REPORT FOR COMMUNICATIONS FOR CAPITAL MARKETS BY MR.

KALTAN
BOSE

Automobile Industry
Demand and Supply Factors

Name - Nalin Gupta

Roll No. - 45
 Contents

• Introduction 1

o Problem 1

• Findings 2

o Demand Factors 2

o Supply Factors 4

• Conclusion 5

• References 5
Introduction

The automobile industry designs, develops, manufactures, markets, and sells the
world's motor vehicles. The automotive industry is one of the most important
economic sectors by revenue. In 2009, the automobile industry is expected to see a
growth rate of around 9%, with the disclaimer that the auto industry in India has been
hit badly by the ongoing global financial crisis.

The automobile industry in India happens to be the ninth largest in the world.
Following Japan, South Korea and Thailand, in 2009, India emerged as the fourth
largest exporter of automobiles. Several Indian automobile manufacturers have spread
their operations globally as well, asking for more investments in the Indian
automobile sector by the MNCs.

Problem

The automobile industry crisis of 2008–2010 was a part of a global financial

downturn. The crisis affected European and Asian automobile manufacturers, but it
was primarily felt in the American automobile manufacturing industry. The downturn
also affected Canada by virtue of the Automotive Products Trade Agreement.

The automobile industry was weakened by a substantial increase in the prices of

automotive fuels linked to the 2003-2008 energy crisis which discouraged purchases
of sport utility vehicles (SUVs) and pickup trucks which have low fuel economy. The
popularity and relatively high profit margins of these vehicles had encouraged the
American "Big Three" automakers, General Motors, Ford, and Chrysler to make them
their primary focus. With fewer fuel-efficient models to offer to consumers, sales
began to slide. By 2008, the situation had turned critical as the credit crunch placed
pressure on the prices of raw materials.

Car companies from Asia, Europe, North America, and elsewhere have implemented
creative marketing strategies to entice reluctant consumers as most experienced
double-digit percentage declines in sales. Major manufacturers, including the Big
Three and Toyota offered substantial discounts across their lineups. The Big Three
faced criticism for their lineups, which were seen to be irresponsible in light of rising
fuel prices. North American consumers turned to higher-quality and more fuel-
efficient product of Japanese and European automakers. However, many of the
vehicles perceived to be foreign were actually "transplants," foreign cars
manufactured or assembled in the United States, at lower cost than true imports.

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Findings
The automobile industry crisis of 2008–2010 makes us wonder what are the factors
which lead to such a crisis. Let us discuss in detail the various demand and supply
factors which affect the automobile sector.

Demand Factors

1. Financing Options

Auto industry observers cite car loans as the biggest driving factor for the expansion
of the Compact Car segment. At present, almost 85 per cent of all new car sales are
backed by auto finance, compared to 65 per cent five years ago.
Interest rates on car loans have come down drastically in the past four or five years,
which helps prospective buyers take the plunge. The growth of the CC-segment in the
past few years can be mainly credited to factors such as rise in income levels leading
to increased affordability and simultaneous reduction in interest rates leading to lower
EMIs. The drop in interest rates usually helps very few people to probably shift from
the base model to a deluxe model. A larger shift happens if people are willing to take
long-term loans, like five years instead of the earlier three-year loans.

2. Advertising And Marketing

Due to the advertising techniques adopted by all the manufacturers in the CC-
Segment the sales have risen drastically. It is all due to because the companies now a
days are using even aggressive selling techniques for which they are even coping with
the Film celebrities and Cricket stars, like Maruti has contracted Irfan Pathan as the
brand ambassador of Zen and for Santro Hyundai has contracted for Shah Rukh Khan.

And the companies are even trying to approach to the customer as to there demand for
a vehicle at special interest loans, etc. They are using data according to the customers
return and earning capacity for attracting the customers for there vehicles.

3. Price Of The Car

One of the major factors that affect the demand of any commodity in the market is the
price of the commodity. As the law of demand also states that with an increase in
price the demand of the commodity decreases and vice versa.

Since, in the compact car segment market even there are very less competitors there is
stiff price competition. Like the price of Zen in 2001 was Rs. 3.93 lacs which
increased to Rs. 4.01 lacs in 2005, but still the sale of the Maruti brand keeps on
increasing it was due to the company’s reputation with the customers.

4. Income Of Consumer / Buyer

The income of the consumer or buyer of the car is a very important factor of demand.
In recent time we have seen that due to increase in the Income of the general public,
there has been a shift from the Lower CC-segment cars to the Upper CC-segment
cars.
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Due to the recent increase in the number of multinationals in India, the income level
of the employees have risen drastically and has made CC-segment cars an entry level
car for a lot of people. The average age of a CC-segment car owner has also dropped
from 35 years to 31 years in India.

5. Increase In Affordability

The demand for passenger cars is driven mainly by greater affordability, which in turn
increases the aspiration level of the customers. Today with high amount of disposable
income in the hand of Indian youth, who forms major portion of the population, PV
market has larger addressable market.

6. Demographic Drivers

Cars being aspirational products, purchase decisions are influenced by the overall
economic environment. Increase in per capita income increases the consumption
tendency of the customer. Growth in per capita income and rising aspirations and
changing lifestyle is leading to increased preference for cars
over two-wheelers, which is also having a positive rub off on car demand.

7. Availability Of Easy Financing Options

A majority of PV purchases are financed through financial institutions. Over the past
4-5 years car industry has been benefited through significant increase in affordability
due to the decrease in EMIs. Car finance rates dropped from 17% in 2000-01 to 11%
in 2005-06. However it has increased and averaged at 13.75% in 2006-07. The current
hardening of interest rates is expected to affect demand by
reducing affordability.

8. New Offerings

Car sales increase when a new model hits the market. Due to escalation in
competition in Indian car market, frequency of new model launches has increased. In
the past one year only the Indian car market has seen many launches namely SX4,
Swift Diesel, Zen Estilo, Spark, Logan, etc.

9. Exports

The share of exports from domestic production is currently at 12-13%, which is much
lower than current export hubs. Currently, India’s share of global passenger cars
export volume stands at less than 1%. But India is fast emerging as a manufacturing
hub for leading global car makers, and several manufacturers have already firmed up
plans for setting up manufacturing bases in India, which will also be used for exports.

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Supply Factors

1. Presence Across Segments

Manufacturers with presence across various product segments can ensure higher
volume and better capacity utilization by using the common manufacturing capacity.
Typically a customer upgrades from one segment to higher segment and the presence
across various segments ensures that the company retains its existing customers.

2. Efficient Operations

Competition in PV segment is very intense and this requires the existing players to
initiate steps to reduce their cost of production. Effective and successful operation
methods like platform commonality, reduction in vendor base and workforce
rationalization can help a company immensely.

3. Wide Dealer Network And Availability Of Finance

A wide dealer network helps the company serve customers over wide geographical
area. For e.g. Maruti has used its available wide service network as point of difference
over competitors. The companies are tying up with the financial institutions having
rural presence to provide additional financing options to customers in such areas.

4. Access To Latest Technologies

Indian PV segment is highly competitive with as many a 14 players operating in it and

more than 80 models on the offering. But still any new model launch meets with
increase in sales volume for the company. Moreover in a time when a substantial
portion of Indian customer is looking to upgrade in higher segment, companies with
latest technologies and latest models will catch more attentions

5. Price Of The Car

Price of the car is one of the major factors that affect the supply as well as the demand
of a car. If the price of the car is high in the market, the manufacturer or the supplier
will want to supply more units in the market so he can earn more profits.

In the automotive industry where the market type is oligopoly, if one company drops
its price for the car, there is a huge impact on the sales of the other cars as well as the
same car. In the market the price of one car is inter-related to the price of the other
cars in the same segment. The best solution is that market equilibrium should be
achieved so that the amount of the quantity demanded should be equal to the amount
of the quantity supplied to achieve maximum profits.

A Market Equilibrium is achieved at the point of intersection of the demand line and
the supply line. The point is the equilibrium point where the quantity demanded is
equal to the quantity supplied.

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 6. Factors Of Production

There are some factors of production which influence the supply of a car like
Cost of Raw Material
Labour Cost
Machinery
Input Cost
These factors influence the supply of a car largely. If the cost of the raw material
(Steel, Spare Parts, Rubber) increases there will be an increase in the cost of
production leading to decrease in profit margins. Costs like labour costs, machinery
and input costs also influence the supply with the increase or decrease in these costs.

7. Government Policies And Taxes

If there is a change in the government policies regarding the increase in the road tax
charged or the tax which is to be paid per unit sold, the supply of a car will fluctuate
with the nature of the change.

Recently the government has reduced the custom duty on inputs and raw material
from 20% to 15% which has increased the supply.

Conclusion

Market economies are assumed to have many buyers and sellers, high competition
and many substitutes. Monopolies characterize industries in which the supplier
determines prices and high barriers prevent any competitors from entering the market.

Demand and supply refer to the relationship price has with the quantity consumers
demand and the quantity supplied by producers. As price increases, quantity
demanded decreases and quantity supplied increases. On the other hand, elasticity
tells us how much quantity demanded or supplied changes when there is a change in
any of the factor. The more the quantity changes, the more elastic the good or service.

By studying various demand and supply factors affecting the automobile industry we
can conclude that an upturn or downturn in this sector is due to an aggregate effect of
multiple factors. These together govern the economies of automobile sector.

References

http://www.wikinvest.com/industry/Auto_Makers
http://en.wikipedia.org/wiki/Automotive_industry
http://business.mapsofindia.com/automobile