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ON
PESTLE ANALYSIS OF AUTOMOBILE
SECTOR OF INDIA
Submitted to:
(LOVELY INSTITUTE OF MANAGEMENT)
MBA Ist – B(Ist Sem.)
(Session 2009-2011)
Date- 05 Dec 2009
I would also like to thank all those people who directly or indirectly
helped us in accomplishing this project.
Literature Review
First, by making effective use of PESTLE Analysis, you ensure that what
you are doing is aligned positively with the powerful forces of change that
are affecting our world. By taking advantage of change, you are much more
likely to be successful than if your activities oppose it;
Second, good use of PESTLE Analysis helps you avoid taking action that is
doomed to failure from the outset, for reasons beyond your control; and
Third, PESTLE is useful when you start operating in a new country or
region. Use of PESTLE helps you break free of unconscious assumptions,
and helps you quickly adapt to the realities of the new environment.
The table below lists some possible factors that could indicate important
environmental influences for a business under the PESTLE headings:
Political / Legal Economic Social Technological
- Environmental regulation - Economic growth - Income distribution - Government spending
and protection on research
- Taxation - Monetary policy - Demographics - Government and
industry focus on
technological effort
- International trade - Government - Labor / social mobility - New discoveries and
regulation spending development
- Consumer protection - Policy towards - Lifestyle changes - Speed of technology
unemployment transfer
- Employment law - Taxation - Attitudes to work and - Rates of technological
leisure obsolescence
Economic
• The level of inflation Employment level per capita is right.
• Govt. has granted concessions, such as reduced interest rates for export
financing.
Social
Technological
• More and more emphasis is being laid on R & D activities carried out by
companies in India.
• With the entry of global companies into the Indian market, advanced
technologies, both in product and production process have developed.
• With the development or evolution of alternate fuels, hybrid cars have made
entry into the market.
• Few global companies have setup R &D centers in India.
• Major global players like audi, BMW, Hyundai etc have setup their
manufacturing units in India.
Environmental
With the entry of global companies into the Indian market, advanced
technologies, both in product and production process have developed.
With the development or evolution of alternate fuels, hybrid cars have made
entry into the market.
Few global companies have setup R &D centers in India.
Major global players like audi, BMW, Hyundai etc have setup their
manufacturing units in India.
Legal
Among the automobiles, 2 wheelers account for 75.77%, cars about 11.09%, 3
wheelers to the tune of 4.33%, tractors about 2.95%, buses & trucks constitute
2.19%, Multi Utility Vehicles (MUVs) to the tune of 1.96% and Light Commercial
Vehicles (LCVs) about 1.71% of the total number of automobiles produced in the
country. Presently, India is the second largest market after China for two & three
wheelers. In tractors production, India is one of the two largest manufacturers in
the world along with China. The subcontinent stands as the 4th largest producer of
trucks in the world. Coming to the passenger car segment, the country is positioned
11th in car production in the world.
The Indian passenger car market is far from being saturated leaving ample
opportunity for volume growth since the per capita car penetration per 1000 is only
7 compared to 500 in Germany. The production of cars in the country has been
growing at a mammoth 27.58% per annum from 2002- 03 onwards as is shown in
Fig.3. In general, cars are broadly classified as Mini, Compact, Mid-Size,
Executive & Premium varieties. There has been a steady rise in compact car
production from 333,000 in 2002-03 to 715,000 in 2005- 06, mid-size cars from
122,000 to 204,000 nos., executive cars from 2000 to 23,000 nos. and premium
variety cars from 4000 in 2002-03 to 5000 nos. in 2005-06. The mini car segment
production reduced from 150,000 in 2002-03 to 98,000 nos. in 2005-06. These
statistics vividly reveal the increasing capacity of the Indian customer, thus driving
the passenger car demand rapidly up the price ladder. Analysts speculate car
production in the sub-continent to touch 1575,000 in 2009 and 2654,000 by 2014.
Cars and MUVs exports rose from 72,000 in 2002-03 to reach 176,000 nos. in
2005-06 with growth @ 48.155 per annum from 2002-03 onwards.
Out of the two wheelers produced in India, motorcycles account for 81.59%,
scooters about 13.42% and mopeds to the tune of 4.99% of the total production.
The production statistics is shown in Fig.4 which shows the growth of 2 wheelers
@ 16.58% per annum from 2002-03 onwards. Out of this, motorcycles have
exhibited production growth @ 19.99% per annum, scooters @ 6.74% per annum
& mopeds @ 2.65% per annum from 2002-03 onwards.
Two wheeler production units in India constitute of Japanese OEMS (Original
Equipment Manufacturers) which include Hero Honda Motors, Honda Motorcycle
& scooter India (P) Ltd., Yamaha Motor India (P) Ltd. & Suzuki Motorcycle India
(P) Ltd. and Indian OEMs consisting of Bajaj Auto L t d . , TVS Motor Company
Ltd., LML Ltd., Kinetic Engineering Ltd., Majestic Auto Ltd., Kinetic Motor
Company Ltd. and Royal Enfield of Eicher Ltd. Out of the aforementioned, Hero
Honda accounts for 39.55%, Bajaj Auto about 26.87%, TVS Motors 17.98%,
Honda Motors 7.94%, Yamaha Motors 3.27%, LML 1.41% and the remaining
2.98% of the total 2 wheelers production in the country. The exports of two
wheelers made a significant growth from a level of 180,000 in 2002-03 to reach
513,000 nos. in 2005-06. The latest estimates put up production of 2 wheelers to
13.6 million by 2009.
Current status of the industry
The industry over a period of time has installed a robust capacity as given below:
T
able 1. Installed capacity in different segments of the automobile industry
Against this installed capacity, the production over last few years has been as:
exports, 1996-2001
Indian automobiles are being exported mainly to the following countries.
With the domestic auto industry now moving in step with the WTO covenants, the
stage is set for it to make rapid strides domestically and internationally to attain its
rightful place in the world trade. A global recession for last two years
notwithstanding, the industry has shown appreciable resilience and adjusted to the
challenges of the environment. Based on the general growth projections indicated
by the Planning Commission of India for the next five-year period, automobile
industry is expected to register growth pattern as given below. This growth
estimate implies certain assumptions relating to segment-wise growth rates
based on a study conducted by the National Council of Applied Economic
Research (NCAER).
Table 3.5 Projections of India’s automobile industry, 2001-2012
The extent to which substitutes limit prices and profits depends on the propensity
of buyers to substitute between alternatives. This, in turn, is dependent on their
price performance characteristics. The more complex the needs being fulfilled by
the product and the more difficult it is to discern performance differences, the
lower the extent of substitution by customers on the basis of price differences.
FIGURE 3.3 The structural determinants of the Five Forces of Competition
For most industries, the major determinant of the overall state of competition and
the general level of profitability is competition among the firms within the
industry. In some industries, firms compete aggressively – sometimes to the extent
that prices are pushed below the level of costs and industry-wide losses are
incurred. In others, price competition is muted and rivalry focuses on advertising,
innovation, and other non price dimensions. Six factors play an important role in
determining the nature and intensity of competition between established firms:
concentration, the diversity of competitors, product differentiation, excess
capacity, exit barriers, and cost conditions.
Threat of Entry
If an industry earns a return on capital in excess of its cost of capital, that industry
acts as a magnet to firms outside the industry. Unless the entry of new firms is
barred, the rate of profit will fall toward its competitive level. The threat of entry
rather than actual entry may be sufficient to ensure that established firms constrain
their prices to the competitive level.
Economies of Scale – Since Indian automobile market is of order $ 350 billion, the
economies of scale are very high. Thus, threat of new entrants is low.
Product Differences – Since there is hardly any difference in the offerings of the various
providers, so product differentiation is low. So threat of new entrants is high.
Brand Identity – Since there is no big Retailer like Amazon.com or Wal-Mart in India.
So threat of new entrants is high.
Government Policy – Since the Government Policy has been quite restrictive till now
with respect to the Retail market & FDI, so threat of new entrants is low.
Capital Requirements – The capital requirements for entering in the automobile sector
are substantially high( high fixed cost and cost of infrastructure), so only big names can
think of venturing into this area So, in that respect threat of new entrants is low.
The firms in an industry operate in two types of markets: in the markets for inputs
and the markets for outputs. In input markets firms purchase raw materials,
components, and financial and labor services. In the markets for outputs firms sell
their goods and services to customers (who may be distributors, consumers, or
other manufacturers). In both markets the transactions create value for both buyers
and sellers. How this value is shared between them in terms of profitability
depends on their relative economic power. The strength of buying power that firms
face from their customers depends on two sets of factors: buyers’ price sensitivity
and relative bargaining power.
Product Differences – Since there is hardly any difference in the offerings of the various
providers, so product differentiation is low. So bargaining power of buyers is high.
Buyer Information – Today’s customers are well educated about the various product
offerings in the sector. So bargaining power of buyers is high.
Buyer Switching Costs – Since customers don’t have to pay a fat premium to be
registered for provision of services , so bargaining power of buyers is high.
Brand Identity – High Brand Identity and trustworthiness reduce the bargaining power
of buyers but, otherwise the bargaining power of buyers is high.
Buyer Profits – Since dealers offers discounts and various bundling services like 0%
insurance, old car sale, etc, on different items. Hence bargaining power of buyers is high.
Product Differences – Since there is hardly any difference in the offerings of the various
suppliers, so product differentiation is low. So bargaining power of Suppliers is low.
Supplier Switching Costs – Since different Suppliers hold resources as per buyer’s
requirements and a large inventory has to be maintained. So bargaining power of
Suppliers is low as they would have to incur a huge cost on switching. But if they get
automobile manufacturers for similar products who can pay higher Supplier switching
cost is low. In such case, bargaining power of Suppliers is high.
Brand Identity – High Brand Identity and Trustworthiness of a Supplier increases the
bargaining power of Suppliers. But, otherwise the bargaining power of suppliers is low.
Tariff rationalization and taming of avoidable competition between rail and road
transport sectors should be carried out. In this unhealthy competition, both the
industries are unable to realize their full potential.
Easier availability of market credit for funding automobile acquisition is required.
Despite lower interest rates, availability of easy credit in rural and semi-urban
areas requires more focused attention. This can substantially spur the demand.
Reasons of Growth
Economic liberalization, increase in per capita income, various tax relief policies,
easy accessibility of finance, launch of new models and exciting discount offers
made by dealers all together have resulted in to a stupendous growth of India
automobile industry.
Market Share
Automobile industry of India can be broadly classified under passenger vehicles,
commercial vehicles, three wheelers and two wheelers, with two wheelers having a
maximum market share of more than 75%. Automobile companies of India, Korea,
Europe and Japan have a significant hold on the Indian market share. Tata Motors
produces maximum numbers of mid and large size commercial vehicles, holding
more that 60% of the market share. Motorcycles tops the charts of two wheelers
with Hero Honda being the key player. Bajaj by far is the number one
manufacturer of three wheelers in India.
Passenger vehicle section is majorly ruled by the car manufacturers capturing over
82% of the total market share. Maruti since long has been the biggest car
manufacturer and holds more that 50% of the entire market.
Global recession has impacted, the Indian automobile industry also and can be seen
clearly in the sales figures of the last financial year. Even then this industry has
high hopes in 2009-2010, as banks have reduced loan interest rates and the major
chuck of automobile customers belong to the middle income group who are
becoming economically stronger with every passing day.
Conclusions
Easier and faster mobility of people and goods across the regions, countries and
continents is a cherished yearning of mankind. The automobile industry’s potential
for facilitating this mobility is enormous. Wheels of development across the globe
would have to be powered by this industry. However, a seamless development of
this industry across countries and continents alone will help in realization of this
objective. For such seamless and barrier-free development of the sector, countries
will have to come together and develop better understanding. Industry across
countries will have to meet challenges of newer technologies, alternative fuels and
affordability of automobiles by people at large through constructive cooperation.
The earlier we are able to achieve this the better it would be for the world
development.