Microeconomics

Automobile sector in India

By
Manpreet
Nimisha
Pushpanjali
Sharmita
Sourav
Goutam

Automobile sector in India

The Indian auto industry is one of the largest in the world with
an annual production of 23.37 million vehicles in FY 2014-15,
following a growth of 8.68 per cent over the last year.

The automobile industry accounts for 7.1 per cent of the

country's gross domestic product (GDP) and about 49% of
manufacturing GDP

Divided into 4 segments -passenger vehicles, 2-wheelers,

commercial vehicles and 3 wheelers

Two wheelers segment (with 81% market share) the leader of

the Indian automobile market.

The overall passenger vehicle segment has 13% market share.

And the 3-wheeler and commercial vehicles constitute 6%

Car, truck and two-wheeler sales are good indicators of

consumers, corporate and farmer sentiment respectively.
Hence the sector can be considered as one of the key
indicators of economic vitality.

Domestic Market Share for 2014-15

13%
3%
3%

81%

Passenger Vehicles

Commercial Vehicles

Three Wheelers

Two Wheelers

Historical Microeconomy of
Indian automotive industry

In the two wheeler segment, before the opening of the Indian economy
there only 2 major players in the market i.e Hero Honda and Bajaj auto with
minor players like TVS, Enfield etc. These 2 players dictated the terms in the
market, hence the economic state then was duopoly

Similarly in the passenger vehicle segment before the advent of Maruti

Udyog limited in 1981, the only 2 players in the segment were Hindustan
motors(Ambassador) and Fiat. The vehicles produced by them though were
different, served as close substitutes. However both behaved like rivals,
hence had price wars. A classic case of duopoly was observed.

Also in the commercial vehicle segment, the only two players were Tata and
Ashok Leyland(Hinduja group) and as in the above cases, duopoly was
notices in this segment too.

In the 3 wheeler segment however, the only player in the market was Bajaj,
they had absolute monopoly in this segment, and were unchallenged,
before other foreign and domestic players entered the segment.

Todays Situation
Two - wheeler market

Others; 1%
Yamaha; 3% Suzuki; 2% Royal Enfield; 2%
Bajaj Auto; 10%
TVS; 12%

Hero Moto Corp; 41%

Passenger vehicles market

Toyota; 5%

Others; 10%

Tata; 5%
M & M; 6%
Honda; 7%

Honda; 29%

Hyundai; 19%

Maruti; 49%

Todays Situation
Three wheeler market

Atul Auto; 3% TVS; 3%

M & M; 6%
Piaggio; 12%

Bajaj; 34%

Commercial vehicles

Others; 7%
Eicher; 6%

Three wheeler market; 42%

Ashok Leyland; 15%

M & M; 25%

Tata ; 47%

Factors determining micro-economy

1.

Number of firms

The automotive industry in each segment has many firms, some homegrown and
others foreign with subsidiaries in India

Each firm has many products and the firm serves as a brand for the various
product lines available.

For example in the two wheeler segment Hero Honda serves as a brand and the
bike models such as passion, Karizma fall under its umbrella

In the passenger vehicle segment the brand Hyundai for example have various
models such as i20,i10 and Creta under its wings.

The presence of multiple number of firms, gives the independence to the firms to
set prices without engaging in price wars, and the action of 1 firm will have
negligible impact on the market as a whole. For example a firm can cut the price
of its cars, bikes or lorries and increase sales without much fear of retaliatory
measures from the competetors

Factors determining a micro-economy

2.

Product differentiation

If the automotive industry as a whole is considered, then based on the

utilizes and excluding the inner and outer characteristics of the vehicle,
we can say that the sector can be differentiated into the 4 segments as
depicted earlier.

If individual segments are considered then, with in each segment the

product differentiation is very high

The goods within each segment perform the same basic functions but
have differences in qualities such as type, style, quality, reputation,
appearance, and location that tend to distinguish them from each other

For example in the commercial vehicle sector, Tata and Ashok Leyland
produce the same products, however the lorries made by Tata are more
frugal and easier to maintain, hence differentiating their product.

Factors determining a micro-economy

3. Pricing power

As the products in the various segments of the automotive industry are

highly differentiated, by the thumb rule we can say that the automotive
industry on the whole is a Price maker and not a Price taker

Each company or a certain brand has its own market power, which helps
it set its own price rather than becoming a price taker

However the same does not hold true all the time. For example, if a
certain brand prices its products higher than the customer expectation,
or the market perception, then the people buying that product will be
lower, hence the sales reduces.

And in the case of the commercial vehicles, when supplying to large fleet
operators or to government agencies, the price is determined to a certain
extent by the buyer.

Factors determining a micro-economy

4. Barriers to entry

Barrier to entry are on the lower side for the automotive industry in
terms of the regulatory and government norms.

However it is a highly capital intensive industry. Finding the source of

funding is one of the barriers

Also for the automotive industry to setup a plant, the real estate required
is very high, getting land allotted by the government agencies may also
form barriers for the new entrants.

Profit maximization condition

In the short run, the profit maximization occurs for the condition MC=MR i.e. the
marginal cost is same as the marginal revenue as shown in the figure 1 above. P is the
price which can be fixed by the automotive firms and the profit will be in the area
PACB.
In the longer run, due to the entrants in the market, the existing products of the
automotive industry, become more elastic and the demand curve shifts to the left
driving down the price, hence the profits will decrease.
In order to increase profitability innovation and introducing the new products is a

Elasticity of demand
The elasticity of demand, is very high in
the longer run for the auto mobile
industry.
The figure shown depicts a sample of the
High elasticity in the automobile market.
When the price of the automobiles
increases, then the demand falls.
For example, in January when the taxes
on vehicles increased, the demand for
them decreased and the same was
reflected in the quarterly results of the
manufacters.

Porters five forces model

Conclusion

On the basis of the analysis done, the we can conclude that the
Automobile market in India, is a combination of Oligopoly and
monopolistic competition.

Across the broad segments we can see that there are a number of
competitors, but 1 or 2 firms have a larger market share.

However due to number of competitors and lack of trust among

competitors, cartelization is absent in the market.

Q and A