Stepping on the gas6 min read . Updated: 06 Sep 2010, 11:05 PM IST
Stepping on the gas
Stepping on the gas
New Delhi: Back in 1993, Pawan Goenka knew he was taking a gamble by quitting General Motors Co.’s (GM) research and development (R&D) centre in Detroit, the undisputed hub of the global auto industry, to head back home to India.
Since then, it’s become clear that Goenka’s call was spot on. Even as the once-mighty GM struggles with fading auto demand in developed markets, the company Goenka joined, Mahindra and Mahindra Ltd (M&M), has just successfully bid for South Korea’s Ssangyong Motor Co. Ltd as it looks to expand its product range and enter new markets.
Goenka himself has earned a reputation as the father of the Scorpio, India’s largest selling sports utility vehicle.
“At that time, there was a lot of opportunity with risk involved," recalls Goenka, president (automotive sector), M&M.
Government policy has also helped nurture the development of the industry from a market that was confined to a handful of outdated models. With high levies making imports unviable for most of the population, companies were encouraged to set up entire automotive ecosystems, complete with their accompanying flotilla of component firms, thus leading to the creation of hubs such as Gurgaon (Maruti Suzuki India Ltd, Hero Honda Motors Ltd), Sriperumbudur (Hyundai Motor Co. Ltd, Ford Motor Co.), Pune (Tata Motors Ltd, Mercedes-Benz) and Pantnagar (Tata Motors, Ashok Leyland Ltd).
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The circle was squared when these companies began exporting cars to developed markets, although the overseas slump has put a dampener on that for now. The slack has, however, been picked up by buoyant domestic markets.
Someone in Goenka’s shoes today won’t really need to think too much about what choices to make. The US auto market is in limbo with the Big 3—GM, Ford and Chrysler—still limping back to normalcy. The Japanese auto firms are trying to overcome recall woes. The Indian market has been accelerating, meanwhile, with the major auto makers having recorded sales growth of 20-60% over the past several months.
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The models available in Indian showrooms are mostly the latest ones available anywhere in the world, given that the country has turned into a buyers’ market.
Ford, for instance, plans to extend its presence in India, encouraged by the success of its small car Figo.
“Our goal is to become a regional excellence leader. We plan to bring specific vehicles for Indian customers," Joe Hinrichs, president (Asia Pacific and Africa), said at Figo’s launch in New Delhi. “We are going to expand our portfolio. We intend to grow here. We will consider bringing all the Ford global products to India."
The next big transformation could be the shifting of innovation to India as the market grows in importance.
Suzuki Motor Corp.’s plan to make Maruti Suzuki, the country’s largest auto maker, a research and development (R&D) hub for global operations may spur more companies to follow suit because of the country’s cost advantage.
Maruti chairman R.C. Bhargava, who’s been associated with the company for most of its 29-year history, is cautious about India’s ability to become a research centre.
“In order to become an R&D hub, we need to have more and more engineers and scientists, but somehow our education system has not been able to produce them," he said. “It has not been able to support the economy or the Indian auto industry. PhDs produced in India are a small fraction of what China produces. We have a very good plan for the future, which is realistic. But the question is—how well can it be implemented?"
Another area of concern, says Bhargava, is infrastructure.
“The highway construction programme has now picked up speed and that is welcome indeed. However, state governments seem almost helpless in improving urban infrastructure," Bhargava said. “While public transportation is being improved in some cities, it has to be realized that it will never replace the use of private transportation."
Rapid growth is also putting pressure on the ancillaries industry.
“Large investments need to be made to keep up with the growing needs of components. In addition, the component manufacturers now need to invest in building engineering and R&D capacities," he said. “We can’t remain dependent on foreign suppliers for component design as this will greatly handicap us in meeting the needs of our customers."
Auto makers have faced supply constraints as the demand for vehicles has resumed after a temporary hiccup during the slowdown of 2008-09. Companies such as Maruti and Hyundai have limited capacities to scale up production and meet the increased demand.
These are, however, problems of plenty and in direct contrast with the starker picture in developed markets. The growth opportunity in India is acting as a beacon for expatriates. M&M’s Goenka often gets calls from colleagues in the US who are toying with the idea of a move to India.
Indian firms, now more ambitious then ever, are also seizing the opportunity to hire exceptional talent and have started visiting Detroit and Europe for recruitments. Maruti Suzuki has hired eight people and M&M has hired around a dozen. Maruti has even taken on a Japanese recruit who will supervise more recruitments from overseas.
With the Indian automobile market set to double in the next five-six years, “this augurs well for the industry," said Maruti Suzuki’s managing executive officer I.V. Rao. “They bring in a wealth of knowledge and experience."
India is expected to witness strong growth in vehicle production across all segments by 2020, according to the Automotive Component Manufacturing Association of India-Ernst and Young Vision 2020 study. Passenger vehicles sales are projected to rise to five million units by 2015 and over nine million by 2020, from 1.95 million now, driven by domestic demand and the export of small cars.
“The Indian economy is expected to see very good growth in the next few years," Bhargava said. “As per capita incomes rise above $1,500 (Rs70,350), we may reach an inflexion point where the demand for cars becomes significantly higher than in the past."
India and China are the engines now driving the global industry. While China’s overall numbers are much higher, India’s low base means its pace of growth is faster.
In July, car sales in China rose 13.6%, the slowest in 15 months, from more than 50% growth seen earlier this year.
But India hit a record high of 38%, up 8% from June, thanks to good economic prospects and the launch of new models.
Some Chinese industry executives, including Hu Maoyuan, chairman of the country’s top auto group SAIC Motor Corp. Ltd, are not too worried.
“China’s auto market is just returning to its normal growth pattern now. Last year’s breakneck growth was good but abnormal and, therefore, cannot last forever," Hu told shareholders in July. “The market will keep growing at a moderate pace in the coming years. It’s a marathon, not a 100-metre race, and it’s impossible to run a marathon like a sprinter."
China may have better prospects than India of dominating the global auto industry.
“It looks to us that wage costs are slightly low there compared to what we pay here. However, manpower productivity here is higher. But, material costs are much lower there, which makes auto components much cheaper as compared to what we have in India," Bhargava said. “We, as a company, are probably more productive than the Chinese Suzuki factory. But, as an industry, we are not efficient enough as far as raw material production is concerned."
Is there anything that could turn the tide in favour of India? Force Motors Ltd chairman Abhay Firodia suggests Tata Motors’ recently launched small car as a possible sign.
“The first 50 years of automobile industry belonged to the US, next to Europe, and then Japan took over in the last 50. I am waiting for a paradigm shift to happen, which could make India dominate at the global front," he said at the 50th annual convention of the Society of Indian Automobile Manufacturers in New Delhi last week. “The Nano is perhaps one such step taken in that direction. But we need more such innovations in India."