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Can India become a global sourcing hub for small cars?

S. Muralidhar


Hyundai Santros, badged as Atos Prime, about to be loaded on to a ship at the Chennai Port for export to Europe. Hyundai Motor Company is the only manufacturer, apart from Suzuki Motor Corporation, to use Indian manufacturing facilities as a global source for small cars. — Shaju John

THE answer to this question will determine the sustainability of the Indian automobile industry's export of vehicles. This could be the key factor that will decide whether this industry's contribution to the country's exports will leapfrog the otherwise difficult process of developing new markets and investing in new products that is vital for exports to the highly competitive developed markets of the West.

The important point is that while Indian component manufacturers will be able to scale up operations, over time, to meet production economies and quality parameters that will be on par with international component vendors, that may still not make India a serious global sourcing base for fully built vehicles.

Only two companies — Suzuki Motor Corporation (SMC) of Japan and Hyundai Motor Company of Korea — have indicated that their Indian manufacturing facilities will be used as a global source for small cars.

However, there are quite a few indicators that the automobile sector has the potential and a clear window of opportunity to become a global player in small cars.

For one, the Indian passenger car industry has matured and reached critical mass in terms of number of vehicles sold and manufacturing quality. The spurt in in-house product development skills and the uniquely high concentration small cars in India will influence the country's ability to become a sourcing hub of sub-compact cars.

With this level of investment in the small car segment, the inherent strengths built up over the years can be leveraged to achieve higher export volumes of such vehicles. This is particularly relevant now as the overseas market for sub-compacts is also growing, albeit at a slower rate than the domestic market. India's prospects for export of vehicles has a parallel, an example that can be emulated in the way Thailand has emerged as a global production base for utility vehicles. The Thai automobile industry has been under development for the past 25 years, with a large chunk of investments in components manufacture and vehicular assembly line production coming only in the last decade.

Large investments poured into Thailand from the global big three — GM, Ford and Toyota — for setting up manufacturing facilities that rolled out pick-up trucks and sports and multi-utility vehicles. Ford and Toyota have focussed the most on manufacturing pick-ups and utility vehicles at their Thai facilities.

This has, over the years, made Thailand one of the largest manufacturing bases for such vehicles outside of the US — the largest market for utility vehicles. Further, since the size of the production capacities is in excess of demand in the local Thai market, exports of utility vehicles became both imperative and cost-competitive.

Ford, which has recently announced additional investments into the Thai operations, and Toyota, which has a sizeable market-share in the pick-up and utility vehicle segments in South-East Asia have both made that country their source for these vehicles. The immediate threat to India's emergence as a hub for manufacture of small cars could come from Thailand, which is also fast emerging as a manufacturer of other passenger vehicles including sedans and sub-compacts. However, since that market has not been focussing on manufacturing small cars, India can claim to have stolen a march during the last two years.

Interestingly, China, the world's fastest growing market, may not be the competitor that India needs to worry about — for two reasons. First, the automobile industry in China will have enough to contend with trying to manufacture for the domestic market.

Second, and most important, is that till 2010 Chinese manufacturers will have to face a higher tariff, if they try to export to the Asean region, making it unprofitable even with China's low cost manufacturing practices. Exports of fully built cars from China to other Asian countries will anyway become unviable due to the higher cost of logistics.

The same reason gives Indian passenger car manufacturers, both multi-national and home-grown car-makers, a window of opportunity to aggressively promote export of small cars.

During the last decade, the market for small cars has been concentrated in the Asian region, with pockets of demand in Latin America and Europe. With the expansion of the European Union and the increased awareness in Western Europe about vehicular pollution and the need for cars with better fuel economy, small cars will become more popular in that part of the world too.

For Indian car manufacturers the domestic market is growing at a heartening clip and the exports market has never looked rosier. Expanding both these markets is completely in their hands.

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