Project Report : Marketing Strategies In automobile Industry

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

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

The automotive industry has certain trends it has to follow, just like fashion designers and musical composers. In times of recession and decreasing sales there is less room to take chances and manufacturers are prone to follow the common pattern as a safer bet rather than releasing a controversial product or idea that might or might not be successful. However throughout the automotive industry's history, great innovators have "boldly gone where no man has gone before" to set new trends which have dynamically altered the industry as a whole.1880's & early 1900's About hundred years ago-The first motor car was imported-Import duty on vehicles was introduced.-Indian Great Royal Road (Predecessor of the Grand Trunk Road) was conceived. First car brought in India by a princely ruler in 1898. Simpson & Co established in 1840.-They were the first to build a steam car and a steam bus, to attempt motor car manufacture, to build and operate petrol driven passenger service and to import American Chassis in India. Railways first came to India in 1850's In 1865 Col. Rookes Crompton introduced public transport wagons strapped to and pulled by imported steam road rollers called streamers. The maximum speed of these buses was 33 kms/hr. From 1888 Motors Spirit attracted a substantial import duty. In 1919 at the end of the war, a large number of military vehicles came on the roads. In 1928 assembly of CKD Trucks and Cars was started by the wholly owned Indian subsidiary of American General Motors in Bombay and in 1930-31 by Canadian Ford Motors in Madras, Bombay and Calcutta In 1935 the proposals of Sir M Visvesvaraya to set up an Automobile Industry were disallowed. 1942 Hindustan Motors Ltd incorporated and their first vehicle was made in 1950. In 1944 Premier Automobiles Ltd incorporated and in 1947 their first vehicle was produced. In 1947 the Government of Bombay accepted a scheme of Bajaj Auto to replace the cycle rickshaw by the auto and assembly started in a couple of years under a license from Piaggio. Manufacturing Programme for the auto and scooter was submitted in 1953 to the Tariff Commission and approved by the Government in 1959. In 1953 the Government decreed that only firms having a manufacturing programme should be allowed to operate and mere assemblers of imported CKD units be asked to terminate operations in three years. Only seven firms namely Hindustan Motors Limited, Automobile Products of India Limited, Ashok Leyland Limited, Standard Motors Products of India Limited., Premier Automobiles Limited, Mahindra & Mahindra and TELCO received approval. M&M was manufacturing jeeps. Few more companies came up later. Government continued with its protectionism policies towards the industry. In 1956, Bajaj Tempo Ltd entered the Indian market with a programme of manufacturing Commercial Vehicles, and Simpson for making engines.1960's In sixties 2 and 3 Wheeler segment established a foothold in the industry. Escorts and Ideal Jawa entered the field in the beginning of sixties. Association of Indian Automobile Manufacturers formally established in 1960. Standard Motors Products of India Ltd. moved over to the manufacture of Light Commercial Vehicles in 1965.1970's Major factors affecting the industry's structure were the implementation of MRTP Act, FERA and Oil Shocks of 1973 and 1979. During this decade there was not much change in the four wheeler industry except the entry of Sipani Automobiles in the small car market. Oil Shock of 1973 quickened the process of dieselization of the Commercial Vehicle segment. Three other companies, namely, Kirloskar Ghatge Patil Auto Ltd, Indian Automotive Ltd and Sen & Pandit Engg products Ltd entered the market during 1971-75. They ultimately withdrew in early eighties. During the seventies the economy was in bad shape. This and many specific problems affected the Automobile Industry adversely.1980's - The period of liberalized policy and intense competition First phase of liberalisation announced. Unfair practices of monopoly, oligopoly etc slowly disappeared. Liberalisation of the protectionism policies of the Government. Lots of new Foreign Collaborations came up in the eighties. Many companies went in for Japanese collaborations. Hindustan Motors Ltd. in collaboration with Isuzu of Japan introduced the Isuzu truck in early eighties. ALL entered into collaboration with Leyland Vehicles Ltd. for development of integral buses and with Hino Motors of Japan for the manufacture of W Series of Engines. TELCO after the expiry of its contract with Daimler Benz, indigenously improved the same Benz model and introduced it in the market. Government approved four new firms in the LCV market, namely, DCM, Eicher, Swaraj and Allwyn. They had collaborations with Japanese companies namely, Toyota, Mitsubishi, Mazda and Nissan respectively. In 1983 Maruti Udyog Ltd was started in collaboration with Suzuki, a Japanese firm. Other three Car manufacturers namely, Hindustan Motors Ltd., Premier Automobiles Ltd., Standard Motor Production of India Ltd. also introduced new models in the market. At the time there were five Passenger Car manufacturers in India - Maruti Udyog Ltd., Hindustan Motors Ltd., Premier Automobiles Ltd., Standard Motor Production of India Ltd. and Sipani Automobiles. Ashok Leyland Ltd. and TELCO were strong players in the Commercial Vehicles sector. In 1983-84 Bajaj Tempo Ltd. entered into a collaboration with Daimler-Benz of Germany for manufacture of LCVs. Important policy changes like relaxation in MRTP and FERA, delicensing of some ancillary products, broad banding of the products, modifications in licensing policy, concessions to private sector (both Indian and Foreign) and foreign collaboration policy etc. resulted in higher growth / better performance of the industry than in the earlier decades.

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

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

1:4 Automobile industry Wheels of ChangeIndia had its date with this wonderful vehicle first time in 1898. Then for the next fifty years, cars were imported to satisfy domestic demand. Between 1910 and 20's the automobile industry made a humble beginning by setting up assembly plants in Mumbai, Calcutta and Chennai. The import/assembly of vehicles grew consistently after the 1920's, crossing the 30,000 mark in 1930. In 1946, Premier Automobile Ltd (PAL) earned the distinction of manufacturing the first car in the country by assembling 'Dodge DeSoto' and 'Plymouth' cars at its Kurla plant. Hindustan Motors (HM), which started as a manufacturer of auto components graduated to manufacture cars in 1949.Thanks to the Licence Raj which restricted foreign competitors to enter the Indian car market, Indian roads were ruled by Ambassador Car from Hindustan Motors and the Fiat from Premier Auto Ltd. for many of the initial years.In 1952, the GOI set up a tariff commission to devise regulations to develop an indigenous automobile industry in the country. After the commission submitted its recommendations, the GOI asked assembly plants, which did not have plans to set up manufacturing facilities, to shut operations. As a result General Motors, Ford and other assemblers closed operations in the country. The year was 1954 and this decision of the government marked a turning point in the history of the Indian car industry. The GOI also had a say in what type of vehicle each manufacturer should make. Therefore, each product was safely cocooned in its own segment with no fears of any impending competition. Also, no new entrant was allowed even though they had plans of a full-fledged manufacturing program. The restrictive set of policies was chiefly aimed at building an indigenous auto industry. However, the restrictions on foreign collaborations led to limitations on import of technology through technical agreements.In the absence of adequate technology and purchasing power, the car industry grew at a snail's pace in the 60s.The demand for cars in 1960was to the tune of 15,714. In the next two decades the number increased to 30,989 i.e. a CAGR of only 3.5 per cent.The other control imposed on carmakers related to production capacity and distribution. The GOI control even extended to fixation of prices for cars and dealer commissions. This triggered the start of a protracted legal battle in 1969 between some carmakers and GOI. Simply put, the three decades following the establishment of the passenger car industry in India and leading upto the early 1980s, proved to be the 'dark ages' for the consumer, as his choice throughout this period was limited to two models viz. Ambassador and Padmini. It was only in 1985, after the entry of Maruti Udyog, that the car makers were given a free hand to fix the prices of cars, thus, effectively abolishing all controls relating to the pricing of the end product.In the early 80's, a series of liberal policy changes were announced marking another turning point for the automobile industry. The GOI entered the car business, with a 74% stake in Maruti Udyog Ltd (MUL), the joint venture with Suzuki Motors Ltd of Japan.The very face of the industry was changed for ever in 1983 with the entry of public sector Maruti Udyog in a joint venture with the Suzuki Corporation of Japan. Car sales grew by 42 per cent yoy in 1985 after Maruti 800 was launched. Thanks to MUL car sales registered a CAGR of 18.6 per cent i.e. from 1981 to 1990.In 1985, the GOI announced its famous broadbanding policy which gave new licenses to broad groups of automotive products like two and four-wheeled vehicles. Though a liberal move, the licensing system was still very much intact. MUL introduced 'Maruti 800' in 1983 providing a complete facelift to the Indian car industry. The car was launched as a "peoples car" with a price tag of Rs 40,000. This changed the industry's profile dramatically. Maruti 800 was well accepted by middle income families in the country and its sales increased from 1,200 units in FY84 to more than 200,000 units in FY99. However in FY2000, this figure came down due to rising competition from Hyundai's 'Santro', Telco's Indica and Daewoo's 'Matiz'.MUL extended its product range to include vans, multi-utility vehicles (MUVs) and mid-sized cars. The company has single handedly driven the sales of cars in the country cornering around 79.6% market share. With increasing competition from new entrants, this market share has plummeted to almost 62% in FY2000.A brief 3-year downturn till 1993 and car sales bounced back to register a 17 per cent growth rate in 1997.Since then, the economy slumped into recession and sales of cars remained quite stagnant FY97 and FY99.The Financial year 2000 has, however, been the turnaround year for the Auto industry with the economy looking up. The automobile industry, crossed the half million mark for the first time in FY2000.Overwhelmed by newer models from new and existing players had led to an impressive shift from a constrained supply situation to a surplus one. Within the past decade, about 30 models have entered the Indian market with a number of models still awaiting launch.The de-licensing of auto industry in 1993 opened the gates to a virtual flood of international auto makers into the country with an idea to tap the large population. Also the lifting of quantitative restrictions on imports by the recent policy is expected to add up to the flurry of foreign cars in to the country.The Indian Automobile industry registered one of the strongest growth rates in FY04. Aided by sustained economic recovery, the industry registered high growth rates in all major segments.

The growth story was led by Medium and Heavy Commercial Vehicles (M&HCVs) registering a 40% growth while Light Commercial Vehicles (LCVs) recorded a 32% jump in total sales. Passenger cars also registered an impressive 34% growth in FY04 and total sales volume crossed the 1 million mark for the first time. Interestingly, two wheelers registered the lowest but healthy growth rate of 13% in FY04. While motorcycle volumes tripped on a high base, scooters registered a 10%growth after 4 years of continuous decline. Three wheelers grew by 23% in FY04.

Apart from strong economic growth in all sectors, low interest rate regime, normal monsoon, continued infrastructure investment, fiscal measures like cut in excise duty (in case of cars), etc provided impetus for the growth. The year also saw a sharp 56% rise in export volumes with all the sectors registering more than 40% growth, signalling therising international competitiveness of the industry.Profitability improvements were recorded in companies across segments driven by rise in volumes and lower interest costs to some extent, notwithstanding the rise in prices of certain inputs like steel.

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

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

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

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

StructureThe Indian automobile industry can be broadly classified into:2 /3 WheelersPassenger CarsCommercial Vehicles (LCV/HCV/MCV)UV (Utility vehicles)Tractors

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

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

Mid-size segment (Rs 0.25-0.45 mn)Fiat Uno, Hyundai Santro, tata Indica, Maruti Alto etc.

Luxury car segment (Rs 0.45- 1mn)Tata Indigo, Honda City, Mitsibushi Lancer, Ford Ikon, Opel Astra, Hyundai Accent & others

Super luxury segment (above Rs 1mn)Mercedes Benz & other imported models

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

SegmentMarket Share (%)

Economy90.2

Mid-size and luxury9.8

Source:SIAM/ Auto Car India

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

Figure -Structure of Passenger Vehicle Market (India)

Trends in Passenger Car / Utiltity Vehicle Sales

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

Commercial Vehicle Sales Growth v/s IIP Growth

Demand for utility vehicles and tractors come from rural India. These vehicles have witnessed steady demand growth over the past few years due to successive monsoons, better procurement prices, improved irrigation facilities, and availability of finance.A strong in-house R&D capability allows a manufacturer to develop and introduce products at lower prices, thus saving costs of importing technology. However, Indian companies spend very little on R&D.Availability of quality components is another factor that determines smooth production without bottlenecks. High rejection rate of auto components has prompted several global majors like Ford, to get their international suppliers

1.6:Features of the automobile industryThe structure of the auto market has been changing at a faster pace along with the global changes in the Industry. There are several global automobile companies who were averse to come and invest in India ten years ago, now have kept India as a priority destination for their investment. Along with the entry of multinational auto companies, the profile of domestic auto companies too witnessed a structural change. The stiff competition to access market prompted companies to go for different models with differing qualities and efficiency. The market too expanded at a rapid pace with the entry of soft financial assistance from several financial institutions to middle income households.MNCs need to carefully plan their entry into emerging markets. Early commitment to a market often results in first mover advantages that are difficult to replicate. On the other hand, later entrants have the opportunity to learn from the mistakes of the first entrant. The Indian car market offers useful lessons in this context. In the 1990s, the Indian Government removed several restrictions in a bid to attract foreign investors into the automobile industry. Among the first to enter was Daewoo of South Korea, with its model Cielo, targeted at the upper end of the market. Other MNCs such as Ford and General Motors also entered the Indian market, followed by Hyundai, Honda, Toyota, Volkswagen etc.Most MNCs began their operations in India as joint ventures with local partners. Examples include Suzuki, G.M, Ford and Daewoo. With the exception of Suzuki, these joint ventures have become fully owned subsidiaries of the foreign partners. In all these cases, the local partners have just not had enough resources to chip in whenever the equity base has been expanded. Consequently, the foreign partners have pumped in the additional capital and raised their equity stakes

With the liberalization of the India economy, theRs 18,500 crore Indian car marketis being opened up to foreign investors. Several companies are setting up or have already set up operations in India to cater to the Indian market. There are several strategies by which a foreign enterprise can set - up Indian operations. This module aims to give the various entry options available to a foreign investor, especially for foreign direct investment. This module does not deal with portfolio investments.Broadly, entry strategies may be classified into two major types :-1. A foreign investor may directly set up its operations in India through a branch office or a representative office or liaison office or project office of the foreign Company ; or2. It may do so through an Indian arm i.e. through a subsidiary company set - up in India under Indian laws.Generally, setting up operations through an Indian arm is advisable, especially if the quantum of investment is huge.The impact of Indias initiatives in economic liberalization and globalization (post 1991) is most apparent in the automotive sector. Automotive industry is a key driver of economic growth contributing around four to five percent to the Indian GDP. Introduction of reforms and entry of international companies has intensified competition in the Indian automotive sector. This has resulted in the transformation of a sellers market (created mainly due to the Indian governments protectionist policies) into a buyers market. The changing structure of this industry has posed many challenges and opportunities to the market participants.Previously, Indian automotive market was characterized by weak air pollution regulations. In addition, low labor cost of maintenance and the psyche of Indian consumer to delay the discarding of the old vehicle reduced the scrap rate. All these factors resulted in prolonged operational existence of vehicle on Indian roads. The benefit of this practice is the comparatively higher revenues for automotive component suppliers, due to increased demand in the aftermarket. But recent pronouncement of GoI to prohibit polluting vehicles in the National Capital Region (NCR) is likely to force the old polluting vehicles off road. This will reduce the average life span of vehicles on road and the overall impact would be reduced per vehicle parts consumption.Two wheelers generate the highest volumes and are more popular in rural and semi urban markets primarily due to lower income levels and poor road conditions. Therefore, these could be classified as entry-level vehicles. Within two wheeler segments, progressively mopeds are likely to be replaced by motorcycles. With the growth in the family income of these rural and semi-urban buyers and the option of numerous used cars, it is expected that a significant shift would take place from two wheelers (mainly scooters) to four wheelers. Lucrative finance schemes have made the purchase of mid-sized cars really affordable. The present owners of the small car are likely to graduate to mid-size cars mainly due to declining importance of small car as status symbol and the marginal increment in repayment installment in the finance options.

Good performance of the economy has led to higher all round growth leading to high GDP growth of 8%. Excise duty reduction on passenger vehicles helped to reduce the ultimate price to the customer. Brisk activities on infrastructural development will give a boost to the automobile industry. Softening of interest rates and improved financing of second hand vehicles have made the purchasing of cars financially viable. Availability of finance in rural and semi-urban areas have led the low-end customers to put money in the purchase of vehicles. Emergence of India as a manufacturing hub for the automobile industry is a good sign for the countrys future prospects.

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

1.7:The landmarks along the way...1928-The first imported car was seen on Indian roads1942-Hindustan Motors incorporated1944-Premier automobiles started1948-First car manufactured in India1953-The Government of India decreed that only those firms which have a manufacturing program should be allowed to operate1955-Only seven firms, namely, Hindustan Motors Limited, Automobile Products of India Limited, Ashok Leyland Limited, Standard Motors Products of India Limited. Premier Automobiles Limited, Mahindra & Mahindra and TELCO received approval.1960 - 1970 -The two, three wheeler industries established a foothold in the Indian scenario.1970 - 1980 -Not much change was witnessed during this period. The major factors affecting the industry were the implementation of the MRTP Act (Monopolies and Restrictive Trade Practices Act), FERA (Foreign Exchange Regulation Act) and the Oil Shock of 1973 and 1979.1980 - 1990 -The first phase of liberalization was announced by the Govt. -With the liberalization of the Government's protectionist policies, the advantages hitherto enjoyed by the Indian car manufacturers like monopoly, oligopoly, slowly began to disappear.1991 -Under the Govt.'s new National Industrial Policy, the license raj was dispensed with, and the automobile industries were allowed to expand freely.1993 -With the winds of liberalization sweeping the Indian car market, many multinationals like Daewoo, Peugeot, general Motors, Mercedes-Benz and Fiat came into the Indian car market.1997 -The National Highway Policy was announced which will hopefully have a positive impact on the automobile industry. The Government also laid down the emission standards to be met by car manufacturers in India in the coming millennium. There were two successively stringent emission levels to be met by April 2000 and April 2005, respectively. These norms were benchmarked on the basis of those already adopted in Europe, hence the names Euro I (equivalent to India 2000) and the Indian equivalent of Euro II.1999 -The Honble Supreme Court passed an order directing all car manufacturers to comply with Euro I emission norms (India 2000 norms) by the 1st of May, 1999 in National Capital Region(NCR) of Delhi. The deadline was later extended to 1st June, 19992004 -Tata Motors becomes the first Indian auto company to be listed on the New York Stock Exchange.

2.1: Auto policy of the Government of India

VISIONTo establish a globally competitive automotive industry in India and to double its contribution to the economy by 2010.POLICY OBJECTIVESThis policy aims to promote integrated, phased, enduring and self-sustained growth of the Indian automotive industry. The objectives are to:- Exalt the sector as a lever of industrial growth and employment and to achieve a high degree of value addition in the country; Promote a globally competitive automotive industry and emerge as a global source for auto components; Establish an international hub for manufacturing small, affordable passenger cars and a key center for manufacturing Tractors and Two-wheelers in the world; Ensure a balanced transition to open trade at a minimal risk to the Indian economy and local industry; Conduce incessant modernization of the industry and facilitate indigenous design, research and development; Steer India's software industry into automotive technology; Assist development of vehicles propelled by alternate energy sources; Development of domestic safety and environmental standards at par with international standards.SIAM welcomed the announcement of Auto Policy, and feels that the policy would serve as a reference document for all stake holders and other interested parties.The Auto Policy has spelt out the direction of growth for the auto sector in India and addresses most concerns of the automobile sector, including-Promotion of R&D in the automotive sector to ensure continuous technology upgradation, building better designing capacities to remain competitive; Impetus to Alternative Fuel Vehicles through appropriate long term fiscal structure to facilitate their acceptance; Emphasis on low emission fuel auto technologies and availability of appropriate auto fuels andencouragement to construction of safer bus/truck bodies - subjecting unorganised sector also to 16% excise duty on body building activity as in case of OEMsThe policy has rightly recognised the need for modernising the parc profile of vehicles to arrest degradation of air quality. The terminal life policy for commercial vehicles and move toward international taxing policies linked to age of vehicles, are steps in the right direction.SIAM has always been advocating encouragement of value addition within the country against mere trading activity. However, this aspect has not been fully addressed. The Auto Policy allows automatic approval for foreign equity investment upto 100% in the automotive sector and does not lay down any minimum investment criteria.The recommendation of promoting passenger cars of length upto 3.8 meters through excise benefits is not in line with the free market concept and may lead to market distortion.However, with the Auto Policy in place, the automotive industry would get further fillip to become vibrant and globally competitive. The industry would get the required support from other Ministries and departments of Government of India in achieving the goals laid down in the auto policy

2.2: Role of Government in Automobile Industry

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

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

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

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

2.3: Impact of union Budget 2004-05

Budget Proposals / Measures No change in basic excise duty on automobiles other than tractors Peak rate of customs duty to be maintained at 20% Automobile companies entitled to 150% deduction of expenditure on in-house R&D facilities Reduction in customs duty for alloy and non alloy steel to 15% and 10% respectively. Excise duty on steel increased to 12% from 8%. Indications of continuing benign interest rate regime. Educational cess of 2% on excise, customs duties and Income Tax. Likely implementation of VAT from April 1, 2005 Strong thrust towards sustainable rural economic growth. Reduction in customs duty on copper as well as some other metals to 15%. Consortium of banks formed to ensure speedy conclusion of loan agreements andimplementation of infrastructure projects.Budget impact:Tractor manufacturers will benefit from increased demand for tractors once they pass on the benefits of excise duty exemption to the end consumers. The industry has just come out of a three-year slump, having registered a volume growth of 10% in FY04. Thus, the current exemption is likely to give a further boost to demand. The target of doubling the agricultural credit in three years is also likely to make more funds available to the farmers for investment in farm mechanisation.With major auto companies spending sizeable amount on product development and in-house R&D expenditure in recent times, deduction of 150% allowed on the same will encourage further R&D investments. With cost efficiency no longer the domain of any single player, future survival will depend upon the capability to offer more technologically competent products. From this perspective, the current move is a step in the right direction.The government has pushed for speedy implementation of infrastructure projects, which is a good sign for the auto industry, especially the CV manufacturers. In line with the international experience, improvement in road infrastructure will translate into increased demand for higher tonnage CVs.Reduction in customs duty on alloy and non alloy steel would have a positive impact on the auto components and automobile industry. However, it would be nullified to some extend by increase in excise duty on steel.

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

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

Overall, no significant impact for the automobile industry (other than tractors).

3: DemandThe demand for cars in the past was supply driven as demand did not match supply. This led to high premium and long waiting periods for the cars. But change in government policies coupled with aggressive capacity additions and upgradation of models by MUL in the early nineties led to increase in supply and subsequently reduced the waiting periods for economy cars.The demand for cars was suppressed by various supply constraints. The demand for cars increased from 15,714 in FY60 to 30,989 in FY80 at a CAGR of only 3.5%. The entry of Maruti Udyog Ltd (GoI-Suzuki JV) in 1983 with a "peoples" car and a more favorable policy framework resulted in a CAGR of 18.6% in car sales from FY81-FY90.After witnessing a downturn from FY90 to FY93, car sales bounced back to register 17% growth rate till FY97. Since then, the economy slumped into recession and this affected the growth of theautomobile industry as a whole. As a result car sales remained almost stagnant in the period between FY97 and FY99. CAGR recorded during the FY94-FY99 period was 14.4%, reaching sales of 409,624 cars in FY99. However, during FY2000, with the revival of economy, the segment went great guns posting a sales growth of 56%yoy. The table below indicates the past sales trend for cars -CarsFY94FY95FY96FY97FY98FY99FY2000

Volume209,203264,822345,486410,992417,736409,624638,815

Growth %yoy27.027.030.019.02.0-2.055.8

Source : SIAM

The demand for cars is dependent on a number of factors. The key variables are per capita income, introduction of new models, availability & cost of car financing schemes, price of cars, incidence of duties and taxes, depreciation norms, fuel cost and its subsidization, public transport facilities etc. 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 segmentthus 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.

SupplyThe 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 productionnumbers of passenger cars in the past few years.CarsFY94FY95FY96FY97FY98FY99FY2000

Production207,658264,468348,146407,539401,002390,355577,243

Growth %yoy27.227.431.617.1(1.6)(2.7)32.4

Source: SIAMThe 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.CapacityThe present production capacities is detailed in the table below. This has increased from an estimated 600,000 units in FY98 to the present 727,000 units in FY2000.Car CapacityFY2000Expected

Maruti Udyog250,000350,000

Hyundai110,000130,000

Telco100,000150,000

Daewoo72,000130,000

Ford India50,00070,000

Fiat India60,00060,000

General Motors25,000100,000

Honda Siel30,00030,000

Hindustan Motors30,00050,000

Total727,0001,070,000

Thus, capacity utilization in FY2000 stands at 79.4%. This is still better than utilization levels the world over which stands at around 40%. Production capacities are expected to increase in the next two years as players introduce new models. The major increase in supply, as was witnessed in FY2000, will be in the mid-size and luxury segment. The supply in the future, taking into account the plans announced by the car majors are expected to grow to 1,070,000 cars by 2002.The segment which has seen a number of new entrants in the recent past will see two new models from the stable of Maruti namely the 'Alto', which will be available in the 800cc and 1000cc configuration. However, industry sources have indicated that after the hectic action of the past two years, this segment will slowly witness some stability in terms of sales volumes and prices. The entry of new players is expected to create a marketing warfare in the car industry. A start has already been made by sharp reduction in prices of Daewoo 'Cielo' and Maruti 800. Lately, the price of Wagon R was also lowered by MUL to face the intensifying competition. However, with manufacturers having to comply with Euro emission norms, car manufacturers have sold their products at lowered margins. This is expected to affect their ability to reduce prices in the future. Increased support through finance from auto manufacturers was quite evident in FY2000. This has and will in the future induce existing owners of cars to go for technologically superior products in the same segment leading to sharp drop in prices of second-hand cars. This will also create a platform for upgradation of existing two-wheeler owners to four-wheelers.The luxury segment will see more new entrants namely Toyota of Japan, Skoda of Czech Republic and Proton of Malaysia in the years to come. Recently, companies like MUL, GM and Hindustan Motors have come out with new models to cover the present gap in the segment. Therefore, the customer will be having a wider choice to choose depending on his specific needs

Indian Automobile IndustryAn Indian car as one which has been conceived and designed in India, has at least 85% of its components 'Made in India', by an Indian company. The Indian passenger car industry as we see today is relatively recent in origins. Except the ubiquitous Ambassador and thePremier Padmini there was not much moving around with an Indian tag.The official mascot of the Indian political system, the Triassic-era Ambassador has little Indian-ness in it. To start with, the name isn't Indian and that's only the tip of the iceberg. The design came from Morris Motors and the present petrol power plant and drive train are Isuzu throwaways. The diesel version has a BMC engine. Of course everything is made in India now, but do you call a tree your own if its roots are in someones courtyard.The other pre-Cambrian relic, the Premier Padmini, which till a few months back was adorning showrooms throughout the country. Its in the market since my grandpa learnt driving and at the time of its going to grave, the Padmini was a completely made in India product. But again, there's very little Indian-ness about the car, except maybe the name Padmini. The entry of Maruti Udyog Ltd, a GoI JV with Suzuki of Japan, in 1983 with a so-called "peoples" car and a more favorable policy framework resulted in a growth rate of 18.6% in car sales from FY81-FY90.After witnessing a downturn from FY90 to FY93, car sales bounced back to register 17% growth rate till FY97. Since then, the economy slumped into recession and this affected the growth of theautomobile industry as a whole. As a result car sales remained almost stagnant in the period between FY97 and FY99. However, with the revival in the economy, FY2000 turned out to be a significant year for the industry in which it recorded volume sales of638,815 units as against 409,951 units in the previous year. Thus, the CAGR for the period FY96 - FY2000 stands at 16.6%.The present day stunner from HM is the Lancer. As with HM products from the past, the Lancer is a borrowed from abroad product. The saving grace is only that this Lancer is a contemporary model and not some. The erstwhile Premier Auto Ltd. no longer exists. The nearest thing to it in the present is Ind Auto Ltd. Ind is an acronym for India or Indian, but the products are all borrowed from Italy. The Uno came to India after the Mafiosi had their fill with it. The Siena is a very contemporary model. It being a good car and all, but I always wonder why Fiat doesn't launch it in their motherland. What's this 'special' car for India, Brazil, Africa, Latin America inc.Ford did take the pains to design an India specific car, the Ikon. So does the quest for an Indian car end with the Ikon. No I don't think so. First thing, the company is American. Secondly, the Ikon's platform is that of the Fiesta, nothing else. So the only thing Indian about the car is the 'Josh' advertising gimmick.Starting with the official one, i.e. Maruti, the company, since its inception has changed the automobile scene in India completely. It's has been the number one manufacturer, churning out close to 300,000 cars last year. At last count it held a 64% market share in the passenger car market with four out of every five cars . on Indian roads being Marutis. Every year it rakes in multi-billion rupee profits, and, yet the company is nothing more than Suzuki India Ltd.Telco is a completely Indian carmaker with no major foreign collaborations. Their Indica was much touted as 'The Indian car', but it was styled by I.D.E.A of Italy. The engine technology had inputs from 'Moteur Modern' of France. In effect it was the case of an Italian body being wrapped around Indian mechanicals. Frankly I would have preferred an Indian body wrapping an Indian platform.India is also the largest manufacturer of agricultural tractors, motor scooters and the world's fifth largest commercial vehicle manufacturer.Each of these sectors experienced rapid growth during the last three years Demand in these sectors isdriven by industrial, individual and agricultural consumers respectively. The increases have resulted from improved overall economic trends in India including large doses of foreign investment a more liberalized economy and higher productivity.The fortune of the Auto component industry is inextricably linked with that of the automobile industry which in turn is influenced by the general economic trends of the country the country's economic growth is projected to grow at more than six percent per annum in the coming years.The estimated growth will automatically emphasize the need for better transport infrastructure facilities. This means demand for automobiles and hence for auto components, is bound to grow accordingly. Therefore, good growth prospects are assured for the automobile industry.World-wide,cars aresegmentedon the basis of theirsize.However,in India, priceis the main factor determining the choice of car. Hence, cars are segmented on the basis of price into three segments :

SegmentPrice Range(Rs. 000)Main ModelsFeatures of the segmentApproximate Market Share of the Segment

Economy< 250M-800, Omni, Uno, AmbassadorPrice, Fuel Efficiency46.9%

Medium250-500Zen, Uno, 118-NE,Ambassador 1800 ISZ, Contessa, Indica, Santro, MatizPrice, Performance, Diesel Option43.1%

Premium500 & aboveLancer, Esteem, Cielo, Accent, City, Opel Astra, IkonStatus Value, Performance, Features.10.1%

Sources : various sources

Absence of adequate mass transportation system and rising income levels have resulted in personal vehicles becoming an important mode of transportation in the urban and semi-urban areas. By international standards however, the Indian car volumes remain small at just over 1% of the world market with penetration rates of approximately 3.7 cars per thousand people as against 24 in Thailand, 144 in Malaysia, 204 in Poland and 90 in Brazil. Cars currently constitute approximately 12% of the total stock of personal vehicles in India.Rising household income, increased urbanisation, introduction of new models and availability of cost effective finance are the key demand drivers in the industry. The premium segment cars are mainly targeted at corporates or businessmen and are usually bought on consumer finance.The midsize segment witnessed an increase of around 115% in sales volume during the period April 1999-March 2000. Currently the economy, medium and premium segments constitute 46.9%, 43.1% and 10.1% respectively of the market.

4.2: Automobile Industry Performance during 2003 04During the year 2003-04 the automobile industry has registered a growth of around 16.5 per cent in numbers and 24 per cent in value terms.Passenger cars saw a 35 per cent growth in FY04 over the previous fiscal while medium and heavy commercial vehicles witnessed a 46 per cent growth.

Segment-wise Performance

Passenger Vehicles

The excise duty reduction on passenger vehicles given in the union budget 2003-04 has directly impacted the sales of passenger vehicles positively as it has reduced the acquisition cost to the customer.The cumulative passenger vehicle sales in the domestic market in April-March 2003-04 have grown by over 27% over the same period last year. However, this is against relatively low and negative growth rates in the previous years.

Within the passenger vehicle segment, while passenger cars and utility vehicles have grown at a brisk pace of 28.6% and 27.6% respectively, MPVs have grown at a lower rate of around 14.5%. However, the growth of MPVs this year is significant as it was (-) 15.7% in the last year.

Passenger Cars & MUVs Annual ProductionFY 2003 TO 2004 in NosMUV-16%;CARS 84%

Passenger Cars Sales Segment-Wise MarketDistribution FY 2002 TO 2003 in NosUpper C3%3%Misc3%Lower C10%Luxury D2%A Seg32%32%%Upper B16%%Lower B34%

Commercial Vehicles

The performance of the commercial vehicle segment during the course of the year was very satisfying. It has clocked over 30% growth rate in consecutive years. The growth rate of all commercial vehicles during the year 2003-04 grew by 36.5%. M&HCV segment has grown by 39.5% whereas LCVs grew by 32%.

With improved economic performance especially in the agricultural sector besides expansion of the national highways and expressways, we are also witnessing fleet rationalisation in the country. This has also led to increased penetration of multi-axle vehicles on our roads. During the year 1998-99 sale of Multi axle vehicles was 4539. Whereas, in the year 2003-04, 59251 multi-axle vehicles were sold. In percentage terms an increase of 67% per annum over a five year period. The share of multi-axle vehicles during the same period has gone up from hardly 5% to around 40%.

Commercial Vehicles Annual ProductionFY 2002 TO 2003 in NosBUSES10%LCV41%TRUCKS49%

Exports

The performance of the automobile industry in exports is also encouraging. Passenger vehicle exports have crossed the hundred thousand mark and clocked sales of around 1,30,000 and two & three wheelers have crossed three hundred thousand mark for the first time clocking around 3,33,000. Commercial vehicle exports have also increased to an all time high of over 17,000. In percentage terms the growth during the year over the previous year have been almost 80% for passenger vehicles, over 49% for two & three wheelers and over 40% for commercial vehicles.

4.3: Indian Automobile MarketThe Indian market confounds global carmakers simply because of the way it is segmented. In the West, automobiles are generally segmented according to platforms -- that is chassis-engine combinations. Price plays a factor but only up to a point. In India, though, price plays the primary role in segmentation.Consider first the segments in the European or American market. At the bottom, you have city cars' -- which include the Daewoo Matiz, the Hyundai Santro, the Maruti 800, Alto, Fiat Uno, the Zen as well as the Wagon R. Next come the budget minis -- which would include cars like the Suzuki Swift (our own Esteem). The next segment, the superminis, would take in cars like the Opel Corsa, the Ford Ikon. Above the superminis are small family cars -- which include models like the Opel Astra and the Ford Escort. Medium-sized family cars are bigger and include cars like the Opel Vectra and Peugeot 406. Compact executive cars are small but immensely prestigious and include the BMW 3 series and the Mercedes C class. Executive cars embrace their bigger brothers -- the BMW 5 series and the Mercedes E class. Only a handful of cars are classified as true-blue luxury cars namely-- Jaguar XJ8, the BMW 7 series. And of course there are the niches like sports, sports utility, and exotics.The Indian market, of course, is quite differently segmented. The Maruti 800 and Zen fall in a class by their own -- and are referred to as the sub-Rs 2.5-lakh cars. The next is the Rs 3-4 lakh segment -- which includes all the other cars that would normally be classified as city cars in Europe. Strictly speaking, the Tata Indica should fall in the super-mini category because of its specifications -- but because of price, it competes in the same segment. Above Rs 4 lakh and all the way up to Rs 10 lakh is the luxury car range. It is loosely divided into two halves -- with Maruti Esteem, Ford Ikon, Hyundai Accent, Daewoo Cielo, Opel Corsa and Honda City 1.3 falling in the bottom layer, and the Opel Astra, Honda City 1.5 and Ford Escort in the upper range. The last segment is of premium car segment, which includes cars like Mercedes Benz and BMW.Scooters India Ltd (SIL), US-based Amerigon and Bangalore-based Maini Group are negotiating a joint venture to manufacture an electrical passenger car. Priced at Rs 1.75 lakhs, the car will target the segment between two-wheelers and petrol/diesel based cars. Assembly from imported Completely Knocked Down (CKD) kits will start as soon as an agreement is finalised among the partners. This venture represents a major manufacturing shift for SIL, a public sector enterprise, which so far has only produced two- and three-wheelers. It also plans to introduce an electric three-wheeler model, already in use in Nepal, into the Indian market.Bajaj Auto has introduced its diesel three-wheeler in Hyderabad. The vehicle has a 416 cc engine and is priced at Rs 83,000, lower than its nearest competitor the Greaves Garuda, which is priced at Rs 85,000 (in Hyderabad). Bajajs petrol three-wheelers already account for 85 per cent of the India market. Its new product, consequentially, could erode its own base.Indian Automobile industry has become more competitive in the export market due to its technological and quality advances, so much so that in quality conscious markets such as Europe and America, Indian automobile industry is emerging as a major player judging by its performance. India today exports: Engine and engine parts, electrical parts, drive transmission & steering pats, suspension & braking parts among others.

5.1: Strengths of the Automobile Industry

Low labor cost:India enjoys a comparative cost advantage in labour as comparedto western countries.Skilled Manpower:India has vast pool of skilled manpower and qualifiedengineers among the largest in the world.

On a scale of 1-10, 1 = low, 10 = high.

Availability of Skilled labour.Sr NoCountryPoints.1India8.52Brazil7.53US7.44Germany6.65Mexico6.6

Availability of Qualified Engineers.Sr NoCountryPoints.1Germany7.52India7.43US7.24Brazil6.45Mexico6.3

Reference: Competitiveness of Indian automotive industry Feb 2004.

5.2: Weaknesses of the Automobile Industry

Low labor productivity:Cost advantage in labor wages is nullified by the fact that we have lower labor productivity.

Defect rates high:We have a higher defect rate about 10 times the world average.

Low Investment in R & D:The Industry has a very low investment in R & D as compared to their foreign counterparts which will their sustainability in the future.

Not reached critical mass:Indian companies are in nascent stage and hence not able to cater to the requirements of OEMs. Our auto- ancillary industry is of 2.4 bn $ while Fords outsourcing budget is 86 bn $.

Poor infrastructure:Poor infrastructure like roads, ports, railways which lead tohigher logistics cost and lower reliability.

5.3: Opportunities for the Automobile IndustryGlobal automobile companies are setting up manufacturing facilities in India. Also, many Indian automobile manufacturers have announced their plans to increase the export of vehicles from India. The year 2002-03 has already seen a significant 65% increase in export volumes during the period April to March. This trend is expected to continue with more global OEMs sourcing vehicles from their Indian plants.Additionally, the introduction of newer technologies such as Electronic Diesel Control Systems to reduce emission levels, safety devices such as Air Bags, Anti-lock Braking Systems, etc. augur well for the Company and the automotive sector as a whole. These technologies not only offer increased safety for drivers and passengers, but also result in greater comfort and better drivability.While there exist many opportunities for growth in business, there are also quite a few factors, which act as an impediment.In my last years speech I mentioned about the need for a well thought out and clearly defined policy on emission norms. It is now fairly certain that Bharat Stage II norms (equivalent of Euro II norms) will be implemented countrywide starting 2005. It is important that this plan is implemented in time in the interest of a cleaner environment. Technology is available to meet the advanced emission norms using gasoline and diesel fuel; Bosch and many other companies have proved this worldwide. There is no need for the authorities to specify the type of technical solution required for this purpose as long as the end objectives are met.The spurious and reconditioned goods market, which I also dealt with in detail in my speech last year, continues to be a worrying factor as it directly affects our market share. The Company on its part has intensified the anti-spurious operations by conducting several raids across the country with the help of local regulatory authorities. Large quantities of spurious and fake products have been seized and legal action has been taken against those indulging in such activities. The Company believes that continued focus and concerted action against spurious activities would improve safety and fuel efficiency of the vehicles and at the same time help in expanding our market share in the Aftermarket. The Company is also continuously educating the users about the benefits of using genuine spares in place of spurious and reconditioned spares.The lack of any significant change in the labor law reforms also continues to be a matter of concern. It is essential that legal reforms be put in place at the earliest to provide more flexibility in manufacturing operations and enable the industry to quickly adjust the work force in line with fluctuating market conditions.

5.4: Challenges for the Indian automobile industryAs we move into the new millennium, the Indian Automobile Industry faces some tremendous opportunities and also great challenges. The growth in automobile sales has been impressive for the past ten years since liberalization began. However, with liberalization, the Indian customer has been presented with a wide range of choices in automobiles, to suit every requirement and budget. The market has turned into a buyers market where the customer is being wooed by the manufacturers and the dealers with a range of freebies unheard of before in India. Financing has become so easy that an automobile is within every aspirant's reach.Competition has meant that manufacturers' margins have been squeezed severely and they are all under pressure to cut costs to be profitable and competitive. Some of the older manufacturers like Premier Automobiles (manufacturers of Premier cars), Automobile products of India (manufacturers of Lambretta scooters) and Ideal Jawa (manufacturers of Jawa and Yezdi motorcycles) have closed shop. Hindustan Motors (manufacturers of Ambassador and Contessa cars) is in trouble due to the declining sales of its cars, as most customers prefer the newer models available in the market. Even the dominant player Maruti has seen its market share decline rapidly due to its models being old and jaded and is in addition facing labour problems in its plant.To add to the problems, come April 2001, under the WTO agreement, India will have to permit import of fully built automobiles, which hitherto was not permitted. The foreign manufacturers such as GM, Ford and Daimler Chrysler will almost certainly import vehicles from their large portfolio of models and makes, further segmenting the market into niches, although how competitive they are in terms of price remains to be seen.The challenge before the industry is to figure out the strategy for survival and growth. It is clear from the picture painted above that the industry will have to increase volumes in each segment to achieve lower cost of manufacture. One way to achieve this will be to go for exports in a big way. Maruti is already exporting vehicles, as are Mahindra, Telco, Daimler Chrysler and more recently Daewoo. The overseas markets will have to be exploited more aggressively, but this will mean the companies will have to invest more in Research and Development of new models with better features.The second opportunity is to become contract manufacturers for overseas companies. A number of Japanese and Korean companies have been following this strategy very successfully. Hindustan Motors is said to be considering this option. The third opportunity is to overcome the vulnerability of the automobile market to oil prices by designing vehicles, which can offer lower fuel consumption. Recent reports suggest the government is exploring the possibility of introducing Gasohol, which is a mixture of Petrol and Alcohol. Gasohol has been very successful in Brazil. Since Alcohol is a by-product of the Sugar industry (of which India has the worlds largest), this is a very logical step that should have been taken many years ago. Even a small percentage reduction in the consumption of petroleum per vehicle can make a big difference to the balance of payments.The industry must focus its R&D efforts in line with the global trends, which is to build vehicles that are considerably more fuel efficient and less polluting. With growing awareness among the public about pollution and the effective campaigns carried out by the NGO's, this will increasingly become an important selling feature. It was surprising to see how the industry kept stalling the introduction of pollution norms for vehicles on the pretext that they needed more time to get the technology. Even Maruti despite its foreign affiliation was caught off guard when the Supreme Court finally ruled that all new vehicles should strictly adhere to the Euro II norms.The inadequacy of road infrastructure in India is well known. This is compounded by the fact that traffic management is very poor or non-existent and the drivers are mostly ill trained and in disciplined. As more vehicles come on the road, this will become a major bottleneck. The industry will need take initiatives firstly to train all drivers in safe driving and proper road discipline and manners. They will also need to assist government agencies in better road design and in building of multilevel parking lots. Training of police personnel in better traffic management and advising them on better equipping themselves to deal with various problems will also have to be done.In terms of the world averages, India's vehicle density is very low and if we have to achieve those density levels, the industry can look forward to a bright future. However in the industry's interest care must be taken to see that we also achieve the safety and convenience levels of using automobiles.

The Challenges

External Level :Integrating into Global Supply ChainsWTO Multilateral trade regimesFTAs (i.e. Bi-lateral Trade)

Country Level :InfrastructureCascading effect of TaxesCost of CapitalCost of PowerInflexible labor laws Inflexible labor laws

Firm Level :Export as a mind setQCDDM equation taken for grantedLogisticsWarranties & Liabilities

Challenges for CEOsDilemma of InvestmentAddressing fast Global Business EnvironmentChanging mind set of teamsDeveloping & Employing people with right right skills skills

5.5: Appropriate Strategies the key to success:

Government :

Flexible Labor laws:Stringent labor laws in India are hindering the over alldevelopment of the Industry. Changing these archaic laws will help in attractinginvestment and lead to expansion of the industry.

Cutting down R.M cost:Government should reduce import duty and taxes on raw materials for auto ancillary industry which will bring down their raw material cost to counter Chinese threat.

Corpus for R& D & expansion:Since most of auto ancillary companies are up coming their range of operation is limited to a few products. In order to encourage these companies to venture into new product categories Government should allocate Soft loans.

Auto expo zones:On lines on software technology parks, govt. should establish export zones of auto-ancillary industries, equipping them with infrastructure & offering them tax sops or holidays.

Research center:Government should establish a research center dedicated to automobile researchcalled Indian institute of automobile research which can work with autoindustry to develop cutting edge technology.

Industry :

Marketing and Advertising in potential markets:ACMA in collaboration with CII or FICCI should organize Trade fairs showcasing Indian Auto ancillary industry both in India and abroad.Acquiring Auto ancillary companies in potential markets:Acquiring companies in overseas market gives a direct entry in that market to Indian companies. For e.g. Bharat Forge acquired one of the largest forging companies inGermany, Carl Dan Peddinghaus GmbH (CDP).

Moving up the value chain:Automobiles companies are going for aggregate buying, hence company should try to acquire tier I status and ultimately target OEM status.Leveraging Software skillsCulture change:Auto ancillary industry should adopt concepts like six sigma rather than continuing with post Morton analysis.R & D spending:

Industry should target at allocating at least 5 % of their revenues on R & D expenditures for achieving cutting edge in technology.

6.1: Competitive ScenarioThe industry witnessed radical changes and entered a competitive phase with de-licensing and liberalization in the 1990s. The two major developments during this period were a strong growth in volumes between 1993 and 1997 and the entry of international car giants into India, especially in the mid car segment. The attraction for these companies was the largely untapped Indian market. However, these companies over-estimated the market in the short term and set up larger than required capacities. This resulted in price wars and thereby affected the expected margins.The global automotive industry is currently undergoing consolidation phase and the repercussions of this consolidation are likely to be experienced in India, too. The installed capacity for passenger car production in India is likely to reach around 1.8mn by end-2004, but the total passenger car sales is expected to be around 0.9mn. This explains an over-capacity of around 50% as compared to the global over-capacity of around 30%. The consolidation of the automotive vehicle industry is likely to have serious implications on the automotive component industry too.Most of the foreign companies entered India using the joint venture/collaboration route. While many of these conglomerates have turned out to be mutually beneficial few tie-ups werent as successful. For example, Mahindra & Mahindra pulled out of car joint venture with Ford, General Motors bought over the stake of Hindustan Motors in its Indian car venture. Mercedes Benz has decided to operate independently after suffering severe losses with Indian partner Telco. Indian players are trying to maintain their hold on the Indian market, not giving in to multinationals. But the very fact of Indian companys reliance on foreign partners for technology is likely to drive the trend of collaborations followed by consolidations.Foreign companies are now all over the Indian market. There is a need for a level playing field to bolster Indian auto industry.It is already a level playing field for companies setting up shop in India. Even in the case of imports, entry barriers in commercial vehicle industry are among the lowest, with tariff at half that of cars. However, on the global plane, things are different. Though the Indian industry, in the last few years especially, has gained considerably in internal efficiencies, in terms of external factors such as cost of finance, infrastructure and labour legislation, we have a long way to go for parity with the developed worldCompetition is heating up in the sector with a host of new players coming in and others like Porshe, Bentley, Audi, BMW all set to venture in the Indian markets. We take a look at the key factors that are vital for gaining a stronghold in such a competitive scenario.

6.2: Competitive Edge

Manpower

The trends clearly indicate a huge opportunity for Indian manufacturers due to:Low cost advantage primarily on account of vast availability of low cost-high skilled manpowerAverage wage rates are 8$ per hour as compared to 20$ in the developed markets.

Highly Competitive at Lower Scales

Indian Auto Companies are highly cost competitiveevenat lower volumes due to:Appropriate levels of automationLow cost automationAutonomation

High Quality & Productivity

Indian Auto Companies have achieved a High level of Productivity by embracing Japanese Concepts and Best Practices:TQMT P MToyota Production SystemsIn fact cost productivity is our key differentiator viz-a-viz competition fromother low cost economies.

Just-In-Time Delivery & Logistics

Indian Auto Companies have proven capability to supply on JIT basis out of Warehouses situated near the CustomersMost Indian companies have arrangements with major Logistic Providers for JIT Supplies.Adequate Warehousing support and onsite Engineering support

7.1: Global ScenarioThe passenger car segment has emerged as a major driving force for upstream industries like steel, iron, aluminum, rubber, plastics, glass, and electronics and down stream industries like advertising and marketing, transport and insurance. The car industry generates large amount of employment opportunities in the economy. For example in the US, every sixth worker is involved in the making of an automobile.The global automotive car market is growing at a rate of only 2 percent per annum and is not expected to pick up in the near term. Growth has dropped due to the increasing levels of saturation in the larger car markets of the world. Worldwide the trend is towards ensuring that one's products are superior in terms of quality. This will enhance the useful life of cars and, hence, slow down growth in sales.The world car production has increased from 44.66 mn in 1996 to an estimated 48.3 mn cars in 1999. Japan, Canada and USA brought about the major increases, which contribute to 53% of the world's car production.The largest car market - the US market expects car sales to decline 8 to 9 per cent to 16 million cars in 2001, as compared to 17.4 million cars sold in 2000.The USA and Japan are the leaders with around 42% of the total world market. However, since the last two to three years, the international passenger car industry has been witnessing an over capacity of more than 30%. The trend suggests that industry volumes may grow by just 2% or around 10 mn vehicles per year. If this situation continues for the next few years the world car market may witness shakeout in the near future. Already signs towards this are being observed as the phenomenon of mergers catches on. The recent mergers in the international car market are Ford-Volvo, Renault-Nissan, Daimler-Chrysler. A few more players are expected to join the fray in the next few years so as to strengthen their hold in the world market. Among the top car manufacturing companies General Motors and Ford Motors group of USA lead with a contribution of 15.8% and 11.6%, of world car production, respectively. Volkswagen and Toyota stand third and fourth with more than 9% contribution each to the world car production.

The global domination of the larger automotive manufacturers is slowly on the wane and the trend in sales is shifting towards more "regio-centric" products. Automakers that have been enjoying a generally prosperous spell would have to rethink on the way vehicles are designed, manufactured, distributed or sold. Already, players like General Motors Volkswagen and Toyota have begun to re-examine their dealer relationships and pricing strategies. Car makers would now have to think in terms of a new customer focus and provide better financing and servicing. Strategic tie-ups, mergers and acquisitions have become the talk of the day. A few instances are Daimler Benz's tie-up with Chrysler of the US, Ford's acquiring of Daewoo and tie up with Volvo Car Corporation and Renault acquiring a stake in Nissan. Such deals will certainly lead to economy in terms of costs but it remains to be seen whether they will also create significant new opportunities for growth.

With global consolidation in the car industry, it is expected that more international players will work closely to bring about operational efficiencies. By nature, the car industry is highly capital-intensive and vast amounts of money are being spent on R&D. With the players getting together to produce more technologically superior cars, they can derive greater benefits from their R&D efforts. Profits, which are under pressure due to wafer thin margins will be boosted due to greater economies of scale. Moreover, bigger capacities among players means lesser fixed costs per car produced. Even if mergers are not on the cards in the near future (one can see that the Daimler-Chrysler merger has not brought about synergies as expected by automobile experts), technology-sharing and the offering of equity stakes is inevitable.In India, the car market has become extremely competitive and come April 2001, India's automobile market will be thrown open to imports of completely built up vehicles, which hitherto was prohibited. With the international acquisitions and alliances, one can expect to see a dramatic change in the auto market. If GM were to acquire Daewoo in Korea, then GM would be in a commanding position in India with its alliance with FIAT and Suzuki motors as well. Already Daimler Chrysler and Ford are contemplating introducing new models in India from their various associate companies through their local subsidiaries. The situation could become very difficult for the purely Indian automakers such as Telco, Mahindra and Hindustan Motors unless they rethink their strategy. It can easily be seen why TELCO has been in the news on rumors that it wants to hive off its car division and bring in an overseas partner. Reports suggest that HM is thinking of exporting parts from its manufacturing units and also assembling and distributing other makes of vehicles who may wish to enter into India, but cannot enter full scale manufacture due to the small market sizes.Clearly exports will be the big opportunity for Indian automobile companies if they can control costs and deliver good quality output. Already Maruti, Hyundai and Ford as well as Mercedes Benz have started exports in a small way and this can grow. Majors like TELCO and Ashok Leyland are already exporting the