India’s rise as an automotive market is set to make it the world’s third largest by 2020 according to a report by Jd Power.

India surpassed France, the United Kingdom and Italy to become the sixth largest automotive market in the world in 2010, the researchers say.

More than 2.7m light vehicles (passenger cars and light-commercial vehicles) were sold in India in 2010, up from just 700,000 light vehicles sold in 2000.

JD Power says that increased economic activity will propel India’s light vehicle market to 11m units a year by 2020, making it the third largest light vehicle market in the world (after China and the US). China is projected to reach 35m units in 2020 while the US is projected at 17.4m.

India has a population of 1.2bn, similar to China’s but its vehicle market is currently much smaller than China’s. Analysts say that demographic trends in India also point to very strong medium-term prospects for growth to per capita car ownership as more people reach driving age, in combination with rising incomes.

“India has quickly become one of the largest and fastest-growing automotive markets in the world,” says John Humphrey, senior vice president of global automotive operations at J.D. Power and Associates.

“This momentum has been driven by a more open and market-driven economy, an empowered and less risk-averse work force, a more consumer-driven culture and an emphasis on small car production.”

Global small car production hub

India is also developing as a major global vehicle sourcing centre. Hyundai, Maruti Suzuki, Ford and Renault-Nissan have plants in India with major export activity focussed on low-margin and cheap to assemble small cars. PSA is also considering its next step for raising its manufacturing presence in India.

In addition to policies favouring general market liberalisation and encouraging foreign investment, India’s government has pursued policies meant to support development of India’s automotive industry. The main thrust of these policies has been to position India as a global hub for small passenger car production. These policies include a reduction on the sales tax of small cars (defined as those less than 4,000 millimetres in length and with an engine displacement of 1.2 litres or less), and providing financial incentives for automakers to build and export vehicles overseas. As a result, many automakers have been shifting their small car production operations to India, or designing vehicles specifically to fit Indian market needs.

In 2010, nearly 80% of all new passenger vehicles sold in India were classified as either mini cars or subcompact passenger cars. By comparison, the mini car and subcompact segments accounted for only 24% of passenger-vehicle sales in China in 2010, and just 3% of passenger-vehicle sales in the US, according to JD Power’s data.

Low price cars dominate domestic market

JD Power estimates that the average transaction price for all new passenger vehicles sold in 2010 in India was about US$10,000 (compared with US$17,500 in China and US$28,000 in the United States), while the best-selling passenger car in India—the Maruti Suzuki Alto—had an average transaction price of about US$6,200. While India’s emphasis on small vehicles has helped sales to grow quickly, it also means that automaker earnings will depend primarily on small car segments, where profit margins are traditionally thin.

“Should fuel prices continue to climb globally in the future—and as demand for inexpensive and reliable transportation increases in many of the world’s developing markets—India could find itself well-positioned to fulfil the needs of the small car segment,” said Humphrey. “That said, profit margins are thinner in the small car segment, so automakers are going to need to manage their businesses carefully to optimise profits.”

Challenges ahead

While significant progress has been made in building the Indian automotive industry, there are challenges that could impede India from reaching its future potential. Economists and automotive industry executives believe that much still needs to be done to smooth the way and drive the country forward.

In India, government, business and academic officials regularly refer to India’s “three deficits” as reasons for caution about India’s future growth. These “deficits” are continual international trade deficits; chronic government budget deficits; and an underdeveloped power generation and distribution infrastructure.

While it was India’s recurring budget and trade deficits that essentially forced the country to liberalise its economy and industries in the early 1990s – and some improvement has been made in these areas – the country’s lagging infrastructure poses the biggest potential obstacle to future growth. To assure the country’s continued economic development, the Indian government has earmarked billions for investment in power generation and road/rail networks.

The so-called ‘Golden Quadrilateral’ (GQ) is a planned highway network connecting India’s four largest urban areas: Delhi, Mumbai, Chennai and Kolkata, thus forming an approximate quadrilateral. Four other top ten cities, Bangalore, Pune, Ahmedabad, and Surat, are also to be served by the six-lane road network.

“Much of India’s future growth in the automotive sector will depend on successfully creating the infrastructure to support its economy,” said Humphrey.

In the automotive space, most senior executives agree that a fourth “deficit” also exists: the lack of a broad-based automotive components and parts production industry, as well as the engineering talent needed to carry the automotive components industry forward.

“Right now, much of the industry still depends on smaller local parts makers to produce components for vehicles,” said Humphrey. “For India to build vehicles of high quality, and in large volumes—especially for export—significant improvements to the components industry will need to be made.”

See also: BRIC markets review – India