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India's Auto sector on fast track
By Dr. Uday Lal Pai
Exclusively for InvestorIdeas.com
posted July 17, 2006
Indian Automobile sector continues to grow in top gear . Based on estimates, the total sales (domestic + exports) last year has crossed the 10 million mark.
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According to auto industry experts Indian Automobile sales will grow at a CAGR of 9.5% up to 2010. To tap this large opportunity, Indian Automobile companies and global automotive giants have announced huge expansion plans.
Even the rising fuel prices and higher financing costs have not dulled demand for automobiles, as was feared. The last quarter (April-June 2006) has seen a substantial growth in sales of passenger cars and commercial vehicles on a year-on-year basis. Both passenger car and commercial vehicle sales are up, while two-wheeler sales continue to be buoyant as expected. The health of industry, educational system and India's willingness to invest and focus on the job cited India is one of the largest markets for two-wheelers, three-wheelers and tractors.
The Economic Survey of Indian government said the auto industry, which maintained a steady annual growth rate of 15 per cent in the last four years, has seen a rise in investment following the liberalisation in the sector in 1991. The survey said the number of automobile manufacturing facilities in India have grown to 15 for passenger cars and multi-utility vehicles, nine for commercial vehicles, and 14 each for two/three-wheelers and tractors.
In this fiscal (April, 2005-March , 2006) so far, figures show that vehicle sales in India have risen by 20%, year-on-year.
Auto industry in India is amongst the main drivers of growth of Indian economy with an output multiplier of 2.24 (for every one cent invested, auto sector gives back 2.24 cents to the economy). India's automotive market has flourished as India's economy has expanded and incomes have risen. The domestic manufacturers have benefited but there has also been substantial inward investment as manufacturers have sought to serve rising demand and use India as low-cost global hub.
In recent years the country has seen increasing number of global players entering Indian market by way of Joint ventures, collaborations or wholly owned subsidiary. Sudden interest of major global players has made Indian auto industry very competitive as India provides twin benefit of ready market and Low cost manufacturing base for them.
Facts first
The Automobile Industry performance in the year 2005-06 showed encouraging results for all segments of the automobile industry. The industry registered a growth of around 13 percent in numbers over the financial year 2004-05. The total vehicle production in Year 2005-06 including tractors touched at a new high of 10 million units which include production of 9,735,216 units of vehicles and an estimated production of more then 2,70,000 units of tractors.
The passenger vehicles posted a growth of around 8% in the year 2005-06 over the year 2004-05. The commercial vehicle segment clocked a growth rate of 10%. While the medium and heavy commercial vehicles (M&HCV) segment has grown by 4.5%, the light commercial vehicles (LCVs) grew by more than 19% during 2005-06 as compared to 2004-05. The Three Wheelers grew by 17% during the same period.
Backed by Government's initiative on rural roads and better connectivity with major towns and cities, improved agricultural performance, upward trend of purchasing power in the hands of rural people, the Two Wheeler segment continued to post a steady growth of around 14% and was able to achieve the record performance of crossing 7 million two wheelers with exact sales standing at 7,056,317 during 2005-06. Motorcycle segment grew at the rate of more than 17% during the fiscal 2005-06 as compared to 2004-05.
The export thrust
The high-growth domestic automobile industry would attract a massive investment of $ 18 billion by next year, but its export potential still remains untapped despite it gaining global recognition, says the Economic Survey of the government of India.
"While a beginning has been made in the export of vehicles, the potential in this area is far from fully tapped," the survey said.
The exports performance of the automobile industry in exports which grew by more than 28% in year 2005-06 as compared to 2004-05 is also encouraging.
Commercial vehicle exports grew by 36% to 40,581 units during this period. Passenger vehicle exports grew by around 6%. The Two Wheelers also crossed five hundred thousand mark for the first time clocking 513,256 units recording a growth rate of plus 40% over the last year.
Passenger car exports grew by about 28% in the quarter ending April-June '06 and stood at 49,132 units. Motorcycle exports for the same period grew by 45.3% and stood at 1.34 million units.
The great Indian market
India is the 11th largest producer of motor vehicles in the world having produced 1.31 million passenger vehicles in the year ending March 2006. Passenger car sales amounted to 1.05 million in the same period. Two-wheeler sales amounted to 7.60 m, three-wheelers to 0.43 million (largest in the world) and commercial vehicles to 0.39 million. India is also the largest tractor manufacturing country having produced some 270 000 units in 2005-06. There are around three million tractors in India.
In other words, India is also the second Largest Producer of Motorcycles in the world after China, the largest Three Wheeler Market in the World, the fourth largest Tractor Market in the World, fifth largest Commercial Vehicle Market in the world and the fourth largest Passenger Vehicle Market in Asia.
India is the world's largest mini car maker. The country is also the second largest maker of motorcycles, the largest tractor maker and ranks fifth in production of trucks and buses.
The Indian auto market was primarily a market where small cars thrived. But this is changing rapidly, with increasing number of big vehicles swarming the roads as part of a new affluence which is changing the face of a resurgent economy.
India is poised to become a powerhouse in the automobile and truck transportation sector, according to Ted Robertson, president, Society of Automobile Engineers International. "I know you must wonder but I have given you an external observation from travelling the world. You are in a very fortunate position," he said adding that he could foresee an explosive growth in the Indian automotive sector in the near future. Where does his optimism stem from? A combination of the health of the industry, educational system and a willingness by India - both business and Government - to invest and focus on the job was responsible, Robertson said.
Drive-in to India
Foreign players, especially those in the luxury car segment are driving into India as never before. Mercedes, BMW, Porsche, Audi, Bentley and Rolls Royce are already here. Now, the Italian marquee Lamborghini is also planning to enter the country. The Italian marquee plans to launch the Gallardo.
The world's biggest carmakers, including Ford and General Motors, are looking for a kill in India, considered one of the fastest growing automobile markets. The auto majors are lining up major investments in the country, in an apparent bid to outdo each other.
Czech carmaker Skoda Auto has announced plans to almost double capacity in the country. Skoda would also export cars to neighbouring Banglasdesh, propelling India as a regional hub.
Japan's Honda would double annual car production from 50,000 units at present by 2010. South Korea's Hyundai, the 2nd largest carmaker in India, plans to establish another plant in India. This would boost its capacity by 150,000 vehicles annually, taking its capacity to 400,000 units.
France's Renault, which has partnered Mahindra & Mahindra to make its Logan Sedan, may also export cars and spare parts from India.
Germany's BMW and Volkswagen are also planning to establish plants in India. The auto boom is here to stay. BMW will invest $22 million in Chennai and Citroen is firming up plans to assemble cars. While others like Renault and Nissan too are slated to enter, no carmaker has been in news like Volkswagen AG.
Meanwhile, India's $5-bn truck market is dominated by local players - Tata Motors and Ashok Leyland - but heavy trucks form a very small part of this market. All the international players which have entered India in the last eight years are targeting the heavy truck market. Volvo, which sold around 600 trucks last year, has managed to carve a niche for itself in India. Following in Volvo's footsteps is Germany-based MAN in a joint venture with Force Motors and Navistar in partnership with M&M. Scania AB, based in Södertälje, Sweden, is a leading European manufacturer of heavy trucks, buses, and diesel engines is planning to enter India with a strategic tir-up with Ashok Leyland
Future Drivers
The Indian automobile market will see at least 30 new launches this fiscal year, spanning everything from affordable hatchbacks to mid-size models to super luxury high-end cars and SUVs.
The future growth drivers in auto industry include the higher GDP growth, India's huge geographic spread- Mass Transport System, increasing Road Development, increasing disposable Income with the service sector, cheaper (declining interest rates) and easier finance Schemes, replacement of aging four wheelers, graduating from two wheelers to four wheelers, increasing dispensable ncome of rural agri sector, growing Concept of Second Vehicle in Urban Areas.
Conservative estimates put the growth rate of Indian economy at 7-8 per cent, with the booming Indian automobile sector being considered as a key driver of growth. The industry experts feel that the steep rise in incomes, triggered by a booming economy, was the main reason behind the growth in car sales. The easy availability of automobile loans after the Indian economy was liberalised is also another reason why car sales in India have boomed.
India's auto market has immense growth potential considering the fact that despite the boom in economy, the fruits of which are now reaching the middle class, only eight out of 1000 Indians own a car. Comparable figures for developed western markets are 450/1000. The market analysts also point out that the transition of any economy from developing to developed has been historically driven by auto sector growth, examples being the United States in 1940S and Japan's success saga in 60s.
Disclaimer
Dr. Uday Lal Pai is an independent columnist for this web site.
Dr. Uday Lal Pai may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
Dr. Uday Lal Pai is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.
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