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Indian Automobile Market

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A detailed analysis on the Indian Automobile market for the year 2014
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A report on Indian Automobile Industry Prepared by Siddharth Jhala 1402170 PGDIM21 Under the guidance of Dr. Binilkumar
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Page 1: Indian Automobile Market

 

A  report  on  Indian  Automobile  Industry  

     

                           

Prepared  by  Siddharth  Jhala  

1402170  PGDIM-­‐21  

 Under  the  guidance  of  

Dr.  Binilkumar  

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Table  of  contents    Sr.  No.   Topic   Page  No.  1   List  of  tables   2  2   List  of  figures   2  3   History  of  Indian  automobile  market   3  4   Current  scenario   4  5   Future  of  Indian  automobile  market   6  6   Application  of  concepts  of  economics   11        

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List  of  Tables  

List  of  Figures      

Sr.  No.   Figure   Page  No.  

1   Timeline  of  various  entrants  in  Indian  market   3  

2   Indian  GDP  growth  vs.  annual  passenger  vehicle  volumes   4  

3   Car  population  vs.  Cars  per  1000  population   7  

4   Growth  in  population  categories  with  higher  incomes   7  

5   Vehicle  affordability   8  

6   Critical  success  factors  for  green  vehicle  development  globally   9  

7   India's  clean  revolution  story  till  now   9  

8   India’s  mobility  revolution  till  now   10  

9   Percentage  share  of  public  transport  in  India   10  

10   Elasticity  for  Maruti  Suzuki  Swift   11  

     

Sr.  No.   Table   Page  No.  

1   Table  of  content   1  

2   List  of  figures   2  

3   The  relation  between  quantity  and  price  of  Swift   11  

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History  of  Indian  automobile  market  The   first  motorcar   on   the   streets   of   India   was   spotted   in   1898.   Before   world   war-­‐1,  around   4,000   motor   vehicles   (cars   and   commercial   vehicles   put   together)   were  imported.   Between   World   war   I   &   II   small   scale   factories   were   set   up   in   Mumbai,  Calcutta  and  Chennai  for  assembling  imported  parts  to  manufacture  cars.  It  was  in  mid-­‐40s  when  India  got   its  own  assembly  with  the  set  up  of  Premier  Automobiles  Limited  (PAL)  and  Hindustan  Motors  (HM).  For  the  five  decades  following  Independence  PAL  &  HM  together  symbolized   India’s  car   industry.   In  1945  as  Mahindra  &  Mohammed  was  established  to  produce  vehicles  for  the  utility  vehicle  segment  a  vehicle  that  would  be  apt   for   the   interiors   of   the   country  where   roads  were  not   developed.   Soon   it   became  Mahindra  &  Mahindra   (as   it   is  known   today)  and  started  producing   the   iconic  Willy’s  Jeep   for   the   Indian  market  without   any  modifications.   In   1956   the   Indian   automobile  industry  was  sealed  off  preventing  new  entrants.  In  early  1980s  winds  of   liberalization  began  blowing  and   foreign  players   to  enter   the  market   after   partnering  with   local   player.   Japanese   company   Suzuki   became   the   first  company   to   enter   the  market   after   partnering  with  Govt   of   India   and   forming  Maruti  Udyog   Limited   (MUL)   after   a   long   gap   of   almost   3   decades.   In   1985   Govt.   of   India  announced  its  famous  broad  banding  policy  which  gave  new  licenses  to  brad  groups  of  automotive  products  such  as  two  and  four  wheeled  vehicles.  MUL  in  no  time  became  the  market   leader   with   70%   market   share   in   this   Oligopoly   market   with   its   successful  models   like  800  and  alto.   In  1993   the   industry  was  de-­‐licensed  and   flood  gates   to   all  international  players  were  opened.   In  no   time  companies   including  but  not   limited   to  Mitsubishi,   Hyundai,   Daewoo,   Chevrolet,   Ford,   Opel,   Honda   had   set-­‐up   their  manufacturing  assemblies  in  the  country.  

Figure  1:  Timeline  of  various  entrants  in  Indian  market  

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Current  scenario    Today  the  Indian  automobile  market   is   the  one  of   the   largest   in  the  world.  During  the  2000s  it  was  one  of  the  fastest  growing  markets  but  today  it  is  experiencing  flat  growth  or  de-­‐growth  for  some  manufacturers.  Due  to  the  uncertainty  factors  which  led  to  flat  or  negative  growth  in  the  market,  forecast  of  passenger  vehicle  was  brought  down  from  5  million   to   4   million   for   the   year   2015   by   SIAM   (Society   of   Indian   Automobile  Manufacturers).  

 Figure  2:  Indian  GDP  growth  vs.  Annual  passenger  vehicle  volumes  

 Indian   automobile   market   is   considered   to   be   one   of   the   most   difficult   markets   for  international  players   to  crack   into  because  of   the   large  rural  population  and  a  unique  customer  mindset  where  not  performance  and  luxury  but  economy  is  the  primary  focus  for  customers  while  buying  a  new  vehicle.  The  annual  production  of  car  and  commercial  vehicles  was   reported   to   be   a   little   over   3.9  million   units   in   2011   and  was   the   sixth  largest  market  globally.  India  emerged  as  Asia’s  third  largest  exporter  of  passenger  cars  due  to  easily  available  cheap  labor.  The   current   Indian   automobile  market   is   a   form  of   oligopoly  where   top   4   companies  dominate  over  80%  of  the  entire  market.    The  current  market  leaders  are    Maruti  Suzuki       46%  Hyundai         22%  Mahindra         11%  Tata                8%            

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The  uncertainty  factors  that  led  to  the  flat  growth  were  as  follows  as  per  the  interaction  I  had  with  experts  in  the  field.  

• Rising  fuel  prices  • Higher  bank  rates  leading  to  costlier  loans  • The  increase  in  inflation  rate  was  higher  than  the  the  rate  of  increase  in  income  

leading  to  lesser  disposable  income  • Uncertainty  over  government  which  was  recently  settled  • Passenger  vehicle  being  a  luxury  and  not  a  need,  the  purchase  was  postponed  in  

most  markets  • Utility  vehicles  on  the  other  hand  being  need,  a  source  of  income,  did  not  register  

flat  or  negative  growth  instead  continued  to  be  on  a  rise  • Uncertainty  over  several  deals  and  future  of  business  houses  like  Vodafone  case,  

Walmart-­‐Bharti  tie-­‐up  failure,  Kingfisher  and  Sahara  • The  expectations  of  potential  buyers  are  not  meeting  the  current  available  

product  line-­‐up  • Lack  of  adequate  infrastructure  in  certain  areas  • Traffic  congestion  issues  in  metros  • Market  demand  is  expected  to  be  flat  in  most  parts  of  the  country  due  to  scarce  

rainfall  • Increase  in  duties  on  imported,  diesel  vehicles  and  SUVs  

     

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The  future  of  the  Indian  automobile  market  The   hope   that   industry   experts   are   pinned   onto   and   the   positive   happenings   are   as  follows  

• Formation  of  a  stable  government,  controlled  by  a  party  single  handedly  • Recent  hold  on  the  reduction   in  duties  on  SUVs  after   the  request   from  SIAM  to  

the  government  • The  inflation  rate  being  slowly  coming  under  control  • The  new  government  is  promoting  production  and  FDI  which  would  mean  local  

production  of  certain  vehicles  which  are  currently  imported  and  hence  cost  more  • Hope   of   implementation   of   GST   which   would   drastically   reduce   the   cost   of  

vehicle  • Rising  prosperity  levels  • Increasing   affordability   in  owning   a  new  vehicle   in   terms  of   starting  price   and  

ease  of  loans  • Hope   of   the   new   government   taking   measures   to   reviving   the   growth   of   the  

automobile  industry  by  going  softer  on  tax  and  duties  • There   is   a   speculation   that   suppressed   demand   for   the   past   few   years   has   to  

open  in  the  coming  years  as  the  product  life  cycle  reaches  an  end  • The   new   government   is   currently   reviewing   its   duties   on   hybrid   and   green  

vehicles  which  will  drastically  reduce  the  costs  of  vehicles  like  Toyota  Prius  and  Mahindra  e2o  

• Expected  growth  in  rural  markets  • India  currently  has  over  50%  of  it’s  population  below  the  age  of  25  which  are  the  

customers  of  tomorrow  • The  GDP  of  the  country   is  going  strong  with  Q1  2014-­‐15  clocking  5.7%  growth  

which  was  recorded  after  10  quarters  • A  lot  of  R&D  has  been  going  on  to  develop  cleaner,  smaller,  smarter  and  cheaper  

vehicles  by  the  giants  like  Maruti  Suzuki,  Hyundai,  Mahindra  and  Tata  • The   new   government   has   made   it   clear   that   their   focus   would   be   on   better  

connectivity  through  better  infrastructure        

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 Figure  3:  Car  population  vs.  Cars  per  1000  population  

 

 Figure  4:  Growth  in  Population  Categories  with  higher  incomes  

 

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 Figure  5:  Vehicle  affordability  

       As   per   few   industry   experts   and   an   industry   report   published   by   KPMG,   two   major  revolutions  can  be  expected  in  the  industry  in  the  coming  decade.  The  clean  revolution  The  mobility  revolution      

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The  Clean  revolution    We  are  currently  facing  the  heat  of  ever  rising  fuel  prices  and  metros  where  clean  air  is  a  rare  sight.  The  conventional  fuel  expected  to  last  not  more  than  30  years,  and  ours  not  being   a   self-­‐reliant   country   in   this  matter   the  prices   are   expected   to   skyrocket   in   the  coming   years.   Clean   revolution   is   about   vehicles  with   zero   or  minimal   emissions   and  running   on   renewable   sources   of   energy,   capturing   large  market   share   and   someday  crossing  the  sale  of  conventional  vehicles.  This  premise  only  gets  strengthened  with  the  recent  developments  in  which  the  new  government  is  reviewing  its  taxing  and  duties  on  hybrid  and  electric  vehicles.  The  current  market  of  Hybrid  cars   is  almost  non-­‐existent  with  the  only  vehicle  in  the  segment  (an  example  of  monopoly),  Toyota  Prius  which  is  priced   at   22   lacs   in   other   country   is   sold   at   39   lacs   in   India.   Reviewing   the   electric  vehicle   market   the   scene   is   not   very   different.   Reva   had  managed   to   achieve   decent  visibility  in  Banglore  but  with  the  recent  acquisition  of  the  company  by  Mahindra  a  new  product,  Mahindra  e2o,  has  been  launched  which  has  not  been  successful  because  of  the  higher   taxes   which   rose   the   price   of   the   vehicle   to   8   lacs.   The   focus   of   the   new  government   is   on   a   rigid   and   reliable   power   grid,   which   can   supply   24   hours   of  electricity  throughout  the  nation,  also  backs  the  theory  of  a  Clean  revolution.    

 Figure  6:  Critical  Success  Factors  for  Green  Vehicle  Development  Globally  

 Figure  7:  India's  clean  revolution  story  till  now    

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The  Mobility  Revolution  With   the   increase   in   the   congestion   problem   in   the   metro   cities   a   tried   and   tested  solution  has  been  of  public  transport.  The  success  of  multiple  forms  of  public  transport  like  Local  trains,  Metro,  Monorail,  Bus  service  in  Mumbai  and  the  innovative  Bus  rapid  transport   system   (BRTS)   in   Ahmedabad   proves   it.   There   is   a   huge   scope   of  improvement  in  the  field  of  public  transport  as  the  cities  continue  to  grow  in  terms  of  population  and  geographically.  The   impact  of   the  mobility  revolution   is  believed  to  be  minimal   on   the   automobile   market   in   the   short-­‐term.   There   is   a   scope   for   the  automobile  manufacturers   to   get   involved   in   the  mobility   revolution   through   Public-­‐Private  partnerships.  The  mobility  revolution  is  expected  to  improve  the  status  quo  for  the  issues  of  traffic  congestion  and  air  pollution.      

 Figure  8:  India's  mobility  revolution  till  now  

 

 Figure  9:  Percentage  share  of  public  transport  in  India  

   

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Application  of  concepts  of  economics  

Price  elasticity  The  following  data  is  collected  for  the  sales  of  Maruti  Suzuki  Swift  in  the  Indian  market.  The  data  represents  sales  volume  and  price  for  the  month  of  August.  We  have  compared  the  sales  of  the  car  for  the  year  2010  and  2014.  There  is  an  increase  in  the  price  of  the  vehicle  by  29.79%  whereas  the  increase  in  the  volume  sold  is  of  25.07%.  From  this,  it  can  be  concluded  that  the  Es  <  1  i.e.  supply  is  inelastic.      

Year   Quantity  Sold   Price  2010   11913   5.17  L  2014   14900   6.71  L  

Table  1:    The  relation  between  quantity  and  price  of  Swift    

Figure  10:  elasticity  for  Maruti  Suzuki  Swift    Substitution  Theory  Mahindra  XUV500  had  gained  a  large  market  share  in  the  sub  15  lac  premium  SUV  category.  Renault  with  the  launch  of  it's  Duster  which  they  priced  below  XUV500  made  an  attempt  to  substitute  XUV500  with  their  Duster.  To  an  extent  Renault  succeeded  in  their  attempt  at  substitution,  Duster  soon  became  a  cheaper  option  for  people  looking  for  a  SUV  which  costed  lesser  but  gave  similar  value  to  XUV500.  

 

Oligopoly:  There  are  limited  number  of  three  wheeler  producers  in  the  market  namely  Bajaj  Auto,  Piaggio,  TVS,  Mahindra  and  Atul  Auto.  They  together  comprise  98%  of  the  market.  They  practice  non-­‐price  competition.  Also  there  is  barrier  to  entry  for  the  new  player,  as  a  

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large  capital  investment  is  required  to  enter  the  market.  The  product  sold  by  them  is  quite  similar  i.e.  the  product  is  homogenous.  Also  the  brand  loyalty  has  been  created  which  plays  a  major  hindrance  in  the  entry  of  the  new  player  in  the  market.  The  passenger  vehicle  market  of  India  is  also  an  Oligopoly  to  an  extent.  The  top  4  players  together  contribute  over  85%  of  the  market.  Maruti  Suzuki       46%  Hyundai         22%  Mahindra         11%  Tata                8%      

Penetrative  pricing  In  2011,  Mahindra  launched  a  new  SUV  by  the  name  of  XUV500.  They  branded  it  as  the  SUV  for  Generation-­‐X.  The  SUV  market  at  that  instant  was  dull  in  terms  of  demand.  Mahindra  launched  XUV500  with  an  aggressive  price  tag  of  10.8  lakhs.  The  sales  were  opened  in  limited  city  and  it  was  backed  by  inadequate  supply.  The  demand  of  the  vehicle  soon  skyrocketed.  As  the  demand  of  the  price  was  rising  day  by  day,  Mahindra  restructured  the  pricing  and  over  a  period  of  2  years  the  price  of  the  product  rose  to  12.25  lacs,  which  is  an  increase  of  13%.  They  managed  to  penetrate  the  market  with  their  aggressive  penetrative  pricing  policy.  The  other  example  could  be  of  the  iconic  Tata  Nano,  which  was  branded  as  a  1  lac  rupee  car.  The  price  of  the  same  car  has  increased  50%  and  reached  1.5  lac.  Although  penetrative  price  was  not  pre-­‐planned  in  this  case  and  the  prices  went  up  after  the  increase  in  costs  of  manufacturing.    

Prestige  pricing  The  price  of  a  Rolls-­‐Royce  Phantom  in  the  Indian  market  is  3.5  crore,  which  is  much  more  than  any  competitor.  The  pricing  of  Rolls  Royce  vehicles  is  called  Prestige  pricing  where  a  person  will  still  spend  the  huge  amount  in  order  to  achieve  the  brand  value  of  owning  a  Rolls  Royce.    

Value  pricing  Most  of  the  market  giants  offer  value  priced  products  to  their  customers.  The  products  of  these  companies  are  priced  in  accordance  with  the  value  the  product  offers  to  the  customer.  Some  of  the  companies  currently  offering  these  benefits  are  Maruti  Suzuki,  Hyundai,  Mahindra  &  Mahindra  and  Tata.  


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