Nissan Motor Co., Japan’s third- biggest automaker, Renault SA and Mahindra & Mahindra Ltd. will spend Rs40 billion ($906 million) on a factory in India to meet demand for cars and sport-utility vehicles in Asia’s fourth-largest economy.
The automakers will build a factory in Chennai, in the state of Tamil Nadu, to open in the second half of 2009 and reach annual production capacity of 400,000 vehicles within seven years, the companies said on a conference call. Mahindra will own half of the plant while Nissan and Renault will each have a 25% stake.
Carlos Ghosn, who heads Nissan and Renault, is counting on emerging markets including India to boost sales after Nissan cut its earnings forecast due to weaker-than-expected sales in the US and Japan. The venture will help the carmakers cut costs while improving efficiency in purchasing, manufacturing and engineering in India.
“There is a big opportunity in India, with a massive population and a big middle class,” said Viswanathan Vasudevan, who helps manage $200 million of Indian stocks at Aquarius Investment Advisors Pte. in Singapore. “Cars are becoming more affordable to people.”The project will also include a powertrain plant for Renault and Nissan, the companies said.
Volkswagen AG, Suzuki Motor Corp. and other automakers are spending more than $5 billion to build factories and expand capacity in India, home to 1.1 billion people, or one out of every six people on Earth. India’s economy grew 9.1% in the six months ended 30 September, the fastest semi-annual pace in 15 years. The growth is creating new jobs, helping more people to buy a car for the first time.
India’s passenger vehicle sales are likely to grow at 14.9% each year in the five years until 2010, research company Frost & Sullivan said on 19 February. The vehicle sales will reach 2.1 million units a year by 2010, the company said.
“It makes sense to form a project with Renault and its Indian partner to help trim costs and increase share,” said Yoshihiro Okumura, a general manager at Chiba-gin Asset Management Co., which manages the equivalent of $365 million in assets in Tokyo.
Nissan, Renault and Mahindra said they chose Chennai, Southern India’s auto hub, as the plant’s location because the area has an existing automotive and components industry, an educated workforce and good infrastructure including ports.Nissan shares rose 1 percent to 1,395 yen at the close of trading before the announcement. Mahindra shares fell 2 % to 839 rupees at 12:56 pm in Mumbai.
The venture will produce vehicles for the Indian market as well as for export, said Koji Endo, a senior analyst at Credit Suisse Group in Tokyo.
“For the automakers to make a profit from this venture, they need to produce vehicles at the lowest possible cost,” said Endo, who rates Nissan’s shares “underperform.” “It will take a long time.”
For the venture to be competitive, it needs to make vehicles that cost no more than 500,000 yen ($4,132), with high production volume and a large proportion of locally made components, he said.
Nissan is 44.3 % owned by Renault, and the two companies have been partners since 1999, sharing parts and engines. Extending the cooperation in emerging markets will be more cost-effective than working with new partners, Ghosn has said. In November, Nissan said it would make a decision whether to join the Mahindra-Renault alliance by 9 March.Separately, Renault and Mumbai-based Mahindra will begin production of Logan sedans in India in the second half of this year. The venture will build as many as 50,000 cars a year.
Tokyo-based Nissan canceled a plan to build a factory in India with Suzuki in November because it needed more production capacity than Suzuki could meet. Nissan still plans to buy small cars produced in India by Suzuki, Japan’s biggest minicar maker, for sale in Europe.
Nissan was passed by Honda Motor Co. as Japan’s second- biggest carmaker last year after introducing only one new model in the first fiscal half. Ghosn said the carmaker’s US sales for the 12 months ending in March would fall short of his goal of 1.1 million. In June, he cut the sales target for Japan to as low as 800,000 vehicles, from an original goal of 846,000.Ghosn said in September that Renault’s operating profit would equal 3% of sales this year, 4.5% of sales in 2008, and 6%in 2009.