Industry to drive on small cars for growth

Auto trend 2010

Small is really big for the Indian car market. Continuing the trend in the last few years small cars are set to rule Indian roads in 2010 too. With every car manufacturer posting record sales figures even post-Diwali, normally considered a dull period, the Indian car industry seems to have got over the worst for now.

Further proof is that the domestic car makers are tripping over themselves to add fresh capacities and churn out more compact cars for the discerning Indian car buyers. Take a look at the car industry sales growth for the last 11 months from the data provided by the Society of Indian Automobile Manufacturers (SIAM), that shows that the small car segment saw a 20 per cent growth in the domestic market.

To start with, Maruti Suzuki, a market leader in the small car segment, saw its domestic sales zooming by 17.2 per cent during this period.  What’s more?  Out of the six new car models launched in the first 10 months of 2009, four are in the mini and compact segment including Nano by Tata Motors, Grande Punto by Fiat, Ritz by Maruti, i20 by Hyundai and Jazz by Honda Siel. Just as the global financial crisis in 2008-09 took its toll on auto sales around the globe, India too saw a slowdown in sales owing to factors like job-losses, pay-cuts and liquidity crunch.

The stimulus packages announced by the government to revive the economy subsequently helped the industry stage a come back. 

As owning a car in India is aspired by every household and with low penetration, increasing income levels and buoyancy in the economy, the opportunity in the passenger vehicle market —— especially small car segment —— is humungous.
So much so, CARE Research in the recently released report on ‘Indian Passenger Vehicle Industry’ has in its forecast pointed out that domestic car sales to double to 2.4 million units in FY2013-14 from 1.2 million units in FY2008-09. In this, small car sales are foreseen to grow at a faster CAGR of 15.8 per cent from 0.9 million units in FY 2008-09 to 2 million units in FY2013-14.  Currently, only 30 out of every 1000 households in India own a car, it adds.

Many drivers
Stating small cars will drive the growth of the industry, Revati Kasture, Head, CARE Research says “Even if the households that can afford a car are considered, the penetration is as low as 45 per cent. Also of the households affording a car, around 70 per cent of the populace affording to own a car fall in the lower end of the income pyramid and can afford to own only a small car.  This makes the small car segment very important for the industry.” That apart, rising income levels of middle class and reduction in the ownership cost with cheaper cars like Nano would make the growth faster. Besides, Kasture adds, lower excise duty of 8 per cent on smaller cars as against 20 per cent on bigger cars also favours the small car segment.  She also points out richer that housefolds, who typically own bigger sedan opt for small car as their additional vehicle, either for female members or children or for smaller trips. Even those who can afford a sedan actually prefer buying a smaller hatch-back on account of chaotic traffic and parking constraints.

 Naturally, the car makers have taken cognizance of the opportunity in the small car segment, points out  CARE Ratings MD, D R Dogra, “The international players are also very positive on the prospects of small car segment in India and with abundance of raw material and cheap labour in addition to the 100 per cent Foreign Direct Investment (FDI) permitted in the sector.” For instance, the German auto giant Volkswagen which launched the small car ‘Polo’ from its Chakan plant in Pune last week is eyeing for a 10 per cent share of the domestic market in the next four to six years. The compact hatchback in both petrol and diesel versions is to take on the likes of Hyundai i20, Maruti Suzuki Swift, Maruti Suzuki Ritz, Chevrolet Beat, Ford Figo, Tata Indica Vista, to mention a few.

Big money
Volkswagen AG board member Jochem Heizmann, made it clear at Pune last week “Clearly, for the long term for the Indian market, there is a need for a car below the Polo. We are looking at different solutions but we definitely need a smaller car below Polo.”

The company has already committed an investment of Rs 3,500 crore in the Chakan plant spread over 575 acres. Other global auto majors like General Motors, Ford and Nissan are also investing large sums in India, especially in the small car segments. These players alongside domestic industry majors like Maruti Suzuki and Hyundai besides Tata Motor seek to envisage India as the hub for small car production.  For instance, India’s top carmaker Maruti Suzuki plans for 75 per cent production ramp up over the next five years in a bid to hold on to its 50 per cent market share. Its Managing Director Shinzo Nakanishi says: “Depending on how the Indian car market performs, we would like to reach 1.5 to 1.75 million units a year by 2015.” By the time the domestic car industry reaches three million units, Maruti sould be able to safeguard its half market share, adds he.

Currently, Maruti can produce one million units a year and its capacity addition is expected to be done in phases. It has 600 acres of land at Manesar in Haryana, of which two-thirds is still free, points out Nakanishi adding: “We can make two plants producing an additional 600,000 cars in Manesar itself.”  It is investing about $215 million in expanding and upgrading its plant in Manesar by shifting some capacity from its ageing facility in nearby Gurgaon, which will also be expanded at a cost of Rs 1500 crore. Hyundai Motor India (HMIL), the second largest player,  too aims to increase its share of profits in global operations and become the largest contributor by next year. Currently it contributes about 20 per cent to Hyundai’s global profits. Its new CEO & Managing Director Han-Woo Park says “HMIL is not a small car company… we have a full line-up including sedans. At present we have a 50:50 share in sales between the domestic market and exports.”

In this context, HMIL Vice-President (Marketing & Sales) Arvind Saxena, points out that HMIL has exported 70,000 units of ‘i20’ this year, while the production is one lakh units. As far as Tata Motors goes, it is making a speedy journey to complete its Sanand (Gujarat) plant for Tata Nano by June 2010.  It expects to deliver all the Nano bookings made by December 2010. Tata Motors President (passenger cars) Rajiv Dubey, confirmed that the first Tata Nano is expected to roll out from the mother plant (Sanand) by June 2010.

Suffice it to say that setting up capacities in the country by the global auto majors as well as domestic players like Maruti Suzuki and Tata Motors in small car sub-segment would contribute towards making India as the hub of small car production.  It would drive passenger vehicle exports from India, which is expected by CARE Research to augment at a strong annual growth of 22 per cent in the next five years from 3,35,739 units in 2008-09 to 9,09,000 units in 2013-14.  Maruti Suzuki and Hyundai will remain the key exporters of cars as per CARE Research data, while small cars constitute around 91 per cent of India’s passenger car exports. Other foreign players within and outside the country have also taken cognizance of the gigantic opportunity in small car sub-segment on the back of burgeoning middle class.

According to industry sources, as many as eight launches are in the offing in the small car sub-segment in the next 18 months. Come January, Toyota will unveil its first small car —— not named yet just code named project EFC —— for India market, followed by Nissan with the new Micra.

US auto majors Ford and General Motors to showcase “Figo” and “Chevrolet Beat” respectively with an intent for an early India launch. Besides, Mahindra Renault will roll out Sandero. The forthcoming Auto Expo 2010 will give a glimpse of how big India is set to become on the world’s automotive map and also as a hub for manufacturing.