Name: Batch: SMS ID: Topic: Faculty: Center:

Palak Shah PGCBM-20 2221624 Automobile Industry Demand and Supply factors & Future ahead Vishwa Balla Dadar (w), Mumbai

Introduction
Indian Automobile Industry is one the largest in the world that designs, builds, and sells motor vehicles in India as well as abroad. The overall production was more than 11 million vehicles in 2008 to 2009. The exports have increased to around 1.5 million in the year 2008 and 2009 which is more than 30% rise over the previous year. India is 2nd largest two wheeler manufacturer in the word. In the passenger car and commercial vehicle market, India ranks at 8th currently. The automobile industry contributes to about 5% of total GDP. In this case study, we study some of the main factors that would impact the Demand and Supply in India Automobile Industry in future. The study of these factors would probably forecast the growth potential of Indian Automobile Industry in coming years.

Factors impacting Demand Factors which could help Indian Automobile Industry grow
Increased access to Finance The financing options is one of the important reasons which has helped boost the sales of car segment in a short term. The interest rates have reduced over the last few years leading to smaller EMIs. The companies are offering long term loans like 5 years instead of earlier 3 years period. Some of the banks offer to complete the loan processing in 2 days and that means that it is easy and faster to get a loan now than it was few years back. The demand curve has shifted upwards or to the right due to increased access to Finance (as represented by Curve D2 of Figure 1). Figure 1: Shifts in Demand Curve of Vehicles

Marketing

The marketing strategies of the companies in Automobile Industry have changed in last few years. The companies now spend heavily on advertisements. The companies have associated film superstars or crickets to their brand names. For example, Ranbir Kappor for Nissan Micra and Priyanka Chopra for Hero Honda scooter with a tagline Why Boys have all the fun have been able to catch the imagination of young buyers. The marketing strategies have helped automotive industries to increase the demand in a short run and the demand curve shifts to the right (as represented by Curve D2 of Figure 1). . Pricing and New Offerings Price is one of the major factors which affect the demand of any item in the market. As per the law of demand, Increase in prices would cause decrease in the demand and vise versa. The price changes represent the movement along the demand curve. This does not result in shifting the demand curve. In the compact and medium car segment, there is lots of competition today. There are so many options available to the consumers like Martuti 800, Hyundai Santro, i10, A-Star, Swift, i20, Nissan Micra, Polo, Fiat, Indica, and many more. Hence companies are coming up with attractive pricing for there cars. The companies are also re-launching the same cars with improvements which were highly successful in the past to re-gain the market. For example, Maruti Swift was the highest selling model around 5 years back. Martui has re-launched the Swift 2 times, the latest being in 2011 with a hope to penetrate the market further. Growing Population (Demographics) and Increasing Income Levels Indias population is 2nd highest in the world at around 1.2 billion in 2011. India represents 17% of total World population. Indias growth rate is around 1.5% and is expected to topple China by 2030. More than 65% of Indias current population is under 35 years. The one of the reasons that boosts demand is increase in population especially younger population would be more inclined to buy new vehicles. The population growth would help increase the demand by shifting it to the right or upwards (as represented by Curve D2 of Figure 1). Another factor is an income level of the buyer. With increase in income levels, the demand for Automobile industry would further increase. Indias per capita income has doubled in last 7 years and the size of Indian middle class is growing very fast. Exports India is fast emerging as a manufacturing hub for global cars. Several large manufacturers have plans to setup or have already setup manufacturing bases in India to produce vehicles for India as well as for Exports. There are Indian Manufacturers which are also exporting their vehicles to the world. For example, TATAs have big plans to export their dream car NANO to all over the world.

Factors which could stall the growth of India Automobile Industry

Non-availability of key raw materials like Steel

The prices and availability of key raw material like Steel could play an important role in stalling demand for the automotive industry. The prices of Steel in last 5 years have increased significantly due to acute shortage of iron ore in India. If the prices of Steel increases further, the Demand curve would shift to the left (as represented by curve D3 in Figure 1). Increase of Crude Oil price The Crude Oil prices in the world market is currently hovering at 100-110$ per barrel. The prices of Petrol in cities of Mumbai are currently at 72 rupees per litre which are at its peak. The prices of petrol have also increased due to recent Governments change in policy of de-regulating the petrol and diesel prices. During periods of high fuel cost as experienced in 2007-2008, demand for large cars declined in favour of smaller, more fuel-efficient vehicles. The higher fuel prices would shift the demand curve the the left (as represented by cureve D3 in Figure 1). Even though the price of the vehicles have come down, increased running costs mean that people look for alternate options like traveling by Government transports or trains.

Factors impacting Supply Factors which could help Indian Automobile Industry grow
Figure 2: Shifts in Demand Curve of Vehicles

Variety & Efficiency Todays automobile industry is offering lots of variety in terms of sub models for the same vehicle. For example, the base model of a car would not have AC, Power steering. The highest version of the model may have features like audio system, AC, Power steering, ABS, etc. These differences enable them to increase the supply as it can cater to different consumers with the same product.

The efficiency of operations has become a key distinguisher amongst different manufacturers. The companies can achieve better efficiency and reduce cost of production by automation, better supply chain management, rationalizing the workforce, etc. These factors allow them to shift the supply curve to the right (as represented by curve S2 in Figure 2). Technology The technology advances allow companies to shift the supply curve to the right i.e. increase the supply. The invention of new machines/techniques reduces the amount of labor necessary to make a particular vehicle. This results in reduction in firms costs.

Factors which could stall the growth

Government Policies and Taxes If there is a change in the Government Policies or taxes, it would impact the supply. For example if there is a increase in the road tax, the supply would reduce i.e. it would shift the supply curve to the left (as represented by the curve S3 in Figure 2). Production Factors There are several factors which impact the supply of a vehicle like Input cost, Raw material cost, Labor cost, Machineries cost, etc. If there is an increase in the cost of raw material, the total production code would increase leading to decrease in profile margins. All these factors are inversely proportional to the quantity supplied i.e. increase in any of these factors would cause reduction in the supply (as represented by the curve S3 in figure 2). Crude Oil Supply The crude oil supply is a critical factor which would largely impact the supply in the automobile industry. The impact is in the short run as well as the long term. In the short term, problems like natural calamities in the countries which produce Crude oil result in increase in the price of the Crude oil and it can be represented as the movement along the Supply curve. The stock of the crude oil is limited. Hence in a long term also the price of crude oil plays a critical role in the quantity produced and supplied.

Conclusion
Demand and supply curves refer to the relationship price has with the quantity consumers demand and the quantity supplied by producers. The quantity demanded decreases and the quantity supplied increases as the price of a commodity increases. By studying various demand and supply factors affecting the automobile industry we can conclude that an upward or a downward impact is due to an aggregation effect of multiple factors that we discussed. These together govern the economies of automobile sector.