New Delhi: Excess production capacity, a problem that crept into the Indian auto industry in the last year, is likely to persist well into the future, a new study by consultancy Ernst and Young shows.
According to a report, India would be capable of producing 5.4 million cars a year in 2014 compared with a market size of between 3.51 million and 4.8 million units. Ahmed Raza Khan / Mint
As a result, car makers doing business in India would have to put up with depressed margins and lower profits than what they have so far been used to. The report, which has analysed and forecast demand for only passenger vehicles, predicts that India would be capable of producing 5.4 million cars a year in 2014 compared with a market size of between 3.51 million and 4.8 million units.
Car makers usually make decisions on capacity additions two-three years in advance, based on future projections for market growth. They had, up till now, been accurate with their growth assessments.
Car sales in India increased at an average annual rate of 17% between fiscal 2003 and 2008, largely in line with capacity additions during those years. That declined sharply in fiscal 2009 when the industry grew by a mere 0.13% to 1.89 million units from the previous year, as the country’s economic growth slowed in the face of global recession.
Meanwhile, capacity additions continued unabated. For instance, General Motors Corp.’s Indian subsidiary inaugurated a 140,000 units a year plant at Talegaon near Pune. Also near Pune, Volkswagen India Pvt. Ltd added a 110,000 units a year plant in February.
Some of this capacity could service exports, which accounted for 18% of total production in India last fiscal. “A significant part of the new capacity additions would be with an export focus,” said Joseph George, an analyst at BNP Paribas Securities Ltd. “This would definitely rise in the next few years.”
At present, car companies in India make use of 65% of installed capacity—marginally higher than the global average of 64%—Ernst and Young said.
But this rate varies widely among individual companies. Some such as market leader Maruti Suzuki India Ltd used 83% of its installed base of a million units, the report said; Fiat India Automobiles Pvt. Ltd’s utilization was at a low 9%. Already under-utilized plants have resulted in some auto companies pulling back on their expansion plans. In the past six months, the Indian units of Toyota Motor Corp. and Honda Motor Co. have said they will put expansion plans on hold.