just-auto.com

Vehicle market in India hots up

By just-auto.com editorial team | 8 September 2003

After a couple of years of stagnation and sluggish growth, the Indian vehicle market has picked up significant momentum in the last few months. While the second quarter of 2003 saw demand jump as a result of cuts in excise taxes and the resulting delayed purchases, the market does appear to have entered a new cycle of stronger growth - not unlike the economy as a whole. Tony Pugliese reports (this article includes model-level sales data).

While second-quarter year-on-year volume growth of around 25% looks somewhat unsustainable in the long run, most in the industry is nevertheless banking on a 15% rise for the full year. Industry analysts and observers are beginning once again to mutter the words "one million" and "car market" in the same sentence. And although car companies are back in overdrive launching new models, it is the old favourites such as the cheap and cheerful Maruti 800 that are finding favour with Indian buyers.

Economic growth strengthens
The Indian economy has performed strongly in recent months, despite the weak global economic conditions and adverse developments in the region - such as the SARS epidemic and terrorist attacks. GDP growth in the first half of 2003 is estimated to have been around 5.5%. With the global and regional short-term outlook continuing to improve, GDP growth in India is expected to accelerate to above 6% pa in the second half of the year. The agricultural sector is expected to put in a robust performance in the second half, following a good monsoon season that is expected to boost yields significantly. This will also help contain inflation, with the annualised expected to drip to as low as 4.5% by year-end.

Improving GDP growth in the US should also help increase overseas demand for goods and services overall. The IT industry and the service outsourcing sector in particular have grown at break-neck speed over the last few years, as companies in the West moved to take advantage of India's low wages to improve their own competitiveness.

Government expenditure is likely to remain at the current buoyant levels, particularly with general elections due next year. New investment in the country's infrastructure is set to continue at the current levels, which will ensure a continued good performance from the construction industry. Consumer expenditure is expected to pick up - helped in no small part with the spread of consumer credit. Bank of India officials also hinted recently that interest rates are likely to remain at the currently low levels in the foreseeable future, providing added confidence to spenders.

Overall, the economy looks to be entering a higher growth cycle, which will favour strong growth in vehicle demand. The main drag on growth remains the relatively high cost of oil, and the uncertainty associated with the religious unrest at home. Any deterioration in overseas economic conditions would also have a marked impact on growth, however.

Light vehicle sales jump 29% in the second quarter
The improving economic conditions have fed through quickly to the vehicle market, after a couple of years of mostly year-on-year decline and stagnation. Light vehicle sales rose by a highly respectable 15.5% in the first half of 2003 to over 421,000 units, though most of the growth came in the second quarter when sales shot up by 29% year-on-year compared with 5.3% year-on-year growth in the first. In July, sales were up again - by 35% year on year.

The massive difference between the two quarters is also down to customers holding back for further reductions in excise duties, which were cut by 8% at the beginning of the 2003-04 fiscal year starting in April. Excise duties were also cut at the beginning of the previous fiscal year, but without the improving economic conditions the effect on the vehicle market was limited.

The spread of credit and falling interest rates have played a major role in attracting new buyers into the car market, as has the growing number of skilled jobs in the fast-expanding service industry. Twelve years after the Indian economy opened up, the market is awash with new models and brands - though only a handful of companies make any money. Many manufacturers have miscalculated this market in the past, and even today many are left with a lot of over-capacity and the difficult struggle to get the price/product ratio right.

Even today, the market remains heavily skewed towards entry-level models - a segment in which the Maruti 800 continues to reign supreme. It is what the millions of Indian motorcycle and scooter riders aspire to - at least as their first step into the four-wheeler market. On its own, this model still accounts for 28% of passenger car sales. Combined with Suzuki's other models, recently listed Maruti Udyog still has a firm grip on the domestic market. The company controlled 45% of the light vehicle market in the first half of 2003 and around 50% of the passenger car market.

Hyundai Motor has had an astonishing couple of years in India. It has succeeded where most others have failed - in bringing tough and effective competition to the volume segments of the market. The Hyundai Santro, pitted against the Maruti Zen and the Tata Indica, has overshot all sales expectations since its launch. The battle for market competitiveness is beginning to spill over into overseas markets, with Hyundai, Tata and Maruti leading India's automotive export drive. Europe, the Middle East and some Asian markets are among the main targets, both for parts and for CBU vehicles. 

Hyundai Motor has said that its Indian unit will be crucial if it is to become the world's fifth-largest vehicle manufacturing group. It is beginning to ramp up exports of CBUs and driveline components, to with transmission parts now being sent back to South Korea and to other Asian markets. Similarly, Tata Motor's production tie-up with the Rover group of the UK will be key to maintaining its recently found economies of scale in car manufacture. The recent arrival of the booted Indigo version of the car, and the new Scorpio utility vehicle, will provide Tata with additional scope to expand into overseas markets.

Volkswagen Group moves in
Volkswagen is the latest car company to move into this market, hot on the heels of sister company Skoda which began assembly of the Octavia in 2001. Existing manufacturers are also bringing in new models and variants, including GM which is tapping its Asian affiliates such as GMDAT and Isuzu for product.

While the country's automakers are falling over each other to dazzle buyers with new technology and products, respect is due to Hindustan Motors for battling on with the old Ambassador. The car is based on the 1950's Morris Oxford and is still the 12th best selling car model in the market. Hindustan has also kept it up with local emissions laws and recently it has also thrown in power steering - the car's a "must have" if you're a taxi driver.

The truck and bus market has also been expanding very strongly after a very poor couple of years. Its recent spurt of growth is more reflective of the improving economic outlook and the ongoing restructuring within the domestic economy in favour of more internal trade. In the second quarter of the year, sales of medium and heavy commercial vehicles were up by 21% to 46,900 units, and similar growth was seen in the light truck sector. Domestic companies such as Ashok Leyland, Tata Motors and Mahindra & Mahindra dominate these quite substantial market segments, but the likes of Volvo are expanding into occupy niche sub-segments.

click to enlarge
click on the table for an enlarged view