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1. Introduction ......................................................................................... 3
1.1. Indian Automobile Industry.................................................................. 3
1.2. Indian Passenger Car market ............................................................... 3
2. Project Objective .................................................................................. 4
3. Factors Affecting Passenger Cars Demand ................................................ 5
3.1. Gross Domestic Product (GDP) ............................................................. 6
3.2. GDP Per Capita (GDP PC)..................................................................... 6
3.3. Prime Lending Rate (PLR) .................................................................... 7
3.4. Consumer Price Index (CPI) ................................................................. 8
3.5. Index of Industrial Production (IIP) ....................................................... 8
3.6. SENSEX ............................................................................................ 9
4. Car Manufacturers Need for Demand Forecasting .................................. 10
5. Methodology for Forecasting ................................................................. 10
5.1. Regression Models ............................................................................ 11
5.1.1. Simple Linear Regression (SLR) ................................................ 11
5.1.2. Multiple Linear Regression (MLR) .............................................. 13
5.2. Exponential Smoothing Models ........................................................... 14
5.2.1. Simple EWS Model.................................................................. 14
5.2.2. EWS-Holt Model ..................................................................... 14
5.2.3. EWS-Holt Winters Model .......................................................... 15
5.3. Decomposition Models....................................................................... 16
5.3.1. Multiplicative Decomposition Model ........................................... 16
5.3.2. Additive Decomposition Model .................................................. 16
6. Analysis and Results ........................................................................... 17
7. Recommendation................................................................................ 18
8. Reference.......................................................................................... 19
9. Annexure .......................................................................................... 19
1.
Introduction
1.1. IndianAutomobileIndustry
The liberalization policy and various tax reliefs by the Govt. of India in recent years have
made remarkable impacts on Indian Automobile Industry. Indian auto industry is
currently growing at the pace of around 18 % per annum. Indias automotive industry is
now $34 billion worth and expected to grow $145 billion in another 10 years.
1.2. IndianPassengerCarmarket
Over the last few decades. the car market in India have been in a burgeoning stage with
all types of cars flooding the market in order to meet the demands of Indian customer.
It is expected that by 2030, the Indian car market will be the 3rd largest car market
across the globe. The main encouraging factors for the success story of the car market in
India are the increase in the opportunity for new investments, the rise in the GDP rate,
the growing per capita income, growing middle-class population, and high ownership
capacity.
The liberalization policies followed by the Indian government had been inviting foreign
investors and manufacturers to invest in the car market in India. The booming software
sector in India has led to the rise in the income level and change in the lifestyle of the
Indian middle class. People have migrated from using two-wheelers to four-wheelers
thereby increasing the demand for different varieties of cars. Moreover, there are many
financing companies providing easy car loans at reasonable interest rates and affordable
installments.
The car Market in India is crowded with all varieties of car models like the small cars,
mid-size cars, luxury cars, super luxury cars, and sports utility vehicles. Among the
major players in cars, Maruti Udyog is the leader with around 52%, market share
followed by Hyundai Motors with 19% and Tata Motors with 16%. Other notable players
in this segment are Honda Siel, Ford and Mahindra.
Some of the other players in the market are Hindustan Motors, Fiat, Daimler Chrysler,
General Motors, Skoda Auto India Private Ltd., and Toyota. Since the demand for foreign
cars are increasing with time, big brands like Mercedes Benz, Aston Martin, Ferrari, and
Rolls-Royce have long since made a foray into the Indian car market.
2.
ProjectObjective
Our objective in this project is to come up with an accurate model for forecasting
monthly total car sales in India. For that we would develop forecasting models
using different methodologies and compare them for better accuracy. The
FactorsAffectingPassengerCarsDemand
The demand for automobiles is affected by a number of factors. The major factors
that influence the demand for cars are:
a) General business activity & national income (GDP)
b) The distribution of national income (GDPPC)
c) The cost of living
d) The psychological atmosphere (whether pessimistic or optimistic)
e) The extent & character of model changes
f) The age of cars in the hands of new car buyers
g) The no of cars scrapped
h) Financing terms
i) Used car prices
In the next few pages we have described the different independent factors which
influence the demand of automobile to a large extent in the context of Indian car
manufacturers
3.1. PriorperiodGrossDomesticProduct(GDP)
A countrys GDP is the total market value of all final goods and services produced in a
country in a given year, equal to total consumer, investment and government spending,
plus the value of exports, minus the value of imports. Previous months GDP is related to
the consumers spending patterns. It has got a positive correlation with the demand
pattern of goods & services. The graph below indicates the Indian GDP(previous month)
& car sales in India over the years.
1,000,000
900,000
800,000
700,000
600,000
500,000
GDP(RsCrores)
400,000
Sales(NoofCars)
300,000
200,000
100,000
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From the above graph it is obvious that with increase in GDP (Previous month)
over the years the sales of cars also goes up which implies the demand for cars
has got a positive correlation with the GDP.
3.2. PriorperiodGDPperCapita(GDPPC)
An approximation of the value of goods produced per person in the country, equal to the
country's GDP divided by the total number of people in the country. GDPPC(Previous
month) also plays a vital role in the demand pattern. This is important in the context
because it factors in the population .The graph below indicates Indian per capita GDP &
car sales over the years
200,000
180,000
160,000
140,000
120,000
100,000
GDPpc(Rs)
80,000
Sales(NoofCars)
60,000
40,000
20,000
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From the above graph it is obvious that with increase in GDPPC over the years
the sales of cars also goes up which implies the demand for cars has got a
positive correlation with the GDPPC.
3.3. PriorperiodPrimeLendingRate(PLR)
PLR is the interest rate charged by banks to their largest, most secure, and
creditworthy customers on short-term loans. This rate is used as a guide for
computing interest rates for other borrowers. Prime lending rate affects the
demand pattern of automobiles, because it affects the ability of the consumers for
repayment of loan.
200000
16
180000
14
160000
12
140000
10
120000
8
Sales(NoofCars)
6
PLR(%)
4
100000
80000
60000
40000
20000
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3.4. PriorperiodConsumerPriceIndex(CPI)
CPI examines the weighted average of prices of a basket of consumer goods and
services, such as transportation, food and medical care. The CPI is calculated by
taking price changes for each item in the predetermined basket of goods and
averaging them; the goods are weighted according to their importance. Changes
in CPI are used to assess price changes associated with the cost of living. CPI
plays a vital role in deciding the demand pattern.
180000
120000
60000
180
170
160
150
140
130
120
110
100
90
80
Sales(NoofCars)
70
60
CPI
50
40
30
20
10
0
1 1 2 2 2 3 3 4 4 5 5 5 6 6 7 7 7 8 8 9 9
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
0
r p b lu c y tc ra g n n v r p b lu c y tc ra g
p e e J e a
u a u o p e e J e a O
u
A S F
D M O M A J J N A S F
D M
M A
3.5. PriorperiodIndexofIndustrialProduction(IIP)
Index of Industrial Production (IIP) in simplest terms is an index which details out
the growth of various sectors in an economy. E.g. Indian IIP will focus on sectors
like mining, electricity, Manufacturing & General. Index of Industrial Production
(IIP), the magnitude of which represents the status of production in the industrial
sector for a given period of time as compared to a reference period of time. IIP
affects the sales pattern of cars.
350
180000
300
250
120000
200
Sales(NoofCars)
150
IIP(Index)
60000
100
50
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3.6. SENSEX(BSE30shareindex)
The Sensex is an indicator of all the major companies of the BSE. If the Sensex
goes up, it means that the prices of the stocks of most of the major companies on
the BSE have gone up. If the Sensex goes down, this tells that the stock price of
most of the major stocks on the BSE have gone down. Auto companies play a
major role in the increase or decrease of sensex. With the change in sensex the
demand & sales pattern of cars changes.
25000
180000
20000
120000
15000
60000
Sales(NoofCars)
10000
Sensex
5000
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The demand pattern is not only affected by the individual factors mentioned
above but also the combination of all of the factors. Our analysis would be to
estimate sales based upon the combined change of the above factors. The
previous month closing Sensex (30 share index) is used to capture the
sentiments of people.
4.
CarManufacturersNeedforDemandForecasting
Planning inventory
5.
MethodologyforForecasting
Our
Regression Models
Decomposition Models
5.1. RegressionModels
The regression model is a univariate/multivariate model in which dependent
variable is forecasted on the basis of its own history and histories of independent
variables. Though regressions models are called as causal or explanatory models
that an independent variable x causes dependent variable y, they are models of
correlation not causation. Regression models are trend extrapolation in general
with the assumption that the historic trend in the data is smooth and will continue
on its present course into the near future. Considering automotive industry a
mature market, there are no disruptive innovations influencing supply and
demand. Therefore historical data gives a fair representation of the future.
For our project we have taken Simple Linear Regression (SLR) and Multiple Linear
Regression (MLR) to forecast monthly car sales in India.
5.1.1.
These variables exhibit a high correlation (> 0.9) with dependant variable.
Further, since these variables have a cause & effect relationship with the
Xi +
Where,
Y intercept
= slope of Y
Using the SLR model, we found out the correlation coefficient (R2) that measures
the proportion of variation in monthly car sales (Y) that is explained by the
corresponding independent variable (X). The results are tabled below.
SimpleLinearRegressionresults
YVariable
XVariable
Totalcar
sales
GDP
(Interpolates)
GDP
(Constant
values)
Totalcar
sales
Totalcar
sales
Totalcar
sales
r
Intercept
Slope
r2
adjr2
DW
MAPE
0.9269
64514.18866
0.252394766
0.9273
62472.52141
GDPper
capita
(Interpolated
data)
GDPper
capita
(Constant
valuedata)
0.9450
117759.5377
0.9257
114411.6946
Totalcar
sales
IIPIndex
0.9132
Totalcar
sales
Sensex(30
share)
0.8475
70741.30491
1.92088688 11.14%
47852.02592
TheSLRofTotalcarsaleshasbeenstudiedwithdifferentindependentvariables
Theindependentvariablesincludedareonlytheoneswhichhavecause/effectrelationshipwithcarsales
TheminimumMAPEisidentifiedwithGDPpercapita(constantvalues)at11.14%
TheforecastofcarsalesforNov09asperaboveregressionis161408cars
5.1.2.
X1i +
X2i +
3 X3i
+ .. +
Xki +
,where,
Y intercept
= slope of Y with variable X1, holding other variables X2, X3..Xk constant
= slope of Y with variable X2, holding other variables X1, X3..Xk constant
= slope of Y with variable X2, holding other variables X1, X2..Xk-1 constant
Independentvariables
GDP,GDPpc,CPI
GDP,GDPpc,CPI,IIP
GDP,GDPpc,Sensex
GDP,GDPpc,IIP
GDP,GDPpc
GDP,GDPpc,Sensex,CPI,IIP
GDP,GDPpc,GDPpc^2
GDP,GDPpc,PLR
GDP,GDPpc,PLR,CPI,IIP
AdjustedRsquare
0.89691477
0.897087876
0.897299681
0.897550212
0.897964968
0.899914207
0.901823855
0.903299779
0.905462921
DW
2.174216231
1.915994089
2.19723
1.949424
2.172709
1.86475
2.32735199
2.394483
2.046039224
MAPE
16.23%
20.42%
15.83%
16.61%
15.74%
11.28%
18.59%
13.99%
17.79%
GDP,GDPpc,PLR,Sensex,CPI
10 IIP,Lag1month
11 GDP,GDPpc,PLR,Sensex,CPI,IIP
0.913655629
1.929379
2.43%
0.913948981
2.057502
2.24%
GDP,GDPpc,GDPpc^2,PLR
12 Sensex,CPI,IIP
0.913655629
2.052521452
1.42%
GDP,GDP^2,GDPpc,GDPpc^2,PLR
13 Sensex,CPI,IIP,Q1,Q2,Q3,Q4
0.911509161
2.143436
18.92%
GDP,GDPpc,GDPpc^2,PLR,Sensex,CPI,
14 IIP,Lag1month,Q1,Q2,Q3,Q4,GDP^2
0.92555644
2.249563388
4.56%
GDP,GDPpc,GDPpc^2,PLR,Sensex,CPI,
15 IIP,Lag1month,Q1,Q2,Q3,Q4
0.925609843
1.896998967
4.98%
5.2. ExponentialSmoothingModels
Exponential smoothing is a very popular scheme to produce a smoothed Time
Series. Unlike forecasts from regression models which use fixed coefficients,
forecasts from exponential smoothing methods adjust based upon past forecast
errors. Whereas in Moving Averages the past observations are weighted equally,
Exponential
Smoothing
assigns
exponentially
decreasing
weights
as
the
observation get older. In other words, recent observations are given relatively
more weight in forecasting than the older observations. We have used the
following exponential smoothing models for the forecasting of car sales.
5.2.1. Simple EWS Model
This is called simple exponential weighted moving average is appropriate for
series that move randomly above and below a constant mean with no trend or
seasonal patterns. The forecasting for Y is
F1=Y1
Ft = WYt + (1-W)Ft-1,
t=2,3,
Ft= weighted average of actual observed Yt and its forecast Ft-1
=forecast for next period (t+1)
Simple EWS model estimates level at timet and do not capture trend or
seasonality. This model has a recursive structure hence at any timet, the new
time t estimate of the Level Ft is a function only of the previously computed
estimate Ft-1.
5.2.2. EWS-Holt Model
The EWS Holts method estimates both the current level and the current trend.
The forecast model is
L1= Y1, T1= 0
Lt= a*Yt+ (1-a)*(Lt-1+Tt-1) for t = 2, 3, 4, Tt= b*(Lt-Lt-1) + (1-b)*Tt-1
t = 2, 3, 4,
Ft= (Lt+ Tt) =forecast of Y for next period (t+1)
Initial Values:
St= Yt/Average(Y1:Ys), t=1,2,,s,
Ls= Ys/Ss,
Ts= [Average(Ys+1:Y2s) -Average(Y1:Ys)]/s
Evaluated values:
Lt= a*(Yt/St-s) + (1-a)*(Lt-1+Tt-1) for t = s+1,
Tt= b*(Lt-Lt-1) + (1-b)*Tt-1for t = s+1,
St= c*(Yt/Lt) + (1-c)*St-s, t=s+1,
Forecast:
Ft= (Lt+ Tt)*St+1-s =forecast of Y for next period (t+1)
5.3. DecompositionModels
In decomposition models, the underlying pattern of the car sales can be broken
down into sub-patterns that identify each component of the time series
separately. Such decomposition can frequently facilitate improved accuracy in
forecasting, and provides an aid in a better understanding of the behaviour of car
sales. Decomposition models usually try to identify three separate components of
the basic underlying pattern: trend, cyclic, and seasonal and then projects the
forecast.
5.3.1. Multiplicative Decomposition Model
The model is assumed to be multiplicative of its components i.e. trend,
seasonality, cyclical and error. All these parts are multiplied by each other to give
the forecast. The model equation is: Y = T*S*C*R
Where, T is the trend, S the seasonality, C the cycle and the error.
5.3.2. Additive Decomposition Model
Additive Decomposition Model projects the identified parts (trend, seasonality,
cyclical and error) to the future and sums the resulting projection to form the
forecast. The model equation is: Y = T+S+C+R
where T is the trend, S the seasonality, C the cycle and the error.
Forecast Models
MAPE
Exponential Smoothing
12 month MA
16.44%
45.60%
Simple EWS
11.64%
EWS-Holts
12.17%
EWS-Winters
2.94%
Decomposition
Additive decomposition
Multiplicative
decomposition
6.
10.47%
6.15%
AnalysisandResults
MultipleLinearRegressionResults
Sl
No
Independentvariables
AdjustedRsquare
DW
MAPE
GDP,GDPpc,PLR,Sensex,CPI
1 IIP,Lag1month
2 GDP,GDPpc,PLR,Sensex,CPI,IIP
0.913655629
1.929379
2.43%
0.913948981
2.057502
2.24%
GDP,GDPpc,GDPpc^2,PLR
3 Sensex,CPI,IIP
0.913655629
2.052521452
1.42%
GDP,GDPpc,GDPpc^2,PLR,Sensex,CPI,
4 IIP,Lag1month,Q1,Q2,Q3,Q4,GDP^2
0.92555644
2.249563388
4.56%
GDP,GDPpc,GDPpc^2,PLR,Sensex,CPI,
5 IIP,Lag1month,Q1,Q2,Q3,Q4
0.925609843
1.896998967
4.98%
The table shows higher correlation between GDP Per Capita and car sales as there
is considerable improvement in MAPE when exponent of GDP-PC is taken into the
combination.
The hypotheses of that car sales contains all three components viz. level, trend
and seasonality has been proved by the accuracy of EWS-Holt-Winters method in
which MAPE is the lowest among EWS models (2.94%). This is comparable with
the MLR model in which MAPE is 1.42% and as EWS models adjust for past errors
which is useful for long term forecasting. Unlike Holt-Winters, both decomposition
models fail to provide forecast results with better accuracy. The multiplicative
decomposition model with MAPE of 6.15% is slightly better than the additive
model in which MAPE is 10.47%.
7.
Recommendation
The analysis shows at least 6 models that include 5 MLR models and Holt-Winters
model have mean absolute percentage error below 6%. Among these we would
recommend 2 models for accurate forecasting. They are:
1. Holt-Winters EWS model
Taking a long term view and the components in car sales data (level, trend and
seasonality), provides a better forecasting model though its MAPE is higher than
the best MLR model.
2. MLR model with explanatory variables combination of GDP, GDPpc (GDP per
capita), GDPpc2, Prime Lending Rate (PLR), Sensex, Consumer Price Index
(CPI) and Index of Industrial Production (IIP).
Car sales for next month = -299305 + 0.1716(GDP) + 15.0685(GDPPc) 0.0004 (GDPPc^2) 2853.799 (PLR) + 2230.6215(CPI Index) 406.787
(IIP) + 2.0551(Sensex)
Among the all forecast models developed, this model provides the best accuracy.
Most importantly all influencing independent variables are built into the model
hence sensitivity analysis also be carried out.
These two models can be used to forecast pan-India combined monthly sales of
passenger cars of all car manufacturers. While adapting these models, individual
car manufacturer have to take into consideration the advertisement expenditure,
promotion plans and efficacy of distribution networks to forecast monthly sales.
8. Reference
CMIE data base, Forecasting Applications & Methods by Francis x.Diebold, Statistics for Managers by
Levine et al.
9.
Annexure
Data.xlsx
CorrelationandSimpleLinearRegression
Simple Linear
Regression and Corre
MultipleLinearRegression
MLR Sheet.xlsx
MLR Dummy.xlsx
MLR Results.xlsx
Smoothingmethods
Smoothing
methods.xlsx
Decompositionmethods
Decomposition.xlsx