Automotive

Industry forecast

Hitting the brakes?

Indian car sales have been hit by falling consumer confidence and tighter credit. But growth will pick up again in
2010, according to the Economist Intelligence Unit’s projections

Over the past few years, India’s automotive market
has boomed. Passenger car sales (including utility
vehicles and multi-purpose vehicles) surged by an
average of 17% per year in the five years to fiscal
year 2007/08 (April-March) to reach 1.56m units. The
market for commercial vehicles rose even more
sharply, by 21% a year, to reach 486,800 units in the
same year. India became the tenth-largest car mar-
ket in the world in 2007, and the third largest in Asia
after China (5.6m units) and Japan (4.3m units).
However, the global financial crisis has punc-
tured the boom in vehicle sales: in the first six
months of 2008/09 car sales rose by only 4.9% year
The economic crisis has on year and commercial vehicle sales fell by 3%.
punctured India’s The outlook for sales will be depressed for the next
car-sales boom few months as consumer confidence remains sub-
dued and credit is more difficult to obtain, with car
sales forecast to increase by only 1.1% in 2008/09
and 3.7% in 2009/10. A faster rate of growth, of
around 11%, should occur between 2010/11 and
2013/14, but this is still significantly slower than
that of the last five years.
The automotive sector has been one of India’s
largest and fastest-growing manufacturing sectors,
with vehicle production (excluding two- and three-
wheelers) increasing by almost 150%, to 2.3m units,
in the five years to 2007/08. Continuous liberalisa-
tion since the early 1990s and a large domestic mar-
ket have made India a prime destination for global
automotive players. According to the government’s
automotive mission plan published in January 2007,
the sector’s turnover is projected to rise from
US$35bn in 2006 to US$145bn in 2016, with its share
of GDP increasing to 10% from 4-5% at present. The
automotive industry consists of around 50 major
companies, provides direct and indirect employment
for over 10m people (2% of the labour force) and
accounts for around 5% of India’s industrial output.
Both foreign- and domestically-owned compa-
nies are active in the automotive sector. In 2006/07
11 companies were producing passenger vehicles.
Maruti Suzuki India, a subsidiary of Suzuki Motor
Corporation of Japan, dominates the passenger-car
market with a share of 38.5%. A total of 12 companies
were manufacturing two- and three-wheelers in
2006/07, but the market is highly concentrated, with
the two biggest players controlling over 70%. Eight
companies produced light, medium-weight and
heavy commercial vehicles in that year, with India’s
Tata Motors (part of the larger Tata Group) having a
61.5% market share.
The three segments of the automotive market
manufactured a total of 10.8m vehicles in 2007/08
(consisting of 1.8m passenger vehicles, 545,000
commercial vehicles, 8m two-wheelers and
500,000 three-wheelers). Most of this production
was for domestic consumption, with exports form-
ing a small, but rapidly growing share; exports of
passenger vehicles represented 11.4% of passenger-
vehicle production. The automotive industry is
becoming increasingly competitive as demand
increases and more foreign companies enter the
market.
Passenger vehicles
Cars are still a luxury item for the vast majority of
Indians, although they are becoming increasingly
affordable for some urban consumers. Sales of pas-
senger cars, sports-utility vehicles (SUVs) and
multi-purpose vehicles (MPVs) reached 1.55m in
2007/08 (up by 12.2% on the previous year and
more than double the level of sales in 2002/03).
This has made India the tenth-largest car market in
the world, and the third-largest in Asia after Japan
and China. However, only about ten Indians in
every 1,000 own a car, meaning that India still has
one of the lowest car-ownership rates in the world.
Indian car buyers focus chiefly on price and fuel
economy, and small, cheap cars make up the bulk
of sales.

India: New passenger car registrations

(incl light trucks; ‘000)
2004a 2005a 2006a 2007a 2008b 2009c 2010c 2011c 2012c 2013c
Indiad 1,062 1,143 1,380 1,548 1,565 1,623 1,755 1,934 2,175 2,446
US 16,865 16,948 16,504 16,089 14,241 12,398 12,320 12,771 13,404 13,971
Japan 4,768 4,748 4,642 4,400 4,185 4,050 4,122 4,235 4,237 4,277
China 2,421 2,941 3,852 4,870b 5,643 6,549 7,370 8,350 9,453 10,616
Germany 3,267 3,319 3,468 3,148 2,981 2,965 3,051 3,342 3,610 3,834
a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Fiscal years (beginning April 1st of year indicated).
Source: Economist Intelligence Unit.

2 Business India Intelligence April 1st 2009 © The Economist Intelligence Unit Limited 2009

Demand. A surge in car sales in the past five
years has been stimulated by the buoyant econo-
my, easier availability and the competitive provi-
sion of credit, as well as the general trend towards
economic liberalisation. India’s car market is strik-
ingly one-dimensional: together the mini- and com-
pact-car segments account for around two-thirds of
new-car sales. Maruti’s ubiquitous 800 model,
which has an engine size of less than 1000cc, was
the best-selling car in India for many years, but
ceded that position to its stablemate, the Alto, in
2005. Tata’s “1 lakh car”, the Nano, which will sell
for around Rs100,000 (US$2,000) was delayed by
production difficulties. About to be released, it will
appeal to millions of consumers who previously
could not afford to buy a car. Sales in the luxury-
car segment—classed as vehicles priced at
US$20,000 and above—have been one of the
fastest growing in the market, although they make
up only 5% of total sales. Few inexpensive cars are
imported because of high duties, although import
tariffs are coming down.
The used-car market in India has traditionally
been largely unorganised, and brokers account for
most of the purchases. The entrance of Maruti and
Ford, one of the big three US carmakers, should
bring greater structure to the used-car market and
lead to an increase in sales. Importing used cars is
impractical because of high duties.
After expanding by 17% a year in the five years to
2007/08, reflecting solid gains in disposable income,
car sales have been badly hurt by the global finan-
cial crisis. The outlook for sales will be depressed in
the year ahead, before faster growth resumes starting
in 2010/11. Even then, however, growth will remain
slower than in the past few years.
Growth in car demand is occurring from a low
base, with only a small proportion of the popula-
tion currently able to aspire to car ownership.
Personal disposable income per head in India is
estimated at just over US$1,000 in 2008. Car own-
ership thus remains unaffordable for the vast
majority of the population, 70% of whom still live
in the countryside. Despite the low level of GDP
per head, the same indicator measured at purchas-
India: Automotive market forecast
2004a 2005a
New passenger car registrations 1,062 1,143
(‘000)d
Stock of passenger cars 8.8 8.7b
(per 1,000 people)
New commercial vehicle registrations 318.4 351.1
(‘000)d
Medium & heavy truck registrations 198.5 207.5
(‘000)d
Retail sales of petrol (‘000 tonnes) 8,847 9,487 10,191b 11,219 11,968 12,639 13,542 14,558 15,662 16,837
a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Fiscal years (beginning April 1st of year indicated).
Source: Economist Intelligence Unit.
© The Economist Intelligence Unit Limited 2009
Automotive
ing power parity exchange rates is estimated at
almost US$3,000 in 2008, and will grow by 8.5% a
year during the next five years. Just as importantly,
incomes are several times higher in the fast-grow-
ing urban regions near Delhi, Bangalore and More and more Indian
Mumbai than in rural areas. (A low average income households can afford
in the country obscures wide urban-rural dispari- personal transport
ties, as well as the influence of a growing middle
class that is increasingly able to afford personal
transport.)
This means that nearly 100m Indian households
have an annual income of more than US$3,000 and
can afford basic consumer goods, and of these,
around 10% have an annual income of over
US$10,000 and can afford inexpensive cars. It is
these middle-class Indians—like their more numer-
ous counterparts in China—who will continue to
attract the attention of domestic and foreign car
companies. Given that only ten Indians in every
1,000 own a car (compared with 14 Chinese, 24
Indonesians and 264 Malaysians), and that the num-
ber of households with an annual income in excess
of US$10,000 will rise from 10.2m in 2008 to 22.6m
in 2013, the potential for growth is substantial.
Demographic factors will also support demand, as
not only will India’s population grow relatively
quickly compared with other countries, but its work-
ing-age population will also increase as a percentage
of the total population.
The market for small cars, which already accounts
for two-thirds of domestic sales, offers the most
promising prospects for growth as rising affluence
enables more Indians to trade up from motorcycles.
Tata’s unveiling of the Nano, the cheapest car in the
world, will spawn many competitors, and the Small cars account for two-
increasing availability of small, cheap cars will fuel thirds of domestic sales
demand growth. More households are also purchas-
ing a second car, and the replacement cycle for cars
has fallen from more than ten years in the mid-1990s
to around five years at present. Luxury carmakers,
such as Mercedes-Benz and BMW of Germany, have
been the least affected by the global financial crisis
so far, and while they will not remain immune,
demand at the upper end of the automotive market
will revive in 2010 and beyond.
2006a 2007b 2008b 2009c 2010c 2011c 2012c 2013c
1,380 1,548a 1,565 1,623 1,755 1,934 2,175 2,446
9.4b 10.1 10.9 11.6 12.3 13.2 14.1 15.2
467.9 486.8 459.0 464.4 508.5 580.7 656.1 737.4
275.6 279.1 251.3 255.5 283.9 325.3 366.9 409.5
Business India Intelligence April 1st 2009 3
Automotive/Energy
Poor road infrastructure
will hold back car sales
India needs to rethink its
licensing strategy
4 Business India Intelligence April 1st 2009
However, several factors will temper car
demand growth in India. Scooters and motorcycles
are the dominant form of personal transport, and
will remain so until incomes rise sufficiently to
allow a broader segment of the population to
afford a car. (Sales of two-wheelers—scooters,
motorcycles, mopeds and electric two-wheelers—
exceeded car sales by a factor of almost five in
2007/08.) Car sales will also be held back by the
poor condition of the road network. This is despite
the 5,846-km so-called golden quadrilateral road-
building project linking the country’s four leading
cities. The new highway links will make car travel
easier and more appealing. This project is an
important part of the ambitious roadbuilding plans
of the National Highways Authority of India,
which envisage the construction of a further 12,000
km of national highways. But congestion will
remain a major problem in Indian cities, and the
construction of new roads is unlikely to keep up
with potential demand.
Supply. Chennai (Madras) is the centre of auto-
motive manufacturing in India. A total of 11 compa-
nies, which include some of the world’s major man-
ufacturers, produce cars in India. The sector is domi-
nated by three firms, Maruti Suzuki India, Hyundai
Motor India (a wholly-owned subsidiary of
Hyundai of South Korea) and Tata, which have a
combined share of the passenger-car market of
almost 80%. Nevertheless, foreign carmakers are
flocking to India to secure a share of the domestic
market. Toyota and Honda of Japan and Ford and
General Motors of the US are the four largest foreign
carmakers in India on a sales basis.
Oil and gas
Fading interest
The upcoming eighth round of the New Exploration Licensing Policy (NELP) is likely to be lacklustre
India’s government touted the eighth round of NELP
as the largest round to date, but it has been delayed
and is being scaled back to reflect the downturn in
the global economy, low oil prices, and concerns
over various aspects of government policy. As a
result, the interest shown during the upcoming
round is likely to drop off considerably compared to
previous rounds, particularly among international
oil and gas majors. This suggests that the govern-
ment needs to rethink its licensing strategy.
NELP strategy
Since its inception in 2000 NELP has become a fun-
damental tenet of successive governments’ energy
policies. It was instrumental in opening up the oil
and gas sector, for the first time providing private and
foreign companies with the option to hold 100%
Exports have become one of the automotive
industry’s biggest growth areas. Exports of passenger
vehicles rose by 25% a year in the five years to
2007/08 and reached 218,000 units. Most exports go
to developing countries in Asia, where inexpensive
cars can find a market. Markets in Africa and the
Middle East (including Egypt, Kenya and Nigeria) are
also important. However, as quality has improved
some Indian manufacturers have headed upmarket.
Small cars are also starting to penetrate western
European markets, and volumes are picking up.
The deregulation of the car market and the entry
of foreign investors have increased price competi-
tion in a highly price-sensitive market. Holding
down prices remains an essential element of any
marketing strategy in India. The launch of Tata’s
Nano will trigger other companies to follow suit.
Bajaj, for example, which dominates the market for
two- and three-wheelers, has announced a joint
venture with a French carmarker, Renault-Nissan, to
produce a similarly low-priced car by 2011. Toyota
and Honda are also considering manufacturing low-
cost cars in India.
Manufacturers will remain committed to the
small-car market despite rising material costs and a
slowdown in the Indian economy. India is likely to
become a centre for the manufacture of cheap, small
cars that can be sold in the domestic market as well
as exported to other emerging markets. The manu-
facture of low-cost, small cars will become increas-
ingly attractive in a domestic and global environ-
ment of high fuel costs and stricter environmental
controls.
equity ownership in projects. As a result, it has
become the government’s primary means by which
to promote new exploration and production projects,
while also providing a strong revenue stream, which
in turn has helped to fund further exploration efforts.
NELP is central to the government’s policy of
long-term energy security. It is hoped that the divi-
dends reaped from increased exploration will go a
long way towards countering India’s dependency on
external energy resources. The minister for petrole-
um and natural gas, Murli Deora, is quick to point
out the gains that have been made in the past nine
years, revealing that there have been 68 discoveries
of oil and gas (from 206 awarded blocks) establishing
reserves of 500m tons of oil and oil equivalent of
gas. To date, a total of US$8.3bn has been committed
by bidders to investment and exploration. Pre-NELP
© The Economist Intelligence Unit Limited 2009