Industry Overview

History
The evolution of the automotive industry has been influenced by various innovations in fuels,
vehicle components, societal infrastructure, and manufacturing practices, as well as changes in
markets, suppliers and business structures. Some historians cite examples as early as the year
1600 of sail-mounted carriages as the first vehicles to be propelled by something other than
animals or humans. However, it is believed by most historians that the key starting point for the
automobile was the development of the engine. The engine was developed as a result of
discovering new energy carrying mediums, such as steam in the 1700s, and new fuels, such as
gas and gasoline in the 1800s. Shortly after the invention of the 4-stroke internal combustion
gasoline-fueled engine in 1876, the development of the first motor vehicles and establishment of
first automotive firms in Europe and America occurred. See Figures 1 and 2 in Appendix A for a
timeline of the automotive industry from 1895 to 2000.
During the 1890s and early 1900s, developments of other technologies, such as the steering
wheel and floor-mounted accelerator, sped up the development of the automotive industry by
making vehicles easier to use. Almost simultaneously, in America, the societal infrastructure that
would provide fertile ground for the proliferation of automobiles was being set. Driver’s licenses
were issued, service stations were opened, and car sales with time payments were instituted.
Famous vehicle models such as Ford’s
Model T were developed during these times and, by 1906, car designs began abandoning the
carriage look and taking on a more “motorage” appearance. During the 1910s, the development
of technologies and societal infrastructure continued in addition to new manufacturing practices
and business strategies. Traffic lights started appearing in the U.S. and thousands of road signs
were posted by B. F. Goodrich on over 100,000 miles of U.S. roads. Henry Ford’s famous
assembly line was launched in 1913,
which allowed vehicles to be mass produced and thus achieved economies of scale. Ford also
introduced the concept of using interchangeable and standard parts to further enable the mass
production process. Automakers also started to merge with other companies (e.g., GM acquired
Chevrolet) and to expand to other markets (e.g., GM of Canada). In the 1920s, the development
of infrastructure, adoption of new manufacturing practices, and the merging of companies
continued (e.g., Benz and Daimler, Chrysler and Dodge, Ford and Lincoln). In the U.S., the
Bureau of Public Roads and the enactment of the Kahn-Wadsworth Bill helped facilitate road-
building projects and develop a national road system. In manufacturing, mass production
methods became better established, which led to the availability of a wide range of satisfactory
cars to the public. While Ford had focused on a single model, GM adopted a new production
strategy for providing greater product variety, which helped the company increase their market
share by 20% and reduce Ford’s by 24%.

In the 1930s, several new vehicle brands were developed (e.g., Ford Mercury, Lincoln
Continental,(Volkswagen) and trends in vehicle consumer preferences were established that
differentiated the American and European market. In the U.S. market, consumers preferred
luxurious and powerful cars, whereas in Europe consumers preferred smaller and low-priced
cars. Also during this time, GM’s product variety strategy continued to give them a competitive
advantage over Ford, allowing GM to continue increasing their market share while Ford kept
losing theirs.

India has a huge automobile industry. The country ranks 4thin Asia and 9th in the world as the
world's largest automobile Industry. India has an annual production of approximately about 2.3
million units. Presently, India is the world's largest manufacturer of tractors, second-largest
manufacturer of two-wheelers, and fifth-largest manufacturer of commercial vehicles.

The automobile industry in India gained momentum after the liberalization in 1991. The industry
has continued to grow consistently and is increasingly becoming competent in the global market.
In the recent past, India has seen an upsurge in the automobile industry thanks to its relaxed
restriction on the investment policies in the sector. India's overall economic growth has also
played a significant role in attracting foreign investors in India to invest in the automobile sector
of the country.

The automobile sector in India has displayed great advances in relation to the utilization of new
technologies and being flexible in the wake of the changing business scenario.
Both the central government of India and its state governments have taken several measures to
draw investments in the sector and further accelerate the growth of the industry in the country.
The government has liberalized the norms for foreign investment in the sector. Presently the
government permits 100% direct foreign investment in the sector.

The government has also undertaken several policy measures and incentives to boost investment
in the automobile sector of India. The most prominent policy is Auto Policy, which was drawn in
2000. This policy basically aims to establish a globally competitive automobile industry in India
and contribute to the Indian economy.

The important objectives of the Auto Policy are:

1. Making India a global source for auto components

2. Aiding the development of vehicles that can be driven by alternative energy sources
3. Developing domestic safety methods that are on par with international standards
4. Steering India's software industry into the automobile technology
5. Making India an international hub for manufacturing small and cheap passenger cars
6. Being the global center for manufacturing two-wheelers
7. Ensuring a balanced transition to open trade at a minimal risk

Thus, this ambitious Auto Policy of India aims not only to make India grow in the sector but also
attract huge investment in the country.

The Department of Heavy Industry, which falls under the Ministry of Heavy Industries and
Public Enterprises, is the leading agency responsible for promoting the growth and development
of the automobile industry in India.

The department assists the industry's growth through policy initiatives, providing technological
collaboration, upgrading, and R&D facilities to the automobile manufacturers.

Also, the growth of Indian middle class and their increased purchasing power supported by
strong macro-economic fundamentals have been instrumental in attracting major auto
manufacturers in India. Several global players, including leading automobile manufacturers
Suzuki and Honda, have invested heavily in India and have managed to tap the Indian market.
All these factors and the initiatives of the government is an indication that the Indian automobile
Industry has been emerging as a new sector that has unlimited potential for growth and has
promise to offer valuable returns on investments. The automobile sector has not only been
meeting the requirements of the domestic market but has been penetrating deep into the
international market.

The government of India has taken several initiatives to attract foreign investments in India. Not
only foreign establishments but also entrepreneurs from India can reap the benefits of the
growing Indian Market.

The growth of automobiles in India has been spurred on in a few years. Till the early 1990s,
India had only a few local industries. Ever since foreign direct investment has been allowed in
1996, international automobile giants have moved in setting up local bases and helping the sector
to enlarge at an accelerated speed. It has taken only a decade or so for the automotive sector in
India to reach its current position. Now, India is the second largest producer of two-wheelers. In
terms of passenger cars, she ranks 11th. Regarding exports, she has secured the 29th rank for
automobiles and 26th for auto parts. There is also the fact that this sector employs more than
3,00,000 people.

On the canvas of the Indian economy, auto industry maintains a high-flying place. Due to its
deep frontward and rearward linkages with several key segments of the economy, automobile
industry has a strong multiplier effect and is capable of being the driver of economic growth. A
sound transportation system plays an essential role in the country's rapid economic and industrial
development. The well-developed Indian automotive industry skillfully fulfils this catalytic role
by producing a wide variety of vehicles: passenger cars, light, medium and heavy commercial
vehicles, multi-utility vehicles such as jeeps, scooters, motorcycles, mopeds, three wheelers,
tractors etc.

The automotive sector is one of the core industries of the Indian economy, whose prospect is
reflective of the economic resilience of the country. Continuous economic liberalization over the
years by the government of India has resulted in making India as one of the prime business
destination for many global automotive players. The automotive sector in India is growing at
around 18 per cent per annum.
"The auto industry is just a multiplier, a driver for employment, for investment, for technology"
The Indian automotive industry started its new journey from 1991 with delicensing of the sector
and subsequent opening up for 100 per cent FDI through automatic route. Since then almost all
the global majors have set up their facilities in India taking the production of vehicle from 2
million in 1991 to 9.7 million in 2006 (nearly 7 per cent of global automobiles production and
2.4 per cent of four wheeler production).

The cumulative annual growth rate of production of the automotive industry from the year 2000-
2001 to 2005-2006 was 17 per cent. The cumulative annual growth rate of exports during the
period 2000-01 to 2005-06 was 32.92 per cent. The production of the automotive industry is
expected to achieve a growth rate of over 20 per cent in 2006-07 and about 15 per cent in 2007-
08. The export during the same period is expected to grow over 20 per cent.

The automobile sector has been contributing its share to the shining economic performance of
India in the recent years. With the Indian middle class earning higher per capita income, more
people are ready to own private vehicles including cars and two-wheelers. Product movements
and manned services have boosted in the sales of medium and sized commercial vehicles for
passenger and goods transport.

Side by side with fresh vehicle sales growth, the automotive components sector has witnessed
big growth. The domestic auto components consumption has crossed rupees 9000 crore and an
export of one half size of this figure.

Eye-Catching FDI Destination - INDIA!

India is on the peak of the Foreign Direct Investment wave. FDI flows into India trebled from $6
billion in 2004-05 to $19 billion in 2006-07 and are expected to quadruple to $25 billion in 2007-
08. By AT Kearney's FDI Confidence Index 2006, India is the second most attractive FDI
destination after China, pushing the US to the third position. It is commonly believed that soon
India will catch up with China. This may also happen as China attempts to cool the economy and
its protectionism measures that are eclipsing the Middle Kingdom's attractiveness. With rising
wages and high land prices in the eastern regions, China may be losing its edge as a low-cost
manufacturing hub. India seems to be the natural choice.
India is up-and-coming a significant manufacturer, especially of electrical and electronic
equipment, automobiles and auto-parts. During 2000-2005 of the total FDI inflow, electrical and
electronic (including computer software) and automobile accounted for 13.7 per cent and 8.4 per
cent respectively.

In services sectors, the lead players are the US, Singapore and the UK. During 2000-2005, the
total investment from these three countries accounted for about 40 per cent of the FDI in the
services sector. In automobiles, the key player is Japan. During 2000-2005, Japan accounted for
about 41 per cent of the total FDI in automobile, surpassing all its competitors by a big margin.
India's vast domestic market and the large pool of technically skilled manpower were the
magnetism for the foreign investors. Hitherto, known for knowledge-based industries, India is
emerging a powerhouse of conventional manufacturing too. The manufacturing sector in the
Index for Industrial Production has grown at an annual rate of over 9 per cent over the last three
years.
Korean auto-makers think India is a better destination than China. Though China provides a
bigger market for automobiles, India offers a potential for higher growth. Clearly, manufacturing
and service-led growth and the increasing consumerisation makes India one of the most
important destinations for FDI.

Automotive Mission Plan 2016

The bumper-to-bumper traffic of global automobile biggies on the passage to India has finally
made government sit up and take notice. In a bid to drive greater investments into the sector,
ministry of heavy industries has decided to put together a 10-year mission plan to make India a
global hub for automotive industry.

"The ten year mission plan will also set the roadmap for budgetary fiscal incentives"
The Government of India is drawing up an Automotive Mission Plan 2016 that aims to make
India a global automotive hub. The idea is to draw an innovative plan of action with full
participation of the stakeholders and to implement it in mission mode to meet the challenges
coming in the way of growth of industry. Through this Automotive Mission Plan, Government
also wants to provide a level playing field to the players in the sector and to lay a predictable
future direction of growth to enable the manufacturers in making a more informed investment
decision.

Major players in the automobile sector are:

o Tata

o Mahindra

o Ashok Leyland

o Bajaj

o Hero Honda

o Daimler Chrysler

o Suzuki

o Ford

o Fiat

o Hyundai

o General Motors

o Volvo

o Yamaha

o Mazda

Foreign Companies in the Indian auto-sector

Until the mid-1990s, automobile industry in India consisted of just a handful of local companies
with small capacities and obsolete technologies. Nevertheless, after the sector was thrown open
to foreign direct investment in 1996, some of the global majors moved in and, by 2002, Hyundai,
Honda, Toyota, General Motors, Ford and Mitsubishi set up their manufacturing bases.

Over the past four to five years, the country has seen the launch of several domestic and foreign
models of passenger cars, multi-utility vehicles (MUVs), commercial vehicles and two-wheelers
and a robust growth in the production of all kinds of vehicles. Moreover, owing to its low-cost,
high-quality manufacturing, India has also emerged as a significant outsourcing hub for auto
components and auto engineering design, rivaling Thailand. German auto-maker Volkswagen
AG, too, is looking to enter India.

India is expected to be the small car hub for Japanese major Toyota. The car, a hot hatch like the
Swift or Getz is likely to be exported to markets like Brazil and other Asian countries. This
global car is crucial for Toyota, which is looking to improve its sales in the BRIC (Brazil,
Russia, India, China) markets.

Two multi-national car majors -- Suzuki Motor Corporation of Japan and Hyundai Motor
Company of Korea -- have indicated that their manufacturing facilities will be used as a global
source for small cars. The spurt in in-house product development skills and the uniquely high
concentration of small cars will influence the country's ability to become a sourcing hub for sub-
compact cars.

A heartening feature of the changing automobile scene in India over the past five years is the
newfound success and confidence of domestic manufacturers. They are no longer afraid of
competition from the international auto majors.

For instance, today, Tata Motor's Indigo leads the popular customer category, while its Indica is
neck-to-neck with Hyundai's Santro in the race for the top-slot in the B category. Meanwhile
M&M's Scorpio has beaten back the challenge from Toyota's Qualis to lead the SUV segment.
Similarly, a few Indian winners have emerged in the motorbike market -- the 150 and 180 cc
Pulsar from Bajaj and 110 cc Victor from the TVS stable. The 93 cc Bike from Bajaj and 110 cc
Freedom bike from LML have also emerged as winners.
Evidently, Indian players have learnt from past mistakes and developed the skills to build
cheaper automobiles using `appropriate' technologies. TVS, for instance, paid an overseas source
$100,000 to fine-tune home-grown engines rather than $1.5 million to import the entire engine.
Similarly, M&M adapted available systems and off-the-shelf components from global suppliers
to keep costs down and go for aggressive pricing. True, Indian players are still lacking in scale of
operation. While economies of scale no doubt play an important role in the auto sector, a few
Indian manufacturers relied on innovation rather than scale of operation for competitive
advantage. For instance, Sundram Fasteners was able to achieve the feat of directly supplying
radiator caps to General Motors purely on the strength of innovation in product quality. The
domestic tooling industry bagged the order for the Toyota Kirloskar transmission plant in the
face of stiff competition from multinational corporations. The cost of the entire job turned out to
be only a fraction of the original estimate.

As the automobile industry has matured over the past decade, the auto components industry has
also grown at a rapid pace and is fast achieving global competitiveness both in terms of cost and
quality.

In fact, industry observers believe that while the automobile market will grow at a measured
pace, the components industry is poised for a take-off. For it is among the handful of industries
where India has a distinct competitive advantage. International automobile majors, such as
Hyundai, Ford, Toyota and GM, which set up their bases in India in the 1990s, persuaded some
of their overseas component suppliers to set up manufacturing facilities in India.

Consequently, the value of cumulative output of the auto components industry rose rapidly to Rs
30,640 crore at end-2003-04 from just Rs 11,475 crore in 1996-97. Foreign companies such as
Delphi, which followed General Motors in 1995, and Visteon, that followed Ford Motors in
1998, soon realised the substantial cost advantage of manufacturing components in India.

Finding the cost lower by about 30 per cent, they began exploring the possibility of exporting
back these low-cost, high-quality components to their global factories and, thus, reducing their
overall costs. Not surprisingly, the industry's exports registered a more than four-fold jump to Rs
4,800 crore in 2003-04 from just Rs 1,033 crore in 1996-97.
Automobile majors such as Maruti Udyog, Toyota, Hyundai have now finalised their plans to
invest in some of the critical auto components. According to the Automotive Component
Manufacturers Association of India (ACMA) officials, auto component manufacturers are
expected to invest about Rs 10,000 crore over the next five years at the rate of Rs 2,000 crore per
annum.

According to analysts, the auto component industry could emerge as the next success story after
software, pharmaceuticals, BPO and textiles. The size of the global auto component industry is
estimated at $1 trillion and is set to grow further. Against this backdrop, McKinsey's latest report
has estimated that the sector has the potential of increasing its exports to $25 billion by 2015
from $1.1 billion in 2004.

Threat to the Dream!

India's expedition to become a global auto manufacturing hub could be seriously challenged by
its inability to uphold its low-cost production base. A survey conducted by the research,
KMPMG firm reveals that the Indian auto component manufacturers are increasingly becoming
skeptical about sustaining the low-cost base as overheads including labour costs and complex tax
regime are constantly rising.

The survey said many executives believe that India's cost advantage is grinding down fast as
labour costs are constantly increasing and retaining employees is becoming more and more
difficult. Increased presence of global automotive companies in the country was cited as one of
the reasons for the high erosion rate.

Indian auto businesses will only flourish if they boost investments in automation. In the longer
term, cost advantage will only be retained if Indian capital can be used to develop low-cost
automation in manufacturing. This is the way to preserve our low cost.

Global auto majors are also cynical about India's low cost manufacturing base. India taxation
remains a big disadvantage. This is not about tax rates it is just about unnecessary complexity.
But some companies also believe there is scope for reducing the cost of doing business.
In spite of this there are opportunities to exploit lower costs right across the board. It's true that
labour costs are definitely increasing but they are still five per cent of the total operational costs.
The labour costs can be further reduced if companies are successful in bringing down other costs
like reducing power costs. Low-cost base can never last long. The company said Indian industry
has till now relied on very labour intensive model but it would have to switch to a more capital
intensive model now.

Interesting Facts:

Hindustan Motors was the oldest car manufacturers in India. It is best known for the Ambassador
which hasn't changed for more than 30 years.

The passenger car and motorcycle segment in India is growing by 8-9 percent.

Commercial vehicle will grow by 5.2 percent.

Sports Utility Vehicle (SUV) in the Indian market will increase in the coming years.

Auto sector in India is the sourcing base for global auto majors.

In the two-wheelers segment, the motorcycles will see the 11.5 percent rise, as compare to
scooters and mopeds.

Commercial vehicles and heavy commercial vehicles market including buses, trucks and tractors
will grow by 5.2 percent.

Phenomenal growth of India Automobile Industry

There's no doubt that the auto industry in India is a lucrative market. From Korean to American
to Japanese- auto majors are queuing to launch their luxury cars, SUVs and MUVs and gain the
maximum share.

Maruti Udyog was formed as a partnership between the Government of India and Suzuki of
Japan. They launched India's first "affordable car" Maruti 800 which has ruled the Indian roads
for more than two decades.
Tata Motors, as first known as Telco. It is the third largest car producer in India after Maruti and
Hyundai. Auto giant is also the fifth largest medium and heavy commercial vehicle manufacturer
in the world.

Mahindra & Mahindra started off with a first batch of 75 utility vehicles (UVs) in 1947. Today,
M&M is manufacturing jeeps, agricultural equipments and light trucks. Ford Motors entered
India in collaboration with Mahindra & Mahindra in 1995. Their first model was Escort.

Honda Siel Cars entered the Indian automobile market in the year 1995 and sells 4 cars - the
City, Accord, Civic and CR-V. Hyundai Motors holds second place behind the market leader
Maruti Suzuki in the Indian automobile market. Hyundai Santro is the most popular car by the
auto giants. To facilitate the buyers to acquire the car, there are a number of car dealers in India.
Car dealers sell cars of various brands. They are involved in the retailing of motor vehicles and
even have service parts department. Car dealers also provide service for the vehicles even after
the sale.

India is the fastest growing automobile markets. There has been a marked technological changes
and process which has led to the unparalleled growth.

In recent times, India has appeared as one of the largest manufacturers of small cars globally.
India's sturdy engineering base and proficiency when it comes to production of affordable, fuel-
economic cars has led to the expansion of production facilities of various car manufacturers like
Hyundai, Toyota, Nissan, VW and Maruti Suzuki.

Two years ago Hyundai alone had exported around 2,40,000 cars, all made in India. By next
year, Nissan plans to export at least 250,000 units produced in its plant in India. GM too has
great plans for India. The car maker's Indian subsidiary, Chevrolet has been doing real well and
GM wants about 50,000 cars manufactured in India in a year's time. The sales figures for almost
all car manufacturers in India have been displaying an all-time high and this has been projected
to grow further.

Hence, the scenario presented by automobiles in India is one of ongoing progress and
development. You can buy the vehicle of your choice from a number of automobile stores across
the country.