History of the Automotive Industry

The evolution of the automotive industry in India can be broadly divided into three phases:

• 1947-1983

This period was marked by unfavourable government policies – steep excise duties and sales tax, and high customs duty on import. There were only two major players in this period – Hindustan Motors and Premier Automobiles Ltd.

• 1983-1993

In 1983, the government of India entered into a joint venture with Suzuki to form

Maruti Udyog. The automobile industry was de-licensed in 1991 with the announcement of the New Industrial Policy; while the passenger car industry was de-licensed in 1993. The automobile s e c t o r i n I n d i a u n d e r w e n t a metamorphosis as a result of these policies with a number of local players coming into prominence during this period.

• 1993-2010

After the sector opened to foreign direct investments in 1996, global majors moved into the Indian market. Measures such as relaxation of the f o r e i g n e x c h a n g e a n d e q u i t y regulations, reduction of tariffs on imports, and refining the banking policies played a vital role in turning around the Indian automobile industry. This period also witnessed the diversification of manufacturers into related activities – fleet management, finance lease, insurance and the used car market.

Current Status

At present, 100% FDI is permissible in the automobile sector, including the passenger car segment. Subsequent to the

liberalization, the auto sector has emerged as a sunrise sector for the Indian economy. As a result of favourable government policies and its inherent cost competitiveness, India has evolved as a global manufacturing hub in recent times.

Automotive industry consists of the automobile and auto component sectors, and a number of global and Indian companies are present in both sectors. Two-thirds of the auto component production is directly consumed by the manufacturers. Being one of the largest industries in India, the automotive industry has witnessed impressive growth in the past two decades.

The period between April-August 2010 saw a production growth of more than 30 per cent over the same period last year, with the industry producing over 7 Million vehicles during this period. Overall automotive production in India has increased at healthy CAGR of close to 9% in the period 2003-09.

G r o w t h D r i v e r s o f I n d i a n Automobile Market

• Rising industrial and agricultural output, which contribute positively

An Overview of the Automotive Sector

PanoramaJANUARY 2011 ISSUE SEVEN

•Overview of Automotive Sector•Player profiles•News updates

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India is the largest

manufacturer of

tractors, two-wheelers

and three-wheelers in

the world.

to the GDP and thereby increase the purchasing power

• Increase in the middle class urban population; coupled with rising working population

• Increasing disposable incomes in the rural agricultural sector

• Availability of easy finance schemes

• Greater affordability of vehicles

• Cost efficiencies contributing to lower production costs

• Favourable government policies

• Growth in road infrastructure across the country

Salient Features of India’s Position in World Production

• Cutting edge automobile testing and R&D centres

• Well developed, globally competitive auto ancillary industry

• Easy availability of low cost steel for production purposes

• Largest manufacturer of tractors in the world

• Largest manufacturer of two wheelers in the world

• Largest manufacturer of three wheelers in the world

• Ninth largest car manufacturer in the world

Segments in the Automobile Sector

The Indian automobile sector can be broadly divided into four segments - two wheelers, three wheelers, passenger vehicles and commercial vehicles. Currently the two wheeler segment is by far the largest in terms of market share. However, passenger vehicles segment is the most rapidly growing segment; and has witnessed a lot of activity by foreign players in recent years.

Two-Wheeler Segment

The domestic two-wheeler industry has grown steadily at a CAGR of 8.5 per cent from 4.2 million in 2001 to 7.43 million in 2009. The motorcycle segment continues to dominate the market; accounting for over 80% of the total sales. It is interesting to note that while the demand for motorcycles is increasing, that of scooters has actually declined over the years. CNG (compressed natural gas) fuelled bikes are a recent promising technological development in the two-wheeler market.

Passenger Vehicles Segment

This segment of the market is constituted by passenger cars and SUVs. The domestic Indian passenger vehicles market has grown at a CAGR of 12.6 per cent over the last seven years. Passenger cars, which accounted for 78.6 per cent of volumes, grew at a CAGR of 15 per cent. The organised used car industry is gaining steady ground in the Indian market with sales fast reaching the levels of new car sales. To benefit from the flourishing trend leading organized manufacturers like Automartindia Ltd and Maruti's TrueValue have made a foray into the used car business. Recently, Mercedes-Benz launched its global pre-owned car business for India branded “Proven Exclusivity.” BMW is also in plans to enter the Indian used car market .

Commercial Vehicles Segment

This segment includes both goods carriers and passenger vehicles. These two categories can be further subdivided into light, medium and heavy vehicles. The domestic commercial vehicles industry clocked sales of more than 384,000 vehicles in 2009. However, sales actually declined in 2009 as compared to previous years. A possible reason for this was the global financial crisis, as a result of which all commercial activity declined. The government has recently brought out a set of incentive schemes; in an attempt to boost sales.

Three Wheeler Segment

Three-wheeler sales in India touched a new record of 0.4 million in 2006–07. However, the launch of four-wheel, sub-1-tonne vehicles such as Ace by Tata Motors and Maxximo by M&M has resulted in a segmental shift away from three-wheelers; leading to declining sales volumes.

This segment includes both passenger and goods carrier vehicles. The proportion of goods carriers in overall

sales has doubled, indicating the i n c r e a s e d n e e d f o r a l o w - c o s t transportation system across short distances.

The Auto Ancillary Industry

The evolution of auto ancillary industry in India can be classified into three phases with distinct features; similar to that of the manufacturing sector. The first one, before the entry of Maruti, which was characterized by small number of auto players like Hindustan Motors, Telco, Bajaj etc. The second phase began with the entry of Maruti and marked the growth period for this industry, with the auto ancillary manufactures requiring to meet stringent quality standards of Maruti’s Japanese collaborator Suzuki. Export of auto components from India also began during this period. After liberalization the third phase of evolution began; with the entry of foreign automobile manufacturers like Mercedes Benz, Ford Motors. The auto ancillary industry witnessed huge capacity expansions and modernization initiatives.

However, the foreign players soon realized the market was not as big as it appeared and soon their sales targets went away. A tough competitive scenario emerged, which resulted in a lot of consolidation in the industry, as continues to be the scene even today. The industry has transformed from being highly domestic centric to a force ready to face global competition. India is now a supplier of a range of high-value and critical automobile components to global auto makers such as Toyota, Ford and Volkswagen.

The inherent strengths in the Indian auto component industry, such as cost reduction in production, low labour costs, established quality standards, availability of raw materials, design; engineering and technical skills etc. provide impetus to the growth of the sector. Also, the entry of g l o b a l O r i g i n a l E q u i p m e n t Manufacturers (OEMs), making India as their manufacturing base has given a big boost to the industry. The segment has also developed as a niche segment by

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diversi fying into sectors such as aerospace, power s egment s and prosthetics.

The turnover in 2009-10 is estimated at around US $19.2 billion. 31% of the auto component industry is dominated by engine parts, 19% by drive transmission and steering parts, and 12 % each by suspension and braking parts and body and chassis, while equipments and electrical parts capture 10 and 9% respectively. The potential growth in the ancillary industry in FY11 is estimated to be around 15-18%, and was around 19.2% in 2009-10.

Regulatory Environment

The Indian government is committed to developing the auto sector, and it formulated the India Auto Policy in 2002 with the objective of promoting the integrated and self-sustained growth of the Indian automotive industry. Salient features of the policy include:

• Providing fiscal incentives to domestic manufacturers and raising import duties to check dumping by foreign players.

• Removal of the condition of minimum foreign direct investment (FDI) for the sector; which was fixed at $50 million dollars for car makers.

• Focus on promotion of R&D in the automot ive sec tor to ensure continuous technology upgradation and building better designing capacities to remain competitive.

• Providing an impetus to the development of alternative fuel vehicles through appropriate long term fiscal structure to facilitate their acceptance.

• Emphasis on low emission fuel auto technologies and availability of a p p ro p r i a t e a u t o f u e l s a n d encouragement to construction of safer bus/truck bodies.

• The Indian emission regulations would also be made compatible with the rest of the world.

The government also formulated India's 10-year Automotive Mission Plan (AMP) 2006-2016. The 25-point plan AMP aims at making India a global manufacturing and export hub for small cars, multi-utility vehicles, two and three-wheelers, tractors and components. The plan provided for the setting up of NATRIP – National Automotive Testing and R&D Infrastructure Project to act as centres of excellence for technical design data and encouraged closer partnership between industry and academia to foster innovation.

Future Prospects

Over the medium term, the prospects for the automotive industry are extremely bright, with low car penetration and rising income being pegged as the dominant growth drivers. According to the annual forecast of the SIAM, passenger vehicle sales in the country will

be 2.2 Million units in 2010-11 as compared to 1.95 Million units in 2009-10.

According to a recent study by KPMG, any major consolidation is unlikely to occur in the industry in the next few years. Depending on the need to access technology, manufacturing facilities, services and distribution networks, some consolidation could be expected in future but anything big in the form of brands being bought or sold or companies exiting the market is unlikely.

The long term outlook of the sector is slightly fluid, since the globally evolving phenomenon of eco-friendly, hybrid vehicles is yet to take off in a big way in the country. However, this can also be viewed as an opportunity for future growth. India is well placed to leverage on its current status as a hub for small cars and as a cost-efficient market to become an export hub for green cars and also a sourcing hub for components for green vehicles.

The challenges towards the development of hybrid vehicles are in the form of a l ack o f regu latory suppor t and i n a d e q u a t e f u e l i n g / c h a r g i n g infrastructure. Hence, policy makers should encourage the same by offering subsidies to the manufacturers and consumers of green vehicles. Increased dialogue between manufacturers and oil companies is also required in order to provide the necessary infrastructure.

Player ProfilesTata Motors: The second biggest passenger car manufacturer, Tata Motors is also ranked as fifth highest in the category o f medium and heavy commercial vehicles at the international level. It is the first company from the engineering industry of India to be listed under the New York Stock Exchange in September 2004. In 2009, the firm created a milestone in the automotive industry by introducing the world’s most fuel efficient and cheapest car- Tata Nano. More than 3 million Tata cars and heavy vehicles are on the road today. British luxury brand Jaguar Land Rover (JLR) plans to increase presence in India and will tap parent Tata Motors for assistance in areas like logistics and service support.

The company is the largest commercial vehicle manufacturer in the country. Having established a strong position in India, it has been rapidly expanding g lobal ly with a series of recent acquisitions such as Daewoo Commercial Vehicle Co. Ltd. (2004) and Hispano Carrocera S. A., Spain, (2009) and joint ventures with Thonburi Automotive Assembly Plant Co., Thailand, (2006) apart from several other strategic alliances in the commercial vehicles space.

Mahindra and Mahindra: This flagship company of the Mahindra group was set up to make general purpose utility vehicles for the Indian market and soon it

started manufacturing agricultural tractors and light commercial vehicles. They have opened a separate sector to focus develop components and offer engineering services called Mahindra Systems and Automotive Technologies (MSAT).

The company formed a joint venture with International Trucks in November 2005 to manufacture medium and heavy vehicles trucks in India and has displaced Ashok Leyland Ltd. from second position with respect to market share. M&M has recently also launched its range of world-class trucks through its joint venture with Navistar of USA.

In the passenger vehicle segment, M&M has portfolio of SUVs in the lower end –

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Bolero, Scorpio and Xylo all of which are extremely strong performers in the market. The company has recently reintroduced the old “jeep” under the name “Thar”. It has global ambitions in the SUV segment and its acquisition of a majority stake in the Korean company, SsangYong, is a huge step in this direction.

General Motors: With closing of their assembly operations business in 1954, it still remains a part of tie-ups with Hindustan Motors to produce Bedford t r u c k s , Va u x h a l l c a r s , A l l i s o n t r a n s m i s s i o n a n d o f f - h i g h w a y equipments. In 1994 it was incorporated as a 59-50 joint venture with C.K.Birla Group of Companies, and in 1999 it became a fully owned subsidiary of General Motors Overseas Corporation.

After a dismal performance during its initial years in the Indian automobile market, GM finally appears to have got it right with its current portfolio of offerings. It has a range of vehicles across segments, including the fastest growing small car (hatchback) segment in the country. It is interesting to note that the company continued aggressive selling in India even during the bankruptcy of the parent company in the US proving its commitment for the market. Recently, the company has also announced plans to enter the commercial vehicle market in the country.

Maruti Udyog: In February 1981, Maruti Udyog Limited (MUL) was incorporated to meet the growing demand of a personal mode of transport; which were caused by the lack of an efficient transport system. Since then, the company has diversified into various types of passenger cars catering to the needs of a very diverse population. The year 2010 proved bright for this major car player as it posted 50.6% increase in sales as compared to the previous year. 

Maruti Suzuki India Ltd (MSIL) has announced an investment of US$ 411.45 million for setting up its third plant at Manesar in order to capitalise on the rapid growth of the Indian auto industry. This new production line–Maruti's sixth overall would have 250,000 units annual capacity

Ford India: Ford has been in India since 1907 when it launched the Model A. Ford

India was established in 1926 but the operations were discontinued in 1954. In 1995, Ford Motor Company received government approval to establish Mahindra Ford India Limited (MIFL); a 50:50 joint venture with M&M. Ford took over the majority stake in venture in 1998, rechristening the company as Ford India Limited. The company has set up a modern, integrated manufacturing facility near Chennai.

Honda Siel Cars India Ltd (HSCI): HSCI is one of the prominent premium car manufacturers in India. This company was started in 1995 by Honda Motor Co. Ltd (Japan) in collaboration with Siel Limited. The company has been performing excellently since its inception. In 2010 it witnessed a 24% increase in the sales record. Honda Siel Cars India (HSCI) announced an investment of US$ 53.55 million for the expansion of its power train facility at Tapukara, Rajasthan in July, 2010. The plant, currently under construction, would become a low-cost production base for its new small car.

Hyundai Motors India Ltd: This Indian unit of the Hyundai Motor Company of South Korea was started in 1996. Hyundai launched its first car, the Hyundai Santro in 1998 and it was an instant success. Currently, HMIL is the largest passenger car exporter and the second largest car manufacturer in India. HMIL boasts of a cutting edge research facility in Hyderabad and two state of the art manufacturing plants located at Sriperumbudur in Tamil Nadu with a combined production capacity of 600000 units per annum. The car sales figure of the company jumped by 46.1% in 2010 as against 42.8% in 2009.

Hero Honda Motors: It is regarded as the World’s Largest Manufacturer of geared and gear-less two-wheelers. Hero Honda Motors Ltd is the result of a joint venture between India's Hero group and the Japanese Honda Motors Company in the year 1983. With 15 million customers worldwide, its products are known for fuel efficiency as well as power delivery coupled with affordability.

In December 2010 the partnership between the Munjal family and Japanese firm Honda Motors came to an end. The Munjals-promoted Hero Group will buy out Honda’s entire 26 per cent stake in Hero Honda. With this, the Munjal

family will control over 52 per cent stake in the company. The transaction will take place in a phased manner and is expected to be completed next year. Honda, which also has an independent fully-owned two-wheeler subsidiary- Honda Motorcycle and Scooter India (HMSI)-will exit Hero Honda at a discount and get over $1 billion for its stake.

Bajaj Auto Ltd.: Bajaj Auto Ltd is the largest exporter of two and tree and wh e e l e r s i n t h e c o u n t r y. B a j a j m a n u f a c t u r e s t w o w h e e l e r s i n collaboration with Kawasaki Heavy Industries of Japan. Its bikes Pulsar and Discover DTSi are amongst the most popular motorcycles on Indian roads. Second by market share in the three-wheeler segment, Bajaj Auto in the process of revamping its product portfolio.

The Renault-Nissan alliance and Bajaj Auto have signed a memorandum of understanding for developing a low-cost car. According to the MoU, the design, engineering, manufacturing and supply base expertise to create the product will be executed by Bajaj with the support of the Renault-Nissan alliance.

Volvo India: The company is one of the leading players in luxury passenger buses and heavy duty trippers. Volvo-Eicher Commercial Vehicles (VECV) has announced an investment of US$ 61.51 million for a new engine plant at its existing facility at Pithampur, Madhya Pradesh. With this, India will now become a global manufacturing hub for Volvo's new medium-duty engine platform, with the only other factory for the engine type being present in Japan.

Partnerships of Indian Players with Foreign Firms

Indian firms are increasingly partnering with foreign companies across a variety of segments. Such a partnership offers a foot hold to the foreign player into the rapidly growing Indian automobile market, while providing technology and monetary support to the Indian company as well.

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What is an Electric Car?

In its simplest form, an electric car is just like any other car in appearance but is propelled by an electric motor instead of an internal combustion engine. The source of energy in an electric car is a set of batteries unlike fossil fuels like petrol, diesel or gas in a traditional car. However, if one was to get into details, an Electric Car is very unlike a traditional car in more ways than one.

This article explores the history of electric cars in brief, their obsolescence and come back, the current electric car market and future outlook.

Electric Cars – A brief history

Electric automobiles dominated the small automobile market that existed in the early 20th century. The key reason for this was that electric motor technology at that point in time was much more mature than any other propulsion method. Moreover, technical features of an electric motor – like the power-torque characteristic are very favorable for being used as a drive-train as it needs little modification. Electric cars had a significant share of automobiles in the first two decades of the 20th century. Some of the well known players then were Baker Electric, Columbia Electric and Detroit Electric.

However, with the advent of compact and safe internal combustion engines, Electric Cars lost their market share very quickly. This was further supported by the low prices of fossil fuels in the early 20th century. Vehicles powered by petrol & diesel were much more powerful than the electric vehicles of those times and were easy to refill and use over a long range. All these advantages made electric vehicles fade into oblivion very quickly.

Come-back of Electric Cars

While Elec tr ic Car s, fue l led by development of new battery technologies, saw continued interest in terms of academic research over the years, the 1990s saw a revival of commercial interest in the product. This was driven mainly by the rising oil prices and growing dependence of the industrialized countries on imported oil. Initiatives to reduce pollution and government incentives for such research served as additional reasons for commercial interest in electric cars. The past two decades have seen every major car manufacturer in the world devote considerable resources to build a commercially feasible electric car.

It is of interest to note that when electric cars made a comeback, the technology they started with (DC Motors powered by Lead Acid batteries) was almost same as

those of the early electric vehicles. This is additional evidence that indicates a lack of commercial interest in Electric Vehicle technologies ever since it was replaced by IC engines.

Current status of the Electric Car market

Even today the market for pure electric cars, that is cars powered only by an electric motor and a set of batteries, is miniscule. The only player in the Indian market is Reva. Reva has sold electric cars in India since 2001. Apart from the traditional Lead Acid powered cars, Reva has also launched models based on newer technologies like Li-ion batteries and is consistently engaged in research & development with new prototypes showcased at major auto shows every year. Recently, Mahindra & Mahindra bought a 55.2% controlling stake in Reva, after which the company was renamed as Mahindra Reva Electric Vehicles Private Limited. General Motors India had also tied up with Reva in 2009. However, this tie-up did not last long and was called off in May 2010. Such alliances indicate a strong interest in the electric car market amongst the major automobile industry players in India and not just within niche companies.

Apart from Mahindra and GM, Tata Motors and Mitsubishi are other big

Electric Cars - Present or Future?

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Source: IBEF Report

After a 26 year partnership, Hero Honda group finally announced the decision to split in December 2010. A lot of differences had emerged in the past few years over a variety of issues, ranging from Honda's reluctance to freely share technology with the Munjal family owned Hero group as well as Hero’s uneasiness over high royalty payouts to Honda.

Moreover, Hero has been eager to tap the export market and participate in large scale exports. The importance of the export pie for Hero group can be understood by the fact that exports constitute about 30% of the total 2-wheeler sales of Bajaj Auto.

Also, Honda was unhappy with the policy to procure supplies from the current suppliers, many of whom are people from the Munjal clan. Besides, Honda wanted to solely concentrate on increasing its Indian market share through its own

Honda Motorcycles and Scooters India (HMSI) division, which is currently the fourth largest 2-wheeler maker in India.

It is expected that the spit will lead to a image erosion in the brand ‘Hero Honda’ which has been the most trusted brand for about two decades owing to superior technology from the Honda Group and an extensive sales and service network. Analysts also expect further price wars in the already highly competitive 2 wheeler industry in India.

Holding Pattern & Higher royalty outgoReports suggest Hero Honda will increase royalty payments (which will continue till 2014) to its Japanese partner from the current 2.6% of annual sales (Rs 416 crore) to about 8%. At estimated FY11 sales of Rs 18,400 crore, the royalty payment would be about Rs 1,400 crore. Analysts say assuming the royalty

payments double to about Rs 1,000 crore, it could knock off about 15-20 per cent of the company’s earnings. Importantly, Hero group will now have to invest in its own R&D capabilities and/or seek technology from other companies as the technical collaboration between the groups will expire in 2014.

In return for the higher royalty payments, Honda is likely to supply technology for three new products. In addition, Honda is likely to bring down its stake (from 26% currently) by 6% initially and sell the remaining 20% to the Munjals at about 30% -50% discount to the market price. Munjal family plans to fund this deal through a Special Purpose Vehicle which would eventually be thrown open for private equity participation and those in the fray include Warburg Pincus, Kohlberg Kravis & Roberts (KKR), TPG, Bain Capital and Carlyle.

The Hero Honda Split

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names that have evinced interest in this market. Lesser known firms like Hero Electric and the clock maker Ajanta have also announced their plans to enter the domestic electric car market.

In the international market too, all major car makers are engaged in sustained Research & Development efforts in electric car technologies. This is apparent from the presence of several prototypes of electric cars at all international auto shows. In the global market, Nissan Leaf, Mitsubishi iMiEV, BMW Mini E, Tesla Roadster are some of the electric vehicles that are commercially available or are in advanced stages of road testing. Hyundai has also ventured into this market with its ‘Blue On’, which is expected to be mass produced by 2012.

Future Outlook for Electric Cars

Year on year, auto makers have come to the realization that electric cars still continue to be ‘cars of the future’. Despite all the R&D that has been going into electric cars by the major auto makers of the world, they continue to face two major constraints – price and convenience of use.

Electric vehicles are priced significantly higher than traditional cars with similar features and performance. Electric cars

using the old lead acid batteries have to carry a considerable load and hence compromise on space and performance. Cars with newer battery technologies like Li-ion are very costly. Moreover, in order to reduce weight the electric car body and other components also use more expensive materials. One solution to this problem i s subs id ies o f fered by governments for zero pollution vehicles. Another solution is that the batteries are not owned by the car owner but are rented. This reduces the one time burden on the car buyer. However, neither of these solutions has proved successful on a large scale.

The second issue is that of convenience. Electric vehicles have either a limited range (per charge of batteries) or a low maximum speed/power. Most electric cars are not meant to be versatile – that is capable of being used in cities as well as on highways. This becomes a bottleneck i n t h e a b s e n c e o f s u p p o r t i v e infrastructure (like charging stations) for electric cars.

In the near term, hybrid electric vehicles that can run on both gas and electricity provide a more pragmatic solution. Some automakers have tested reasonable commercial success with these vehicles. Prime examples are the Toyota Prius and Honda Civic Hybrid. A specific variety of

hybrid vehicles, the plug-in hybrids have received more attention recently. Plug-in hybrid cars can run on both gas and batteries and also allow the batteries to be charged directly by plugging in.

It appears that pure electric cars would continue to be the next generation technology at least as long as the hybrid electric car market grows and matures. Till then, let’s hope that we continue to find new sources of fossil fuels.

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