JOIN USAutomotive Industry plays an important role in the economy by contributing significantly to manufacturing GDP, and generating both direct and indirect employment. In addition, it also contributes significantly to government exchequer in the form of various taxes. Therefore the growth in the automotive industry is very closely watched by all the stakeholders to assess the overall growth in the economy.
There are many countries where the automotive industry has played a significant role in their economic development, especially in the manufacturing sector (ie. Japan, Germany and South Korea). Looking at this trend, many developing economies such as China, India, Mexico, Thailand among others are also focusing on the automotive sectors.
At PwC Autofacts, we believe that the growth going forward will mainly come from the developing economies in Asia, including India, and developing economies in Asia, will play a critical role in the volume growth. The light vehicle (gross weight up to 6 tonnes) volume is expected to grow from 88.2 million in 2015 to 110.5 million in 2022 and developing Asia is expected to contribute around 65% to this growth, which is roughly about 14.6 million light vehicles.
China and India are expected to add almost about 11.8 million light vehicles to the overall volume growth in the next seven years (China nine million, India roughly three million).
The structure of the Indian automotive industry is very different, compared with both developed and other developing economies. The Indian automotive industry is predominately dominated by two-wheelers (around 80%) and small cars (86%). In fact, sub four meter small cars are mostly developed in India, to avail the exercise benefit.
The vehicles are highly taxed in India in the form of various taxes such as exercise duty, VAT, OCTROI and road taxes among others. In fact, on small car, if you are paying Rs 100 to original equipment manufacturers (OEM) (ie. vehicle manufacturers), around Rs 65 of it, you pay to the government in the form of various taxes.
This goes up to 80% on the bigger vehicles. The other peculiar feature in the Indian automotive market is people buy vehicles on financing arrangement in much higher proportion (in the range of 75-80%) compared with other developed and developing economies. As a result, interest rates play an important role in the growth of Indian automotive sector. Post goods and service tax, it is not too sure whether the exercise duty benefit will continue on the smaller car in the form of dual tax structure.
In order to promote sustainable and fuel efficient transportation in the country, the government of India may think of dual tax structure even in the GST regime on the smaller and bigger cars.
Growth over the last five years
The growth over the last five years from 2012 to 2016 has not been very significant, compared with 2007-2011. From 2007 to 2011, the growth was significant across all the segments such as passenger cars (60%), commercial vehicles (30%) as well as two-wheelers (40%). The growth over the last five years was even flat (for segments such as motorcycles) or reduced in segments like medium and heavy commercial vehicles as well as small commercial vehicles. On the other hand, there has been marginal growth in the passenger car segment by about 7%. One sub-segment which did extremely well, is the scooter segment, which grew almost over 95%.
The other interesting feature, is that in the last five years, there has been good growth in the export front in all the segments such as passenger vehicles, commercial vehicles as well as two-wheelers, mainly motorcycles. and the growth is in double digit across the segment due to OEMs looking aggressively towards export market in continents such as Africa, South America and Europe.
In the last five years, the overall structure of the Indian automotive industry has not changed significantly in terms of different segment and sub-segment except in the passenger vehicles and two-wheelers. In the passenger vehicles, due to changing customer preferences of late, compact SUVs, cross and hatch-backs are becoming more and more popular. Similarly in two-wheelers, scooters are becoming more popular.
OEMs, who have launched new products to address the customer changing preference, have grown more, compared with others. The growth in the Indian automotive industry has become more gradual and also linked to growth in the overall Indian economy including rural economy especially for segments like motorcycles, small cars. When the Indian economy grows over 8%, we have seen in the past, a significant growth across all the segments in the automotive sectors. For economy to grow over 8%, we need to at least have growth of 3-4% in the agriculture sector. That’s why the rural economy plays an important role in the growth story. Agriculture continues to contribute around 17% to the overall GDP number.
Future outlook
The growth in the Indian automotive industry looks positive in the short, medium and long term, considering low penetration and increase in disposable income. There are many trends which are emerging an that will have an impact on the global as well as Indian automotive industry growth, such as new product portfolio, business model as well as regulatory changes.
Product innovations mainly include autonomous vehicles, connected vehicles, flying cars and alternate fuel vehicles among others. Changes in the business model mainly includes changing customer preference towards the mobility and the rise of cab aggregators. On the regulatory front, more and more focus will be on reduction in emission as well as increase in safety norms. Noise pollution may also get attention increasingly going forward in India.
Short-term growth in the Indian automotive industry looks very positive, in fact, double digits in the segments such as passenger vehicles including SUVs, commercial vehicles and scooters, on the back of many positive factors such as better monsoon, increase in disposable income, increased economic activity, roll out of GST, coupled with decrease in overall tax rates on vehicles as well as phasing out of old vehicles sooner than later. Uncertainty relating to bigger diesel vehicles, hopefully, will get resolved but nevertheless the share of diesel vehicle in the overall passenger segment will come down going forward, as there is no real incentive for customers to buy these vehicles.
In the medium to long term, overall double digit growth looks within the reach, provided the economy keeps growing over 8%. The growth will not automatically happen for all the OEMs. Only those OEMs will grow who have put in place or will put in place in future a robust strategy on all the fronts, such as product development considering changing customer preference, distribution network as well as aftermarket sales service across India. Digital and social media will increasingly play an active role in the distribution network.
In order to address pollution, the government will look for alternate fuel vehicle, however, the pure electrical vehicle especially in the passenger segment will take more time in India considering challenges around availability of clean energy, cost constraint as well as charging infrastructure.
Pure electrical vehicle will take off early in two-wheeler segment compared with less challenges in this segment. For the passenger car, alternate fuel vehicles such as hybrid will make more sense in the medium term, and this segment is expected to grow provided some good incentives are offered by the government and OEMs are already launching products in this segment. Looking at the potential growth on the long-term basis American, European, Japanese and Korean OEMs have all established their presence in India. In fact some of them are looking very aggressively export market as well.
Chinese OEMs
Considering slowdown in the Chinese automotive market (volumes are expected to grow from 23 million in 2015 to 30 million in 2020, 1.4 million every year compared with over two million every year over the past 10 years). Of late, Chinese OEMs have started looking aggressively in the Indian automotive market. This will only intensify the competition which will also lead to many product innovations.
For any OEM to succeed in the Indian automotive market strong presence in small vehicle with excellent distribution network will be the key to success. Traditionally, Chinese OEMs are not very strong in the small car segment and they will look for either acquiring small car technology or alliances with those automakers who are strong in small car portfolio. Overall, India offers an exciting opportunity for the automakers and also for consumers in the years to come.
(The author is the Partner of automobile at PwC, India)