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The automobile industry emerged in India from 1940. The growth of the automobile industry
was pampered during 1950 and 1960 due to nationalization and license raj. After 1970, the
automotive industry started to grow, but the growth mainly driven by tractors, heavy vehicles
and two wheelers. In the 1980s, many Japanese manufactures launched their joint-venture
and the Indian government chose Suzuki for its joint-venture to manufacture small cars. But
the major growth of the Indian Automobile Industry started after the economic liberalization
in 1991 and gradual weakening of license raj. Since then, the Automobile Industry in India
has accelerated to meet the domestic and export needs.

Currently, Indian Automobile Industry can be classified in to three segments. They are
Commercial Vehicles (e.g. Trucks, Buses etc.), Non-Commercial Vehicles (e.g. Cars, Vans,
SUVs etc.) and Two Wheelers.

As the automobile industry is wide spread in India, we will concentrate only on the four
wheeler segment and go in to detail in this report.







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The four wheeler industry in India has not matched up to the performance of its counterparts
in the world. This is mainly due to the regulatory atmosphere prevailing till the opening up of
the industry in the mid 1990s. The various legislative acts sheltered the industry from
external competition for a long time. Moreover the industry was considered as low priority
because cars were thought as ³unaffordable luxury´.

Initially in the post liberalization period, the passenger car segment saw a boom. The
buoyancy in the sector was derived primarily from economic vibrancy, changes in
government policies, increase in the purchasing power, improvement in life styles, and
availability of car finance. The passenger car industry was finally deregulated in 1993, and
many companies, both Indian and foreign (e.g. Ford, General Motors, etc.), entered the
market. However, the smooth sailing was suddenly disrupted in the last quarter of FY 1996.
The automobile industry, which contributed substantially to the growth in FY 1996, failed to
maintain the momentum. The overall slowdown in the economy and the resultant slowdown
in industrial production, political uncertainty and inadequate infrastructure development were
some factors responsible for the slowdown experienced by the automobile industry. In FY
2000 the industry experienced a positive turnaround, but again declined in FY 2001 and was
followed by a marginal growth of 0.5% in FY 2002.

However, since then the passenger vehicle industry witnessed a rapid growth. International
competition, increase in number of participants and the need to counter pressure on margins
have made the segment a buyer¶s market rather than a seller¶s one. Today, customers have
wide choice on models and the rising income levels, especially among young adults, coupled
with the low equal monthly installments (EMIs), have made vehicle purchase affordable.

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The Passenger Vehicle industry consists of two segments, i.e. Passenger Cars and Utility
Vehicles with the former accounting for 80% of the total volume. Within the passenger car
segment, the mini and compact car segment accounts for 80% of the total volume. Over the
past few years, the compact car segment has been the focus for most OEMs with intense
competition. As the demand in India for the small cars is set to increase over the next few
years, this segment is likely to witness the entry of all major Passenger Vehicle
manufacturers.

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The Passenger Vehicle segment accounts for 15.96% of the market share in the Indian
Automobile Industry. The production of passenger vehicles has increased at a CAGR 11.03%
from 12,09,876 units in FY2004-05 to 18,38,697 units in FY2008-09. The sales of Passenger
Vehicles have been volatile over the years with a CAGR of 11.34% for a 4 year period
ending FY2008-09. In the same period, domestic sales and exports of Passenger Vehicles
increased at a CAGR of 9.95% and 19.18% respectively. The Passenger Vehicle segment
grew only by 6.75% Y-o-Y to 18,87,619 units sold in FY2008-09 as against 17,68,283 units
sold in FY2007-08. The domestic sales grew by a meager 0.13% Y-o-Y to 15,51,880 units in
FY2008-09, but, the export sales grew by 53.73% Y-o-Y to 335,739 units in the same year.


 

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c  !  The demand for passenger cars are driven mainly by greater
affordability, which in turn increases the aspiration level of customers. The growing
population, esp. the middle class and the upper middle class contribute a major portion to the
demand of passenger vehicles. Passenger vehicle segment has addressed mainly the youth
and the people from the IT industry who forms major chunk of the population.

"#$%&Cars being aspirational products, purchase decisions are influenced


by overall economic environment. Increase in per capita income to $1032 ($2932 PPP),
increased working member per family and the changing lifestyle leads to increase in the
consumption tendency of the customer and leads to preference of cars over two wheelers.

'  !Factors like the rapid pace of new product introductions, rising income
levels and a buoyant used car market have shrunk the average replacement cycle for cars.
According to Crisil statistics, over the last decade, car replacement cycle has shrunk from 10
years to nearly 5 years at present. With more than one working member in the family concept
of a second car is also in rise in urban India.
& ! 
! # $   Availability and cost of vehicle finance is a key
driver for passenger vehicle demand across the world. In India, vehicle finance has been
steadily rising over the years facilitated by competition amongst banking and NBFC
participants. The interest rates and EMIs have also declined over the years. But during the FY
2008-09, esp. Sep-Dec 2008 period witnessed a reversal of trends. Tight liquidity conditions
and risk aversion in the banking system led to sharp decline in vehicle financing.

(    & Passenger Vehicles has been traditionally seen as luxurious item
in India, esp. so in rural areas. At present India has a vehicle ownership of 11 Passenger
Vehicles per 1000 citizens which is low when compared with other ownership propensities in
the world. This is due to limited demand of passenger vehicles in rural India. Today, the
Passenger Vehicle manufactures are ready to break the myth by exploring the rural market
which consists of 2/3rd of the population. They are ready to penetrate the market with
aggressive strategy, product mix and increase the availability of finance by having tie-ups
with financial institutions.

(#Car sales increases when a new model hits the market. Due to escalation in
competition in the Indian car market, frequency of new model launches has increased. In the
past one year Indian car market has seen many new launches to by all Passenger Vehicle
manufactures to sustain in the market.

c  '  %  Distribution is another key factor in driving demand.
Increase in distribution reach brings a large number of households into the target population.
Having realized the purchasing power of people in the rural areas, companies are expanding
their distribution network in those areas also.

   c"$&#      In India, infrastructure with respect to
roads is improving at a brisk pace, which helps in increasing the efficiency of the passenger
vehicle. In India, effect of gasoline price does not affect the industry much.



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India is a place of resources and many international companies come here to start their
business due to the resource factor. Labour resource, an essential requirement for the
automobile industry can be obtained in abundance in India at cheap cost. So, all
manufacturers prefer to invest in India. Another factor for investment is, the availability of
supplier in India who can deliver quality material to their customers. Other resources like
land, power etc. is also available in abundance in India.

 
 




 
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India is slightly different from other countries and its preference varies accordingly. Indian
people requirements vary and can be broadly classified in to six segments. They have been
listed below:

r Potency Buyers ± Youth belong to this segment as they buy cars to attract opposite sex
and feel powerful and their most concerns are brand image of trendy and innovative
appeals from the group.
r Utility Buyers ± They are people who belong to the middle class segment of the country
and they buy cars for basic transportation and care for family. These people always want
value for money and cost of ownership are the benefits these buyers are associated with.
r Prestige Buyers ± These buyers are those who buy cars for need of prestige. They are
least price sensitive and desirous of latest / futuristic features in cars.
r Adventure Buyers ± They seek fun and adventure to increase their popularity. SUVs find
preference for these buyers.
r Status Buyers ± They are buyers who want to show-off success and attract attention.
Superior craftsmanship and best technology are imagery issues that this group relates to.
r Liberation Buyers ± They are the smallest of the six segments. These buyers seek
increased freedom and latest technology. Safety consciousness is relatively higher among
them.

Apart from the above listed preferences, it also varies in terms of color, size and engine
preference for gaining desirable performance. There is also significant regional and city-by-
city difference in preferences. Given by high fuel prices and vehicular congestion in cities the
preference of compact cars is distinct in the Indian middle class. In India, significant number
of aspiring buyers prefer black colored car as opposed to any other color.


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At present, in India, the effective tax rate applicable on passenger vehicles range between 24-
38% depending on the size of the car and is added in the cost of the car and passed on to the
customer. The components of the tax rate applied are excise duty/CENVAT, Valued Added
Tax (VAT) and Central Sales Tax (CST). The excise duty applicable for passenger vehicles
more than 4 metre in length is 20% and less than 4 metre is 8%. The VAT in India varies
from state to state between 4 ± 12.5%. The last component applicable in the tax for passenger
vehicles is Central Sales Tax (CST) and its applicable for interstate sale of goods. The
effective tax rate applicable on passenger vehicles ranges between 24-38% depending on the
size of the car. But, the roll-out of Goods and Service Tax (GST) sometime in 2010 is likely
to have a positive impact on the passenger vehicle industry, as it will help reduce the overall
cost to the customer.
The Exim Policy provides import of Capital Goods, raw materials, components, consumables
etc. either under concessional duty rate or at zero duty for carrying out manufacturing
activities with time bound export obligations. Export benefits like Duty Entitled Pass Book
(DEPB) and Advance License are prevalent in India helping manufactures reduce their cost.
The import of new cars and old cars to India are levied a custom duty of 60% and 100% to its
value respectively.

With regards to Foreign Direct Investments (FDIs) in this segment, 100% investment is
permissible under automatic route enabling all international manufacturers to invest in India.

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Despite the economic downturn across the globe, the export of passenger vehicles from
Indian shores grew by 53.73% in FY2008-09. This was largely due to the export of compact
cars. Out of the total cars exported from India 91% were small cars. India had emerged as a
export hub mainly due to the evolving in-house R&D skills, ability to develop vendors to
supply high quality auto components, export-specific products and cost competitive
manufacturing capabilities. With all these factors and growing investments, India has a long-
term potential for exports. But, India needs to strengthen its logistics infrastructure in line
with the global benchmarks to improve cost competitiveness for its exports. Changes in its
export regulation also remain significant factor determining export potential from India.

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With several international OEMs entering India to cater the growing domestic demand as
well as for exports because India is likely to witness significant capacity creation in the
passenger car segment space over the next 2-3 years. As a result, facility sharing is emerging
as a key trend for all OEMs.


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The Indian used car market has increased significantly, growing at a CAGR of 28% between
FY2001-02 and FY2006-07. This was mainly due to the reduction in the life cycle of vehicles
and increase in variety of models. Due to enormous growth in this segment, manufacturers of
OEMs have entered this segment which has resulted in increase of share of organized players
in a predominantly unorganized market.

According to Crisil data, the size of the used car market in India is estimated to be equal to
that of the new car market or even higher. The mini and compact car segment accounts for
around 60% of the total used car volume and mid size cars accounts for 30% of the used car
volume and the rest 10% by others.

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A robust domestic economy, rising disposable income and aspiration levels with the
consumers, India seems to provide the ideal backdrop to a sustained long term demand
growth for the sector. The Indian domestic market with an annual demand in excess of 1.5mn
vehicles has reached a state to attract investments from global majors. With excess capacity
and demand saturation in major markets, the Indian market is likely to remain a key
destination. Pricing, a key factor to increase with competition, the rising quality expectations
and regulatory norms on emission and safety are likely to push cost pressures for the
companies.

During this period, as new players enter the marker the focus will be to strengthen their
position by establishing strong service/distribution network. Going forward sharing of
facilities and other infrastructural requirements will significantly reduce the cost structure.
Another major concern in the future will be the increase in raw material costs owing mainly
to high steel and aluminum prices. But, due to the various demand drivers listed above, it is
expected that the Indian automobile industry would continue to grow at a robust rate in the
long term.







r http://en.wikipedia.org/wiki/Automobile_industry_in_India
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r http://www.icra.in/Files/PDF/SpecialComments/2010-January-PV-Note.pdf
r http://www.fadaweb.com/review_06.htm
r http://www.indiainbusiness.nic.in/industry-infrastructure/industrial-
sectors/automobile.htm
r www.siamindia.com