The Hindu Business Line : Automobiles: Running high on confidence

Owing to its low-cost, high-quality manufacturing, India has emerged as a significant outsourcing hub for auto components and engineering design. A reassuring feature of the changing automobile scene over the past five years is the success and the confidence of domestic manufacturers, says S. D. Naik.

THE automobile industry has undergone a dramatic transformation over the past decade, both in size and technological sophistication. Until the mid-1990s, it consisted of just a handful of local companies with small capacities and outdated technologies. However, after the sector was thrown open to foreign direct investment in 1996, some of the global majors moved in and, by 2002, Hyundai, Honda, Toyota, General Motors, Ford and Mitsubishi set up their manufacturing bases.

Over the past four to five years, the country has seen the launch of several domestic and foreign models of passenger cars, multi-utility vehicles (MUVs), commercial vehicles and two-wheelers and a robust growth in the production of all kinds of vehicles. Moreover, owing to its low-cost, high-quality manufacturing, India has also emerged as a significant outsourcing hub for auto components and auto engineering design, rivalling Thailand.

The year 2003-04 was a landmark one for the auto sector. For the first time, the total sales (domestic plus exports) of passenger vehicles — cars, utility vehicles and MUVs — crossed the one-million mark with sales growing 30.2 per cent during the year. Of this, domestic sales accounted for 9,00,752 units and exports 1,29.316 units.

With total investment exceeding Rs 50,000 crore, the turnover of the automobile industry exceeded Rs 59,518 crore in 2002-03. Including the turnover of the auto component sector, the industry's total turnover was above Rs 84,000 crore in 2002-03. According to estimates, in 2003-04, the total turnover of the industry was more than Rs 100,000 crore ($22.74 billion).

The total production of all types of vehicles in India rose from 4.2 million units in 1998-99 to 7.3 million units in 2003-04. Over this period, commercial vehicles output grew 2.8 times compared to 2.2 times for passenger cars. However, it is the two-wheeler output, which continues to dominate the sector.

In 2003-04, for instance, for every passenger car produced in the country, seven two-wheelers were turned out. In 2003-04, the country produced 842,437 passenger cars, 146,103 MUVs, 275,224 commercial vehicles, 5,624,950 two-wheelers and 340,729 three-wheelers.

Apart from the growing middle-class with rising income levels, institutionalisation of automobile finance in recent years has contributed a great deal to the impressive sales growth. This is also expected to pave the way to sustain a long-term high growth for the industry. Till the early 1990s, auto finance was generally marred by supply constraints and high interest rates. In recent years, however, things have changed dramatically with improved supply of bank funds and a substantial lowering of interest rates.

With a large number of financing agencies entering the market, auto finance is now available both from banks and non-banking finance companies (NBFCs). Of late, the East Asian model of creating purchasing power of customers through financing has come into vogue. Most NBFCs have arranged tie-ups with the dealers and manufacturers.

In addition to the growing domestic demand, automobile exports have also registered a healthy growth in recent years, thanks to the improvement in the quality of products and their competitive prices. For instance, export of passenger cars rose from 28,122 in 1998-99 to 166,413 units in 2004-05. Exports of commercial vehicles increased to 30,000 units in 2004-05 from 12,255 in 2002-03 and those of two-wheelers to 336,724 units in 2004-05 from 179,682 in 2002-03.

While the output levels of the domestic industry are no doubt still small in comparison with international auto giants, India has now emerged as the fastest growing car market in the world. The country's two-wheeler industry is already the largest in the world and is expected to continue to maintain robust growth in the coming years. The growth rate of all commercial vehicles in 2003-04 was 36.5 per cent; while the medium and heavy vehicle segment 39.5 per cent, the LCV segment logged a growth of 32 per cent.

Thanks to the all-pervading optimism in the air, car-makers have drawn up plans to increase their production capacities by as much as 44 per cent over the next two-three years. While the country's largest car producer, Maruti Udyog Ltd (MUL), will increase its capacity by setting up a new plant, Tata Motors, Hyundai, Ford and Toyota are planning to expand their capacities.

Toyota Motor Corporation of Japan has announced its plan to invest over 10 billion yen ($89 million) along with mini-vehicle producer Daihatsu Motor Company to set up a factory in India to produce 100,000 small cars a year from as early as 2007.

Toyota, which already operates in India through a joint venture with Kirloskar group, will build the new plant near its existing factory in Bangalore.

The tractor and utility major, Mahindra & Mahindra Ltd (M&M), has decided to enter into 51:49 per cent joint venture with French carmaker, Renault, to introduce `Logan', a mid-sized sedan in the Indian market.

The car is to be rolled out by mid-2007. The cost of the project, with a capacity to produce 50,000 units per annum, is estimated at Rs 700 crore.

German auto-maker Volkswagen AG, too, is looking to enter India.

Two multi-national car majors — Suzuki Motor Corporation of Japan and Hyundai Motor Company of Korea — have indicated that their manufacturing facilities will be used as a global source for small cars. The spurt in in-house product development skills and the uniquely high concentration of small cars will influence the country's ability to become a sourcing hub for sub-compact cars.

A heartening feature of the changing automobile scene in India over the past five years is the newfound success and confidence of domestic manufacturers. They are no longer afraid of competition from the international auto majors.

For instance, today, Tata Motor's Indigo leads the popular customer category, while its Indica is neck-to-neck with Hyundai's Santro in the race for the top-slot in the B category. Meanwhile M&M's Scorpio has beaten back the challenge from Toyota's Qualis to lead the SUV segment.

Similarly, a few Indian winners have emerged in the motorbike market — the 150 and 180 cc Pulsar from Bajaj and 110 cc Victor from the TVS stable. The 93 cc Bike from Bajaj and 110 cc Freedom bike from LML have also emerged as winners.

Evidently, Indian players have learnt from past mistakes and developed the skills to build cheaper automobiles using `appropriate' technologies.

TVS, for instance, paid an overseas source $100,000 to fine-tune home-grown engines rather than $1.5 million to import the entire engine.

Similarly, M&M adapted available systems and off-the-shelf components from global suppliers to keep costs down and go for aggressive pricing.

True, Indian players are still lacking in scale of operation. While economies of scale no doubt play an important role in the auto sector, a few Indian manufacturers relied on innovation rather than scale of operation for competitive advantage.

For instance, Sundram Fasteners was able to achieve the feat of directly supplying radiator caps to General Motors purely on the strength of innovation in product quality.

The domestic tooling industry bagged the order for the Toyota Kirloskar transmission plant in the face of stiff competition from multinational corporations. The cost of the entire job turned out to be only a fraction of the original estimate.

As the automobile industry has matured over the past decade, the auto components industry has also grown at a rapid pace and is fast achieving global competitiveness both in terms of cost and quality.

In fact, industry observers believe that while the automobile market will grow at a measured pace, the components industry is poised for a take-off. For it is among the handful of industries where India has a distinct competitive advantage. International automobile majors, such as Hyundai, Ford, Toyota and GM, which set up their bases in India in the 1990s, persuaded some of their overseas component suppliers to set up manufacturing facilities in India.

Consequently, the value of cumulative output of the auto components industry roserapidly to Rs 30,640 crore at end-2003-04 from just Rs 11,475 crore in 1996-97. Foreign companies such as Delphi, which followed General Motors in 1995, and Visteon, that followed Ford Motors in 1998, soon realised the substantial cost advantage of manufacturing components in India.

Finding the cost lower by about 30 per cent, they began exploring the possibility of exporting back these low-cost, high-quality components to their global factories and, thus, reducing their overall costs. Not surprisingly, the industry's exports registered a more than four-fold jump to Rs 4,800 crore in 2003-04 from just Rs 1,033 crore in 1996-97.

Automobile majors such as Maruti Udyog, Toyota, Hyundai have now finalised their plans to invest in some of the critical auto components. According to the Automotive Component Manufacturers Association of India (ACMA) officials, auto component manufacturers are expected to invest about Rs 10,000 crore over the next five years at the rate of Rs 2,000 crore per annum.

According to analysts, the auto component industry could emerge as the next success story after software, pharmaceuticals, BPO and textiles. The size of the global auto component industry is estimated at $1 trillion and is set to grow further. Against this backdrop, McKinsey's latest report has estimated that the sector has the potential of increasing its exports to $25 billion by 2015 from $1.1 billion in 2004.

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