India zips ahead 615
Feb 24, 2005 India zips ahead By Indrajit Basu
KOLKATA - Although its auto market is shrinking and is likely to be dampened further in the next few years, China continues to attract the biggest chunk of auto sector foreign investment in Asia. But that's about to change. Judging by the growth rate that India's auto sales recorded in 2004 and the slew of new launches that the country is poised to see this year, India seems to have finally arrived in the big league of Asian car markets, making foreign investors sit up and take notice.
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With almost 24% growth in car sales in 2004, India has emerged as the fastest-growing car market in the world, outstripping China's estimated 13.7% growth last year. But India's potential looks even more promising, so much so that investment banking firm Goldman Sachs has predicted that it will have the largest number of cars by 2050. However, at this point, India is still far behind in terms of car sales compared to other Asian giants like China, South Korea and Japan. But considering that India's auto industry really took off only as recently as 2000, it has done amazingly well.
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Sales of pbuttenger vehicles crossed the million-figure mark (1,044,597 units) in 2004, making India the fastest-growing in this segment. The growth rate of other segments was equally impressive. Sales of commercial vehicles grew at 28%, two-wheelers at 17%, three-wheelers at 13% and exports went up by 36%. Auto analysts say India's chances of staying ahead of China in terms of growth are bright, given that the Chinese government's efforts to cool down the scorching economy are likely to dampen demand there.
Of course, India's total auto tally in 2004 is nowhere close to China, which sold about 2.2 million vehicles. But analysts foresee that China's days of scorching car sales, which registered 71% growth rate in 2003, are over, dampened primarily by Beijing's moves to tighten easy credit. "The biggest factor behind the slowdown in sales is uncertainty over the future of the economy created by government policies designed to cool down the overheated economy," says a report prepared by Chinese auto sector analyst Chi Hung Kwan. "Additional factors include more stringent screening of automobile Debt Loans and higher crude oil prices, which have raised the cost of automobile ownership."
But that's not just a uniquely Chinese trend. Globally, too, auto markets are slumping. While North America and Japan reported flat or negative growth in 2004, France and Germany shrank by 2% and 5%, respectively, Spain and the United Kingdom grew by a meager 2% each. Italy's decline was the highest, at -19%. Canada's auto market also shrank by 5%.
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"Clearly, then, India has emerged as a significant auto market," says Dilip Chenoy, director general of the Society of Indian Automobile Manufacturers (SIAM), "and that is due to the overall shift in government policies since 2000." Important features of these policies include steps to make manufacturing compebreastive by creating export promotion zones, expanding infrastructure, like power, roads and ports, bringing down transaction costs, developing industry-specific clusters and freeing industries from excessive regulations. "Besides, the auto industry per se has also undergone several other changes in the way it conducts business. For instance, most of the original equipment manufacturers OEMs are now following ISO 9000, 9001, 14000 series and other best practices such as supply chain management. Local auto makers have also started spending on research and development," adds Chenoy.
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The car market is also undergoing significant structural shifts. "One such major shift," says Chenoy, "is easy finance. Today, over 80% of the cars sold are financed, thanks to the continuously sliding interest rates for the past five years." Consequently, car upgrades have become frequent and multiple ownership a norm. "As the number of double-income families has gone up and so has disposable income, changing lifestyles with greater need for mobility and pleasure has made cars an absolute must-have," says Neeraj Bhatia of TNS India, a market research outfit.
According to Rajesh Jejurikar, vice president of Indian auto major Mahindra and Mahindra, booming sales have "expectedly" changed the perception of foreign investors, for whom the Indian market, or rather the lack of it, was a laughing stock not so long ago. "The past two years have completely changed the way the world views India," he says. "Now, everybody wants to be here."
In the past four years, India has not only seen launches of a plethora of foreign marques, but owing to "its low-cost, high-quality manufacturing", says P Balendran of General Motors, India, it has also emerged as a significant outsourcing hub for auto components and auto engineering design, rivaling Thailand. This is why, perhaps, India is now getting all the variety and attention that were so far reserved for mature car markets. A slew of new models is being lined up for launch this year. Creating a landmark of sorts, 30 new cars will hit Indian roads this year, including 11 "super luxury" cars from celebrated brands like Audi, BMW, Ferrari and Alfa Romeo. The roll-out in the luxury segment has already begun with a Bentley model, two Porsche best-sellers and Mercedes Benz's Maybach. "This is the biggest launch lineup I have ever seen in India," says Hormazd Sorabjee, editor of Autocar India.
This confidence is reflected in investments as well. The next three to four years, says SIAM, could see the industry pump in as much as $5 billion, "out of which foreign direct investment FDI would be close to $3 billion - higher than ever," says SIAM's Chenoy. Again, that would be miniscule compared to China, which is expected to attract $13 billion in 2005 alone. "As per our understanding, China will continue to attract higher FDI flows as compared to India, both in the short and long term," says Chenoy. "The reasons are that China offers better facilities and a larger domestic market."
Still, feel experts, India cannot be compared with China on mere numerical terms since one, the country's auto market is more stable than China's, and two, it has acquired its own growth momentum, says the third BRIC (Brazil, Russia, India, China) report from Goldman Sachs. The report adds that in line with the industry's projection, India will add a million cars a year from next year and sales volumes will overtake Germany by 2010 and Japan by 2012, to become the world's fourth largest market by 2020. And by 2050, Indians will buy every sixth car produced in the world.
Indrajit Basu is a Kolkata-based equity-analyst-turned-journalist with more than 12 years of experience in business-finance and technology journalism. Besides writing for Asia Times Online, he also writes for US-based publications, as well as IT companies.