By: Swaroop Joshi, MBA I, SIBM
It’s not just the monsoons rampant in the country. The country suddenly seems to be flooded with auto giants flurrying in with huge funds. Small cars, all of a sudden have become the pets of the auto Goliaths. Small cars; which are currently defined as the cars less than 1200 cc engine capacity for petrol vehicles and less than 1500 cc engine capacity for diesel vehicles, along with a 4 meter length constraint; make up about 65% of total passenger cars market in India.
Maruti Udyog Ltd, the current market leader in passenger cars and gaining more than 80% of its revenues from its small and compact cars segment, will launch a new compact car by 2008-9 and invest an additional Rs 3,000 Crore till 2010. Code named A, the car would be priced at around Rs 4 lakh with an engine capacity of 1,000-1,200 cc. It has already committed to investing Rs 6,000 Crore by the end of the decade in its existing facilities at Gurgaon and the new unit at Manesar.
Tata Motors, which has eaten up a sizable share of Maruti in the last 5 years, has announced plans to invest Rs 10,000-12,000 Crore over the next three to four years to expand its production capacity for passenger cars and commercial vehicles. In addition to expanding its existing unit, Tata Motors has decided to set up a JV with Fiat of Italy to build a range of small cars and sedans for the Indian market. Technological inputs from FIAT would help the Tatas in developing the highly awaited 1 lac car.
After riding high on its Santro, Hyundai Motor India, which is the third largest player, enjoying about 20% market share in passenger cars, is also looking at another small car, positioned between the Santro and the Getz.
The global giants are not awaiting any invitations to join the party either. GM shifted its gears to the small cars segment, and has announced 3000 Crore plan to roll out the all new model “Spark” in addition to its Aveo plans at its proposed facility in Talegaon near Pune.The Toyota Kirloskar JV, which had initially denied of any plans of foraying into the small cars market until August end the latest, too seem to have swirled their plans. In 18 months' time, Toyota is now planning to roll out a small car. It is putting up a plant that will make 1.5 lakh small cars a year. It aims to corner 10% of the market in the next 4 years. Japan's Honda Motors along with its Indian partner SIEL is planning to set up a second plant in India, which could involve an investment of about 8000 Crores over a period of five years. The proposed plant will primarily be used for building small cars in India. Even majors like Ford, Nissan and Volkswagen have publicly unleashed their aspirations to foray into the Indian small car segment in past 1 month, all combined together totaling more than a whooping 25000 Crores investment plans.
Reasons underlying the gold rush
The biggest trigger for the sudden flurry can be seen in the excise duty cut from 24% to 16% for smaller cars in the recent Union Budget. In a recent move, the heavy industries ministry is expected to recommend that any car up to 4 meters in length should be considered “small” and charged lower excise, regardless of its engine capacity or the fuel used to run it. Till now, petrol cars with engine capacity of up to 1,200 cc and diesel vehicles with engine capacity of 1,500 cc were eligible for the lower excise bracket as long as they were up to 4 meters in length. This definition excluded several popular small cars, besides almost all the entry-level sedans, from the lower excise bracket. The latest move, if accepted, is expected to bring some cheer since popular car models such as Maruti Swift, Hyundai Getz, Tata Indica petrol and Fiat Palio (petrol) would become eligible for entry into the small car club. A few sedans could also qualify, provided their respective manufacturers tinker with the length. At present, the small car club comprises five models from the Maruti stable — M800, Omni, Zen, Alto and WagonR - besides the Hyundai Santro.
The present proposal comes close on the heels of industry bigwigs, including Ratan Tata, asking the government to relax the “small car” definition to include all cars with up to 1,500 cc engine capacity. If one takes a look at other small car markets around the world, it becomes apparent that India has come up with a novel way to define a small petrol car. In Brazil, a small car must have less than 1,000 cc engine capacity, whereas in Japan, the 660 cc cars fall under this ambit. Nowhere in the world is a small car defined as having engine capacity of up to 1,200 cc.
Although the excise duty cut might have been the immediate cause for the gold rush, the underlying reasons are far broader. The Indian Auto Industry has come a long way from the days of Ambassadors and Premiers, to the Maruti 800 revolution, now becoming the fourth largest and fastest growing passenger car producing hub on the globe. No doubt that a robust domestic market with stable consumption trends has been the key to the industry growth; due to the improved productivity, quality and reliability along with the traditional low labor cost factor, global auto giants are looking at India as a sourcing hub for their global operations. Thus, the situation in the global arena might have a larger part to play for the recent flurry. The excise cut might not give a competitive edge to any one of the auto players in the domestic market, but certainly does impact the global markets to a large extent. For example, Maruti Alto is the no. 1 brand in its segment on the Netherlands. With the duty cut, they can become more cost effective in the Netherlands market, and can increase their market share from the current 18.7% in that country.
Another important global reason for auto companies is the Free Trade Agreement India signed with Thailand two years ago. As per the agreement, the so-called 82 early harvest items, which include a range of auto components, will be subject to zero duty when imported from Thailand into India from September 1. Japanese majors like Toyota and Honda have major operations in Thailand and the FTA will help them integrate their Thai operations into their India plans. The option of importing critical components from their own operations/suppliers in Thailand confers a twin advantage for the Japanese majors. First, the time to market can be crashed as they do not have to wait for Indian component suppliers to invest in production capacities and, second, it confers a big price advantage as they can import duty-free components unlike other competitors.
Apart from these strategic reasons, the global crude oil price pressures on developing and developed markets seem enormous. With the fear of crude touching the 100 $ mark within one year, more and more manufacturers are turning to fuel efficient cars worldwide. Shifting to fuel efficient cars offers a temporary solution to the manufacturers till some other non crude technology ramps up to take over the market. The shifting of Indian autos towards manufacturing more and more diesel variants also seems to be a direct ramification of the crude prices.
Mind Games?
As mentioned earlier, robust domestic demand is the key to the recent small cars bout. The Neo spender youth, double income family and possessing of a car still being a status symbol more than a commuting medium is driving the auto growth. Along with it, the congenital frugal mentality, which still prefers fuel efficiency over looks and style, is stimulating small cars demand in particular. Though the two wheeler market is expanding, the taste of the urban youth is shifting to own a car after their first salary rather than owning a two wheeler.
It might just not be the mind games, but something more for the small cars to be rolled out in masses in the Indian markets. Ease in financing should be credited with a lion’s share. More than 80% of Indian car sales are on credit. Schemes like 5000 per month were a huge success because it brought the affordability factor into picture which was totally absent earlier.
Words of Caution
Though most auto majors are investing heavily in the small cars segment to gain a competitive advantage globally, the big flurry might lead to over capacities across all companies, including ancillary and auto comp industries in India, apart from the fierce competitive pressures. It would take at least 2-3 years till the time all capacities are built up, and in case of economic slowdown fuelled by sky rocketing crude prices, huge losses might be incurred. Also a jump shift from two wheelers to executive cars surpassing the small car segment in view of higher and higher disposable incomes of Indian families, along with easier financing schemes, too is not a remote possibility.
Imperialism of the new generation?
Long gone is the period when powerful Imperials used to be at war in far away lands for local and global supremacy. History is repeating itself; with some changes though. The difference this time is that amidst the clashes of the Emperors and Kings, the customer would be emerging as the trump Ace; the real victor.
It’s not just the monsoons rampant in the country. The country suddenly seems to be flooded with auto giants flurrying in with huge funds. Small cars, all of a sudden have become the pets of the auto Goliaths. Small cars; which are currently defined as the cars less than 1200 cc engine capacity for petrol vehicles and less than 1500 cc engine capacity for diesel vehicles, along with a 4 meter length constraint; make up about 65% of total passenger cars market in India.
Maruti Udyog Ltd, the current market leader in passenger cars and gaining more than 80% of its revenues from its small and compact cars segment, will launch a new compact car by 2008-9 and invest an additional Rs 3,000 Crore till 2010. Code named A, the car would be priced at around Rs 4 lakh with an engine capacity of 1,000-1,200 cc. It has already committed to investing Rs 6,000 Crore by the end of the decade in its existing facilities at Gurgaon and the new unit at Manesar.
Tata Motors, which has eaten up a sizable share of Maruti in the last 5 years, has announced plans to invest Rs 10,000-12,000 Crore over the next three to four years to expand its production capacity for passenger cars and commercial vehicles. In addition to expanding its existing unit, Tata Motors has decided to set up a JV with Fiat of Italy to build a range of small cars and sedans for the Indian market. Technological inputs from FIAT would help the Tatas in developing the highly awaited 1 lac car.
After riding high on its Santro, Hyundai Motor India, which is the third largest player, enjoying about 20% market share in passenger cars, is also looking at another small car, positioned between the Santro and the Getz.
The global giants are not awaiting any invitations to join the party either. GM shifted its gears to the small cars segment, and has announced 3000 Crore plan to roll out the all new model “Spark” in addition to its Aveo plans at its proposed facility in Talegaon near Pune.The Toyota Kirloskar JV, which had initially denied of any plans of foraying into the small cars market until August end the latest, too seem to have swirled their plans. In 18 months' time, Toyota is now planning to roll out a small car. It is putting up a plant that will make 1.5 lakh small cars a year. It aims to corner 10% of the market in the next 4 years. Japan's Honda Motors along with its Indian partner SIEL is planning to set up a second plant in India, which could involve an investment of about 8000 Crores over a period of five years. The proposed plant will primarily be used for building small cars in India. Even majors like Ford, Nissan and Volkswagen have publicly unleashed their aspirations to foray into the Indian small car segment in past 1 month, all combined together totaling more than a whooping 25000 Crores investment plans.
Reasons underlying the gold rush
The biggest trigger for the sudden flurry can be seen in the excise duty cut from 24% to 16% for smaller cars in the recent Union Budget. In a recent move, the heavy industries ministry is expected to recommend that any car up to 4 meters in length should be considered “small” and charged lower excise, regardless of its engine capacity or the fuel used to run it. Till now, petrol cars with engine capacity of up to 1,200 cc and diesel vehicles with engine capacity of 1,500 cc were eligible for the lower excise bracket as long as they were up to 4 meters in length. This definition excluded several popular small cars, besides almost all the entry-level sedans, from the lower excise bracket. The latest move, if accepted, is expected to bring some cheer since popular car models such as Maruti Swift, Hyundai Getz, Tata Indica petrol and Fiat Palio (petrol) would become eligible for entry into the small car club. A few sedans could also qualify, provided their respective manufacturers tinker with the length. At present, the small car club comprises five models from the Maruti stable — M800, Omni, Zen, Alto and WagonR - besides the Hyundai Santro.
The present proposal comes close on the heels of industry bigwigs, including Ratan Tata, asking the government to relax the “small car” definition to include all cars with up to 1,500 cc engine capacity. If one takes a look at other small car markets around the world, it becomes apparent that India has come up with a novel way to define a small petrol car. In Brazil, a small car must have less than 1,000 cc engine capacity, whereas in Japan, the 660 cc cars fall under this ambit. Nowhere in the world is a small car defined as having engine capacity of up to 1,200 cc.
Although the excise duty cut might have been the immediate cause for the gold rush, the underlying reasons are far broader. The Indian Auto Industry has come a long way from the days of Ambassadors and Premiers, to the Maruti 800 revolution, now becoming the fourth largest and fastest growing passenger car producing hub on the globe. No doubt that a robust domestic market with stable consumption trends has been the key to the industry growth; due to the improved productivity, quality and reliability along with the traditional low labor cost factor, global auto giants are looking at India as a sourcing hub for their global operations. Thus, the situation in the global arena might have a larger part to play for the recent flurry. The excise cut might not give a competitive edge to any one of the auto players in the domestic market, but certainly does impact the global markets to a large extent. For example, Maruti Alto is the no. 1 brand in its segment on the Netherlands. With the duty cut, they can become more cost effective in the Netherlands market, and can increase their market share from the current 18.7% in that country.
Another important global reason for auto companies is the Free Trade Agreement India signed with Thailand two years ago. As per the agreement, the so-called 82 early harvest items, which include a range of auto components, will be subject to zero duty when imported from Thailand into India from September 1. Japanese majors like Toyota and Honda have major operations in Thailand and the FTA will help them integrate their Thai operations into their India plans. The option of importing critical components from their own operations/suppliers in Thailand confers a twin advantage for the Japanese majors. First, the time to market can be crashed as they do not have to wait for Indian component suppliers to invest in production capacities and, second, it confers a big price advantage as they can import duty-free components unlike other competitors.
Apart from these strategic reasons, the global crude oil price pressures on developing and developed markets seem enormous. With the fear of crude touching the 100 $ mark within one year, more and more manufacturers are turning to fuel efficient cars worldwide. Shifting to fuel efficient cars offers a temporary solution to the manufacturers till some other non crude technology ramps up to take over the market. The shifting of Indian autos towards manufacturing more and more diesel variants also seems to be a direct ramification of the crude prices.
Mind Games?
As mentioned earlier, robust domestic demand is the key to the recent small cars bout. The Neo spender youth, double income family and possessing of a car still being a status symbol more than a commuting medium is driving the auto growth. Along with it, the congenital frugal mentality, which still prefers fuel efficiency over looks and style, is stimulating small cars demand in particular. Though the two wheeler market is expanding, the taste of the urban youth is shifting to own a car after their first salary rather than owning a two wheeler.
It might just not be the mind games, but something more for the small cars to be rolled out in masses in the Indian markets. Ease in financing should be credited with a lion’s share. More than 80% of Indian car sales are on credit. Schemes like 5000 per month were a huge success because it brought the affordability factor into picture which was totally absent earlier.
Words of Caution
Though most auto majors are investing heavily in the small cars segment to gain a competitive advantage globally, the big flurry might lead to over capacities across all companies, including ancillary and auto comp industries in India, apart from the fierce competitive pressures. It would take at least 2-3 years till the time all capacities are built up, and in case of economic slowdown fuelled by sky rocketing crude prices, huge losses might be incurred. Also a jump shift from two wheelers to executive cars surpassing the small car segment in view of higher and higher disposable incomes of Indian families, along with easier financing schemes, too is not a remote possibility.
Imperialism of the new generation?
Long gone is the period when powerful Imperials used to be at war in far away lands for local and global supremacy. History is repeating itself; with some changes though. The difference this time is that amidst the clashes of the Emperors and Kings, the customer would be emerging as the trump Ace; the real victor.
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