Why carmakers are still betting on India9 min read . Updated: 15 May 2019, 07:00 AM IST
Amid a steep slowdown in vehicle sales, three auto makers are looking to enter India. What is their game?
NEW DELHI : Since the winter of 2018, the rumblings within India’s automobile industry have been far from pleasant. Consumers have been giving expression to their anxiety with their wallets, passenger vehicle sales have witnessed a free fall, and talk of the dreaded R-word has only gotten louder.
In April, India’s auto sale figures plummeted to an eight-year low. (Passenger vehicle sales in April fell 17.1% to 247,541 units from a year earlier, data released by the Society of Indian Automobile Manufacturers, or Siam, showed. Car sales slumped almost 20%, while overall automobile sales dropped 16%). But even amidst this pall of gloom, there are some bright spots on the horizon: three, to be precise. In the middle of what appears to be a distinctly terrible patch in India’s automotive story, three new players—Groupe PSA of France, Kia Motors Corp. from South Korea, and SAIC Motor Corp. Ltd from China—are expected to make their debut on Indian roads between 2019-21.
The story of why these global players would place their bets on the Indian market at this juncture is a broader story about the country’s middle class and the calculated bets that are being placed on the role that reasonably affluent Indians would begin to play in an emerging global market.
India has over a billion people, but only an estimated 30 million cars and 170 million motorbikes. Even if fears of a recession turn out to be real, consumer spending will pick up again, eventually. In this calculation, which does have detractors, the sale figures in 2030 matter as much as those in 2020. The point is to have a seat at the high table.
“There is no ideal time to launch a brand and we are looking at long-term prospects," says Rajiv Chaba, chairman and managing director, MG Motor India Pvt. Ltd, which is owned by SAIC.
At present, India is the fourth largest passenger vehicle market globally—with an annual volume of over three million units.
In fiscal year 2018, India overtook Germany as the fourth largest manufacturer of passenger and commercial vehicles.
Understandably, the Indian market is attracting interest from a slew of Chinese automobile companies for the first time—despite fears of a contraction in consumer spending. The reason: the Chinese slowdown is steeper, and the market is far more saturated. Essentially, a playbook which was deployed in the case of mobile phones may play out yet again—this time, with cars.
Besides SAIC, China’s biggest utility vehicle manufacturer Great Wall Motor Co. Ltd has set up a team to establish independent operations in India. China’s state-owned enterprise, Changan Automobile Co. Ltd, is also exploring local opportunities.
In the commercial vehicle segment, BYD Co. Ltd entered the domestic market with a joint venture with Hyderabad-based Olectra Greentech Ltd, and the company has been supplying electric busses to several state transport units (STUs).
On 6 May, Mint had reported that China’s state-owned Chery Automobile Co. Ltd is in an advanced stage in its discussions with Tata Motors Ltd over a potential tie-up for the Indian market.
Every major shift in the Indian economy has mirrored a quantum change in the country’s automobile sector. While it was the entry of Suzuki Motor Corp. (and birth of the Maruti Suzuki brand) in the early 1980s, which signalled a nascent urge to open up the economy, the post-liberalization growth boom created space for a slew of new foreign entrants.
What happens in the next few years will indicate the direction of the third wave of generational shift—how fast India’s middle class widens; the pace at which India’s economy will go electric; and how soon the country’s auto emission norms match global standards. The Chinese and Korean entrants are placing optimistic bets on all three of the above, particularly, the electric push.
The India playbook
Among the Group of Twenty (G20) economies, India is probably the only market with the lowest penetration of automobiles. Hence, the ensuing buzzword: “growth potential". Besides, in terms of regulations and vehicular emission norms, India will soon be on par with the rest of the developed world.
According to Vinnie Mehta, director general, Automotive Component Manufacturers Association of India (Acma), India is the only sweet spot remaining in the global economy in terms of growth projections, and that’s true for the automotive industry as well.
In 2018, sales in China—the world largest automobile market—declined by 2.8% to 28.1 million units compared to a growth projection of 3% made at the start of the year. This was the first ever fall after the 1990s.
During the same period, sales of cars and light trucks in the US market grew by 0.6%. In the European Union market, sales were down by 0.04%.
The Indian automobile market, on the other hand, is projected to grow to 9-10 million units by 2030, from 3.37 million in fiscal 2019, according to a projection of Suzuki Motor Corp. in 2018. A chunk of the new vehicles are also expected to be electric by the end of 2030.
“Most of the leading Chinese manufactures, given their prowess in electric vehicles, are interested in the Indian market where electric mobility is yet to take off. Also, given the saturation in China, the US, and other markets, most of these manufacturers have understood that presence in India is required for long-term sustainability," Mehta says.
For a long time, it was quite difficult to break the duopoly of Maruti Suzuki India Ltd and Hyundai Motor Co. in India. But the whole new electric segment has made the race for dominance in 2030 that much more open. Indian consumers, above a certain strata, have also begun to move away from being price conscious and becoming more technology focussed.
According to Sugato Ghosh, deputy director general, Siam, automobile manufacturers who are not currently present in India are worried about missing out on an opportunity since the market has huge potential.
The new entrants already have big plans. “We are going to be the first company to offer an affordable mild hybrid in a mass-market vehicle," says Chaba of MG Motor. “For both SAIC and MG, this is one of the few global markets and success here will lead to entry in many other markets," Chaba adds. MG Motor has already acquired the manufacturing capacity of General Motors Co. in Gujarat before the American company rescinded operations in India.
According to Avik Chattopadhyay, founder of Expereal, a brand consultancy firm, the way Indians have warmed up to Chinese smartphones, even at the premium and luxury end, that may happen again in the automotive segment too.
Apart from the Chinese, the other major player in the battle for automotive dominance are likely to be Koreans. The parent company of Kia Motors, Hyundai Motor Co., is already a successful company in India with the Hyundai brand, and the South Korean conglomerate is aiming to grab a share of the premium market from the likes of Honda Cars India Ltd. The company’s strategy is to overwhelm the incumbents with an aggressive chase for volumes. Kia will begin rolling out cars within a year from its factory in Anantapur, Andhra Pradesh, which has a production capacity of three million vehicles a year.
French vehicle manufacturer Groupe PSA, on the other hand, has taken a very conservative approach to the Indian market and will go after a market share of just 2%. The company will instead focus on sourcing power trains, gearboxes, and other components for its production operations in other parts of the world. After working on its re-entry in the Indian market for almost a decade, Groupe PSA has announced the launch of its Citroen brand in India.
Unlike a lot of other manufacturers, Groupe PSA will invest in India with the aim of manufacturing vehicles with a high degree of localization, in order to rein in costs. It is also very evident that the company will use India as a manufacturing hub for vehicles and other related components.
While launching the Citroen brand in India in April 2019, Carlos Tavares, chairman, Groupe PSA, said the company would want to follow a scalable approach in India and would not want to throw money at expanding facilities unless there is a certain demand.
“We want to come to India and stay here for the long term. We are not here to stay for a few years," said Michelle Wen, executive vice-president, global purchasing and supplier quality, Groupe PSA. “In 2018, our total purchasing turnover was €42 billion, and last year, we purchased parts worth €25 million from India. So, the playground is large and there is no limit to growth in India. We want to source good quality parts and suppliers from Indian component suppliers for the domestic market and for the world."
Groupe PSA’s choice of the existing Citroen as the main brand is distinct. So is the muted ambition on the sale volume and market share front. But nearly every hopeful new player has one thing in common: their perceived hope that India will go electric faster than anticipated.
Given the rising level of pollution in most Indian cities and the government’s clear indications that the country will go electric sooner than later, most of the new entrants will be launching an electric vehicle soon after the launch of their operations in India.
MG Motor will launch its sub ₹10 lakh electric vehicle right after the launch of Hector, its first product. Kia Motors India is also in the process of testing its electric variants for the India market.
The Citroen management is considering a vehicle with an electric power train for India.
MG Motor has already collaborated with technology companies like Microsoft Corp., TomTom International BV, and others for its first product, and the company is floating the idea of an “internet of cars".
But given how the local units of global companies like Volkswagen AG, Groupe Renault, and Ford Motor Co. have been struggling to get a foothold in the Indian market, most of the new entrants are trying to create a niche in the premium segment in particular.
“Hyundai is getting Kia into India to play an important role in the premium segment where it couldn’t make a mark," said a senior industry executive on condition of anonymity. “Most of these (new) players are trying to introduce an electric vehicle in the first year of operations to make a mark for themselves, compared to a Suzuki or Honda who are yet to launch a product in that segment," the executive added.
Ultimately, the entry of these new companies is good news for the Indian economy since the automobile industry is the biggest contributor to direct and indirect employment generation after textiles. High focus on localization and export of vehicles and spare parts will also help create skilled labour across the country.
“These manufacturers who will step into the Indian market missed the bus when the economy was liberalized in 1991. Now they cannot afford to look away from India because it’s the only big market projected to grow. Hence, it is a kind of desperation as well. For example, Groupe PSA has been trying to re-enter this market for quite some time," said a senior executive of one of the top four manufacturers on condition of anonymity.
Whether these new entrants manage to survive in a crowded market, only time will tell. But their fate will be tied in with a set of other variables which are far more important— whether the ongoing slump in vehicle sales is a temporary blip or a part of broader shift in consumer spending; whether electric dreams can indeed take root in a price conscious country; and whether the Indian middle class will become wide enough, fast enough, to retain global attention.