Fast rise in auto sector capacity raises concern

Fast rise in auto sector capacity raises concern
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First Published: Tue, Feb 02 2010. 10 02 PM IST

Updated: Tue, Feb 02 2010. 10 02 PM IST
New Delhi: Auto makers in India are putting capacity expansion plans back in top gear and bringing in crores of rupees in investment, on the back of a revival in the sales of cars, trucks and two-wheelers.
Analysts believe this is only the beginning of a trend that will see the country add 2-2.5 million units in manufacturing capacity in the next four years. However, massive expansion plans have also given rise to fears of an excess in production capacity.
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“India is expected to account for nearly 50% of the increase in global capacity between 2007 and 2012,” said Vikas Sehgal, partner with Booz and Co., a consultancy.
CSM Worldwide, a US-based auto market forecaster, has predicted that the sales of cars and utility vehicles in India will cross four million units by 2015 from 2.5 million in 2010. The government expects the automotive sector to account for one-tenth of the gross domestic product by 2016 from 5% now.
Domestic passenger vehicle sales increased 23% to 1,367,986 units in the nine months to December. Firms such as Maruti Suzuki India Ltd have already been caught flatfooted by this surge and are rushing to add capacity.
On Saturday, the country’s largest car maker announced it was investing Rs1,700 crore to be able to produce 250,000 more units by 2012 at its factory in Manesar, Haryana. That will take Maruti’s annual production to 1.25 million units. Two days later, Hero Honda Motors Ltd, the country’s largest maker of motorcycles, said it was hoping to add a fourth plant next year. The company expects its current manufacturing capacity of 5.4 million units per year to come under strain in the next fiscal.
It is working on a new plant and expects to make an announcement in the next two-three months, said Ravi Sud, chief financial officer of Hero Honda.
Building a car manufacturing plant from scratch usually requires an investment of $800 million-1 billion (Rs3,709- 4,637 crore), said Sehgal. But auto makers can simply add a new assembly line—where the physical production takes place—at an existing factory by putting in $250-350 million.
The government expects the auto sector, which includes component makers and ancillary units, to account for $35-40 billion in investment between 2006 and 2016, according to the Automotive Mission Plan. But some industry executives fear India is rushing too fast to add capacity.
According to a survey by professional services firm KPMG, 43% of auto executives said India could suffer from overcapacity in the next 6-10 years.
In general, auto plants are run best at 85% capacity utilization. While some car makers such as Maruti Suzuki and Hyundai Motor India Pvt. Ltd have been producing flat out for the past six months, others are struggling to utilize their existing capacity.
Volkswagen India Pvt. Ltd, which inaugurated its plant in Pune last March, has a capacity of 110,000 units, though it produced only 3,300 units last year. Others, such as Ford Motor Co.’s India unit, are utilizing about one-third of their installed capacity. But with sales reviving, CSM expects average plant utilization rates to rise from 72% to 84% by 2015.
Industry watchers such as Dilip Chenoy, director general of the Society of Indian Automobile Manufacturers, point out that exports are also expected to grow in coming years. He predicts India will be able to export at least a million units by 2014.
Government incentives have made India primarily a small car market in recent times. Small-car sales account for 70% of domestic sales.
Rising fuel prices have seen small-car sales surge worldwide. Booz expects small cars to make up 40% of all vehicles sold globally, with India accounting for as much as 30% of the increase in sales of small and micro cars (with engine capacity less than 1,000cc).
Global auto companies seeking to capitalize on economies of scale are also eyeing India, which is being positioned as a small-car export hub. Hyundai, which has exported 215,474 units so far this fiscal, has already said it expects to make India an export hub for its small cars. Ford and Nissan Motor Co. have also ramped up capacity in the last year, mainly due to their export plans. The Ford Figo is expected to have a “significant export component”, John Parker, Ford’s recently retired executive vice-president for Asia-Pacific and Africa, had said in an earlier interview with Mint.
Graphics by Yogesh Kumar/Mint
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First Published: Tue, Feb 02 2010. 10 02 PM IST