With everyone’s eyes on China at the moment, it’s easy to forget that India is also on the brink of becoming a major vehicle market. Max Pemberton of Autelligence looks at how India is progressing so far, the challenges it needs to overcome, and the potential size of the country’s vehicle market in 2020.
Although India has been much discussed in recent years, and has been the recipient of major foreign investment in the automotive industry, it has not received the same level of attention as the world’s other major developing country, China. Now that China is on everyone’s lips and on the radar screens of the world’s politicians and industrialists, attention must surely turn again to India, the next emerging market with very substantial potential.
India, though, has seen false dawns before, and has been defeated in its attempts to fulfil its promise by a mixture of world events and its domestic inability to overcome a burdensome bureaucracy. The motor industry has poured billions of dollars into building factories to produce motor vehicles, and India has a very good component-manufacturing base. Some companies have achieved success, such as Maruti, with its Suzuki Alto-based small cars, while other players such as Telco and Hyundai have also recently increased production volumes.
But how is India progressing and what are the challenges it needs to overcome?
India has the world’s second largest population – already at 1.05 billion in 2004 – and is growing fast. So fast, in fact, that it will have more people than China by 2050, or maybe even sooner. Crucially, the population in the 20 to 64 year old age group – the portion of the population that is most active economically – is booming. At the same time, Gross National Product has been rising rapidly, recently achieving growth rates of 7% to 8% a year, which is faster than the rate of growth of its population, so per capita income is increasing. However, as is common in rapidly growing emerging markets, income is very unevenly distributed. In particular, in the year 2000, while the top 20% of the population had access to 40% of GNP, the poorest 25% of the population lived in abject poverty. The poverty of the poorest segment was the reason for the shock result at the recent election, when the ruling party was so decisively rejected, and the stock market stumbled, as it was uncertain the new government would continue with the reform programme instigated by its predecessor. Relations with Pakistan seem to be on the mend and the prospect of war appears to be diminishing. India now seems ready for a considerable expansion of motorisation – indeed it is a necessity if the country is to progress. The new government, headed by Manmohan Singh, has been able to reassure the market and growth looks set to continue. Vehicle sales have in fact climbed dramatically, rising 14% between 2002 and 2003, with a similar advance expected this year.
As referred to earlier, the top 20% of the population, numbering 202 million in 2000, had access to 40% of GNP in 2000, and the top 10%, numbering 101 million, had access to 33% of GNP. In motor industry terms, this provides a very large market for both vehicle sales and aftermarket activities. But there is more to come. India’s GNP was $US 449 billion on the inflation-adjusted constant measure. However, on the even more important local measure of PPP (Purchasing Power Parity), GNP was five times higher, at $US 2.6 trillion, making it the world’s fourth largest economy on the PPP measure. This provides a per capita income of $US 8,516 on the PPP basis for the top 10% of the population and $US 5,161 for the top 20%, or the more than 200 million people who constitute the much vaunted middle class. This is a sufficient level of income to allow the start of mass purchase of motor vehicles, provided they are built locally and priced for the domestic market. For comparative purposes, the number of people in the economically active 20 to 64 year group in W Europe is 240 million, in the USA 165 million, and in Japan 79 million.
Although vehicle sales have risen by 14% and are currently around a million units per annum, these are modest volumes considering the size of the population and, in particular, the 200 million people making up the middle class. Further, India has one of the lowest vehicle ownership rates in the world, at 9 vehicles per 1,000 of the total population, with a total of just 9 million vehicles on the roads of the country, many of them old and in poor condition. This level of ownership is quite inadequate to service the needs of such a large and widely dispersed population, where more than 70% of people still live in rural areas, and where the population is forecast to increase to 1.152 billion by 2010 and 1.272 billion by 2020. The vehicle parc alone would need to increase by 33% just to maintain ownership at its current level in 2020, so fast is the rate of population growth!
The Indian government has recognised this fact and has formulated a set of Policy Objectives for the automotive industry aimed at promoting “integrated, phased, enduring and self sustaining growth of the industry”. Should this policy remain in place, the prospects for the industry in India look bright.
India has the potential to become one of the greatest automotive markets on the planet in the fullness of time. It has the people, the ability, and sufficiently high level of income among the middle classes. It also has sufficient capacity already installed to lift production volumes by 50%, but it will need much more if the country’s potential is to be met. Many manufacturers have already had their fingers burnt by building factories when the first false dawn occurred some seven years ago, and may be loath to get back into the fray just yet, especially as the boom in China is demanding intense concentration and a significant call on resources.
All the ingredients are in place to allow rapid growth in India. The demand is there, economic prospects look good, and there is definitely a need to expand motorisation if the government is to provide even basic services to the majority of its population. Our core forecast is that growth will occur, but lagging China by about five or six years. The forecast is that sales volume will reach nearly 11 million units a year by 2020, with local production providing all of the demand as well as some export volume. During its progress, sales volumes in India will overtake Germany by 2010 and Japan by 2012, to become the world’s fourth largest market by 2020, always assuming that the government continues to handle the economy with growth in mind!
Although India has been a damp squib in the past, largely due to inertia and the challenges of managing such a large and diverse nation, the omens look good this time. The government has changed through the democratic process and the new team is being led by the man who was responsible for many previous economic and financial advances.
On balance, we can expect fireworks from India, even though it may not be a “big bang”.
The forecasts used in this article are taken from Max Pemberton’s India Strategic Market Profile, which is available here.
Although India has been much discussed in recent years, and has been the recipient of major foreign investment in its automotive industry, it has in many ways not received the attention of the world’s other major developing country, China – but this is about to change.
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