Come 2030, India will become the world’s third largest automotive market behind China and the U.S., says a forecast by U.S.-based consultancy firm Keystone. The consultancy firm estimates that with a consistent GDP growth of 6%, Indian domestic automobile demand will touch 20 million in 2030, just behind 62 million and 23 million vehicles in China and the U.S. respectively. Don’t want to look that deep in to the future? Another study by Booz-Allen Hamilton, a global consulting firm says that the Indian domestic market of 1 million passenger cars will double by 2010 and cross 3.5 million by 2015. The estimates of these studies can also be substantiated by a report of The Economist, which predicts that by 2020 almost 40% of the global industry sales and 55% of production will happen in Asia (primarily India and China) over the next 15 years.

Indian car market overtakes South Korea

The Indian automotive industry, currently producing about 8 million vehicles annually, is the second fastest growing in the world after China. During the first quarter of 2005-06, India had overtaken South Korea to become the number-three car market in the Asia-Pacific. During the quarter ended June 2006, about 243,000 cars were sold in India, compared to about 225,000 cars in South Korea. Korea was leading India by about 36,000 cars two years earlier. China sold 1.1 million cars during April-June 2006, displacing Japan as Asia's largest car market.

In August 2006, India’s domestic sale of passenger cars rose 16% to 83,844 units from 72,272 units in the same month last year. Sale of commercial vehicles also moved up 28.4% to 35,333 units from 27,515 units in the corresponding month last year, according to the Society of Indian Automobile Manufacturers (SIAM).

India is also set to enter in to the league of top-10 car manufacturing nations moving ahead of U.K. and Canada. India’s car production capacity is expected to cross the mark of 2 million by the end of 2007-08 moving up 70% from the current capacity of 1.4 million units. With this expansion, India will move up two steps from the current 11th rank to match Brazil’s two million capacity at 8th position. Importantly, this estimate doesn’t take in to account the Rs. 100,000 ($2,200) car expected to be launched in 2007 by Tata Motors, the largest automotive company of India. Company has pegged the ‘addressable market’ of this car at 1 million units annually at a ‘mature stage’.

Big plans for small cars

In fact, India has now achieved the status of a low-cost global manufacturing base for small cars. It is already the third largest manufacturer of small cars in the world after Japan and Brazil. About 70% of the cars sold in India belong to small cars segment. The reduction in excise duty on small cars announced in the budget this year has encouraged global as well as domestic manufacturers to set up new capacities for this segment in India. The new capacities are being generated to cater both domestic as well as global markets. Automobile manufacturers are expected to invest more than $5 billion (about Rs. 25,000 crore) in India during the period of 2005-10, according to an estimate by SIAM. And with the new announcements, SIAM will have to do some homework to bring a revised estimate!

Maruti Udyog Ltd, the largest car manufacturer of India, has announced an additional investment of $652 million (Rs. 3,000 crore) taking its total capital expenditure plans to $1.95 billion (Rs. 9000 crore) by 2008. The company is also discussing with Japan’s second largest automaker Nissan Motor Co. to set up a new plant with an additional investment of about $540 million (Rs. 2,500 crore).

Earlier in August 2006 some of the automobile manufacturers announced investment plans of nearly $870 million (Rs. 4,000 crore.) General Motors, the largest automobile manufacturer of the world, has decided to set up a new plant at Talegaon in the west-Indian state of Maharashtra with an investment of $293 million (Rs. 1,350 crore) for enhancing its India capacity to 225,000 units by 2008.

Tata Motors Ltd, the largest automotive company of India, has announced investments worth $2.6 billion (Rs. 12,000 crore) for its various projects over the next four years. It has formed an alliance with Italy's largest manufacturer Fiat SpA to set up a new plant for cars and engines near Pune with an investment of about $435 million (Rs. 2000 crore). It is also setting up a Rs. 1,000 crore ($222 million) plant for its Rs. 100,000 ($2,200) car at Singur in the east-Indian state of West Bengal.

India’s largest utility vehicle maker Mahindra and Mahindra announced an expansion plan of $120 million (Rs. 550 crore). Mahindra has total capex plans of about $216 million (Rs. 1000 crore) in the next three years for its automotive division. Honda Motor Co., Japan’s third largest automaker, has planned to invest $650 million (Rs. 3,000 crore) in India by 2016, which includes its second car plant by the end of 2007 with an investment of about $200 million in a period of five years.

Export Potential: India becoming Small-Car-Hub

India is already exporting 13.5% of its total car production annually, and it is not difficult to predict that this percentage will move up further considering the enhanced thrust of Indian automakers on the global markets. Even global automakers are now looking at India as a manufacturing hub for other markets.

Under the $1.95 billion (Rs. 9000 crore) capex plan, Maruti will bring a new small car to the market in 2008 with a clear focus on exports. It will target to export 150,000 cars out of the total 200,000 cars of this new model produced annually. And after 2009, the company will try to export as much as 40% of its total sales with an export target of 400,000 cars on an estimated annual sale of 1 million units by 2010. Analysts peg this export target worth about $3 billion.

Hyundai Motor India Ltd, a subsidiary of South Korea's Hyundai Motor Co, has already implemented this strategy for some time now. The second largest car manufacturer of India exported 39% of its total sales in 2005-06, and plans to take this percentage to 50% after commissioning its second plant in the next couple of years. The other companies that are trying to build a manufacturing base in India for small cars also have an eye on the export market.

The made-in-India tag has now become a symbol of quality product at a cheaper price. And it is the same strategy that India implemented for its IT services sector. When Hyundai started exporting its hatchback small car Santro to Europe in 2003, it faced a resistance from European dealers. The dealers asked for discount on India-made cars considering them inferior. Hyundai invited those dealers to its Chennai plant, and they got so impressed that they withdrew their demand for discount.

The Automotive Mission

The Automotive Mission Plan (AMP) drafted by the Heavy Industries and Public Enterprises Ministry has envisaged a target of $145 billion turnover of the Indian automotive sector by the year 2016. The Indian automotive sector currently generates revenue of $34 billion a year. In 2005-06 the automotive industry grew by 12 percent in terms of numbers and 10% in value terms while exports exceeded $2 billion. The industry believes that an investment of $35 billion - $40 billion would be needed in the next 10 years to achieve the goals of the AMP.

India or China?

With China and India expected to become the largest and the third largest automotive markets by 2030, global automakers can’t ignore any of them at the cost of the other. At present, while China has definite advantages in terms of the market size, Indian has advantages in terms of business environment. Foreign companies are required to form a joint venture with a local partner to set up an auto plant in China, while India had allowed 100% foreign direct investment (FDI) through automatic route in the sector way back in 2002. And interestingly, the Chinese market has become too competitive to earn profits, compared to growing and profitable India.