Indian Automotive Industry: Opportunities and Challenges Posed By Recent Developments

For forty years since India's independence from the British in 1947, the Indian car market was dominated by two localized versions of ancient European designs -- the Morris Oxford, known as the Ambassador, and a old Fiat. This lack of product activity in the Indian market was mainly due to the Indian government's complex regulatory system that effectively banned foreign-owned operations. Within this system (referred to informally as the "license raj"), any Indian firm that wanted to import technology or products needed a license/permit from the government. The difficulty of getting these licenses stifled automobile and component imports, creating a low volume high cost car industry that was inefficient, unprofitable, and technologically obsolete. The two dominant products Ambassador and Fiat, although customized to the poor road conditions in India, were based on a stale design concept (with outdated features), and were also fuel inefficient.


Then came the abolition os license raj, In 1993, the government followed up its liberalization measures with significant reductions in the import duty on automobile components. These measures have spurred the growth of the Indian economy in general, and the automotive industry in particular. Since 1993, the automotive industry has been experiencing growth rates of above 25%.

In the past two years, more than a dozen multi-national firms have announced plans to enter the Indian market. Most of them have formed joint ventures with Indian firms, while there are exceptions such as Hyundai which plan to form fully-owned units. Despite the large growth potential of the Indian market (analysts expect the growth to triple in the next five years), no one expects the industry to sustain the fragmentation caused by more than a dozen suppliers. Many of these new firms will not enjoy the scale economies and relationships with suppliers that Maruti does, so they have decided not to challenge Maruti at its price of $5,500 in the smaller car segment.

Amongst the many issues facing the Indian automotive industry, the biggest by far is the poor road infrastructure. India's road network, comprising of a modest national highway system (that is only 2% or less of the total roadway length) is woefully inadequate and dilapidated, and can barely keep pace with the auto industry's rapid growth. Most roads are single-lane roads built in the 1950's and 60's, and are crowded with two-wheelers, bullock carts, and even pedestrian humans and cows. Traffic laws are not well enforced leading to one of the highest per-capita accident rates in the world. It is to be expected that the introduction of bigger and more powerful vehicles will only worsen the situation. Upgrading the existing highway system is itself expected to cost $30 billion or more, and resource and land constraints prevent the building of new highways. The Indian government's approach to solving this problem is to privatize the road infrastructure, by having private firms build and operate tollways. However, it is unclear if this alone will be able to solve this infrastructure problem of enormous proportions, which can severely bottleneck future growth.

To analyze the strengths and weaknesses of the various players in the Indian automotive industry, it is useful to classify them into the following four categories: (1) Indian Assemblers, (2) Multinational Assemblers (3) Indian Component Makers, and (4) Multi-national Component Makers.

Now if we look at the strength and weakness of various groups then we have

Group

Indian Assemblers

Strengths

• Established distribution and after-sales networks, and supplier base.

• Understanding of the Indian market and ability to liaison with the government

 

Weaknesses

• Lack of product development capabilities (except TELCO)

• Brand image (especially HM and PAL).


Multi-national Assemblers

Strengths

• Lean production capability

• Ability to design products with differentiating features

• Deep pockets, brand image.
 

Weaknesses

• Lack of experience with the Indian market, industry, and government.

• Small component supplier base and high import tariffs.

 
Indian Component Suppliers

Strengths

• Low cost, skilled workforce

• Learning From exports

Weaknesses

• Small Size, Fragmentation

• Lack of know-how in certain areas.

 

Multi-national Component Suppliers

Strengths

• Size, Deep pockets

• Experience and Know-how in technology.

 
Weaknesses

• Import tariffs, currency exchange rate fluctuations.

• Inexperience with Indian workforce.

The Indian automotive industry, although growing rapidly, is in a state of flux. The production capacities planned by the new joint ventures currently exceed most projections, and unless import tariffs come down quickly and the economy grows remarkably, a shake-out may be expected from the current 20 firms to about half a dozen major firms turning out finished products by the end of the decade.