Analysis of the Automobile industry

(4wheeler segment)

Alfred Barretto

503

Priyanka Kulkarni 540 Rohit Gunwani 547

Indian market overview

Beginning from the era when there were only a few car varieties in Indian market, the automobile industry has come up a long way with a diverse array of cars. A continuous and somewhat irreversible economic liberalization since the early 1990s in India has resulted in making the country one of the prime business destinations for many global automotive players. The passenger car industry was de-licensed in 1993.The automotive sector in India is currently growing at around 18% per annum and the future prospects of the automotive sector are also reflective of the economic resilience of the country. The norms for Foreign Direct Investment and import of technology too have been progressively liberalized over the years for manufacture of vehicles (including passenger cars) in order to make this sector competitive globally. At present, 100% FDI is permissible under the automatic route and this includes passenger cars. The import of technology/technological up-gradation with a royalty payment of 5% without any limit on the duration and a lump sum payment of USD 2 million is also allowed under the automatic route in the automotive sector. India today has over 15 manufacturers of passenger cars & multi utility vehicles, over 10 manufacturers of commercial vehicles. India now occupies the seventh position globally in automobile productions at 1,40,49,830 units during 2009-10. In 2009 itself, India emerged as the Asias fourth largest exporter of automobiles, behind Japan, South Korea and Thailand. The passenger vehicle segment and commercial vehicle segment have all recorded an impressive growth rate of 24.55% and 15.10% respectively over the corresponding period of the previous year. The automotive industry had an investment of about USD 10 billion in 2002-03 which has gone up to more than USD 16 billion in the current year. The industry has already attained a turnover of more than USD 32 billion in 2009-10 and provides direct and indirect employment to over 13 million people. The contribution of the automotive industry to GDP has risen from 2.77% in 1992-93 to more than 5% in the recent years and the automotive industry is currently making a contribution of 17% to the overall indirect tax collection by the Government of India. Despite the economic slowdown in 2008, 2009 and for some part of the current year the Indian automobile sector continued with its growth story, especially in the passenger vehicles segment. The passenger vehicle market, which constitutes nearly 80% of vehicle sales, demonstrated immense growth potential as the passenger vehicles stock stood at around 11 per 1,000 people in 2008. The proportion of vehicles to the size of the population is very low, with less than 10% owning a passenger car. However presently due to increasing incomes, increased willingness to borrow there is a potential of the demand for car to increase by almost double by the end of the decade. Thus looking at

this potential many car manufacturers around the world are eyeing investment in India and hence are entering through joint ventures with local firms. The sale of commercial vehicles is on a rise because of industrial growth, road network expansion and cheap credit. Indias current largest markets are Asia and Africa but with bettered quality & technology they are looking to make a mence in the European region. The introduction of the range of new products and also the increase in investment in the small car segment saw a 19% year on year increase in car sales in the year 2010 this was supported by the governments stimulus package, expanded dealership networks, pre-emptive spending before an anticipated price hike in April. The small car segment has been the centre of attraction with most manufacturers planning or already launching small cars to reap benefits out of the same with Ford Motor launching its Figo & GM launching Beat small car and Cruze compact sedan. The market is expecting to increase because of increase in demand for affordable small cars & demand from less penetrated segments, such as rural areas. A number of companies are dominating the Indian automobile industry, but like in any other sector, the automobile sector also has got top 10 players. When talking about top automobile companies, one name that would come in most of our minds is Maruti Suzuki and this company has consistently been the leader in the automobile industry in India. Tata Motors is leading the commercial vehicle segment with a market share of about 64%.Maruti Suzuki is leading the passenger vehicle segment with a market share of 46%.Hyundai Motor India and Mahindra and Mahindra are focusing expanding their footprint in the overseas market.

Top automobile companies in India

Maruti Suzuki India Limited Hyundai Motor India Limited Tata Motors Mahindra & Mahindra Limited General Motors India Private Limited Honda Siel Cars India Limited Toyota Kirloskar Motor Private Limited Hindustan Motors

Some details regarding these companies can be obtained from the content given below:

Maruti Suzuki India Limited:

As mentioned earlier, Maruti Suzuki India Limited is leading the automobile industry in India for quite a longer number of years. The company began its journey in the year 1981 with its name as Maruti Udyog Limited, and the company began to attract the market when it introduced its popular four-wheeler model Maruti 800. It got its present name in the year 2007.

Hyundai Motor India Limited:

This company was founded in the year 1998 and it is second largest car manufacturing company in India, which was established as a subsidiary of auto giant of Korea, Hyundai Motor Company. The company captured the hearts of Indian car lovers with the introduction of its Santro car model and now is continuing its dream run with the i10s & i20s.

Tata Motors:
Even though, Tata Motors holds the third position in the automobile industry, the company has occupied the first position in the commercial car manufacturing section. In the luxury car segment, the company has a market share of 6.4%, while in the case of multi-utility vehicles, its market share is 31.2%.

Mahindra & Mahindra Limited:

Mahindra & Mahindra ltd, which is a part of the Mahindra Group holds the pride of being the largest company in the segment of sport utility vehicle. During the year 2008, the company has sold 10,641 units of utility vehicles, which this number has raised to 15,296 vehicles in the year 2009.

General Motors India Private Limited:

General Motors India Private Limited is a subsidiary of the giant in automobile industry known as giant General Motors.

Honda Siel Cars India Limited:

This company is joint venture between an Indian company called Siel limited and Japanese company Honda Motor Company ltd., which began its journey in the year 1995.

Toyota Kirloskar Motor Private Limited:

Toyota Kirloskar Motor Private Limited is a joint venture between Kirloskar Group and Toyota Motor Corporation belonging to Japan. The company has introduced some of the popular model cars like Camry, Fortuner, Corolla, Land Cruiser Pradeo, Innova and now the Etios Liva

Hindustan Motors:
Hindustan Motors are the manufacturers of the great car, which can still be found in Indian roads named as Ambassador. This model car is still being used as government limousine and as taxi cabs in some parts of India. It has collaborated with Mitsubishi Motors Japan in the year 1998 and introduced products like the Cedia, Lancer, Pajero, Montero, Outlander, Lancer EVO X.

Passenger cars
Maruti Suzuki Tata Motors Hyundai Mahindra & Mahindra Honda Toyota Hindustan Motors General Motors Fiat Ford Volkswagen Audi BMW Mercedes-Benz Nissan Skoda Volvo Sonalika (ICML) Premier Motor

Commercial vehicles
Tata Motors Ashok Leyland Swaraj Mazda Volvo MAN AMW ITEC Force Motors Mercedes-Benz Hyundai Mahindra Navistar Eicher Motors

SWOT analysis

Strengths

1. Good investment avenue for car manufacturers due to easy availability of labour, increase in
demand for vehicles, technological & cost advantage since India are low cost producers of steel. 2. Increasing number of joint ventures is helping to bring more expertise & technology in the market. 3. Stability of the government leading to security over policy issues.

Weaknesses
1. More demand for small cars hence affecting sales of premium car segment. 2. Cost of production high because of difference in infrastructural development & electricity costs.

Opportunities
1. Increasing wealth resulting in increase in demand for premium segment vehicles. 2. Demand from less penetrated areas like the rural areas. 3. Commercial vehicles are benefiting from the joint ventures.

Threats
1. High import tariffs can affect the growth of hybrid & premium cars.

2. Fees for local testing of new vehicles can acts as a deterrence to car manufacturers.
3. Increase cost of raw materials particularly for steel and rubber. 4. Increasing oil and petrol prices resulting in discouraging sales.

Porter's Five Forces Analysis - Indian Automobile Industry

Now after understanding the Indian Automobile Industry, it is now time to understand the attractiveness of this industry from a business perspective which is independent of any manufacturer. We will be analyzing the following forces of the Porters recommended diamond model.

http://www.siamindia.com/scripts/market-share.aspx

Threat of new entrants

This aspect is looked at from the following aspects:

1. Economies of Scale Setting up a plant for car manufacturing requires a huge amount of
investment. Therefore only an established player can achieve economies scale because of the trust and recognition of its brand. However this depends also the segment the vehicle is in. Because for a premium segment vehicle this concept is not applicable because these are manufactured on order and not based on potential demand. Thus the treat of new player in the general segment is low while the premium segment involves established players around the world so in this case the threat of a new entrant would be higher. Thus depending on the segment the threat varies. Attractiveness for the industry: Favourable (in general)

2. Product differentiation There is high amount of differentiation in terms of the type of the vehicle,
the technology & price. But again the differentiation should be of relevance and economy to the customer. So in case of Mahindra Reva or a Nissan Leaf which are electric cars there is low threat to the existing segment unless there are developed in terms of relevance and economy. Thus a new entrant would only be a threat if he could counter on these factors to shake up the existing players in the market. Attractiveness for the industry: Unfavourable (based on relevance & economy)

3. Brand identity This plays an important role in buying a vehicle because it is the label of trust and
reliability. Thus companies are making themselves aware through their products and offering them huge after sales support especially brands like Maruti, Toyota and that is the reason why they are selling more because they have been able to create a sense of trust and ease for the customers. Thus this is the biggest barriers to break. Attractiveness for the industry: Favourable

4. Switching cost The cost to switch is high as an average person might use a car for five years or
more thus creating an immediate switch is difficult. Attractiveness for the industry: Favourable

5. Access to channels of distribution Another important factor on which drives the demand for this
type of product is the channel distribution. If it is not located close to the market then it is difficult to come close to the customer and make itself available. Most of the distributors are multi-brand distributors and exclusive dealership is a costly proposition that can be explored only by top brands. Multibrand dealers increase the competition among rival firms. Attractiveness for the industry: Unfavourable

6. Capital

requirement There is huge requirement of capital not only for manufacturing and

assembly but also distribution thus this could act as a deterrence to new players. Attractiveness for the industry: Favourable

7. Access to technology There are patented technologies that the company like the CDI of Fiat,
Kompressor of Mercedes have and do not have access to. Thus these firms have an advantage of this technology resulting in a high barrier to new players. Attractiveness for the industry: Favourable

8. Access to raw material India is a low cost producer of steel. A number of OEM manufactures
have base in Pune and Bangalore, which are the main hubs for car manufacturing in India. Also labour is cheap in India. Infrastructure however, can pose to be a problem as India is not very developed on that front. The raw materials available in India are globally capable but not of world class quality so they have to largely dependent on global sources. Thus due to lack of access of quality raw materials. The industry is unfavourable. However, in terms of access to all the other required raw materials, the industry can still be considered favourable. Attractiveness for the industry: Favourable

9. Government protection
which have a duty of 10%.

- The government wants development of domestic industries so it has

levied an import duty ranging from 10, 60 , 100% on all types of vehicles except commercial ones

Attractiveness for the industry: Favourable

Bargaining power of buyers

1. Number of buyers There is an increasing demand for vehicles especially in the low & mid-size
segment thus the bargaining power of the buyer is higher in this segment whereas as in the high & premium segment due to higher technology & safety features the bargaining power is lower. Attractiveness for the industry: Unfavourable (Low & mid-size segment) Favourable (High & Premium segment)

2. Buyers threat of backward integration The buyer does not have the capacity and the financial
muscle power to go backwards. Attractiveness for the industry: Favourable

3. Industrys threat of forward integration The industry has the brand image and financial muscle
to go ahead and setup exclusive showrooms. Hence this turns out to be a huge threat for existing dealers. Attractiveness for the industry: Favourable

4. Contribution to quality There is a huge contribution in terms of service on the part of the dealer.
Thus the after sale service becomes a very critical cog of product delivery. Attractiveness for the industry: Unfavourable

5. Buyers

profitability The automobile (auto) dealerships in India are showing a healthy

improvement in their credit quality, buoyed by surging business volumes, and enhanced capital structure and liquidity. The average operating margin was 2.50 to 2.75%, historically; however, the average margin has improved to about 3% in the past two years. The improvement in profitability was

supported by the surge in sale of vehicles in the past couple of years; the dealers benefitted from economies of scale, higher commissions, and increased share of revenues from the high-margin spares and services segment. (Source: Crisil) Attractiveness for the industry: Unfavourable

Threat of substitute products

1. Availability of substitutes There are substitute available within the four-wheeler segment in the
form of small cars, mid-size, estates, cabriolets, SUVs, MPVs, Sedans. The motor bikes, private vehicles could also act as substitute money hence the manufacturers of four wheelers have to showcase on the economy & space factor to attract sales. Attractiveness for the industry: Unfavourable

2. Switching cost - There is less switching since this is a high investment and high involvement
product for the average customer. So switching cost is high in terms of both, actual financial switching cost as well as psychological switching cost. Attractiveness for the industry: Favourable

3. Substitutes price-value The price value is lower compared to the four wheelers.
Attractiveness for the industry: Unfavourable

Bargaining power suppliers

1. Number of suppliers There are a number of OEM suppliers who manufacture components for
Indian automobile companies. Also, excepting a joint venture or a highly specialized compoment, these OEM manufacturers are not necessarily bound to a particular automobile manufacturing company. They can choose to serve more than one companies and the automobile manufacturing

companies too can source components from more than one supplier. The large number of suppliers available increases competition within suppliers and is thus beneficial to the automobile industry. Attractiveness for the industry: Favourable

2. Availability of substitutes In terms of the raw materials there are many substitutes in terms of
plastic, carbon fibre which are cheaper alternative to steel. Attractiveness for the industry: Favourable

3. Switching cost There is low switching cost as the supplier supplies parts which are critical and
customized to the need of the manufacturer. Attractiveness for the industry: Unfavourable

4. Suppliers threat of forward integration The knowledge and expertise of making a car is required
for this purpose so if the supplier gets an access to this or enters into a joint venture with an automobile he can use this knowledge along with its financial power to integrate forward but this is a rare instance. Attractiveness for the industry: Favourable

5. Industrys threat of backward integration The car companies can form alliances or take over
material supplying companies. Attractiveness for the industry: Favourable

6. Contribution to quality The role of the supplier is very critical to the ultimate quality of the vehicle
as the cars are needs to be reliable and safe for the passengers hence the compromise on these factors could turn out to be fatal. Hence the supplier has an upper hand in this case. Attractiveness for the industry: Unfavourable

7. Contribution to cost The cost of a component adds up to the final price of the vehicle. Hence the
cost factor has a role to play especially in low cost vehicles in order to deliver at the promised price. Attractiveness for the industry: Unfavourable

8. Industrys importance to supplier With rising incomes and need for ease & convenience in
travelling there is rising demand for vehicles. So looking at the potential growth in this industry in the future we can see the importance rising for the supplier. Attractiveness for the industry: Favourable

Rivalry among competitors

1. Competitors There are many competitors are hawking in the market. Thus every move is
watched even Tata was coming up with its small cars other players like Ford, Hyundai & GM were gearing up to give stiff competition. Toyota also has been bringing many different models out to offer a wide product range to the customers. Attractiveness for the industry: Unfavourable

2. Industry growth - The Automotive industry in India is one of the largest in the world and one of the
fastest growing globally. Carmakers like Tata, Mahindra are going global to take advantage of the resources there and also to increase its playground for sale.

Attractiveness for the industry: Favourable

3. Fixed cost There is huge amount of fixed cost involved in terms of machinery, technology,
labour cost & rising raw materials costs. As a result the threat of new entrants is considerably low, which eventually would result into less fierce competition. Attractiveness for the industry: Favourable

4. Openness of terms of sales There is complete transparency wherein the customer is informed
about the EMI, price is displayed in the ads, on the net and on showroom cars. Even during the sale of the vehicle the customer is given the complete details of the accessories in the car, services he is eligible for. Attractiveness for the industry: Unfavourable

5. Strategic stakes In most cases the automobile is strategically important business.

Attractiveness for the industry: Unfavourable

Conclusion
There was a survey conducted by Mazars and it was interesting to note that when asked about the companys plan of expansion that they wanted a new facility and capacity expansion rather than going international with a strong 54% for domestic expansion.

The survey showed that the challenges faced by the industry was more due to inadequate technology, infrastructure, increase in competition from China and also increase in imported products which means that it would need a lot of support in terms infrastructural and technological development which would be possible through a technological exchange through joint ventures. Government of India is drawing up the Automotive Mission Plan (AMP) 2006-2016 that aims to make India a global automotive hub. The objective is to draw an innovative plan of action with full participation of the stakeholders and to implement it in mission mode to meet the challenges coming in the way in the growth of the industry. Also 40% of respondents said they would require help from the government for improved infrastructural facilities and 24% wanted tax incentives to promote and develop growth in the auto sector. Also

when consumers in India buy a car they are most cost & fuel efficiency conscious according 66% of the respondents whereas only 18% value brands thus riding home the fact that fuel efficiency and affordability are their key decision factors. The survey also points out that in the next three years it is the small & mid size car segment which will foresee a growth. Thus pointing out, that people owning a two wheeler will now transition to four wheelers of cheaper options like Tata Nano facilitated by cheaper loan facilities.