DA DOWN TO EARTH INDIA luned 8 ottobre 2007 n. 10 vol.

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Small car revolution: who cares about congestion, pollution Small cars have had it good for quite a while, but the market could undergo a drastic transformation with the advent of ultra-cheap, small cars led by the Tatas Rs 1 lakh model. The Tata car, the stuff of dreams millions of potential vehicle owners havent yet dared to dream, is slated to roll out of its factory in Singur, West Bengal, in 2008. The state government has done everything in its powers to facilitate the project, from land acquisition to fiscal breaks. At the moment, details are under wraps. Impressionistic media reports and hints from carmakers point to a stripped-down car perhaps with a 30-horsepower engine, in the range of 700 cc engine displacement with three cylinders. It will have a capacity of four or five passengers. Bosch is said to be designing a special fuelinjection system for the petrol version and a CRDi unit for the diesel version. Industry response has been cautious. Practically all of Indias manufacturers offer or plan to offer a variety of small cars in different price ranges. For a long time, the Maruti 800 model of Maruti Udyog Limited has set the bottom price, now at Rs 2.16 lakh for the base model. Without taxes its cost can go down to Rs 1.4 lakh. Currently, nearly all Indian small cars are in the price range of Rs 2-4 lakh. In relation to the global price range all these cars fall below the US $10,000 tag. The Tatas will add a layer at the base of the pyramid, with a production capacity expected to exceed 350,000 units annually. Tata car will set the trend Industry argues that if India does not enter this segment, the Chinese will. Its mantra is: build volumes at the lower end, at lesser margins, and remain profitable.The availability of local skills and material, frugal engineering and an indigenous manufacturing base is the right recipe. Decentralised assembly to feed regional markets, as Tata Motors has planned, can keep logistics costs to a minimum.

Rising raw material costs, especially that of steel, and production delays can force Tata Motors to raise the price though. Auto market watcher Murad Ali Baig says, Rs 1 lakh seems unachievable. Buyers preference for comfort and performance and harsher standards will push up costs. The margin of supplying components for small cars will have to be far too low compared to normal standards. But no one is coming out with data. The lowest cost of the base model may grip customer attention but its variants with improved features power-steering and air-conditioning among othersmay push up both prices and margins. Even though most carmakers have begun eyeing the small car market in India, it is not clear who else might want to enter this segment. A price war may ensue. So far only Bajaj Auto Ltd, in a tie-up with Frances Renault group, has announced plans to make a Rs 1.2-lakh car. The ranks may swell with more players planning models priced somewhere between a high-end two-wheeler and Maruti 800. The look of the Tata car and customer response will be decisive. Three playersMaruti Udyog, Tata Motors and Hyundaihave captured nearly 86 per cent of the car market in India. Global analysts CSM forecast that Tata Motors, aiming to close the gap with Maruti Udyog, will be number one by 2012. Maruti has not yet risen to the bait. The gossip is Maruti 800 might be reinvented to beat the competition. Hyundai has not ventured into the ultra-low-cost class. Three playersMaruti Udyog, Tata Motors and Hyundaihave captured nearly 86 per cent of the car market in India. Global analysts CSM forecast that Tata Motors, aiming to close the gap with Maruti Udyog, will be number one by 2012. Maruti has not yet risen to the bait. The gossip is Maruti 800 might be reinvented to beat the competition. Hyundai has not ventured into the ultra-low-cost class. Jagdish Khattar, managing director, Maruti Udyog says, Our parent company Suzuki Motor Corporation, leader of minicars for decades, believes that given norms of safety and emissions, and the tax structure on cars in India, it is not feasible for us to manufacture and sell a car profitably for US $2,500-3,000." Khattar believes customers are upscaling. Within each car model variants with more features are preferred. Any company that wishes to tap the bottom of the pyramid has to deliver on several parameters, including cost of ownership, maintenance, quality, reliabiliy and styling.

and European carmakers have a small presence in the Indian car market3.3 and 0.8 per cent respectively. General Motors has just about rolled out a small car model, Spark. Others desperate to get a foothold in the small car segment are tying knots with Indian partners. Renault has joined hands with Mahindra and Mahindra to produce a small car, Logan. Bajajs interest in a tie-up with Renault to produce a low-cost car is perhaps a strategy for the two-wheeler industry to diversify and de-risk business.
US

India, China to lead cheap car boom The Indian market mirrors the global trend. Globally, the segment for low-cost cars priced below US $10,000 is expected to grow most in China, India, and central and eastern Europe. India and China are expected to be the major players. PricewaterhouseCooperss projections say that by 2014 every other low-cost vehicle will be assembled in Asia, with India and China accounting for 11 per cent and 34 per cent of the global output. Currently, low-cost cars costing less than US $7,000 are mainly produced in China and India. China sells the cheapest carsGeely HQ, Xiali and Cerry are in the US $2,500-3,000 range, followed by Maruti 800 (US $5,400). Ultra-low-cost cars can make millions afford new cars in the price-sensitive markets of developing Asia. Market-watchers say every size segment will have a low-cost variant. This is a new growth opportunity as the market in developed countries has begun to get saturated (see box: Cheap drive).

India may use this segment to expand its export base. The Auto Mission Plan 2006 has already proposed breaking out of traditional markets. Tata Motors plans to build a retail network across Africa and Latin America for its ultra-low-cost car. India is being seen as a hub for low-cost cars with major markets in West Asia, Southeast Asia and Africa. The new cost dynamics can metamorphose the car market. Small, low-cost cars present big dilemmas. They help save energy compared to big cars and SUVs, but their bloated numbers will undercut the fuel savings of two-wheelers. And as they begin to pirate travel trips from public transport, cities will also fall into the pincer grip of congestion and pollution. Smallest vehicle segments are gaining popularity Nearly 40 per cent of the Chinese market is A and B segment. The B segment will increase by around 30 per cent till 2012 In Brazil about 50 per cent of household will be able to buy cars by 2012. Low-cost cars will be the most important segment In the US, Europe and Japan the second-hand car market has begun to shift towards low-cost cars. In the US, where sales of low-cost cars had fallen in the past decade, from 307,000 units in 1996 to 70,000 in 1998, it rose to 272,000 in 2005. The base price of Chinese cars is US $5,400, rising to US $7,000-11,000 In western Europe, the low-cost car segment is expected to grow by 0.8per cent annually through 2012 The Japanese low-cost car segment is expected to grow by 0.6 per cent annually through 2012

Predatory low-cost car market seducing more and more customers The marketing establishment is trying to create a new kind of customer. At 8.5 per cent GDP growth, buying power is getting stronger. The car industry is not with targeting high-growth cites like Delhi and other metros. Though the curve is skewed towards the top of the urban pyramid, buying power in smaller cities, towns and villages is upward bound. Consider this survey carried out by a research firm, IIMS Data Works, entitled Invest India Incomes and Savings Survey 2007. Demand is trickling down to small towns and villages, it says. Of the total number of households in semi-urban and rural areas planning to purchase consumer durables in the next one year, 1.05 million households are planning to buy cars, nearly equal to car sales in 2006-07. Quick to latch on, the automobile industry has begun to rework its product portfolio to target consumers in small and semi-urban markets. The main focus is on first-time buyers. Says Ravi Kant, managing director, Tata Motors: Industry has failed in reaching out to rural areas. In fact, his competitor, Maruti Udyog, has begun networking with rural banks: 2.1 million panchayats represent a big potential market. The Indian middle class is also estimated to expand from its current size of 50 million to 583 million by 2025, according to the consultancy firm McKinsey. Also, the global consultancy firm Roland Berger estimates that by 2010 an additional 30 million households will be able to buy a

car. Product strategies of car companies will target these households. While vehicle sales will increase by 8.7 per cent per annum between 2006 and 2012, according to Roland Berger, the low-cost car segment is expected to grow by 7.6 per cent annually. Entry-level cars represent about two-thirds of the passenger car market and Indian c armakers will dominate low-cost production in the small segments known as A and B. A warning sign is that the Rs 1 lakh car, priced close to the high-end two-wheeler, will make it easier for two-wheeler buyers to migrate to cars. From a modest 10-15 per cent shift from two-wheelers to cars, predictions of a bigger shift, nearly 25 per cent, are on the cards (see box : Under siege). Cheap cars are also likely to be predatory on the used car market. In most developed countries, used vehicles are transition vehicles for buyers unready for new cars. But Indians hold on to cars longer, which prevents the growth of a large pool of used newer models. If Indias used vehicle market is slow to grow, prospective buyers may move from two-wheelers to new, cheap cars. Estimates from Roland Berger show that the ratio of used cars to new cars is 1:1 in Indiathis is less than the global ratio of 2:1. The reaction of used car dealers is mixed. Maruti True Value says the second-hand car market is large. Used cars can also offer a wider range of comfort and performance features, which might be absent in cheap, small cars. This, it feels, can thwart the competition from low-cost cars. Low-cost cars will target the first-time buyer, graduates from two-wheelers and may compete with used cars. As carmakers scope the market, there are some things they can be sure of: they are not likely to be hassled by a proactive regulatory regime; there wont be serious policy disincentives to making and selling their wares; and public transport will not pose a serious competition in the near future. Mixed views on the low-cost wheeze Dipankar Khurana, MBA student, New Delhi Institute of Management: I would prefer a small car if it is more fuel-efficient. A car is safer than a bike. But if there was good public transport, like the metro services, I would definitely prefer it. Dal Chand, a dhaba-owner has a Maruti WagonR. He says: Tatas car price is attractive. I will buy a petrol version and fit a CNG kit. CNG is cheaper than diesel and is available in nearby towns as well. One can even go to Agra in a CNG car. Mohan Singh, an elderly person owns a juice shop near Sangam Vihar, says: Our public transporteven the metrois not comfortable for elderly people. If a car is cheaper it is a better option than a two-wheeler.I think the motorcycle market will collapse because of this small car. Ayushman D Sharma, a doctor at Batra Hospital, has a Maruti Zen. He doesnt think people in big cities will buy a Tata 600-700cc, 32-bhp car. A low-speed and low-power car is more useful in smaller cities for short-distance travel. Buyers will have to decide, he says, whether they prefer a car at Rs 1 lakh possibly without power steering or AC, or a second-hand with more facilities at more or less the same price. Amar Srivastava, IBM, Lucknow: With a Rs 1 lakh car, I will not be sure of features like fuel efficiency, safety and comfort, but I know that I can get the best bike for Rs 50,000. Its easier

to navigate in a city on a bike and maintenance is cheaper. Rohit Sharma, telemarketing executive with Airtel: I can take three people along with me if I have a car. Though I will commute for work on my bike, for family outings and long-distance journeys a car is more comfortable. Two-wheeler makers in denial mode? The Tatas Rs 1 lakh car has sent out disturbing signals for the two-wheeler industry. A recent survey carried out by the Associated Chambers of Commerce and Industry of India in metros and semi-urban areas has found that nearly 90 per cent of consumers are waiting for the lowbudget car. This may take away nearly 25 per cent of the two-wheeler market. Sales have already shrunk this year compared to the last. The two-wheeler industry is, however, in denial mode. Brijmohan Lall Munjal, founder director and chairman, Hero Group, feels low-cost cars are unlikely to make any impact on the twowheeler market as the two markets are distinct. Two-wheeler customers rely on two-wheelers due to low operational and maintenance cost and other advantages. Operational costs are, indeed, a big concern. But those who own high-end two-wheelers for aspirational reasons can migrate to compact or bigger cars.But a shift from low-end bikes to low-cost cars will be influenced by running costs. Venu Srinivasan, chairman and managing director, TVS Motors, thinks two-wheelers and lowcost small cars will go hand in handtheyll complement each other. Therefore, therell be no big impact. Two-wheeler customers who want to graduate to cars can go for these low-cost cars. A family might have a two-wheeler and also go for this car. Srinivasan adds that even today second-hand cars can be bought for Rs 1 lakh, but that has not undermined the twowheeler market. Some bike dealers, too, see no threat. In a place like Delhi, mileage, time and navigation are crucial. I have two cars myself, but drive to work on a bike, says Sanjay Malhotra, sales manager of Rohan Auto Sales Private, a dealer in Suzuki bikes. If at all, only entry-level bikers will go for small cars. That segment is just 30 per cent. Others disagree. The Indian dream to own a car will soon be fulfilled, says Amitabh Soni of Maruti Motors, Noida. The status symbol attached to cars will be a motivation. Two-wheeler drivers will go for the Rs 1 lakh car; those with big cars might use it as a second option. Government sits back, carmakers make hay No one knows where to place the ultra-low-cost cars in the overall paradigm shift in technology in India. Small cars and downsizing have begun to find favour to achieve greater fuel efficiency in a world increasingly threatened by energy insecurity and global warming, because they are more energy-efficient than oil-guzzling SUVs. The main concern about the new small car is abnormally low prices linked to what is on offer in terms of emissions performance, durability and safety. The Tata car will jam cities before Euro IV standards are enforced in 2010. It will thus meet abysmally backward Euro II standards in smaller cities that are 10 years behind Europe and Euro III norms in 11 major cities that lag by five years.Should Tata Motors have waited for Euro IV to kick in? Why Euro IV, someone may even ask for Euro V. We will meet the standards we have to meet, was MD Ravi Kants reaction, knowing the government is sitting

on more stringent standards. While the automobile industry prospers, much of urban and suburban India is getting more polluted. Central Pollution Control Board data show that in more than half of the 90 cities it monitors, particulate levels (particles of 10 micron that can kill at very low concentration) are hitting the critical button. Nearly 13 cities have begun to show an upward movement in NO2 concentration, largely driven by vehicular pollution. Cities close to Singur already have a higher NOx profile than most cities. Howrah, a couple of hours from Singur, and Kolkata are among the NOx and particulate matter hotspots in the country. Other small cities are showing up on the list of most polluted ones in the country. Yet the government has not fixed emissions standards to bring all cities within the fold of cleaner standards. Industry observers claim that moving to Euro IV standards will create price pressures. Industry might find it easy to promise rock-bottom prices with good cost management and efficiencies of scale and may even offer a variety of features at reduced costs, but low-cost cars will prevent an R& D challenge. For instance, engines and exhaust systems, along with emissions control components, are taken to constitute about 30-35 per cent of the total cost of a car. I V Rao, technical director of Maruti Udyog, points out that there is little scope to cut costs in these areas since industry has to meet regulations. The increasing popularity of low-cost cars has created extreme pressures for innovation to meet high and durable efficiency levels at lower and lower costs. This is particularly challenging for emissions-control components manufacturers. Higher emissions control standards imply more precious metal loading in cat converters to clean up exhaust, for instance. This has to be matched with other improvements to reduce emissions. Strong regulatory checks on performance, safety and durability that are necessary to offset adverse impacts are still weak (see box: Not very exacting). Regulators will, however, have to enforce strong compliance measures so that emissions stay low through a vehicles life and not just when it is new. Small may be efficient, it must also be clean. Big threat to counter The other bigger worry is the advent of cheap diesel cars. Tata Motors is already producing a 700cc commercial pick-up truck and is in the process of upgrading its engine system through collaborations. Cheap cars on low-cost poor quality fuel can be a fatal attraction for low- to middle-income groups. Even without low-cost cars projections show that by 2010, diesel cars can be half of total car sales. On August 23, 2007, the Delhi High Court raised questions on the expansion of the diesel car fleet in Delhi. It was responding to submissions from the Delhi transport department that on a per passenger-kilometre basis, 3-13 diesel cars spew particulate emissions equal to a diesel bus. This is negating the benefits of switching public transport to CNG. The current norms allow diesel cars to emit very high levels of particulate matter, and nearly three times more NOx compared to petrol cars. Diesel emissions are several times more toxic. Without clean diesel and without narrowing the price difference between diesel and petrol, the use of diesel in the ultra-low-cost segment must not be allowed. Only when new diesel vehicles are fitted with advanced emissions control technologies, especially traps, and run on diesel with less than 10 parts per million sulphur fuels, will toxicity levels of the emissions come close to the level of petrol emissions.

Not at the cutting edge, no one seems to care How safe are low-cost cars? Industry maintains they meet required standards. But key safety standards are not complete. Some, including the full frontal crash test, air bags that protect the rider from impact and anti-lock braking systems (ABS), are not mandatory and offered only in high-end cars. Currently, the Automotive Research Association of India ( ARAI), a Pune-based certification agency, checks components that influence safety levels. These include brake systems, door latches, fuel tanks, speedometers, speed limiters, reflex reflectors, safety glass, safety belts, side door crush resistance, steering wheel impact protection, among others. But full-crash tests that determine how a car will crumple in a collision, minimising the impact on the riders, is still not mandatory. Tata Motors claims it has adequate in-house facilities for safety checks that meet international standards. But key tests are not backed by mandatory certification. In early September 2007, the Union ministry of shipping, road transport, and highways finalised the draft automotive industry standards for frontal crash, frontal, side and offset impact crash safety tests. To be enforced in 2009-10, these will increase prices. The majority of small cars will have to be upgraded to meet standards. Impact absorbing features like air bags along with ABS can increase prices by Rs 40,000-50,000. According to sources in ARAI, many entry-level cars will need redesign to integrate changes in safety regulations. This could hit makers of small cars. Unfortunately, Indian buyers are not informed of safety status of cars as in Europe. Add the fact that consumer awareness is low and government not proactive and what you get is a mix that allows industry to get away with specious reasoningfor instance, arguing cars are safer than two-wheelers. Government not counting cost of motorisation Desperate strategies to cut costs and build a new customer base for cars is easy in India because public policy does not try to recover the full costs of owning and using a car. The cost of using urban space for parking and movement, pollution and health damages, and social impacts are not reflected in taxes and road pricing. Despite enjoying hidden subsidies, the car industry is continuously externalising the true costs of its products while minimising tax contributions. If fiscal brakes are not applied to check the boom, cars will only complicate the transition to more sustainable transportation in cities. When mass produced in India, cheap cars will erode the fuel economy advantage of the twowheeler fleet (see box: Poor trade-offs), and counteract the energy and pollution benefits of public transport planned under the Jawaharlal Nehru National Urban Renewal Mission ( JNNURM). GDP in India is not adjusted to reflect the congestion and public health cost of the car boom as in other countries. But independent estimates for India show that congestion on Indian roads means a loss of Rs 3,000-4,000 crore every year. As congestion builds up and vehicles slow down emissions increase up to five times. Industry, now backed by the Auto Missions Plan, is anxious to expand car ownership. There is a huge potential for the car market to grow; India currently has about 7 cars per thousand people compared to the 650 in the developed world. A study carried out by the University of Michigan Transportation Research Institute and IBM Institute for Business Value on how Indians view their automotive future points out that the factors dissuading potential buyers in India from actually buying a car include: they dont need a car; are uncertain about the cost of

operation; roads are not good; congestion makes driving unappealing; and, parking space is not sufficient. While these are viewed as barriers by industry, the government does not seize this as an opportunity to junk car-centric growth and build systems to actually move people. Cars rolling in, cities rolling over While the Union ministry of heavy industry (MoHI) backs the Auto Missions Plan and sops for the car industry, the Union ministry of urban development (MoUD) can barely counter this with its National Urban Transport Policy. It has not yet figured out ways to promote low-cost public transport to counteract low-cost cars, especially in small cities and towns. An urban infrastructure development scheme for small and medium towns was introduced by MoUD in 2005-06, chiefly to plan for cities and towns with a population of less than a million, and did not qualify for support under JNNURM. Curiously, the scheme listed urban transport (mass rapid transit systems and light railway transport systems) and rolling stock like buses and trams as items not be considered for funding. The justification was this scheme was for small urban areas, where demand for public transport might be inadequate. By default the responsibility of organising mobility in small cities is left to the people, who then buy personal vehicles. Cars take over cities. Despite apprehensions that the influx of very cheap cars can create severe infrastructure pressures, no move has been made to restrain car use. On the contrary, the car industry is complaining about a high tax burden. Global financial services major Citigroup spawns data to show that taxes pump up the on-road price of the Indian cars by nearly 50 per cent in contrast to 23-28 per cent in China. Two Union ministriesheavy industries and urban developmenthave serious differences on fiscal strategy. MoUD has mooted a proposal to levy a Re 1 cess on petrol, an 8 per cent cess on cars and 4 per cent cess on two-wheelers to create an annual Rs 5,000-crore fund to revamp urban infrastructure and reduce use of personal cars. But MoHI is pushing hard to slash excise on small and big cars to perk up the market. Industry opposes the proposed cesses in this long-running feud, ignoring the fact that the total tax burden per vehicle kilometre is 2.3 times higher for public transport buses than cars in Indian cities, as estimated by a 2004 World Bank study. The result of this policy failure is evident. Crawling traffic is the most visible indicator. In Delhi, average vehicular speed has plunged from 20-27 km/hr in 1997 to 15 km/hr in 2002, with cars and two-wheelers occupying more than 90 per cent of road space but carrying much fewer people than public transport. In Mumbai, average roadway speed has dropped from 38 km/hr in 1962 to 15-20 km/hr 1993. In Chennai, the average speed is 13 km/hr, and in Kolkata it ranges from 10-15 km/hr but falls to only 7 km/hr in the centre of town. Building more roads is not the answer: traffic expands to occupy available space. For every 10 per cent increase in road capacity, there is a resultant 9 per cent increase in traffic. Globally, cities are recovering the full cost of car use and reducing their use. Congestion pricing has been implemented in London, Stockholm and Singapore, in which motorists are charged a fee to drive into the densest areas, providing an incentive for drivers to find alternatives. In New York it is estimated that congestion costs the region more than US $5 billion in lost time every year. The citys congestion pricing will reduce vehicle miles travelled, which could yield significant reduction in emissions. The central London congestion charge, introduced in February 2003, has helped reduce traffic congestion by 30 per cent and pollution by 12 to 20 per cent.

Action can be driven only by political will and public anger. In Kolkata, for instance, there is no road space left for more cars except where tramlines have been ripped out and rickshaws taken off. Alarming level of particles, heavy with diesel particulate matter (share rising up to 61 per cent), is choking the city. The Left Front government cannot implement its own policies to cut vehicular pollution, let alone acknowledge pollution dilemmas. If ignored, this can adversely affect the investment climate in the state. The message is clear. Industry is trying to create a new class of car owners, backed by public policies to inflate revenue but not produce clean, durable and efficient cars. Badly regulated markets have cost advantages. Industry knows it and uses it. Without policy brakes, more polluting diesel can become the preferred choice of carmakers and users. Given expected sales and the quality of diesel this will spell a public health disaster. Regulators ignore the fact that the majority needs affordable and efficient public transport, not cars. Higher taxes on cars and use can restrain traffic and raise funds for public transport. Stringent emissions norms can improve technology. Inputs from Vivek Chattopadhyaya, Priyanka Chandola, Jayeeta Sen and Ravleen Kaur