1.

1: The Beginning of New Era…

With the invention of the wheel in 4000 BC, man’s journey on the road of mechanized
transport had begun. Since then he continually sought to devise an automated, labor saving
machine to replace the horse. Innumerable attempts reached conclusion in the early 1760s with
the building of the first steam driven tractor by a French Captain, Nicolas Jacob Cugnot. It was
however left to Karl Benz and Gottlieb Damlier to produce the first vehicles powered by the
internal combustion engine in 1885. It was then that the petrol engine was introduced, which
made the car a practical and safe proposition. Then onwards, it has been one big journey...on the
roads

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1.2: History of Automobile Industry

The automobile as we know it was not invented in a single day by a single inventor. The history
of the automobile reflects an evolution that took place worldwide. It is estimated that over
100,000 patents created the modern automobile. However, we can point to the many firsts that
occurred along the way. Starting with the first theoretical plans for a motor vehicle that had been
drawn up by both Leonardo da Vinci and Isaac Newton.
In 1769, the very first self-propelled road vehicle was a military tractor invented by French
engineer and mechanic, Nicolas Joseph Cugnot (1725 - 1804). Cugnot used a steam engine to
power his vehicle, built under his instructions at the Paris Arsenal by mechanic Brezin. It was
used by the French Army to haul artillery at a whopping speed of 2 1/2 mph on only three
wheels. The vehicle had to stop every ten to fifteen minutes to build up steam power. The steam
engine and boiler were separate from the rest of the vehicle and placed in the front (see
engraving above). The following year (1770), Cugnot built a steam-powered tricycle that carried
four passengers.
In 1771, Cugnot drove one of his road vehicles into a stone wall, making Cugnot the first
person to get into a motor vehicle accident. This was the beginning of bad luck for the inventor.
After one of Cugnot's patrons died and the other was exiled, the money for Cugnot's road vehicle
experiments ended.
Steam engines powered cars by burning fuel that heated water in a boiler, creating steam
that expanded and pushed pistons that turned the crankshaft, which then turned the wheels.
During the early history of self-propelled vehicles - both road and railroad vehicles were being
developed with steam engines. (Cugnot also designed two steam locomotives with engines that
never worked well.) Steam engines added so much weight to a vehicle that they proved a poor
design for road vehicles; however, steam engines were very successfully used in locomotives.
Historians, who accept that early steam-powered road vehicles were automobiles, feel that
Nicolas Cugnot was the inventor of the first automobile.

The automotive industry has certain trends it has to follow, just like fashion designers and
musical composers. In times of recession and decreasing sales there is less room to take chances
and manufacturers are prone to follow the common pattern as a safer bet rather than releasing a
controversial product or idea that might or might not be successful. However throughout the
automotive industry's history, great innovators have "boldly gone where no man has gone before"
to set new trends which have dynamically altered the industry as a whole.
1880's & early 1900's
• About hundred years ago
-The first motor car was imported
-Import duty on vehicles was introduced.
-Indian Great Royal Road (Predecessor of the Grand Trunk Road) was conceived.
• First car brought in India by a princely ruler in 1898.
• Simpson & Co established in 1840.
-They were the first to build a steam car and a steam bus, to attempt motor car
manufacture, to build and operate petrol driven passenger service and to import American
Chassis in India.
• Railways first came to India in 1850's
• In 1865 Col. Rookes Crompton introduced public transport wagons strapped to and
pulled by imported steam road rollers called streamers. The maximum speed of these
buses was 33 kms/hr.
• From 1888 Motors Spirit attracted a substantial import duty.
• In 1919 at the end of the war, a large number of military vehicles came on the roads.
• In 1928 assembly of CKD Trucks and Cars was started by the wholly owned Indian
subsidiary of American General Motors in Bombay and in 1930-31 by Canadian Ford
 Motors in Madras, Bombay and Calcutta In 1935 the proposals of Sir M Visvesvaraya to
set up an Automobile Industry were disallowed.
• 1942 Hindustan Motors Ltd incorporated and their first vehicle was made in 1950.
• In 1944 Premier Automobiles Ltd incorporated and in 1947 their first vehicle was
produced.
• In 1947 the Government of Bombay accepted a scheme of Bajaj Auto to replace the cycle
rickshaw by the auto and assembly started in a couple of years under a license from
Piaggio. Manufacturing Programme for the auto and scooter was submitted in 1953 to the
Tariff Commission and approved by the Government in 1959.
• In 1953 the Government decreed that only firms having a manufacturing programme
should be allowed to operate and mere assemblers of imported CKD units be asked to
terminate operations in three years.
• Only seven firms namely Hindustan Motors Limited, Automobile Products of India
Limited, Ashok Leyland Limited, Standard Motors Products of India Limited., Premier
Automobiles Limited, Mahindra & Mahindra and TELCO received approval. M&M was
manufacturing jeeps. Few more companies came up later.
• Government continued with its protectionism policies towards the industry.
• In 1956, Bajaj Tempo Ltd entered the Indian market with a programme of manufacturing
Commercial Vehicles, and Simpson for making engines.
1960's

• In sixties 2 and 3 Wheeler segment established a foothold in the industry.

• Escorts and Ideal Jawa entered the field in the beginning of sixties.
• Association of Indian Automobile Manufacturers formally established in 1960.
• Standard Motors Products of India Ltd. moved over to the manufacture of Light
Commercial Vehicles in 1965.
1970's

• Major factors affecting the industry's structure were the implementation of MRTP Act,
FERA and Oil Shocks of 1973 and 1979.
• During this decade there was not much change in the four wheeler industry except the
entry of Sipani Automobiles in the small car market.
• Oil Shock of 1973 quickened the process of dieselization of the Commercial Vehicle
segment.
• Three other companies, namely, Kirloskar Ghatge Patil Auto Ltd, Indian Automotive Ltd
and Sen & Pandit Engg products Ltd entered the market during 1971-75. They ultimately
withdrew in early eighties.
• During the seventies the economy was in bad shape. This and many specific problems
affected the Automobile Industry adversely.

1980's - The period of liberalized policy and intense competition

• First phase of liberalisation announced.

• Unfair practices of monopoly, oligopoly etc slowly disappeared.
• Liberalisation of the protectionism policies of the Government.
• Lots of new Foreign Collaborations came up in the eighties. Many companies went in for
Japanese collaborations.
• Hindustan Motors Ltd. in collaboration with Isuzu of Japan introduced the Isuzu truck in
early eighties.
• ALL entered into collaboration with Leyland Vehicles Ltd. for development of integral
buses and with Hino Motors of Japan for the manufacture of W Series of Engines.
• TELCO after the expiry of its contract with Daimler Benz, indigenously improved the
same Benz model and introduced it in the market.
• Government approved four new firms in the LCV market, namely, DCM, Eicher, Swaraj
and Allwyn. They had collaborations with Japanese companies namely, Toyota,
Mitsubishi, Mazda and Nissan respectively.
• In 1983 Maruti Udyog Ltd was started in collaboration with Suzuki, a Japanese firm.
• Other three Car manufacturers namely, Hindustan Motors Ltd., Premier Automobiles
Ltd., Standard Motor Production of India Ltd. also introduced new models in the market.
• At the time there were five Passenger Car manufacturers in India - Maruti Udyog Ltd.,
Hindustan Motors Ltd., Premier Automobiles Ltd., Standard Motor Production of India
Ltd. and Sipani Automobiles.
• Ashok Leyland Ltd. and TELCO were strong players in the Commercial Vehicles sector.
 • In 1983-84 Bajaj Tempo Ltd. entered into a collaboration with Daimler-Benz of Germany
for manufacture of LCVs.
• Important policy changes like relaxation in MRTP and FERA, delicensing of some
ancillary products, broad banding of the products, modifications in licensing policy,
concessions to private sector (both Indian and Foreign) and foreign collaboration policy
etc. resulted in higher growth / better performance of the industry than in the earlier
decades.

1990's
• Mass Emission Norms were introduced for in 1991 for Petrol Vehicles and in 1992 for
Diesel Vehicles.
• In 1991 new Industrial Policy was announced. It was the death of the License Raj and the
Automobile Industry was allowed to expand.
• Further tightening of Emission norms was done in 1996.
• In 1997 National Highway Policy has been announced which will have a positive impact
on the Automobile Industry.
• The Indian Automobile market in general and Passenger Cars in particular have
witnessed liberalisation. Many multinationals like Daewoo, Peugeot, General Motors,
Mercedes-Benz, Honda, Hyundai, Toyota, Volvo and Fiat entered the market.
• Various companies are coming up with state-of-art models of vehicles.
• TELCO has diversified in Passenger Car segment with Indica.
Despite the adverse trend in the growth of the industry, it is resolutely trying to meet the
challenges. Various issues of critical importance to the industry are being dealt with
forcefully.

.
 1.3: Preview of Automobile Industry
The automobile industry, one of the core sectors, has undergone metamorphosis with the
advent of new business and manufacturing practices in the light of liberalization and
globalization. The sector seems to be optimistic of posting strong sales in the next couple of
years in view of a reasonable surge in demand.
The Indian automobile market is gearing towards having international standards to meet
the needs of the global automobile giants and become a global hub. Players are strategizing to
consolidate their position and gradually increase market penetration with the launch of new
models, targeting different segments. Since the sector is price driven, huge investment is
envisaged to remain competitive through cost advantage, for which indigenization is highly
important. The product becomes dearer if it is manufactured using imported parts. IT in the
automobile sector plays a crucial role.. Some players are working towards development of
efficient production systems that control the entire production process with high precision and
accuracy. Such systems working on real time operating systems allow efficient control of
different parts of manufacturing and production. It is essential to leverage skills of different
engineering disciplines to build these kinds of integrated systems.
Analysts foresee high scope in the electronics for auto sector and expect the retailing of
such electronics products to contribute a major chunk of future revenues. The government is
increasing the research and development (R&D) fund for the automobile industry over and above
the Rs 1400 crores earmarked for eight years. All laboratories in the country researching on
automobile technology, such as BHEL which is developing cell technology as alternative fuel,
have also been brought together through the setting up of a national R & D working group. The
group is working out a plan to link all major laboratories across the country to give a thrust to
automotive research.
Indian automobile sector being a driver of product and process technologies, and has become a
excellent manufacturing base for global players, because of its high machine tool capabilities,
extremely capable component industry, most of the raw material locally produced, low cost
manufacturing base and highly skilled manpower Not only a large number of world
manufacturers have set up production bases in India but also a large number of foreign
companies are collaborating with the auto component suppliers and vendors.
Indian Automobile Components Industry has been making rapid strides towards
achievement of world-class Quality Systems by imbibing ISO 9000/QS 9000 Quality Systems
whereby the Indian Automotive industry has become more competitive in the export market due
to its technological and quality advances, so much so that in quality conscious markets such as
Europe and America, it is emerging as a major player, based on its performance. India today
exports: Engine and engine parts, electrical parts, drive transmission & steering pats, suspension
& braking parts among others.
The sector is striding inroads into the rural middle class after its inroads into the urban
markets and rural rich. It is trying to bring in varying products to suit requirements of different
class segments of customers.
States like Rajasthan, Uttar Pradesh, Maharashtra, Andhra Pradesh and West Bengal are
vying to woo global players with proposals including heavy tax exemptions and to create a more
investor friendly regime, each state is proposing to provide all regulatory clearances at express
speed.
The Government should promote Research & Development in automotive industry by
strengthening the efforts of industry in this direction by providing suitable fiscal and financial
incentives.
The current policy allows Weighted Tax Deduction under I.T. Act, 1961 for sponsored
research and in-house R&D expenditure. This will be improved further for research and
development activities of vehicle and component manufacturers from the current level of 125%.
In addition, Vehicle manufacturers will also be considered for a rebate on the applicable
excise duty for every 1% of the gross turnover of the company expended during the year on
Research and Development carried either in-house under a distinct dedicated entity, faculty or
division within the company assessed as competent and qualified for the purpose or in any other
R&D institution in the country. This would include R & D leading to adoption of low emission
technologies and energy saving devices.
Government will encourage setting up of independent auto design firms by providing
them tax breaks, concessional duty on plant/equipment imports and granting automatic approval.
Allocations to automotive cess fund created for R&D of automotive industry shall be
increased and the scope of activities covered under it enlarged.

1:4 Automobile industry – Wheels of Change

India had its date with this wonderful vehicle first time in 1898. Then for the next fifty
years, cars were imported to satisfy domestic demand. Between 1910 and 20's the automobile
industry made a humble beginning by setting up assembly plants in Mumbai, Calcutta and
Chennai. The import/assembly of vehicles grew consistently after the 1920's, crossing the 30,000
mark in 1930. In 1946, Premier Automobile Ltd (PAL) earned the distinction of manufacturing
the first car in the country by assembling 'Dodge DeSoto' and 'Plymouth' cars at its Kurla plant.
Hindustan Motors (HM), which started as a manufacturer of auto components graduated to
manufacture cars in 1949. Thanks to the Licence Raj which restricted foreign competitors to
enter the Indian car market, Indian roads were ruled by Ambassador Car from Hindustan Motors
and the Fiat from Premier Auto Ltd. for many of the initial years.
 In 1952, the GOI set up a tariff commission to devise regulations to develop an
indigenous automobile industry in the country. After the commission submitted its
recommendations, the GOI asked assembly plants, which did not have plans to set up
manufacturing facilities, to shut operations. As a result General Motors, Ford and other
assemblers closed operations in the country. The year was 1954 and this decision of the
government marked a turning point in the history of the Indian car industry. The GOI also had a
say in what type of vehicle each manufacturer should make. Therefore, each product was safely
cocooned in its own segment with no fears of any impending competition. Also, no new entrant
was allowed even though they had plans of a full-fledged manufacturing program. The restrictive
set of policies was chiefly aimed at building an indigenous auto industry. However, the
restrictions on foreign collaborations led to limitations on import of technology through technical
agreements. In the absence of adequate technology and purchasing power, the car industry grew
at a snail's pace in the 60’s. The demand for cars in 1960 was to the tune of 15,714. In the next
two decades the number increased to 30,989 i.e. a CAGR of only 3.5 per cent.
The other control imposed on carmakers related to production capacity and distribution.
The GOI control even extended to fixation of prices for cars and dealer commissions. This
triggered the start of a protracted legal battle in 1969 between some carmakers and GOI. Simply
put, the three decades following the establishment of the passenger car industry in India and
leading upto the early 1980s, proved to be the 'dark ages' for the consumer, as his choice
throughout this period was limited to two models viz. Ambassador and Padmini. It was only in
1985, after the entry of Maruti Udyog, that the car makers were given a free hand to fix the
prices of cars, thus, effectively abolishing all controls relating to the pricing of the end product.
In the early 80's, a series of liberal policy changes were announced marking another
turning point for the automobile industry. The GOI entered the car business, with a 74% stake in
Maruti Udyog Ltd (MUL), the joint venture with Suzuki Motors Ltd of Japan. The very face of
the industry was changed for ever in 1983 with the entry of public sector Maruti Udyog in a joint
venture with the Suzuki Corporation of Japan. Car sales grew by 42 per cent yoy in 1985 after
Maruti 800 was launched. Thanks to MUL car sales registered a CAGR of 18.6 per cent i.e. from
1981 to 1990.
In 1985, the GOI announced its famous broadbanding policy which gave new licenses to
broad groups of automotive products like two and four-wheeled vehicles. Though a liberal move,
the licensing system was still very much intact. MUL introduced 'Maruti 800' in 1983 providing
a complete facelift to the Indian car industry. The car was launched as a "people’s car" with a
price tag of Rs 40,000. This changed the industry's profile dramatically. Maruti 800 was well
accepted by middle income families in the country and its sales increased from 1,200 units in
FY84 to more than 200,000 units in FY99. However in FY2000, this figure came down due to
rising competition from Hyundai's 'Santro', Telco's Indica and Daewoo's 'Matiz'.
MUL extended its product range to include vans, multi-utility vehicles (MUVs) and mid-
sized cars. The company has single handedly driven the sales of cars in the country cornering
around 79.6% market share. With increasing competition from new entrants, this market share
has plummeted to almost 62% in FY2000.
A brief 3-year downturn till 1993 and car sales bounced back to register a 17 per cent
growth rate in 1997.Since then, the economy slumped into recession and sales of cars remained
quite stagnant FY97 and FY99. The Financial year 2000 has, however, been the turnaround year
for the Auto industry with the economy looking up. The automobile industry, crossed the half
million mark for the first time in FY2000.
Overwhelmed by newer models from new and existing players had led to an impressive shift
from a constrained supply situation to a surplus one. Within the past decade, about 30 models
have entered the Indian market with a number of models still awaiting launch. The de-licensing
of auto industry in 1993 opened the gates to a virtual flood of international auto makers into the
country with an idea to tap the large population. Also the lifting of quantitative restrictions on
imports by the recent policy is expected to add up to the flurry of foreign cars in to the country.
The Indian Automobile industry registered one of the strongest growth rates in FY’04.
Aided by sustained economic recovery, the industry registered high growth rates in all major
segments.

The growth story was led by Medium and Heavy Commercial Vehicles (M&HCVs)
registering a 40% growth while Light Commercial Vehicles (LCVs) recorded a 32% jump in
total sales. Passenger cars also registered an impressive 34% growth in FY’04 and total sales
volume crossed the 1 million mark for the first time. Interestingly, two wheelers registered the
lowest but healthy growth rate of 13% in FY’04. While motorcycle volumes tripped on a high
base, scooters registered a 10%
growth after 4 years of continuous decline. Three wheelers grew by 23% in FY’04.
 Apart from strong economic growth in all sectors, low interest rate regime, normal
monsoon, continued infrastructure investment, fiscal measures like cut in excise duty (in case of
cars), etc provided impetus for the growth. The year also saw a sharp 56% rise in export volumes
with all the sectors registering more than 40% growth, signalling the
rising international competitiveness of the industry.
Profitability improvements were recorded in companies across segments driven by rise in
volumes and lower interest costs to some extent, notwithstanding the rise in prices of certain
inputs like steel.

Though the peak customs duty had been reduced to 20% in January 2004 and Special
Additional Duty was abolished, the domestic industry still enjoys adequate protection, with no
import threats. The potential borne by the industry is well exhibited by the growing number of
international players setting up base in India and increasing
competitivenessin the industry.
Many companies have entered the car manufacturing sector, to tap the middle and
premium end of car industry.

1.5: Background of Automobile Industry

 The automobiles industry for many years operated in a seller's market. In such a scenario the
manufacturer could offer outdated models and also raise prices at will. Little or no attempt
 was made to control costs or to offer new products. Lack of innovation restricted the
consumer’s options to the models offered by these companies.

 The number of manufacturers (domestic and foreign) increased dramatically after the de-
licensing of the sector. Increased competition has forced companies to focus on cutting costs,
improve technology and styling through research. It has also constrained them to limit price
increases.

 Availability of easy credit facilities also resulted in creating demand for automobiles. The car
financing market has boomed from a turnover of Rs 7,000 m in FY95 to nearly Rs 35,000 m
in FY97.

Structure
 The Indian automobile industry can be broadly classified into:
 2 /3 Wheelers
 Passenger Cars
 Commercial Vehicles (LCV/HCV/MCV)
 UV (Utility vehicles)
 Tractors

The models in the car market can be fitted to different segments as given below:

Category Models
 Economy segment (upto Rs 0.25mn) Maruti Omni, Maruti 800 etc.

Mid-size segment (Rs 0.25-0.45 mn)
Luxury car segment (Rs 0.45- 1mn)
Super luxury segment (above Rs 1mn)
Fiat Uno, Hyundai Santro, tata Indica,
Maruti Alto etc.
Tata Indigo, Honda City, Mitsibushi
Lancer, Ford Ikon, Opel Astra, Hyundai
Accent & others
Mercedes Benz & other imported models

The economy segment has a very large foothold over the Indian automobile market as compared
to the mid-size and luxury segment.

Segment Market Share (%)

Economy 90.2
Mid-size and luxury 9.8

Source: SIAM/ Auto Car India

 Increased urbanisation, low pricing policies, improvement in products and technology have
fuelled demand for 4-wheelers. The markets are clearly segmented between economy models
and premium models. The easy availability of finance and increased levels of disposable
incomes has led to higher demand for premium models. Rural areas have also become an
exciting market to cater to.
 The growth of the economy has also resulted in a shift in consumer preferences in each of the
segment. Gradual shift can be seen in buyers from mopeds to economy scooters, from
economy scooters to premium and from premium to motorcycles

Figure -Structure of Passenger Vehicle Market (India)

Trends in Passenger Car / Utiltity Vehicle Sales
 The passenger car segment has seen rapid growth on the back of rise in disposable income,
increased availability of consumer finance, and reduction in excise and customs duties. Post-
1991, this segment has seen maximum foreign investment. There is a clear segmentation of
passenger cars based on price and size. While the lower and medium range cars (Maruti,
Ford, Cielo) have been moderately successful, luxury cars such as Mercedes have found the
going tough.
 The CV segment is directly linked to industrial production and foreign trade and is therefore
subject to cyclical fluctuations of the economy. The demand for CVs is related to growth in
movement of goods transported and freight rate levels, both of which are linked to level of
production.

Commercial Vehicle Sales Growth v/s IIP Growth

 Demand for utility vehicles and tractors come from rural India. These vehicles have
witnessed steady demand growth over the past few years due to successive monsoons, better
procurement prices, improved irrigation facilities, and availability of finance.
 A strong in-house R&D capability allows a manufacturer to develop and introduce products
at lower prices, thus saving costs of importing technology. However, Indian companies spend
very little on R&D.
Availability of quality components is another factor that determines smooth production without
bottlenecks. High rejection rate of auto components has prompted several global majors like
Ford, to get their international suppliers
 1.6: Features of the automobile industry
The structure of the auto market has been changing at a faster pace along with the global
changes in the Industry. There are several global automobile companies who were averse to
come and invest in India ten years ago, now have kept India as a priority destination for their
investment. Along with the entry of multinational auto companies, the profile of domestic auto
companies too witnessed a structural change. The stiff competition to access market prompted
companies to go for different models with differing qualities and efficiency. The market too
expanded at a rapid pace with the entry of soft financial assistance from several financial
institutions to middle income households.
MNCs need to carefully plan their entry into emerging markets. Early commitment to a
market often results in first mover advantages that are difficult to replicate. On the other hand,
later entrants have the opportunity to learn from the mistakes of the first entrant. The Indian car
market offers useful lessons in this context. In the 1990s, the Indian Government removed
several restrictions in a bid to attract foreign investors into the automobile industry. Among the
first to enter was Daewoo of South Korea, with its model Cielo, targeted at the upper end of the
market. Other MNCs such as Ford and General Motors also entered the Indian market, followed
by Hyundai, Honda, Toyota, Volkswagen etc.
Most MNCs began their operations in India as joint ventures with local partners.
Examples include Suzuki, G.M, Ford and Daewoo. With the exception of Suzuki, these joint
ventures have become fully owned subsidiaries of the foreign partners. In all these cases, the
local partners have just not had enough resources to chip in whenever the equity base has been
expanded. Consequently, the foreign partners have pumped in the additional capital and raised
their equity stakes

With the liberalization of the India economy, the Rs 18,500 crore Indian car market is
being opened up to foreign investors. Several companies are setting up or have already set up
operations in India to cater to the Indian market. There are several strategies by which a foreign
enterprise can set - up Indian operations. This module aims to give the various entry options
available to a foreign investor, especially for foreign direct investment. This module does not
deal with portfolio investments.
Broadly, entry strategies may be classified into two major types :-
 1. A foreign investor may directly set up its operations in India through a branch office or a
representative office or liaison office or project office of the foreign Company ; or
2. It may do so through an Indian arm i.e. through a subsidiary company set - up in India
under Indian laws.
Generally, setting up operations through an Indian arm is advisable, especially if the
quantum of investment is huge.
The impact of India’s initiatives in economic liberalization and globalization (post 1991)
is most apparent in the automotive sector. Automotive industry is a key driver of economic
growth contributing around four to five percent to the Indian GDP. Introduction of reforms and
entry of international companies has intensified competition in the Indian automotive sector. This
has resulted in the transformation of a seller’s market (created mainly due to the Indian
government’s protectionist policies) into a buyers market. The changing structure of this industry
has posed many challenges and opportunities to the market participants.
Previously, Indian automotive market was characterized by weak air pollution
regulations. In addition, low labor cost of maintenance and the psyche of Indian consumer to
delay the discarding of the old vehicle reduced the scrap rate. All these factors resulted in
prolonged operational existence of vehicle on Indian roads. The benefit of this practice is the
comparatively higher revenues for automotive component suppliers, due to increased demand in
the aftermarket. But recent pronouncement of GoI to prohibit polluting vehicles in the National
Capital Region (NCR) is likely to force the old polluting vehicles off road. This will reduce the
average life span of vehicles on road and the overall impact would be reduced per vehicle parts
consumption.
Two wheelers generate the highest volumes and are more popular in rural and semi
urban markets primarily due to lower income levels and poor road conditions. Therefore, these
could be classified as entry-level vehicles. Within two wheeler segments, progressively mopeds
are likely to be replaced by motorcycles. With the growth in the family income of these rural and
semi-urban buyers and the option of numerous used cars, it is expected that a significant shift
would take place from two wheelers (mainly scooters) to four wheelers. Lucrative finance
schemes have made the purchase of mid-sized cars really affordable. The present owners of the
small car are likely to graduate to mid-size cars mainly due to declining importance of small car
as status symbol and the marginal increment in repayment installment in the finance options.
 Good performance of the economy has led to higher all round growth leading to high
GDP growth of 8%. Excise duty reduction on passenger vehicles helped to reduce the ultimate
price to the customer. Brisk activities on infrastructural development will give a boost to the
automobile industry. Softening of interest rates and improved financing of second hand vehicles
have made the purchasing of cars financially viable. Availability of finance in rural and semi-
urban areas have led the low-end customers to put money in the purchase of vehicles. Emergence
of India as a manufacturing hub for the automobile industry is a good sign for the country’s
future prospects.

The automotive industry performance is closely linked to industrial growth. It is hoped

that industrial growth would be around 7 per cent during the year 2003-04 as against around
6.5% last year. Agriculture output during the year 2003-04 increased by over 10% as compared
to (-)3.2% in the previous year. Today we are fourth largest economy (USD 2.5 trillion) in the
world after USA, Japan and China in terms of purchasing power parity. The outlook for the year
2004-05 is promising and it is expected that the current growth rates of GDP and industrial
output will be sustainable, which would ensure robust growth in the automotive sector.
Good performance of the economy has led to higher all round growth leading to high
GDP growth

1.7: The landmarks along the way...

1928- The first imported car was seen on Indian roads
1942- Hindustan Motors incorporated
1944- Premier automobiles started
1948- First car manufactured in India
1953- The Government of India decreed that only those firms which have a manufacturing
program should be allowed to operate
1955- Only seven firms, namely, Hindustan Motors Limited, Automobile Products of India
Limited, Ashok Leyland Limited, Standard Motors Products of India Limited. Premier
Automobiles Limited, Mahindra & Mahindra and TELCO received approval.
1960 - 1970 - The two, three wheeler industries established a foothold in the Indian scenario.
1970 - 1980 - Not much change was witnessed during this period. The major factors affecting the
industry were the implementation of the MRTP Act (Monopolies and Restrictive Trade
Practices Act), FERA (Foreign Exchange Regulation Act) and the Oil Shock of 1973 and
1979.
1980 - 1990 - The first phase of liberalization was announced by the Govt. -With the
liberalization of the Government's protectionist policies, the advantages hitherto enjoyed
by the Indian car manufacturers like monopoly, oligopoly, slowly began to disappear.
1991 - Under the Govt.'s new National Industrial Policy, the license raj was dispensed with, and
the automobile industries were allowed to expand freely.
1993 - With the winds of liberalization sweeping the Indian car market, many multinationals like
Daewoo, Peugeot, general Motors, Mercedes-Benz and Fiat came into the Indian car
market.
1997 - The National Highway Policy was announced which will hopefully have a positive impact
on the automobile industry. The Government also laid down the emission standards to be
met by car manufacturers in India in the coming millennium. There were two
successively stringent emission levels to be met by April 2000 and April 2005,
respectively. These norms were benchmarked on the basis of those already adopted in
Europe, hence the names Euro I (equivalent to India 2000) and the Indian equivalent of
Euro II.
1999 - The Hon’ble Supreme Court passed an order directing all car manufacturers to comply
with Euro I emission norms (India 2000 norms) by the 1st of May, 1999 in National
Capital Region(NCR) of Delhi. The deadline was later extended to 1st June, 1999
2004 - Tata Motors becomes the first Indian auto company to be listed on the New York Stock
Exchange.
 2.1: Auto policy of the Government of India

VISION
To establish a globally competitive automotive industry in India and to double its contribution to
the economy by 2010.

POLICY OBJECTIVES
This policy aims to promote integrated, phased, enduring and self-sustained growth of the Indian
automotive industry. The objectives are to:-

• Exalt the sector as a lever of industrial growth and employment and to achieve a high
degree of value addition in the country;
• Promote a globally competitive automotive industry and emerge as a global source for
auto components;
• Establish an international hub for manufacturing small, affordable passenger cars and a
key center for manufacturing Tractors and Two-wheelers in the world;
 • Ensure a balanced transition to open trade at a minimal risk to the Indian economy and
local industry;
• Conduce incessant modernization of the industry and facilitate indigenous design,
research and development;
• Steer India's software industry into automotive technology;
• Assist development of vehicles propelled by alternate energy sources;
• Development of domestic safety and environmental standards at par with international
standards.
SIAM welcomed the announcement of Auto Policy, and feels that the policy would serve as a
reference document for all stake holders and other interested parties.
The Auto Policy has spelt out the direction of growth for the auto sector in India and addresses
most concerns of the automobile sector, including-
Promotion of R&D in the automotive sector to ensure continuous technology

• upgradation, building better designing capacities to remain competitive;

• Impetus to Alternative Fuel Vehicles through appropriate long term fiscal structure to
facilitate their acceptance;
• Emphasis on low emission fuel auto technologies and availability of appropriate auto
fuels and
encouragement to construction of safer bus/truck bodies - subjecting unorganised sector
also to 16% excise duty on body building activity as in case of OEMs
The policy has rightly recognised the need for modernising the parc profile of vehicles to arrest
degradation of air quality. The terminal life policy for commercial vehicles and move toward
international taxing policies linked to age of vehicles, are steps in the right direction.
SIAM has always been advocating encouragement of value addition within the country against
mere trading activity. However, this aspect has not been fully addressed. The Auto Policy allows
automatic approval for foreign equity investment upto 100% in the automotive sector and does
not lay down any minimum investment criteria.
The recommendation of promoting passenger cars of length upto 3.8 meters through excise
benefits is not in line with the free market concept and may lead to market distortion.
However, with the Auto Policy in place, the automotive industry would get further fillip to
become vibrant and globally competitive. The industry would get the required support from other
Ministries and departments of Government of India in achieving the goals laid down in the auto
policy

2.2: Role of Government in Automobile Industry

The government is making efforts to overcome the constraints at their research centers for
automobile industry. India can also learn from countries like Japan that are already using these
technologies for a wide number of applications. The Indian auto industry should launch
programmes for market development and a wider acceptance of alternative energy-driven
vehicles in India. It should also work in tandem with the government to make India a world
leader in this area.

Indian automobile industry is also consistently trying to meet the emerging challenges of
environmental pollution and better safety standard. According to a study, automobile exhaust
contributes more than 60% of the atmospheric pollution in metropolitan cities, with the growing
number of vehicles, the pollution in the cities is continuously increasing. Government initiated
controls by notifying emission standard from the year 1992 under which were furthers tightened
in April 1996 under the Motor Vehicles Act. Euro-I emission norms have already been made
applicable throughout the country and Indian is poised to induct Euro-II norms across the
country by April 2005. Form that date 7 metropolitan cities are going to switch over to Euro–III
norms. To meet this emerging challenges of newer emission norms Indian automobile industry
has already braced itself up with new investment and fresh technological induction.

With the growing number of vehicles, the pollution in the cities is ever increasing.
Government initiated controls by notifying emission standards from the year 1992 which were
further tightened under the Motor Vehicle Act. For meeting these norms, unleaded petrol was
also introduced in metropolitan cities from 1995, which enabled fitments of catalytic convertors
on new petrol driven vehicles. The norms are being further tightened from April,2000 when
India’s stage one norm equivalent to Euro-I will become effective. For 2-wheelers, India has
announced one of the tightest norms in the entire world. In the national capital territory region of
Delhi, India’s stage 2 norms equivalent to Euro-II norms, will be effective from April, 2000, as
per the order of Hon’ble Supreme Court. This would apply to passenger cars.
The government seems most keen to hand over a huge replacement market on a platter to
the automobile industry without ensuring that manufacturers take responsibility of the emission
performance of the vehicles they produce for its useful life. In fact the most important action
point that was recorded after the ministerial consultation was that manufacturers would have to
give emissions warranty for two- wheelers from But ultimately, the government could not muster
enough courage to push the mighty automobile industry and enforce it.

Government will encourage and assist establishment of specialized training institutes for
the automobile sector through the active association of interested automobile industries. These
institutes will be set up in Bidadi Industrial area and Dharwad Growth center. The Institute will
be managed by the participating automobile industries and will train skilled category of auto
workers, in specified skill areas such as painting, welding, auto mechanical, etc. It also is making
an effort abe to enlist the support of multilateral aid institutions to provide part of the funding for
this project, which promises tremendous environment-improvement benefits for the vehicle,
which create pollution.
The policy of broadbanding capacities in the eighties led to increased utilization of
capacity for four-wheelers in the industry.
The liberal policy on foreign participation through technical and financial collaboration in
early eighties led to substantial product upgradation and introduction of new models. But it was
alleged that the policy was discriminatory in favor of MUL, while others like Telco, PAL, HM
were denied permission to produce cars in collaboration with Japanese companies.
The GOI controls the car sector by way of framing policies on depreciation norms, import
duty on cars and parts used in it, petrol prices and import duty of steel.
 During the era of socialist inspired controls, the government protected the car industry
from new entrants by making effective use of licenses. However, after liberalization and with the
consequent opening up of the auto sector in 1992-93, the license raj ceased to exist .
The perception of a car as a luxury good lead to heavy excise duty on cars. The excise
duty doubled from 25% in FY87 to 55% in FY91. Till 1987, the GOI followed a discriminatory
policy so as to charge lower duty on fuel efficient car with engine capacity of less than 1000cc.
This helped MUL to price its car at a lower price in comparison to others. But with lobbying
from PAL and HM government withdrew the provision in 1987.
But with the onset of the liberalization process in the early nineties, the government has
continually rationalized the excise duty regime. Presently, there is a duty of 40% (16% + 24%)
on motor vehicles, designed for transport of not more than six persons (excluding the driver). On
vehicles designed for transport of more than six persons, but not more than 12 persons, the duty
is 32% (16% + 16%). Over and above the excise duty, cess by the Central Government, states are
now charging a uniform sales tax of 12%. This came in being after the 15th of May 2000. Earlier,
states used to charge sales tax varying from 3 to 14%. But MUL vehicles receive favorable
treatment in terms of sales tax as well.
In line with its treatment for luxury items import duties for car have been maintained
high. In the 80's, import duties varied between 150 to 200% based on the engine capacity of a
car. The import duty on cars and components has come down in the last few years in line with
general reduction in import tariffs. In the FY98 budget, the import duty on cars has also been
further brought down from 50% to 40% ad valorem. Substantial reduction in import duty has
been extended in the budget FY98 for import of certain items which would help the industry to
reduce the emission level of vehicles. The import duty on catalytic converters and parts thereof
has been reduced from 25% to 5%. The duty on CNG kits and parts thereof have been reduced
from 10% to 5%.
The import duty on auto components will be a key factor in deciding the final pricing of
cars as new ventures start with about 50% indigenisation levels. The reduction in import duty on
steel in the last few years has helped the industry in reducing raw material costs as major steel
requirement of car industry was imported. Even today, all CKD/SKD imports include metal
pressed body panels.
 2.3: Impact of union Budget 2004-05

Budget Proposals / Measures

• No change in basic excise duty on automobiles other than tractors

• Peak rate of customs duty to be maintained at 20%

• Automobile companies entitled to 150% deduction of expenditure on in-house R&D

facilities

• Reduction in customs duty for alloy and non alloy steel to 15% and 10% respectively.

• Excise duty on steel increased to 12% from 8%.

• Indications of continuing benign interest rate regime.

• Educational cess of 2% on excise, customs duties and Income Tax.

• Likely implementation of VAT from April 1, 2005

• Strong thrust towards sustainable rural economic growth.

• Reduction in customs duty on copper as well as some other metals to 15%.

 • Consortium of banks formed to ensure speedy conclusion of loan agreements and
implementation of infrastructure projects.

Budget impact:
Tractor manufacturers will benefit from increased demand for tractors once they pass on the
benefits of excise duty exemption to the end consumers. The industry has just come out of a
three-year slump, having registered a volume growth of 10% in FY04. Thus, the current
exemption is likely to give a further boost to demand. The target of doubling the agricultural
credit in three years is also likely to make more funds available to the farmers for investment in
farm mechanisation.
With major auto companies spending sizeable amount on product development and in-house
R&D expenditure in recent times, deduction of 150% allowed on the same will encourage further
R&D investments. With cost efficiency no longer the domain of any single player, future survival
will depend upon the capability to offer more technologically competent products. From this
perspective, the current move is a step in the right direction.
The government has pushed for speedy implementation of infrastructure projects, which is a
good sign for the auto industry, especially the CV manufacturers. In line with the international
experience, improvement in road infrastructure will translate into increased demand for higher
tonnage CVs.
Reduction in customs duty on alloy and non alloy steel would have a positive impact on the auto
components and automobile industry. However, it would be nullified to some extend by increase
in excise duty on steel.

R&D sop will also boost investments in technology related areas. Cess of 2% may result in
increase in end product prices if the manufacturers decide to pass on the hike.

Rural thrust is likely to result in long term increase in demand of automobiles. Favourable
economic scenario, renewed impetus on infrastructure and thrust on rural economy are likely to
sustain healthy growth rates across segments.

Overall, no significant impact for the automobile industry (other than tractors).
 3: Demand
The demand for cars in the past was supply driven as demand did not match supply. This led to
high premium and long waiting periods for the cars. But change in government policies coupled
with aggressive capacity additions and upgradation of models by MUL in the early nineties led to
increase in supply and subsequently reduced the waiting periods for economy cars.
The demand for cars was suppressed by various supply constraints. The demand for cars
increased from 15,714 in FY60 to 30,989 in FY80 at a CAGR of only 3.5%. The entry of Maruti
Udyog Ltd (GoI-Suzuki JV) in 1983 with a "peoples" car and a more favorable policy framework
resulted in a CAGR of 18.6% in car sales from FY81-FY90.
After witnessing a downturn from FY90 to FY93, car sales bounced back to register 17% growth
rate till FY97. Since then, the economy slumped into recession and this affected the growth of
the automobile industry as a whole. As a result car sales remained almost stagnant in the period
between FY97 and FY99. CAGR recorded during the FY94-FY99 period was 14.4%, reaching
sales of 409,624 cars in FY99. However, during FY2000, with the revival of economy, the
segment went great guns posting a sales growth of 56%yoy. The table below indicates the past
sales trend for cars -

Cars FY94 FY95 FY96 FY97 FY98 FY99 FY2000

Volume 209,203 264,822 345,486 410,992 417,736 409,624 638,815
Growth %yoy 27.0 27.0 30.0 19.0 2.0 -2.0 55.8

Source : SIAM

The demand for cars is dependent on a number of factors. The key variables are per capita
income, introduction of new models, availability & cost of car financing schemes,
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