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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.