31-07-2012, 11:34 AM
Indian Automotive Industry: Opportunities and Challenges Posed By Recent Developments
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Introduction to The Indian Automotive Industry
For forty years since India's independence from the British in 1947, the Indian car market was
dominated by two localized versions of ancient European designs -- the Morris Oxford, known as
the Ambassador, and a old Fiat. This lack of product activity in the Indian market was mainly due
to the Indian government's complex regulatory system that effectively banned foreign-owned
operations. Within this system (referred to informally as the "license raj"), any Indian firm that
wanted to import technology or products needed a license/permit from the government. The
difficulty of getting these licenses stifled automobile and component imports, creating a low
volume high cost car industry that was inefficient, unprofitable, and technologically obsolete. The
two dominant products Ambassador and Fiat, although customized to the poor road conditions in
India, were based on a stale design concept (with outdated features), and were also fuel inefficient.
A Brief Introduction to the Top Four Indian Automotive Assemblers
As seen in Table 1, Maruti Udyog Limited (MUL) is the number one Indian automotive assembler
commanding more than a 70% share of the Indian passenger vehicle market. (It also sells a few
thousand jeeps, called Gypsy, which are not included in the passenger vehicle data of Table 1.)
Most recent data released by MUL show that it produced a total of 277,000 vehicles in 1995/96
resulting in a turnover of approximately $2 billion (Rs. 6673 crore, Source: Financial Express,
March 30, 1996). It is also a reasonably profitable venture with after tax profits of about $122
million (a 65 % increase over the previous year). MUL's relatively large production volumes offer
scale economies in production and distribution, that pose formidable barriers to entry. It has also
established a solid supplier-base located around India (most of its assembly is concentrated in
Northern India near New Delhi). Its products enjoy good reputation – in fact, Indian automotive
industry observers credit Maruti for the rapid improvement in quality and supplier capability in
this industry. (Until last year, new Maruti's have to be booked several months in advance!) MUL's
product line is concentrated in the economy car segment, although it has been moving up recently
to cater to the premium market segments by introducing the higher-end Esteem.
Recent Developments and Issues Facing the Indian Automotive Industry
In the past two years, more than a dozen multi-national firms have announced plans to enter the
Indian market. Most of them have formed joint ventures with Indian firms, while there are
exceptions such as Hyundai which plan to form fully-owned units. Exhibit 2 displays most of
these firms and their products planned for the Indian market3. Despite the large growth potential
of the Indian market (analysts expect the growth to triple in the next five years), no one expects the
industry to sustain the fragmentation caused by more than a dozen suppliers. Many of these new
firms will not enjoy the scale economies and relationships with suppliers that Maruti does, so they
have decided not to challenge Maruti at its price of $5,500 in the smaller car segment. Most are
planning to produce between 20,000 and 50,000 higher-end vehicles. The stiffest competition is
building up in the mid-sized car range (1,300 cc and above), where several of these multi-national
and Indian companies are planning to go head-to-head. Although these newly announced vehicles
at $12,000 or above remain expensive by Indian standards and planned capacity exceeds projected
demand, new entrants are betting on the rising incomes of middle-class families.
Discussion of the Strengths and Weaknesses of the Various Players
To analyze the strengths and weaknesses of the various players in the Indian automotive industry,
it is useful to classify them into the following four categories: (1) Indian Assemblers, (2) Multinational
Assemblers (3) Indian Component Makers, and (4) Multi-national Component Makers.
Table 2 presents the strengths and weaknesses of each of these groups.
The Indian assemblers, typified by Maruti, have built a formidable distribution and after-sales
network. They also have an established supplier base, which gives them cost and delivery time
advantages, especially in light of import tariffs and currency exchange rate fluctuations/
devaluations. Their biggest weakness, with the exception of TELCO, is the lack of product design
capability. In the coming years, they should focus on acquiring product design and lean production
know-how (as the Korean firms did in the eighties and early nineties [Amsden and Kang 95]).
They could acquire know-how with help from their joint-venture partners, and also with
investments in research and development which at present are at extremely low levels.
Conclusions
The Indian automotive industry, although growing rapidly, is in a state of flux. The production
capacities planned by the new joint ventures currently exceed most projections, and unless import
tariffs come down quickly and the economy grows remarkably, a shake-out may be expected from
the current 20 firms to about half a dozen major firms turning out finished products by the end of
the decade. However, if multi-national firms decide to use India as a production base from which
vehicles are exported to the rest of the world, more than half a dozen firms may be able to remain
profitable in India. Suzuki has already begun to use its Maruti joint-venture production to export a
few thousand cars to the Middle East and Europe. However, the production capacities of other
emerging economies such as Korea and China are also predicted to grow significantly in the coming
years, so exports may also face a highly competitive market situation.