India: A bumpy, crowded road for carmakers

June 18, 2013 7:35 pm

India: A bumpy, crowded road for carmakers

By James Crabtree and Henry Foy

Global groups looking to cash in on a boom face a dilemma about how much more to invest as sales slide

Sanand seems an unlikely spot for a global automotive hub. A small, dusty backwater in the western Indian state of Gujarat, its population is barely 30,000. Yet over the past few years this sleepy town has undergone an improbable transformation and is now often hailed as a “new Detroit” in the making.A partly completed $1bn Ford factory stands just off the main two-lane highway. When it opens next year this will be one of the most sophisticated built by the US company, whose founder Henry Ford unveiled the first automobile assembly line at Highland Park, Michigan, exactly a century ago.

Next door are the hangar-like buildings belonging toTata Motors, India’s largest domestic carmaker. Opened amid much fanfare in 2010, the $500m plant makes the ultra-cheap Nano, a small car once hailed as a miracle of frugal engineering and designed with the nation’s everyman in mind.

Such factories embody the hopes of India’s automotive sector, conceived at a moment when the country seemed destined to follow in the tyre tracks of China’s recent car-buying boom, when an explosion in demand reshaped the global industry about a decade ago.

This led nearly all the world’s biggest car companies to invest heavily in a market that analysts bet will become the world’s third largest by 2020. Once derided for potholed roads and antiquated jalopies, India now stands as one of the last big untapped frontiers for the world’s $800bn car industry.

“As its per capita GDP goes up, this is going to be a huge market, ultimately one day bigger than China”, says John Leech, head of automotive at KPMG in the UK. “The major car companies for the last couple of decades have been trying to get a foothold, an entry into India. And really up until now they have not succeeded.”

Today these investment efforts look more than a little headstrong. India’s car industry has mirrored the nation’s overall economic health, with a sharp slide in growth since 2011 coinciding with a crash in sales. The market shrank for the first time in a decade last year and many fear this will be repeated in 2013, posing dilemmas for the likes of Ford and Tata.

Most people in the industry still reckon that India is destined to join the US and China in a “big three” of automotive nations. But the road to that future now looks bumpy, while fewer foreign car companies can hope to win back the $8bn they have collectively channelled into the country since the mid-1990s.

The result is a race for supremacy that has significant implications for a car industry that remains one of the most important engines of the global economy, as well as a potential source of India’s own economic recovery. It also leaves the country’s car sector delicately poised between its future as a global power and its awkward, struggling adolescence.

One statistic above all explains the excitement India kindles: just 18 people in every 1,000 own a car. In China the figure is 58, according to the World Bank, while in most European countries it is more than 500. “India’s level of car ownership per capita is even lower than in Sudan, or Afghanistan,” says Tomas Ernberg, head of Volvo in India. “So in the long term there is bound to be growth, enormous growth.”

The market is also strikingly new. Barely 20 years ago India’s “Licence Raj” restricted aspirant motorists to two basic choices: the grand Hindustan Ambassador, an imitation of the venerable British Morris Oxford; and the boxy Maruti-Suzuki 800hatchback, the country’s first (and then only) people’s car.

The former ferried New Delhi’s amply proportioned bureaucrats around on plush back seats, with curtains drawn and red lights flashing on the bonnet. But it was the 800 that won over India’s emerging middle classes, which partly explains why Maruti remains the country’s leading carmaker by sales.

Small vehicles continue to dominate today, although auto companies have since introduced a range of models broadly comparable to those of any industrialised country. Sports utility vehicles have done well of late, for instance, while tycoons now parade their affection for flashy BMWs and Audis.

Their popularity could not stem last year’s sales slump, however, a decline prompted by falling growth but exacerbated by high interest rates, fuel prices and import duties. Even so, 2m cars were sold during 2012, about twice as many as five years earlier.

All this pales in comparison with China, the world’s most important auto market, where 15.5m cars were sold last year. Yet interest in the two nations is closely linked. Only a handful of leading companies were prepared for China’s car spurt, includingVolkswagen and General Motors. Others were stuck without sufficient capacity when the boom began.

Hence India’s investment explosion, as carmakers scanned the globe for their next growth market and vowed not to be caught out again. Ford, Toyota, Honda, VW and GM all launched major investments, trying to overhaul India’s leading manufacturers: Maruti-Suzuki, Hyundai of South Korea, and the Indian duo of Tata Motors and Mahindra & Mahindra.

“We knew that when we went to India we were relatively late with respect to someone like Suzuki, so we knew we needed scale,” says Andy Palmer, executive vice-president at Nissan, which also announced a $1bn investment in 2011 as part of a plan to double its capacity. “Ultimately, it’s going to be a very big market for us.”

The outcome is an increasingly cut-throat contest in which a handful of incumbents face off against more than half a dozen global newcomers, all of whom are spending heavily just at the moment when domestic demand has all but collapsed – an inconvenient bump in the road that few foresaw.

“You have now what I’d say is a hyper-competitive auto market,” says Anand Mahindra, chairman of Mahindra, a carmaker that specialises in SUVs. “Where I think western companies got it wrong was thinking that India was just China waiting to happen. That simplistic approach has tripped up most people.”

This combination of a slowdown and a looming overcapacity crisis is visible in Indian showrooms, where manufacturers now offer steep discounts and generous financing options to tempt back customers.

It is also leaving its mark in car hubs such as Sanand. Peugeot is one early casualty, with the troubled French automaker recently ditching plans to spend $850m on a plant in the town. This makes it the first global car company to retreat from India’s troublesome market in recent memory, says KPMG’s Mr Leech, although almost certainly not the last.

Those planning to stick it out face challenges too. Indians never warmed to Tata’s Nano, and the economic slowdown has not helped its fortunes. The group’s factory can churn out 250,000 of the tiny vehicles annually but it is making barely any at all this year. The facility’s rear lot houses many thousands, all waiting forlornly for buyers.

Ford faces a different problem. Its factory in Sanand, the company’s second in India, will enable it to produce 440,000 vehicles a year. In the last financial year, however, it sold just over 77,000 in the country – a stark example of the gap between the aspirations and performance of many global manufacturers.

The head of Ford in India, Joginder Singh, seems relaxed: the market will grow threefold by 2020, he says, bouncing back from its slowdown and creating room for growth.

But others are less sanguine. “Everyone has a plan to win 10 per cent market share and so, assuming we can see a 170 per cent total market, everyone will be happy,” say Karl Slym, the laconic British-born head of Tata Motors.

“Obviously that isn’t going to be the case. There is going to be overcapacity. There is an over-exuberance here.”

India brings other complexities. The popularity of smaller cars is forcing western groups to rethink their sedan-heavy portfolios. Subsidies also distort the market, making diesel vehicles cheaper to run than petrol models. Tariffs also make imported cars expensive, further spurring a burst in local factory building.

. . .

Then there are the quirks of India’s cost-conscious and demanding consumers. Car buyers want plenty of features, says Ananth Narayanan at consultants McKinsey, but they also expect suspension suitable for potholed roads, and extra-strong air conditioning fit for baking summers. Space in the back also matters in a country whose middle class still often enjoys chauffeur-driven comforts.

These preferences create challenges for global auto companies, which now try to offer fewer categories of cars – “platforms” in the industry jargon – which are then tweaked for local markets.

“An engineer in America or Germany will find it really hard to get this combination of design and value right, hence why more development is going to shift into India,” McKinsey’s Mr Narayanan says.

Greater local production and more models adapted to Indian tastes are likely to be part of the solution to what ails India’s car market. Nissan, for example, next month launches a range of its Datsun small cars designed specifically for the Indian market. Manufacturers are also increasingly hedging their bets, exporting surplus “made in India” cars abroad.

India’s domestic car companies face different challenges. Some have already pushed abroad. Tata bought Britain’s Jaguar Land Rover in 2008, and Mahindra acquired Ssangyong of South Korea two years later. Such global forays will continue but now they must also face the threats at home. “We think the western companies have learnt their lessons,” says Mr Mahindra. “They are now bringing better products . . . we are bracing for a new era of competition.”

At the end of all this, the opportunities in India remain huge. Only a fraction of the country’s 1.2bn people have ever been in a car, let alone bought one.

Millions now want to, even if fewer are likely to pick up a set of keys this year. This presents the world’s largest carmakers with a quandary: throwing money at India’s stagnant market is one worry, but not being there when the boom finally does arrive is perhaps an even bigger risk.

The road may be crowded, but considered this way, the race for India’s car market has only just begun.

. . .

Exports: Market for ‘Made in India’ cars grows

Their green, red and blue bonnets glistening in the harsh Indian sun, scores of Ford Figo hatchbacks sit parked on a loading dock in Chennai, southeast India, ready to be shipped to showrooms as far away as Mexico, Algeria and the Caribbean.

Leveraging low production costs, proximity to developing markets and experience in building cars for cost-conscious consumers, global carmakers such as Ford and Nissan are increasingly shipping models made in India overseas.

A buffer against the country’s looming overproduction crisis, these exports are attractive for another reason: vehicles developed to accommodate Indian tastes are finding favour with customers across developing Asia and Africa as well.

Hyundai of South Korea is India’s largest exporter, shipping out 260,000 cars in the last financial year, while Nissan exported about three-quarters of its Indian production in the same period. Ford has increased exports by 15 per cent to counter falling domestic sales. Overall, 555,000 cars were shipped from the country’s ports last year.

And it’s not just cars and engines. Global auto component manufacturers such as Bosch of Germany have also followed their clients into India to set up plants, and are now sending parts made in the country back to developed markets.

“A fundamental part of our strategy is to become an export hub,” says Joginder Singh, Ford’s India head, who predicts that a quarter of the cars and 40 per cent of the engines the company produces will now be exported. Destination markets include industrialised economies such as Australia and Europe.

“It is a very good business hedge for us that we are able to mix and match demand in India and abroad,” adds Mr Singh.