INTERIM REPORT

Analysis of Indian Automobile Sector

Submitted By: BS-B

Ashwini Kumar Verma 09BSHYD0190
Jubin Bansal 09BSHYD0338
Pragati Gyanchand 09BSHYD0235
Md. Naeem Izzuddeen 09BSHYD0459
Submitted to: Mansi Singhal 09BSHYD0435
G. Meenakshi Sowmya 09BSHYD0274
Prof. Sanjay Sharan Md. Zohaib 09BSHYD0460

Faculty Business Strategy-I

IBS Hyderabad
 INDEX

AUTOMOTIVE INDUSTRY IN INDIA……………………………………………………..3

1. Evolution of the automotive industry…………….…………………….…………..3

2. Size and Structure of the automotive industry…….………………………………..3
3. Overview of automotive industry in India…………….……………………………4
3.1 Snapshots………………………………………………………………………..4
3.2 Major Manufacturers……………………………………………………………5
3.2.1 Car Segment………………………………………………………………5
3.2.2 Commercial Vehicle Segment……………………………………………6
3.3.3. Two and Three Wheeler Segment…………………………………….....6

3.3 Production in India…………………………………………………………….7

3.3.1 Passenger Vehicle Production……………….….……………………….7
3.3.2 Commercial Vehicle Production………………..……………………….8
3.3.3 Two-Wheeler Production……………………….……………………….9
3.3.4 Tractor Production………………………………...……………………10

3.4 Future Prospects………………………………………………………………11

4. Growth factors for auto companies in India………………………………………13

4.1 Economic Growth…………………………………………………………….13
4.2 Population Increase……………………………………………………………16
4.3 Infrastructure Development………………………………………………...…19
4.4 Government Regulations……………………………………………………...20
4.5 Rise in Income level…………………………………………………………..21
4.6 Financing………………………………………………………………...……22

5. References …………………………………………………………………………24

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THE AUTOMOTIVE INDUSTRY IN INDIA

1. EVOLUTION OF THE AUTOMOTIVE INDUSTRY

While the automotive industry in India started developing in the 1940s, distinct growth rates
started only in the 1970s. Cars were considered ultra luxury products, manufacturing was strictly
licensed, expansion was limited and there was a restrictive tariff structure. The decade 1985 to
1995 saw the entry of Maruti Udyog in the passenger car segment in collaboration with Suzuki
of Japan, and Japanese manufacturers in the two-wheeler and commercial vehicle segments.
After economic reforms took place in India in 1991, it is only in the mid-1990s, that the
automotive industry started opening up. Thus, the mid-1990s are characterized by the entry of
global automotive manufacturers through joint ventures in India. Till the 1990s, the automotive
industry in India was primarily dominated by Maruti Suzuki, Tata Motors, Hindustan Motors and
Premier Padmini in the passenger car segment. Ashok Leyland, Tata Motors and Mahindra &
Mahindra dominated the commercial vehicle segment while Bajaj Auto dominated the two-
wheeler segment. After the year 2000, further policy changes were introduced and focus on
exports in the industry started increasing. Following that, the Core Group on Automotive
Research& Development (CAR) was set up in the year 2003 to identify priority areas for
Research and Development (R&D) in India.

2. SIZE AND STRUCTURE OF THE AUTOMOTIVE INDUSTRY

The automotive industry is one of the largest industries in India and is of high strategic
importance to the Indian manufacturing sector overall. The industry has been growing at a fast
and steady pace over the past five years registering a CAGR of 17%.

According to the Indian Brand Equity Foundation (IBEF), India is envisaged to be the third
largest automobile market in the world by 2030 only behind USA and China.

According to the UNIDO International Yearbook of Industrial Statistics 2008, India ranks 12 th
among the world’s top 15 automotive nations.

Given below are some of the key features of the automotive industry in India that indicate the
size of the Indian automotive industry:

1. Fourth largest market for passenger cars in Asia.

2. Second largest manufacturer of two-wheelers worldwide.
3. Fifth largest manufacturer of commercial vehicles worldwide.
4. Largest manufacturer of tractors and three-wheelers worldwide.

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 3. OVERVIEW OF THE AUTOMOTIVE INDUSTRY IN INDIA
India has emerged not only as a large domestic market for automotive manufacturers, but also as
a crucial link in the global automotive chain. Among other industries, the automotive industry in
India is understood to be the most dynamic. It has been experiencing strong growth after the
liberalization of the economy in 1991.

3.1 A SNAPSHOT OF THE INDIAN AUTOMOTIVE INDUSTRY

The automotive industry in India produces a wide range of vehicles like passenger cars, utility
vehicles, commercial vehicles, two-wheelers, three-wheelers and tractors.

Currently, there are approximately 15 manufacturers of passenger cars and utility vehicles, 9
manufacturers of commercial vehicles, 16 manufacturers of two-wheelers and three-wheelers
and 14 manufacturers of tractors.

The Indian automotive industry is one of the world’s fastest growing automotive industries
growing at a Compounded Annual Growth Rate (CAGR) of approximately 17% over the last
five years. It is now the 11th largest manufacturer of passenger cars, 4th largest manufacturer of
commercial vehicles and the 2nd largest manufacturer of two-wheelers in the world.

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 3.2 MAJOR MANUFACTURERS IN THE AUTOMOBILE INDUSTRY

3.2.1 CAR SEGMENT

The largest Indian passenger car manufacturers are Tata Motors, Maruti Suzuki, Mahindra &
Mahindra and Hindustan Motors.

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Presence of foreign players such as Mercedes-Benz, Fiat, Honda, General Motors and Toyota is
also growing in this segment.

Recently, the passenger car segment has also seen the entry of other global majors such as
BMW, Audi, Volkswagen and Volvo.

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 3.2.2

3.2.3
COMMERCIAL VEHICLE SEGMENT

Major Indian manufacturers of commercial vehicles are Tata Motors, Ashok Leyland, Eicher

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Motors, Mahindra & Mahindra and Force Motors. Like the passenger car segment, this segment
has also seen foreign companies such as MAN, ITEC, Mercedes-Benz, Scania and Hyundai
entering the market.

TWO & THREE-WHEELER SEGMENT

The two wheeler sector is dominated by Indian companies like Hero Honda, Bajaj Auto and
TVS. Foreign players in this segment include Honda, Yamaha and Piaggio. Three wheeler
segment includes TATA Motors, Piaggio, Force Motors etc.

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 3.3 PRODUCTION IN INDIA

3.3.1 PASSENGER VEHICLE PRODUCTION

The passenger cars can be classified into various categories like the Small Cars, Hatchbacks,
MUVs (Multi-Utility Vehicles), SUVs (Sports-Utility Vehicles) and Sedans (both basic and
luxury). Due to the growing population in India and various other economic and non-economic
factors, the demand for the passenger cars has seen a steady rise. Also with the increased
competition between the manufacturers the Indian customer has a wide variety to choose from,
has further increased the demand. Moreover, the car penetration level in India is just 9 vehicles
per 1000 which is very low as compared to the 600 vehicles per 1000 of the US, which shows
that there is a tremendous potential still in this passenger car market.

The following graph shows the Production of the Passenger Vehicles in India:

From the graph we can see that the production of the cars has been growing at a CAGR of 19.2%
since 2002 and the projected CAGR will be around 6.3% till 2014 at the minimum. Also, the
CAGR of the MUVs has been 13% since 2002 and estimates are that that this sector will have a
CAGR of 0.4% till 2014. Thus the overall passenger car market has grown at 18.4% since 2002
and will continue to grow at minimum 6.3% till 2014.

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 3.3.2 COMMERCIAL VEHICLE PRODUCTION
The Commercial Vehicles means the vehicles used for the commercial purposes. This further
includes two segments:

 Light Commercial Vehicles (LCVs).

 Medium & Heavy Commercial Vehicles (M&HCVs).

This includes the cargo carrying vehicles like the TATA ACE which falls under the LCVs and
the trucks (M&HCVs) manufactured by the companies like Ashok Leyland, TATA Motors etc.
The Commercial Vehicle Production in India has also shown a steady increase. This is basically
due to the increased Commercialization and setting up of the various manufacturing plants all
across India. Demand for commercial vehicles has increased due to further development of the
manufacturing sector, more trade and commerce between regions, increased road transport
(passenger and freight) owing to the construction of more national highways and better roads.

The following graph explains the trend of the production of the commercial vehicles in India:

The graph clearly explains that the production of the commercial vehicles has grown at a CAGR
of almost 16% where majority of the increase is due to the increased production of the LCVs
which has grown at a CAGR of 21.5% as compared to the M&HCVs that have grown at a
CAGR of 11%.

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 3.3.3 TWO-WHEELER PRODUCTION

The two-wheeler sector in India has been on a constant rise since 1960s. This sector has been
revamped by the Indian manufacturers only namely Hero Honda and Bajaj Auto. The 2 segments
in the two-wheeler market are:

 Scooters
 Motor-bikes.

The earlier products included the LML’s Vespa, Bajaj’s Chetak and Hero Honda’s CD100. Then
there were collaborations with the foreign makers like Kawasaki and Piaggio. These products
laid the foundation of the Indian two wheelers.

The following graph shows the production of the two-wheelers vehicles in India:

This graph explains that the production in this sector is growing at a CAGR of 11%. Indian two-
wheeler sector is also the second largest producer of the two wheelers in the world, chasing
down China at a rapid pace.

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 3.3.4 TRACTOR PRODUCTION
The tractor production has also increased manifolds in India. This can be obvious because of the
fact that India is the largest agriculture supplier in the world. Also majority of the population
resides in the rural areas which explain the need for increased demand for the tractors.

The major players in this area are: Mahindra & Mahindra, Sonalika, HMT, Force Motors, and
Eicher Motors etc.

The following graph shows the production of the tractors in India:

The graph above clearly shows that the production in this sector has increased at a CAGR of
11.1% since 2002. The situation can further improve only because of the improving conditions in
the agriculture industry.

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 3.4 FUTURE PROSPECTS

“The automotive industry is set to grow more than four times by 2016”
-
AMP

The future of the Indian automotive industry will be shaped by a rise in domestic demand and
exports growth. According to the AMP (Automotive Mission Plan 2006-2016), the automotive
industry’s turnover is expected to reach USD 145 billion by 2016 including USD 35 billion in
exports, contributing 10% to GDP. By 2016, India is expected to enjoy the position of being the
world’s 7th largest passenger car manufacturer (from 11th largest currently), remain the 4th largest
manufacturer of commercial vehicles, retain the position of being the world’s 2 nd largest two-
wheeler manufacturer, the world’s largest three-wheeler manufacturer and become the largest
tractor manufacturer in the world (from second largest currently).

Going forward it is evident that the automotive industry in India offers immense potential in
terms of sales and employment opportunities. Growth in the economy is expected to continue
which is also going to help the automotive industry to expand. Rising disposable incomes and the
new wave of consumerism arising out of it are going to be key drivers. Foreign direct
investments are pouring into India in large numbers and manufacturing companies including
global majors are going to setup manufacturing facilities first and then develop R&D services,
both on a large scale.

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The automotive industry in India has been crossing record milestones and is one of the world’s
fastest growing markets. The strengths of the Indian economy – large pool of skilled human
resources, high quality engineering skills, strategic position combined with the strong growth
trends in the economy and vast investments by global companies, are expected to drive the
automotive industry to great heights.

4. GROWTH FACTORS FOR THE AUTO COMPANIES IN INDIA

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Following are the factors of growth for the automobile sector in India:

4.1 Economic Growth.

4.2 Population Increase.
4.3 Infrastructure Development.
4.4 Government Regulations.
4.5 Rise in Income level.
4.6 Easy availability of Finance.

4.1 ECONOMIC GROWTH

 GDP

GDP (Gross Domestic Product) of India is on the upward trend. The graph below shows the
GDP of India in comparison to the world. With the increasing GDP and the increased
contribution of the automobile sector in the country’s GDP (which is presently 10%), there are
very high prospects of this sector doing exceedingly well in the years to come.

 EXPORTS

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The Indian automotive industry is gaining worldwide recognition with a steady increase in the
rate of growth of exports. Automotive exports crossed the USD 1 billion mark in the year 2003–
2004, and increased to USD 2.76 billion in the year 2006–2007. The industry exported 15% of
its passenger car production, 10% of commercial vehicles production, 26% of three-wheelers
production and 7% of two-wheelers production in 2006–2007. The key exporters for passenger
cars are Maruti Suzuki, Tata Motors and Hyundai Motors, the key exporter for MUVs is
Mahindra & Mahindra and the key exporters for two-wheelers are Bajaj Auto and Hero Group.

 FDI

FDI (Foreign Direct Investment) has also been increasing in this sector. As seen from the fig
above, the FDI has increased from USD 4.2 Billion in 2002-03 to USD 33 Billion in 2009-2010.
This has encouraged the foreign players to invest for a long term in the Indian Automotive
sector.

 IMPORTS

Imports have decreased substantially over the past decade. The most notable decline in imports
can be seen in the commercial vehicles segment. This can be attributed mainly to a substantial
increase in production capacities of commercial vehicles in India from 2000–2001 onwards.
Imports of passenger cars declined between 1996–1997 and 2000–2001. This was due to the
expansion of manufacturing facilities of cars in India during the period. However, imports of

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passenger cars have increased in recent years. Growth in passenger car imports took place
between 2001–2002 and 2005–2006 due to increase in demand for premium and luxury cars.

 CONTINUED EXCHANGE RATE & TARIFF REDUCTION

The exchange rate is market driven, so future can’t be predicted on this basis but it has shown a
declining trend in the past 5 years which is a healthy sign for the Indian economy. There can be
further increase in exports owning to the fact that the transactions between the companies can be
safer when it comes to exchange rates.

Also continued import tariff reduction helps in bringing new technology to the country as soon
as it is launched worldwide. This helps the companies in India to launch a new vehicle with the

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improved technology along with the other developed countries. The special parts or components
can also be imported as when needed at a cheaper rate. This figure will continue to drop as more
and more foreign players start their manufacturing units in India.

 INDEX OF INDUSTRIAL PRODUCTION (IIP)

This tells us the rate at which the Industry is currently growing in India. The November 2009
Index of Industrial Production (IIP) stood at 11.7%. Manufacturing has almost 80% weight in IIP
and grew by 12.7% in November 2009, which is encouraging for the automobile companies
planning to enter India because the scale of operations in India is increasing at a rapid pace.

4.2 POPULATION INCREASE AND ITS DISTRIBUTION

The population of India as provided in the 2001 censuses shown below, the table also gives the
proportion of urban population of the total population.

 PENETRATION LEVEL

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The percentage car penetration outside Asia pacific and inside pacific has been shown in the
graphs below. Looking into the graph one can easily figure it out that the car penetration in India
is very low and is only 9% while that of USA is 89%, so there lies a huge potential for the car
manufactures who can grab this market easily looking at the growing income levels.

The figure below shows the futuristic view of the car penetration in a country in relation to
population.

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 REGISTRATION

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The tables below show the number of registration which happened and which are expected to
occur till 2013 and it clearly indicates that the growth prospects are very high.

4.3 INFRASTRUCTURE DEVELOPMENT

Continued investment in infrastructure is essential for India to be able to realize the targets set in
the AMP. There are inadequate ports, insufficient feeder rail lines to the ports, and bad roads.
Despite the bottlenecks in this regard there are companies that have made the most out of the
existing infrastructure. For instance, Hyundai has setup its factory very strategically near the port
in Chennai and has built a supply chain hub around surrounding areas. It has now become the
second largest passenger car manufacturer in India after entering the Indian market in 1998.

Roads

With respect to roads, the Golden Quadrilateral, a corridor connecting the four metro cities of
India, New Delhi in the North, Mumbai in the West, Chennai in the South and Kolkata in the
East spanning 6500 km is being built. The GOI has also launched a program for the construction
of 66,500 km of national highways of which 50,000 km is expected to be completed by 2015.
With better road infrastructure, significant growth is expected in the automotive industry. For
instance, better roads are leading to greater demand for multi-axle vehicles.

Railways

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The Ministry of Railways is in the process of developing freight corridors in Railways. Drawn on
similar lines of highway a project linking east with west and north with south, the ministry is
planning for an east-west corridor and a north-south corridor. Connectivity between rails and
ports (both dry and sea ports) is essential and a blueprint for railway development is being
prepared.

Ports

For India to develop into a global automotive hub, port development is imperative. Specialized
port infrastructure for handling vehicle exports is being developed especially near the main
automotive clusters near Mumbai and Pune in the West, Chennai in the South, and Kolkata in the
East. Two new deep ports are being developed that have special emphasis on the automotive
industry. One is in Dhamra in the state of Orissa (East India) which will be completed by 2010,
and the second is in Sutrapada in the state of Gujarat (West India).

Power

The high cost and relatively lower quality of power in many parts of India is also an issue
highlighted by many manufacturers. Many companies face fluctuations in supply of power and
power outages that in turn affect the quality of production. The average manufacturer in India
loses 8.4% in sales due to power cuts as opposed to less than 2% in China and Brazil. It is
estimated that the power outages alone cost India 1 per cent of GDP. Several companies are
willing to pay more for power in return for consistent and good quality of power. The Eleventh
Five Year Plan of India 2007–2012, issued by the Planning Commission of India, has set
ambitious targets to generate and distribute more and better quality power.

4.4 GOVERNMENT REGULATIONS

Vision

To establish a globally competitive automotive industry in india and to double its contribution to
the economy by 2010

Policy objectives

This policy aims to promote integrated, phased, enduring and self-sustained growth of the Indian
automotive industry. The objectives are to:-

 Exalt the sector as a lever of industrial growth and employment and to achieve a high
degree of value addition in the country.
 Promote a globally competitive automotive industry and emerge as a global source for
auto components.
 Establish an international hub for manufacturing small, affordable passenger cars and a
key center for manufacturing Tractors and Two-wheelers in the world.

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  Ensure a balanced transition to open trade at a minimal risk to the Indian economy and
local industry.
 Conduce incessant modernization of the industry and facilitate indigenous design,
research and development.
 Steer India's software industry into automotive technology.
 Assist development of vehicles propelled by alternate energy sources.
 Development of domestic safety and environmental standards at par with international
standards.

The Auto Policy has spelt out the direction of growth for the auto sector in India and addresses
most concerns of the automobile sector, including-

 Promotion of R&D in the automotive sector to ensure continuous technology up

gradation, building better designing capacities to remain competitive.
 Impetus to Alternative Fuel Vehicles through appropriate long term fiscal structure to
facilitate their acceptance.
 Emphasis on low emission fuel auto technologies and availability of appropriate auto
fuels and encouragement to construction of safer bus/truck bodies - subjecting
unorganized sector also to 16% excise duty on body building activity as in case of OEMs.

The policy has rightly recognized the need for modernizing the profile of vehicles to arrest
degradation of air quality. The terminal life policy for commercial vehicles and move toward
international taxing policies linked to age of vehicles, are steps in the right direction.

The Auto Policy allows automatic approval for foreign equity investment up to 100% in the
automotive sector and does not lay down any minimum investment criteria.

The recommendation of promoting passenger cars of length up to 3.8 meters through excise
benefits is not in line with the free market concept and may lead to market distortion.

However, with the Auto Policy in place, the automotive industry would get further fillip to
become vibrant and globally competitive. The industry would get the required support from other
Ministries and departments of Government of India in achieving the goals laid down in the auto
policy.

4.5 RISE IN INCOME LEVEL

The Indian population resides mainly in cities and the villages. The cities in India are growing
bigger in size and with increased urbanization and commercialization; the income level of the
people has definitely increased. Similarly, the new agricultural practices have also helped to
improve the standard of living of the people in the rural areas.

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Thus overall as seen in the table, the figure of GDP per head has improved since 2004 and will
continue improving till 2013. Private consumption per head will also increase manifolds till
2013. The number of households with annual earnings of more than USD 15,000 will show a
staggering increase of 110% from 2009 to 2013.

All these factors show that there will be a rise in the income level of the people of India; coupled
with improving lifestyles, easy availability of finance and availability of options, there is almost
a certainty of huge growth potential for the automobile companies planning to enter or expanding
their base in India.

4.6 FINANCING
The Indian automobile sector is on a high growth trajectory thanks to the many exciting
automobile launches. Many choices are available in the market which gives a good reason to
replace that old automobile you own or pick up a new one out of a wide variety available in the
market suiting all kinds of budgets and requirements. It is a thing of the past when consumers
used to dig deep in to their bank statements, plan their budget and save for months to own their
dream vehicle. Indian consumers can heave a sigh of relief thanks to the many auto financing
companies which have spread their tentacles across India.

Auto financing is now made easy because of the vast network of banks and Non-Banking
Finance Companies (NBFC) extending finance facility to consumers in India. So when you have
zeroed in on your dream vehicle, leave all your worries aside and go for easy and quick auto
financing options offered by banks and various finance companies.

Features of Auto Finance

 Upto 90% can be financed.

 The finance period is usually between 1 to 5 years.
 Interest is calculated on the basis of compound interest.
 Equated Monthly Instalment (EMI) is worked out for repayment.
 Early settlement of the pending amount is available.

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Following documents are required to obtain Automobile Finance in India:

 Bank statement for previous 6 months.

 Copy of PAN Card.
 2 Passport size photographs.
 Proof of residence.
 Proof of identity.
 Proof of income.
 Last three salary statements for salaried individuals.
 Previous 3 year IT Returns for self employed.

The following are the names of leading banks and other institutions that provide auto finance:

 ICICI Bank.
 Bank of Baroda.
 HDFC Bank.
 State Bank of India.
 Bank of India.
 Andhra Bank.
 Union Bank of India.
 Standard Chartered.
 United Bank of India.

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5. References

 Automotive Component Manufacturing Association (2007), Engine of Growth Driving the Indian
Manufacturing Sector, Automotive Component Manufacturing Association, New Delhi.
 Bhat, P N M (2001), Indian Demographic Scenario 2025, Population Research Centre, Institute of
Economic Growth, New Delhi.
 Business Knowledge Resource Online (22nd June 2008), Maharashtra – Investment Opportunities,
www.business.gov.in.
 Chenoy, D, A Roychowdhury and S Verma (22nd January 2008), “Nano Step: Making India the small
car hub”, The Economic Times.
 Confederation of Indian Industry & KPMG (2006), Indian Automotive Supply Chain, A Discussion
Paper.
 Confederation of Indian Industry (12th June 2006), Industry Monitor, Karnataka, www.ciionline.org.
 Doval P (21st April 2008), “Indian market to be flooded with luxury sedans”, The Economic Times.
 Haryana Online (12th June 2006), Haryana Industries, www.haryana-online.com, Haryana Online.
 Indian Brand Equity Foundation (2008), Automotive Industry Update April – June 2008, Indian Brand
Equity Foundation.
 Kaiser Family Foundation (21st June 2008), www.globalhealthfacts.org, Kaiser Family Foundation.
 KPMG International (2007), KPMG’s India Automotive Study 2007, KPMG.
 LKW (15th October 2007), Sector Watch Automobiles, An Independent Research Initiative, LKW.
 Mercator Media Limited (19th June 2008), www.portstrategy.com, Mercator Media Limited.
 Ministry of Heavy Industries and Public Enterprises (2008), Annual Report 2007–2008, Department of
Heavy Industry, New Delhi.
 Ministry of Heavy Industries and Public Enterprises (2007), Annual Report 2006–2007, Department of
Heavy Industry, New Delhi.
 EBSCO.

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