"India has quickly become one of the largest and fastest-growing automotive markets in the world," said John Humphrey, senior vice president of global automotive operations at J.D. Power and Associates. "This momentum has been driven by a more open and market-driven economy, an empowered and less risk-averse work force, a more consumer-driven culture and an emphasis on small car production."
Global Small Car Production Hub
In addition to policies favoring general market liberalization and encouraging foreign investment, India's government has pursued policies meant to support development of India's automotive industry. The main thrust of these policies has been to position India as a global hub for small passenger car production. These policies include a reduction on the sales tax of small cars (defined as those less than 4,000 millimeters in length and with an engine displacement of 1.2 liters or less), and providing financial incentives for automakers to build and export vehicles overseas. As a result, many automakers have been shifting their small car production operations to India, or designing vehicles specifically to fit Indian market needs.
In 2010, nearly 80 percent of all new passenger vehicles sold in India were classified as either mini cars or subcompact passenger cars. By comparison, the mini car and subcompact segments accounted for only 24 percent of passenger-vehicle sales in China in 2010, and just 3 percent of passenger-vehicle sales in the United States.
The average transaction price for all new passenger vehicles sold in 2010 in India was about $10,000 (compared with $17,500 in China and $28,000 in the United States), while the best-selling passenger car in India—the Maruti Suzuki Alto—had an average transaction price of about $6,200. While India's emphasis on small vehicles has helped sales to grow quickly, it also means that automaker earnings will depend primarily on small car segments, where profit margins are traditionally thin.
"Should fuel prices continue to climb globally in the future—and as demand for inexpensive and reliable transportation increases in many of the world's developing markets—India could find itself well-positioned to fulfill the needs of the small car segment," said Humphrey. "That said, profit margins are thinner in the small car segment, so automakers are going to need to manage their businesses carefully to optimize profits."
Challenges Remain
While significant progress has been made in building the Indian automotive industry, there are challenges that could impede India from reaching its future potential. Economists and automotive industry executives believe that much still needs to be done to smooth the way and drive the country forward.
In India, government, business and academic officials regularly refer to India's "three deficits" as reasons for caution about India's future growth. These "deficits" are continual international trade deficits; chronic government budget deficits; and an underdeveloped power generation and distribution infrastructure.
While it was India's recurring budget and trade deficits that essentially forced the country to liberalize its economy and industries in the early 1990s—and some improvement has been made in these areas—the country's lagging infrastructure poses the biggest potential obstacle to future growth. To assure the country's continued economic development, the Indian government has earmarked billions for investment in power generation and road/rail networks.
"Much of India's future growth in the automotive sector will depend on successfully creating the infrastructure to support its economy," said Humphrey.
In the automotive space, most senior executives agree that a fourth "deficit" also exists: the lack of a broad-based automotive components and parts production industry, as well as the engineering talent needed to carry the automotive components industry forward.
"Right now, much of the industry still depends on smaller local parts makers to produce components for vehicles," said Humphrey. "For India to build vehicles of high quality, and in large volumes—especially for export—significant improvements to the components industry will need to be made."
