A COMPREHENSIVE PROJECT 1 Entitled On AUTOMOBILE INDUSTRY (Passenger Car)

Submitted to SANKALCHAND PATEL COLLEGE OF ENGINEERING DEPARTMENT OF BUSSINESS MANAGEMENT Affiliated to Hemchandracharya North Gujarat University In Partial Fulfillment of the Requirement of the Award for the Degree of

MASTER OF BUSINESS ADMINISTRATION Under the Guidance of

Mr. Bhavesh Patel Mr. Chirag Rathod

Presented by Students of M.B.A Semester-III

Sadhu Jaimin Gohil Divya Parekh Sanket Shah Kamil 10 37 54

INDEX

Executive summary The Indian automobile industry has come a long way since the first car ran on the streets of Mumbai in 1898. The initial years of the industry were characterized by unfavorable government policies. The real big change in the industry, as we see it today, started to take place with the liberalization policies that the government initiated in the 1991. The liberalization policies had a salutary impact on the Indian economy and the automobile industry in particular. The automobile industry in the country is one of the key sectors of the economy in terms of the employment opportunities that it offers. The industry directly employs close to around 0.2 million people and indirectly employs around 10 million people. The prospects of the industry also has a bearing on the autocomponent industry which is also a major sector in the Indian economy directly employing 0.25 million people. The Indian automobile industry is a stark contrast to the global industry due to many of the characteristics, which are peculiar to India. The Indian automobile industry is very small in comparison to the global industry. Except for two wheelers and tractors segments, the Indian industry cannot boast of big volumes vis--vis global numbers. The report covers the two segments, passenger cars and multi-utility vehicle segment. It contains an in-depth study of both the segments and the performance of the automotive industry in terms of production, sales, capacity, exports and imports. The major events and their impact on the industry and across the segments are discussed in detail. The report also looks into the factors that boost the revenue growth across segments and concludes with a look at the financial performance (in term of different ratios) of the major players in the industry.

The Indian automotive industry is protectionist Interestingly, it is the companies that entered India after 1991 that have lobbied most strongly with the Government to maintain tariff caps of 25 per cent and 40 per cent. This affords them substantial protection. Similarly, they have persuaded the Government to hike the import duty on second-hand cars to 180 per cent. However, should tariff reductions be extended in the new round of WTO negotiations, the duty on second-hand car imports will drop to 25 per cent.

Foreign companies have lobbied hardest for high tariff caps

The Indian automobile industry is protectionist because few of its companies are commercially viable. India is the only country in the world with numerous car producers. Although consolidation seems imminent, it has not yet begun. A fundamental shake-out will do the industry considerable good. Recent growth in the automotive sector Segments of the Indian automotive industry have grown at varying rates since 1995. The sales of cars and multi-utility vehicles have almost doubled. Those of tractors and two-wheelers have grown at a slow, steady pace. The bus industry has shown no growth, and the truck and LCV industries have done badly. The boom in the car market can be explained by the tremendous interest of global car companies. Within two years of liberalization, 60 per cent of all major car and vehicle companies had invested money in India, whether through joint ventures, equity participation, or technical collaborations. Companies saw huge potential in the Indian domestic market. Many companies also saw India as a potential manufacturing and exporting hub for the rest of the Asian region. Much of this enthusiasm has now faded, due to policy and infrastructural bottlenecks. India now produces 6 lakh cars a year, up from 3 lakh cars in 1995. Currently, some 28, 000 cars are exported. A key trend of the last few years is the shift to bigger, more expensive cars. Until three years ago, small cars had a 57 per cent share of the market. Now, mid-size cars account for a half, and small cars for just a third of those on Indian roads. With the introduction of the Mercedes Benz, the Sonata, and the Accord in 2001 in India, it is the first time that cars over 4.5 metres long are being sold in the country. Another important development is the rise of a booming secondary market in automobiles. Today, most car purchase is occurring in 4

Car and MUV sales have doubled since 1995

Move toward bigger cars

Rise of second-hand

car market...

this market, as scooter owners upgrade to cheap, four-wheel vehicles. Some second-hand Fiats and Maruti 800s are now even cheaper than a new two-wheel vehicle. In turn, many small car owners are looking to buy a bigger, second-hand car. As a result, there has been a fundamental shift in the two-wheeler industry. In 1999, motorcycle sales overtook those of scooters for the first time. This is because second-hand cars have replaced scooters as the family vehicle of the middle class. Secondly, policy restrictions on motorcycles have been lifted, bringing in a range of powerful, emissions-controlled, branded, Japanese models, that are very popular with the young. Within the scooter market, there has been a shift away from heavy, metal-geared models to gearless, lighter, plastic-bodied ones. Cars and two-wheelers have now become household essentials in India. There are currently close to 35 million two wheelers and 8 million cars in the country. In addition, there are 2 million trucks and 2 million other vehicles. Despite the boom in some parts of the industry, there is need for considerable revitalization. Data drawn from the balance sheets of thirty-four companies shows a 2 per cent drop in turnover. Profitability has declined by 42 per cent. Outdated policies pose key hurdles

Causing drop in scooter sales

Policy issues of key concern to Indian automotive sector

Domestic policies, rather than the global economic slowdown, are impacting the Indian automotive sector most heavily. What poses a particular drag are high and numerous taxes, customs tariffs and excise duties.

Although cars and two wheelers have become household essentials, policy makers continue to view and to tax them as luxury items. They disregard the fact that Indias automotive 5

industry is the largest in the world and is a primary generator of employment in the country. Should the sector be relieved of its punitive tax burden, it could become a significant driver of economic growth and employment. Policy makers also overlook the fact that car and vehicle owners present a significant vote bank. At the moment, they are forcing consumers to pay taxes equivalent to the value of every new car they purchase. This is because, for each car, there is a 35 per cent customs duty on the imported pack; a 40 per cent value-added tax; and a Modvat customs duty. There is then a 32 per cent excise duty and a 12 per cent sales tax. Many big cities impose their own taxes. If the Government brings import tariffs down, it will boost exports. We see this from the recent experiences of Brazil, Mexico and Australia. It is not only important to bring down tariffs, but to do so in a public, scheduled manner so that industry is able to prepare and take full advantage. In India, tax and tariff reductions are announced arbitrarily in the budget, with no prior notice. Most importantly, the Government should stop controlling the automotive sector. This is a hangover from the early years of Independence. Automotives are consumer durables akin to washing machines, televisions or fridges. Since the Government does not feel compelled to draw up national policies for these sectors, it should not do so in the auto sector. Global opportunities for the Indian automotive sector India could become a major exporter of automotive components If the Indian automotive sector positions itself correctly, it could become a major global exporter of automotive parts and components. The country has mature steel and ancillary industries. But this can only happen if the industry builds its capacity to meet global quality standards, delivery schedules, and prices.

Taxes equal the value of each car

High tariffs constrain exports

Auto policy should be abolished

Manufacturers will have to develop systems to efficiently manage 6

labour, raw material, production and shipping. The Government will also have to be lobbied to rationalize and reduce tax rates across a number of sectors. Many foreign car companies have found it more convenient to operate out of Thailand, for instance, because there is a single tax rate and very little bureaucracy. India is not yet ready to become a significant exporter of indigenous cars. Production costs are still too high. Cars are also becoming increasingly complex, with parts sourced from the best suppliers globally. Similarly, global marketing and advertising expenses constitute a considerable part of the cost of each car.

INTRODUCTION
Industry:
Indian automobile industry in India is as well developed as any top industrial nations. Long years of License Raj and protectionism led to the development of various segments of automobile industry. There are a large number of wellentered players in all segments of the automobile industry as depicted in the following table. Indian Automobile Industry

Three Wheelers

Multi Utility Vehicles

Commercial Vehicles

Passenger Carriers

Goods Carriers

Passenger Cars

Two Wheelers

Motor Cycle

Scooters

Mopeds

There are also exists a huge market and production base fro specialty vehicles like Tractors, Earthmoving vehicles, Cranes etc. But despite having a welldeveloped industry and a large market, the industry still has not been able to realize its full potential owing to the following reasons. Low purchasing power Price sensitive market Pent up/suppressed demand Existence of a large middle class Insufficient transportation infrastructure 8

India as a country has a per capita income of around US$318 per annum. That is very miniscule compared with that of developing nations like Japan or the USA, which is in the range of $20000. Hence the emphasis on large market size of a billion people quietly diminishes. Thereafter the existence of a large middle class and that too with a majority of them in the lower end ensures that the disposable income left with the masses is comparatively less. Hence the possession of an automobile is considered a luxury and often avoided by people. But the scenario is after all not that bad and the industry as a whole is growing in terms of volume albeit the profitability and profit margin is of question. To have a better grasp of the situation let us review each segment individually. Heavy commercial vehicles: In India the commercial vehicles are graded according to their Gross Vehicle Weight (GVW). It is as under: LCV: Intermediate commercial vehicle with GVW of 8 to 10 ton MCV: Medium commercial vehicles with GVW of 10 to 15 ton. HCV: GVW of 16 ton and above. But the gradation apart, the segment is more recognizes by its utility such as the vehicles which carry passenger are called buses and those specializing in carrying loads as trucks. Since 80% of commercial vehicles are purchased on credit, the availability of credit is a major factor influencing demand. The credit squeeze affects the demand negatively. The other important factors influencing demand of CV are depreciation norms, diesel prices and changes in the Motor Vehicle Act. Light commercial vehicles: Like the Heavy vehicles segment, the LCV, which are also essentially freight carriers are equally important. Small freight loads over small distance are transported through these vehicles. In India in rural areas, these vehicles also ferry passengers over short distances. This segment is much more populated and competitive than the HCV. The liberalization of government policy with respect to foreign, technical and financial collaboration lead to a sudden spurt in technical collaboration in LCV segment. The LCV segment is populated with six players with Telco being the traditional market leader by a wide margin. Passenger car segment: The first motorcar on the streets of India was seen in 1898. Mumbai had its first taxicabs in the early 1900. Then for the next fifty years, cars were imported to satisfy domestic demand. The Indian car industry can be classified, based on the price of the car into four segments. The demand for passenger cars can be segmented on the basis of the user segment as those bought by taxi operators, 9

government/non government institutions, individual buyers etc. A major portion of the de4mand in India accrues mainly from personal vehicle owner. The demand for cars is dependent on a number of factors. The key variables are per capita income, introduction of new models, availability & cost of car financing schemes, price of cars, incidence of duties and taxes depreciation norms, fuel cost and its subsidization, public transport facilities etc. The first four factors have positive relationship with the demand whereas others have an inverse relationship with demand for cars. Two Wheelers Segment: The two-wheeler segment like the passenger is very heterogeneous and could be split on basis of usage, load capacity, stroke engine, utility and appeal. In India it is generally sub-segmented into Motorbikes, Scooters, Scooterettes and Mopeds. The promotional and marketing outgo would rise steadily for the two-wheelers producers; the emphasis would now be on aesthetics, design, and product positioning and market segmentation. As a result, the consumer would be the ultimate beneficiary with the choice of more models with superior features. Special Utility Vehicles: This segment is also a very important segment but finds very less mention among the analysts in spite of its direct bearing on the economy. The probable reason for this trend is that the vehicle seems mundane and lacks the glamour of the luxury cars. The segment comprises of Tractors, Earth Moving Equipments and Material Handling.

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INDIAN AUTOMOBILE HISTORY

The origin of automobile is not certain. In this section of automobile history, we will only discuss about the phases of automobile in the development and modernization process since the first car was shipped to India. We will start automotive history from this point of time. The automobile industry has changed the way people live and work. The earliest of modern cars was manufactured in the year 1895. Shortly the first appearance of the car followed in India. As the century turned, three cars were imported in Mumbai (India). Within decade there were total of 1025 cars in the city. The dawn of automobile actually goes back to 4000 years when the first wheel was used for transportation in India. In the beginning of 15th century Portuguese arrived in China and the interaction of the two cultures led to a variety of new technologies, including the creation of a wheel that turned under its own power. By 1600s small steam-powered engine models was developed, but it took another century before a full-sized engine-powered vehicle was created. The actual horseless carriage was introduced in the year 1893 by brothers Charles and Frank Duryea. It was the first internal-combustion motor car of America, and it was followed by Henry Ford's first experimental car that same year. One of the highest-rated early luxury automobiles was the 1909 Rolls-Royce Silver Ghost that featured a quiet 6-cylinder engine, leather interior, folding windscreens and hood, and an aluminum body. It was usually driven by chauffeurs and emphasis was on comfort and style rather than speed. During the 1920s, the cars exhibited design refinements such as balloon tires, pressed-steel wheels, and four-wheel brakes. Graham Paige DC Phaeton of 1929 featured an 8-cylinder engine and an aluminum body. The 1937 Pontiac De Luxe sedan had roomy interior and rear-hinged back door 11

that suited more to the needs of families. In 1930s, vehicles were less boxy and more streamlined than their predecessors. The 1940s saw features like automatic transmission, sealed-beam headlights, and tubeless tires.

The year 1957 brought powerful high-performance cars such as Mercedes-Benz 300SL. It was built on compact and stylized lines, and was capable of 230 kmh (144 mph). This was the Indian automobile history, and today modern cars are generally light, aerodynamically shaped, and compact.

Automotive Industry, globally, as well in India, is one of the largest industries and key sectors of the economy. Due to its deep forward and backward linkages with several key segments of the economy, automotive industry has a strong multiplier effect and is capable of being the driver of economic growth. A sound transportation system plays a pivotal role in the countrys rapid economic and industrial development. The well-developed Indian automotive industry ably fulfils this catalytic role by producing a wide variety of vehicles: passenger cars, light, medium and heavy commercial vehicles, multi-utility vehicles such as jeeps, scooters, motor-cycles, mopeds, three wheelers, tractors etc.

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Although the automotive industry in India is nearly six decades old, until 1982, only three manufacturers M/s. Hindustan Motors, M/s. Premier Automobiles & M/s. Standard Motors tenanted the motorcar sector. Owing to low volumes the sector perpetuated obsolete technologies and was out of synchronization with the world industry. In 1982, Maruti Udhyog Limited (MUL) came up as a Government initiative in collaboration with Suzuki of Japan to establish volume production of contemporary models. After the lifting of licensing in 1993, 17 new ventures have come up, of which 16 are for manufacture of cars. There are at present 15 manufacturers of passenger cars and MUVs, 9 manufacturers of Commercial Vehicles, 14 of two and three wheelers and 14 of tractors besides 5 manufacturers of engines. The automotive industry comprising of the automobile and the auto component sectors has shown great advances since Delicensing and opening up of the sector to FDI in 1993. The industry had an investment of a sum exceeding Rs. 50,000 crore in 2002-03 which is slated to go upto 80,000 crore by a year 2007. The industry provides direct employment to about 4.5 Lakhs persons and generates indirect employment of 1 crore. The contribution of the automotive industry to GDP has risen from 2.77% in 1992-93 to 8.7% in 2007-08.

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INDIAN SCENARIO
Historical industry Development
It was in 1898 that the first motorcar steered down the Indian road. From then till the First World War, about 4,000 cars were directly imported to India from foreign manufacturers. The growing demand for these cars established the inherent requirements of the Indian market that these merchants were quick to pounce upon. The Hindustan Motors (HM) was set up in 1942 and in 1944; Premier Autobackmobile (PAL) was established to manufacture automobiles in India. However, it was PAL, which came out with the first car in India in 1946. Hindustan Motors could only produce their first car in 1949 as they were concentrating on auto components more than the finished product. It was left to another company, Mahindra and Mahindra (M&M) to manufacture sturdier utility vehicles, namely the American Jeep. In the 50s, the Government of India granted approval to only 7 car dealers to operate in India - HM, API, ALL, SMPIL, PAL, M&M and Telco. The protectionist policies continued to remain in place. The 60s witnessed the establishment of the two-three-wheeler industry in India and in the 70s things remained much the same. Since the 80s, the Indian car Industry has seen a major resurgence with the opening up of Indian shores to foreign manufacturers and collaborators. The 90s have become the melting point for the car industry in India. The consumer is king. He is being constantly wooed by both the Indian and foreign manufacturers. Though sales had taken a dip in the first few months of 1999, it is back to boom time. New models like Marutis Classic, Alto, Station Wagon, and Fords Ikon, the new look Mitsubishi Lancer are all being launched with an eye on the emerging market. In these last years of the millennium, suffice it is to say that Indian cars will only grow from strength to strength.

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Now let us look at the industry development in the chronological order: 1880's & early 1900's About hundred years ago o The first motor car was imported o Import duty on vehicles was introduced. o Indian Great Royal Road (Predecessor of the Grand Trunk Road) was conceived. First car brought in India by a princely ruler in 1898. Simpson & Co established in 1840. o They were the first to build a steam car and a steam bus, to attempt motorcar manufacture, to build and operate petrol driven passenger service and to import American Chassis in India. Railways first came to India in 1850's In 1865 Col. Rookes Crompton introduced public transport wagons strapped to and pulled by imported steam road rollers called streamers. The maximum speed of these buses was 33 kms/hr. From 1888 Motors Spirit attracted a substantial import duty. In 1919 at the end of the war, a large number of military vehicles came on the roads. 1942 Hindustan Motors Ltd incorporated and their first vehicle was made in 1950. In 1944 Premier Automobiles Ltd incorporated and in 1947 their first vehicle was produced. Only seven firms namely Hindustan Motors Limited, Automobile Products of India Limited, Ashok Leyland Limited, and Standard Motors Products of India Limited. Premier Automobiles Limited, Mahindra & Mahindra and TELCO received approval. M&M was manufacturing jeeps. Few more companies came up later. Government continued with its protectionism policies towards the industry. AIA&AIA (association of the component manufacturers) came into being in 1959. 1960's In sixties 2 and 3 Wheeler segment established a foothold in the industry. Association of Indian Automobile Manufacturers formally established in 1960. Standard Motors Products of India Ltd. moved over to the manufacture of Light Commercial Vehicles in 1965. 15

1970's Major factors affecting the industry's structure were the implementation of MRTP Act, FERA and Oil Shocks of 1973 and 1979. During this decade there was not much change in the four-wheeler industry except the entry of Sipani Automobiles in the small car market. Oil Shock of 1973 quickened the process of dieselization of the Commercial Vehicle segment. Three other companies, namely, Kirloskar Ghatge Patil Auto Ltd, Indian Automotive Ltd and Sen. & Pandit Engg. products Ltd entered the market during 1971-75. They ultimately withdrew in early eighties. During the seventies the economy was in bad shape. This and many specific problems affected the Automobile Industry adversely. 1980's - The period of liberalized policy and intense competition First phase of liberalization announced. Unfair practices of monopoly, oligopoly etc slowly disappeared. Liberalization of the protectionism policies of the Government. Lots of new Foreign Collaborations came up in the eighties. Many companies went in for Japanese collaborations. Hindustan Motors Ltd. in collaboration with Isuzu of Japan, introduced the Isuzu truck in early eighties. ALL entered into collaboration with Leyland Vehicles Ltd. for development of integral buses and with Hino Motors of Japan for the manufacture of W Series of Engines. TELCO after the expiry of its contract with Daimler Benz indigenously improved the same Benz model and introduced it in the market. Government approved four new firms in the LCV market, namely, DCM, Eicher, Swaraj and Allwyn. They had collaborations with Japanese companies namely, Toyota, Mitsubishi, Mazda and Nissan respectively. The Two Wheeler market increased. Since 1982 the Government had permitted foreign collaborations for the manufacturing of Two Wheelers up to 100cc engine capacity. Foreign Equity up to 40% was also allowed. In 1983 Maruti Udhyog Ltd was started in collaboration with Suzuki, a Japanese firm. Other three Car manufacturers namely, Hindustan Motors Ltd., Premier Automobiles Ltd., Standard Motor Production of India Ltd. also introduced new models in the market. At the time there were five Passenger Car manufacturers in India - Maruti Udyog Ltd., Hindustan Motors Ltd., Premier Automobiles Ltd., Standard Motor Production of India Ltd., and Sipani Automobiles.

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Ashok Leyland Ltd. and TELCO were strong players in the Commercial Vehicles sector. Important policy changes like relaxation in MRTP and FERA, delicensing of some ancillary products, broad banding of the products, modifications in licensing policy, concessions to private sector (both Indian and Foreign) and foreign collaboration policy etc. resulted in higher growth / better performance of the industry than in the earlier decades.

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1990's Mass Emission Norms were introduced for in 1991 for Petrol Vehicles and in 1992 for Diesel Vehicles. In 1991 new Industrial Policy was announced. It was the death of the License Raj and the Automobile Industry was allowed to expand. Further tightening of Emission norms was done in 1996. In 1997 National Highway Policy has been announced which will have a positive impact on the Automobile Industry. The Indian Automobile market in general and Passenger Cars in particular have witnessed liberalization. Many multinationals like Daewoo, Peugeot, General Motors, Mercedes-Benz, Honda, Hyundai, Toyota, Volvo and Fiat entered the market. Various companies are coming up with state-of-art models of vehicles. TELCO has diversified in Passenger Car segment with Indica. Despite the adverse trend in the growth of the industry, it is resolutely trying to meet the challenges. Various issues of critical importance to the industry are being dealt with forcefully

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INTERNATIONAL SCENARIO
Understanding global dynamics is vital for the Indian automotive sector.

0.1 Evolution of Automobiles in the World

Mans journey on the road of mechanized transport had begun right from the time when the wheel was invented in 4000 BC. Since then he has continually sought to devise an automated, labor saving machine to replace the horse. However, it was not until 1885 when the first car rolled down the streets that man was truly able to come out with an automated devise to replace the horse. All the earlier attempts, though successful, were steam-powered road-vehicles. A French man Nicolas Jacob Cugnot built the first self-propelled car in 1769, which could attain speeds of up to 6 kms/hour. It was in 1771 that he again designed a steam-driven engine for a car, which enabled it to run so fast that the car rammed into a wall, it was the first recorded accident in the history of cars. Francois Isaac de Rivaz designed the worlds first internal combustion engine in 1807. He to develop the worlds first vehicle to run on such an engine, one that used a mixture of hydrogen and oxygen to generate energy, subsequently used this. This subsequently gave way to a number of designs based on the internal combustion engine in the early 19th century with negligible degree of commercial success. Thereafter in 1860, Jean Joseph Etienne Lenoir built the first successful twostroke gas driven engine. In 1862 he again built an experimental vehicle driven by his gas-engine, which ran at a speed of 3 kms/hour. These cars became so popular that by 1865 many could be seen on the roads. It was not until 1885 that a four-stroke engine was devised and a petrol engine introduced. Gottileb Damlier and Nicolas Otto worked together on the mission till they fell apart. Daimler created his own engines, which he used both for cars and for the first four-wheel horseless carriage. Meanwhile, Karl Benz was in the process of creating his own advanced tri-cycle, which proved to be the first true car. This car first came to the roads 1886. During the same decade in 1890 Henry Ford of the United States began work on a horseless carriage. He went several steps further and in 1896, came out with 19

his first car-- the Quadricycle. This was an automobile powered by a two-cylinder gasoline engine. Henry Ford then went on establish the Ford Motor Company, which was launched in 1903, and in 1908 he catapulted his vehicle, Model T Ford to the pinnacle of fame. Henry Ford did not stop here and continued with his innovations, he then went on to produce the Model T Ford on a moving assembly line, thereby introducing the modern mass production techniques of the automobile industry. The modern car that we see on the roads today is an outcome of several innovations and discoveries over the ages; yet the car industry has still not stopped progressing and will continue to come out with better versions as decades pass by. It is worth noting here that the first ever land-speed record was established in 1898. Count Gaston de Chasseloup-Laubat of France drove an electric car at a speed of 39.24 miles per hour in Acheres near Paris. This flagged off the era of wheels race, which lasted till 1964, after which jet and rocket -propelled vehicles were allowed. Ever since the invention of wheel, man has endeavored to create different modes of transport to suit his needs. But, automobile takes perhaps pride of place amongst all his contraptions. Merely because it has evolved over the years from an article of extravagance to the one of necessity. And, nowhere has this evolution been more visible than in our very own backyard. Remember the days of the ubiquitous Ambassador and the Fiat, which dominated the countrys roads, at a time when the Indian consumer had little option. However, since then, liberalization and the entry of competition have brought about a sea change in the Indian automotive sector, which has evolved as a major player in the Asian context. A fact reflected in the emergence of India as the 18th largest global car market with a share of a mere 0.80 per cent. Hence, imagine the underlying potential that India possesses. Keeping this in mind, it becomes imperative for the Indian players to try and understand what they are up against on a global platform, as exports could well hold the proverbial -- key -- in terms of survival. With this objective in mind, the following is a preliminary analysis of the global vehicle car park. Starting from the time when Henry Ford rolled out his first vehicle to now, the world passenger car park has grown to accommodate an estimated 524 million vehicles. This figure, although a ballpark estimate, is undoubtedly growing every single day. What with automotive plants the world over spewing out mutants of a 20

particular design almost on a minute-to-minute basis. Accuracy in such an exercise is just not possible, as new cars are registered globally everyday, while some are abandoned and others are scrapped due to old age and accidents. All these problems mean that putting a number to the global car park is a complex issue. Even more difficult perhaps understands the dynamics of change in the global automobile industry. But despite the rapid pace of change and the inherent problems of statistics, it is very important for Indian auto manufacturers to understand the dynamics of the global marketplace and the competition therein. A dozen companies dominate worldwide. Roughly, one car in seven on the worlds roads is currently produced on a General Motors (GM) platform. Putting GMs Indian operations in perspective is the fact that this carmaker manufactures mere 60,000 vehicles in India, which is just a minuscule 0.075 per cent. There are estimated to be around 80 million such vehicles, including the Opel, Vauxhall and Saab variants from the GM stable. Around one in eight cars are produced on the Ford/Mazda platform, which amounts to 67.1 million vehicles worldwide. Of this, Fords Indian operations are capable of producing mere 100,000 vehicles annually. One in 12 vehicles shares a Toyota or Lexus label. While almost 41 million vehicles come from the Volkswagen, Skoda and Audi combine. Then, there are 30 to 33 million each of Nissan, Fiat and Peugeot-Citroens cars on global roads, as well as 25-26 million, respectively, of Honda and Renault models. So, in effect, the top eight automotive brands account for almost three in every four cars on world roads, with companies like Mitsubishi, Chrysler and Hyundai adding another seven per cent, leaving 20 per cent of world car park in the hands of miscellaneous car makers like Daewoo, Suzuki, Isuzu, Lotus and Maruti. Having roughly understood the players that dominate the global passenger car market, it is now imperative that we define the largest car parks in the world and also understand their operational dynamics. United States The US is the largest passenger car market in the world and is said to contain almost 150 million cars. Historically, car sales in this market have been controlled by the Big Two, namely General Motors and Ford (excluding Mazda). However, statistics now show that the share of other Marques in the US market is on the rise. The fastest growth is in the Japanese brands, notably those of Toyota, Nissan and Honda, whose combined share on American roads was estimated to have increased to over 28 per cent in 1998. Most other brands surprisingly have smaller market shares in the US. A prime example of which is 21

Volkswagen, which despite being the fourth largest manufacturer in the world, accounts for less than one vehicle in every 60 cars on American roads. Traditionally, up market brands like BMW and Mercedes Benz also account for less than a minuscule 1.3 per cent combined. Western Europe The so-called Big Six dominate the car park in Western Europe, accounting for almost three in every four cars on the regions roads. Interestingly, Volkswagen and its affiliates, which control a huge 15.6 per cent of the European car park, have dominated this region over the last decade. Now, compare this 15.6 per cent of Volkswagen, which is the market leader, and the 80 per cent share of Maruti Udhyog in India and what have you? Coming back to Western Europe, Fiat is the second largest player there with 13.3 per cent of the total car pie. But analysts state that its share will fall as older Fiats are scrapped. This aside, perhaps the other aspect that is truly interesting and specific to Europe, is the long tail of other carmakers. After the Big Six, BMW, the top three Japanese firms and Mercedes Benz account for a huge chunk of cars on European roads. Then, there are firms like Volvo, Mitsubishi, Mazda, Suzuki, Lada, Proton, Rover, Maruti and Tata, all vying for a piece of the action. For these companies, supplying dedicated parts and maintaining a regional service network is unlikely to be economically viable in the medium term. Japan The profile of the Japanese car park is very distinct from that of the US or Europe for several reasons. First, there are fewer imports due to policy restrictions, a la India! Secondly, there are very few older vehicles, mainly because of the draconian vehicle-testing regime, which results in many cars being replaced after a five-year period. Furthermore, because of support to domestic industry, Toyota together with Daihatsu dominates the Japanese car park, accounting for almost 40 per cent of the market share. The other large manufacturers include Nissan and Honda, which together account for almost one third of the cars in use. Other manufacturers with a growing presence are Subaru and Suzuki, which have increased their sales significantly in the last few years, thanks to a number of innovative models and a growing popularity of mini cars. Does this trend resemble some other car markets? Asia Toyota, Nissan, Honda and Mitsubishi have dominated the markets of the ASEAN region for more than a decade now. In India, however, Suzuki, through Maruti Udyog completely dominated the car park with a solid 80 per cent market share until recently. Interestingly, the ASEAN and Indian markets are quite 22

diverse compared to Japan, despite the similarity in vehicles. In India and Southeast Asia, vehicles have much longer lives (often more than 20 years) due to the testing regimes which are absolutely rudimentary, to say the least. In China, commercial vehicles and not passenger cars surprisingly dominate the park and new vehicular sales. The market for passenger cars until now has been very small with a mere 3.5 million vehicles, and Volkswagen and Daihatsu dominate it. The South Korean market with around 7.5 million vehicles is also unusual. Almost every car on Korean roads is designed and built locally and will perhaps spend its entire life on Korean roads due to policy restraints. Even more interesting is the fact that this scenario looks set to continue. This is despite the pressure to increase exports to South Korea, which is being resisted vehemently by local carmakers, despite the collapse of the local currency and the economic problems that plague the region.

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Rest of the world Finally, the statistics for the rest of the world are very varied. In Eastern Europe, there are still many old cars from the erstwhile Soviet era, even though most of the auto-manufacturers have been driven out of business. There is also a large number of cars imported and often stolen from Western Europe that find their way into east European markets. Elsewhere, Africa has a small market that is dominated mainly by French and Japanese, and in some cases Italian made cars. However, the trend here is changing with players like Daewoo and Hyundai finding it easier to penetrate. Lastly, there is the South American market that has been controlled by European and US producers. There are an estimated 23 million vehicles in this region, most of which have been manufactured in Brazil or Argentina. This completes the list of the main passenger car markets of the world. But, with the economic uncertainties that plague some of the regions above, a fall in demand is the most likely scenario that will slow down the pace of growth in the interim. There are some interesting trends that have surfaced, which also need a mention, as these will play a big role in augmenting or decelerating demand.

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Overview of Automotive Mission Plan:

The Indian Automotive Industry after de-licensing in July, 1991 has grown at a spectacular rate on an average of 17% for last few years. The industry has now attained a turnover of Rs. 1, 65,000 crores (34 billion USD, assuming 1$ = Rs. 46) and an investment of Rs. 50,000 crores. Over Rs. 50,000 crores of investment is in pipeline in the vehicle industry alone. The industry is providing direct and indirect employment to 1.31 crore people. It is also making a contribution of 17% to the kitty of indirect taxes. The export of automotive sector has grown on an average 30% per year during the last five years. The export earnings from this sector is estimated at over 5 billion USD out of which the share of vehicle sector is 2.8 billion USD during the year 2006-07. Even with this rapid growth, the Indian Automotive Industrys contribution in global terms is very low. This is evident from the fact that even though passenger and commercial vehicles have crossed the production figure of 2.0 million in the year 2006-07, yet Indias share is about 2.9 percent of world production of 66.46 million passenger and commercial vehicles. Indian automotive export constitutes only about 0.3% of global trade. It is a well accepted fact that the automotive industry is a volume driven industry and certain critical mass is a pre-requisite for attracting the much needed investment in Research and Development and New Product Design and Development. R&D investment is needed for innovations which is the life-line for achieving and retaining the competitiveness in this industry. This competitiveness in turn depends on the capacity and the speed of the industry to innovate and upgrade. The most important indices of competitiveness are productivity of both labor and capital. The concept of attaining competitiveness on the basis of cheap and abundant labor, favorable exchange rates, low interest rates and confessional duty structure is becoming inadequate and therefore, not sustainable. In light of the above, it is felt that a greater emphasis is required on the development of the factors which can ensure competitiveness on a long-term basis. India with its rapidly growing middle class (450 million in 2007 as per NCAER Report), market oriented stable economy, availability of trained manpower at competitive cost, fairly well-developed credit and financing facilities and local availability of almost all the raw materials at a competitive cost has offered itself as one of the favorite destination for investment for the automotive manufacturers. These advantages need automotive manufacture to be exploited in a manner to attain the twin objective of ensuring availability of best quality product at lowest cost to the consumers on the one hand and developing and 25

assimilating the latest technology in the industry on the other hand. The Government recognizes its role as a catalyst and facilitator to encourage the companies to move to higher level of competitive performance. The Government wants to create a policy environment to help companies gain competitive advantage. The government policies target to encourage growth, promote domestic competition and stimulate innovation. It is also felt that a general improvement in availability of trained manpower and good infrastructure is required for the sustainable growth of the industry. Besides, specialized and industry-specific initiatives can lead to competitive advantage. Keeping in view the above factors, the Government has launched a unique initiative of National Automotive Testing and R&D Infrastructure Project (NATRIP) to provide specialized facilities for Testing, Certification and Homologation to the industry. A similar initiative is required for creating specialized institutions in automotive sector for education, training and development, market analysis and formulation and dissemination of courses in automotive sector. It has been noticed that the Auto Industry has grown in clusters of interconnected companies which are linked by commonalities and complementarities. The major clusters are in and around Manesar in North, Pune in West, Chennai in South, Jamshedpur-Kolkata in East and Indore in Central India. The Ministry of Heavy Industries and Public enterprises is envisaging in the Eleventh Five-Year Plan period to create a National Level Specialized Education and Training Institute for Automotive Sector and to enhance the transportation, communication and export infrastructure facilities through concerned Ministries in and around these clusters. The Government will make attempts to streamline the relevant Government Institutions and Educational and Research Institutions in and around the clusters to meet the growing needs of the automotive sector.

26

The Automobile Industry - Wheels of Change

The transformation of the Indian market for passenger cars is remarkable. A few years ago you had a choice between three cars. Now the Indian car market has around thirty cars for the consumers. From a stage where the consumer had to wait for months to get a car, the market has turned in favor of the buyer. With new models and recession in the economy, manufacturers are doing everything to attract the consumers. In comparison with the kind of cars available in developed countries, Indias passenger cars may appear primitive even today, when a much wider choice is available than in earlier years. Earlier, the choice was between three cars. The Ambassador from Hindustan Motors was phased out from the European market before 1960. This car is still used by all the government agencies and you still find that most taxis are of this make. For the urban employed class it was Premier Padmini, a Fiat version of the same vintage. Then came Maruti a 798 cc from Maruti Suzuki, which became the most popular car in the country. The opening up of the economy and liberalization attracted investments form different parts of the globe. The result was wide range of cars in the Indian market. The joint venture between Government of India and Suzuki Motors of Japans produced Maruti 800 (798 cc), Omni E (796 cc), Maruti Zen (993 cc), Maruti 1000 (970 cc) and Maruti Esteem (1298 cc). Hindustan Motors offer Ambassador ISZ (1817 cc), Contessa GLX (1817 cc). Other than the older models like Premier Padmini (1366 cc) and Premier 118 NE, the market now has new cars, including Fiat Uno (999 cc (1171 cc), Daewoo Cielo (1498 cc), Peugeot 309 (1360 cc), Opel Astra (1597 cc), Ford Escort (1299 cc), Honda City (1343 cc), and Mercedes E220 (2199 cc). Until the 1980s the automobile industry in this country had charted an uneventful course. The scenario showed a limited number of manufacturers, low levels of production and the use of anachronistic technology. Hindustan Motors, for example, have continued with the use of the old reliable Ambassador, making only cosmetic changes in the 1957-designed body. Premier Auto did the same with the Fiat body that was newly introduced in 1964. For a long time, owning a personal four-wheeler was considered a luxury in India, and a limited road network with poor road surface did not help matters much. Production showed only a very gradual upward curve from the 1950s until the early 1980s before Maruti came into the scene.

27

Though the consumers are happy about the variety of cars available, the manufacturers are worried. The drop in the demand and the inventory pile-up in most of the production units are hitting the bottom line. Though all players claim that they are not in the market for short-term gains, they admit that the present condition is far from attractive. With sales remaining stagnant or going down, car manufacturers have started going all out to win the customers. For the first time, car manufacturers in India offered heavy discounts. Easy finance offers, free accessories and attractive warranty offers are the other soaps offered now.

28

FUTURE TRENDS & OUTLOOK

First, the global automotive market is growing by just over two per cent a year, or a net of 10 million vehicles. Secondly, the growth has slowed down considerably and is expected to slow down further due to the increasing levels of saturation reached in the larger car markets the world over. In fact, analysts from the Economist Intelligence Unit (EIU) state that this saturation in the larger markets could possibly turn into negative growth, given the recent trend among carmakers to opt for quality components, which will undoubtedly enhance the life of a vehicle. This aside, the Asian economic crisis has further added to the woes of global automotive manufacturer, with the demand from the developing regions also now turning into a trickle. Lastly, the global domination by the main automotive manufacturers is on the wane -- albeit very slowly as -- region centric products -- become the name of the game. Interestingly, it is these emerging trends and more importantly the concept of region centric products, which are said to be the main cause of the winds of change blowing across the automotive car parks the world over. Automakers that have been enjoying a generally prosperous spell until now have to look ahead to likely difficulties that could force a fundamental rethink in the way vehicles are designed, manufactured, distributed and sold. Leading manufacturers have already put their research and engineering teams to work on new fuel and power-train technologies to meet the eco-friendly norms post 2000. Further downstream, companies such as Ford and General Motors of the US, Germanys Volkswagen and Toyota of Japan have begun to re-examine their dealer relationships and pricing strategies. They have all embraced a new customer focus, hoping to increase their exposure to areas such as insurance, finance, servicing and even recycling. But, perhaps more significant is the fact that most manufacturers are now on the look out for new strategic tie-ups, mergers and acquisitions - that will drive out costs and keep pace with the impending price cuts. Examples of which are already visible in the Daimler Benz merger with Chrysler of the US. Ford has acquired Swedens Volvo Car Corporation and Renault of France has acquired an influential stake in debt-laden Nissan. In trucks, the Volvo group has finally secured control of Swedish archrival Scania and another merger with Mitsubishi has also been cemented. Meanwhile, General Motors has increased its stake in 29

Suzuki of Japan and has also signaled the possibility of helping out the Korean cheabol Daewoo. Thus, while such deals and restructuring will certainly create an opportunity to cut costs, it remains to be seen whether they will create significant new opportunities for growth. However, what remains uncertain is the timing of any downturn. Many economists predicted last year that European and US automotive markets would contract in 1999. Given the steep declines seen in Southeast Asia and Latin America, the scenario pointed to an industry struggling to remain profitable in the face of overcapacity, falling prices and weakening demand. However, so far that gloomy outlook has not been realized. Low-cost finance and rising disposable incomes have helped confound most economic forecasts, with even the moribund East Asian markets showing a modest rebound. But the worlds manufacturers are not sanguine. The changing market scenario has forced most automakers to explore new ways to defend margins and market share. Thus, new automotive strategies will become clear over the next two years, but the manufacturers will have little option but to start moving now.

30

UNIQUE CHARACTERISTICS OF THE INDIAN MARKET

During our interaction with the industry people we came across several phenomenon, which struck us as unique to the Indian market and thus are worth mentioning here. Some of these are: 1. The Tax and Duty structure: 60% of the final showroom price comprises of various forms of duties and taxes. There is excise duty, import duties on components, Central Sales tax, state sales tax, Octroi, Road tax. All this heavily affects the pricing strategies of the automobile companies. 2. Differential taxation: The sales tax structure is not standardized across the country. At present it varies between 4% and 12% from state to state. This leads to a substantial difference in prices across different states. This has caused many a problem to dealers in states having higher rates of sales tax because customers who are in the know of things do not hesitate to buy vehicles from neighboring states, which have lower sales tax. Moreover, there are tax benefits in buying from Union territories also. The sales tax structure has just recently been standardized at 12%. This has resulted in price increase in some states, which had lower rates. 3. Reasons for buying: For many Indian buyers the reason for buying a car is not for transportation, utility or anything else. The primary motive is to use it as a tax saving device!!! Businesses in India get depreciation benefits on their assets. So purchasing of a car is done in order to save on taxation by claiming depreciation on the vehicles value. This leads to another characteristic of the market, which is the March, and September end buying rush. The tax system allows for 40% depreciation on the asset value if an asset is purchased before the 31 st of March and 20% depreciation benefit if it is purchased before the 30th of September in a financial year. Nearing the end of these months demand spurts drastically and there is a mad rush to get delivery of the vehicles and get them registered before the month end. Dealers who have ready stock, and thus can give immediate delivery are in an advantageous position in these times. Even the Road Tax Office makes a quick buck by backdating registrations for those who could not procure their vehicles before the deadline. 4. Comparatively less evolution to the medium and premium segment : In the mid 1990s most of the new foreign players who came into the market, came in with mid-sized cars because they felt that the Indian market, like other developing markets, would evolve from the small cars to the mid-sized 31

segment. This, however, has not happened and even today the strongest segment, both, in terms of volumes and growth is the small car segment. Growth in the mid-sized and premium segments has been sluggish and slow. These still remain small volume segments. This has led to manufacturers rethinking their strategies towards small sized cars.

32

5. Role of rumors and word of mouth: Buyers in India are a closely-knit group. The social system in India is also tilted towards joint families. Word of mouth and peer opinion play a very significant part in deciding which make of car to buy. Rumors about price discounts, mileage or quality problems in cars spread like wild fire and have seriously affect sales. 6. The Prices sensitive market: The buyer in India is very price sensitive. Demographics show that 20% of the Indian population is under poverty line and 60% consists of middle class. The segments are very price sensitive and always go for the economic options. That is why we see that most of the Indian automobile companies market their cars on price and have many upgraded versions in the A and B segment. 7. Most number of Players: The Indian automobile industry has the more number of players than any other country in the world. Whereas, in the other countries, there are normally six to seven players at a time. 8. Foreign Companies: Most of the Indian automobile companies are either wholly owned subsidiaries of any foreign company or a joint venture between an Indian Company and a foreign company. 9. High Growth rate: Indian automobile market is growing faster than the world automobile market. The world automobile market is growing at 2% per annum, whereas the Indian automobile market is growing at five to six percent per annum. 10. Domination of Compact cars: In other countries it is the mid-size segment that is dominating the market, whereas the compact size passenger cars dominate the Indian passenger car market. 11. Domination of Two-wheeler segment: In the automobile sector, worldwide, it the passenger car segment that drives the market, but in India, due to high percentage of middle class in the population, it is the two-wheeler segment that dominates the market.

33

GOVERNMENT POLICY
The policy of broad banding capacities in the eighties led to increased utilization of capacity for four-wheelers in the industry. The liberal policy on foreign participation through technical and financial collaboration in early eighties led to substantial product up gradation and introduction of new models. But it was alleged that the policy was discriminatory in favor of MUL, while others like Telco, PAL, and HM were denied permission to produce cars in collaboration with Japanese companies. The GOI controls the car sector by way of framing policies on depreciation norms, import duty on cars and parts used in it, petrol prices and import duty of steel. During the era of socialist inspired controls, the government protected the car industry from new entrants by making effective use of licenses. However, after liberalization and with the consequent opening up of the auto sector in 1992-93, the license raj ceased to exist. The perception of a car as a luxury good lead to heavy excise duty on cars. The excise duty doubled from 25% in FY87 to 55% in FY91. Till 1987, the GOI followed a discriminatory policy so as to charge lower duty on fuel-efficient car with engine capacity of less than 1000cc. This helped MUL to price its car at a lower price in comparison to others. But with lobbying from PAL and HM government withdrew the provision in 1987. But with the onset of the liberalization process in the early nineties, the government has continually rationalized the excise duty regime. Presently, there is a duty of 40% (16% + 24%) on motor vehicles, designed for transport of not more than six persons (excluding the driver). On vehicles designed for transport of more than six persons, but not more than 12 persons, the duty is 32% (16% + 16%). Over and above the excise duty, cess by the Central Government, states are now charging a uniform sales tax of 12%. This came in being after the 15th of May 2000. Earlier, states used to charge sales tax varying from 3 to 14%. But MUL vehicles receive favorable treatment in terms of sales tax as well. In line with its treatment for luxury items import duties for car have been maintained high. In the 80's, import duties varied between 150 to 200% based on the engine capacity of a car. The import duty on cars and components has come down in the last few years in line with general reduction in import tariffs. In the FY98 budget, the import duty on cars has also been further brought down from 50% to 40% ad valorem. Substantial reduction in import duty has been extended in the budget FY98 for import of certain items, which would help the industry to 34

reduce the emission level of vehicles. The import duty on catalytic converters and parts thereof has been reduced from 25% to 5%. The duty on CNG kits and parts thereof has been reduced from 10% to 5%. The import duty on auto components will be a key factor in deciding the final pricing of cars as new ventures start with about 50% indigenization levels. The reduction in import duty on steel in the last few years has helped the industry in reducing raw material costs as major steel requirement of car industry was imported. Even today, all CKD/SKD imports include metal pressed body panels. Policy on petroleum products, auto emission and depreciation The price of petrol and diesel was regulated till recently by the government as part of its policy on petroleum products management. However, since 1997, the prices of these fuels have been deregulated and linked to the movements in international prices. As a result, already, the price of diesel has been raised twice, the latest by a huge 40%. This dismantling of the Administered Price Mechanism (APM) of petroleum products will reduce the cost disadvantage of petrol driven cars. On the vehicle emission front, judicial activism has goaded the government to take certain policy measures in the recent past, which has led to stricter emission norms for automobiles. As per a Supreme Court judgment, banning registration of all non-Euro I compliant cars within Delhi, all vehicles should become Euro I compliant by April 2000. (In the National Capital Region of Delhi, Euro II norms are now in operation) As a result, almost all the existing players and new entrants have started introducing models complying with the said norms. This development has led to an increase in the prices of cars, which by an estimate, could be anywhere between 10-15%. The depreciation norms have effect on demand for cars as institutions purchase cars for use by managerial staff and claim depreciation in their books. With this the companies are benefited from tax shelter provided by depreciation. Therefore any changes in depreciation norms affect the demand from this segment. The depreciation benefits, which accrue to institutions & corporate buyers, were slashed from 33.33% to 20% in 1990. This led to decrease in demand from this segment for a short period. But with increase in depreciation rate to 25% in 1994, corporate demand was restored. Automotive Policy In a policy announcement in FY94, the government had permitted foreign car producers to invest in the automobile sector in India and hold majority stakes. The objective of the policy was to build automobile production capabilities in the country, with minimum foreign exchange outflows. The key conditions of the policy related to production, imports, exports, level of indigenization and foreign equity inflows. 35

Since all the new ventures involved the import of capital goods and CKD/ SKD kits, the promoters had to fulfill certain export obligations. They were also required to provide an indigenization program. However, these conditions were framed in the nature of MOUs, which the new ventures had to sign with the Directorate General of Foreign Trade (DGFT). But, in the last three years many of the companies failed to live up to their export commitments, which made it difficult to obtain permission for importing additional CKD/ SKD kits. In addition, the uncertainty regarding the threshold level for classifying imports as CKD/ SKD or component imports continues. Currently, the threshold level is set on a case-to-case basis where imports below a certain percentage of the total value of the car are being charged duty that is applicable to components (30%), while imports above this percentage are being charged at the rate applicable to CKD/ SKD (45%). The industry wants the threshold level to be at 70%, while the government wants it to be at 35%. In November '97, the Cabinet Committee on Foreign Investment cleared a new policy for permitting new car ventures. It addresses the aspect of indigenisation level and exports by the new ventures. The main proposals of the new policy are: The new ventures would have to indigenes up to 50% within 3 years and 70% by the end of seventh year of starting commercial production. They will have to invest a minimum of $50 million as equity capital over a period of 3-4 years. The venture will have to become foreign exchange neutral over a period of 5-7 years. The ventures will be allowed to export components & ancillaries, apart from cars. A moratorium of 2 years would be given to companies for meeting the export commitment. The new policy is expected to provide development of ancillarisation and increase employment opportunities. But for some of the new car ventures, auto policy will be a speed barker as they have to sign a new MOU with the government and make necessary arrangement to meet the new policy. Import Policy The import of passenger cars and other automotive vehicles is restricted and an import license is required for these items. Import of capital goods and automotive components/parts are placed under Open General License (OGL) and hence, no Government approval is required. SKD/CKD Imports: Some of the joint ventures in the passenger car sector envisage initial import of cars in SKD/CKD kits. 36

Import of cars in SKD/CKD kits requires a license from the Directorate General of Foreign Trade (DGFT). While the Government has decided to grant the required license in the case of joint ventures approved in the car sector, these are required to give details about import programmed, indigenization planned and export possibilities and sign a memorandum of understanding (MOU) with DGFT in this respect. The underlying idea for this is to discourage screwdriver technology and to have an assurance that the joint venture partners have longterm commitments to the projects. Import Duty In line with its treatment for luxury items import duties for car have been maintained high. In the 80's, import duties varied between 150 to 200% based on the engine capacity of a car. The import duty on cars and components has come down in the last few years in line with general reduction in import tariffs. In the 1997-98 Budget, the import duty on cars has also been further brought down from 50 per cent to 40 per cent ad valorem. Import of capital goods in the auto sector in general is attracting import duty of 25 per cent. However, under the Export Promotion Capital Goods (EPCG) Scheme, capital goods can be imported on payment of confessional duty of 15 per cent on taking export obligation of four times the c.i.f. value of imported goods, to be fulfilled in five years or zero duty payment on an export obligation of six times the c.i.f. value to be fulfilled in eight years where the c.i.f. value of imported goods is RS. 20 crores or more. The import duty on auto components will be a key factor in deciding the final pricing of cars as new ventures start with about 50% indigenization levels. The reduction in import duty on steel in the last few years has helped the industry in reducing raw material costs as major steel requirement of car industry was imported. Even today, all CKD/SKD imports include metal pressed body panels. Excise Duty The perception of a car as a luxury item leads to heavy excise duty on cars. The excise duty doubled from 25% in FY87 to 55% in FY91. Till 1987, the GOI followed a discriminatory policy so as to charge lower duty on fuel-efficient car with engine capacity of less than 1000cc. This helped MUL to price its car at a lower price in comparison to others. But with lobbying from PAL and HM government withdrew the provision in 1987. But with the onset of the liberalization process in the early nineties, there has been continued rationalization of excise duty in respect of automobiles. In 199798 there was a duty of 40 per cent on motor vehicles, designed for transport of not more than six people (excluding the driver). On vehicles designed for transport of more than six people, but not more than 12 people, the duty was 25 per cent. In the case of public transport vehicles and vehicles for transport of goods, the duty was fixed at 15 per cent. The duty on two-wheelers varies from 15 per cent to 20 per cent depending upon engine capacity, Excise duty on auto 37

components has been reduced from levels of 20 and 15 per cent to 18 and 13 per cent. Excise duty on electrically operated vehicles has been reduced from 10 to 8 per cent and bodies of motor vehicles from 20 to 18 per cent. The car industry had been asking for reduction in excise duty so as to reduce the end prices of cars to customers and increase the sluggish demand. With continuation of liberalization and shift in the perception (of car being a luxury product) may lead to reduction in duties over a period of two to three years. This will reduce the prices of cars leading to further boost in demand. The government policies have been instrumental in shaping up of the car industry right from the post-independence era. 1. The Government controls car sector with the help of policies on taxation, depreciation norms, import duty on cars and parts used in it, petrol prices and import duty of steel. 2. After liberalization and with opening up of the auto sector in 1992-93 the license raj ceased to exist. 3. The perception of car as a luxury good has lead to heavy excise duty for cars. The excise duty had doubled from 25% in FY87 to 55% in FY91. But with the liberalization process in early nineties, the government has brought down the excise duty to 40 per cent in 1992-93. 4. In line with its treatment for luxury items import duties for car have been maintained high. The import duty on cars and components has come down in the last few years in line with general reduction in import tariffs. Over the years the import duty has been decreased from above 200% to 103% on passenger cars. The current duty on Completely Knock Down / Semi Knock Down (CKD/SKD) kits is 103% (including 5% special duty) and for components 68% (including 5% special duty). 5. The reduction in import duty on steel in the last few years has helped the industry in reducing raw material costs as major steel requirement of car industry was imported. 6. The prices of petrol and diesel are regulated by the government as part of its policy on petroleum products management. This affects the operational cost of the car and hence the demand for them. The proposed dismantling of Administered Price Mechanism (APM) of petroleum products will reduce this disadvantage of petrol driven cars. Till last year diesel cars were considered as economy cars due to large price differential compared to petrol with former being subsidized. But last year the hike in diesel prices by as much as 40 % reduced the differential and in future we might see petrol and diesel price parity. This will result in more demand for petrol cars, as petrol cars are easy to handle and demand lesser maintenance compared to their diesel counterparts. 7. On the vehicle emission front, the government has taken an active role in the recent past, which has led to strict emission norms for the 38

automobiles in the last few years. With all the cars will have to be Euro II compliant by April 2000 the new entrants and existing players will be forced to introduce latest models from their portfolio of cars. This will make the cars dearer by 15 to 20 per cent. Here one needs to focus on one important issue. The industry is geared to deliver the hardware to meet the prescribed norms and it shouldnt be difficult for any of the carmakers in the country to meet the norms. But the issue the Government hasnt addressed satisfactorily is the quality of fuel which is a prerequisite for automobiles to meet Euro I and Euro II norms. In the light of this Government should establish an infrastructure, which allows unadulterated fuel to be supplied from refineries to fuel filling stations. Without this the expensive hardware would just be emitting poisonous gases. So in this case the court ruling has been in the right direction but devoid of understanding of the ground reality. 8. The depreciation benefits, which accrue to institutions & corporate buyers, were slashed from 33.33% to 20 % in 1990. 9. The new ventures would have to indigenes up to 50% within 3 years and 70% by the end of seventh year of starting commercial production.

39

EVALUATION OF THE AUTOMOBILE INDUSTRY

Technology And Manufacturing Process

The body panel and engine constitute a major portion of the total cost of car manufacture. A typical cost structure for car is as given below: Parts/assembly Glass Brakes/wheels/tyres Interiors Transmission system Ignition/exhaust system Steering/suspension Comfort fittings Engine Body Others % Of total cost 5 6 7 7 8 9 11 16 18 13 Source: Probity Research

Glass

13%

5%

6% 7%

Brakes/wheels/tyres Interiors Transmission system Ignition/exhaust system Steering/suspension Comfort fittings

18%

7% 8%

16% 11%

9%

Engine Body Others

40

Car manufacturing is basically assembly of components procured from ancillaries or auto component manufacturers. Nearly the car manufacturers outsource 80% of auto components. This helps in reducing the capital cost needed to setup a car manufacturing plant. Therefore, auto ancillaries play a key role in maintaining the quality and price of the product. But till the entry of MUL in the Indian car industry, vendor development was hardly seen as a part of automobile manufacturing in the country. With the setting up of auto component manufacturing facilities by Indian promoters, in collaboration with Japanese players for supply to MUL, the country was first introduced to the concept of out sourcing. With the new entrants planning to start manufacturing facilities with a small capacity base in the country, the role of auto component players will substantially become important over the years. Presently, some of the luxury car manufacturers import CKD/ SKD kits and just carryout assembly operations in the country. But with strict policy guidelines of the GOI in force, all manufacturers have to opt for 70% indigenization within five years of starting manufacturing operations in the country. This will further boost the operations of auto component manufacturers in the country. Technology As far as the changes in technology are concerned than one change will be that all the cars will have to be fitted with Multi Point Fuel Injection (MPFI a technology in which traditional carburetor is required and fuel is sprayed by different valves into the combustion chambers of an engine). Secondly due to change in consumer preferences there have been technological advancements in power steering, power windows and such other facilities, which are now available as a standard feature on the deluxe versions of almost all the cars. Developments too have taken place in the safety aspect of the car with cars becoming sturdier with side impact bars, air bags, collapsible steering etc. are becoming more and more popular due to foreign carmakers coming in India with these technologies.

41

INDIAN AUTOMOBILE MARKET Trade

Demand The demand for cars in the past was supply driven, as demand did not match supply. This led to high premium and long waiting periods for the cars. But change in government policies coupled with aggressive capacity additions and up gradation of models by MUL in the early nineties led to increase in supply and subsequently reduced the waiting periods for economy cars. The demand for cars was suppressed by various supply constraints. The demand for cars increased from 15,714 in financial year 1960 to 30,989 in financial year 1980 at a compounded annual growth rate (CAGR) of only 3.5%. The entry of Maruti Udhyog Ltd (Government of India Suzuki Motors, Joint Venture) in 1983 with a "peoples" car and a more favorable policy framework resulted in a CAGR of 18.6% in car sales from financial year 1981 to financial year 1990. After witnessing a downturn from financial year 1990 to financial year 1993, car sales bounced back to register 17% growth rate till financial year 1997. Since then, the economy slumped into recession and this affected the growth of the automobile industry as a whole. As a result car sales remained almost stagnant in the period between financial year 1997 and financial year 1999. CAGR recorded during the financial year 1994 - financial year 1999 period was 14.4%, reaching sales of 409,624 cars in financial year 1999. However, during financial year 2000, with the revival of economy, the segment went great guns posting a sales growth of 56% year on year growth. But again in the financial year 2001 the car sales were seen declining, as there was a negative growth rate of about 5% in car sales. The market recovered in financial year 2002, but could not reach the figures achieved in financial year 2000. The data for this year is available up to November, which is also showing negative growth rate of 3.44%, against the same period last financial year. The table below gives the production numbers of passenger cars in the past few years. Now in financial year car sales bounced to 12%, 27%,17%,8%, 21% and 12% in 2002 to 2008 respectively. And CAGR of last 6 year is 16.12%.

42

The table below indicates the past sales trend for cars: Automobile Domestic Sales Trends Category Passenger Vehicles Commercia l Vehicles Three Wheelers Two Wheelers Grand Total 2002-03 707,198 190,682 231,529 4,812,12 6 5,941,53 5 2003-04 902,096 260,114 284,078 5,364,24 9 6,810,53 7 2004-05 1,061,57 2 318,430 307,862 6,209,76 5 7,897,62 9 2005-06 1,143,07 6 351,041 359,920 7,052,39 1 8,906,42 8 2006-07 1,379,979 467,765 403,910 7,872,334 10,123,98 8 2007-08 1,547,985 486,817 364,703 7,248,589 9,648,094

43

Passenger Vehicles 1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 year

No of sales

Comm ercial Vehicles 600,000 500,000 No.of sales 400,000 300,000 200,000 100,000 0 2002- 2003- 2004- 2005- 2006- 200703 04 05 06 07 08 year

44

Three Wheelers 500,000 No.of sales 400,000 300,000 200,000 100,000 0 2002- 2003- 2004- 2005- 2006- 200703 04 05 06 07 08 year

Tw o Wheelers 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 year

Year

No. of sales

Sales

Year on Year Growth (%)

Year on Year Grow th (%) 30 25 20 15 10 5 0

200102 200203 200304 200405 200506 200607 2007-

632584 707,198 902,096 1,061,572 1,143,076 1,379,979 1,547,985

11.79511 27.55918 17.67838 7.67767 20.72504 12.17453

Year on year Growth

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Ye ar

45

08

CAGR = 16.12%

46

Determinants of Demand
The demand for cars is dependent on a number of factors. The key variables are listed below: 1. 2. 3. 4. 5. 6. 7. 8. 9. Per capita income Introduction of new models Availability & cost of car Financing schemes Price of cars Incidence of duties and taxes Depreciation norms Fuel cost and its subsidization Public transport facilities

The first four factors viz, increase in per capita income, introduction of new models, availability & cost of car financing have positive relationship with the demand whereas others have an inverse relationship with demand for cars. The demand for cars in the future can be estimated with the help of making use of macro economic variables like growth in GDP, per capita income etc. or house hold penetration technique. An attempt is made to estimate the potential demand for passenger cars based on the household penetration level of passenger cars. The demand for cars in the future is expected to come predominantly from the existing two-wheeler owners who will be upgrading to a four-wheeler, due to rising income and necessity of car for personal transportation purposes. Therefore, excluding the owners of mopeds, the potential demand for cars in the next fifteen to twenty years can be taken as 50% of the existing two-wheeler population of around 28mn units. But with the release of new models in the higher end of the economy segment, the supply of second hand economy cars is expected to increase substantially, which will be costing just about two times the price of premium range twowheelers. This could affect the demand for first hand/new cars. Also, with cross demand from utility vehicles, availability of finance and other factors the above mentioned potential for cars will be difficult to realize. Growth in the segment thus is expected to hover around 15-20%yoy. The dominance of economy segment will continue in the future, as it will provide large volume to Indian car industry. This is because a majority of customers for cars will graduate from two-wheelers. The demand for mid-sized and premium cars is expected to rise as new models enter the market, income levels rise and present car owners upgrading from the economy segment to higher end cars.

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Supply The supply of cars in Indian industry till 1991 was dependent upon the production capacity of individual players. The production of cars has increased from 42,475 units to 181,420 units from 1981 to 1991 respectively. The growth in production of cars has varied in the last three decades from just 1% in 1970-80 to 21% in 1980-90 and above 15% in 1991- 96. The table below gives the production numbers of passenger cars in the past few years. Now in financial year car Production bounced to 19%, 37%,22%,8%, 18% and 14% in 2002 to 2008 respectively. And CAGR of last 6 year is 19.38%. Category Passenger Vehicles Commercia l Vehicles Three Wheelers Two Wheelers Grand Total Automobile Production Trends 2002-03 2003-04 2004-05 2005-06 723,330 989,560 1,209,87 1,309,30 6 0 203,697 276,719 5,076,22 1 6,279,96 7
Passenger Vehicles No.of production 2,000,000
No.of prduction 600,000 500,000 400,000 300,000 200,000 100,000 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 year

2006-07 1,545,223 519,982 556,126 8,466,666 11,087,99 7

2007-08 1,762,131 545,176 500,592 8,026,049 10,833,948

275,040 356,223 5,622,74 1 7,243,56 4

353,703 374,445 6,529,82 9 8,467,85 3

391,083 434,423 7,608,69 7 9,743,50 3

Com m ercial Vehicles

1,500,000 1,000,000 500,000 0 2002- 2003- 200403 04 05 2005- 2006- 200706 07 08

year

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600,000 500,000 400,000 300,000 200,000 100,000 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 year

No.of production

Three Wheelers

Tw o Whe e le rs 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 2002- 2003- 2004- 2005- 2006- 200703 04 05 06 07 08 ye ar

No. of production

Year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Production 608851
723,330 989,560 1,209,876 1,309,300 1,545,223 1,762,131

Year on Year Growth (%)

Growth

Year on Year Growth(%)

40 35 30 25 20 15 10 5 0 37

19 37 22 8 18 14

19

22 8

18

Year on Year Growth 14

2002- 2003- 2004- 2005- 2006- 200703 04 05 06 07 08 Year

CAGR = 19.38% From the above chart, it can be seen that the production of cars was increasing till 2003, with a steep increase in 2005-06, but thereafter, it was tipsy-topsy. The major increase in production of cars in the 80's was due to the entry of Maruti Udyog Limited in 1983, which helped increase car production by 20,000 to 30,000 cars per annum till the early nineties. With the entry of Maruti Udyog Limited, the face of the passenger car industry changed forever. Existing producers who had operated in a protected, high margin environment faced the prospect of not just diminishing market share, but a shift in focus from producing vehicles to selling them. But Maruti Udypg Limited made use of the opportunity open to its technologically superior product and

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increased its capacity from 100,000 cars in FY90 to 240,000 cars in FY96 and 350,000 cars in FY98. The opening of economy in 1993, attracted world majors who joined hands with existing auto majors, to start their operations at the earliest. The first ones to enter the field were Mercedes Benz in joint venture with Telco to manufacture E220, E250D models, Peugeot in JV with PAL to manufacture Peugeot 309L, Fiat in JV with PAL to manufacture Fiat Uno. This has helped in increasing the number of models available to the customer from 8 to 30 and hence provided a wide choice to him. This has also helped in reducing the average waiting period and premium on cars, which were a part and parcel of car cost in the eighties.

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Exports The passenger car exports in the eighties and early nineties had been very negligible as the companies were facing a capacity constraint that was not even sufficient to supply to the domestic market. The poor quality of cars compared to international standards led to poor quantity of exports from the country. But now, the Indian automotive industry has found a ready and accepting global market because of the introduction of new vehicles and components with improved quality and performance. In 1985, MUL started exporting cars to neutralize the impact of foreign exchange outflow. The exports of MUL increased from 100 cars in financial year 1987 to 6,000 cars in financial year 1990. The exports witnessed further momentum in the nineties to reach a volume of 37,161 in financial year 1997. But from financial year 1998 onwards, a southward trend was witnessed with declining sales of 20% 29,747 vehicles. The same continued in financial year 1999 with a further drop of 14% 25,464 units. Financial year 2000 too saw lackluster exports with a 9% fall in export sales that touched 23,271 units. The reason for sharp drop in car exports has been a drop in Maruti udyog Limited exports, which now accounts for 90% of the country's total exports. But in the last two years, the rise in the export of cars from India has been phenomenal. This is largely attributed to the quality of the cars produced by Indian automobile companies to remain competitive in the global car market. There has been great improvement in the quality of Indian cars to come to global terms. Exports are expected to increase further in the near future as, new entrants like Hyundai, Honda Siel, GM and Ford are busy investigating options in the world markets. GM has commenced exports to Nepal and is further considering Sri Lanka as a potential export market. Further Ford is scheduled to commence exports by the end of the third quarter of the current fiscal. In the longer run, as the industry matures, exports should increase as manufacturers strive to attain economies of scale, which will not be possible given the relatively small size of the domestic market. Given below is the table showing the number of cars exported from India and a chart representing the same. The table below gives the production numbers of passenger cars in the past few years. Now in financial year car Exports bounced to 30%, 80%,29%,6%, 13% and 10% in 2002 to 2008 respectively. And CAGR of last 6 year is 25.78%. 51

Category Passenger Vehicles Commercia l Vehicles

Automobile Exports Trends 20022003- 2004-05 2005-06 2006-07 03 04 72,005 129,291 166,402 175,572 198,452 12,255 17,432 29,940 40,600 49,537

2007-08 218,418 58,999

Three 43,366 68,144 66,795 76,881 143,896 141,235 Wheelers Two 179,682 265,052 366,407 513,169 619,644 819,847 Wheelers Grand Total 307,308 479,919 629,544 806,222 1,011,529 1,238,499

Passenger Vehicles 250,000 200,000 150,000 100,000 50,000 0 200203 200304 200405 200506 200607 200708

No.of Export

year

Commercial Vehicles 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 year

No.of Export

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Three Wheelers 200,000 No.of Export 150,000 100,000 50,000 0 200203 200304 200405 200506 200607 200708

Year

Tw o Wheelers 1,000,000 800,000 600,000 400,000 200,000 0 2002- 2003- 2004- 2005- 2006- 200703 04 05 06 07 08 Year

No.of Export

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0.1.1
Year on Year Growth (%)
-

Year 200102 200203 200304 200405 200506 200607 200708

Export 55250
72,005 129,291 166,402 175,572 198,452 218,418

Year on Year Growth(%)

90 80 70 60 50 40 30 20 10 0 80 Year on Year Growth 30 29 6 13 10

30.32579
Growth

79.55836 28.70347 5.510751 13.03169 10.06087

Year 200 200- 200 200 000 200 2-03 04 4-05 5-06 6-07 7-08 Year

CAGR = 25.78%

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Capacity
The Automobile Manufacturers have put up a robust manufacturing capacity of 95 lakh plus vehicles per annum since 1993. Today India is the worlds second largest manufacturer of two wheelers, fifth largest manufacturer of commercial vehicles and manufactures largest number of tractors in the world. The country offers fourth largest passenger car market in Asia today. A supplier driven market, having no more than a handful of vehicular models two decades ago, now offers more than 150 models and variants by way of customer options
The table below gives the production numbers of passenger cars in the past few years. Now in financial year 2007-8 2.24million capacity of Four Wheeler. 12.69million of Two & three Wheeler, 0.79 million of Engine.
Installed Capacities in the Indian Automobile Industry 2007-08 2006-07 2007-08 Installed Capacity (In Million) Installed Capacity (In Million) a) Four Wheelers 1.79 a) Four Wheelers 2.24 b) Two &Three Wheelers 10.59 b) Two &Three Wheelers 12.69 c) Engines 0.29 c) Engines 0.39

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SEGMENTATION OF THE INDUSTRY

The Indian automobile industry can be classified, on the basis of price, in four different segments, into the 'small' car or the economy segment (up to Rs. 2.5 lakhs), mid-size segment (Rs. 2.75-4.0 lakhs), premium car segment which can be divided into lower premium (Rs. 5-7 lakhs) and upper premium segment (Rs. 7-10 lakhs) and Luxury car segment (above Rs1mn). One of the things to note here is that the models shown below have many variants so there will be a price overlapping, which can result in overlapping across segments. This segmentation is done according to prices of basic models. The models in the car market can be fitted to different segments as given below: Category Economy segment (up to Rs. 2.5 lacs) Models Neno, Revo, Maruti Omni, Maruti 800, Padmini Premier 118NE, Ambassador Nova, Fiat Uno, Zen, Hyundai Santro, Daewoo Matiz, Tata Indica, Contessa Esteem, Cielo, Siena, Accent, Ikon, Corsa, Baleno, Lancer, Astra, Escort, Honda City, Swift Desire. Features of the segment Price, Fuel Efficiency Price, Performance

Mid-size segment (Rs. 2.75-4 lacs)

Premium Car Segment (Rs.5-10 lacs)

Price, Performance, Diesel option Status value, performance, Product features

Luxury segment Mercedes Benz and other imported (Above Rs10 lakhs). models

The demand for passenger cars can be segmented on the basis of the user segment as taxi operators, government, non-government institutions, and individual buyers. A major portion of the demand in India accrues mainly from personal vehicle owners. The distribution in 2007-08 of car sales in terms of the above mentioned segments is as given in the chart below. Since, then share of sales in the 56

economy segment has increased with a large number of entrants purveying their wares and with some degree of success. Market Share (%) (2006-07) Economy 49.78 Mid Size 41.64 Premium 8.4 Luxury 0.08 Segment Market Share (%) (2007-2008) 61.49 27.1 11.24 0.15

Chart 1 - Relative market share of different segments

8%

0% 50%

42%

Economy

Mid Size

Premium

Luxury

But there is also another view to segment the Indian Automobile Industry, i.e., on the basis of the type of vehicle compact, mid-size, utility wagons and station wagons. The table below shows the models featuring in different segments stated above: Segment Compact Mid-Size Utility Vehicles Station Models Maruti 800, Alto, Indica, Matiz, Santro, Zen, Palio, Uno, Wagon R Accent, Viva, Accord, Ambassador, Astra, Baleno, Camry, Cielo, City, Contessa, Ikon, Esteem, Indigo, LancerMondeo, Octivia, Nexia, Corsa, Siena, Sonata Armada, Commander, Gypsy, Bolero, MM550, Omni, Pajero, Qualis, Safari, Sierra, Scorpio, Sumo, Versa, Voyager Baleno, Corsa, Palio (weekend), Siena 57

Wagons

(weekend)

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Major Players
There are as many as 15 players in the Indian Automobile Industry, which shows that Indian Automobile industry is the biggest automobile industry in the world, in terms of numbers of players in the industry. The players in the Indian Automobile Industry are listed below: TELCO Mahindra & Mahindra Limited Maruti Udyog Limited Hyundai Motor India Limited Honda Siel Cars India Limited Fiat India Automobiles Pvt. Limited Ford India Limited General Motors India Pvt. Limited Toyota Kirlosker Motor Limited Hindustan Motors Limited Skoda India Limited DaimlerChrysler India Limited Premier Auto Limited Daewoo Motors India Limited Mitsubishi Motors India Limited

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1. Maruti Udyog Limited Maruti Udyog Ltd (MUL) is the largest car manufacturer in the country with a market share of over 47 per cent in the car industry. Established in December 1983, Maruti Suzuki India Ltd. has ushered a revolution in the Indian car industry. The company has been ranked number one in customer satisfaction in the J D Power Survey 2001. Maruti is the only market leader in the world to be ranked number one in customer satisfaction, and the only company to top customer satisfaction rankings for two years in a row. Maruti's quality systems and practices have been rated as a "benchmark for the automotive industry world-wide" by A V Belgium, global auditors for International Organization for Standardization. This car is meant for an average Indian individual who is affordable as well as has elegant appeal. Maruti Suzuki India Ltd. is the result of collaboration of Maruti with Suzuki of Japan. At this time, the Indian car market had stagnated at a volume of 30,000 to 40,000 cars for the decade ending 1983. This was from where Maruti took over. Minicar Maruti 800, India's number one car since 1986, has the lowest manufacturing cost in the world. At the end of March 2008, Maruti had a market share of over 48 per cent of the Indian passenger car market. The company has crossed the milestone of becoming the first Indian company in March 1994, by manufacturing in totality one million vehicles. It is known for its mass-production and selling of more than a million cars. Maruti Suzuki India Ltd. is the India's largest automobile company which entered in the market with affirmed aim to render high quality fuel efficient and low - cost vehicles. Sales figure in the year 1993 has reached up to 1, 96,820. Maruti comes in a variety of models in the 800 segment. Its cars operate on Japanese technology, pliable to Indian conditions and Indian car users. By the year 1998-99, the company has modernize the existing facilities and expand its capacity by 1, 00,000 units. Recently to ward off the growing competition, Maruti has completed Rs. 4 billion expansion project at the current site, which has raised the total production capacity to over 3,20,000 vehicles per annum. With the coming 60

of each and every year, the total production of the company exceed by 4, 00,000 vehicles.

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 In the small car segment it produces the Maruti 800 and the Zen. The big car segment includes the Maruti Esteem and the Maruti 1000. Along with them, the company also manufactures Maruti Omni. Other models include Wagon R and the Baleno. Headquarter in Gurgaon, on 17 September 2007; Maruti Udyog was renamed to Maruti Suzuki India Limited. Both in terms of volume of vehicles sold and revenue earned, the company is India's leading automobile manufacturers and the market leader in the car segment. Sales recorded in June 2008, is Rs. 4,753.58 crores. Product Manufactured: Passenger cars & MUVs Models: Maruti 800, Omni, Zen, Alto, Altura, WagonR, Gypsy, Esteem, Baleno and Versa Installed capacity (nos. per annum) Turnover Gross Profit/(Loss) Investment Employees (in Nos.) Foundation Day 350000 89287 mn 931 mn 38667 mn 9500 February 24, 1981

Now let us see some of the strategies followed by MUL in the recent past. MUL is a joint venture between Government of India and Suzuki motors of Japan, with both having a stake of 50% each in the company. But, on 30 th
May, 2002, MUL was privatized as Suzuki Motors, Japan purchased 4.2% share of Government of India in MUL. Government of India is disinvesting the MUL. This was only the first phase of disinvestment of MUL. In the second phase Government of India will offer another 20% of its stake in MUL to general public by April 2004.

Suzuki had recently rehauled the Board of directors of MUL by

appointing the former nominee of Government of India, Jagdish Khattar was appointed as MD of MUL.

MUL, in its first major strategic initiative after being taken

over by Suzuki, is preparing a three-year road map of growth, which will involve cutting costs by 30% and increasing productivity by 50%. One key feature of the plan is to intensify research and development activities so that all the know-how needs not to be brought from Japan. For instance, if the model needs facelift, the R&D of the engineering wing in India should be good enough to execute it. including vendors, materials and internally within Maruti

The new plan will also address needs to cut down on costs

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organization. It will also enable the company to be more competitive in the market place. The plan is a joint effort of all the Maruti divisions including marketing, finance, production, materials and engineering.

Productivity increase is also a very key component of this

strategy and in the manufacturing; Maruti plants are being benchmarked with the Kosai plant in Japan, which is Suzukis most efficient plant. will seek to become a world class manufacturer by 2005 on the lines of the Kosai manufacturing plant. Under this exercise, production of different models will be concentrated in a single plant rather than scattered production. Suzuki Metal India Pvt. Ltd. In India, with an investment of Rs.100 crore. The joint venture will produce components and cylinder blocks for both Maruti and Suzukis forthcoming twowheeler venture. The venture will also help in hiking the local content level in Maruti cars, as major components for its engines and gearbox would be produced in India.

Maruti has also revamped its manufacturing operations in which it

Suzuki and its partner MUL have decided to float a joint venture,

MUL, in its bid to reduce costs by 50%, will reduce the hours per

vehicle from 24 to 12-13. The company today has 123 robots manning various production techniques. The production system is also being fine-tuned in order to reduce inventory levels. Emboldened by the impressive growth of WagonR in the domestic market, it is now launching a campaign to reposition the vehicle as the value-for-money car with the original tallboy design.

MUL is driving in a new brand positioning for its tall boy WagonR.

Under its new owner Suzuki, MUL has embarked a massive revamp

exercise of its entire dealer network. This includes the termination of non-performing outlets. While around seven dealers have already been terminated, warning notices have been issued to a couple of others. Maruti has a network of around 175 dealers.

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2. Tata Engineering & Locomotive Company Long associated with the truck and bus industry in India, Telco decided to plunge into the highly competitive car market in India, and it has not been a smooth ride. Telco found out that the transformation to a car market was not easy, as it found itself at the receiving end from the Korean and Japanese players. Despite the patriotic twist to the Indica campaign, the car found the competition hot to handle, and its sales have been on a steady descent, after the initial euphoria. To combat that, it launched the petrol version of its Indica car. Named Indica 2000. The 1400 cc engine generates 75 BHP and is capable of propelling the car from zero to 60 kmph in less than six seconds, a record in this category. It had also launched a new version of Indica2000 named IndicaV2. This has proved to be a good success for Telco after the initial outburst. Only recently has Telco crossed the 200000 unit-selling figures for India. Telco's target is to sell another 90,000 a year to break even, implying monthly sales of 7500 cars a month, by no means easy, considering the fact that they are selling about 350 cars a month at present. Telco has launched a car in December, 2002 namely Indigo, which will be followed by three new variants of its premium small car Indica, The company already has five variants of Indica, all conforming to the stringent Euro-II emission norms. They are working on a mid-sized car, Magna, which will be in the market in 2004. They are also developing two-three more variants of Indica, which would be launched in about two years, most probably a three-box and a family-van version of Indica. Currently, Indica is exported to Malta and Italy. Tata Engineering last year exported 500 units of the diesel version of Indica to Malta and, recently, despatched the first shipment of 200 units to Italy. Tata Engineering is looking at exports in a big way to offset the limited response to the car in the domestic market, but it remains to see if they can make much of an impact. The Indica enjoys a market share of 13.0 per cent of the passenger-car market. Indica has continued to remain amongst the top three cars in its segment and has ended the first ten months of the current year with a cumulative sale of 65205 cars. Product Manufactured: M&HCVs, LCVs, Passenger Cars, MUV Models: Indica, Indigo, Sumo, Estate, Sierra and Safari Installed capacity (nos. per annum) Turnover Gross Profit/(Loss) Investment 360000 81642 mn (4304) mn 56381 mn 64

Employees (in Nos.) Foundation Day

24440 September 1, 1945

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Now let us look at the major strategies followed by Telco in the recent past. Telco is in talks with the MG Rover Group and Iran Khodro for marketing of Indica and Indigo. Negotiations with MG Rover have reached the final stages to export Indica and sell it in UK. Rover has agreed to Telcos demand to use the Indica brand name on every Indica sold abroad. The 1400cc Indica will sell as Rover-Indica. Rover has also sought permission to sell Indica in other European countries. The company is also finalizing the plans to launch its new D segment car Magma, by 2004. Indigo, the latest offering from the Tata Engineering stables, is counting on an aggressive pricing strategy to edge out competitors Accent, Siena, Ikon and Esteem in the midsize car market and is targeting a sales of around 1200 cars per month. Telco has started work on its brand new second generation platform that will eventually replace the existing car and UV platforms in the automakers stable. The new platform is a three-year venture. The automaker is also interested in launching the station wagon variant of Indica.

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3. Hyundai Motors India Limited Hyundai Motors India has made the small car the pivot of their strategy in India. Although it is also making its presence felt in the mid-size segment. In January 1998, Hyundai Motors India, a subsidiary of the $27-billion Hyundai of South Korea, announced the launch of its 999-cc Santro. The model came in five variants, the first time an Indian consumer was offered a variety of choices. Clearly, Hyundai's strategy was aimed at taking on the market leader, MUL. But by pricing the deluxe model at Rs 4 lakh, it was also bridging the gap between the small and the middle segments. Besides bracing up for losses in the initial years, Hyundai has been banking on exports too. In the long run, low production costs and component-manufacturing skills will make cars made in India competitive. However, shakeouts are bound to happen on the road to profits. The reason bring that investments necessary for a large plant are simply huge. HML has been focussing on expanding its market share in an increasing market size. For instance, MUL accounts for 50 per cent of the market share while 14 other players share the balance 50 per cent. According to market surveys, 40 per cent of Santro customers are first time buyers who no longer see Maruti 800 as the benchmark. Though price is a sensitive issue, the fact is that new technology and lower interest rate driving down the equated monthly instalment have combined to encourage novice buyers to go in for better cars. The market share of Hyundai in 2008 was 25.5%, which was mainly due to the increasing sales of Santro. Hyundai is also planning to make India as its production hub for Santro so as to minimise production costs. Product Manufactured: Passenger Cars Models: Santro, Sonata and Accent Installed capacity (nos. per annum) Turnover Gross Profit Investment Employees (in Nos.) Foundation Day 120000 30592 mn 3896 mn 16204 mn 2461 May 6, 1996

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Now let us look at the major strategies followed by Hyundai Motors in the recent past. Hyundai has got the permission to manufacture cars in China, becoming the latest automaker to join the race for the worlds fastest growing car market. In a bid to increase the production of Santro Zip Plus, Hyundai Motor India has asked all its employees to put in an additional one hour a day, instead of starting a third shift. The employees would be paid overtime wages for the additional hour they put in. After the success of its car venture in India, Hyundai Motor is planning to foray into commercial vehicles. Hyundai is planning to manufacture trucks in its Chennai plant. They may enter the Indian commercial vehicle market by launching a 2.5 tone truck. Hyundai has also lined up plans to launch a super-B segment car Getz and a multi-purpose vehicle Carens. While Getz is likely to be priced at Rs.4.5-5.5 lacs, Carens is expected to be introduced with a price tag of Rs.10 lacs. The company also plans to upgrade its money spinning midsizer Accent within the next two years. Hyundai is to make an investment of Rs.300 million over the next three years in its Indian subsidiary. The fresh infusion will be used to expand the capacities and fund product launches, which includes a SUV Terracan in the first half of 2003 followed by the premium hatchback Getz and a MUV Carens. The company is also planning to make its Indian arm as the manufacturing hub for Santro, so as to reduce the cost of production and export the car to neighboring countries.

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4. Ford India Limited Established in 1995 as a joint venture with the Mahindras, Ford India, a subsidiary of the Ford Motor Company and manufacturers of the Escort and Ikon in India, is headquartered in Maraimalai Nagar near Chennai. Ford's commitment to India is embodied in its present investment of $ 500 million. In March 1999, Ford India announced the launch of a new petrol model, Ford Escort Sport-E. The Ford Escort Sport-E is a limited edition, petrol-driven car in the 1.6 Zetec categories. Ford India's Ikon was launched on May 26, 1999. The flexible manufacturing facility at Maraimalai Nagar, where the Ikon is manufactured has an annual capacity of 50,000 vehicles - but can be expanded to 100,000 with increase in demand. Market Share of the Ford India Limited is 2.4% in 2008. Product Manufactured: Passenger Cars Models: Escort, Ikon and Mondeo Turnover Gross Profit Capacity Investment Employees (in Nos.) Foundation Day 30592 mn 3896 mn 120000 units p.a. 16204 mn 2461 May 6, 1996

Now let us have a look at the various strategies followed by Ford India in the recent past. Ford India following the lead of cross-town rival GM, is reviving interest free loans to lure customers to its showrooms amid an uncertain economic climate. Ford Motor is pulling the plug of its Think electric vehicle division due to poor customer demand and lack of government support for environmentally friendly cars. They think that there is no mass market for environmentally friendly cars. Ford Motors is steering towards making its Indian arm the production and sourcing hub for low cost passenger cars due to lower labor costs.

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5. Hindustan Motors Limited Hindustan Motors Ltd (HML) is the oldest passenger car manufacturer in the country. It also has a small presence in the multi-utility vehicle and the heavy commercial vehicle segments. The later is generally manufactured for exports. Other than the automotive sector, the company has diversified into earth moving equipments and power products. In the passenger car segment, the company has the well known Ambassador and Contessa models. It has recently tied with Mitsubishi of Japan for manufacturing the Lancer range of cars. At present, the company has a market share of 1.0 % in the car segment. Product Manufactured: Passenger Cars & MUVs Models: Ambassador and Lancer Turnover Gross Profit Capacity Investment Employees (in Nos.) Foundation Day 17930 mn 1265 mn 64000 units p.a. 6146 mn 11,270 February 11, 1942

Now let us look at the major strategies followed by HML in the recent past. Hindustan Motors has come out with homemade version of Mitsubishis Pajero, with an entry-level price tag of Rs.19.7 lacs. The countrys oldest surviving carmaker Hindustan Motors is all set to unleash Japanese fury on Indian roads. The firm is in negotiations with its technology partner Mitsubishi Motor Corp, Japan to roll out a host of luxury cars and MUVs, ranging from Galant to Space Star. HML is planning to launch LPG variants of Ambassador and the rural transport vehicle, which are expected to arrest declining sales. HML is also planning to launch a host of upgraded versions of Ambassador and Lancer cars to face competition in future and stage a turnaround. HML has recently launched Pajero in Chennai, after a successful launch in Delhi and Mumbai.

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6. General Motors India Ltd. General Motors India Ltd. is joint venture of General Motor Corp, USA and Hindustan Motors, India, constituted in 1994. The company has a market share of 3.2% in the Indian Passenger car market. Product Manufactured: Passenger Cars Models: Corsa and Astra Turnover Gross Profit Capacity Investment Employees (in Nos.) Foundation Day 5119 mn 25000 6870 mn 461 April 15, 1994

Now let us look at the major strategies followed by GM in the recent past. General Motors has drawn up an aggressive launch strategy, which it expects will increase its sales numbers four-fold in the next three years. The models to be launched are Vectra, Zafira, Subaru and Chevrolet Pather. The company is all set to enter the small-car segment with a slew of products after its European and Asian alliances with Suzuki and Fiat for product sharing and co-branding. The company is finally revving up to implement an aggressive blueprint for expansion in India. The company wants to capture volumes and will not fight shy of tying up with rivals to leverage the market. Nubira, once touted as Daewoos major offensive for India, seems finally racing in, but this time round under the GMI brand name. The company will market Nubira in the Indian market. GMI is also planning to enter other Asian markets by 2004, so as to increase its market share in the Asian passenger car market.

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7. Honda SIEL Cars India Ltd. Honda SIEL Cars India Ltd. Is a joint venture between Honda Motor Corp, Japan and SIEL Group, India, constituted in 1997. Honda SIEL Cars India Ltd. Has a market share of around 4.2% in the Indian passenger car market. Sales recorded up till June'08 is around 2,843.53 crore. Product Manufactured: Passenger Cars Models: City and Accord Turnover Gross Profit Capacity Investment Employees (in Nos.) Foundation Day 7200 mn 623 mn 30000 units p.a. 3811 mn 811 December 5, 1997

Recent strategies: Honda has planned a two-fold expansion plan for Indian market. Its Indian arm appears to be targeting the premium segment even this time around. While on one hand it plans to import top end models in the Completely Build Units (CBUs) forms, it is also planning to enhance the existing range of models manufactured in India by introducing newer luxury variants. Honda SIEL Cars is joining the bandwagon of mid-sized carmakers in India playing the price card to boost sales. The company is preparing to launch a stripped down base-version of its premium mid-sizer City. The Company is contemplating launching its much famed luxury sedan Civic. The car is, likely to be introduced as a fully built imported model, is expected to be positioned as a premium C segment model to take on Skoda Octavia and Mitsubishi Lancer. The firm is also readying a plan to enter the premium sports utility vehicle segment with its close to Rs.20 lakhs CR-V. This model would be pitted against Mitsubishi Pajero and the Hyundai Terracan.

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8. Fiat Automobiles India Ltd. Fiat Automobiles India Ltd. is a joint venture of Fiat Group, Italy and Premier Automobiles, India, constituted in 1997. Fiat India Pvt. Ltd. is an Industrial Joint Venture, incorporated on January 02, 1997, between Fiat Group Automobiles and Tata Motors Limited originally. This joint venture resulted in the formation of Fiat Automobiles Pvt. Ltd. which has manufacturing locations in 60 countries. It was hoped that this new venture would produce cars which give good performance, are beautiful and which would be suitable for Indian conditions . Product Manufactured: Passenger Cars Models: Uno, Siena and Palio Turnover Gross Profit Capacity Investment Employees (in Nos.) Foundation Day 3905 mn 50000 units p.a. 16900 mn 2171 December 16, 1997

Recent Strategies: Indian consumers might soon be able to drive around Fiats Alfa Romeo and Multipa in the country as Fiat India looks at the possibilities of importing the car as completely built-up units (CBUs). Fiat India has launched its new station wagon Palio Adventure. The vehicle has replaced the present station wagon by Fiat, Siena Weekend. It is expected to be priced at around Rs.6 lacs. Fiat India is unleashing another price war in the Indian car market. The company is planning to cut the price of Uno, by Rs.15000-20000 as part of efforts to boost sales.

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MARKET SHARE OF THE PASSENGER CAR COMPNY IN 2007-08

MUL has regained some of its market share in last couple of months. In April, this year the market share of MUL was around 47.3%, but in 2008, the market share of MUL has climbed to around 50%. Hyundai is second with 25.5% market share, closely followed by Telco with 13% market share. The following table shows the market share of leading automobile players in the country:
MARKET SHARE OF PASSENGER CAR Passenger cars 2006-07 200708 Maruti 46.3 47.3 Hyundai 24.5 25.5 Tata Motors 15.4 12.7 Honda Siel 4.7 4.2 GM 1.3 3.2 Ford 4.9 2.4 Mahindra Renault 0 1.8 others 2.9 2.9

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75

The countrys entry-level model Maruti 800 continued to be the hot favorite of the year with a market share of 21%. Maruti 800 continued to be the largest single selling model in India and attracted buyers despite an almost three-week long waiting period. According to the latest data released by Society of Indian Automobile Manufacturers (SIAM), the premium hatchbacks of Maruti (WagonR, Zen and Alto), Hyundai (Santro) and Tata (Indica) also raced up on the sales chart, while the Fiat Palio lost steam and skid down the graph. Riding on this surge, Maruti closed the October 2002 with a 50% share in the passenger car market, while Hyundai emerged second with 17%, followed by Tata with 13% share of the pie.

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Collaborations and Mergers

Now let us look at the brief features of each of the major players: Collaborators Company Foreign Indian Company Company Daewoo Daewoo Motors DCM Group, Corporation, India Ltd. India South Korea General General Motors India Hindustan Motors Corp., Ltd. Motors, India USA Hindustan Motors Mitshubishi, Birla Group, Ltd. Japan India Honda Motor Honda SIEL Cars SIEL Group, Company, India Ltd. India Japan Hyundai Hyundai Motor India Corporation, Ltd. South Korea FIAT India Premier FIAT Group, Automobiles Italy Automobiles Ltd. Ltd., India Mahindra & Ford Motor Ford India Ltd. Mahindra Co., USA Ltd., India Mahindra & Mahindra Ltd. Mahindra Group Establish ed in 1995 1996 1948 1997 1996 1997 1996 Models Matiz, Cielo, Nexia Astra, Corsa Ambassador, Contessa, Lancer Accord, City Santro, Accent, Sonata Uno, Siena, Siena Weekend, Palio Escort, Ikon, Mondeo Armada, Commander, Bolero, Scorpio, Marshall Maruti 800, Omni, Zen, Alto, WagonR, Esteem, Versa, Baleno, Gypsy, Maruti 1000 Mercedes Benz - E Class, S Class, C Class 77

1945

Maruti Udyog Ltd.

Suzuki Motor Corp., Japan Mercedes Benz AG, Germany

Govt. of India

1983

Mercedes-Benz India Ltd.

1995

Skoda Auto India Pvt. Ltd. Tata Engineering and Locomotive Ltd.

Toyota Kirlosker Motor India Ltd.

Vaulxvaughan , Audi, SEAT International Automotive Design, UK; Robert Mosch GmBH, Germany; I.DE.A. Italy Toyota Motor Corporation

Tata Group, India

1989 1954

Octivia Sierra, Estate, Indica, Sumo, Indigo

1937

Qualis, Camry

Name of joint venture Birla Group of Companies (Hindustan Motors) with General Motors of the US Premier Automobile Ltd. with Peugeot of France Telco with Mercedes-Benz of Germany DCM with Daewoo Motor Company of the Republic of Korea Mahindra and Mahindra with Ford Motor Company of the US Sriram Industrial Enterprises Ltd. with Honda Motor Company of Japan Hindustan Motors with Mitsubishi Motor Corporation of Japan Hyundai Motor Company, Republic of Korea Hero Cycles Ltd. Ludhiana with BMW, Germany Volvo AB, Sweden Kamal Sabre Motors Ltd. with JD

Foreign equity participation (%) 50.00

Annual capacity 25 000

Implementation schedule Production already launched (Opel Astra) Production already launched (Peugeot 309) Production already launched (Mercedes E220) Production already launched (Cielo) Production already launched (Escort) City

50.00 76.00 91.23 50.00 90.00 10.00 100.00 51.00 100.00 100.00

60 000 20 000 160 000 125 000 30 000 30 000 100 000200 000 10 000 Not indicated 720

Commercial vehicles Not Indicated (sports 78

Automotive Design of South America and Sabrae International Corporation, US Premier Automobiles with Fiat, Italy Maini Amerigon Car Company with Amerigon Inc., US and Asian Equity, UK M/S Overseas Concept Auto Ltd., Chandigarh with Concept Industrial Management Ltd., UK 74.00 54.25 100 000 I-6 000 V-80 000 2 200

car) Over a period of seven years from 1997 Bangalore (electric car) 1996 (not commenced) Rajpura, Punjab

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Key Issues in Automobile Industry

Key Earning Drivers
1. Government policy The GOI policy will continue to dominate the supply of cars. The different norms with great significance to the sector are import duty on CKD/ SKD kits, auto components, foreign exchange and neutralization schedule for new ventures etc. 2. Excise duty The car industry had been asking for reduction in excise duty so as to reduce the end prices of cars to customers and increase the slogging demand. With continuation of liberalization and shift in the perception (of car being a luxury product) will lead to reduction in duties over a period of two to three years. This will reduce the prices of cars leading to further boost in demand. 3. Sales tax duty The levy of uniform sales tax in all the states, will have a negative impact on the demand front, due to increased prices. 4. Competition in the sector With the entry of all the world majors in the car segment, the competition is expected to heat up substantial in the next two years. This will lead to shakeout in the industry and only those companies having a backing of multinationals with strong commitment will be able to continue operations in the segment. This may also lead to take over activity in the Indian car industry. 5. Release of new models The flood of variations in existing and new models will provide wide range of choice for the customer one year down the line. Also these new models will be able to carve a niche for themselves in the crowded market. 6. India as a manufacturing hub for cars More and more multi national companies are making India as their production hub. These companies include Hyundai and Fiat and Toyota. These companies are manufacturing cars in India and are exporting to other countries of the world. The reason for selection of India as their manufacturing hub is as follows: 7. Cheaper labor costs 80

As labor in India is available at much cheaper rates then other developing countries in the world. As labor constitutes about 8% of the total cost of the car, more and more MNCs are approaching India to set up their manufacturing units in the country. This is the reason why about seven companies are interested in buying the assets of the phased out company Daewoo. 8. Lower technological costs In India technology and technological staff is available at about 10% of the costs of these in any developing countries. Hence, MNCs find India good in terms of cost reduction as the technology can be imported from the country of parent company and the cheaper technological personnel can be hired from India. 9. Import Duty As India is one of the countries with very high import duties, hence MNCs find it easier to set up plant in the country than to import CBUs from the parent company.

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Governments decision on second-hand car imports

Today one of the important discussions in the industry circles is that whether government will release quantitative restrictions, which will allow free import of second-hand cars in the country. Recent report in Economic Times states that the consumer will get internationally acclaimed models at the price of domestic cars. The industry circle has already started lobbying against this. The argument against this is that free imports will sound a death knell for local auto industry. Here we can take the example of New Zealand where due to free imports Japanese exports flooded the local market, and killed the auto industry there. Another argument is that robust indigenous industry is essential for the growth of economy and employment. However every coin has two sides and there are advocators of this policy. Their school of thought is that allowing free imports would enhance competition, which would push the domestic industry to produce better products, more variety at lower prices. The government of India has time till April 2001 to decide upon this and only time will tell whether we will be driving Chevrolets and Toyota Corollas at the price of Maruti 800s and Zen.

Will we ever get Affordable SUVs

A big SUVs like the Mercedes, BMW or Mitsubishi sets the hearts of many urban cowboy. In many other country MUVs and SUVs account of 20-30% of personal transport vehicle but in India there is a clear caste divide between comfortable personal cars and rough SUVs. Till recently Indian buyers had very few vehicles that could claim to be SUVs but this is soon going to be changed. Competition is very high so Toyota and Lancer introduced a best model that retains more performance, look, comfortable and the better prices and there are improved versions. Tata and HM also offering new models which has the less market share and not grip on imported market, Mitsubishi also introduced new segmented cars which range between 20-34 lakh. GM also come up with Isuzu Panther which may have an engine made by HM. Maruti also introduced the grand Vitara with help of Suzuki also Toyota also launch the Land Cruiser Prado one of the world top SUVs. Also expecting from Honda and Toyota soon they launch a very cute and competent smaller SUV. Till now SUVs in India were very costly for middle class people to purchase, but with the introduction of Mahindra Scorpio and Toyota Qualis, the scenario has changed. They may not have the elegance and class of costly SUVs such as

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Prado, Pajero and LAN cruiser, but they still rule the hearts of thousands of Indians due to lower price tags.

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Imported Cars that May soon be Available

Under WTO pressures the government had to open the doors for the import of new and second hand cars in the last budget. So these were allowed but with such stringent restriction that the administration barrier ban. Customs duties were also raised as further deterred. As few affordable second hand cars will ever be less than three years old, this restriction has virtually died up the possibility of all imports and the further restrict infill process. A few models of sport car, luxury cars and SUVs from existing carmaker can be expected. Hyundai, Skoda, Mercedes, Maruti are in the process of getting a few models through the paces. Daimler Chrysler will certainly be offering for sale a few unit of sport Mercedes. BMW is the only company that plant is located in India and the model is submitted for the testing also is also one of the largest producers of luxury cars and its 7 series is the most advanced luxury car in the world today.

The Luxury segment Shootout

Once there was time, when it was difficult to find a single luxury car on the roads of major cities of India, but the picture is not so now, India now has a virtual alphabet soup of luxury car from the Accord to the Camry, Mercedes-Benz, Mondeo, Octiva, Sonata, and Vectra. Many people wonder how the auto companies can afford to launch so many top-end models when the demand is hardly 1000 cars a month.

Hatchbacks still rule the Indian market

The success of the Fiat Palio, Tata Indica and Hyundai Santro has confirmed that the small hatchbacks still rule the Indian Automobile Market. In 1998 the Maruti 800 Indias first hatchbacks ruled the roasts and accounted for about 45% of domestic car sales while the bigger Zen accounted for 19%. Then the Wagon-R, Santro, and Matiz joined the Zen and these B-segment hatchback shrank the share of the 800 while the share of the segment overall rose to 52%.

Changing Paradigms in a Competitive Market

The Advent of a multitude of a new car is quckilily changing the way people perceive them. An entire generation accustomed to a two car world are bewildered that there is now so much choice even though the choice for Indian customers is much smaller markets like Thailand, Taiwan, Malaysia, and Indonesia where buyers can choose from over a hundred different models of cars and SUVs. In the old days a car was seen as just a means of transport. Now buyers want much higher level of performance and comfort. As buyers slowly move to bigger and more powerful cars, they are beginning to appreciate 84

that more powerful cars are easier to drive and safer when overtaking. With more engine power they also become more aware about the need for better ride, handling and safety. Power steering which had earlier been luxury is now a standard offering by an every brand. Good air conditioning too is now as a standard requirement. Styling too has become styling too has become a great area of interest and concern. The Indian buyers has already demonstrated that he is not willing to buy any old model and customers quickly rejected the angular shapes of older generation models like the Peugeot 309, Fiat Uno, and even the first AE-class Mercedes.

New Models to be released

There are a whole lot of new car launches knocking the door of Indian Automobile Industry. 2003 will see a lot of new launches and new variants of the existing cars to be flooded in the market. The major cars waiting for launch in 2003 are as follows:

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ANALYSIS

86

SWOT ANALYSIS:
STRENGTH
AVAILABILITY OF SKILLED MANPOWER WITH ENGINEERING AND DESIGN CAPABILITIES India has a growing workforce that is English-speaking, highly skilled and trained in designing and machining skills required by the automotive and engineering industries. In a combined assessment of manpower availability and capabilities, India ranks much ahead of other competing economies (see figure). Many Indian and global players are leveraging this advantage by increasingly outsourcing activities like design and R&D to their Indian arms. The Society of Indian Automobile manufacturers (SIAM) estimates that automotive vehicle manufacturers are expected to invest US$ 5.7 billion in the Indian market from 2005 to 2010. Of this, about US$ 2.3 billion will be on research and development and the rest probably on capex. Some examples of investment in areas leveraging the engineering and design capabilities of India include: MICO, the Indian operation of Bosch and a key player in fuel injection equipment, ignition systems and electricals, has invested in the MICO Application Centre (MAC) for R&D. It has emerged as a key global R&D competency centre catering to the entire Bosch Group. It is the first of its kind in India and the Bosch Groups first outside Europe. 87

GM set up a technical centre at Bangalore that became fully operational in September 2003. The centre focuses on both R&D and engineering, and takes up high-value work to complement current research programmes, as well as new exploratory research projects.

GRAPH 9 INDIAS COMPETITIVE POSITION

GRAPH 10 WORKING AGE POPULATION 88

89

 ENGINEERING SKILLS: Increasingly OEMs around the world are not only looking at lower cost but also adequate design capabilities in the outsourced countries. India has strong competitive advantage in design and engineering skills vis--vis other low cost economies (China & Thailand). India is now the ninth country in the world to design a vehicle on its own. India has a vast pool of skilled manpower every year; approximately 19 million students are enrolled in high schools and 10 million students in pre graduate degree courses across India. Moreover, 2.1 million graduates and 0.3 million post-graduates pass out of India's non-engineering colleges.

PRESENCE OF STRONG INDUSTRY ASSOCIATIONS AND SUPPORTING INDUSTRIES INDUSTRY ASSOCIATIONS The Indian automotive industry is well served by the two industry associations Society of Indian Automobile Manufacturers (SIAM) that represents the OEMs and Automotive Components Manufacturers Association (ACMA) that represents the components industry. Both associations actively engage with industry, government and other stakeholders to promote the interests of the industry and improve competitiveness.

90

GRAPH 11 AUTO COMPONENT PARTS

91

 SUPPLIER BASE Indian automobile manufacturers are well supported by the automotive component industry. Indian companies produce a range of automotive components like engine parts, electrical parts, equipments etc. Ford is leveraging the large, high quality automotive supplier base of India and has made India a component-sourcing base. This has helped Ford reduce the cost of manufacturing and increase its exports. Ford India awarded the Q1 supplier status to 10 suppliers to help them export their products to Ford worldwide.

11th largest passenger car in the world and is expected to be the 7th largest market by 2016 source IBEF

VIBRANT

AND

COMPETITIVE

AUTO

COMPONENT

INDUSTRY Proficiency in Understanding Technical Drawings and well conversant in all Global Automotive Standards: American, Japanese, Korean, European Standards etc. costs Flexibility in small-batch production. Growing Simulation Indian automotive component industry has CAGR of 25 % (2000-2005) and it is projected to grow up to 34 % (2005-2014).
92

Appropriate Automation leading to economic production

IT

Capability

for

Design,

Development

&

 STABLE ECONOMIC POLICIES Continuity in reforms and policies India targets to emerge as the manufacturing hub for small cars

93

 PROVEN PRODUCT DEVELOPMENTAL CAPABILITIES Capabilities to develop complete vehicles and systems More than 125 Fortune 500 (including large auto companies) have R&D centres in India Companies can leverage on Indias acknowledged leadership in the IT industry EXPORT POTENTIAL Increased outsourcing has lead to a large potential to export components and vehicles to other markets

COMPETITIVE MANUFACTURING COST Implementation of VAT, has positioned India as one of the leading low cost manufacturing sources HIGH QUALITY STANDARDS 9 Indian component manufacturers have won the Deming Prize for quality ISO certified Most leading component manufacturers are QS and

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 THE LOCATION ADVANTAGE

There are also strategic reasons for Indias move up the car export sweepstakes. India is located between the Pacific Rim countries and Europe. It is also closer to the East Coast of the US compared to major car exporting nations such as Japan and South Korea. Shorter distance has a twin benefit. Reduced transportation costs as well as reduced delivery cycle time. This is why the South Korean car giant Hyundai plans to gradually shift its export base to Chennai so as to take advantage of low cost and shorter delivery time for exports to European and American markets. Hyundai is aiming to emerge among the world's top five carmakers by the end of the current decade. To achieve this, it has to sell 5 million cars a year globally, a sharp increase from the 3 million units that it sells now. Most of these will roll out of its facility at Irungattukottai near Chennai. GOVERNMENTS HELPFUL STANCE

Government has realized the importance of making India an export hub for small cars and thus in their auto policy its commitment comes forward which is very positive and beneficial for exports. Some of the excerpts from the auto policy are shown below: Make India an international hub for manufacturing small, affordable passenger cars for sales worldwide Ensure a balanced transition to open trade at minimal risk to the Indian economy and the local industry
95

Provide a conducive environment for modernisation and facilitate indigenous design, research and development Assist development of vehicles propelled by alternative energy sources Develop safety and environmental standards at par with international standards

FOREIGN DIRECT INVESTMENT Automatic approval has been granted to foreign equity investment up to 100 per cent for the manufacture of automobiles and components. IMPORT TARIFF Import tariffs have been fixed in a manner to facilitate development of manufacturing capabilities as opposed to mere assembly. For motor cars and multi-utility vehicles (MUVs), the import tariff has been designed to give maximum fillip to manufacturing without extending undue protection.

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WEAKNESSES

LOW INVESTMENT IN R&D Indian vehicle manufacturers have been spending less than 0.4 per cent of sales on R&D. Companies like Daimler -Chrysler spend over eight per cent of their huge turnover on R&D. Also, investment in R&D by Indian auto components companies is also very low (1 percent of sales) as compared to Korea (7 percent of sales). QUALITY CONSIDERATIONS & LABOUR

PRODUCTIVITY Some of the automobile (vehicles) industry does not matches global standards; Further, much of the low labour cost advantage is nullified on accounting for the relatively low labour productivity in the country as compared to international norms. LOW INTERNATIONAL CREDIT RATINGS

The growing domestic investor confidence is still not paralleled by a similar outlook by foreign investors. A large chunk of FII funds is still bagged by other Asian economies such as Malaysia and China due to their better credit ratings by international agencies.

97

 BUREAUCRATIC PROCEDURES While long bureaucratic procedures and interventions have reduced recently, they still remain a major deterrent to our industrial growth. A recent case in point is of the biotech startups facing hurdles at all stages of establishment. INADEQUATE GROWTH OF DOMESTIC MARKET We cannot view the export potential in isolation, to exploit export potential evolution of the domestic industry is indispensable. China's per capita income of $800 has driven its domestic automobile industry past the inflexion point. India's per capita income ($250) has to increase to at least $600 before something similar can happen here. In 1999, India sold more cars than China. Last year, China's car sales (1.2 million) were double that of India's (600,000).

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OPPORTUNITIES LARGE AND GROWING DOMESTIC DEMAND Demand growth expected to be around 10 % CAGR making India one of the fastest growing markets
VEHICLE PENETRATION

GRAPH 12 VEHICLE PENETRATION WORLDOVER

Source: ACMA

99

 LARGE MARKET WITH SIGNIFICANT POTENTIAL FOR GROWTH IN DEMAND India offers a huge growth opportunity for the automobile sector the domestic market is large and has the potential to grow further in the future due to positive demographic trends and the current low penetration levels.

GRAPH 13 GROWING CONSUMING CLASS

CHANGING SEGMENTS -

LIFESTYLES,

DRIVING

DEMAND

FOR

NEW

Fast paced urbanization to rise from 28% to 40% by 2020 Upward migration of household income levels
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Middle class expanding by 30-40 million every year Growing working population

Consumers in India are now more informed, sophisticated and demanding. Urban consumers have been especially exposed to western lifestyles through overseas travel For example, more than 5 million Indians traveled overseas last year and this number is expected to increase by 15 per cent to 20 per cent per annum. An increase in the number of working women and the prevalence of nuclear double income families, especially in urban areas, are other trends shaping lifestyles. These changes are driving an increased need for personal transport, especially in segments like working women, young executives and teenagers. This has led to the growth in demand for motorcycles, ungeared and automatic scooters and compact cars. Across the automobile spectrum, consumer aspirations are driving demand for upper end models in all segments. SLOWDOWN IN GLOBAL AUTO INDUSTRY The global auto industry is going through the worst slowdown in 20 years. As a result companies like GM, Ford, Hyundai, and Renault are increasingly looking at low cost countries like India, China and Thailand for sourcing passenger cars and components at cheaper costs. STRATEGIC ALLIANCES Indian auto firms can form strategic alliances with foreign companies like Renault did with mahindra. Moreover, with the tariff reduction
101

because of Chinas commitments under WTO, some of the Indian auto products have an opportunity to enter Chinese market.

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 INDIAS

GROWING

POWER

IN

WORLD

TRADE

NEGOTIATIONS

The failed ministerial meet of the WTO at Cancun, Mexico had India surfacing as an opinion leader amidst similar developing countries in raising multilateral issues. For India the most significant outcome of Cancun, was that it changed the politics of world trade.
FREEDOM FOR ADRS, GDRS

Raising international funds through listings on foreign stock exchanges is becoming an increasingly viable and lucrative option. The relaxation measures by the finance ministry in this regard have opened up avenues for Indian corporates to raise larger funds.

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THREATS Competition In the last four years, India's US exports for automobile components have increased marginally by $78 million whereas China's exports zoomed by a billion dollars. China now exports 10 times more components than India. Thailand does 3 times more4. China's US export growth rate (27%) and Thailand's (36%) are higher than India's (25%)5. Also, China has larger economies of scale and lower labour costs. Thailand has excess capacity and depreciated assets. Mexico and Brazil enjoy the benefits of Free Trade Agreement (FTA) with US.so such kind of competition poses the greatest threat.

GRAPH 14 CHINAS COMPETITIVE ADVANTAGE

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 DOMESTIC POLITICAL DOMINANCE The need is that there should be an attempt to drive the multicultural and multicommunity values of the nation. The team spirit is lacking in India. We do not have a brand for governance. India will not and should not inherit the brand of the ruling party. That brand that is India should be inherited and held in custody by the ruling party. PERCEPTIONS OF INDIANS ABROAD
Much of the focus on India in the US and the UK these days is related to outsourcing of white-collar jobs. The fever pitch borders on racism, even in well-respected editorials, publications and Web sites. There are many examples, but when we get the foreign media in India, we usually get busy convincing them about our woes with Pakistan, glorious tales of our past and, recently, even about our internal differences/divisions.

INCOMPETENT SUPPLY CHAIN

Our supply chain management has a dismal performance as compared to the fantastic supply chain of the china. So in spite of our having a good

105

geographical location we lose the contracts. So improvements in supply chain are viable. BILLS PRICES OF FUEL ARE INCREASING DAY BY DAY LIKE ANYTHING. COUNTRIES. INCREASING INTEREST RATES HAVE BEEN A CONCERN; HOWEVER IT HAS NOT SLOWED DOWN THE DEMAND SO FAR. INDIA IS AMONGST THE HIGHLY PETROLEUM COUNTRY AND ALSO THE PRICE FUEL IS HIGH THEN MOST OTHER PRICES OF CRUDE OIL RISING LEADING TO HIGHER FUEL

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PEST Analysis

The automobile has become the darling of not only the rich but also the middle class in the Indian society but the picture is fast changing due to mass motorization. Thus it is very important to study the environment in which the automobile industry operates. Environmental forces, which are especially important for one organization, may not be same for other, and over time their importance may change. It is useful to consider what environment influences have been practically important in the past and the extent to which there any impacts which may make any of these more or less significant in the features for the organization and its competencies. In order to answer some of the key question about forces that work in the macro environment, a PEST analysis indicating the importance of political, Legal, Social and Technological influences on organization carried out. The automobile industry is influences to a great extent by environmental forces such as Political, Economical, Social, and Technological the following PEST analysis of automobile industry? And which of these are the most important at the present time? Or in the next few years. Political Environment Economical Environment Social Environment Technological Environment

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PEST ANALYSIS

POLITICAL-LEGAL FACTORS
Many political factors affect and create opportunity or threat for the industry. Due to the socialist leaning of some of the ministers many multinationals had to move out of India in the late 70s. A deep-seated fear of multinationals made the political leaders to shut the door on giant multinational companies for painfully long times. When things turned from bad to worse, the situation was sought to remedy through a bold liberalization Programmed in the early 90s. Apart from a willingness to bend the rules and get along with the times, political stability is also essential foe economic growth. After liberalization steps taken by P.V. Narasimha Rao government 1992, they could not make the bold decision on liberalization or could not implement the planned programs because of the Babri Masjid demolition and subsequent securities scams. The NDA government also could not go for bold decisions on disinvestments, power sector reforms, and labor reforms etc. due to the scams of the ministers. Recent UPA government is also find troubles because of the left parties who are giving support. The political party in power decides the legal framework. The government, therefore, may legislate on matters like wage fixation, managerial remuneration, safety and health at work, location of plants, entry of multinationals, price controls, import-export policy, licensing policy etc. During the license-permit-raj that prevailed till the late 80s, licensing policies, quota restrictions, import duties, FOREX regulations, restrictions on FDI flows, controls on distribution and pricing of commodities, regulations on all aspects of corporate functioning, had really put the captains of industry in a spot and pushed them to the wall. The liberalization measures, macroeconomic reforms, and structural adjustments brought about in the early 90s have altered the economic scenario quite dramatically. Obviously companies that want to do business globally must pay attention to the above developments closely and learn to adapt them selves to the laws of the land. The rules of competition, trademark rights, price controls, product quality

108

lows, and a number of other legal issues in individual countries may be of special importance to global companies. The liberal policy on foreign participation through technical and financial collaboration in early eighties led to substantial product up gradation and introduction of new models. But it was alleged that the policy was discriminatory in favor of MUL, while others like Telco, PAL, HM were denied permission to produce cars in collaboration with Japanese companies. The GOI controls the car sector by way of framing policies on depreciation norms, import duty on cars and parts used in it, petrol prices and import duty of steel. The GOI policy will continue to influence the supply of cars. The different norms with great significance to the sector are import duty on CKD/ SKD kits, auto components, foreign exchange and neutralization schedule for new ventures etc.

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Auto policy First time in 1991 the Automobile policy opened up the auto sector to foreign manufacturers. After that many foreign manufacturers move to India to open manufacturing plants of cars. The government of India announces auto policy every year. The major parts of Auto policy of the year 2004 are as below. Auto policy of government of India 2004 Vision To establish a globally competitive automotive industry in India and to double its contribution to the economy by 2010

Policy objectives This policy aims to promote integrated, phased, enduring and selfsustained growth of the Indian automotive industry. The objectives are to: Exalt the sector as a lever of industrial growth and employment and to achieve a high degree of value addition in the country; Promote a globally competitive automotive industry and emerge as a global source for auto components;
110

 Establish an international hub for manufacturing small, affordable passenger cars and a key center for manufacturing Tractors and Two-wheelers in the world; Ensure a balanced transition to open trade at a minimal risk to the Indian economy and local industry; Conduce incessant modernization of the industry and facilitate indigenous design, research and development; Steer India's software industry into automotive technology; Assist development of vehicles propelled by alternate energy sources; Development of domestic safety and environmental standards at par with international standards. SIAM welcomed the announcement of Auto Policy, and feels that the policy would serve as a reference document for all stake holders and other interested parties. The Auto Policy has spelt out the direction of growth for the auto sector in India and addresses most concerns of the automobile sector, including Promotion of R&D in the automotive sector to ensure continuous technology up gradation, building better designing capacities to remain competitive; Impetus to Alternative Fuel Vehicles through appropriate long-term fiscal structure to facilitate their acceptance; Emphasis on low emission fuel auto technologies and availability of appropriate auto fuels and encouragement to construction of safer bus/truck bodies subjecting
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unorganized sector also to 16% excise duty on body building activity as in case of OEMs The Auto Policy allows automatic approval for foreign equity investment up to 100% in the automotive sector and does not lay down any minimum investment criteria. With the Auto Policy in place, the automotive industry would get further fillip to become vibrant and globally competitive.

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 GOVERNMENT REGULATIONS AND SUPPORT The Government of India (GoI) has identified the automotive sector as a key focus area for improving Indias global competitiveness and achieving high economic growth. The Government formulated the Auto Policy for India with a vision to establish a globally competitive industry in India and to double its contribution to the economy by 2010. It intends to promote Research & Development in automotive industry by strengthening the efforts of industry in this direction by providing suitable fiscal and financial incentives. Some of the policy initiatives include: Automatic approval for foreign equity investment upto 100 per cent of manufacture of automobiles and component is permitted. The customs duty on inputs and raw materials has been reduced from 20 per cent to 15 per cent. The peak rate of customs duty on parts and components of battery-operated vehicles have been reduced from 20 per cent to 10 per cent. These new regulations would strengthen Indias commitment to globalisation. Apart from this, custom duty has been reduced from 105 per cent to 100 per cent on second hand cars and motorcycles. National Automotive Fuel Policy has been announced, which envisages a phased programme for introducing Euro emission and fuel regulations by 2010. Tractors of engine capacity more than 1800 cc for semitrailers will now attract excise duty at the rate of 16 per cent.

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Excise duty is being reduced on tyres, tubes and flaps from 24 per cent to 16 per cent. Customs duty on lead is 5 per cent.

A package of fiscal incentives including benefits of double taxation treaty is now available. These government policies reflect the priority government accords to the automobile sector. A liberalised overall policy regime, with specific incentives, provides a very conducive environment for investments and exports in the sector.

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 FISCAL POLICY Import Policy: Import of passenger cars and other automotive vehicles is restricted and an import licence is required for these items. Import of capital goods and automotive components/parts come under Open General Licence (OGL) and so, they require no Government approval. SKD/CKD Imports: Some ventures in the passenger car sectors envisage initial import of cars in SKD/CKD kits that requires a licence from Directorate General of Foreign Trade (DGFT). While the Government has decided to grant the required licence for the venture, they require the firm/s setting it up to give import details about their import programme, the indigenization planned the export possibilities and signs a memorandum of understanding (MOU) with DGFT in this respect. The underlying idea is to discourage low tech applications and to have assurances that the firm/s has a long term commitment to the undertaking. Import Duty: The import of cars under CBU and two wheelers attract a basic duty of 60%. The import of used cars is discouraged and carries a duty structure of around 150%. The import of SKD/CKD kits has been pegged at 25%. The import of vehicles meant for the transport of goods including dumpers - 50.80%. Special purpose vehicles-crane lorries, road sweepers, concrete mixers attract a duty of 50.80%. Specialized
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vehicles used in infrastructure construction projects are permitted duty free. Spl. National Calamity Contingent Duty (NCCD) of 1% is charged over and above the custom duty on motorcars, MUVs and two wheelers. Import of capital goods in the auto sector overall is attracting an import duty of 25%. However, under the Export Promotion Capital Goods (EPCG) Scheme, capital goods including CKD/SKD as well as computer software systems at 5% custom duty subject to an export obligation equiv. to 5 times CIF value of capital goods to be fulfilled over a period of 8 years reckoned from the date of issue of licence over a period of 8 years. However, in respect of EPCG licences for C$ 33 million or more, the export obligation is required to be fulfilled over a period of 12 years. Import duty on automotive accessories including spark plugs is 50.80%. The duties are inclusive of additional duties. The import of certain items that would help in reduction of emission level of vehicles has been reduced viz. CNG kits and its parts and catalytic converter is 5%. Tires: All categories of new tires can be imported freely. No WTO Bound Rates for tires & tubes. Second hand / used tires can also be imported freely if per tire CIF value is CS$ 255 and above for Truck & Bus Tires and CS$ 36 and above for passenger car tires, otherwise only with license. The standard rate of duty for import of tires is 35.2 %. Excise Duty: Vehicles designed for transport of 6 - 12 persons the duty is 24%. In case of public transport vehicles and vehicles for transport of goods,
116

the duty has been fixed at 24%. The duty on passenger cars, two wheelers, auto components and bodies of motor vehicles are 24%. Excise duty on electrically operated vehicles is 8%.

117

Source: Credit Analysis and Research Limited (CARE)

118

 Budget Impact Industry Reduction in excise duty on small cars and reduction in custom duty likely to have positive impact on the automobile industry. Emphasis on NHDP and other urban and rural road developmental projects likely to have a favorable impact on automobile sector. Thrust on agriculture sector, rural employment and rural financing are expected to improve the purchasing power of rural segment .This is likely to have a positive impact on industry primarily the two wheeler, tractor and utility vehicle segment.

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Source: Credit Analysis and Research Limited (CARE)

EMISSION NORMS

Since pollution is caused by various sources, it requires an integrated, multidisciplinary approach. The different sources of pollution have to be addressed simultaneously in order to stall widespread damage.

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EMISSION NORMS TECHNICAL ASPECT Emission norms are prescribed CO (Carbon Monoxide), HC

(Hydrocarbons) and NOX (Nitrous oxide) levels set by the government, which a vehicle would emit when running on roads. All the manufacturers need to implement the same for vehicles being manufactured from the date of implementation. EURO NORMS Euro norms refer to the permissible emission levels from both petrol and Diesel vehicles, which have been implemented in Europe. However in India, the government has adopted the Euro norms for available fuel quality and the method of testing. Euro-1 norms in India are known as INDIA 2000 since it will be implemented from 1/4/2000. The norms equivalent to Euro-2 are called 2005 norms but the Indian Government has not yet specified these.

WHAT ARE THE EURO-I AND EURO-II NORMS?

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The Euro norms require manufacturers to reduce the existing polluting Emission Levels in a more efficient manner by making certain technical changes in their vehicles. WHAT ARE THE EMISSION LEVELS OF THE ABOVE NORMS? 1998 C.O. monoxide) (gm/km) H.C + (gm/km) (Hydro Carbons & Nitrous Oxides) EVOLUTION OF EMISSION NORMS Norms Euro II Euro II Euro III Euro IV Implementation Schedule Already implemented April 1, 2005 April 1, 2005 April 1, 2010 ECONOMIC FACTORS Economic factors throw light on the nature and direction of the economy in which the industry operates. Interest rates, inflation rates,
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EURO I 2.75

EURO II 2.20

(carbon 4.34 NO X 1.50 0.97 0.50

Applicable Area Top 11 cities, inc. 4 Metros All India Top 11 cities, inc. 4 Metros All India

unemployment rates, gross national product, sectoral growth rate of agriculture, industry infrastructure, level of disposable income, availability of credits are some of the economical factors which affect more or less to each industry.

Year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

GDP 5.5 6 4.3 4.3 8.3 6.2 8.4 9.2 8.5

Inflation rate 6.7 5.4 5.4 5.4 3.8 4.2 4.2 5.3 5.9

Foreign Exchange Reserve ($billion)

300 250 200 150 100 50 0 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 54.1 73.2 136 107 142 Series1 202 266

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From the above two graphs we can easily say that the Indian economy is growing and growing at a faster pace. Also we can say that the inflation rate is really under control. If we talk about the GDP growth rate then its really leapfrogging. Also we are able to generate and increase the foreign exchange reserves. This shows the capabilities of the country to repay the loans and also to make balance of payments in favour.
50 49 48 47 46 45 44 43 42 41 2001- 2002- 2003- 2003- 2004- 2005- 2006- 200702 03 04 04 05 06 07 08 45.95 44.95 44.93 44.25 47.69 46.47 Series1 49.25 48.4

Source: ACMA

GRAPH 19 EXCHANGE RATES

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From these two graphs we can see and contemplate that the import tariffs are decreasing and due to that the OEMs have started using imported materials in their products (here CARS). Also the market exchange is lowering. These graphs are interrelated and show the effects on one another.

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THE FUTURE GROWTH DRIVERS

Source: ACMA The brilliant performance of the automotive sector is attributed to better performance of the economy and high all round growth leading to robust GDP growth, improved infrastructure development, excise duty reduction on passenger vehicles, improved financing of second hand vehicles, availability of finance in rural and semi-urban areas and the emergence of India as a manufacturing hub for the automotive industry. Investment upto Rs 30,000 crore has been planned for the Sector, by leading Indian and global players, by 2010.

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Increasing affordability is driving the passenger car demand rapidly up the price ladder. Fuel prices Indias relatively high fuel prices, coupled with the differential pricing for petrol and diesel, have also contributed to the bias toward small cars and diesel vehicles the latter particularly for public transportation, i.e., utility vehicles. Fuel prices for petrol in India is about 0.85$/liter and the price of diesel is about 0.60$/liter. Current recession in fuel production in Gulf increase the fuel prices internationally and it reaches to the record price of 47$/barrel. This also affects Indian fuel companies and the fuel prices further increased to 40 Rs/liter. Changes in fuel prices in India are shown in figure-11. Prices increase sharply after FY02.

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SOCIAL FACTORS The social factors that affect a firm include the values, attitudes, beliefs, opinions, and lifestyles of persons in the social environment, as developed from demographic, cultural, religious, educational, and ethnic conditioning. Like other forces in the external environment, social factors change continually. As social attitudes, beliefs, and values change, so does the demand for various types of dresses, books, leisure activities, etc. Key Market Drivers -Social Growth in urbanization Upward migration of household income levels Low interest rates translating to low financing and acquisition costs hence greater affordability. 85% of Cars are financed in India (15% in China)

Source: ACMA GRAPH 23 HOUSEHOLD INCOME AND URBANIZATION

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Source: ACMA

GRAPH 24 CONSUMER FINANCING RATES

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Source: ACMA GRAPH 24 FINANCE PENETRATION

RURAL CONSUMER BOOM India may soon see a rural consumer boom, as huge plans are being drawn for getting growth from this segment. The consumers demand for products and services in the rural areas are on an increase and would post a significant growth in the near future. The rural customers are now better able to afford products and have shown a shift in their approach from willing to spend rather than save. The rural family is now having multiple sources of income and is not necessarily dependant on Agriculture for his survival. The physical boundaries between urban and rural India is getting reduced as the infrastructure improves slowly. The penetration of television, radio, newspaper and mobiles has resulted in creating a pent up demand for consumer & lifestyle products. Urbanization

Another significant qualitative aspect of the changing demographics is increasing urbanization. Around 320 million peoples are living in urban areas. This accounts for 30% of the total population. It is shown in figure-12 as below.

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Trends in Urbanization, 1990-2020E (Millions of people, percentage)

More and more people are moving toward the urban areas and this trend will increase the demand of cars because of more penetration of cars in urban areas.
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More of the social factors are discussed in detail in the Marketing Analysis section.

132

TECHNOLOGICAL FACTORS Technological factors represent major opportunities and threats that must be taken service into account while doing strategic analysis. Technological break through can dramatically influence the industrys products, customers, markets, suppliers, process, distributors, marketing competitors, and manufacturing practices,

competitive positions. Technology is changing rapidly and the new inventions and modification in models of car is very common now a days. We will look how some of the factors affecting the car market. RESEARCH AND DEVELOPMENT INSTITUTIONS The Automotive Research Association of India (ARAI), Pune is the premier automobile research institution in the country. This organization receives grants from the Government for carrying out its research projects. It has been set up in collaboration with the automobile manufacturers. Apart from facilities for testing, evaluation and test approval of vehicles, it has vehicle engineering groups and test laboratories in the field of fatigue testing, automotive emissions, safety and homologation, materials, metrology and electronics & control systems. At the unit level R&D efforts in the automobile sector have been concentrated at entering into technological collaboration and absorbing foreign technology. The effort in indigenous R&D has therefore been limited to a few units, and these are at a nascent stage as compared to the large expenditure on R&D activities in the developed world.

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134

THE AUTO-COMPONENT INDUSTRY IS GRADUATING TO WORLDCLASS

INDIA THE NEXT BIG AUTOMOTIVE R&D BASE India. An Excellent base for Prototyping, Testing, Validating and Productionizing of Auto-Components. World renowned IT Skills with excellent Automotive Domain Knowledge. Global MNCsShifting Automotive Design Centers into

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SOME DESIGN & RESEARCH CENTERS IN INDIA

Source: ACMA AUTO GAS CATCHES ON Auto Liquefied Petroleum Gas (LPG) has become quite popular. It was the Supreme Court order against polluting fuels in public transport, which initially triggered off the launch of the auto gas filling stations in the metros in FY01 by the Oil PSUs. The CNG stations had done really well commercially at the beginning, however in the last few years LPG has been gaining popularity. On account of this, LPG stations have
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been set up not only in the metros, but also in other cities. Indian Oil Corporation (IOC) was the 1st to take the lead and set up an LPG dispensing station in Delhi in 2000. There are over 100 vehicles daily changing over to LPG in Mumbai, alone which indicates how strong the trend is towards LPG.

BIO-FUELS FOR COMMERCIAL UTILIZATION The National Mission on Bio-Diesel by the government is well on track and may be implemented in the next couple of months. However the approval of the main project by the Expenditure Finance Committee (under the Ministry of Finance) of raising Jatropha plantations worth Rs four lakh hectares (approx) is awaited. The objective of the project was to produce bio-diesel, which further would be blended with conventional diesel to the extent of 20%. The larger objective of the national mission on bio-diesel is to promote the creation of a national infrastructure for production of bio-diesel through cultivation of Jatropha plant and processing of its oil. Alternatively, it would alsoaim at developing all necessary ancillary activities that include R&D, awareness campaigns, backward and forward linkages, standardization and marketing. FUEL TECHNOLOGY It was in 1996 that the Ministry of Environment and Forests formally notified fuel specifications. Maximum limits for critical ingredients like Benzene level in petrol have been specified only recently and a limit of 5% m/m and 3% m/m has been set for petrol in the country and metros
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respectively. The high levels of pollution have necessitated eliminating leaded petrol, through out the country. Some of the important parameters that enable introduction of better emission control technologies for petrol vehicles are Octane Number, Sulfur and Lead. Benzene should also be controlled in petrol as higher benzene in fuel leads to higher benzene emissions, which is carcinogenic. To address the high pollution in key cities 0.05% sulfur petrol & diesel has been introduced since 2000-2001. The benzene content has been further reduced to 1%. Smokeless JASO FC grade of lubricating oil has been mandated in Delhi for dispensation through pre-mixing units from all petrol stations for two-stroke 2&3 Wheelers and sale of loose TwoStroke Lubricating oil is banned. Similarly, for diesel vehicles, the sulfur content is being reduced from 500 PPM in the Bharat Stage II (BS II) vehicles to 350 PPM for BS III vehicles and then to 50 PPM for BS IV vehicles. The lower sulfur content in Diesel does compromise on the lubricity of the fuel. Cetane Number also increased in a phased manner and the Density of the fuel is kept within a narrow band. All efforts of introducing better technology and cleaner fuels will be negated if the fuel itself is adulterated. The administration is addressing this issue through increased checks on fuel adulteration are and severe penalties imposed on persons involved in fuel adulteration. ROAD & TRAFFIC MANAGEMENT
Inadequate and poor quality of road surface leads to increase Vehicle Operation Costs and also increased pollution. It has been estimated that improvements in roads will result in savings of about 15% of Vehicle Operation Costs. The traffic management also plays an important role in

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reducing urban air pollution form Automobiles. In India, the vehicle

population is growing at rate of over 5% per annum and today the vehicle population is approximately 40 million. The vehicle mix is also unique to India in that there is a very high proportion of two wheelers (78%).

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Porters Diamond Model

Government

Firm Strategy, Structure and Rivalry

Factor Conditions

Demand Conditions

Related and Supporting Industries

India is one of the fast growing market in the world India as it is most cost effective in all the means of production of a car including components, because of cheap labour and other cost benefits, which enables any manufacturing a cutting edge to cater domestic market plus export in cheaper rates. Plus it can also export to its patent country at cheaper rates than it produces in its own country. Demand Condition The demand of the cars in India is rising continuously as the income level is growing and the per capita income rising High degree of correlation between per capita income and demand for cars the increase in no. Of people crossing the income threshold and changing consumer profile. There is a high degree of correlation between the demand for cars and economic growth 140

 As the middle class is growing the demand of mid range small car is rising. This can be seen as mid range car had captured 50% market share and same as this is in the premium cars, and also a downturn in the economy cars as people demand of better quality cars and availability of easy finance and backed by increased money supply at lower interest rate. FACTOR CONDITIONS Indias comparatively cheaper and skill workforce can be effectively utilised to setup large Low cost production bases. Huge investments from the companies for capacity expansion, R&D etc. Related and supporting industries The demand of petroleum industry is related to the demand of automobile industry, where passenger industry is one of the fast growing industry, the component industry is also fully supported the automobile industry with have a track record of exporting component to the development countries due to its quality and low price. That why many auto international components manufacturer has also entered India like Delphi and many others. Firm Strategy, Structure and Rivalry Due to the high demand for the products, the passenger car industry is undergoing a phase of transformation with Increase in the capacity of existing players New entrants Large number of JV and Collaboration This have created an environment of immense rivalry among players and the search for competitive such advantage with in nation can help provide organization with base of achieving such advantages on a more global basis. GOVERNMENT Liberalized policy regime. Automatic approval for up to 100% FDI. The customs duty on inputs and raw materials has been reduced from 20 per cent to 15 per cent.

141

Porters Five Force Analysis

Threat of Entrants Bargaining power of suppliers Bargaining power of Buyers Threat of Substitute Competitive Rivalry

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Diagram of Porter's 5 Forces

SUPPLIER POWER Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation Switching costs of firms in the industry Presence of substitute inputs Threat of forward integration Cost relative to total purchases in industry DEGREE OF RIVALRY Exit barriers Industry concentration Fixed costs/Value added Industry growth Intermittent Overcapacity Product differences Switching costs Brand identity Diversity of rivals Corporate stakes BUYER POWER Bargaining leverage Buyer volume Buyer information Brand identity Price sensitivity Threat of backward integration Product differentiation Buyer concentration vs. industry Substitutes available Buyers' incentives

BARRIERS TO ENTRY Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution Expected retaliation Proprietary products

THREAT OF SUBSTITUTES Switching costs Buyer inclination to substitute Price-performance Trade-off of substitutes

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BARRIERS TO ENTRY FACTORS

ATTRACTIVENESS Low 1 2 3 4

High 5

Economies of Scale Product Differentiation Brand Identity Switching Cost Access to Channels of Distribution Capital Requirement Access to Technology Access to raw material Government Protection

Note: Points 3.5

Economies of Scale:-. In the automobile industry, economies of scale act as a significant entry barrier since it is a capital-intensive industry. Globally, it has been witnessed that car manufacturers with low volumes find it extremely difficult to survive given the high per unit cost. The acquisitions of Rolls Royce, Jaguar, Rover, and AMC/Jeep are a testament to this. On the other hand by entering on a large scale, one runs the risk of drastic under-utilization of capacity as observed by Daewoo's experience in India. Since the economy segment cars are expected to drive volume growth in India in the

144

coming years, it is extremely important for a manufacturer to have a model in this segment to reduce his per unit cost. Product Differentiation: - Here the product is passenger car. Now there are many kind of ways through which companies can differentiate their product from others as far as automobile industry is concern. But in India consumers are too much conscious about price rather then uniqueness of a car. One of the key trends observed in the car industry during the last decade is that the products of different companies have become increasingly similar especially in the economy and mid-size segment. There is a perceptible shift towards "cars" being treated as a commodity rather than as a consumer good. In the premium car segment in India, differentiation between different models is declining as companies strive to increase volumes by cutting prices. Brand Identity: - Brand plays an important role in Indian passenger car industry. Consumers are quite branding conscious. Creation of brand image in consumers mind is very important factor in Indian passenger car industry. If we take an example of Maruti Suzuki, it is Indias oldest car manufacturer and it has created such kind of image in Indian consumers mind like maruti is low cost, better performance car which gives value for money. And if we talk about international giants like fiat and ford then they are struggling to survive in Indian market just because of their poor brand image in Indian market. And on the other side brand like Scoda has created magic in the premium car segment even its totally new in Indian

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market. So we can say that brand identity can be a barrier for a company if it is new. Switching cost: - The cost which is incurred to switch to available substitute products. Now passenger car has substitutes like state transportation system and hybrid cars (i.e. Reva) which are very weak in real practices. So we can say that though the switching cost is less but due to weak substitutes industry attractiveness is high in this case. Access to channel distribution: - Availability of sources to access to channel of distribution is easily available & easy to access. Due to which the barriers to entry is low, hence industry is high attractive. Capital requirement: - Substantial amount of capital is required. Huge capital costs act as a significant entry barrier and only established companies with deep pockets possess the resources to enter the automobile industry. Significant costs are involved in the development of a new car as can be seen by Telco's Indica which has incurred an expenditure of Rs. 17 billion. Hence the attractiveness of industry was low. Access to technology: - Access to technology is quite satisfactory. Due to which moderate barrier to entry, hence industry attractiveness is moderate.

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Access to raw material: - Indian automotive component industry is growing rapidly. And also its exports are increasing. So access to raw material is quite good. Government Protection: - According the policy of government, it has opened the gate for all companies to enter in the Indian market. Companies can install their plats as well as R&Ds in the country. The prices of the cars are not moderate by government. So as far as factor of government protection is concern passenger car industry is quite attractive to enter.

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RIVALRY AMONG COMPETITORS

FACTORS Low 1 Number of Competitors Industry Growth Fixed Cost Switching Cost Openness of terms of sales Differentiation 2 3 4 ATTRACTIVE NESS High 5

Note: Points 2.66

Number of competitors :- Before 10 years there is negligible competition in the Indian passenger car industry but after liberalization many MNCs like ford, Daimler Chrysler, Scoda, Toyota, Hyundai, Honda, GM etc. and many Others like Audi, Nissan, Walks Wagon etc are about to come. So strong competition is prevails in the industry thus the attractiveness is low.

Industry growth: - As the urbanization and modernization increase in India and India is growing on faster bases, the passenger car industry is also growing rapidly. And industry is far from penetration so attractiveness is high.

Fixed cost: - The fixed cost of industry is higher because of technology required and equipment. Due to requirement of huge capital only capable and huge
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competitors can stand in the market even threats of new entrants is quite low so industry attractiveness is high.

Switching

cost:

There

are

many

national

international brands of cars available in t e market so the brand switching cost is very less. And in the case of product, because of lesser and weaker substitutes of car, less switching can be done. So overall, in the case of switch cost industry attractiveness is moderate. Openness of terms of sales: - Industry is fully open for sell. There is not any kind of restrictions on the companies from government in terms of sell. So in this case industry attractiveness is high. Differentiation:- Differentiation is required to stay in the competition. But now a days companies give more importance to provide different car at low price. So because of price reduction differentiation is limited up to certain extent. So in this case the attractiveness of the industry is moderate.

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THREAT FROM SUBSTITUTES

FACTORS Low 1 Availability of Close substitutes Switching Cost Substitutes price value 2 3 4 ATTRACTIVENESS High 5

Note: Points 3.33

Availability

of

close

substitute:

Public

transportation system is the closest substitute of passenger car. And the other substitute Hybrid car is on developmental stage. So here if we consider urban area like metros then public transportation is the closest and strongest substitute of car. So the industry attractiveness is quite moderate in this case. Switching cost: - Only few substitutes are present. For public transportation, switching cost is too less. While in the case of others its quite high. Though the industry is more attractive. Substitutes price value: - Here substitutes (public transportation) price value is too low. But it has low quality and consumer preferences.

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BARGAINING POWER OF BUYERS

FACTORS Low 1 No of Buyers Availability of Substitutes Switching Cost Contribution to Cost Contribution to Quality 2 3 4 ATTRACTIVENESS High 5

Note: Points 3.4

Number of buyers: - Larger number of buyers. Huge competition prevails in Indian market. Buyers are too much price sensitive. We can say that industry is less attractive in the case of bargaining power of buyers as they have high bargaining power.

Availability of substitute: - In the case of availability of substitutes industry attractiveness is quite good.

Switching cost: - Only few substitutes are present. For public transportation, switching cost is too less. While in the case of others its quite high. Though the industry is more attractive.

Contribution to Cost: - Indian buyer is always price sensitive. They always want value for money. If any company like Maruti provides good product at low cost then buyers
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bargaining power gets lower. So we can say that industry attractiveness is moderate. Contribution of Quality: - Buyer wants a good quality product at least value. Now as the quality improves, price of the product will obviously increase. So here industry attractiveness is moderate.

BARGANING POWER OF SUPPLIER

FACTORS Low 1 No of suppliers Switching Cost Contribution to quality Contribution to cost Industrys supplier importance to 2 3 4 ATTRACTIVE NESS High 5

Note: Points 2.4

Number of Supplier: - The availability of number of supplier is quite good. Due to which bargaining power of supplier is moderate and thus the industry attractiveness is moderate.

Switching Cost: - here the switching cost is higher. So suppliers have higher bargaining power and thus attractiveness is low.

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Contribution

of

Quality:

The

impact

of

contribution to quality is moderate. Indian automotive component manufacturer are now improving on the quality basis. Thus they are on developmental stage and hence here their bargaining power is low. Thus the industry is more attractive. Contribution of Cost: most of the Indian

automotive components manufacturers provides raw material at cheaper cost then other suppliers of foreign countries. Bargaining power is increased. Contribution to cost is higher. So lesser attractive. Industry Importance to Supplier: - Supplier is very important for industry. Hence the bargaining power is very high. Therefore attractiveness of industry is lower.

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GOVERNMENT ACTION
FACTORS Low 1 Industry protection Industry Regulation Customs & tariff restrictions 2 3 4 ATTRACTIVENESS High 5

Note: Points 3.0

Industry protection: - Government has liberalized its policy & gives support to industry as a whole. Also reduction on excise duty for passenger cars has given industry a good flow. Due to which industry has higher protection, hence higher attractive.

Industry regulation: - The industry has to follow the rules of government strictly. Government is very strict regarding to pollution control. So, attractiveness is lower.

Customs and tariff restrictions abroad : - In this budget, excise duty is cut by 8% to 16% from 24% on cars & utility vehicles. Custom duty on specific raw material grades be brought down to 5% from 10-15% and Customs duty on copper wire rods, which are the raw materials for motors to be reduced from the current levels of 10%. On

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the other side government has increased interest rate on the car loan. So industry attractiveness is moderate.

BARRIERS TO EXIT
FACTORS Low 1 Assets Specialization Cost to exit Government Restriction 2 3 4 ATTRACTIVENESS High 5

Note: Points 2.33

Assets specialization: - The assets specialization is quite high in this industry. Thus exit barriers are quite high and industry in less attractive.

Cost of exist: - The cost to exit is higher. The company invests crores of rupees in acquiring in capital assets, such as land, building, tower, equipment, technology and others. So barriers to exit is higher, hence lower attractive.

Government restriction: - There is no restriction from the government to exit. So lesser the barrier to exist, hence higher attractive.

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156

OVERALL ASSESSMENT
FACTORS Barriers to Entry Rivalry among Competitors Threat of Substitutes Bargaining Power to Buyers Bargaining Power of Suppliers Government Action Barriers to Exit Total Points POINTS 2.5 2.66 3.33 3.4 2.4 3.0 2.33 19.62

Final Overall Points

2.80

Although liberalization of the Indian economy has reduced the impact of government policy as an entry barrier, the car industry still enjoys high entry barriers due to huge capital costs involved in setting up efficient plants and numerous cost advantages enjoyed by Maruti. The competition between firms in the car industry is expected to intensify considerably as newer companies will start reducing Maruti's dominance of the market. The expected significant over-capacity in the industry, increasing working capital needs, and high exit barriers coupled with low
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differentiation between models especially in the economy segment will put downward pressure on prices and profitability of companies.

The lack of adequate public transportation system coupled with the fact that the electric or hybrid cars are still in the developmental stage means that the Indian car industry faces minimal competition from substitutes. Even rising prices of fuel force consumer to choose substitute like public transport. The entry of the global car manufacturers has transferred the balance of power into the hands of the buyer. The Indian car buyer is not only extremely price conscious, but also wants the highest value and service. Huge dealerships, member clubs, mobile squads, and replacement vehicles are just some of the sops being offered to the customer. The availability of cheap financing and maturing of the used car market will also increase the choices for the consumers. With many new models waiting to be launched, the Indian car buyer will only have more power to choose and dictate terms to the dealer. Supplier power in the automobile industry will diminish greatly in the coming years due to the large number of competing suppliers, threat of cheaper and better-quality imports, and an increasing trend towards reduction of a car company's vendor base.

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Strategic Group Analysis

Strategic Group Analysis is done to identify defined groups so that each represented organization with similar strategic characteristic, following similar strategies or compete on similar basis. These groups are easily identifies using two or perhaps three set of key characteristic on the basis of the competition, in the passenger car industry there are around 15 companies and many others international players are still entering the market, India has more number of players than the other developing countries in the world. This makes the market more and more competitive and thus all fight for the share, below is the list of all the major players in the market. Tata Engineering and Locomotive Company Mahindra & Mahindra Limited Maruti Udyog Limited Hyundai Motor India Limited Honda Siel Cars India Limited Fiat India Automobiles Pvt. Limited Ford India Limited General Motors India Pvt. Limited Toyota Kirloskar Motor Limited Hindustan Motors Limited Skoda India Limited DaimlerChrysler India Limited Premier Auto Limited Daewoo Motors India Limited Mitsubishi Motors India Limited

This excludes Daewoo motors as it has lost market now due to the Korean parent company had got bankrupted resulting in the lost of market in India. The characteristics considered in finding strategic groups are price and the quality of the cars provided by the different manufacturers. The prices of different cars available in the Indian market are given in the chapter of pricing above. X-axis shows the price of the models with the company and the Y-axis shows the quality of the product of the company.

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Mercedes

High
Opel, HM, Telco

Honda, Ford Hyundai, Skoda

Price / Quality / Image

Maruti, Opel, Hyundai, Ford

Medium
Hyundai, Telco

Maruti, Fiat, Telco

Fiat, Maruti Maruti

Low Compact Mid-size Premium Luxury

Market Segmentation
From the above strategic group mapping, we have derived the following four cost leaders in their particular segment and four quality leaders in their particular segment. Attributes Segment A Segment B Segment C Segment D Cost Leader Maruti Fiat Maruti Hyundai , Skoda Quality Leader Maruti Hyundai, Telco Honda, Hyundai Mercedes

160

Implication for Groups

Group A Group A had been seen many changes it has lost from 80% in financial year 1995 to now 50% in financial year 2002 but despite that the company is able to manage its share because it caters segment A and this segment has a large share in the Indian automobile market, but this is not going to last much as the gap between segment A and segment B is narrowing down day by day due to frequent reduction in the prices of segment B cars. According to the industry experts, it seems that in the next 5-10 years, the segment A will be completely phased from the market and the segment B cars will take their place as entrylevel cars. The segment B cars are offering better technology, product features and safety and not a very high price to the customers and hence this segment is becoming more and more popular with the customers. Group B In this segment Hyundai and Telco are the quality leaders whereas Fiat is the cost leader. The success of Hyundai and Telco is more or less attributed to Santro and Indica respectively. They are able to capture the market share of Maruti and have been able to bridge a gap between segment A and semen B, as the difference between the prices of cars in both the segment is not much. Let us not forget the cost leader in the segment i.e. Fiat, whose success is mainly due to Palio. This car is giving stiff competition to Maruti 800 and the other factor behind its success is its endorsement by Sachin Tendulkar, who was also responsible for skyrocketing the sales of TVS Victor in the two-wheeler segment. Group C This group consists of the major MNCs of the global automotive market. The quality leader in this segment happens to be Hyundai and Honda. The major boost provided to them was by Accent and City models respectively. These are top quality car models for the middle upper income groups. They have very good product features, technology and safety features, which no other model in the segment offers to its buyers. The cost leader in the segment is Maruti again. The company has three models in this segment and all the three models have the lowest price tag in the segment, even then they all are able to differentiate themselves from one another as Esteem is lower premium segment car, Versa is a multi purpose vehicle and Baleno is an upper premium car. It is amazing that in how many segments can be a company cost leader, in spite of 15 different players operating in the industry. Group D 161

This segment consists of the luxury sedans and Mercedes, Sonata, Mondeo, Octavia and Accord. The quality leader in this segment is of course, Mercedes, but the company may not be able to sustain that position for too long and many luxury sedans such as Pajero, Prado and many others are throbbing the doors of Indian automobile market to enter this segment and they will give Mercedes a tough fight. The cost leader in the segment is Skoda with its newly launched luxury sedan Octavia. The company is also going to launch another car in the same segment sometime next year. 2003 will see many luxury sedans to be launched in this segment, as this segment offers the maximum margin among all the other segments. This segment has created a great niche for the MNCs and no Indian company operates in this segment and the number of models are also fewer.

162

Value Chain Analysis

Support Activities

Firm Infrastructure Human Resources Management Technology Development Procurement Inbound Operation Outbound Marketing Logistic Logistic & Sales Primary Activities

Service

1.1 M

Value Chain analysis was originally introduce as an accounting analysis to shed light on the value added of separate step in complex manufacturing process, in order to determine where cost improvement to be made and value creation improved. These two basic steps of identifying separate activities and assessing the value added from each were linked to an analysis of an organisatations competitive advantages by Michael Porter. Above figure show a systematic representation of the value Chain. The primary activities of an organization are grouped into five main areas: I. Inbound Logistics: The inputs for the automobile industry are steel, aluminum, tyres, fibers, glass and engines. Most of the companies manufacture the engines on their own, even there are companies who get manufactured the engines for their cars outside their company such as Ford India. Limestone, coal and power. All the other raw materials are acquired from the auto-ancillary industry and other such related industries. II. Operations: The automobile plants in India have improving operational skills with overall managerial excellence resulted in better and stable plant operations. Optimization of operation of assembling, painting and engine manufacturing has been the most important measures towards improving overall plant efficiency. Other measures adopted in this regard have been, motor standardization, improved maintenance system including computerized maintenance, process stimulating modes, use of low cost 163

alternative fuels including industrial and agriculture wastes, petroleum coke, etc in the areas. III. Outbound Logistics: The automobile plants are geographically dispersed over mostly in all the states, the industry enjoys a unique benefit of location advantage. This is reinforced to the Industrys extensive marketing and distribution network with a countrywide reach. This widespread network of factories and distributor network allow industry to optimize on freight distribution cost.

164

IV. Marketing and Sales: There is very high competition in the automobile industry because of large number of players. Brand building and improved logistics management have drastically brought down the delivery costs of the manufacturers. Industry has very strong distribution channels and also high advertising expenses. V. Service: The many Companies in the industry have customer service cells, manned by qualified mechanical engineers to advice customers on applications and advisory services on motor driving. In fact, the after sales service is one of the most important elements forming the perception of the consumer towards a particular company or brand. The support activities that are linked to primary activities can be divided in to four areas: I. Procurement: Most of the company in the automobile industry has their own engine manufacturing facilities, whereas the other raw materials are procured from the auto-ancillary and glass industries. II. Technology Development: As a part of modernization of Technologies, the automobile industry has seen frequent shifts from the old technologies to the newer ones. The industry do not have the problem of procuring the technology, as most of the firms are in collaboration with some foreign companies and have easy access to their technology. In fact, some of the collaborations are made for the sole purpose of technology sharing. Moreover, almost all the companies have their own well developed research and development department, but it basically focuses on new product development. III. Human Resources Management: HRM is a very important area in any industry that transcends all primary activities. Because of effective Human Resources Industry has improved its process through new technology. Employees are always encouraged to give suggestion for improvement in most of the company. IV. Infrastructure: The systems of planning, finance, quality control, information management, etc are crucially important to an organizations performance in its primary activities. Infrastructure also consists of the structures and routines that sustain its culture. The Quality of Indian cars was not as good as it is today, but now we are coming at par with the global market in terms of quality. Most of the Indian companies are thriving to lower down there cost through optimum utilization of infrastructure facilities.

165

Comparative Analysis:
Here first of all we will look at the comparison of all the major depends on that we can have ideas about the overall companies. Capacity Compan Market (Annual Segments Models y Share Production) Maruti 800, Esteem, Eco, Mid & Zen, Wagon MUL 350000 49.97 premium R, Omni, Alto, Baleno, Versa Mid, Santro, Hyundai 120000 17.16 premium & Accent, Luxury Sonata Indica, Mid & Telco 360000 13.34 Sumo, premium Safari, Siera Premium & Honda 30000 1.95 City, Accord Luxury Mid & Fiat 50000 2.54 Palio, Siena premium Premium & Opel Corsa, GM 25000 1.11 Luxury Astra Premium & Ikon, Ford 50000 2.51 Luxury Mondeo Mid & Ambassador HM 64000 2.42 premium , Lancer, C Class, E Mercede N.A. 0.15 Luxury class, S s class, Skoda N.A. 0.86 Luxury Octiva M&M 120200 3.28 Muvs Balero, players and Investment (Rs. mn)

38667

16204 56381 3811 16900 6870 16200 6146 N.A. N.A. N.A.

166

Strategic Comparison of different players Market Competitive Strategic Company Share Scope Intent Objective MUL National Be cost leader Expansion via internal growth Expansion via internal growth Aggressive expansion via acquisition Aggressive expansion through internal growth Aggressive expansion through internal growth Aggressive expansion via mergers and alliances Aggressive expansion through internal growth Hold to present share Hold to

Competitive Position Retrenching to a position that can be defended Getting stronger on the move Getting stronger on the move Stuck in the middle of the pack Getting stronger on the move

Strategic Posture Mostly offensive Combination of offensive and defensive Mostly defensive

Competitive Strategy Providing value foe money products Pursuing differentiation based on quality and technology Striving for low cost leadership

Hyundai

Be quality Multi country leader

Telco

National

Be in the top three

Honda

Multi Country

Move in the top five

Pursuing differentiation Conservative based on follower image and reputation Striving for Conservative low cost follower leadership Pursuing differentiation Conservative based on follower image and reputation Pursuing differentiation Conservative based on follower image and reputation Mostly Conservative focusing on a follower market niche Mostly Mostly 167

Fiat

Multi Country

Sustain competitiv e position

GM

Global

Move in the top five

Stuck in the middle of the pack

Ford

Multi national

Move in the top five Be in the top ten Sustain

Stuck in the middle of the pack Struggling, losing ground Well

HM Mercedes

National Global

niche created Skoda Multi Country Develop brand name Develop in the car segment

M&M

National

present share Aggressive expansion through internal growth Aggressive expansion through internal growth

entrenched Developing a position that can be defended Developing a position that can be defended

defensive Combination of offensive and defensive Combination of offensive and defensive

focusing on a market niche Currently focusing on a market niche Mostly focusing on a market niche

168

Financial Analysis of different players

Maruti Udyog Limited Du Pont Analysis Ratios Net Profit (loss) Net Sales Total Assets Total Assets Turnover Ratio Net Profit (loss) Margin Ratio (%) Return on Total Assets (%) Equity ROE (%) (Rs. In crores) 1999-2000 2000-2001 (140.13) (109.82) 331.81 786.76 1351.71 1424.25 0.25 0.55 (2.37) (0.58) 800.00 (0.18) (7.16) (3.96) 850.00 (0.13)

From the above table, we can see that the return on equity on Ford Motor India Ltd. has increased as compared to the previous year. This can largely be attributed to the decrease in loss of the company as compared to the previous year. But, surprisingly, the net loss margin ratio has increased in spite of reduction in loss over the previous year.
Mar ' 08 Per share ratios In Crore Mar ' 07

Adjusted EPS (Rs)

55.94

53.69

Adjusted cash EPS (Rs)

75.61

63.09

Reported EPS (Rs)

59.91

54.07

Reported cash EPS (Rs)

79.57

63.46

169

Dividend per share

5.00

4.50

Operating profit per share (Rs)

88.31

76.30

Book value (excl rev res) per share (Rs)

291.28

237.23

Book value (incl rev res) per share (Rs.)

291.28

237.23

Net operating income per share (Rs)

625.34

512.49

Free reserves per share (Rs) Profitability ratios Operating margin (%)

286.28

231.89

14.12

14.88

Gross profit margin (%) Net profit margin (%)

10.97

13.05

9.34

10.29

Adjusted cash margin (%)

11.79

12.01

Adjusted return on net worth (%)

19.20

22.63

170

Reported return on net worth (%)

20.56

22.78

Return on long term funds (%) Leverage ratios Long term debt / Equity

27.35

30.74

0.05

0.08

Total debt/equity

0.10

0.09

Owners fund as % of total source

90.33

91.57

Fixed assets turnover ratio Liquidity ratios Current ratio Current ratio (inc. st loans) Quick ratio Inventory turnover ratio Payout ratios

2.48

2.41

1.03

1.42

0.91 0.66

1.40 1.13

22.93

28.76

Dividend payout ratio (net profit)

9.78

9.72

Dividend payout ratio (cash profit) Earning retention ratio

7.36

8.28

89.53

90.21

171

Cash earnings retention ratio Coverage ratios

92.25

91.67

Adjusted cash flow time total debt

0.41

0.34

Financial charges coverage ratio

50.46

68.23

Fin. charges cov.ratio (post tax) Component ratios

39.57

49.76

Material cost component (% earnings)

77.25

73.36

Selling cost Component

3.10

3.37

Exports as percent of total sales

4.10

3.90

Import comp. in raw mat. consumed

10.84

12.62

Long term assets / total Assets

0.74

0.61

172

Bonus component in equity capital (%)

173

Hindustan Motor Ltd. Du Pont Analysis (Rs. In crores) Ratios Net Profit Net Sales Total Assets Total Assets Turnover Ratio Net Profit (loss)Margin Ratio(%) Return on Total Assets(%) Equity ROE(%) 1996-97 36.85 952.43 937.18 1.02 25.85 26.27 107.57 0.34 1997-98 1998-99 34.31 (35.00) 1003.27 1217.58 1021.04 1461.51 0.98 29.24 28.73 107.57 0.32 0.83 (34.79) (28.98) 107.83 (0.32) 2000-01 2001-02 (117.79 (63.29) ) (56.48) 1330.81 1233.28 893.54 1461.87 1196.54 1105.74 0.91 (21.03) (19.14) 107.83 (0.59) 1.03 (10.47) (10.79) 161.25 (0.73) 0.81 (15.82) (12.78) 161.25 (0.35) 19992000

From the above table, we can see that the return on equity on Hindustan Motor Ltd. has been decreasing over the year, this is mainly attributed to the increased competitiveness in the industry. Although the sales are increasing but the profit has been declining, in fact, in the last four years the company is running in losses. Ratio Analysis Ratios Margins ratios (%) PBDIT (NNRT) / sales PBDT (NNRT) / sales PAT (NNRT) / sales PBDIT (NNRT) / net sales PBDT (NNRT) / net sales PAT (NNRT) / net sales Returns ratios (%) PAT (NNRT) / net worth PAT (NNRT) / total assets PBIT (NNRT) / capital employed PAT (NNRT) / capital employed Liquidity ratios (times) Long term debt / equity 199697 9.73 5.29 2.94 12.81 6.96 3.87 16.07 4.89 19.54 7.37 1.05 199798 9.74 5.25 2.64 12.61 6.80 3.42 13.39 3.93 16.55 5.59 1.29 199899 5.09 (0.18) (2.21) 6.62 (0.24) (2.87) (14.05) (3.17) 7.59 (5.47) 1.79 19992000 4.85 (1.12) (3.49) 6.61 (1.52) (4.76) (30.99) (5.29) 7.03 (9.88) 2.58 174 200001 1.64 (4.30) (6.99) 2.25 (5.87) (9.55) (62.18) (11.53) (3.61) (24.20) 1.43

2001-02 3.70 (1.31) (4.68) 5.00 (1.77) (6.32) (31.86) (6.82) 0.99 (13.56) 1.70

Total debt / equity Current ratio Interest cover Gross working capital cycle (days) Net working capital cycle (days) Avg. days of debtors Avg. days of creditors

1.38 1.64 1.75 166.00 90.00 39.00 76.00

1.68 1.47 1.74 170.00 93.00 40.00 76.00

2.56 1.18 0.58 165.00 77.00 44.00 87.00

3.41 1.26 0.42 188.00 93.00 46.00 95.00

1.94 1.19 (0.18) 168.00 83.00 46.00 85.00

2.30 1.11 0.07 172.00 69.00 53.00 102.00

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Honda SIEL Motors India Ltd. Du Pont Analysis Ratios Net Profit Net Sales Total Assets Total Assets Turnover Ratio Net Profit (loss)Margin Ratio(%) Return on Total Assets(%) Equity ROE(%) (Rs. In crores) 1998-99 1999-2000 2000-01 2001-02 (40.71) (46.06) (29.09) 26.29 442.19 467.89 519.70 656.47 470.22 495.88 533.37 595.87 0.94 (10.86) (10.21) 360.00 (0.11) 0.94 (10.16) (9.58) 360.00 (0.13) 0.97 (17.87) (17.41) 360.00 (0.08) 1.10 24.97 27.51 360.00 0.07

From the above table, we can see that the ROE, being negative in 1998-99 has become positive in 2001-02, saying that the company is coming out of the black on the red. This situation is mainly attributed to the increase in sales which resulted in profit. Ratio Analysis 199899 1999-2000 2000-01 1.44 (2.18) (6.62) 2.00 (3.03) (9.21) (4.82) (10.63) 0.34 0.43 2.02 (0.83) 1.72 (1.07) (7.09) 2.39 (1.49) (9.84) (17.87) (10.56) (8.69) (14.34) 0.40 0.43 1.19 (1.54) 4.12 1.70 (4.06) 5.68 2.34 (5.60) (13.39) (6.82) (4.06) (10.08) 0.41 0.86 1.13 (0.67)

Ratios Margins ratios (%) PBDIT (NNRT) / sales PBDT (NNRT) / sales PAT (NNRT) / sales PBDIT (NNRT) / net sales PBDT (NNRT) / net sales PAT (NNRT) / net sales Returns ratios (%) PAT (NNRT) / net worth PAT (NNRT) / total assets PBIT (NNRT) / capital employed PAT (NNRT) / capital employed Liquidity ratios (times) Long term debt / equity Total debt / equity Current ratio Interest cover

2001-02 10.35 8.40 3.09 13.39 10.87 4.00 12.02 6.06 16.20 9.95 0.13 0.63 1.21 2.59 176

Gross working capital cycle (days) Net working capital cycle (days) Avg. days of debtors Avg. days of creditors

63.00 41.00 7.00 21.00

68.00 44.00 19.00 24.00

84.00 55.00 30.00 28.00

177

Hyundai Motors India Limited Du Pont Analysis Ratios Net Profit Net Sales Total Assets Total Assets Turnover Ratio Net Profit (loss)Margin Ratio(%) Return on Total Assets(%) Equity ROE(%) (Rs. In crores) 1997-98 1999-2000 2000-01 2001-02 (4.99) (50.44) 59.66 171.84 0.16 365.80 1678.25 2230.18 117.09 1645.27 1937.92 2098.95 0.00 0.22 0.87 1.06 (0.03) (0.00) 465.74 (0.01) (7.25) (1.61) 812.54 (0.06) 28.13 24.36 812.54 0.07 12.98 13.79 812.54 0.21

From the above table, we can see that the company has transferred the its negative ROE in 1997-98 and 1999-2000 to positive in 2001-02. The increased ROE is mainly attributed to the increase in sales which in turn resulted in increase in profit. The asset turnover ratio is also improving significantly, which also caused the improvement in the ROE. Ratios Margins ratios (%) PBDIT (NNRT) / sales PBDT (NNRT) / sales PAT (NNRT) / sales PBDIT (NNRT) / net sales PBDT (NNRT) / net sales PAT (NNRT) / net sales Returns ratios (%) PAT (NNRT) / net worth PAT (NNRT) / total assets PBIT (NNRT) / capital employed PAT (NNRT) / capital employed Liquidity ratios (times) Long term debt / equity Total debt / equity Current ratio Interest cover Gross working capital cycle Ratio Analysis 1997-98 1999-2000 2000-01 (3062.50) (3062.50) (3118.75) (3062.50) (3062.50) (3118.75) (2.14) (0.90) (0.72) (0.72) 0.52 0.52 0.26 5.22 (1.49) (9.90) 7.27 (2.07) (13.79) (8.34) (3.86) (1.08) (3.34) 1.02 1.02 2.67 (0.48) 60.00 10.74 7.80 2.56 14.89 10.82 3.55 7.64 3.46 8.63 3.78 0.95 0.96 1.82 1.99 43.00 2001-02 12.88 10.92 5.68 17.46 14.80 7.71 19.10 9.25 14.81 10.29 0.69 0.69 1.80 4.16 45.00 178

(days) Net working capital cycle (days) Avg. days of debtors Avg. days of creditors

57.00 17725.00

(110.00) 2.00 170.00

17.00 0.00 25.00

22.00 1.00 22.00

179

Mahindra & Mahindra Ltd. Du Pont Analysis (Rs. In crores) Ratios Net Profit Net Sales Total Assets Total Assets Turnover Ratio Net Profit (loss)Margin Ratio(%) Return on Total Assets(%) Equity ROE(%) 199697 204.15 3005.45 2529.89 1.19 14.72 17.49 101.79 2.01 199798 236.34 3342.59 3155.40 1.06 14.14 14.98 103.37 2.29 199899 210.97 3434.15 3387.94 1.01 16.28 16.50 103.37 2.04 19992000 249.06 3531.76 3471.90 1.02 14.18 14.42 110.48 2.25 200001 99.80 3506.52 3634.99 0.96 35.14 33.89 110.48 0.90 2001-02 75.29 3243.05 3743.51 0.87 43.07 37.32 116.01 0.65

From the above table, we can see that, the ROE of the company is decreasing in the last two years, mainly attributed to the decrease in sales. In relation to the decrease in sales, the decrease in profit is more significant. The asset turnover ratio is also decining. Ratio Analysis Ratios Margins ratios (%) PBDIT (NNRT) / sales PBDT (NNRT) / sales PAT (NNRT) / sales PBDIT (NNRT) / net sales PBDT (NNRT) / net sales PAT (NNRT) / net sales Returns ratios (%) PAT (NNRT) / net worth PAT (NNRT) / total assets PBIT (NNRT) / capital employed PAT (NNRT) / capital employed Liquidity ratios (times) Long term debt / equity Total debt / equity Current ratio Interest cover Gross working capital cycle (days) 199697 13.26 10.97 5.80 15.53 12.85 6.79 20.96 8.75 20.02 10.13 0.94 0.99 1.96 5.01 87.00 199798 13.43 10.35 5.91 16.05 12.37 7.07 20.51 7.64 17.91 9.68 0.93 1.06 1.90 3.56 103.00 199899 12.84 9.13 5.15 15.33 10.90 6.14 15.92 5.95 15.03 7.66 0.99 1.06 1.94 2.73 118.00 19992000 13.91 10.63 5.77 17.01 13.01 7.05 15.42 6.76 17.54 9.15 0.48 0.52 1.84 3.38 108.00 180 200001 8.43 5.80 2.33 10.28 7.07 2.85 5.44 2.65 8.03 3.63 0.50 0.62 1.48 1.96 113.00

2001-02 8.49 5.55 1.91 10.30 6.73 2.32 4.54 1.90 7.67 2.97 0.71 0.93 1.23 1.68 130.00

Net working capital cycle (days) Avg. days of debtors Avg. days of creditors

8.00 19.00 79.00

21.00 33.00 81.00

31.00 49.00 86.00

19.00 44.00 88.00

27.00 46.00 85.00

36.00 59.00 93.00

181

Maruti Udyog Ltd. Du Pont Analysis (Rs. In crores) Ratios Net Profit Net Sales Total Assets Total Assets Turnover Ratio Net Profit (loss)Margin Ratio(%) Return on Total Assets(%) Equity ROE(%) 199596 414.87 4796.1 3626.21 1.32 11.56 15.29 132.29 3.14 199697 510.08 5897.59 3224.34 1.83 11.56 21.15 132.29 3.86 199798 836.3 6283.79 3178.53 1.98 7.51 14.85 132.29 6.32 199899 484.18 5973.16 4708.1 1.27 12.34 15.65 132.29 3.66 19992000 394.1 7121.3 5529 1.29 18.07 23.27 132.3 2.98 2000-01 (280.2) 6867.1 6132.2 1.12 (24.51) (27.44) 132.3 (2.12)

From the above table, we can see that the ROE of MUL has been constantly declining since the financial year 1997-98. Up to 1996-97, the ROE was on an increase, but thereafter the sad story started as more and more MNCs began entering Indian Automobile Industry and MUL lost its market share to them. Ratio Analysis Ratios Margins ratios (%) PBDIT (NNRT) / sales PBDT (NNRT) / sales PAT (NNRT) / sales PBDIT (NNRT) / net sales PBDT (NNRT) / net sales PAT (NNRT) / net sales Returns ratios (%) PAT (NNRT) / net worth PAT (NNRT) / total assets PBIT (NNRT) / capital employed PAT (NNRT) / capital employed Liquidity ratios (times) Long term debt / equity Total debt / equity Current ratio Interest cover Gross working capital cycle (days) 199596 14.28 12.21 6.41 19.26 16.46 8.65 49.46 11.97 57.44 30.76 0.30 0.34 0.99 5.77 68.00 199697 13.65 12.66 6.55 18.02 16.72 8.65 39.93 16.14 55.07 31.85 0.06 0.13 1.19 11.47 63.00 199798 16.84 16.22 10.06 22.27 21.45 13.31 45.96 25.75 56.62 39.03 0.01 0.08 0.95 23.59 58.00 199899 12.26 11.63 6.13 16.19 15.37 8.11 20.52 12.44 29.89 18.65 0.00 0.06 1.45 15.72 58.00 19992000 8.17 7.54 4.17 10.85 10.00 5.53 14.45 8.73 17.81 13.78 0.00 0.20 1.03 8.46 61.00 182

2000-01 1.25 0.47 (3.08) 1.66 0.62 (4.08) (10.29) (5.73) (7.22) (9.72) 0.12 0.44 1.09 (2.91) 79.00

Net working capital cycle (days) Avg. days of debtors Avg. days of creditors

39.00 6.00 29.00

40.00 9.00 23.00

42.00 11.00 16.00

42.00 12.00 16.00

42.00 14.00 19.00

58.00 22.00 21.00

183

Effect of Liberalization and WTO

Liberalization has changed the mindset
It has changed the mindset, by ushering in foreign competition. Take the car industry for instance. In the 1980s, Maruti had a monopoly over the market, by creating a strong supplier base that was supported by the government. The customer had no choice but to accept the limited range offered. Today there are lots of new players in the auto industry, both local and foreign such as the Japanese. Maruti has upgraded its models and diversified its range, in order to effectively compete with other suppliers. With the liberalization of the Indian economy, the passenger car industry was finally deregulated in 1993 and many companies, both Indian and foreign, announced their plans to enter the market.

184

Effect of WTO
Breathing in WTO's world The World Trade Organization (WTO) regulations, which India has accepted, provide that countries cannot discriminate against foreign goods. This could be seen as 'arbitrary' and 'unfair'. The government might not be able to impose higher custom duties, but it can Ensure that this "flooding" of the Indian market with cheaper, more polluting cars will not have serious repercussions on the growing problem of air pollution in cities. This can be done through domestic norms and regulations. WTO allows governments to adopt domestic regulations, Standards and emission norms for the protection of the environment and the health and safety of its people, as long as these norms are used to regulate both domestic and foreign producers without discrimination. The import of old cars could seriously impact the environment. Firstly, it is important to note that under current emission norms, only Delhi is to implement EURO I norms and has moved to EURO II in April 2000. The Mumbai High Court also ordered similar norms. These states can refuse to register cars that do not meet these norms. But the rest of urban India - also reeling under smog and disease - is still scheduled to go in For EURO I norms in 2000 and EURO II in 2005. This means that as of today, India cannot stop imports of non-EURO I compliant technology, which became obsolete in Europe in 1996, and it cannot stop nonEURO II compliant technology till 2005, which will become obsolete in Europe in 2000. Unless India upgrades its emission norms urgently and makes all of India EURO II compliant by 2000, India can become the world's biggest dump yard of obsolete and polluting technology. Thirdly, India does not have a taxation system that would ensure that old cars are phased out. This lacuna could easily make the deadly import of second-hand cars even more persistent as it basically means that once such a vehicle enters an Indian city, it will stay and pollute for life.

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WTO Regime and Its Impact on the Indian Automobile Industry The Society of Indian Automobile Manufacturers (previously known as Association of Indian Automobile Manufacturers) requested RIS to conduct a study highlighting the implications of the WTO regime on the Indian automobile industry. The study analyses in detail the implications of the phasing out of quantitative restrictions (QRs) on the automobile sector in India. The study adopts a method of analyzing in detail the product-wise phase-outs in three phase-out periods given the structure-conduct-performance of the sector prior to the phase out. The liberalization of Indias automobile sector is contrasted with the experience of other developing countries, which have gone in for removing the QRs on automobiles. The product-wise structures of tariffs, both existing and those committed in the Uruguay Round, have been analyzed to draw lessons on the nature of protection in place with respect to the automobile sector in other developing countries. In addition to tariff protection, different countries have adopted several other measures to protect their respective automobile sectors. In the light of this analysis, the study makes recommendations for the automobile policy in India. This study has been published and circulated widely. The SIAM has now designated RIS as its adviser on WTO matters. Indias commitment to GATT and WTO agreements on Quantitative Restrictions (QRs), on Tariffs, and on Trade-Related Investment Measures (TRIMs) has important implications for the Indian automotive industry. Domestic policies also affect the Indian automotive industry, but these are unlikely to change in the near-term. Small-scale sector reservations are most counterproductive and impact auto ancillaries significantly.

Quantitative restrictions (QRs) In April 2001, India abolished those quota restrictions or import licenses allowed under Article 18B of the GATT. India signed the GATT in 1947, but was excused from having to lift QRs due to the strained balance of payments situation. India has, therefore, been able to rely considerably on import quotas and import licensing as a policy tool for the last fifty years. Now that India has a considerable foreign exchange cover, it has been forced to meet its GATT commitments. However, 600 items are still covered by quota restrictions, including items such as eggs, food grains, gold and silver jewellery, safety matches, granite, and 186

Only some restrictions lifted...

600 still remain

films and tapes. This is because Article 18B of the GATT allows continuing quota restrictions on any item that might threaten a countrys national security, or human and animal health.

Tariffs

The lifting of import licensing has made tariffs the Governments main trade policy tool. Customs duties to be cut by 30% from 1990 level Duties on manufactures to be capped at 25% and 40% No caps on duties on metals and consumer goods Under the WTO, India has committed to reduce its customs duties by 30 per cent from the 1990 base level. Duties are now, by and large, in line with that commitment, except for those on liquor, which are still very high.

In addition, India has committed to bind or cap its tariffs on manufactured products at 25 per cent and 40 per cent. Tariffs greater than 40 per cent must be brought down to this level. Those less than 40 per cent must be reduced to 25 per cent. Automotive ancillaries will also be affected by these rates. However, India is not bound to reduce tariff rates on products such as non-ferrous metals, petroleum and related products, and all types of consumer goods.

Trade related investment measures (TRIMS)

Export requirement eliminated

The WTO provision on TRIMS prohibits host countries from imposing 2 trade-affecting commitments on foreign investors. The first is an export requirement, which India has, by and large, abolished. The second is a local content commitment. The automobile sector is still bound by this requirement. India was to have abolished it on 1 January 2000, but asked for an extension. But India will have to do away with this requirement soon, since it has tied its abolition to 187

Local content requirement will go in the next few

years

the phasing out of quota restrictions.

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Auto Expo 2002

Though, the AutoExpo 2002 ended on January 21, the exhibitors and participants have now plenty of time to review the gains achieved during one week mela of automobiles. While the murmurs of discontent and dissatisfaction from the performance of previous Auto Expos were already audible, the decibel level has only increased this time. Some of the biggest names in Indian automobile industry like Maruti Udyog and Bajaj Auto were conspicuous by their absence from the Expo this year and that rubbed off some of the sheen from this biennial event. The Expo received more footfalls this year in comparison to the last year going over 1 million. But, for many of the exhibitors increasing footfalls mean more damages to the exhibits, more manpower to manage the crowds, and less time dedicated to the business visitors. The loss of quality time in fact has forced many organizations to rethink their strategy for the next Expo. Highlights@AutoExpo2002 This was the 6th Auto Expo to be organized in Delhi. This time, Confederation of Indian Industries, Society of Indian Automobile Manufacturers, and Automotive Component Manufacturers Association of India organized the Expo jointly. In total 900 companies participated in the Expo covering 15 Pavilions and 60,000 sqms of area. Participation from the overseas companies Stands at 150 that can be termed good after considering the global gloom in automobile sector. Business@AutoExpo2002 Auto Expo in total saw the business transaction worth INR 28.27 crore, out of which export orders were worth US$ 7.63 million. According to a press release by the organizers, 9 joint ventures were announced during the Expo of which 3 were the technical collaborations and rest of them both technical as well marketing collaborations. 117,400 business enquiries were generated during the Expo, many of which are expected to materialize in the coming days. The Expo attracted 120,000 business visitors with 1,000,000 general visitors in tandem. Newlaunches@AutoExpo2002 Like all previous editions of Auto Expo, this Expo also marked the launching pad fore many products. Celebrated auto designer, Dilip Chabria, showcased many of his new designs at the Expo including, Single built on the Hero Honda CBZ, Attractor built over Mahindra tractor, Infidel a completely new sedan 189

prototype, and Lextran Orion a new luxurious passenger bus. German motor company BMW spell bounded the visitors with an array of new products like X5, new 7 series, and Aria coupe. Not to be outdone were Mercedes Benz, who showcased C Class Sports Coupe, M Class, SLK, and CLK Cabrio. Fiat showed its enthusiasm recently gained success with the special sports edition of Palio signed by non other than batting maestro Sachin Tendulkar. They also showcased the Ferari used by Michael Schumacher. From Indian automakers, TELCO launched its TATA Sedan to be launched in the market soon. Worlds largest two-wheeler manufacturer Hero Honda was on hand with its multiple offerings so were other two-wheeler manufacturer like TVS and Eicher. Automotive Mission Plan 20062016 The vision of the Automotive Mission Plan (AMP) 20062016 is to emerge as the destination of choice in the world for design and manufacture of automobiles and auto components with output reaching a level of US$ 145 billion accounting for more than 10 per cent of the GDP and providing additional employment to 25 million people by 2016. As per the AMP, it is estimated that the total turnover of the automotive industry in India would be in the order of US$ 122 billion159 billion in 2016. It is expected that in real terms, India would continue to enjoy its eminent position of being the largest tractor and three-wheeler manufacturers in the world and the worlds second largest two-wheeler manufacturer. By 2016, India would emerge as the worlds seventh largest car producer (as compared to the eleventh largest currently) and retain the fourth largest position in world truck manufacturing sector. Further, by 2016, the automotive sector would double its contribution to the countrys GDP from current levels of five per cent to 10 per cent

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Future Outlook
Demand projections envisage a nine per cent increase in the demand for passenger cars, but one wonders whether this demand can be met. All is not smooth sailing for the automotive industry. It has been hit by spiraling prices of cold rolled coils and sheets, one of its main imported steel have gone up, and the continuous depreciation of the rupee vis--vis foreign currencies has made steel even costlier. The increase of excise on steel and pig iron has also jacked up costs. Taxes, including customs duties, contribute to two-thirds of the total vehicle price. Another factor acting as a drag on the automobile industry is that its growth is intrinsically linked to the growth of the ancillary units producing components. Over 5,000 ancillary units manufacture about 50-60 per cent of the components that go into the finished products. These are unable to keep pace, either technologically or financially, with the needs of the automobile industry. Over the last five years, investments in the components industry have been just 30-40 per cent of what is required. The Association of Indian Automobiles Manufacturers (AIAM) has now called for a national policy consensus on the automobile industry so as to make it a foreign exchange surplus sector. The government should take policy initiatives to improve the technology, productivity and competitiveness of this sector, says the Associations President Abhay Firodia. The authorities should remember that the automobile industry has, the world over, spearheaded a nations economic development and established its international competitiveness. A strong domestic manufacturing base is a pre-requisite for successful exports, and it is necessary to accumulate surplus to build up the superstructure. Towards this end, the industry has accorded priority to producing high quality, fuelefficient, safe and environment friendly vehicles of international standards. It is unlikely that India can really compete with the Japanese on the export front in the foreseeable future, as far as completed cars are concerned. However, India could conceivably set up facilities, in collaboration with world leaders, to manufacture selected automotive products that could be profitably exported. Another strategy would be to establish specialized facilities in the country for manufacturing components for foreign manufacturers with a buy-back arrangement. The quantum leap in the level of traffic in Indias main cities is bound to have a negative impact on future sales of car. Especially if city fathers introduce 191

legislation that limits the movement of these vehicles on the roads. If that happens, the passenger car manufacturers in India will have to work out new strategies to sell their vehicles. The latest trend of production and sales figures does not augur well for the industry. After the most uninterrupted boom period in living memory, 1990-91 has shown an estimated drop in production figures. In future, cars in India may well be available off the shelf- with not all that many eager buyers waiting to take them off

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