Mumbai: India has emerged the leader in small cars, overtaking Japan, as declining sales in Western markets coupled with robust growth in Asia redraws the global map of the auto industry faster than many expected.
Growing market: Maruti Suzuki cars at the Jawaharlal Nehru Port. Most car manufacturers in India count on exports to remain profitable. Ashesh Shah /Mint
It’s well known that China will overtake the US as the world’s largest car market this year. Less noticed is the fact that India will top Japan for the first time in sales of super-compact cars. It overtook Japan as the world’s number one producer of basic cars in 2007.
Auto makers such as Ford Motor Co., Nissan Motor Co., Volkswagen AG, General Motors Corp., or GM, and China’s Shanghai Automotive Industries Corp., or SAIC, are pouring hundreds of millions of dollars into the country, hoping to capture a piece of the growing market for tiny, inexpensive passenger vehicles. As they do so, they are quietly transforming India into an export hub for small car manufacturing.
“From a small car production hub perspective, India is right in the centre of the radar,” said Michael Boneham, head of Ford India, which plans to roll out its first India-made compact, the Figo, in the first quarter of next year.
At least 892,000 basic cars—the smallest category of passenger vehicle—will be sold in India this year, up 14% from last year and surpassing the 708,034 forecast for Japan, according to Bangkok-based JD Power and Associates.
Nearly half of all cars sold in India—such as Maruti Suzuki India Ltd’s Swift, GM’s Spark and Hyundai Motor Co.’s Santro— fall into the basic category. These are cars so small they’re almost nonexistent in the US market.
To manufacture these low-margin vehicles profitably, car makers must localize production to cut costs and ramp up volumes. For now, they can’t sell enough cars in India alone to make the numbers work. The market is too consolidated— Maruti Suzuki sells half of all cars in India— and too small. India ranks 10th globally for total car and truck sales. JD Power expects Indian car and truck sales to hit 1.9 million this year, a far cry from China’s 12.3 million.
Hungry for scale, car makers must count on exports.
“The margins are slim to say the least,” said John Parker, Ford’s executive vice-president for Asia Pacific and Africa. “We see exports as an opportunity to expand the volume base. The key thing in this area of the marketplace is to create scale.”
Ford has invested $500 million (Rs2,340 crore) in India and its factory in Chennai can manufacture up to 200,000 cars a year. Even if sales more than double, to 60,000 vehicles next year as executives hope, they’ve got capacity to spare.
Parker said the firm has not ruled out shifting production of the Fiesta and Focus from Europe to India.
Nissan plans to shift production of its Micra cars for the European market from the UK to Chennai, which it also aims to use as an export hub for Africa and West Asia. The company plans to roll out its first made-in-India compact car in May, part of a seven-year, $920 million India investment it made with partner Renault SA.
Volkswagen has invested €580 million (around Rs3,900 crore) in India, and this month started production of its first India compact car at a factory that can make up to 110,000 cars a year. GM opened a second, $300 million factory in India in September 2008, boosting annual capacity to 225,000 vehicles. This month, it teamed up with China’s SAIC to launch an India joint venture, with fresh investment of up to $350 million.
The Indian government has encouraged small car production with tax incentives, and, unlike China, it allows foreign companies to fully own their Indian subsidiaries.
Analysts caution that India’s emergence as an auto hub still faces headwinds such as bureaucratic red tape, labour unrest, inefficient ports, poor infrastructure and competition from Thailand and South Korea, which recently signed a free trade agreement giving car makers duty-free access to Europe. “It’s not a foregone conclusion despite the high demand,” said John Bonnell, director of automotive forecasting at JD Power and Associates. “Compromising that is a lot of red tape, bureaucracy and unions.”