India’s auto makers are having trouble reaching out to people because their dealers are finding it increasingly difficult to open more outlets in big cities where rising real estate costs and the unavailability of land make such outlets economically unviable.

A file picture of a family looking over a Ford Ikon sedan at a Ford showroom in New Delhi

“The infrastructure cost is going very high in bigger cities," said Arvind Saxena, vice-president of marketing and sales at Hyundai Motor India Ltd. “There, it is difficult to get a good number of applications (for dealerships) as compared with smaller cities." Hyundai plans to expand the number of its outlets to 250 from around 180 now.

While manufacturers are constantly expanding into smaller towns, several recent international entrants including Volkswagen AG and Volvo Cars are looking for space in the metros to kick-start sales. They are fighting for real estate with new businesses such as organized retail and existing businesses that are growing in step with an expanding economy.

That, coupled with a government move to allow foreign companies to enter the local construction industry in 2005, has sparked a boom in India’s real estate market, making it one of the most sought-after investment destinations in Asia. In the last three years, real estate has become at least three times dearer in some of the top cities.

Even motorcycle and scooter makers are feeling the pinch. “The opportunity costs for dealers are high," said Satya Sheel, managing director, Suzuki Mo-torcycle India Pvt. Ltd. “Rising real estate costs don’t allow the dealership to remain viable."

Sheel is looking to double the number of Suzuki’s retail outlets to 290 in the next 12 months. However, it is car makers that are the worst hit because outlets selling and servicing cars need more space than those selling and servicing two-wheelers.

The companies themselves are hoping that a large sales volume (number of units sold) will encourage dealers to continue in the business and attract new people to enter the business. “Volumes are larger now," said Saxena. “The large number of cars sold so far also means more vehicles for servicing."

Back of the envelope calculations show that car makers plan to open at least 300 outlets in the next 18 months to expand their reach. Sales in the domestic market are expected to reach 2.2 million units by 2010 from 1.4 million in 2006-07, according to the Society of Indian Automobile Manufacturers, an industry body.

Companies say that the problem is more pronounced in bigger cities where they have to fight for prime commercial area with other businesses with deep pockets and ambitious plans.

“The location matters," said Jnaneshwar Sen, senior general manager of marketing at Honda Siel Cars India Ltd, which makes the Civic sedan. “It has to be convenient for the customer to visit and service his vehicle."

Both car companies and dealers prefer to have all facilities under a single roof.

Maruti Suzuki India Ltd, which sells half the cars in the country, purchased two tracts of land in New Delhi and Mumbai, and leased it to dealers in an effort to address the problem. However, it said it doesn’t have a specific plan to do so in future for other dealers.

Manufacturers in India look at car retailing as a separate business and prefer not to subsidize or own-dealer outlets, unlike in the West.

In India, manufacturer involvement with retail outlets is purely advisory—concerning the blueprint of a unit, corporate logos and the kind of facilities provided to consumers—and is targeted at ensuring that all outlets look alike.

However, if real estate prices continue to stay as high, glitzy car retail outlets themselves may start to become unfashionable. “With heavy competition, we make most of our margins from service and spares," said Ashok Sachdev, managing director of Hans Hyundai, a Hyundai dealership in New Delhi.

Shabana Hussain and Rasul Bailay contributed to this story.