of all the efforts, there are a lot of challenges to be encountered before the companies can start producing small cars to meet the global demand. On the one hand, they have to attend to their own production techniques and on the other, there are still a number of impediments that influence the growth prospective of the sector. Experts say, India can be able to meet the escalating global demand for small cars and can emerge as a suitable destination for car production and sales only if it emphasizes on adequate infrastructure, changes in labor and tax regulations, creation of more skilled workers, undertaking automotive research and development and, above all, boosting the scale of exports of the companies. Even though the Government of India has taken some positive steps, a lot more needs to be done to boost the industry.

Outlook

India’s possibility of becoming an exporting base mostly depends on how quickly the government clears the bottlenecks that hinder the expansion of the auto industry. Many companies have requested the government to hasten the process of expansion of the ports and build railways and other roads that would serve as links to their manufacturing clusters. The companies must also ensure cost-efficient manufacturing and careful cost management to uphold decent profits in the markets. They have to congregate small car making expertise in India. Their future focus should be to increase the quality levels while keeping the costs low. Despite all these it remains that the rush of the global automobile companies will make a significant contribution to the Indian economy.

Tags: Small Cars, Automobile, Passenger Cars, Export Hub, Maruti Suzuki, Tata Motors, Hyundai, Mahindra & Mahindra, Bajaj Auto.

N Janardhan Rao, Senior Economist.