In partial fulfillment of grand project at 2nd year of MBA programme.

Submitted to: Prof. Yogesh Doshit

Submitted By: Ashutosh Sharma(50) Apurva Shah (47) Haresh Nayak (28)

Executive summary The Indian automobile industry has come a long way since the first car ran on the streets of Mumbai in 1898. The initial years of the industry were characterized by unfavorable government policies. The real big change in the industry, as we see it today, started to take place with the liberalization policies that the government initiated in the 1991. The liberalization policies had a salutary impact on the Indian economy and the automobile industry in particular. The automobile industry in the country is one of the key sectors of the economy in terms of the employment opportunities that it offers. The industry directly employs close to around 0.2 million people and indirectly employs around 10 million people. The prospects of the industry also has a bearing on the auto-component industry which is also a major sector in the Indian economy directly employing 0.25 million people. The Indian automobile industry is a stark contrast to the global industry due to many of the characteristics, which are peculiar to India. The Indian automobile industry is very small in comparison to the global industry. Except for two wheelers and tractors segments, the Indian industry cannot boast of big volumes vis--vis global numbers. The report covers the two segments, passenger cars and multi-utility vehicle segment. It contains an in-depth study of both the segments and the performance of the automotive industry in terms of production, sales, capacity, exports and imports. The major events and their impact on the industry and across the segments are discussed in detail. The report also looks into the factors that boost the revenue growth across segments and concludes with a look at the financial performance (in term of different ratios) of the major players in the industry. The Indian automotive industry is protectionist Foreign companies have lobbied hardest for high tariff caps Interestingly, it is the companies that entered India after 1991 that have lobbied most strongly with the Government to maintain tariff caps of 25 per cent and 40 per cent. This affords them substantial protection. Similarly, they have persuaded the Government to hike the import duty on second-hand cars to 180 per cent. However, should tariff reductions be extended in the new round of WTO negotiations, the duty on second-hand car imports will drop to 25 per cent. The Indian automobile industry is protectionist because few of its companies are commercially viable. India is the only country in the world with numerous car producers. Although consolidation seems imminent, it has not yet begun. A fundamental shake-out will do the industry considerable good. Recent growth in the automotive sector

Car and MUV sales have doubled since 1995

Segments of the Indian automotive industry have grown at varying rates since 1995. The sales of cars and multi-utility vehicles have almost doubled. Those of tractors and two-wheelers have grown at a slow, steady pace. The bus industry has shown no growth, and the truck and LCV industries have done badly. The boom in the car market can be explained by the tremendous interest of global car companies. Within two years of liberalization, 60 per cent of all major car and vehicle companies had invested money in India, whether through joint ventures, equity participation, or technical collaborations. Companies saw huge potential in the Indian domestic market. Many companies also saw India as a potential manufacturing and exporting hub for the rest of the Asian region. Much of this enthusiasm has now faded, due to policy and infrastructural bottlenecks. India now produces 6 lakh cars a year, up from 3 lakh cars in 1995. Currently, some 28, 000 cars are exported. A key trend of the last few years is the shift to bigger, more expensive cars. Until three years ago, small cars had a 57 per cent share of the market. Now, mid-size cars account for a half, and small cars for just a third of those on Indian roads. With the introduction of the Mercedes Benz, the Sonata, and the Accord in 2001 in India, it is the first time that cars over 4.5 metres long are being sold in the country. Another important development is the rise of a booming secondary market in automobiles. Today, most car purchase is occurring in this market, as scooter owners upgrade to cheap, four-wheel vehicles. Some second-hand Fiats and Maruti 800s are now even cheaper than a new two-wheel vehicle. In turn, many small car owners are looking to buy a bigger, second-hand car. As a result, there has been a fundamental shift in the two-wheeler industry. In 1999, motorcycle sales overtook those of scooters for the first time. This is because second-hand cars have replaced scooters as the family vehicle of the middle class. Secondly, policy restrictions on motorcycles have been lifted, bringing in a range of powerful, emissions-controlled, branded, Japanese models, that are very popular with the young. Within the scooter market, there has been a shift away from heavy, metal-geared models to gearless, lighter, plastic-bodied ones. Cars and two-wheelers have now become household essentials in India. There are currently close to 35 million two wheelers and 8 million cars in the country. In addition, there are 2 million trucks and 2 million other vehicles. Despite the boom in some parts of the industry, there is need for

Move toward bigger cars

Rise of secondhand car market...

Causing drop in scooter sales

considerable revitalization. Data drawn from the balance sheets of thirtyfour companies shows a 2 per cent drop in turnover. Profitability has declined by 42 per cent. Outdated policies pose key hurdles Policy issues of key concern to Indian automotive sector Domestic policies, rather than the global economic slowdown, are impacting the Indian automotive sector most heavily. What poses a particular drag are high and numerous taxes, customs tariffs and excise duties. Although cars and two wheelers have become household essentials, policy makers continue to view and to tax them as luxury items. They disregard the fact that Indias automotive industry is the largest in the world and is a primary generator of employment in the country. Should the sector be relieved of its punitive tax burden, it could become a significant driver of economic growth and employment. Policy makers also overlook the fact that car and vehicle owners present a significant vote bank. At the moment, they are forcing consumers to pay taxes equivalent to the value of every new car they purchase. This is because, for each car, there is a 35 per cent customs duty on the imported pack; a 40 per cent value-added tax; and a Modvat customs duty. There is then a 32 per cent excise duty and a 12 per cent sales tax. Many big cities impose their own taxes. If the Government brings import tariffs down, it will boost exports. We see this from the recent experiences of Brazil, Mexico and Australia. It is not only important to bring down tariffs, but to do so in a public, scheduled manner so that industry is able to prepare and take full advantage. In India, tax and tariff reductions are announced arbitrarily in the budget, with no prior notice. Most importantly, the Government should stop controlling the automotive sector. This is a hangover from the early years of Independence. Automotives are consumer durables akin to washing machines, televisions or fridges. Since the Government does not feel compelled to draw up national policies for these sectors, it should not do so in the auto sector. Global opportunities for the Indian automotive sector India could become a major exporter of automotive components If the Indian automotive sector positions itself correctly, it could become a major global exporter of automotive parts and components. The country has mature steel and ancillary industries. But this can only happen if the industry builds its capacity to meet global quality standards, delivery schedules, and prices.

Taxes equal the value of each car

High tariffs constrain exports

Auto policy should be abolished

Manufacturers will have to develop systems to efficiently manage labour, raw material, production and shipping. The Government will also have to be lobbied to rationalize and reduce tax rates across a number of sectors. Many foreign car companies have found it more convenient to operate out of Thailand, for instance, because there is a single tax rate and very little bureaucracy. India is not yet ready to become a significant exporter of indigenous cars. Production costs are still too high. Cars are also becoming increasingly complex, with parts sourced from the best suppliers globally. Similarly, global marketing and advertising expenses constitute a considerable part of the cost of each car.

INTRODUCTION......................................8 1.1 Industry:.....................................................................................................................8 1.2 Introduction to the Indian automobile industry:......................................................10 1.3 The Automobile Industry - Wheels of Change .......................................................11 2 INTERNATIONAL SCENARIO.....................................13 2.1 Evolution of Automobiles in the World...................................................................13 2.2 Future Trends & Outlook.........................................................................................17 3 INDIAN SCENARIO.....................................................................19 3.1 Historical industry Development.............................................................................19 3.2 Unique characteristics of the Indian market............................................................22 3.3 Government Policy..................................................................................................23 3.3.1 Policy on petroleum products, auto emission and depreciation........................24 3.3.2 Automotive Policy............................................................................................25 3.3.3 Import Policy....................................................................................................26 3.3.4 Import Duty.......................................................................................................26 3.3.5 Excise Duty.......................................................................................................26 3.4 Technology And Manufacturing Process.................................................................28 3.4.1 Technology.......................................................................................................29 4 Indian Automobile market.................................................................................31 4.1 Trade........................................................................................................................31 4.1.1 Demand.............................................................................................................31 4.1.2 Supply...............................................................................................................33 4.1.1 Exports..............................................................................................................34 4.1.2 Import................................................................................................................36 4.2 Capacity...................................................................................................................36 4.3 Segmentation of the Industry...................................................................................37 4.4 Major Players...........................................................................................................38 4.4.1 Maruti Udyog Limited......................................................................................39 4.4.2 Tata Engineering & Locomotive Company......................................................41 4.4.3 Hyundai Motors India Limited.........................................................................42 4.4.4 Ford India Limited............................................................................................43 4.4.5 Hindustan Motors Limited................................................................................44 4.4.6 General Motors India Ltd..................................................................................46 4.4.7 Honda SIEL Cars India Ltd..............................................................................46 4.4.8 Fiat Automobiles India Ltd...............................................................................47 4.5 Market Share............................................................................................................47 4.6 Collaborations and Mergers.....................................................................................49 5 Key Issues in Automobile Industry.................................................................................52 5.1 Key Earning Drivers................................................................................................52 5.2 Governments decision on second-hand car imports...............................................53 5.3 Will we ever get Affordable SUVs..........................................................................53 5.4 Imported Cars that May soon be Available.............................................................54 5.5 The Luxury segment Shootout.................................................................................54 5.6 Hatchbacks still rule the Indian market...................................................................54

5.7 Changing Paradigms in a Competitive Market........................................................54 5.8 New Models to be released .....................................................................................55 6 Industry Analysis.................................................................................................56 6.1 SWOT ANALYSIS:................................................................................................56 6.2 PEST Analysis.........................................................................................................57 6.3 Porters Diamond Model..........................................................................................60 6.4 Porters Five Force Analysis...................................................................................61 6.5 Strategic Group Analysis.........................................................................................68 6.6 Value Chain Analysis..............................................................................................71 1.1 Margin......................................................................................................................71 6.7 Comparative Analysis:.............................................................................................72 6.8 Financial Analysis of different players....................................................................75 7 Effect of Liberalization and WTO..................................................................................82 7.1 Liberalization has changed the mindset...................................................................82 7.2 Effect of WTO.........................................................................................................82 7.2.1 Breathing in WTO's world................................................................................82 7.2.2 WTO Regime and Its Impact on the Indian Automobile Industry....................83 8 Auto Expo 2002..............................................................................................85 9 Future Outlook.....................................................................................................87

1
1.1 Industry:

INTRODUCTION

Indian automobile industry in India is as well developed as any top industrial nations. Long years of License Raj and protectionism led to the development of various segments of automobile industry. There are a large number of well-entered players in all segments of the automobile industry as depicted in the following table. Indian Automobile Industry

Three Wheelers

Multi Utility Vehicles

Commercial Vehicles

Passenger Carriers

Goods Carriers Motor Cycle

Passenger Cars

Two Wheelers

Scooters

Mopeds

There are also exists a huge market and production base fro specialty vehicles like Tractors, Earthmoving vehicles, Cranes etc. But despite having a well-developed industry and a large market, the industry still has not been able to realize its full potential owing to the following reasons. Low purchasing power Price sensitive market Pent up/suppressed demand Existence of a large middle class Insufficient transportation infrastructure India as a country has a per capita income of around US$318 per annum. That is very miniscule compared with that of developing nations like Japan or the USA, which is in the range of $20000. Hence the emphasis on large market size of a billion people quietly diminishes. Thereafter the existence of a large middle class and that too with a majority of them in the lower end ensures that the disposable income left with the masses is

comparatively less. Hence the possession of an automobile is considered a luxury and often avoided by people. But the scenario is after all not that bad and the industry as a whole is growing in terms of volume albeit the profitability and profit margin is of question. To have a better grasp of the situation let us review each segment individually. Heavy commercial vehicles: In India the commercial vehicles are graded according to their Gross Vehicle Weight (GVW). It is as under: LCV: Intermediate commercial vehicle with GVW of 8 to 10 ton MCV: Medium commercial vehicles with GVW of 10 to 15 ton. HCV: GVW of 16 ton and above. But the gradation apart, the segment is more recognizes by its utility such as the vehicles which carry passenger are called buses and those specializing in carrying loads as trucks. Since 80% of commercial vehicles are purchased on credit, the availability of credit is a major factor influencing demand. The credit squeeze affects the demand negatively. The other important factors influencing demand of CV are depreciation norms, diesel prices and changes in the Motor Vehicle Act. Light commercial vehicles: Like the Heavy vehicles segment, the LCV, which are also essentially freight carriers are equally important. Small freight loads over small distance are transported through these vehicles. In India in rural areas, these vehicles also ferry passengers over short distances. This segment is much more populated and competitive than the HCV. The liberalization of government policy with respect to foreign, technical and financial collaboration lead to a sudden spurt in technical collaboration in LCV segment. The LCV segment is populated with six players with Telco being the traditional market leader by a wide margin. Passenger car segment: The first motorcar on the streets of India was seen in 1898. Mumbai had its first taxicabs in the early 1900. Then for the next fifty years, cars were imported to satisfy domestic demand. The Indian car industry can be classified, based on the price of the car into four segments. The demand for passenger cars can be segmented on the basis of the user segment as those bought by taxi operators, government/non government institutions, individual buyers etc. A major portion of the de4mand in India accrues mainly from personal vehicle owner. 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, price of cars, incidence of duties and taxes depreciation norms, fuel cost and its subsidization, public transport facilities etc. The first four factors have positive relationship with the demand whereas others have an inverse relationship with demand for cars.

Two Wheelers Segment: The two-wheeler segment like the passenger is very heterogeneous and could be split on basis of usage, load capacity, stroke engine, utility and appeal. In India it is generally sub-segmented into Motorbikes, Scooters, Scooterettes and Mopeds. The promotional and marketing outgo would rise steadily for the two-wheelers producers; the emphasis would now be on aesthetics, design, and product positioning and market segmentation. As a result, the consumer would be the ultimate beneficiary with the choice of more models with superior features. Special Utility Vehicles: This segment is also a very important segment but finds very less mention among the analysts in spite of its direct bearing on the economy. The probable reason for this trend is that the vehicle seems mundane and lacks the glamour of the luxury cars. The segment comprises of Tractors, Earth Moving Equipments and Material Handling.

1.2 Introduction to the Indian automobile industry:

India, the world's largest democracy, having a very large pool of scientific and engineering talent in the world has marched forward in critical areas of development - be it space or electronics. This pool of knowledge has enabled India to attain high levels of achievement in diverse high tech areas. The country has an open economy in the process of integrating with the world economy. Far reaching economic reforms aimed at deregulation and attracting foreign investment have moved India firmly into the front ranks of rapidly growing Asia-Pacific Region in the automobile industry, the developing regions are the growth areas of tomorrow. In the dynamics of transition of the Indian economy, the automobile industry is emerging as a leading industry. The automotive industry's strong linkages with the capital equipment and the services industry, and, the potential for earning foreign exchange through exports also acted as an impetus for its growth. The automobile sector comprises of all vehicles, including 2-3 wheelers, passenger cars and multi-utility vehicles, light and heavy commercial vehicles, and the allied engineering sector comprises largely of the auto components sector. Agricultural tractors and Earth Moving Machinery is an associated sector, which keeps the wheels of the agrarian economy moving. It is heavily reliant and aligned to the automobile and allied engineering sector and plays a significant role in India. The Automobile and Allied Engineering Industry may alternatively be termed the automotive industry. The Automotive Industry in India is now working in terms of the dynamics of an open market. Many joint ventures have been set up in India with foreign collaboration, both technical and financial with leading global manufacturers. The Government of India is keen to provide a suitable economic, and business environment conducive to the success of the established and prospective foreign partnership ventures.

The world automobile leaders have evinced keen interest in India and are making their entry through joint ventures and technology cooperation agreements. RS.127 bn or US $ 3617 mn is the investment envisaged in the new vehicle projects. If one looks at the joint venture's list, he or she can observes that the equity participation in the joint ventures indicate a wide variation. The equity participation is not regulated by Government but is market driven. It depends upon the market perceptions of the joint venture partners and their business perceptions primarily in terms of technological, financial and market strengths of the partners. With increased production and capacity creation in the passenger car sector, substantial growth in exports is envisaged. This tremendous growth in the vehicle sector is geared as well to accelerate the continuous growth of the auto-component industry.

1.3 The Automobile Industry - Wheels of Change

The transformation of the Indian market for passenger cars is remarkable. A few years ago you had a choice between three cars. Now the Indian car market has around thirty cars for the consumers. From a stage where the consumer had to wait for months to get a car, the market has turned in favor of the buyer. With new models and recession in the economy, manufacturers are doing everything to attract the consumers. In comparison with the kind of cars available in developed countries, Indias passenger cars may appear primitive even today, when a much wider choice is available than in earlier years. Earlier, the choice was between three cars. The Ambassador from Hindustan Motors was phased out from the European market before 1960. This car is still used by all the government agencies and you still find that most taxis are of this make. For the urban employed class it was Premier Padmini, a Fiat version of the same vintage. Then came Maruti a 798 cc from Maruti Suzuki, which became the most popular car in the country. The opening up of the economy and liberalization attracted investments form different parts of the globe. The result was wide range of cars in the Indian market. The joint venture between Government of India and Susuki Motors of Japans produced Maruti 800 (798 cc), Omni E (796 cc), Maruti Zen (993 cc), Maruti 1000 (970 cc) and Maruti Esteem (1298 cc). Hindustan Motors offer Ambassador ISZ (1817 cc), Contessa GLX (1817 cc). Other than the older models like Premier Padmini (1366 cc) and Premier 118 NE, the market now has new cars, including Fiat Uno (999 cc (1171 cc), Daewoo Cielo (1498 cc), Peugeot 309 (1360 cc), Opel Astra (1597 cc), Ford Escort (1299 cc), Honda City (1343 cc), and Mercedes E220 (2199 cc). Until the 1980s the automobile industry in this country had charted an uneventful course. The scenario showed a limited number of manufacturers, low levels of production and the use of anachronistic technology. Hindustan Motors, for example, have continued with the use of the old reliable Ambassador, making only cosmetic changes in the 1957-designed body. Premier Auto did the same with the Fiat body that was newly introduced in 1964.

For a long time, owning a personal four-wheeler was considered a luxury in India, and a limited road network with poor road surface did not help matters much. Production showed only a very gradual upward curve from the 1950s until the early 1980s before Maruti came into the scene. Though the consumers are happy about the variety of cars available, the manufacturers are worried. The drop in the demand and the inventory pile-up in most of the production units are hitting the bottom line. Though all players claim that they are not in the market for short-term gains, they admit that the present condition is far from attractive. With sales remaining stagnant or going down, car manufacturers have started going all out to win the customers. For the first time, car manufacturers in India offered heavy discounts. Easy finance offers, free accessories and attractive warranty offers are the other soaps offered now.

INTERNATIONAL SCENARIO

Understanding global dynamics is vital for the Indian automotive sector.

2.1 Evolution of Automobiles in the World

Mans journey on the road of mechanized transport had begun right from the time when the wheel was invented in 4000 BC. Since then he has continually sought to devise an automated, labor saving machine to replace the horse. However, it was not until 1885 when the first car rolled down the streets that man was truly able to come out with an automated devise to replace the horse. All the earlier attempts, though successful, were steam-powered road-vehicles. A French man Nicolas Jacob Cugnot built the first self-propelled car in 1769, which could attain speeds of up to 6 kms/hour. It was in 1771 that he again designed a steamdriven engine for a car, which enabled it to run so fast that the car rammed into a wall, it was the first recorded accident in the history of cars. Francois Isaac de Rivaz designed the worlds first internal combustion engine in 1807. He to develop the worlds first vehicle to run on such an engine, one that used a mixture of hydrogen and oxygen to generate energy, subsequently used this. This subsequently gave way to a number of designs based on the internal combustion engine in the early 19th century with negligible degree of commercial success. Thereafter in 1860, Jean Joseph Etienne Lenoir built the first successful two-stroke gas driven engine. In 1862 he again built an experimental vehicle driven by his gas-engine, which ran at a speed of 3 kms/hour. These cars became so popular that by 1865 many could be seen on the roads. It was not until 1885 that a four-stroke engine was devised and a petrol engine introduced. Gottileb Damlier and Nicolas Otto worked together on the mission till they fell apart. Daimler created his own engines, which he used both for cars and for the first four-wheel horseless carriage. Meanwhile, Karl Benz was in the process of creating his own advanced tri-cycle, which proved to be the first true car. This car first came to the roads 1886. During the same decade in 1890 Henry Ford of the United States began work on a horseless carriage. He went several steps further and in 1896, came out with his first car-the Quadricycle. This was an automobile powered by a two-cylinder gasoline engine. Henry Ford then went on establish the Ford Motor Company, which was launched in 1903, and in 1908 he catapulted his vehicle, Model T Ford to the pinnacle of fame. Henry Ford did not stop here and continued with his innovations, he then went on to produce the

Model T Ford on a moving assembly line, thereby introducing the modern mass production techniques of the automobile industry. The modern car, that we see on the roads today is an outcome of several innovations and discoveries over the ages; yet the car industry has still not stopped progressing and will continue to come out with better versions as decades pass by. It is worth noting here that the first ever land-speed record was established in 1898. Count Gaston de Chasseloup-Laubat of France drove an electric car at a speed of 39.24 miles per hour in Acheres near Paris. This flagged off the era of wheels racing, which lasted till 1964, after which jet and rocket -propelled vehicles were allowed. Ever since the invention of wheel, man has endeavored to create different modes of transport to suit his needs. But, automobile takes perhaps pride of place amongst all his contraptions. Merely because it has evolved over the years from an article of extravagance to the one of necessity. And, nowhere has this evolution been more visible than in our very own backyard. Remember the days of the ubiquitous Ambassador and the Fiat, which dominated the countrys roads, at a time when the Indian consumer had little option. However, since then, liberalization and the entry of competition, have brought about a sea change in the Indian automotive sector, which has evolved as a major player in the Asian context. A fact reflected in the emergence of India as the 18th largest global car market with a share of a mere 0.80 per cent. Hence, imagine the underlying potential that India possesses. Keeping this in mind, it becomes imperative for the Indian players to try and understand what they are up against on a global platform, as exports could well hold the proverbial -key -- in terms of survival. With this objective in mind, the following is a preliminary analysis of the global vehicle car park. Starting from the time when Henry Ford rolled out his first vehicle to now, the world passenger car park has grown to accommodate an estimated 524 million vehicles. This figure, although a ballpark estimate, is undoubtedly growing every single day. What with automotive plants the world over spewing out mutants of a particular design almost on a minute-to-minute basis. Accuracy in such an exercise is just not possible, as new cars are registered globally everyday, while some are abandoned and others are scrapped due to old age and accidents. All these problems mean that putting a number to the global car park is a complex issue. Even more difficult perhaps understands the dynamics of change in the global automobile industry. But despite the rapid pace of change and the inherent problems of statistics, it is very important for Indian auto manufacturers to understand the dynamics of the global marketplace and the competition therein.

A dozen companies dominate worldwide. Roughly, one car in seven on the worlds roads is currently produced on a General Motors (GM) platform. Putting GMs Indian operations in perspective is the fact that this carmaker manufactures mere 60,000 vehicles in India, which is just a minuscule 0.075 per cent. There are estimated to be around 80 million such vehicles, including the Opel, Vauxhall and Saab variants from the GM stable. Around one in eight cars are produced on the Ford/Mazda platform, which amounts to 67.1 million vehicles worldwide. Of this, Fords Indian operations are capable of producing mere 100,000 vehicles annually. One in 12 vehicles share a Toyota or Lexus label. While almost 41 million vehicles come from the Volkswagen, Skoda and Audi combine. Then, there are 30 to 33 million each of Nissan, Fiat and Peugeot-Citroens cars on global roads, as well as 25-26 million, respectively, of Honda and Renault models. So, in effect, the top eight automotive brands account for almost three in every four cars on world roads, with companies like Mitsubishi, Chrysler and Hyundai adding another seven per cent, leaving 20 per cent of world car park in the hands of miscellaneous car makers like Daewoo, Suzuki, Isuzu, Lotus and Maruti. Having roughly understood the players that dominate the global passenger car market, it is now imperative that we define the largest car parks in the world and also understand their operational dynamics. United States The US is the largest passenger car market in the world and is said to contain almost 150 million cars. Historically, car sales in this market have been controlled by the Big Two, namely General Motors and Ford (excluding Mazda). However, statistics now show that the share of other marques in the US market is on the rise. The fastest growth is in the Japanese brands, notably those of Toyota, Nissan and Honda, whose combined share on American roads was estimated to have increased to over 28 per cent in 1998. Most other brands surprisingly have smaller market shares in the US. A prime example of which is Volkswagen, which despite being the fourth largest manufacturer in the world, accounts for less than one vehicle in every 60 cars on American roads. Traditionally, up market brands like BMW and Mercedes Benz also account for less than a minuscule 1.3 per cent combined. Western Europe The so-called Big Six dominate the car park in Western Europe, accounting for almost three in every four cars on the regions roads. Interestingly, Volkswagen and its affiliates, which control a huge 15.6 per cent of the European car park, have dominated this region over the last decade. Now, compare this 15.6 per cent of Volkswagen, which is the market leader, and the 80 per cent share of Maruti Udhyog in India and what have you? Coming back to Western Europe, Fiat is the second largest player there with 13.3 per cent of the total car pie. But analysts state that its share will fall as older Fiats are scrapped. This aside, perhaps the other aspect that is truly interesting and specific to Europe, is the

long tail of other carmakers. After the Big Six, BMW, the top three Japanese firms and Mercedes Benz account for a huge chunk of cars on European roads. Then, there are firms like Volvo, Mitsubishi, Mazda, Suzuki, Lada, Proton, Rover, Maruti and Tata, all vying for a piece of the action. For these companies, supplying dedicated parts and maintaining a regional service network is unlikely to be economically viable in the medium term. Japan The profile of the Japanese car park is very distinct from that of the US or Europe for several reasons. First, there are fewer imports due to policy restrictions, a la India! Secondly, there are very few older vehicles, mainly because of the draconian vehicletesting regime, which results in many cars being replaced after a five-year period. Furthermore, because of support to domestic industry, Toyota together with Daihatsu dominates the Japanese car park, accounting for almost 40 per cent of the market share. The other large manufacturers include Nissan and Honda, which together account for almost one third of the cars in use. Other manufacturers with a growing presence are Subaru and Suzuki, which have increased their sales significantly in the last few years, thanks to a number of innovative models and a growing popularity of mini cars. Does this trend resemble some other car markets? Asia Toyota, Nissan, Honda and Mitsubishi have dominated the markets of the ASEAN region for more than a decade now. In India, however, Suzuki, through Maruti Udyog completely dominated the car park with a solid 80 per cent market share until recently. Interestingly, the ASEAN and Indian markets are quite diverse compared to Japan, despite the similarity in vehicles. In India and Southeast Asia, vehicles have much longer lives (often more than 20 years) due to the testing regimes which are absolutely rudimentary, to say the least. In China, commercial vehicles and not passenger cars surprisingly dominate the park and new vehicular sales. The market for passenger cars until now has been very small with a mere 3.5 million vehicles, and Volkswagen and Daihatsu dominate it. The South Korean market with around 7.5 million vehicles is also unusual. Almost every car on Korean roads is designed and built locally and will perhaps spend its entire life on Korean roads due to policy restraints. Even more interesting is the fact that this scenario looks set to continue. This is despite the pressure to increase exports to South Korea, which is being resisted vehemently by local carmakers, despite the collapse of the local currency and the economic problems that plague the region. Rest of the world Finally, the statistics for the rest of the world are very varied. In Eastern Europe, there are still many old cars from the erstwhile Soviet era, even though most of the automanufacturers have been driven out of business. There is also a large number of cars

imported and often stolen from Western Europe that find their way into east European markets. Elsewhere, Africa has a small market that is dominated mainly by French and Japanese, and in some cases Italian made cars. However, the trend here is changing with players like Daewoo and Hyundai finding it easier to penetrate. Lastly, there is the South American market that has been controlled by European and US producers. There are an estimated 23 million vehicles in this region, most of which have been manufactured in Brazil or Argentina. This completes the list of the main passenger car markets of the world. But, with the economic uncertainties that plague some of the regions above, a fall in demand is the most likely scenario that will slow down the pace of growth in the interim. There are some interesting trends that have surfaced, which also need a mention, as these will play a big role in augmenting or decelerating demand.

2.2 Future Trends & Outlook

First, the global automotive market is growing by just over two per cent a year, or a net of 10 million vehicles. Secondly, the growth has slowed down considerably and is expected to slow down further due to the increasing levels of saturation reached in the larger car markets the world over. In fact, analysts from the Economist Intelligence Unit (EIU) state that this saturation in the larger markets could possibly turn into negative growth, given the recent trend among carmakers to opt for quality components, which will undoubtedly enhance the life of a vehicle. This aside, the Asian economic crisis has further added to the woes of global automotive manufacturer, with the demand from the developing regions also now turning into a trickle. Lastly, the global domination by the main automotive manufacturers is on the wane -albeit very slowly as -- region centric products -- become the name of the game. Interestingly, it is these emerging trends and more importantly the concept of region centric products, which are said to be the main cause of the winds of change blowing across the automotive car parks the world over. Automakers that have been enjoying a generally prosperous spell until now are having to look ahead to likely difficulties that could force a fundamental rethink in the way vehicles are designed, manufactured, distributed and sold. Leading manufacturers have already put their research and engineering teams to work on new fuel and power-train technologies to meet the eco-friendly norms post 2000. Further downstream, companies such as Ford and General Motors of the US, Germanys Volkswagen and Toyota of Japan have begun to re-examine their dealer relationships and

pricing strategies. They have all embraced a new customer focus, hoping to increase their exposure to areas such as insurance, finance, servicing and even recycling. But, perhaps more significant is the fact that most manufacturers are now on the look out for new strategic tie-ups, mergers and acquisitions - that will drive out costs and keep pace with the impending price cuts. Examples of which are already visible in the Daimler Benz merger with Chrysler of the US. Ford has acquired Swedens Volvo Car Corporation and Renault of France has acquired an influential stake in debt-laden Nissan. In trucks, the Volvo group has finally secured control of Swedish archrival Scania and another merger with Mitsubishi has also been cemented. Meanwhile, General Motors has increased its stake in Suzuki of Japan and has also signaled the possibility of helping out the Korean cheabol Daewoo. Thus, while such deals and restructuring will certainly create an opportunity to cut costs, it remains to be seen whether they will create significant new opportunities for growth. However, what remains uncertain is the timing of any downturn. Many economists predicted last year that European and US automotive markets would contract in 1999. Given the steep declines seen in Southeast Asia and Latin America, the scenario pointed to an industry struggling to remain profitable in the face of overcapacity, falling prices and weakening demand. However, so far that gloomy outlook has not been realized. Low-cost finance and rising disposable incomes have helped confound most economic forecasts, with even the moribund East Asian markets showing a modest rebound. But the worlds manufacturers are not sanguine. The changing market scenario has forced most automakers to explore new ways to defend margins and market share. Thus, new automotive strategies will become clear over the next two years, but the manufacturers will have little option but to start moving now.

3
3.1 Historical industry Development

INDIAN SCENARIO

It was in 1898 that the first motorcar steered down the Indian road. From then till the First World War, about 4,000 cars were directly imported to India from foreign manufacturers. The growing demand for these cars established the inherent requirements of the Indian market that these merchants were quick to pounce upon. The Hindustan Motors (HM) was set up in 1942 and in 1944, Premier Autobackmobile (PAL) was established to manufacture automobiles in India. However, it was PAL, which came out with the first car in India in 1946. Hindustan Motors could only produce their first car in 1949 as they were concentrating on auto components more than the finished product. It was left to another company, Mahindra and Mahindra (M&M) to manufacture sturdier utility vehicles, namely the American Jeep. In the 50s, the Government of India granted approval to only 7 car dealers to operate in India - HM, API, ALL, SMPIL, PAL, M&M and Telco. The protectionist policies continued to remain in place. The 60s witnessed the establishment of the two-three-wheeler industry in India and in the 70s things remained much the same. Since the 80s, the Indian car Industry has seen a major resurgence with the opening up of Indian shores to foreign manufacturers and collaborators. The 90s have become the melting point for the car industry in India. The consumer is king. He is being constantly wooed by both the Indian and foreign manufacturers. Though sales had taken a dip in the first few months of 1999, it is back to boom time. New models like Marutis Classic, Alto, Station Wagon, and Fords Ikon, the new look Mitsubishi Lancer are all being launched with an eye on the emerging market. In these last years of the millennium, suffice it is to say that Indian cars will only grow from strength to strength. Now let us look at the industry development in the chronological order: 1880's & early 1900's About hundred years ago o The first motor car was imported o Import duty on vehicles was introduced. o 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. o They were the first to build a steam car and a steam bus, to attempt motorcar 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. 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. 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. AIA&AIA (association of the component manufacturers) came into being in 1959.

1960's In sixties 2 and 3 Wheeler segment established a foothold in the industry. 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 dieselisation 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 liberalization announced. Unfair practices of monopoly, oligopoly etc slowly disappeared.

Liberalization 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. The Two Wheeler market increased. Since 1982 the Government had permitted foreign collaborations for the manufacturing of Two Wheelers up to 100cc engine capacity. Foreign Equity up to 40% was also allowed. 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., Sipani Automobiles. Ashok Leyland Ltd. and TELCO were strong players in the Commercial Vehicles sector. 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 liberalization. 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

3.2 Unique characteristics of the Indian market

During our interaction with the industry people we came across several phenomenon, which struck us as unique to the Indian market and thus are worth mentioning here. Some of these are: 1. The Tax and Duty structure: 60% of the final showroom price comprises of various forms of duties and taxes. There is excise duty, import duties on components, Central Sales tax, state sales tax, Octroi, Road tax. All this heavily affects the pricing strategies of the automobile companies. 2. Differential taxation: The sales tax structure is not standardized across the country. At present it varies between 4% and 12% from state to state. This leads to a substantial difference in prices across different states. This has caused many a problem to dealers in states having higher rates of sales tax because customers who are in the know of things do not hesitate to buy vehicles from neighboring states, which have lower sales tax. Moreover, there are tax benefits in buying from Union territories also. The sales tax structure has just recently been standardized at 12%. This has resulted in price increase in some states, which had lower rates. 3. Reasons for buying: For many Indian buyers the reason for buying a car is not for transportation, utility or anything else. The primary motive is to use it as a tax saving device!!! Businesses in India get depreciation benefits on their assets. So purchasing of a car is done in order to save on taxation by claiming depreciation on the vehicles value. This leads to another characteristic of the market, which is the March, and September end buying rush. The tax system allows for 40% depreciation on the asset value if an asset is purchased before the 31st of March and 20% depreciation benefit if it is purchased before the 30th of September in a financial year. Nearing the end of these months demand spurts drastically and there is a mad rush to get delivery of the vehicles and get them registered before the month end. Dealers who have ready stock, and thus can give immediate delivery are in an advantageous position in these times. Even the Road Tax Office makes a quick buck by backdating registrations for those who could not procure their vehicles before the deadline. 4. Comparatively less evolution to the medium and premium segment: In the mid 1990s most of the new foreign players who came into the market, came in with midsized cars because they felt that the Indian market, like other developing markets, would evolve from the small cars to the mid-sized segment. This, however, has not happened and even today the strongest segment, both, in terms of volumes and growth is the small car segment. Growth in the mid-sized and premium segments has been sluggish and slow. These still remain small volume segments. This has led to manufacturers rethinking their strategies towards small sized cars.

5. Role of rumors and word of mouth: Buyers in India are a closely-knit group. The social system in India is also tilted towards joint families. Word of mouth and peer opinion play a very significant part in deciding which make of car to buy. Rumors about price discounts, mileage or quality problems in cars spread like wild fire and have seriously affect sales. 6. The Prices sensitive market: The buyer in India is very price sensitive. Demographics show that 20% of the Indian population is under poverty line and 60% consists of middle class. The segments are very price sensitive and always go for the economic options. That is why we see that most of the Indian automobile companies market their cars on price and have many upgraded versions in the A and B segment. 7. Most number of Players: The Indian automobile industry has the more number of players than any other country in the world. Whereas, in the other countries, there are normally six to seven players at a time. 8. Foreign Companies: Most of the Indian automobile companies are either wholly owned subsidiaries of any foreign company or a joint venture between an Indian Company and a foreign company. 9. High Growth rate: Indian automobile market is growing faster than the world automobile market. The world automobile market is growing at 2% per annum, whereas the Indian automobile market is growing at five to six percent per annum. 10. Domination of Compact cars: In other countries it is the mid-size segment that is dominating the market, whereas the compact size passenger cars dominate the Indian passenger car market. 11. Domination of Two-wheeler segment: In the automobile sector, worldwide, it the passenger car segment that drives the market, but in India, due to high percentage of middle class in the population, it is the two-wheeler segment that dominates the market.

3.3 Government Policy

The policy of broad banding 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 up gradation 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 has 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. 3.3.1 Policy on petroleum products, auto emission and depreciation The price of petrol and diesel was regulated till recently by the government as part of its policy on petroleum products management. However, since 1997, the prices of these fuels have been deregulated and linked to the movements in international prices. As a result, already, the price of diesel has been raised twice, the latest by a huge 40%. This dismantling of the Administered Price Mechanism (APM) of petroleum products will reduce the cost disadvantage of petrol driven cars. On the vehicle emission front, judicial activism has goaded the government to take certain policy measures in the recent past, which has led to stricter emission norms for

automobiles. As per a Supreme Court judgment, banning registration of all non-Euro I compliant cars within Delhi, all vehicles should become Euro I compliant by April 2000. (In the National Capital Region of Delhi, Euro II norms are now in operation) As a result, almost all the existing players and new entrants have started introducing models complying with the said norms. This development has led to an increase in the prices of cars, which by an estimate, could be anywhere between 10-15%. The depreciation norms have effect on demand for cars as institutions purchase cars for use by managerial staff and claim depreciation in their books. With this the companies are benefited from tax shelter provided by depreciation. Therefore any change in depreciation norms affect the demand from this segment. The depreciation benefits, which accrue to institutions & corporate buyers, were slashed from 33.33% to 20% in 1990. This led to decrease in demand from this segment for a short period. But with increase in depreciation rate to 25% in 1994, corporate demand was restored. 3.3.2 Automotive Policy In a policy announcement in FY94, the government had permitted foreign car producers to invest in the automobile sector in India and hold majority stakes. The objective of the policy was to build automobile production capabilities in the country, with minimum foreign exchange outflows. The key conditions of the policy related to production, imports, exports, level of indigenisation and foreign equity inflows. Since all the new ventures involved the import of capital goods and CKD/ SKD kits, the promoters had to fulfill certain export obligations. They were also required to provide an indigenisation program. However, these conditions were framed in the nature of MOUs, which the new ventures had to sign with the Directorate General of Foreign Trade (DGFT). But, in the last three years many of the companies failed to live up to their export commitments, which made it difficult to obtain permission for importing additional CKD/ SKD kits. In addition, the uncertainty regarding the threshold level for classifying imports as CKD/ SKD or component imports continues. Currently, the threshold level is set on a case-tocase basis where imports below a certain percentage of the total value of the car are being charged duty that is applicable to components (30%), while imports above this percentage are being charged at the rate applicable to CKD/ SKD (45%). The industry wants the threshold level to be at 70%, while the government wants it to be at 35%. In November '97, the Cabinet Committee on Foreign Investment cleared a new policy for permitting new car ventures. It addresses the aspect of indigenisation level and exports by the new ventures. The main proposals of the new policy are: The new ventures would have to indigenes up to 50% within 3 years and 70% by the end of seventh year of starting commercial production. They will have to invest a minimum of $50 million as equity capital over a period of 3-4 years.

The venture will have to become foreign exchange neutral over a period of 5-7 years. The ventures will be allowed to export components & ancillaries, apart from cars. A moratorium of 2 years would be given to companies for meeting the export commitment. The new policy is expected to provide development of ancillarisation and increase employment opportunities. But for some of the new car ventures, auto policy will be a speed barker as they have to sign a new MOU with the government and make necessary arrangement to meet the new policy.

3.3.3 Import Policy The import of passenger cars and other automotive vehicles is restricted and an import license is required for these items. Import of capital goods and automotive components/parts are placed under Open General License (OGL) and hence, no Government approval is required. SKD/CKD Imports: Some of the joint ventures in the passenger car sector envisage initial import of cars in SKD/CKD kits. Import of cars in SKD/CKD kits requires a license from the Directorate General of Foreign Trade (DGFT). While the Government has decided to grant the required license in the case of joint ventures approved in the car sector, these are required to give details about import programme, indigenisation planned and export possibilities and sign a memorandum of understanding (MOU) with DGFT in this respect. The underlying idea for this is to discourage screwdriver technology and to have an assurance that the joint venture partners have long-term commitments to the projects. 3.3.4 Import Duty 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 1997-98 Budget, the import duty on cars has also been further brought down from 50 per cent to 40 per cent ad valorem. Import of capital goods in the auto sector in general is attracting import duty of 25 per cent. However, under the Export Promotion Capital Goods (EPCG) Scheme, capital goods can be imported on payment of confessional duty of 15 per cent on taking export obligation of four times the c.i.f. value of imported goods, to be fulfilled in five years or zero duty payment on an export obligation of six times the c.i.f. value to be fulfilled in eight years where the c.i.f. value of imported goods is RS. 20 crores or more. 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. 3.3.5 Excise Duty The perception of a car as a luxury item leads 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, there has been continued rationalization of excise duty in respect of automobiles. In 1997-98 there was a duty of 40 per cent on motor vehicles, designed for transport of not more than six people (excluding the driver). On vehicles designed for transport of more than six people, but not more than 12 people, the duty was 25 per cent. In the case of public transport vehicles and vehicles for transport of goods, the duty was fixed at 15 per cent. The duty on twowheelers varies from 15 per cent to 20 per cent depending upon engine capacity, Excise duty on auto components has been reduced from levels of 20 and 15 per cent to 18 and 13 per cent. Excise duty on electrically operated vehicles has been reduced from 10 to 8 per cent and bodies of motor vehicles from 20 to 18 per cent. The car industry had been asking for reduction in excise duty so as to reduce the end prices of cars to customers and increase the sluggish demand. With continuation of liberalization and shift in the perception (of car being a luxury product) may lead to reduction in duties over a period of two to three years. This will reduce the prices of cars leading to further boost in demand. The government policies have been instrumental in shaping up of the car industry right from the post-independence era. The Government controls car sector with the help of policies on taxation, depreciation norms, import duty on cars and parts used in it, petrol prices and import duty of steel. After liberalization, and with opening up of the auto sector in 1992-93 the license raj ceased to exist. The perception of car as a luxury good has lead to heavy excise duty for cars. The excise duty had doubled from 25% in FY87 to 55% in FY91. But with the liberalization process in early nineties, the government has brought down the excise duty to 40 per cent in 1992-93. In line with its treatment for luxury items import duties for car have been maintained high. The import duty on cars and components has come down in the last few years in line with general reduction in import tariffs. Over the years the import duty has been decreased from above 200% to 103% on passenger cars. The current duty on Completely Knock Down / Semi Knock Down (CKD/SKD) kits is 103% (including 5% special duty) and for components 68% (including 5% special duty). 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. The prices of petrol and diesel are regulated by the government as part of its policy on petroleum products management. This affects the operational cost of the car and hence the demand for them. The proposed dismantling of Administered Price Mechanism (APM) of petroleum products will reduce this disadvantage of

petrol driven cars. Till last year diesel cars were considered as economy cars due to large price differential compared to petrol with former being subsidized. But last year the hike in diesel prices by as much as 40 % reduced the differential and in future we might see petrol and diesel price parity. This will result in more demand for petrol cars, as petrol cars are easy to handle and demand lesser maintenance compared to their diesel counterparts. On the vehicle emission front, the government has taken an active role in the recent past, which has led to strict emission norms for the automobiles in the last few years. With all the cars will have to be Euro II compliant by April 2000 the new entrants and existing players will be forced to introduce latest models from their portfolio of cars. This will make the cars dearer by 15 to 20 per cent. Here one needs to focus on one important issue. The industry is geared to deliver the hardware to meet the prescribed norms and it shouldnt be difficult for any of the carmakers in the country to meet the norms. But the issue the Government hasnt addressed satisfactorily is the quality of fuel which is a prerequisite for automobiles to meet Euro I and Euro II norms. In the light of this Government should establish an infrastructure, which allows unadulterated fuel to be supplied from refineries to fuel filling stations. Without this the expensive hardware would just be emitting poisonous gases. So in this case the court ruling has been in the right direction but devoid of understanding of the ground reality. The depreciation benefits, which accrue to institutions & corporate buyers, were slashed from 33.33% to 20 % in 1990. The new ventures would have to indigenes up to 50% within 3 years and 70% by the end of seventh year of starting commercial production.

3.4 Technology And Manufacturing Process

The body panel and engine constitute a major portion of the total cost of car manufacture. A typical cost structure for car is as given below: Parts/assembly Glass Brakes/wheels/tyres Interiors Transmission system Ignition/exhaust system Steering/suspension Comfort fittings Engine Body Others % Of total cost 5 6 7 7 8 9 11 16 18 13 Source: Probity Research

Glass

13%

5%

6% 7%

Brakes/wheels/tyres Interiors Transmission system Ignition/exhaust system Steering/suspension Comfort fittings

18%

7% 8%

16% 11%

9%

Engine Body Others

Car manufacturing is basically assembly of components procured from ancillaries or auto component manufacturers. Nearly the car manufacturers outsource 80% of auto components. This helps in reducing the capital cost needed to setup a car manufacturing plant. Therefore, auto ancillaries play a key role in maintaining the quality and price of the product. But till the entry of MUL in the Indian car industry, vendor development was hardly seen as a part of automobile manufacturing in the country. With the setting up of auto component manufacturing facilities by Indian promoters, in collaboration with Japanese players for supply to MUL, the country was first introduced to the concept of out sourcing. With the new entrants planning to start manufacturing facilities with a small capacity base in the country, the role of auto component players will substantially become important over the years. Presently, some of the luxury car manufacturers import CKD/ SKD kits and just carryout assembly operations in the country. But with strict policy guidelines of the GOI in force, all manufacturers have to opt for 70% indigenisation within five years of starting manufacturing operations in the country. This will further boost the operations of auto component manufacturers in the country. 3.4.1 Technology As far as the changes in technology are concerned than one change will be that all the cars will have to be fitted with Multi Point Fuel Injection (MPFI a technology in which traditional carburetor is required and fuel is sprayed by different valves into the combustion chambers of an engine). Secondly due to change in consumer preferences

there have been technological advancements in power steering, power windows and such other facilities, which are now available as a standard feature on the deluxe versions of almost all the cars. Developments too have taken place in the safety aspect of the car with cars becoming sturdier with side impact bars, air bags, collapsible steering etc. are becoming more and more popular due to foreign carmakers coming in India with these technologies.

4
4.1 Trade

Indian Automobile market

4.1.1 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 financial year 1960 to 30,989 in financial year 1980 at a compounded annual growth rate (CAGR) of only 3.5%. The entry of Maruti Udyog Ltd (Government of India Suzuki Motors, Joint Venture) in 1983 with a "peoples" car and a more favorable policy framework resulted in a CAGR of 18.6% in car sales from financial year 1981 to financial year 1990. After witnessing a downturn from financial year 1990 to financial year 1993, car sales bounced back to register 17% growth rate till financial year 1997. 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 financial year 1997 and financial year 1999. CAGR recorded during the financial year 1994 financial year 1999 period was 14.4%, reaching sales of 409,624 cars in financial year 1999. However, during financial year 2000, with the revival of economy, the segment went great guns posting a sales growth of 56% year on year growth. But again in the financial year 2001 the car sales were seen declining, as there was a negative growth rate of about 5% in car sales. The market recovered in financial year 2002, but could not reach the figures achieved in financial year 2000. The data for this year is available up to November, which is also showing negative growth rate of 3.44%, against the same period last financial year. The table below indicates the past sales trend for cars: Year 1994 1995 1996 1997 1998 Sales 209,20 3 264,82 2 345,48 6 410,99 2 417,73 6 Year on Growth (%) 27.00 27.00 30.00 19.00 2.00 Year

1999 2000 2001 2002 2003*

409,62 4 638,81 5 605,62 8 632,58 4 381,57 4

-2.00 55.80 -5.20 4.45 -3.44 * Upto November 2002 Source: SIAM

700,000 600,000 500,000 400,000 300,000 200,000 100,000 0

19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 *

Sales

Year

* Upto November 2002

4.1.1.1

Determinants of Demand

The demand for cars is dependent on a number of factors. The key variables are listed below: 1. 2. 3. 4. 5. 6. 7. 8. 9. Per capita income Introduction of new models Availability & cost of car Financing schemes Price of cars Incidence of duties and taxes Depreciation norms Fuel cost and its subsidization Public transport facilities

The first four factors viz, increase in per capita income, introduction of new models, availability & cost of car financing have positive relationship with the demand whereas others have an inverse relationship with demand for cars.

The demand for cars in the future can be estimated with the help of making use of macro economic variables like growth in GDP, per capita income etc. or house hold penetration technique. An attempt is made to estimate the potential demand for passenger cars based on the household penetration level of passenger cars as explained in Annexure 4 of the report. The demand for cars in the future is expected to come predominantly from the existing two-wheeler owners who will be upgrading to a four-wheeler, due to rising income and necessity of car for personal transportation purposes. Therefore, excluding the owners of mopeds, the potential demand for cars in the next fifteen to twenty years can be taken as 50% of the existing two-wheeler population of around 28mn units. But with the release of new models in the higher end of the economy segment, the supply of second hand economy cars is expected to increase substantially, which will be costing just about two times the price of premium range two-wheelers. This could affect the demand for first hand/new cars. Also, with cross demand from utility vehicles, availability of finance and other factors the above mentioned potential for cars will be difficult to realize. Growth in the segment thus is expected to hover around 15-20%yoy. The dominance of economy segment will continue in the future, as it will provide large volume to Indian car industry. This is because a majority of customers for cars will graduate from two-wheelers. The demand for mid-sized and premium cars is expected to rise as new models enter the market, income levels rise and present car owners upgrading from the economy segment to higher end cars. 4.1.2 Supply The supply of cars in Indian industry till 1991 was dependent upon the production capacity of individual players. The production of cars has increased from 42,475 units to 181,420 units from 1981 to 1991 respectively. The growth in production of cars has varied in the last three decades from just 1% in 1970-80 to 21% in 1980-90 and above 15% in 1991- 96. The table below gives the production numbers of passenger cars in the past few years.

Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003*

Production Year on Year Growth (%) 207658 27.20 264468 27.40 348146 31.60 407539 17.10 401002 -1.60 390355 -2.70 577243 32.40 513514 -0.11 564126 0.10 329955 -1.99 * Upto September 2002

Source: SIAM
700000 600000 500000 400000 300000 200000 100000 0
19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 *

Production

Year

* Upto September 2002 From the above chart, it can be seen that the production of cars was increasing till 2001, with a steep increase in 2001, but thereafter, it was tipsy-topsy. The major increase in production of cars in the 80's was due to the entry of MUL in 1983, which helped increase car production by 20,000 to 30,000 cars per annum till the early nineties. With the entry of MUL, the face of the passenger car industry changed forever. Existing producers who had operated in a protected, high margin environment faced the prospect of not just diminishing market share, but a shift in focus from producing vehicles to selling them. But MUL made use of the opportunity open to its technologically superior product and increased its capacity from 100,000 cars in FY90 to 240,000 cars in FY96 and 350,000 cars in FY98. The opening of economy in 1993, attracted world majors who joined hands with existing auto majors, to start their operations at the earliest. The first ones to enter the field were Mercedes Benz in joint venture with Telco to manufacture E220, E250D models, Peugeot in JV with PAL to manufacture Peugeot 309L, Fiat in JV with PAL to manufacture Fiat Uno. This has helped in increasing the number of models available to the customer from 8 to 30 and hence provided a wide choice to him. This has also helped in reducing the average waiting period and premium on cars, which were a part and parcel of car cost in the eighties. 4.1.1 Exports The passenger car exports in the eighties and early nineties had been very negligible as the companies were facing a capacity constraint that was not even sufficient to supply to

the domestic market. The poor quality of cars compared to international standards led to poor quantity of exports from the country. But now, the Indian automotive industry has found a ready and accepting global market because of the introduction of new vehicles and components with improved quality and performance. In 1985, MUL started exporting cars to neutralize the impact of foreign exchange outflow. The exports of MUL increased from 100 cars in financial year 1987 to 6,000 cars in financial year 1990. The exports witnessed further momentum in the nineties to reach a volume of 37,161 in financial year 1997. But from financial year 1998 onwards, a southward trend was witnessed with declining sales of 20% yoy to 29,747 vehicles. The same continued in financial year 1999 with a further drop of 14%yoy to 25,464 units. Financial year 2000 too saw lackluster exports with a 9% fall in export sales that touched 23,271 units. The reason for sharp drop in car exports has been a drop in MUL exports, which now accounts for 90% of the country's total exports. But in the last two years, the rise in the export of cars from India has been phenomenal. This is largely attributed to the quality of the cars produced by Indian automobile companies to remain competitive in the global car market. There has been great improvement in the quality of Indian cars to come to global terms. Exports are expected to increase further in the near future as, new entrants like Hyundai, Honda Siel, GM and Ford are busy investigating options in the world markets. GM has commenced exports to Nepal and is further considering Sri Lanka as a potential export market. Further Ford is scheduled to commence exports by the end of the third quarter of the current fiscal. In the longer run, as the industry matures, exports should increase as manufacturers strive to attain economies of scale, which will not be possible given the relatively small size of the domestic market. Given below is the table showing the number of cars exported from India and a chart representing the same. Year 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 Export Figures 37161 29747 25464 23271 28000 48000 Year on Year growth (%) (19.95) (14.40) (8.61) 20.32 71.43

60000 50000 40000 30000 20000 10000 0

1996-97 1997-98 1998-99 19992000 2000-01 2001-02

No. of units

Year 4.1.2 Import Transport equipment including auto parts and vehicles have long been a part of the annual imports, primarily because of their superior technology. Though the absolute value of transport equipment imports have increased intermittently over the decades, their share in the total imports of the country has steadily declined. The transport equipment imports valued Rs. 72 crores or US $151 million in 1960-61, a share of 6.4%. This share has fallen to 1.4% for the year 1999-2000, though the absolute value has risen to Rs. 2571 crores or US $611 million. In spite of the fetish foreign cars seem to enjoy, the import of auto components far outnumbers the import of vehicles. In 1997-98 while Rs. 17 billion worth of auto components were imported, in comparison only Rs. 1.7 billion worth of vehicles or engines were imported.

4.2 Capacity
In 2001-02, in India, the total capacity of all automobile (passenger car) players (about 15 automobile players) in the automobile industry has been estimated at 1.25 million units per annum. The individual capacities of major players in the Indian Automobile Industry is given below: Players PAL TELCO MUL M&M Hyundai Honda HML GM Fiat Capacity (units per annum) N.A. 360000 350000 120200 120000 30000 64000 25000 50000

Ford DaimlerChrysler India Pvt. Ltd Daewoo Toyota Total

50000 9000 72000 50000 1300200

4.3 Segmentation of the Industry

The Indian automobile industry can be classified, on the basis of price, in four different segments, into the 'small' car or the economy segment (up to Rs. 2.5 lakhs), mid-size segment (Rs. 2.75-4.0 lakhs), premium car segment which can be divided into lower premium (Rs. 5-7 lakhs) and upper premium segment (Rs. 7-10 lakhs) and Luxury car segment (above Rs1mn). One of the things to note here is that the models shown below have many variants so there will be a price overlapping, which can result in overlapping across segments. This segmentation is done according to prices of basic models. The models in the car market can be fitted to different segments as given below: Category Models Features of the segment Price, Fuel Efficiency

Economy segment (up Maruti Omni, Maruti 800, Padmini to Rs. 2.5 lacs) Premier 118NE, Ambassador Nova, Fiat Mid-size segment (Rs. Price, Uno, Zen, Hyundai Santro, Daewoo Matiz, 2.75-4 lacs) Performance Tata Indica, Contessa Price, Premium Car Segment Esteem, Cielo, Siena, Accent, Ikon, Corsa, Performance, (Rs.5-10 lacs) Baleno, Lancer, Astra, Escort, Honda City Diesel option Status value, Luxury segment Mercedes Benz and other imported models performance, (Above Rs10 lakhs). Product features The demand for passenger cars can be segmented on the basis of the user segment as taxi operators, government, non-government institutions, and individual buyers. A major portion of the demand in India accrues mainly from personal vehicle owners. The distribution in 2001 of car sales in terms of the above mentioned segments is as given in the chart below. Since, then share of sales in the economy segment has increased with a large number of entrants purveying their wares and with some degree of success. Segment Economy Mid Size Premium Market Share (%) (2000-01 49.78 41.64 8.4 Market Share (%) (1999-2000) 61.49 27.1 11.24

Luxury

0.08

0.15

Chart 1 - Relative market share of different segments

8%

0% 50%

42%

Economy

Mid Size

Premium

Luxury

But there is also another view to segment the Indian Automobile Industry, i.e., on the basis of the type of vehicle compact, mid-size, utility wagons and station wagons. The table below shows the models featuring in different segments stated above: Segment Compact Mid-Size Utility Vehicles Station Wagons Models Maruti 800, Alto, Indica, Matiz, Santro, Zen, Palio, Uno, Wagon R Accent, Viva, Accord, Ambassador, Astra, Baleno, Camry, Cielo, City, Contessa, Ikon, Esteem, Indigo, LancerMondeo, Octivia, Nexia, Corsa, Siena, Sonata Armada, Commander, Gypsy, Bolero, MM550, Omni, Pajero, Qualis, Safari, Sierra, Scorpio, Sumo, Versa, Voyager Baleno, Corsa, Palio (weekend), Siena (weekend)

4.4 Major Players

There are as many as 15 players in the Indian Automobile Industry, which shows that Indian Automobile industry is the biggest automobile industry in the world, in terms of numbers of players in the industry. The players in the Indian Automobile Industry are listed below: TELCO Mahindra & Mahindra Limited Maruti Udyog Limited Hyundai Motor India Limited Honda Siel Cars India Limited Fiat India Automobiles Pvt. Limited Ford India Limited

General Motors India Pvt. Limited Toyota Kirlosker Motor Limited Hindustan Motors Limited Skoda India Limited DaimlerChrysler India Limited Premier Auto Limited Daewoo Motors India Limited Mitsubishi Motors India Limited

4.4.1 Maruti Udyog Limited Maruti Udyog Ltd (MUL) is the largest car manufacturer in the country with a market share of over 80 per cent in the car industry. Maruti Udyog Limited, a subsidiary of Suzuki Motor Corporation of Japan, has been the leader of the Indian car market for 17 years. Its manufacturing plant, located some 25 km south of New Delhi in Gurgaon. Minicar Maruti 800, India's number one car since 1986, has the lowest manufacturing cost in the world. At the end of October 2002, Maruti had a market share of over 50 per cent of the Indian passenger car market. The company sold around 275000 passenger cars in the domestic market from January to October 2002. It also exported over 25000 vehicles during the year, raising the cumulative tally of exported vehicles to 3,00,000. Maruti's contribution as the engine of growth of the Indian auto industry, indeed its impact on the lifestyle and psyche of an entire generation of Indian middle class, is widely acknowledged. Its emotional connect with the customer continues. The company has been ranked number one in customer satisfaction in the J D Power Survey 2001. Maruti is the only market leader in the world to be ranked number one in customer satisfaction, and the only company to top customer satisfaction rankings for two years in a row. Maruti's quality systems and practices have been rated as a "benchmark for the automotive industry world-wide" by A V Belgium, global auditors for International Organization for Standardization. In keeping with its leadership position, Maruti supports safe driving and traffic management through mass media messages and a state-of-the art driving training and research institute that it manages for the Delhi Government. Maruti's channel partners own and manage 256 sales outlets across 157 Indian cities. The service network covers 807 towns and cities, bolstered by nearly1899 authorized service outlets. The company has recently ventured into related service areas including pre owned cars, lease and fleet management for corporates, auto insurance and auto finance. The companys turnover touched Rs 9410.3 crore in 2001-02 Maruti achieved a turnaround in a tough market last fiscal, with a net profit of Rs104.5 crore in 2001-02 compared to a loss of Rs 269 crore in 2000-01. Product Manufactured: Passenger cars & MUVs Models: Maruti 800, Omni, Zen, Alto, Altura, WagonR, Gypsy, Esteem, Baleno and Versa

Installed capacity (nos. per annum) Turnover Gross Profit/(Loss) Investment Employees (in Nos.) Foundation Day

350000 89287 mn 931 mn 38667 mn 5770 February 24, 1981

Now let us see some of the strategies followed by MUL in the recent past. MUL is a joint venture between Government of India and Suzuki motors of Japan, with both having a stake of 50% each in the company. But, on 30th May, 2002, MUL was privatized as Suzuki Motors, Japan purchased 4.2% share of Government of India in MUL. Government of India is disinvesting the MUL. This was only the first phase of disinvestment of MUL. In the second phase Government of India will offer another 20% of its stake in MUL to general public by April 2004. Suzuki had recently rehauled the Board of directors of MUL by appointing the former nominee of Government of India, Jagdish Khattar was appointed as MD of MUL. MUL, in its first major strategic initiative after being taken over by Suzuki, is preparing a three-year road map of growth, which will involve cutting costs by 30% and increasing productivity by 50%. One key feature of the plan is to intensify research and development activities so that all the know-how needs not to be brought from Japan. For instance, if the model needs facelift, the R&D of the engineering wing in India should be good enough to execute it. The new plan will also address needs to cut down on costs including vendors, materials and internally within Maruti organization. It will also enable the company to be more competitive in the market place. The plan is a joint effort of all the Maruti divisions including marketing, finance, production, materials and engineering. Productivity increase is also a very key component of this strategy and in the manufacturing; Maruti plants are being benchmarked with the Kosai plant in Japan, which is Suzukis most efficient plant. Maruti has also revamped its manufacturing operations in which it will seek to become a world class manufacturer by 2005 on the lines of the Kosai manufacturing plant. Under this exercise, production of different models will be concentrated in a single plant rather than scattered production. Suzuki and its partner MUL have decided to float a joint venture, Suzuki Metal India Pvt. Ltd. In India, with an investment of Rs.100 crore. The joint venture will produce components and cylinder blocks for both Maruti and Suzukis forthcoming two-wheeler venture. The venture will also help in hiking the local content level in Maruti cars, as major components for its engines and gearbox would be produced in India. MUL, in its bid to reduce costs by 50%, will reduce the hours per vehicle from 24 to 12-13. The company today has 123 robots manning various production

techniques. The production system is also being fine-tuned in order to reduce inventory levels. MUL is driving in a new brand positioning for its tall boy WagonR. Emboldened by the impressive growth of WagonR in the domestic market, it is now launching a campaign to reposition the vehicle as the value-for-money car with the original tallboy design. Under its new owner Suzuki, MUL has embarked a massive revamp exercise of its entire dealer network. This includes the termination of non-performing outlets. While around seven dealers have already been terminated, warning notices have been issued to a couple of others. Maruti has a network of around 175 dealers. 4.4.2 Tata Engineering & Locomotive Company Long associated with the truck and bus industry in India, Telco decided to plunge into the highly competitive car market in India, and it has not been a smooth ride. Telco found out that the transformation to a car market was not easy, as it found itself at the receiving end from the Korean and Japanese players. Despite the patriotic twist to the Indica campaign, the car found the competition hot to handle, and its sales have been on a steady descent, after the initial euphoria. To combat that, it launched the petrol version of its Indica car. Named Indica 2000. The 1400 cc engine generates 75 BHP and is capable of propelling the car from zero to 60 kmph in less than six seconds, a record in this category. It had also launched a new version of Indica2000 named IndicaV2. This has proved to be a good success for Telco after the initial outburst. Only recently has Telco crossed the 200000 unit-selling figure for India. Telco's target is to sell another 90,000 a year to break even, implying monthly sales of 7500 cars a month, by no means easy, considering the fact that they are selling about 350 cars a month at present. Telco has launched a car in December, 2002 namely Indigo, which will be followed by three new variants of its premium small car Indica, The company already has five variants of Indica, all conforming to the stringent Euro-II emission norms. They are working on a mid-sized car, Magna, which will be in the market in 2004. They are also developing two-three more variants of Indica, which would be launched in about two years, most probably a three-box and a family-van version of Indica. Currently, Indica is exported to Malta and Italy. Tata Engineering last year exported 500 units of the diesel version of Indica to Malta and, recently, despatched the first shipment of 200 units to Italy. Tata Engineering is looking at exports in a big way to offset the limited response to the car in the domestic market, but it remains to see if they can make much of an impact. The Indica enjoys a market share of 13.0 per cent of the passenger-car market. Indica has continued to remain amongst the top three cars in its segment and has ended the first ten months of the current year with a cumulative sale of 65205 cars. Product Manufactured: M&HCVs, LCVs, Passenger Cars, MUV Models: Indica, Indigo, Sumo, Estate, Sierra and Safari Installed capacity (nos. per annum) 360000

Turnover Gross Profit/(Loss) Investment Employees (in Nos.) Foundation Day

81642 mn (4304) mn 56381 mn 24440 September 1, 1945

Now let us look at the major strategies followed by Telco in the recent past. Telco is in talks with the MG Rover Group and Iran Khodro for marketing of Indica and Indigo. Negotiations with MG Rover have reached the final stages to export Indica and sell it in UK. Rover has agreed to Telcos demand to use the Indica brand name on every Indica sold abroad. The 1400cc Indicas will sell as Rover-Indica. Rover has also sought permission to sell Indica in other European countries. The company is also finalizing the plans to launch its new D segment car Magma, by 2004. Indigo, the latest offering from the Tata Engineering stables, is counting on an aggressive pricing strategy to edge out competitors Accent, Siena, Ikon and Esteem in the midsize car market and is targeting a sales of around 1200 cars per month. Telco has started work on its brand new second generation platform that will eventually replace the existing car and UV platforms in the automakers stable. The new platform is a three-year venture. The automaker is also interested in launching the station wagon variant of Indica. 4.4.3 Hyundai Motors India Limited Hyundai Motors India has made the small car the pivot of their strategy in India. Although it is also making its presence felt in the mid-size segment. In January 1998, Hyundai Motors India, a subsidiary of the $27-billion Hyundai of South Korea, announced the launch of its 999-cc Santro. The model came in five variants, the first time an Indian consumer was offered a variety of choices. Clearly, Hyundai's strategy was aimed at taking on the market leader, MUL. But by pricing the deluxe model at Rs 4 lakh, it was also bridging the gap between the small and the middle segments. Besides bracing up for losses in the initial years, Hyundai has been banking on exports too. In the long run, low production costs and component-manufacturing skills will make cars made in India competitive. However, shakeouts are bound to happen on the road to profits. The reason bring that investments necessary for a large plant are simply huge. HML has been focussing on expanding its market share in an increasing market size. For instance, MUL accounts for 50 per cent of the market share while 14 other players share the balance 50 per cent. According to market surveys, 40 per cent of Santro customers are first time buyers who no longer see Maruti 800 as the benchmark. Though price is a sensitive issue, the fact is that new technology and lower interest rate driving down the equated monthly instalment have combined to encourage novice buyers to go in for better cars. The market share of Hyundai in October 2002 was 17%, which was mainly due to the increasing sales of

Santro. Hyundai is also planning to make India as its production hub for Santro so as to minimise production costs. Product Manufactured: Passenger Cars Models: Santro, Sonata and Accent Installed capacity (nos. per annum) Turnover Gross Profit Investment Employees (in Nos.) Foundation Day 120000 30592 mn 3896 mn 16204 mn 2461 May 6, 1996

Now let us look at the major strategies followed by Hyundai Motors in the recent past. Hyundai has got the permission to manufacture cars in China, becoming the latest automaker to join the race for the worlds fastest growing car market. In a bid to increase the production of Santro Zip Plus, Hyundai Motor India has asked all its employees to put in an additional one hour a day, instead of starting a third shift. The employees would be paid overtime wages for the additional hour they put in. After the success of its car venture in India, Hyundai Motor is planning to foray into commercial vehicles. Hyundai is planning to manufacture trucks in its Chennai plant. They may enter the Indian commercial vehicle market by launching a 2.5 tonne truck. Hyundai has also lined up plans to launch a super-B segment car Getz and a multi-purpose vehicle Carens. While Getz is likely to be priced at Rs.4.5-5.5 lacs, Carens is expected to be introduced with a price tag of Rs.10 lacs. The company also plans to upgrade its money spinning mid-sizer Accent within the next two years. Hyundai is to make an investment of Rs.300 million over the next three years in its Indian subsidiary. The fresh infusion will be used to expand the capacities and fund product launches, which includes a SUV Terracan in the first half of 2003 followed by the premium hatchback Getz and a MUV Carens. The company is also planning to make its Indian arm as the manufacturing hub for Santro, so as to reduce the cost of production and export the car to neighboring countries. 4.4.4 Ford India Limited Established in 1995 as a joint venture with the Mahindras, Ford India, a subsidiary of the Ford Motor Company and manufacturers of the Escort and Ikon in India, is headquartered in Maraimalai Nagar near Chennai. Ford's commitment to India is embodied in its present investment of $ 500 million. In March 1999, Ford India announced the launch of a new petrol model, Ford Escort Sport-E. The Ford Escort Sport-E is a limited edition, petroldriven car in the 1.6 Zetec categories. Ford India's Ikon was launched on May 26, 1999. The flexible manufacturing facility at Maraimalai Nagar, where the Ikon is manufactured has an annual capacity of 50,000

vehicles

but

can

be

expanded

to

100,000

with

increase

in

demand.

In November 2000, Ford India announced a 48.8 per cent rise in sales of its Ikon cars (2,704 units) the previous month and said it has also exported 1,600 completely knocked down (CKD) kits of the mid-size car. Ford India had sold 18,771 Ikon cars since its launch in November 1999 as against its target of 21,000 units for the same year. It achieved its 21,000 sales target in December 2000. According to company sources, Ford India's exports increased to 20,000 units annually and generated revenues worth Rs 165 crore in 2001. The company is also hopeful of earning Rs 200 million ($ 5 million) through exports in 2002. And as per the EPCG scheme, the company will have to achieve exports worth Rs 9.5 billion within seven years, including a two-year moratorium. Product Manufactured: Passenger Cars Models: Escort, Ikon and Mondeo Turnover Gross Profit Capacity Investment Employees (in Nos.) Foundation Day 30592 mn 3896 mn 120000 units p.a. 16204 mn 2461 May 6, 1996

Now let us have a look at the various strategies followed by Ford India in the recent past. Ford India following the lead of cross-town rival GM, is reviving interest free loans to lure customers to its showrooms amid an uncertain economic climate. Ford Motor is pulling the plug of its Think electric vehicle division due to poor customer demand and lack of government support for environmentally friendly cars. They think that there is no mass market for environmentally friendly cars. Ford Motors is steering towards making its Indian arm the production and sourcing hub for low cost passenger cars due to lower labor costs. The firm is also in the process of firming up plans to unleash a range of vehicles on the Indian roads by 2004. The firm has short-listed the premium hatchback, multi-purpose vehicle and sports utility vehicle as target segments for introducing new models. 4.4.5 Hindustan Motors Limited Hindustan Motors Ltd (HML) is the oldest passenger car manufacturer in the country. It also has a small presence in the multi-utility vehicle and the heavy commercial vehicle segments. The later is generally manufactured for exports. Other than the automotive sector, the company has diversified into earth moving equipments and power products. In the passenger car segment, the company has the well known Ambassador and Contessa models. It has recently tied with Mitsubishi of Japan for manufacturing the Lancer range of cars. At present, the company has a market share of 4.2% in the car segment. HML, incorporated in 1942, is the flagship company of the C.K. Birla group of

companies The company became the first manufacturer of cars in India when it set up its plant at Port Okha in Gujarat. In 1948, it shifted its activities in Uttarpara near Calcutta and set up facilities to manufacture cars and trucks. Over the years, HML has diversified into heavy engineering equipment like excavators, cranes, presses and steel products under the heavy engineering division (HED). With the division becoming a loss making one, it was hived off to Hyderabad Industries Ltd, a group company, in FY92. In 1971, HML further diversified its activities to include earth-moving equipment such as dumpers, front-end loaders etc by setting up a plant near Chennai. In 1985, HML set up a plant at Hosur in Tamil Nadu for manufacturing heavy-duty transmission required for earth moving equipments. In 1986, a project was undertaken to produce HCVs at Vadodara. A part of the assets was later sold to a JV between GM and HML, General Motors India Ltd. In 1987, HML commenced the production of petrol engines in collaboration with Isuzu Motor Company, Japan. Recently, the company has entered into a technical collaboration with Mitsubishi of Japan for the manufacture of the Lancer car. Commercial production of the car started in October 1998. HML also entered into collaboration with OKA Motor Company of Australia to produce custom-designed rural transport vehicle. By selling off its stake in its heavy earth-moving equipment division to Caterpillar of the US, it has managed to bring in the much-needed cash to upgrade its manufacturing facilities at Uttarpara in West Bengal. Product Manufactured: Passenger Cars & MUVs Models: Ambassador and Lancer Turnover Gross Profit Capacity Investment Employees (in Nos.) Foundation Day 17930 mn 1265 mn 64000 units p.a. 6146 mn 11,270 February 11, 1942

Now let us look at the major strategies followed by HML in the recent past. Hindustan Motors has come out with homemade version of Mitsubishis Pajero, with an entry-level price tag of Rs.19.7 lacs. The countrys oldest surviving carmaker Hindustan Motors is all set to unleash Japanese fury on Indian roads. The firm is in negotiations with its technology partner Mitsubishi Motor Corp, Japan to roll out a host of luxury cars and MUVs, ranging from Galant to Space Star. HML is planning to launch LPG variants of Ambassador and the rural transport vehicle, which are expected to arrest declining sales. HML is also planning to launch a host of upgraded versions of Ambassador and Lancer cars to face competition in future and stage a turnaround. HML has recently launched Pajero in Chennai, after a successful launch in Delhi and Mumbai.

4.4.6 General Motors India Ltd. General Motors India Ltd. is joint venture of General Motor Corp, USA and Hindustan Motors, India, constituted in 1994. The company has a market share of 1.1% in the Indian Passenger car market. Product Manufactured: Passenger Cars Models: Corsa and Astra Turnover Gross Profit Capacity Investment Employees (in Nos.) Foundation Day 5119 mn 25000 6870 mn 461 April 15, 1994

Now let us look at the major strategies followed by GM in the recent past. General Motors has drawn up an aggressive launch strategy, which it expects will increase its sales numbers four-fold in the next three years. The models to be launched are Vectra, Zafira, Subaru and Chevrolet Pather. The company is all set to enter the small-car segment with a slew of products after its European and Asian alliances with Suzuki and Fiat for product sharing and cobranding. The company is finally revving up to implement an aggressive blueprint for expansion in India. The company wants to capture volumes and will not fight shy of tying up with rivals to leverage the market. Nubira, once touted as Daewoos major offensive for India, seems finally racing in, but this time round under the GMI brand name. The company will market Nubira in the Indian market. GMI is also planning to enter other Asian markets by 2004, so as to increase its market share in the Asian passenger car market. 4.4.7 Honda SIEL Cars India Ltd. Honda SIEL Cars India Ltd. Is a joint venture between Honda Motor Corp, Japan and SIEL Group, India, constituted in 1997. Honda SIEL Cars India Ltd. Has a market share of around 2% in the Indian passenger car market. Product Manufactured: Passenger Cars Models: City and Accord Turnover Gross Profit Capacity Investment Employees (in Nos.) Foundation Day 7200 mn 623 mn 30000 units p.a. 3811 mn 811 December 5, 1997

Recent strategies: Honda has planned a two-fold expansion plan for Indian market. Its Indian arm appears to be targeting the premium segment even this time around. While on one hand it plans to import top end models in the Completely Build Units (CBUs) forms, it isalso planning to enhance the existing range of models manufactured in India by introducing newer luxury variants. Honda SIEL Cars is joining the bandwagon of mid-sized carmakers in India playing the price card to boost sales. The company is preparing to launch a stripped down base-version of its premium mid-sizer City. The Company is contemplating launching its much famed luxury sedan Civic. The car is, likely to be introduced as a fully built imported model, is expected to be positioned as a premium C segment model to take on Skoda Octavia and Mitsubishi Lancer. The firm is also readying a plan to enter the premium sports utility vehicle segment with its close to Rs.20 lakhs CR-V. This model would be pitted against Mitsubishi Pajero and the Hyundai Terracan. 4.4.8 Fiat Automobiles India Ltd. Fiat Automobiles India Ltd. is a joint venture of Fiat Group, Italy and Premier Automobiles, India, constituted in 1997. Fiat Automobiles India has a market share of % in the Indian passenger car market. Product Manufactured: Passenger Cars Models: Uno, Siena and Palio Turnover Gross Profit Capacity Investment Employees (in Nos.) Foundation Day

3905 mn 50000 units p.a. 16900 mn 2171 December 16, 1997

Recent Strategies: Indian consumers might soon be able to drive around Fiats Alfa Romeo and Multipa in the country as Fiat India looks at the possibilities of importing the car as completely built-up units (CBUs). Fiat India has launched its new station wagon Palio Adventure. The vehicle has replaced the present station wagon by Fiat, Siena Weekend. It is expected to be priced at around Rs.6 lacs. Fiat India is unleashing another price war in the Indian car market. The company is planning to cut the price of Uno, by Rs.15000-20000 as part of efforts to boost sales.

4.5 Market Share

MUL has regained some of its market share in last couple of months. In April, this year the market share of MUL was around 42.5%, but in October 2002, the market share of

MUL has climbed to around 50%. Hyundai is second with 17% market share, closely followed by Telco with 13% market share. The following table shows the market share of leading automobile players in the country: Company MUL Telco GM Fiat Hyundai Ford Honda HM Mitshubishi Mercedes Skoda Toyota M&M Market Share (%) 49.97 13.34 1.1 2.54 17.16 2.51 1.95 2.42 0.15 0.86 4.71 3.28

The countrys entry-level model Maruti 800 continued to be the hot favorite of the year with a market share of 21%. Maruti 800 continued to be the largest single selling model in India and attracted buyers despite an almost three-week long waiting period.

3% 3% 3% 5%

6% MUL Telco Hyundai 50% Toyota M&M Ford Fiat Others

17%

13%

According to the latest data released by Society of Indian Automobile Manufacturers (SIAM), the premium hatchbacks of Maruti (WagonR, Zen and Alto), Hyundai (Santro) and Tata (Indica) also raced up on the sales chart, while the Fiat Palio lost steam and skid down the graph.

Riding on this surge, Maruti closed the October 2002 with a 50% share in the passenger car market, while Hyundai emerged second with 17%, followed by Tata with 13% share of the pie. No. Of Model Units sold in Oct, 2002 M800 11,364 Omni 3,550 Zen 4,946 Alto 2,192 Wagon R 3,381 Esteem 1,073 Versa 86 Gypsy 290 Baleno 56 Indica 7,192 Corsa/Swn 505 Astra 90 Uno 6 Palio 1,305 Siena/Wk 60 Santro 7,300 Accent 1,800 Sonata 151 Ikon 1,197 Mondeo 55 Accord 101 City 1,050 Lancer 405 Ambass 897 Mercedes 83 Sk Octavia 464 Camry 111 Qualis 2430 Bolero 397 Scorpio 1373 Total 53,910 Market Share 21.08 6.59 9.17 4.07 6.27 1.99 0.16 0.54 0.10 13.34 0.94 0.17 0.01 2.42 0.11 13.54 3.34 0.28 2.22 0.10 0.19 1.95 0.75 1.66 0.15 0.86 0.21 4.51 0.74 2.55 100.00

4.6 Collaborations and Mergers

Now let us look at the brief features of each of the major players: Company Collaborators Models

Daewoo Motors India Ltd. General Motors India Ltd. Hindustan Motors Ltd. Honda SIEL Cars India Ltd. Hyundai Motor India Ltd. FIAT India Automobiles Ltd. Ford India Ltd. Mahindra & Mahindra Ltd.

Foreign Company Daewoo Corporation, South Korea General Motors Corp., USA Mitshubishi, Japan Honda Motor Company, Japan Hyundai Corporation, South Korea FIAT Group, Italy Ford Motor Co., USA -

Indian Company DCM Group, India Hindustan Motors, India Birla Group, India SIEL Group, India Premier Automobiles Ltd., India Mahindra & Mahindra Ltd., India Mahindra Group

Established in 1995 1996 1948 1997 1996 1997 1996 1945 Matiz, Cielo, Nexia Astra, Corsa Ambassador, Contessa, Lancer Accord, City Santro, Accent, Sonata Uno, Siena, Siena Weekend, Palio Escort, Ikon, Mondeo Armada, Commander, Bolero, Scorpio, Marshall Maruti 800, Omni, Zen, Alto, WagonR, Esteem, Versa, Baleno, Gypsy, Maruti 1000 Mercedes Benz - E Class, S Class, C Class Octivia

Maruti Udyog Ltd.

Suzuki Motor Corp., Japan Mercedes Benz AG, Germany Vaulxvaughan, Audi, SEAT International Automotive Design, UK; Robert Mosch GmBH, Germany; I.DE.A. Italy Toyota Motor Corporation

Govt. of India

1983

Mercedes-Benz India Ltd. Skoda Auto India Pvt. Ltd.

1995 1989

Tata Engineering and Locomotive Ltd.

Tata Group, India

1954

Sierra, Estate, Indica, Sumo, Indigo

Toyota Kirlosker Motor India Ltd.

1937

Qualis, Camry

Name of joint venture

Foreign equity

Annual

Implementation

participation (%) Birla Group of Companies (Hindustan Motors) with General Motors of the US Premier Automobile Ltd. with Peugeot of France Telco with Mercedes-Benz of Germany DCM with Daewoo Motor Company of the Republic of Korea Mahindra and Mahindra with Ford Motor Company of the US Sriram Industrial Enterprises Ltd. with Honda Motor Company of Japan Hindustan Motors with Mitsubishi Motor Corporation of Japan Hyundai Motor Company, Republic of Korea Hero Cycles Ltd. Ludhiana with BMW, Germany Volvo AB, Sweden Kamal Sabre Motors Ltd. with JD Automotive Design of South America and Sabrae International Corporation, US Premier Automobiles with Fiat, Italy Maini Amerigon Car Company with Amerigon Inc., US and Asian Equity, UK M/S Overseas Concept Auto Ltd., Chandigarh with Concept Industrial Management Ltd., UK 50.00

capacity 25 000

schedule Production already launched (Opel Astra) Production already launched (Peugeot 309) Production already launched (Mercedes E220) Production already launched (Cielo) Production already launched (Escort) City

50.00 76.00 91.23 50.00 90.00 10.00 100.00 51.00 100.00 100.00

60 000 20 000 160 000 125 000 30 000 30 000 100 000200 000 10 000 Not indicated 720

Commercial vehicles Not Indicated (sports car) Over a period of seven years from 1997 Bangalore (electric car) 1996 (not commenced) Rajpura, Punjab

74.00 54.25

100 000 I-6 000 V-80 000 2 200

5 Key Issues in Automobile Industry

5.1 Key Earning Drivers
Government policy The GOI policy will continue to dominate the supply of cars. The different norms with great significance to the sector are import duty on CKD/ SKD kits, auto components, foreign exchange and neutralization schedule for new ventures etc. Excise duty The car industry had been asking for reduction in excise duty so as to reduce the end prices of cars to customers and increase the slogging demand. With continuation of liberalization and shift in the perception (of car being a luxury product) will lead to reduction in duties over a period of two to three years. This will reduce the prices of cars leading to further boost in demand. Sales tax duty The levy of uniform sales tax in all the states, will have a negative impact on the demand front, due to increased prices. Competition in the sector With the entry of all the world majors in the car segment, the competition is expected to heat up substantial in the next two years. This will lead to shakeout in the industry and only those companies having a backing of multinationals with strong commitment will be able to continue operations in the segment. This may also lead to take over activity in the Indian car industry. Release of new models The flood of variations in existing and new models will provide wide range of choice for the customer one year down the line. Also these new models will be able to carve a niche for themselves in the crowded market. India as a manufacturing hub for cars More and more multi national companies are making India as their production hub. These companies include Hyundai and Fiat and Toyota. These companies are manufacturing cars in India and are exporting to other countries of the world. The reason for selection of India as their manufacturing hub is as follows: Cheaper labour costs As labor in India is available at much cheaper rates then other developing countries in the world. As labour constitutes about 8% of the total cost of the car, more and more MNCs are approaching India to set up their manufacturing units in the country. This is the reason why about seven companies are interested in buying the assets of the phased out company Daewoo. Lower technological costs

In India technology and technological staff is available at about 10% of the costs of these in any developing countries. Hence, MNCs find India good in terms of cost reduction as the technology can be imported from the country of parent company and the cheaper technological personnel can be hired from India. Import Duty As India is one of the countries with very high import duties, hence MNCs find it easier to set up plant in the country than to import CBUs from the parent company.

5.2 Governments decision on second-hand car imports

Today one of the important discussions in the industry circles is that whether government will release quantitative restrictions, which will allow free import of second-hand cars in the country. Recent report in Economic Times states that the consumer will get internationally acclaimed models at the price of domestic cars. The industry circle has already started lobbying against this. The argument against this is that free imports will sound a death knell for local auto industry. Here we can take the example of New Zealand where due to free imports Japanese exports flooded the local market, and killed the auto industry there. Another argument is that robust indigenous industry is essential for the growth of economy and employment. However every coin has two sides and there are advocators of this policy. Their school of thought is that allowing free imports would enhance competition, which would push the domestic industry to produce better products, more variety at lower prices. The government of India has time till April 2001 to decide upon this and only time will tell whether we will be driving Chevrolets and Toyota Corollas at the price of Maruti 800s and Zen.

5.3 Will we ever get Affordable SUVs

A big SUVs like the Mercedes, BMW or Mitshbishi sets the hearts of many urban cowboy. In many other country MUVs and SUVs account of 20-30% of personal transport vehicle but in India there is a clear caste divide between comfortable personal cars and rough SUVs. Till recently Indian buyers had very few vehicles that could claim to be SUVs but this is soon going to be changed. Competition is very high so Toyota and Lancer introduced a best model that retains more performance, look, comfortable and the better prices and there are improved versions. Tata and HM also offering new models which has the less market share and not grip on imported market, Mitsubishi also introduced new segmented cars which range between 20-34 lakhs. GM also come up with Isuzu Panther which may have an engine made by HM. Maruti also introduced the grand Vitara with help of Suzuki also Toyota also launch the Land Cruiser Prado one of the world top SUVs. Also expecting from Honda and Toyota soon they launch a very cute and competent smaller SUV. Till now SUVs in India were very costly for middle class people to prchase, but with the introduction of Mahindra Scorpio and Toyota Qualis, the scenario has changed. They

may not have the elegance and class of costly SUVs such as Prado, Pajero and Lancruiser, but they still rule the hearts of thousands of Indians due to lower price tags.

5.4 Imported Cars that May soon be Available

Under WTO pressures the government had to open the doors for the import of new and second hand cars in the last budget. So these were allowed but with such stringent restriction that the administration barrier ban. Customs duties were also raised as further deterred. As few affordable second hand cars will ever be less than three years old, this restriction has virtually died up the possibility of all imports and the further restrict infill process. A few models of sport car, luxury cars and SUVs from existing carmaker can be expected. Hyundai, Skoda, Mercedes, Maruti are in the process of getting a few models through the paces. Dailmer Chrysler will certainly be offering for sale a few unit of sport Mercedes. BMW is the only company that plant is located in India and the model is submitted for the testing also is also one of the largest producers of luxury cars and its 7 series is the most advanced luxury car in the world today.

5.5 The Luxury segment Shootout

Once there was time, when it was difficult to fnd a single luxury car on the roads of major cities of India, but the picture is not so now, India now has a virtual alphabet soup of luxury car from the Accord to the Camry, Mercedes-Benz, Mondeo, Octiva, Sonata, and Vectra. Many people wonder how the auto companies can afford to launch so many top-end models when the demand is hardly 1000 cars a month.

5.6 Hatchbacks still rule the Indian market

The success of the Fiat Palio, Tata Indica and Hyundai Santro has confirmed that the small hatchbacks still rule the Indian Automobile Market. In 1998 the Maruti 800 Indias first hatchbacks ruled the roasts and accounted for about 45% of domestic car sales while the bigger Zen accounted for 19%. Then the Wagon-R, Santro, and Matiz joined the Zen and these B-segment hatchback shrank the share of the 800 while the share of the segment overall rose to 52%.

5.7 Changing Paradigms in a Competitive Market

The Advent of a multitude of a new car is quckilily changing the way people perceive them. An entire generation accustomed to a two car world are bewildered that there is now so much choice even though the choice for Indian customers is much smaller markets like Thailand, Taiwan, Malaysia, and Indonesia where buyers can choose from over a hundred different models of cars and suvs. In the old days a car was seen as just a means of transport. Now buyers want much higher level of performance and comfort. As buyers slowly move to bigger and more powerful cars, they are beginning to appreciate that more powerful cars are easier to drive and safer when overtaking. With more engine power they also become more aware about the need for better ride, handling and safety. Power steering

which had earlier been luxury is now a standard offering by an every brand. Good air conditioning too is now as a standard requirement. Styling too has become styling too has become a great area a of interest and concern. The Indian buyers has already demonstrated that he is not willing to buy any old model and customers quickly rejected the angular shapes of older generation models like the Peugeot 309, Fiat Uno, and even the first AE-class Mercedes.

5.8 New Models to be released

There are a whole lot of new car launches knocking the door of Indian Automobile Industry. 2003 will see a lot of new launches and new variants of the existing cars to be flooded in the market. The major cars waiting for launch in 2003 are as follows:

6
6.1 SWOT ANALYSIS:
STRENGTH

Industry Analysis

ECONOMIES OF SCALE: The entry in this industry is highly restricted by the kind of capacity that one needs to start with to make the project viable and to enjoy the economic of scale but putting a high capacity TECHNOLOGY: The technology used by industry is upgraded and environment friendly so there is control over the pollution also after the liberalization MNCs enters and changes the whole environments of the Indian Automobile industry and its constantly Innovated by these companies. QUALITY: Quality of the Indian cars are constantly changes and it will excepted over the world also the comparison of global it will not much more different. The quality of cars manufactured in India are coming to terms with the global norms and now India has also started to export cars from India all over the world and the cars are well accepted all over the world INPUTS: Requirements of all kind of Raw Material are easily available in the country with cheaper skilled and unskilled labour easily available

WEAKNESS
DEMAND-SUPPLY IMBALANCE: Demand and supply are inter related according to that the production of cars are high but the changes of the consumer mind affect the purchasing power also they ignore to purchase but relatively cars are sold but not meet the appropriate demand. LOW PROFITABILITY: The general financial health of the Automobile industry continuous to worrisome mainly because of low profitability coupled with high cost of inputs. The changing in the government norms for the import and export terms so, the prices of the cars are constantly fluctuate. INFRASTRUCTURE: Requirements of the basic infrastructure are very poor in terms of the Power and Transportation facilities that are main inputs and the lack or poor supply of all these leads to increase in the cost of production also the manpower because the technology is play the major role but it will not improved in comparisons with global.

OPPORTUNITIES
The Growth of the Automobile industry is directly linked to the Growth of the Economy and the internal and external environment factors. In the country like India people changes their mind set and also increasing their per capita income so, the purchasing power increases. Consumption in cars in India are constantly increasing because of the innovation of the various kind of technology, there is, therefore, significant potential growth in automobile industry, consumption in the coming years even if the current economic growth rates have to be maintained in the country. Country's

automobile industry capacity will need to be enhanced to meet the growing demand during the coming years. The recent emphasis on creation of infrastructure in the country should provide a further fillip to the demand of automobile industry. Even a part conversion of national highways to concrete has the potential to generate double-digit growth rate for automobile industry, year after year. The Demand of the Automobile industry is bound to increase in near future because of the government policy of building the strong infrastructural base for the nation.

THREATS
Automobile industry consumption of the country is related to the overall growth of the economy and any slow down of Indian economy, infrastructure, new technology, consumption rate is expected to also adversely affect automobile industry consumption. The prices of the cars according to high compare to the small wheeler so, only Middle and the Upper class people are purchased and in India the price rate constantly fluctuated so, a sharp drop in growth rate of economy or purchasing power of people is likely to reflect in drop in automobile industry demand with time lag. A drop in automobile industry demand upsets the supply demand equation, thus depressing automobile industry prices and increasing finished goods inventories. A sharp fall in demand may also force cutback in production and supplies from some plants. Many factors affecting to the automobile industry like power, labour, government certain norms, import export duties, The recent revisions of all these has been changed and government allowed to second hand import cars in the country so it will play the major role for the new up coming models. Petrol and Diesel prices are constantly increasing so the Automobile industry being suffered because of this reason.

6.2 PEST Analysis

The automobile has become the darling of not only the rich but also the middle class in the Indian society but the picture is fast changing due to mass motorization. Thus it is very important to study the environment in which the automobile industry operates. Environmental forces, which are especially important for one organization, may not be same for other, and over time their importance may change. It is useful to consider what environment influences have been practically important in the past and the extent to which there any impacts which may make any of these more or less significant in the features for the organization and its competencies. In order to answer some of the key question about forces that work in the macro environment, a PEST analysis indicating the importance of political, Legal, Social and Technological influences on organization carried out. The automobile industry is influences to a great extent by environmental forces such as Political, Economical, Social, and Technological

the following PEST analysis of automobile industry? And which of these are the most important at the present time? Or in the next few years. Political Environment Economical Environment Social Environment Technological Environment

Political Analysis
The automobile industry faces different political factors Environment Protection Law Petrol and Diesel vehicles create lots of air pollution therefore the government of India laid down strict emission rules and norms. All the cares by April 2000 should be EURO II acquaints but the cost of shifting from EURO I to EURO II is very high and it also requires changes made in the engine. However new models with EURO II engines are available from 1998. Thus ultimately the cost of production increased and in turn the unit cost also increase, the govt. now plans for shifting from EURO II to directly EURO IV but there are lot of controversies as the infrastructures is not well developed for EURO IV norms, because a EURO IV engine requires a high grade petrol which would be too costly for India. The cost of refining increased by 30% to 40% Taxation Policy Taxation policy includes CST (Central sales tax), states sales tax, RTO and the most important is the central excise duty. The price of the car depend a lot on such duty structure in the present budget of 01-02 the Govt has slashed the prices of their car after the announcement of the Union Budget 01-02 every state have their different taxation policy and others taxes and producers and documentation this gives a differentiation in prices in different states. Maruti 800 may cost on road Rs.10000 more in Gujarat then Delhi. Foreign Trade Regulation For JV in passenger, approval of FIPB and the GOI is essential for any level of foreign equity participation for foreign equity participation up to 51%, the RBI accords automatics approval. For equity participation involving more than 51% proposal are considered for single window clearance By the FIPB (Foreign Investment Promotion Board) in the Ministry of Industry. The Govt has been liberal in approvals such cases. Similarly for foreign technology agreements in the priority sector involving lump sum technology payment of US$2 million and royalty at 5% on domestic sales and 8% of export over a period of 10 years from the date of agreement or 7 years from commencement of production, automatic approval is given by RBI a very large no. Of foreign collaboration proposal have been approved in the automotive sector. Government Stability

Thus a lot is dependent on Govt policy and any Govt decision is to be followed by the automobile industry. Thus stability of the Govt is one of the major political factors, which affects the automobile industry. Labour Laws and Employment Laws Are also to be followed strictly because in India MUL, which is the largest car, manufacturer is in the public sector hence MUL has to follow the rules and regulation and laws framed and laid down for the protection of workers. Others factor such as EXIM policy and Govt stability also affect a lot to the automobile industry in its strategy as well as operational decision.

Economical Analysis
Business Cycle The most important economic factor affecting the automobile industry is the opening of the economy. With liberalization, which started from 91 Indian buyers, have seen a wide choice of cars for the first 5 years the Indian passenger car manufacturer had enjoyed a protected market and the need to bring in updated technology did not arise. Indian customers had to be satisfied with model such as Ambassador and Fiat. But it was only in 1991 that the liberalization of economic policy started in rural terms. India opened it gates to foreign players who were seriously looking at newer markets to prop up the sagging global passenger car market and within no time the world leading automobile giants were busy setting up shop in India. India with its strong democracy and a growing economy naturally became the better choice. Energy availability and the Economic cost The international price of crude petroleum, which is imported by India, affects the manufacturing of automobile in India. If the prices of the petrol of diesel goes very high than the operational cost on the part of customers increased and thus a customer will think as the buy a new car or not. Others There is high correlation between Per capital Income and demand for cars, the increase in number of people crossing the income threshold and changing consumer profile. There is correlation between cars demand and Economic Growth. Money Parallel economy (i.e. Black money) may also be one of the major reason for the increase in the demand the increase of salary of Govt and semi Govt employees in the 5th pay commission has also led to some extend the increase in the demand of cars.

Socio-Culture Analysis
Population Demographic In India automobile has become the darling of not only the rich but also the middle class sin every society. Only the rich and higher class people can afford the cars but the growth and development of industrializations can change the scenario also the middle and upper class using the cars the reason is increase in per capita income and Disposable incomes.

Life style Changes Standard of living, fashion, trend, preference and taste changed according with change in environment and increasing the usages of cars also for the comfortable and for the status symbol people using the Cars. Social Mobility Social relationship in terms of one individual respect another is very high and having a car increasing the social mobility, in India there are different people, religion, different festivals, so the need and the consumption is different and having the car is social mobility. Other Factors In India there is joint family system, this affect the auto market in the sense of family cars are being sold. Like Hyundai promotional activity for the Santro.

Technological Analysis
The MNCs arrives in India have brought in the state of art technology the automobile technology is evolving more and more towards an industrial sophistication keeping the requirements of buyers the use of lighter alloys for fuel tanks the introduction of complex system of electronics control of engines, the endeavors for max. Security and developments and in new technology that were not known in cars 10 years ago. Only in market of different dimension can guarantee an adequate return on investment, the low Labour cost achieved by robotisation impact only on the direct manufacturing process but also on the cost of the chain of suppliers often dont compensate for the burden of others non-competitive factors. The new technology has enabled the car manufacturer to make cars that have features like Multipoint fuel Injection (MPFI) increase in the break horse power (BHP) increased revolution per minute (RPM) quick chilling air conditioners, remote controlled locking systems, electronic dash boards and the demand for the better music has made the cars through the span of time more and more costlier thus making an impact on the final price of the car. In India have no directly spending on the research work but it indirectly carved out by the policy that is adopt and R&D is left on the private hands. In India also some of the players are developing indigenous technology for the products e.g. Tata have developed Indica and Reva first Indian electronic car developed by Reva motors. However only technology is not a factor that sells car more even looks are laying a major in the selling of the car.

6.3 Porters Diamond Model

India is one of the fast growing market in the world India as it is most cost effective in all the means of production of a car including components, because of cheap labour and other cost benefits, which enables any manufacturing a cutting edge to cater domestic market plus export in cheaper

rates. Plus it can also export to its patent country at cheaper rates than it produces in its own country. Demand Condition The demand of the cars in India is rising continuously as the income level is growing and the per capita income rising High degree of correlation between per capita income and demand for cars the increase in no. Of people crossing the income threshold and changing consumer profile. There is a high degree of correlation between the demand for cars and economic growth As the middle class is growing the demand of mid range small car is rising. This can be seen as mid range car had captured 50% market share and same as this is in the premium cars, and also a downturn in the economy cars as people demand of better quality cars and availability of easy finance and backed by increased money supply at lower interest rate. Related and supporting industries The demand of petroleum industry is related to the demand of automobile industry, where passenger industry is one of the fast growing industry, the component industry is also fully supported the automobile industry with have a track record of exporting component to the development countries due to its quality and low price. That why many auto international components manufacturer has also entered India like Delphi and many others. Firm Strategy, Structure and Rivalry Due to the high demand for the products, the passenger car industry is undergoing a phase of transformation with Increase in the capacity of existing players New entrants Large number of JV and Collaboration This have created an environment of immense rivalry among players and the search for competitive such advantage with in nation can help provide organization with base of achieving such advantages on a more global basis.

6.4 Porters Five Force Analysis

Threat of Entrants Bargaining power of suppliers Bargaining power of Buyers Threat of Substitute Competitive Rivalry

Diagram of Porter's 5 Forces

 BARRIERS TO ENTRY Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution Expected retaliation Proprietary products

SUPPLIER POWER Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation Switching costs of firms in the industry Presence of substitute inputs Threat of forward integration Cost relative to total purchases in industry DEGREE OF RIVALRY Exit barriers Industry concentration Fixed costs/Value added Industry growth Intermittent Overcapacity Product differences Switching costs Brand identity Diversity of rivals Corporate stakes BUYER POWER Bargaining leverage Buyer volume Buyer information Brand identity Price sensitivity Threat of backward integration Product differentiation Buyer concentration vs. industry Substitutes available Buyers' incentives

THREAT OF SUBSTITUTES Switching costs Buyer inclination to substitute Price-performance Trade-off of substitutes

Threat Of Entry Depend on the barriers

Economic of Scale In the automobile industry, economies of scale act as a significant entry barrier since it is a capital-intensive industry. Globally, it has been witnessed that car manufacturers with low volumes find it extremely difficult to survive given the high per unit cost. The acquisitions of Rolls Royce, Jaguar, Rover, and AMC/Jeep are a testament to this. On the other hand by entering on a large scale, one runs the risk of drastic under-utilization of capacity as observed by Daewoo's experience in India. Since the economy segment cars

are expected to drive volume growth in India in the coming years, it is extremely important for a manufacturer to have a model in this segment to reduce his per unit cost. Huge Capital Costs Huge capital costs act as a significant entry barrier and only established companies with deep pockets possess the resources to enter the automobile industry. Significant costs are involved in the development of a new car as can be seen by Telco's Indicar which has incurred an expenditure of Rs. 17 bn. Access to Distribution Channel This is very important factor in this industry as the competition intensifies the players with component marketing and distribution network will definitely have a competitive edge over other players, older players like Maruti and HM considerable advantages in this regard over their fellow counterparts because of their long existence and the monopoly power that they enjoyer over such a long period of time, entry of any new player will be restricted by this factor to a large extent. Cost advantages independent of Size Maruti's presence in the car industry since 1984 gives it considerable cost advantages over the new entrants. Are its plants highly depreciated and its cars highly indigenes as compared to its competitors, it has a wide distribution and services network, which will require mammoth resources to replicate. Expected Relation In this industry, which is highly capital intensive and with the existing of the established players with huge resources and built in competence the possibility of expected retaliation and the severity of the same is very high, for a new players to challenge these forbidden behemoths and make a dent in the market will be very difficult and for this any new players it becomes costly to break that barriers unless careful attention is paid to strategy to avoid retaliation. The best example of retaliation was seen when Telco was about to roll its small car Indica in the Indian market, at the same time Maruti slashed the rates of its entry level car Maruti 800, so much that even the managing team of Telco believed that their car Indica would not be able to generate demand in the market. Legislation or Government action The license-raj regime of the Indian government till 1991 acted as a significant barrier for any new entrants in the passenger car industry. Moreover, the government's perception of the car being a "luxury" rather than a modern "necessity" resulted in this sector being labeled as "low priority." However, the liberalization of the Indian economy has removed this hindrance. Differentiation One might think that a car is just a means of personal transport, and hence there will not be much difference among cars. But he might be thinking on the wrong track, because there is great differentiation in cars. But the major problem is that other companies can easily copy any new thing introduced by any company. The major source of

differentiation in the automobile sector is in the after sale services provided by different companies and the financial schemes provided. Although liberalization of the Indian economy has reduced the impact of government policy as an entry barrier, the car industry still enjoys high entry barriers due to huge capital costs involved in setting up efficient plants and numerous cost advantages enjoyed by Maruti. The recent pull-out of Daewoo is an example that even a global automobile company could find it extremely difficult to operate in India if it faces labor trouble and problems with its joint venture partner.

Bargaining Powers of Buyers

The following tables outline some factors that determine Buyers power Buyers are Powerful if: Buyers are Weak if: Buyers are concentrated - there are a few Producers threaten forward integration buyers with significant market share producer can take over own distribution/retailing Buyers purchase a significant proportion of Significant buyer switching costs - products output - distribution of purchases or if the not standardized and buyer cannot easily product is standardized switch to another product Buyers possess a credible backward Buyers are fragmented (many, different) integration threat - can threaten to buy no buyer has any particular influence on producing firm or rival product or price Producers supply critical portions of buyers' input - distribution of purchases Buyers' Price Sensitivity Car buyers in India are extremely price-sensitive especially in the economy segment. Although it is too early to judge the three new small cars and Maruti's response to it, we can expect the price competition to intensify since buyers would be more willing to switch while intense competition among the companies would require them to generate volumes. Relative Bargaining Power Gone are the days when the Indian car buyer had to buy one of the 30,000 Ambassdors or Fiats, which were produced. The penetration of satellite television has globalized the Indian customer. The Indian consumer is no longer satisfied with an outdated Mercedes E-220 or Peugeot 309 when one can see the latest S-Series Convertible flying down Rodeo Drive in Los Angeles. Car companies have been forced to revamp their dealer network. From a small shed for a dealership, the shift is towards huge dealerships that not only offer complete range of services for the car but also make sure that the customer has a replacement vehicle so that they may not become immobile. Many companies have mobile squads to take care of the car if it breaks down on the road. The entry of global players has re-defined the dealer-customer relationship in India.

Availability of Easy Financing The entry of numerous car companies has brought along with it a massive increase in the availability of cheap finance for the Indian consumer. This has led to fierce competition among the car companies and has even led to free gifts being doled out to buyers to lure them to purchase a particular car. Used Car Market The used car market is still in the nascent stage in India as compared to the developed nations like United States, which has a thriving, used car market. A thriving used car market reduces the ownership period of cars and helps in increasing demand for new cars. Recently, Mercedes Benz in India was offering discounts of 30-35% for sparingly used E220s as it had decided to phase out this model. The entry of the global car manufacturers has transferred the balance of power into the hands of the buyer. The Indian car buyer is not only extremely priced conscious, but also wants the highest value and service. Huge dealerships, member clubs, mobile squads, and replacement vehicles are just some of the sops being offered to the customer. The availability of cheap financing and maturing of the used car market will also increase the choices for the consumers. With many new models waiting to be launched, the Indian car buyer will only have more power to choose and dictate terms to the dealer.

Bargaining Power of the Suppliers

The following tables outline some factors that determine supplier power. Suppliers are Powerful if: Credible forward integration threat suppliers Suppliers concentrated Significant cost to switch suppliers Customers Powerful Suppliers are Weak if: by Many competitive suppliers - product is standardized Purchase commodity products Credible backward integration threat by purchasers Concentrated purchasers Customers Weak

Diminishing Supplier Power One of the key trends observed in the global auto industry is the significant increase in outsourcing of car parts. In India, the development of the auto ancillary industry has also brought in this phenomenon. However, the large number of competitors for supplying each part implies that in the coming years, supplier power will diminish to a large extent except for suppliers who have almost monopolistic powers like Mico-Bosch. Also, there is an increasing shift towards reduction in vendor base for a car company, which means that the chosen suppliers also have to make substantial financial investments to enhance the quality of their products. Moreover, the lowering of tariffs will expose the Indian automobile ancillary industry to fierce competition from better-quality imports. All these

factors will lead to a situation where the automobile manufacturer will have substantial bargaining power with the suppliers in terms of quality and pricing of the product. Supplier power in the automobile industry will diminish greatly in the coming years due to the large number of competing suppliers, threat of cheaper and betterquality imports, and an increasing trend towards reduction of a car company's vendor base.

Threat of Substitutes
Inadequate Public Transportation System In developed nations, city planners have tried to relieve traffic congestion and pollution by creating an efficient public transportation system. However, they have been remarkably ineffective in encouraging motorists to forsake their cars for buses or subway. The public transportation system in India is not only extremely inadequate; it is notably poor in quality. This scenario is not expected to change drastically in the next ten years. Developmental Stage of Electric Cars All the major car manufacturers in the world are currently developing electric cars or hybrid cars to reduce pollution in the coming years. However, these technologies will require considerable length of time to become commercially feasible in developing nations. The lack of adequate public transportation system coupled with the fact that the electric or hybrid cars are still in the developmental stage means that the Indian car industry faces minimal competition from substitutes.

Competitive Rivalry
Highly Concentrated Industry The Indian car industry is highly concentrated with Maruti itself accounting for about 80% of all sales. The lack of competition in the economy segment to Maruti 800 has given the company considerable power. Its dominance in this segment gives it the power to cross-subsidize its models in the other segments. However, this scenario is expected to change drastically over the next three years with a number of new models being launched to challenge Maruti 800's dominance. The scenario in the economy segment could be similar to that in the premium segment currently with intense price competition. The slashing of Cielo's price by 25% has led to Ford and Opel introducing cheaper models. Diversity of Competitors 1984 and 1993 have been landmark years for the Indian car industry. The entry of Maruti in 1984 changed the complexion of the industry as for the first time Indians had the opportunity to buy a car which was comparable to the Japanese automobiles. 1993 was a historic year as the industry was deregulated and India became the latest battlefield for global auto majors. The last few years have seen the industry integrate with the global automobile industry and evolve into being extremely competitive. For the first time, Maruti's position as the leader of the car industry will be severely challenged especially if

the three new cars (Telco Indica, Daewoo D'Arts, Hyundai Santro) in the economy segment can deliver the promised performance. Product Differentiation One of the key trends observed in the car industry during the last decade is that the products of different companies have become increasingly similar especially in the economy and mid-size segment. There is a perceptible shift towards "cars" being treated as a commodity rather than as a consumer good. In the premium car segment in India, differentiation between different models is declining as companies strive to increase volumes by cutting prices. Even Opel Astra has decided to introduce a new model without any frills to reduce its price by Rs. 10 million. Excess Capacity and Exit Barriers The entry of numerous players in the car industry can lead to significant over-capacity. This is likely to lead to significant price cuts (as seen by Daewoo's recent price cut of Cielo) as companies will need to generate volumes to cover their fixed costs. The car industry faces high exit barriers in India due to various government laws, which make it difficult for a company to shutdown and fire all its employees. Also, many of the new players have invested heavily to set up new plants and develop the ancillary industry close to its manufacturing location. This means that these companies will suffer from high exit barriers and might be forced to continue operations even if they do not generate enough volumes. Increase in Working Capital Needs The intense rivalry between the automobile companies will mean that the companies would have to give longer credit periods to its dealers. The substantial over-capacity in the industry will lead to increased inventory holding. These two factors point towards an increase in working capital needs of car companies. The competition between firms in the car industry is expected to intensify considerably as newer companies will start reducing Maruti's dominance of the market. The expected significant over-capacity in the industry, increasing working capital needs, and high exit barriers coupled with low differentiation between models especially in the economy segment will put downward pressure on prices and profitability of companies.

Competition and Collaboration

After liberalization of industrial policy in July 1991, several new JV & agreement for manufacturer of cars/MUV have been signed between Indian companies and world giants of the automobile industry. Competition has forced many companies to have joint collaboration with others to be more competitive in the market e.g. Ford Ikon will have a HM engine from year 2003.

Mitsubishi motors had tied up with HM for production and marketing thus utilizing of the capacity at its fullest and be at the cost advantages and finally be competitive. Maruti is the market leader with leader with over 60% share of the passenger car and MUV. MUL has been a leading manufacturer with 50% equity participation by the Govt. and the balance 50% by M/S Suzuki Motor Corporation (SMC) of a wide range of passenger cars and utility vehicle, it has an installed capacity of 350000 units p/a, it has achieved over 95% indigenization in models, Maruti 800, Omni and Gypsy, The level of indigenization for Zen and Gypsy (wide trade) is over 81%. MUL has exported 162617 vehicles up to November 1997 to more than 100 countries in different parts of the world. On the other hand world leaders automobiles manufacturer i.e. Ford and GM are also thinking to acquire Daewoo motors of Korea, the result of this will be that whoever would be acquiring Daewoo, would be the leader in the world automobile market, this is because of Daewoos success in the small cars segment through its Matiz models. Which is being termed as the most successful small car ever.

6.5 Strategic Group Analysis

Strategic Group Analysis is done to identify defined groups so that each represented organization with similar strategic characteristic, following similar strategies or compete on similar basis. These groups are easily identifies using two or perhaps three set of key characteristic on the basis of the competition, in the passenger car industry there are around 15 companies and many others international players are still entering the market, India has more number of players than the other developing countries in the world. This mzkes the market more and more competitive and thus all fight for the share, below is the list of all the major players in the market. Tata Engineering and Locomotive Company Mahindra & Mahindra Limited Maruti Udyog Limited Hyundai Motor India Limited Honda Siel Cars India Limited Fiat India Automobiles Pvt. Limited Ford India Limited General Motors India Pvt. Limited Toyota Kirlosker Motor Limited Hindustan Motors Limited Skoda India Limited DaimlerChrysler India Limited Premier Auto Limited Daewoo Motors India Limited Mitsubishi Motors India Limited

This excludes Daewoo motors as it has lost market now due to the Korean parent company had got bankrupted resulting in the lost of market in India.

The characteristics considered in finding strategic groups are price and the quality of the cars provided by the different manufacturers. The prices of different cars available in the Indian market are given in the chapter of pricing above. X-axis shows the price of the models with the company and the Y-axis shows the quality of the product of the company.

Mercedes

High
Opel, HM, Telco

Honda, Ford Hyundai, Skoda

Price / Quality / Image

Maruti, Opel, Hyundai, Ford

Medium
Hyundai, Telco

Maruti, Fiat, Telco

Fiat, Maruti Maruti

Low Compact Mid-size Premium Luxury

Market Segmentation
From the above strategic group mapping, we have derived the following four cost leaders in their particular segment and four quality leaders in their particular segment. Attributes Segment A Segment B Segment C Segment D Cost Leader Maruti Fiat Maruti Hyundai , Skoda Quality Leader Maruti Hyundai, Telco Honda, Hyundai Mercedes

Implication for Groups

Group A Group A had been seen many changes it has lost from 80% in financial year 1995 to now 50% in financial year 2002 but despite that the company is able to manage its share because it caters segment A and this segment has a large share in the Indian automobile

market, but this is not going to last much as the gap between segment A and segment B is narrowing down day by day due to frequent reduction in the prices of segment B cars. According to the industry experts, it seems that in the next 5-10 years, the segment A will be completely phased from the market and the segment B cars will take their place as entry-level cars. The segment B cars are offering better technology, product features and safety and not a very high price to the customers and hence this segment is becoming more and more popular with the customers. Group B In this segment Hyundai and Telco are the quality leaders whereas Fiat is the cost leader. The success of Hyundai and Telco is more or less attributed to Santro and Indica respectively. They are able to capture the market share of Maruti and have been able to bridge a gap between segment A and semen B, as the difference between the prices of cars in both the segment is not much. Let us not forget the cost leader in the segment i.e. Fiat, whose success is mainly due to Palio. This car is giving stiff competition to Maruti 800 and the other factor behind its success is its endorsement by Sachin Tendulkar, who was also responsible for skyrocketing the sales of TVS Victor in the two-wheeler segment. Group C This group consists of the major MNCs of the global automotive market. The quality leader in this segment happens to be Hyundai and Honda. The major boost provided to them was by Accent and City models respectively. These are top quality car models for the middle upper income groups. They have very good product features, technology and safety features, which no other model in the segment offers to its buyers. The cost leader in the segment is Maruti again. The company has three models in this segment and all the three models have the lowest price tag in the segment, even then they all are able to differentiate themselves from one another as Esteem is lower premium segment car, Versa is a multi purpose vehicle and Baleno is an upper premium car. It is amazing that in how many segments can be a company cost leader, in spite of 15 different players operating in the industry. Group D This segment consists of the luxury sedans and Mercedes, Sonata, Mondeo, Octavia and Accord. The quality leader in this segment is of course, Mercedes, but the company may not be able to sustain that position for too long and many luxury sedans such as Pajero, Prado and many others are throbbing the doors of Indian automobile market to enter this segment and they will give Mercedes a tough fight. The cost leader in the segment is Skoda with its newly launched luxury sedan Octavia. The company is also going to launch another car in the same segment sometime next year. 2003 will see many luxury sedans to be launched in this segment, as this segment offers the maximum margin among all the other segments. This segment has created a great niche for the MNCs and no Indian company operates in this segment and the number of models are also fewer.

6.6 Value Chain Analysis

Firm Infrastructure Human Resources Management Technology Development Procurement Inbound Operation Outbound Marketing Logistic Logistic & Sales

Support Activities

Service

1.1 Mar

Primary Activities Value Chain analysis was originally introduce as an accounting analysis to shed light on the value added of separate step in complex manufacturing process, in order to determine where cost improvement to be made and value creation improved. These two basic steps of identifying separate activities and assessing the value added from each were linked to an analysis of an organisatations competitive advantages by Michael Porter. Above figure show a systematic representation of the value Chain. The primary activities of an organisation are grouped into five main areas: I. Inbound Logistics: The inputs for the automobile industry are steel, aluminium, tyres, fibres, glass and engines. Most of the companies manufacture the engines on their own, even there are companies who get manufactured the engines for their cars outside their company such as Ford India. limestone, coal and power. All the other raw materials are acquired from the auto-anciliary industry and other such related industries. II. Operations: The automobile plants in India have improving operational skills with overall managerial excellence resulted in better and stable plant operations. Optimization of operation of assembling, painting and engine manufacturing has been the most important measures towards improving overall plant efficiency. Other measures adopted in this regard have been, motor standardization, improved maintenance system including computerized maintenance, process stimulating modes, use of low cost alternative fuels including industrial and agriculture wastes, petroleum coke, etc in the areas. III. Outbound Logistics: The automobile plants are geographically dispersed over mostly in all the states, the industry enjoys a unique benefit of location advantage. This is reinforced to the Industrys extensive marketing and distribution network with a countrywide reach. This widespread network of factories and distributor network allow industry to optimize on freight distribution cost.

IV. Marketing and Sales: There is very high competition in the automobile industry because of large number of players. Brand building and improved logistics management have drastically brought down the delivery costs of the manufacturers. Industry has very strong distribution channels and also high advertising expenses. V. Service: The many Companies in the industry have customer service cells, manned by qualified mechanical engineers to advice customers on applications and advisory services on motor driving. In fact, the after sales service is one of the most important elements forming the perception of the consumer towards a particular company or brand. The support activities that are linked to primary activities can be divided in to four areas: I. Procurement: Most of the company in the automobile industry has their own engine manufacturing facilities, whereas the other raw materials are procured from the auto-ancillary and glass industries. II. Technology Development: As a part of modernization of Technologies, the automobile industry has seen frequent shifts from the old technologies to the newer ones. The industry do not have the problem of procuring the technology, as most of the firms are in collaboration with some foreign companies and have easy access to their technology. In fact, some of the collaborations are made for the sole purpose of technology sharing. Moreover, almost all the companies have their own well developed research and development department, but it basically focuses on new product development. III. Human Resources Management: HRM is a very important area in any industry that transcends all primary activities. Because of effective Human Resources Industry has improved its process through new technology. Employees are always encouraged to give suggestion for improvement in most of the company. IV. Infrastructure: The systems of planning, finance, quality control, information management, etc are crucially important to an organisations performance in its primary activities. Infrastructure also consists of the structures and routines that sustain its culture. The Quality of Indian cars was not as good as it is today, but now we are coming at par with the global market in terms of quality. Most of the Indian companies are thriving to lower down there cost through optimum utilization of infrastructure facilities.

6.7 Comparative Analysis:

Here first of all we will look at the comparison of all the major players and depends on that we can have ideas about the overall companies. Capacity Market Investment Company (Annual Segments Models Share (Rs. mn) Proudction) MUL 350000 49.97 Eco, Mid & Maruti 800, 38667 premium Esteem, Zen, Wagon R,

Hyundai Telco Honda Fiat GM Ford HM Mercedes Skoda M&M

120000 360000 30000 50000 25000 50000 64000 N.A. N.A. 120200

17.16 13.34 1.95 2.54 1.11 2.51 2.42 0.15 0.86 3.28

Mid, premium & Luxury Mid & premium Premium & Luxury Mid & premium Premium & Luxury Premium & Luxury Mid & premium Luxury Luxury Muvs

Omni, Alto, Baleno, Versa Santro, Accent, Sonata Indica, Sumo, Safari, Siera City, Accord Palio, Siena Opel Corsa, Astra Ikon, Mondeo Ambassador, Lancer, C Class, E class, S class, Octiva Balero,

16204 56381 3811 16900 6870 16200 6146 N.A. N.A. N.A.

Strategic Comparison of different players Market Competitiv Strategic Company Share e Scope Intent Objective Expansion Be cost via MUL National leader internal growth Hyundai Multi country Be quality leader Expansion via internal growth

Competitiv e Position Retrenching to a position that can be defended Getting stronger on the move Getting stronger on the move Stuck in the middle of the pack Getting stronger on

Strategic Posture Mostly offensive

Competitive Strategy

Providing value foe money products Pursuing Combination differentiation of offensive based on and quality and defensive technology Mostly defensive Striving for low cost leadership

Telco

National

Honda Fiat

Multi Country Multi Country

Aggressive Be in the expansion top three via acquisition Aggressive expansion Move in through the top five internal growth Sustain Aggressive competitive expansion

Pursuing differentiation Conservative based on follower image and reputation Conservative Striving for follower low cost

GM

Global

Ford

Multi national

HM Mercedes

National Global

Skoda

Multi Country

M&M

National

through position internal growth Aggressive expansion Move in via the top five mergers and alliances Aggressive expansion Move in through the top five internal growth Hold to Be in the present top ten share Sustain Hold to niche present created share Aggressive expansion Develop through brand name internal growth Aggressive Develop in expansion the car through segment internal growth

the move

leadership Pursuing differentiation Conservative based on follower image and reputation Pursuing differentiation Conservative based on follower image and reputation Mostly Conservative focusing on a follower market niche Mostly Mostly focusing on a defensive market niche Combination Currently of offensive focusing on a and market niche defensive Combination Mostly of offensive focusing on a and market niche defensive

Stuck in the middle of the pack

Stuck in the middle of the pack Struggling, losing ground Well entrenched Developing a position that can be defended Developing a position that can be defended

6.8 Financial Analysis of different players

Ford Motor India Ltd. Du Pont Analysis Ratios Net Profit (loss) Net Sales Total Assets Total Assets Turnover Ratio Net Profit (loss) Margin Ratio (%) Return on Total Assets (%) Equity ROE (%) (Rs. In crores) 1999-2000 2000-2001 (140.13) (109.82) 331.81 786.76 1351.71 1424.25 0.25 0.55 (2.37) (0.58) 800.00 (0.18) (7.16) (3.96) 850.00 (0.13)

From the above table, we can see that the return on equity on Ford Motor India Ltd. has increased as compared to the previous year. This can largely be attributed to the decrease in loss of the company as compared to the previous year. But, surprisingly, the net loss margin ratio has increased in spite of reduction in loss over the previous year. Ratio Analysis Ratios Margins ratios (%) PBDIT (NNRT) / sales PBDT (NNRT) / sales PAT (NNRT) / sales PBDIT (NNRT) / net sales PBDT (NNRT) / net sales PAT (NNRT) / net sales Returns ratios (%) PAT (NNRT) / net worth PAT (NNRT) / total assets PBIT (NNRT) / capital employed PAT (NNRT) / capital employed Liquidity ratios (times) Long term debt / equity Total debt / equity Current ratio Interest cover Gross working capital cycle (days) Net working capital cycle (days) Avg. days of debtors Avg. days of creditors 1999-2000 3.47 (25.19) (31.11) 4.71 (34.19) (42.23) (1.07) (13.62) 1.39 1.70 1.16 (0.09) 2000-2001 4.87 (4.19) (10.45) 6.51 (5.60) (13.96) (27.15) (8.27) (1.37) (10.31) 1.81 1.96 1.50 (0.15) 64.00 (4.00) 10.00 69.00

Hindustan Motor Ltd. Du Pont Analysis Ratios Net Profit Net Sales Total Assets Total Assets Turnover Ratio Net Profit (loss)Margin Ratio(%) Return on Total Assets(%) Equity ROE(%) 1996-97 36.85 952.43 937.18 1.02 25.85 26.27 107.57 0.34 1997-98 34.31 1003.27 1021.04 0.98 29.24 28.73 107.57 0.32 (Rs. In crores) 1998-99 1999-2000 2000-01 2001-02 (117.79 (35.00) (63.29) ) (56.48) 1217.58 1330.81 1233.28 893.54 1461.51 1461.87 1196.54 1105.74 0.83 0.91 1.03 0.81 (34.79) (28.98) 107.83 (0.32) (21.03) (19.14) 107.83 (0.59) (10.47) (10.79) 161.25 (0.73) (15.82) (12.78) 161.25 (0.35)

From the above table, we can see that the return on equity on Hindustan Motor Ltd. has been decreasing over the year, this is mainly attributed to the increased competitiveness in the industry. Although the sales are increasing but the profit has been declining, in fact, in the last four years the company is running in losses. Ratio Analysis Ratios Margins ratios (%) PBDIT (NNRT) / sales PBDT (NNRT) / sales PAT (NNRT) / sales PBDIT (NNRT) / net sales PBDT (NNRT) / net sales PAT (NNRT) / net sales Returns ratios (%) PAT (NNRT) / net worth PAT (NNRT) / total assets PBIT (NNRT) / capital employed PAT (NNRT) / capital employed Liquidity ratios (times) Long term debt / equity Total debt / equity Current ratio Interest cover Gross working capital cycle (days) Net working capital cycle (days) Avg. days of debtors 199697 9.73 5.29 2.94 12.81 6.96 3.87 16.07 4.89 19.54 7.37 1.05 1.38 1.64 1.75 166.00 90.00 39.00 199798 9.74 5.25 2.64 12.61 6.80 3.42 13.39 3.93 16.55 5.59 1.29 1.68 1.47 1.74 170.00 93.00 40.00 199899 5.09 (0.18) (2.21) 6.62 (0.24) (2.87) (14.05) (3.17) 7.59 (5.47) 1.79 2.56 1.18 0.58 165.00 77.00 44.00 19992000 4.85 (1.12) (3.49) 6.61 (1.52) (4.76) (30.99) (5.29) 7.03 (9.88) 2.58 3.41 1.26 0.42 188.00 93.00 46.00 200001 1.64 (4.30) (6.99) 2.25 (5.87) (9.55) (62.18) (11.53) (3.61) (24.20) 1.43 1.94 1.19 (0.18) 168.00 83.00 46.00 2001-02 3.70 (1.31) (4.68) 5.00 (1.77) (6.32) (31.86) (6.82) 0.99 (13.56) 1.70 2.30 1.11 0.07 172.00 69.00 53.00

Avg. days of creditors Honda SIEL Motors India Ltd.

76.00

76.00

87.00

95.00

85.00

102.00

Du Pont Analysis Ratios Net Profit Net Sales Total Assets Total Assets Turnover Ratio Net Profit (loss)Margin Ratio(%) Return on Total Assets(%) Equity ROE(%) (Rs. In crores) 1998-99 1999-2000 2000-01 2001-02 (40.71) (46.06) (29.09) 26.29 442.19 467.89 519.70 656.47 470.22 495.88 533.37 595.87 0.94 0.94 0.97 1.10 (10.86) (10.21) 360.00 (0.11) (10.16) (9.58) 360.00 (0.13) (17.87) (17.41) 360.00 (0.08) 24.97 27.51 360.00 0.07

From the above table, we can see that the ROE, being negative in 1998-99 has become positive in 2001-02, saying that the company is coming out of the black on the red. This situation is mainly attributed to the increase in sales which resulted in profit. Ratio Analysis Ratios 1998-99 1999-2000 2000-01 2001-02 Margins ratios (%) PBDIT (NNRT) / sales 1.44 1.72 4.12 10.35 PBDT (NNRT) / sales (2.18) (1.07) 1.70 8.40 PAT (NNRT) / sales (6.62) (7.09) (4.06) 3.09 PBDIT (NNRT) / net sales 2.00 2.39 5.68 13.39 PBDT (NNRT) / net sales (3.03) (1.49) 2.34 10.87 PAT (NNRT) / net sales (9.21) (9.84) (5.60) 4.00 Returns ratios (%) PAT (NNRT) / net worth (17.87) (13.39) 12.02 PAT (NNRT) / total assets (10.56) (6.82) 6.06 PBIT (NNRT) / capital employed (4.82) (8.69) (4.06) 16.20 PAT (NNRT) / capital employed (10.63) (14.34) (10.08) 9.95 Liquidity ratios (times) Long term debt / equity 0.34 0.40 0.41 0.13 Total debt / equity 0.43 0.43 0.86 0.63 Current ratio 2.02 1.19 1.13 1.21 Interest cover (0.83) (1.54) (0.67) 2.59 Gross working capital cycle (days) 63.00 68.00 84.00 Net working capital cycle (days) 41.00 44.00 55.00 Avg. days of debtors 7.00 19.00 30.00 Avg. days of creditors 21.00 24.00 28.00

Hyundai Motors India Limited Du Pont Analysis Ratios Net Profit Net Sales Total Assets Total Assets Turnover Ratio Net Profit (loss)Margin Ratio(%) Return on Total Assets(%) Equity ROE(%) (Rs. In crores) 1997-98 1999-2000 2000-01 2001-02 (4.99) (50.44) 59.66 171.84 0.16 365.80 1678.25 2230.18 117.09 1645.27 1937.92 2098.95 0.00 0.22 0.87 1.06 (0.03) (7.25) 28.13 12.98 (0.00) (1.61) 24.36 13.79 465.74 812.54 812.54 812.54 (0.01) (0.06) 0.07 0.21

From the above table, we can see that the company has transferred the its negative ROE in 1997-98 and 1999-2000 to positive in 2001-02. The increased ROE is mainly attributed to the increase in sales which in turn resulted in increase in profit. The asset turnover ratio is also improving significantly, which also caused the improvement in the ROE. Ratios Margins ratios (%) PBDIT (NNRT) / sales PBDT (NNRT) / sales PAT (NNRT) / sales PBDIT (NNRT) / net sales PBDT (NNRT) / net sales PAT (NNRT) / net sales Returns ratios (%) PAT (NNRT) / net worth PAT (NNRT) / total assets PBIT (NNRT) / capital employed PAT (NNRT) / capital employed Liquidity ratios (times) Long term debt / equity Total debt / equity Current ratio Interest cover Ratio Analysis 1997-98 1999-2000 (3062.50 ) (3062.50 ) (3118.75 ) (3062.50 ) (3062.50 ) (3118.75 ) (2.14) (0.90) (0.72) (0.72) 0.52 0.52 0.26 5.22 (1.49) (9.90) 7.27 (2.07) (13.79) (8.34) (3.86) (1.08) (3.34) 1.02 1.02 2.67 (0.48) 2000-01 10.74 7.80 2.56 14.89 10.82 3.55 7.64 3.46 8.63 3.78 0.95 0.96 1.82 1.99 2001-02 12.88 10.92 5.68 17.46 14.80 7.71 19.10 9.25 14.81 10.29 0.69 0.69 1.80 4.16

Gross working capital cycle (days) Net working capital cycle (days) Avg. days of debtors Avg. days of creditors Mahindra & Mahindra Ltd. Du Pont Analysis (Rs. In crores) Ratios Net Profit Net Sales Total Assets Total Assets Turnover Ratio Net Profit (loss)Margin Ratio(%) Return on Total Assets(%) Equity ROE(%)

57.00 17725.00

60.00 (110.00) 2.00 170.00

43.00 17.00 0.00 25.00

45.00 22.00 1.00 22.00

199697 204.15 3005.45 2529.89 1.19 14.72 17.49 101.79 2.01

199798 236.34 3342.59 3155.40 1.06 14.14 14.98 103.37 2.29

199899 210.97 3434.15 3387.94 1.01 16.28 16.50 103.37 2.04

19992000 249.06 3531.76 3471.90 1.02 14.18 14.42 110.48 2.25

200001 99.80 3506.52 3634.99 0.96 35.14 33.89 110.48 0.90

2001-02 75.29 3243.05 3743.51 0.87 43.07 37.32 116.01 0.65

From the above table, we can see that, the ROE of the company is decreasing in the last two years, mainly attributed to the decrease in sales. In relation to the decrease in sales, the decrease in profit is more significant. The asset turnover ratio is also decining. Ratio Analysis Ratios Margins ratios (%) PBDIT (NNRT) / sales PBDT (NNRT) / sales PAT (NNRT) / sales PBDIT (NNRT) / net sales PBDT (NNRT) / net sales PAT (NNRT) / net sales Returns ratios (%) PAT (NNRT) / net worth PAT (NNRT) / total assets PBIT (NNRT) / capital employed PAT (NNRT) / capital employed Liquidity ratios (times) Long term debt / equity Total debt / equity Current ratio Interest cover 199697 13.26 10.97 5.80 15.53 12.85 6.79 20.96 8.75 20.02 10.13 0.94 0.99 1.96 5.01 199798 13.43 10.35 5.91 16.05 12.37 7.07 20.51 7.64 17.91 9.68 0.93 1.06 1.90 3.56 199899 12.84 9.13 5.15 15.33 10.90 6.14 15.92 5.95 15.03 7.66 0.99 1.06 1.94 2.73 19992000 13.91 10.63 5.77 17.01 13.01 7.05 15.42 6.76 17.54 9.15 0.48 0.52 1.84 3.38 200001 8.43 5.80 2.33 10.28 7.07 2.85 5.44 2.65 8.03 3.63 0.50 0.62 1.48 1.96 2001-02 8.49 5.55 1.91 10.30 6.73 2.32 4.54 1.90 7.67 2.97 0.71 0.93 1.23 1.68

Gross working capital cycle (days) Net working capital cycle (days) Avg. days of debtors Avg. days of creditors Maruti Udyog Ltd. Du Pont Analysis (Rs. In crores) Ratios Net Profit Net Sales Total Assets Total Assets Turnover Ratio Net Profit (loss)Margin Ratio(%) Return on Total Assets(%) Equity ROE(%)

87.00 8.00 19.00 79.00

103.00 21.00 33.00 81.00

118.00 31.00 49.00 86.00

108.00 19.00 44.00 88.00

113.00 27.00 46.00 85.00

130.00 36.00 59.00 93.00

199596 414.87 4796.1 3626.21 1.32 11.56 15.29 132.29 3.14

199697 510.08 5897.59 3224.34 1.83 11.56 21.15 132.29 3.86

199798 836.3 6283.79 3178.53 1.98 7.51 14.85 132.29 6.32

199899 484.18 5973.16 4708.1 1.27 12.34 15.65 132.29 3.66

19992000 394.1 7121.3 5529 1.29 18.07 23.27 132.3 2.98

2000-01 (280.2) 6867.1 6132.2 1.12 (24.51) (27.44) 132.3 (2.12)

From the above table, we can see that the ROE of MUL has been constantly declining since the financial year 1997-98. Up to 1996-97, the ROE was on an increase, but thereafter the sad story started as more and more MNCs began entering Indian Automobile Industry and MUL lost its market share to them. Ratio Analysis Ratios Margins ratios (%) PBDIT (NNRT) / sales PBDT (NNRT) / sales PAT (NNRT) / sales PBDIT (NNRT) / net sales PBDT (NNRT) / net sales PAT (NNRT) / net sales Returns ratios (%) PAT (NNRT) / net worth PAT (NNRT) / total assets PBIT (NNRT) / capital employed PAT (NNRT) / capital employed Liquidity ratios (times) Long term debt / equity Total debt / equity Current ratio 199596 14.28 12.21 6.41 19.26 16.46 8.65 49.46 11.97 57.44 30.76 0.30 0.34 0.99 199697 13.65 12.66 6.55 18.02 16.72 8.65 39.93 16.14 55.07 31.85 0.06 0.13 1.19 199798 16.84 16.22 10.06 22.27 21.45 13.31 45.96 25.75 56.62 39.03 0.01 0.08 0.95 199899 12.26 11.63 6.13 16.19 15.37 8.11 20.52 12.44 29.89 18.65 0.00 0.06 1.45 19992000 8.17 7.54 4.17 10.85 10.00 5.53 14.45 8.73 17.81 13.78 0.00 0.20 1.03 2000-01 1.25 0.47 (3.08) 1.66 0.62 (4.08) (10.29) (5.73) (7.22) (9.72) 0.12 0.44 1.09

Interest cover Gross working capital cycle (days) Net working capital cycle (days) Avg. days of debtors Avg. days of creditors

5.77 68.00 39.00 6.00 29.00

11.47 63.00 40.00 9.00 23.00

23.59 58.00 42.00 11.00 16.00

15.72 58.00 42.00 12.00 16.00

8.46 61.00 42.00 14.00 19.00

(2.91) 79.00 58.00 22.00 21.00

7 Effect of Liberalization and WTO

7.1 Liberalization has changed the mindset
It has changed the mindset, by ushering in foreign competition. Take the car industry for instance. In the 1980s, Maruti had a monopoly over the market, by creating a strong supplier base that was supported by the government. The customer had no choice but to accept the limited range offered. Today there are lots of new players in the auto industry, both local and foreign such as the Japanese. Maruti has upgraded its models and diversified its range, in order to effectively compete with other suppliers. With the liberalization of the Indian economy, the passenger car industry was finally deregulated in 1993 and many companies, both Indian and foreign, announced their plans to enter the market.

7.2 Effect of WTO

7.2.1 Breathing in WTO's world The World Trade Organization (WTO) regulations, which India has accepted, provide that countries cannot discriminate against foreign goods. This could be seen as 'arbitrary' and 'unfair'. The government might not be able to impose higher custom duties, but it can Ensure that this "flooding" of the Indian market with cheaper, more polluting cars will not have serious repercussions on the growing problem of air pollution in cities. This can be done through domestic norms and regulations. WTO allows governments to adopt domestic regulations, Standards and emission norms for the protection of the environment and the health and safety of its people, as long as these norms are used to regulate both domestic and foreign producers without discrimination. The import of old cars could seriously impact the environment. Firstly, it is important to note that under current emission norms, only Delhi is to implement EURO I norms and has moved to EURO II in April 2000. The Mumbai High Court also ordered similar norms. These states can refuse to register cars that do not meet these norms. But the rest of urban India - also reeling under smog and disease - is still scheduled to go in For EURO I norms in 2000 and EURO II in 2005. This means that as of today, India cannot stop imports of non-EURO I compliant technology, which became obsolete in Europe in 1996, and it cannot stop non-EURO II compliant technology till 2005, which will become obsolete in Europe in 2000. Unless India upgrades its emission norms urgently and makes all of India EURO II compliant by 2000, India can become the world's biggest dump yard of obsolete and polluting technology.

Thirdly, India does not have a taxation system that would ensure that old cars are phased out. This lacuna could easily make the deadly import of second-hand cars even more persistent as it basically means that once such a vehicle enters an Indian city, it will stay and pollute for life. 7.2.2 WTO Regime and Its Impact on the Indian Automobile Industry The Society of Indian Automobile Manufacturers (previously known as Association of Indian Automobile Manufacturers) requested RIS to conduct a study highlighting the implications of the WTO regime on the Indian automobile industry. The study analyses in detail the implications of the phasing out of quantitative restrictions (QRs) on the automobile sector in India. The study adopts a method of analyzing in detail the productwise phase-outs in three phase-out periods given the structure-conduct-performance of the sector prior to the phase out. The liberalization of Indias automobile sector is contrasted with the experience of other developing countries, which have gone in for removing the QRs on automobiles. The product-wise structures of tariffs, both existing and those committed in the Uruguay Round, have been analyzed to draw lessons on the nature of protection in place with respect to the automobile sector in other developing countries. In addition to tariff protection, different countries have adopted several other measures to protect their respective automobile sectors. In the light of this analysis, the study makes recommendations for the automobile policy in India. This study has been published and circulated widely. The SIAM has now designated RIS as its adviser on WTO matters. Indias commitment to GATT and WTO agreements on Quantitative Restrictions (QRs), on Tariffs, and on Trade-Related Investment Measures (TRIMs) has important implications for the Indian automotive industry. Domestic policies also affect the Indian automotive industry, but these are unlikely to change in the near-term. Small-scale sector reservations are most counter-productive and impact auto ancillaries significantly.

Quantitative restrictions (QRs) In April 2001, India abolished those quota restrictions or import licenses allowed under Article 18B of the GATT. India signed the GATT in 1947, but was excused from having to lift QRs due to the strained balance of payments situation. India has, therefore, been able to rely considerably on import quotas and import licensing as a policy tool for the last fifty years. Now that India has a considerable foreign exchange cover, it has been forced to meet its GATT commitments. However, 600 items are still covered by quota restrictions, including items such as eggs, food grains, gold and silver jewellery, safety matches, granite, and films and tapes. This is because Article 18B of the GATT allows continuing quota restrictions on any item that might threaten a countrys national security,

Only some restrictions lifted...

600 still remain

or human and animal health.

Tariffs

The lifting of import licensing has made tariffs the Governments main trade policy tool. Customs duties to be cut by 30% from 1990 level Duties on manufactures to be capped at 25% and 40% No caps on duties on metals and consumer goods Under the WTO, India has committed to reduce its customs duties by 30 per cent from the 1990 base level. Duties are now, by and large, in line with that commitment, except for those on liquor, which are still very high. In addition, India has committed to bind or cap its tariffs on manufactured products at 25 per cent and 40 per cent. Tariffs greater than 40 per cent must be brought down to this level. Those less than 40 per cent must be reduced to 25 per cent. Automotive ancillaries will also be affected by these rates. However, India is not bound to reduce tariff rates on products such as nonferrous metals, petroleum and related products, and all types of consumer goods.

Trade related investment measures (TRIMS)

Export requirement eliminated Local content requirement will go in the next few years

The WTO provision on TRIMS prohibits host countries from imposing 2 trade-affecting commitments on foreign investors. The first is an export requirement, which India has, by and large, abolished. The second is a local content commitment. The automobile sector is still bound by this requirement. India was to have abolished it on 1 January 2000, but asked for an extension. But India will have to do away with this requirement soon, since it has tied its abolition to the phasing out of quota restrictions.

Auto Expo 2002

Though, the AutoExpo 2002 ended on January 21, the exhibitors and participants have now plenty of time to review the gains achieved during one week mela of automobiles. While the murmurs of discontent and dissatisfaction from the performance of previous Auto Expos were already audible, the decibel level has only increased this time. Some of the biggest names in Indian automobile industry like Maruti Udyog and Bajaj Auto were conspicuous by their absence from the Expo this year and that rubbed off some of the sheen from this biennial event. The Expo received more footfalls this year in comparison to the last year going over 1 million. But, for many of the exhibitors increasing footfalls mean more damages to the exhibits, more manpower to manage the crowds, and less time dedicated to the business visitors. The loss of quality time in fact has forced many organizations to rethink their strategy for the next Expo. Highlights@AutoExpo2002 This was the 6th Auto Expo to be organized in Delhi. This time, Confederation of Indian Industries, Society of Indian Automobile Manufacturers, and Automotive Component Manufacturers Association of India organized the Expo jointly. In total 900 companies participated in the Expo covering 15 Pavilions and 60,000 sqms of area. Participation from the overseas companies Stands at 150 that can be termed good after considering the global gloom in automobile sector. Business@AutoExpo2002 Auto Expo in total saw the business transaction worth INR 28.27 crore, out of which export orders were worth US$ 7.63 million. According to a press release by the organizers, 9 joint ventures were announced during the Expo of which 3 were the technical collaborations and rest of them both technical as well marketing collaborations. 117,400 business enquiries were generated during the Expo, many of which are expected to materialize in the coming days. The Expo attracted 120,000 business visitors with 1,000,000 general visitors in tandem. Newlaunches@AutoExpo2002 Like all previous editions of Auto Expo, this Expo also marked the launching pad fore many products. Celebrated auto designer, Dilip Chabria, showcased many of his new designs at the Expo including, Single built on the Hero Honda CBZ, Attractor built over Mahindra tractor, Infidel a completely new sedan prototype, and Lextran Orion a new luxurious passenger bus. German motor company BMW spell bounded the visitors with an array of new products like X5, new 7 series, and Aria coupe. Not to be outdone were Mercedes Benz, who showcased C Class Sports Coupe, M Class, SLK, and CLK Cabrio.

Fiat showed its enthusiasm recently gained success with the special sports edition of Palio signed by non other than batting maestro Sachin Tendulkar. They also showcased the Ferari used by Michael Schumacher. From Indian automakers, TELCO launched its TATA Sedan to be launched in the market soon. Worlds largest two-wheeler manufacturer Hero Honda was on hand with its multiple offerings so were other twowheeler manufacturer like TVS and Eicher.

Future Outlook

Demand projections envisage a nine per cent increase in the demand for passenger cars, but one wonders whether this demand can be met. All is not smooth sailing for the automotive industry. It has been hit by spiraling prices of cold rolled coils and sheets, one of its main imported steel have gone up, and the continuous depreciation of the rupee vis--vis foreign currencies has made steel even costlier. The increase of excise on steel and pig iron has also jacked up costs. Taxes, including customs duties, contribute to two-thirds of the total vehicle price. Another factor acting as a drag on the automobile industry is that its growth is intrinsically linked to the growth of the ancillary units producing components. Over 5,000 ancillary units manufacture about 50-60 per cent of the components that go into the finished products. These are unable to keep pace, either technologically or financially, with the needs of the automobile industry. Over the last five years, investments in the components industry have been just 30-40 per cent of what is required. The Association of Indian Automobiles Manufacturers (AIAM) has now called for a national policy consensus on the automobile industry so as to make it a foreign exchange surplus sector. The government should take policy initiatives to improve the technology, productivity and competitiveness of this sector, says the Associations President Abhay Firodia. The authorities should remember that the automobile industry has, the world over, spearheaded a nations economic development and established its international competitiveness. A strong domestic manufacturing base is a pre-requisite for successful exports, and it is necessary to accumulate surplus to build up the superstructure. Towards this end, the industry has accorded priority to producing high quality, fuel-efficient, safe and environment friendly vehicles of international standards. It is unlikely that India can really compete with the Japanese on the export front in the foreseeable future, as far as completed cars are concerned. However, India could conceivably set up facilities, in collaboration with world leaders, to manufacture selected automotive products that could be profitably exported. Another strategy would be to establish specialized facilities in the country for manufacturing components for foreign manufacturers with a buy-back arrangement. The quantum leap in the level of traffic in Indias main cities is bound to have a negative impact on future sales of car. Especially if city fathers introduce legislation that limits the movement of these vehicles on the roads. If that happens, the passenger car manufacturers in India will have to work out new strategies to sell their vehicles. The latest trend of production and sales figures does not augur well for the industry. After the most uninterrupted boom period in living memory, 1990-91 has shown an estimated drop in production figures. In future, cars in India may well be available off the shelf- with not all that many eager buyers waiting to take them off!