Indian auto industry – Ready to roll again

Despite all odds, the Indian automotive industry has made its presence felt globally. Starting from humble beginnings at the time of liberalisation in 1991, India is today the sixth-largest motor vehicle producer globally and the third-largest market in Asia. Besides four-wheelers, the country boasts of the world’s second largest two-wheeler market and the largest tractor market globally. India’s suppliers are rapidly upgrading skills and scale to leverage this opportunity. Some have already transformed themselves into global power houses.

India’s promise and long-term potential cannot be doubted. By 2025, motorisation rates will increase five-fold. At 72 vehicles per 1,000 inhabitants, the country’s motorisation rate will be 60-70 per cent higher than that of China in 2010.

Nearly all international players have recognised these trends and bet on India’s future by setting up substantial operations in the country. Despite the recent weakness of the Indian market, OEM capacity expansion has grown at a CAGR of 12 per cent over the last five years. Over the last 14 years, FDI in the automotive sector amounted to about 4.5 per cent of total inflows into India.

While the last five years have nevertheless taken a toll on the confidence of the industry, the challenges of the last few years have not all been negative. Low capacity utilisation for domestic sales has forced MNCs and local players to actively leverage India as a vehicle export hub. Besides better fixed cost degression, exports provide higher margins and therefore support domestic business of OEMs as well as the balance of payment of the country. In FY14, global OEMs on average exported 32.5 per cent of their total sales out of India. For domestic OEMs the corresponding number is 75, which is poised to grow due to the increased export focus of Maruti-Suzuki.

In addition, increased competition in India and the need to export have resulted in a much stronger focus on Research & Development amongst domestic manufacturers. R&D investments, as a percentage of revenue, have risen dramatically for Ashok Leyland, Maruti Suzuki, Mahindra & Mahindra and Tata Motors.

At the same time, many MNCs have realised that they must leverage local R&D expertise to enable domestic teams to react faster to market developments. In a first step, non-safety critical factors such as increasing ground clearance for Indian vehicles, localisation of non-critical parts, etc., must get development clearance locally to avoid endless iterations between over-burdened headquarter engineers in the US, Europe, Japan or South Korea and the local team. Subsequently, several OEMs are showing the way by developing clear strategies to build vehicle variant capability in India and to leverage this capacity globally. Some, such as Bharat Benz, have even developed specific vehicles for the local market and in the process changed long-held paradigms of the parent company.

Constant price pressure and exchange rate volatility have driven OEMs towards localisation. Again, it is not political mandate like in China but economic necessity that drives localisation and increases the industrial footprint and strength in the country. Going forward, not only the long-term but also the short- to mid-term opportunities in India look positive. Sales of MHCVs are picking up, which typically is a 6-9 month lead indicator for the economy and private consumption. Footfalls in dealerships are increasing.

The need of the hour is to build on this momentum via decisive reform. Growth and the virtuous cycle that it drives need to be nurtured and supported rather than taken for granted, as the last five years of the UPA Government have clearly shown. Take the implementation of GST as an example.

More than half of the domestic freight journey is spent due to regulatory stoppages and rests according to a World Bank research. Indirect negative effects of the current situation on sales, inventories, logistics can amount to 10-14 per cent of the operating costs for manufacturing firms.

At the same time, experience in other markets clearly shows that the largest gains in economy-wide total factor productivity have come through the modernisation of freight, which is more effective than even electrification at creating economic value.

Hence, to drive Indian manufacturing (not limited to the automotive industry) it is paramount not only to implement GST as soon as possible, but to also ensure that all roads are virtually check-post free and that tolls can be cleared efficiently using electronic systems.

With the right focus, driving India’s GDP growth to 5-6 per cent in FY15 seems very feasible. Return to growth rates of around 7-8 per cent in FY16 is what we expect. India’s automotive industry seems to be ready to roll again. Fasten your seatbelts and enjoy the ride.

The writer is Managing Partner, Roland Berger Strategy Consultants

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