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Automotive industry in India to reach US$ 16.5B by 2021

The automobile industry in India is world’s fourth largest, with the country currently being the world's 4th largest manufacturer of cars and 7th largest manufacturer of commercial vehicles in 2017. Overall, Domestic automobiles sales increased at 7.01 per cent CAGR between FY13-18 with 24.97 million vehicles getting sold in FY18.

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Definition / Scope

Automotive is one of the largest industries in the global market. Automotive industry, globally, as well as in India, is one of the key sectors of the economy. Due to its deep forward and backward linkages with several major segments of the economy, the industry has a strong multiplier effect of industrial growth.

Automotive sector is the leader in product and process technology in the manufacturing sector globally and in India also. The industry is recognized as one of the drivers of economic growth contributing significantly to the overall GDP of the nation. Demographically and economically, India's automotive industry is well positioned for growth, servicing both domestic demand and increasingly, export opportunity.

The Indian automobile industry has grown at a fairly healthy pace, aided by robust economic activity and infrastructure development; growing middle class population with disposable income and availability of easy consumer finance facilities. The industry manufactures almost all major transport vehicles such as cars, multi-utility vehicles, light commercial vehicles, buses, trucks, tractors, motorcycles, scooters, mopeds and three-wheeler.

Market Overview

India has emerged as one of the largest and fastest growing automotive markets in the world, particularly strong in subsectors like light passenger and commercial vehicles, two wheeler and automotive components. The automotive industry in India is the 4th largest in the world with more than 4 million cars and commercial vehicles produced in India, with the country being the largest manufacturer of tractors, 4th largest manufacturer of car and 7th largest manufacturer of commercial vehicles.

The industry produced a total 29,075,605 vehicles including Passenger Vehicles, Commercial Vehicles, Three Wheeler, Two Wheeler and Quadricycle in FY 2018 as against 25,330,967 in FY 2017, registering a growth of 14.78 percent over the same period last year. The Two-Wheeler segment dominates the market with 81% in terms of volume owing to a growing middle class and a young population. India is a key pillar of global automotive market-policy, actions and strategies of players in India will have a fundamental impact on the global auto landscape.

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Key Metrics

Metrics Value Explanation
Base Year 2017 Researched through internet


Market Risks

  • The Automotive industry in India is highly competitive. The factors affecting competition include product quality and features, pricing, reliability, safety, fuel economy, customer service and financing terms.
  • Demand for a vehicle depends largely on socio-economic and political conditions, which tends to make vehicle demand highly volatile.
  • Increment in raw material prices.
  • Factors like disaster, stoppages, union issues, super financial stress and other external factors causes supply chain disruption.
  • The industry is subject to regulations and legislation related to environmental concerns.
  • The auto industry and economic stability are correlated. Factors like per capita income, employment level, size of middle class, interest rates play a major role in auto industry.
  • Automobiles are the most heavily taxed manufactured products in India and pose a lot of burden on the sellers and buyers alike.
  • Most of the Industries manufacturing automotive lack research and innovation, which limits the option to choose from the market and with global manufacturer launching new models of vehicles, costumers will always be attracted towards them.

Top Market Opportunities

  • vehicle penetration in India is still very low. Only 18 people per 1000 own vehicles in India compared to 809 people per 1000 in the USA, 519 people per 1000 in the UK, and 101 people per 1000 in China
  • India is fast emerging as global R&D hub. Strong support from government and private players such as Suzuki, Hyundai, are keen to establish R&D facilities in India.
  • Focus shifting on electric cars to reduce emission.
  • Strong support from the government; setting up of NATRIP centers.
  • Firms both national and foreign are increasing their footprints with over 1,165 R&D centers
  • Opportunities of creating sizable market segments through innovations.
  • Global players such as General Motors, Nissan and Toyota announced plans to develop India as small cars manufacturing hub.
  • Strong export potential in ultra-low-cost cars segment (to developing & emerging markets).
  • Strong growth in demand due to rising income, middle class and young population.
  • Growing economic stability and development of infrastructure, easy finance option from both private firms and automotive sectors.

Market Drivers

Growing Demands

  • Rising Income and large young population.
  • Greater availability of credit and financing options.
  • Demand for commercial vehicles increasing due to the high level of activity in the infrastructure sector.

Market size:

  • India’s automobile industry has grown largely because of its large market size.
  • The industry has had its fair share of both local and foreign consumers leading to higher production levels.

Policy Support

  • Clear vision of Indian government to make India an Auto manufacturing hub.
  • Initiatives like ‘Make in India’, ‘Automotive Mission Plan 2026’, and NEMMP 2020 to give a huge boost to the sector.

Support infrastructure and high investments

  • Improving road infrastructure.
  • Established auto ancillary industry giving the required support to boost growth.
  • 5 percent of total FDI inflows to India went into the automobiles sector.

Labour law reforms: The Industry has been affected by a high incidence of strikes due to outdated labor laws, but reforms could change this scenario in the days ahead. A majority of the labor force consists of unskilled labor which after implementation of these reforms will pave the way for the creation of new employment opportunities for a Highly skilled and educated local labor pool.

Shift from Agriculture driven to the Manufacturing driven economy: Currently, Agriculture in India accounts for 17 percent of GDP but employs over 50 percent of the population. Moving to the manufacturing-intensive economy means, creating jobs for the nearly 10 million workforces and more skillful labors to choose for automotive industries.

Market Restraints

Taxation The high tax on fuels and rapid fluctuation on fuel prices encourage consumers to shift from private vehicle to public transport.

Infrastructure constraints Insufficient road infrastructure and traffic congestion could be a bottleneck in the growth of the automotive industry.

Stability in exchange rates The industry is global and thus subject to the vagaries of exchange rate fluctuations. Widely varying exchange rates can move an industry from a viable to a non-viable situation in a short period of time. Devaluation increases the cost of imported competition. This threat to viability can quickly eliminate jobs and productive capability built up over a long period of time.

Global interconnectedness India is emerging as a priority market for global automotive companies. Indian companies are globalizing as well. Thriving in such an environment will need a clear strategy and the ability to manage risks and build organizational capability.

Industry Challenges

  • Adequate availability of trained human resources and retention of talented work forces and labors.
  • Due to the multiplicity of taxes, elaborate compliance obligations and tax cascading, the current indirect tax regime in India provides for a complex tax environment.
  • The Government has imposed minimum import price on steel which has reduced the lower commodity price.
  • Low orientation on Research and Development related to global standard.
  • The automobile sector affects the environment in multiple ways, starting from the use of materials that causes environmental degradation, and ending with the management of scrap.
  • There has been continuous change in consumer demand in the motor vehicle industry, encouraging the companies to focus on innovation, continuously.
  • Political obstruction plays a major role in impeding the growth of overall country, so the automotive industries is affected as well.

Technology Trends

IoT (Internet of Things) IoT and connected devices have now made their way into the automotive industry. It is expected that connected cars will step out of developmental obscurity and become an important personal item to be connected to the internet.

Electric Cars The declining reservoir of non-renewable energy sources is a major push for the production of electric vehicles, which is reflected in the increased market share of electric cars in the European market.

Cloud powered automotive industry One major automotive industry trend is the use of cloud technology. The automotive industry will take more determined steps to integrate their engineering and design activities with the cloud.

Baby boomers and multi-terrain vehicles Costumers demand and need of much needed comfort in difficult terrain baby boomers lead the way.

Crossover vehicles For a generation that expects the comfort of an SUV with fuel and operational cost-effectiveness, crossover vehicles have become a big hit. A mix between regular Sedans and SUVs, crossover vehicles have emerged as one of the most practical ways to commute without compromising on comfort and style

Telematics: Telematics is obviously one of the key automotive industry technology trends promising innovative changes. Globally, this business domain is primarily working on the consumption of IoT technologies. The implementation of IoT Telematics solutions helps reduce the number of car accidents, crashes, and damages, thus ensuring traffic optimization.

Regulatory Trends

  • The Government of India aims to make automobile manufacturing the main driver of "Make in India" initiative.
  • The government plans to promote eco-friendly vehicles-- CNG based vehicles, electric and hybrid cars.
  • Transfer pricing Regulations: The Income Tax Act has provisions which make provisions for taxation of income arising from transactions between associated enterprises. Transfer Pricing Regulations lay down that any income arising from such an international transaction shall be computed having regard to the arm’s length price.
  • Customs duty is charged when any product is imported to India. Automobile manufacturers based in foreign countries who want to avail lower custom duties and pass on the benefits to the customers can import Completely Knocked Down Kits (CKD) Kits which are charged concessional Customs duty at 6%. At present, if a completely built unit of any vehicle is imported it attracts a duty of 105%.
  • Research and Development cess act: The act states that all payment made towards import of technology will attract a cess of 5%.

Other Key Market Trends

  • Uncertain structural transformation of the labor market: Changes in employment status are linked to the process of structural transformation, as resources (capital and workers) are moved from low to high-productivity sectors. Although this has been a characteristic feature of the development processes of other parts, in India the shift has not yet taken place to same extent.
  • There are different labor unions under the influence of different political backgrounds,their changing demands and proposals.
  • Continuous occurrence of strikes and stoppages.
  • Lack of proper wage and salaried workers and labors in Indian market.

Market Size and Forecast

Production

  • The industry produced a total 29 million vehicles including Passenger Vehicles, Commercial Vehicles, Three Wheeler, and Two Wheeler.
  • The production of Passenger vehicles and Commercial vehicles was 4,010,373 and 894,551 respectively. Similarly, 1,021,911 three wheeler were produced in the year 2017/18 and the two wheeler segment dominated the market with 23,147,057 units produced.

Sales and Export

  • The passenger and commercial vehicle sales alone crossed 4.02 million units, while total sales, including two-wheeler and three-wheeler, reached almost 25 million units, registering a growth of 14.78 percent.
  • The sale of Passenger Vehicles grew by 7.89 percent. The overall Commercial Vehicles segment grew by 19.94 percent. Three Wheeler sales grew by 24.19 percent. Two Wheeler sales registered a growth at 14.80 percent.
  • The overall automotive exports increased by 16.12 percent. Two and Three Wheeler Segments registered a growth of 20.29 percent and 40.13 percent respectively, while Passenger Vehicles and Commercial Vehicles declined by (-)1.51 percent and (-) 10.53 percent respectively.
  • In the Fiscal year FY17, the Indian automotive industries saw the gross turnover of 67,724 million USD.
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Market Outlook

  • The FAME India (Faster Adoption and Manufacturing of Hybrid and Electric Vehicles in India) initiative is a policy introduced by the Indian government to incentivise the adoption of electric vehicles.
  • Driven by aggressive pricing and an increasing number of exports, passenger vehicle (PV) production in India is expected to grow at a CAGR of 9.0% from FY15 to FY20.
  • The industry forecasts the sales growth of passenger vehicles in FY19 at 8-10 percent, with utility vehicles growing at 14-15 percent and cars up between 8-9 percent in the domestic market.
  • Commercial vehicles, on the other hand, are pitted to continue their growth momentum in double-digits at 10- 12 percent, with M&HCVs up by 9-11 percent and light commercial vehicles growing at 10-12 percent.
  • The Indian automotive aftermarket is estimated to grow at around 10-15 percent to reach $16.5 billion by 2021, from around $7 billion in 2016.
  • India’s auto industry has a potential to generate up to $300 billion in annual revenue by 2026, creating 65 million additional jobs and contributing over 12% to GDP.

Technology Roadmap

The infrastructure of Indian roads might still be problem ridden and not be above the mark, but there is no stop to Smarter Automotive pulling up in the Indian parking lot. India is now the playing ground for every major automotive technologies.

Infineon With higher expectations from customers on reliability and quality, mechanical and electro-mechanical components are replaced by semi-conductor solutions. Infineon sensors, microcontrollers and power semiconductors help automotive manufacturers achieve their increasingly challenging safety, affordability and efficiency targets while simultaneously creating more sustainable mobility choices by lowering emissions and fuel consumption.

Vehicle Electrification (EVs/HEVs) With the fossil fuels becoming scarce and expensive as well as stringent emission norms, more and more OEMs would be looking to venture into the field of vehicle electrification.

Autonomous Driving This involves communications between vehicles, Vehicle to Infrastructure communication and Vehicle to Everything Communication

Infotainment Systems The infotainment systems inside cars provides a lot of functionality in terms of navigation, digital audio and video broadcasts from the satellites, making and receiving calls, connectivity via Bluetooth, etc.

The government is already working on an e-vehicle policy as it has set the target to have an all-electric vehicle fleet in the country by 2030. Under the policy, the government will provide for mandatory charging infrastructure along with offering incentives to people buying electric vehicles. The government is focusing on developing a working environment for the EV in India by not only creating charging infrastructure but also tendering orders for purchase of electric vehicles.

In August 2017, Central government entity Energy Efficiency Services Limited (EESL) had awarded a contract to Tata Motors and Mahindra & Mahindra to procure 10,000 electric vehicles for government departments.

Distribution Chain Analysis

Distribution chains in the automotive sector have to contend with peculiarities in the Indian context which are distinctly different from those in developed countries. Preference for small cars and two wheelers, lack of visibility at the customer end especially in rural markets, packaging complexities due to language and cultural diversity, quality challenges due to resource shortcomings, large number of fragmented suppliers which impede effective collaborations, complex tariffs and duties, lack of infrastructure (off highway transit is difficult) and a multilevel distribution system impacting price of products are some of the significant supply chain challenges.

Competitive Landscape

  • The Indian automobile market can be divided into several segments, two-wheeler (motorcycles, geared and un-geared scooters and mopeds), three wheeler, commercial vehicles (light, medium and heavy), passenger cars, utility vehicles (UVs) and tractors.
  • There are nearly 100 automotive companies in India. some of the major companies are: Tata Motors Limited India, Maruti Suzuki Ltd. India, Hyundai Motors India Ltd (HMIL), Mahindra & Mahindra Limited (M&M), General Motors India Private Limited (GM India), Hero MotoCorp Limited, Honda Siel Cars India Ltd etc.
  • Announcement of FAME: The government had first launched Faster Adoption and Manufacturing of Hybrid and Electric vehicles in India (FAME scheme) in 2015. The key players will be focused towards development of electric vehicles to emerge as front runners.

Competitive Factors

Luxury cars The luxury car segment has been seeing high growth rates and expanded at 37 per cent CAGR between FY07-15. Sale of luxury cars stood at 33,279 units in 2016. The luxury car market in India is expected to grow at 25 per cent CAGR till 2020.

New Financing Options Car-makers such as BMW, Audi, Toyota, Skoda, Volkswagen and Mercedes-Benz have started providing customized finance to customers through NBFCs.

Addressing Consumer Preferences The dynamics of Indian automobile market is changing with the changing consumer preferences.

Cost efficiency Costumers are demanding low budget luxury vehicles.

Fuel efficiency Due to high fuel prices costumers are attracted towards fuel efficient vehicles.

Augmenting R&D Orientation The industries need to focus on research and development to carry out innovations, as the costumers are more technology oriented and they love innovated products.

Key Market Players

Maruti Suzuki Maruti Suzuki India Limited, formerly known as Maruti Udyog Limited, is an automobile manufacturer in India. It is a 56.21% owned subsidiary of the Japanese car and motorcycle manufacturer Suzuki Motor Corporation. It is the market leaders in the passenger vehicles segments and held very close to 50% of the market share in FY 2018.

Hyundai Motor India Ltd Hyundai Motor India Ltd is a wholly owned subsidiary of the Hyundai Motor Company headquartered in South Korea. It held over 13% of market share in FY 2018.

Mahindra and Mahindra Mahindra and Mahindra Limited is an Indian multinational car manufacturing corporation headquartered in Mumbai, Maharashtra, India. It held over 7% of market share in FY18.

Tata Motors Tata Motors Limited headquartered in Mumbai, is an Indian multinational automotive manufacturing company and a member of the Tata Group. It is market leader in commercial vehicles segment. It held over 6% of market share in FY18.

Honda cars India Honda Cars India Ltd is a subsidiary of Honda of Japan for the production, marketing and export of passenger cars in India. It held more than 5% of the market share in FY18.

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Strategic Conclusion

Automobile industry plays a vital role in the fabric of Indian economy. This sector of industry has made a rapid & steady growth in India. Favorable Government policy and whole hearted support of the Government, opening up of the automobile industries for 100% FDI, increase in purchasing power capacity of middle class and easy and cheap auto-finance facility has helped the automotive sectors.

Current low car penetration, rising prosperity and the increasing affordability of private vehicles offer a healthy prognosis for the Indian automotive industry. Innovation is likely to intensify among engine technology & alternative fuels which will shift the focus on electric cars to reduce emission.

From an infant industry in the 1940s, today Indian automotive companies are ranked globally among the top and are believed to make it all the way to the top.

References

Further Reading

Appendix

  • CAGR: Compound Annual Growth Rate
  • CV: Commercial Vehicle
  • FDI: Foreign Direct Investment
  • FY: Indian Financial Year (April to March) So FY17 implies April 2016 to March 2017
  • INR: Indian Rupee
  • LCV: Light Commercial Vehicle
  • SIAM: Society of Indian Automobile Manufacturers


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