R.C. Bhargava, chairman of India’s number-one passenger car manufacturer, Maruti Suzuki, has just returned from Rohtak, in northern India, where his company is building an R&D showpiece. Bhargava has witnessed the growth of India’s automobile sector since 1981, when he joined Maruti, then known as Maruti Udyog, as the company’s third employee. He is excited about the mandate coming from Suzuki Motor Corp. headquarters in Hamamatsu, Japan.
“Suzuki is very clear that the future lies in our ability to design an indigenous Indian car,” Bhargava says. “We have the necessary advantage vis-à-vis cost, engineering skills and expertise. So Suzuki is putting its full weight behind the project. We have bought 600 acres in Rohtak, and over the next five years we will be investing US$300 million to build this plant. It will fashion the new Indian car with Indian facilities, know-how and technology.” Bhargava notes that between Gurgaon, home of Maruti Suzuki’s mother plant, and Rohtak, “We will have 1,000 engineers working on the new projects.” The small car to be rolled out from the Rohtak plant will be on a brand-new platform with a 1.2-liter engine. Maruti’s mainstay — the 800cc Maruti 800, India’s largest-selling car — is 25 years old this year.
The new Maruti offering is a sign of the times. It has been hard to avoid predictions lately that India will become the world’s small-car hub. Urban mobility in India is all about small cars. While two-wheelers play a crucial role in Indians’ commutes, the aspirational novelty of owning a passenger car is of overriding importance to the Indian psyche.
Toyota Kirloskar Motors deputy managing director Sandeep Singh is among those who are bullish. His company until now has manufactured only big cars in India. “We are making a US$600 million investment in a second car plant in India,” Singh says. “By end of December 2010 or early January 2011, Toyota will be ready to unveil its new compact car designed by Toyota Japan and developed for the Indian market. It will be launched in India first and will have a lot of Indian-ness, including the fact that it will have an Indian platform. It will be manufactured by Indians for Indians.”
Ford Motor Co. has just launched its version of a small car — Figo — that will be manufactured locally early next year. Ford CEO Alan Mulally, who was in India for Figo’s September launch, believes that the Indian small-car segment will double over the next 10 years. “About 60% of the vehicles worldwide will be smaller vehicles like the new one here,” Mulally said at the time. Ford is investing US$500 million to double capacity to 200,000 cars annually at its Chennai plant in southern India.
A Growing Domestic Market
What is driving the optimism? For one, the domestic market is already growing nicely. India produced 1.5 million vehicles last year. In the first four months of this fiscal year, production was up 10% compared with the same period last year.
Dilip Chenoy, director general of the Society of Indian Automobile Manufacturers (SIAM), believes that India can soon become the second-largest manufacturer of small cars in the world, behind only Japan. “Look at the Indian government’s Automotive Mission Plan 2006-16,” he says. “It clearly states that investment assistance will be provided to support the small-car industry; a suitable domestic environment will be made available in terms of tax differentials; the government will help create and augment related support infrastructure in terms of people and technology assistance; and the government will promote big-ticket infrastructure reforms in terms of road connectivity.”
If India completes its transformation to a small-car hub, it won’t be because of engineering, notes Dinesh Mohan, a professor in the transportation research and injury prevention program at the Indian Institute of Technology (IIT) Delhi. “We need to understand the mechanics,” Mohan says. “India doesn’t have vertically integrated automobile plants; all our car projects are vendor-based. Maruti Suzuki used to be vertically integrated, but even that has changed. There is no fluid assembly line process here; it is putting together and sourcing from various vendors. In many ways, like the after-shave lotions and perfumes at the lower end of the pyramid, the small cars are all the same. There is no differentiating factor in them. There might be varied product perceptions, but in reality they are the same.”
India “does not have engineers with adequate research capability,” he continues. “I think India will flourish as a hub primarily because of the cost arbitrage that it offers. What is bringing all the global majors to India is simply the fact that research is dominated by OEMs [original equipment manufacturers], and they are combining to bring about cost efficiencies, be it in power trains, transmissions, brakes, seat belts, you name it.” He cites as an example the 50/50 joint venture formed by the Tatas and Fiat that is investing €650 million to build passenger cars, engines and transmissions in India.
Puneet Gupta, an analyst with CSM Worldwide, an automotive market forecasting service, says that Indian labor costs are 90% lower than in the United States and Europe, while raw material costs are 11% lower. In an interview with Bloomberg News, he noted that designing a small car in India would cost US$225 million to US$250 million, while the same process would cost US$400 million in Europe.
The major automotive manufacturers have clearly found their way to India. Volkswagen is ready to launch the Polo from its US$700 million facility in Chakkan, near Pune in western India. Says Thomas Dahlem, Volkswagen India director of manufacturing engineering: “As a global player, we realize the importance of India. We know that it will become the fifth-largest auto market by 2016. We understand that it is a price-sensitive market where it is tough to sell, but we are keen on it. Using just-in-time techniques, we want to build an auto environ here, controlling quality and technological inputs following a global sourcing model.”
A Global View
But India’s small cars aren’t being sold only locally. Suzuki has nearly doubled its export target to 130,000 cars from India this year, while Hyundai’s exports of the compacts i10 and i20 leapfrogged by 43% in the January-July period. India sold 201,000 fuel-efficient mini-cars and hatchbacks abroad in that period. Compared with 1.5 million vehicles produced last year, close to 1.85 million are expected to be made this year. While as much as 75% to 80% will be sold locally, the balance will be exported.
H.S. Lheem, chief executive of Hyundai Motor India, the country’s second-largest manufacturer, told Japanese daily Nihon Keizai Shimbun that his company is ready to unveil a US$5,000 to US$6,000 800 cc small car from its Chennai plant. The car will be sold in India as well as exported. Nissan, too, is readying a small-car gambit with a big investment in an export-focused plant in India.
India’s exports already have topped China’s, and this in itself is a catalyst. Bhargava believes that China isn’t strong in the small-car segment because its auto industry took shape making midsize cars. Tim Armstrong, director of market intelligence service IHS Global Insight, says that 95% of the 690,000 cars that India will export in 2015 will be small cars. With oil’s 2008 price spike still fresh in people’s minds, more and more people are shifting away from gas guzzlers.
Environmental consciousness is increasing, too. Rising worries about carbon dioxide emissions have led European governments to announce subsidies for replacing cars more than 10 years old. Germany, for instance, provided buyers a €2,500 subsidy to buy a new car. Given their cost, mileage and emissions advantages, small cars have much to offer. Maruti’s new A-star, for one, has done exceedingly well in Europe, Bhargava says.
Environmental hazards could also drive more and more toward small cars. “It is here that India stands to gain,” Bhargava says. “A greater awareness that large cars are a needless luxury is dawning upon the Europeans. But we need to prune costs further; there are too many non-value-adding transaction costs which are still a deterrent. That is why we have started an interface with the government in a move toward cooperation so that the consumer or the government doesn’t get hurt.”
It’s Not About the Nano
The majors’ great rush to enter the Indian small-car market is fraught with irony. Few realized until recently that the real market was in the compact space. Ford, Honda and Toyota all read it wrong. Only Hyundai took the risk, along with Tata and its Indica, to develop and expand the Indian small-car market. By 2015, Indian passenger-car production is likely to swell to 3.5 million, and more than 60% will be small cars, according to SIAM.
The queuing up of global majors to manufacture small cars in India appears to have little to do with the Tatas’ ultra-low-cost (ULC) car, the Nano. Rather, investors believe the market will widen and deepen. The Toyota Yaris and iQ are already doing well in Europe, Toyota’s Singh says. “Europe is not interested in the ULC car. It wants a small car with all the safety features, and also top-end accessories. It seeks … a modern, fuel-efficient hatchback. A distinction needs to be made between the ULC and a strategy compact for the European market. Our endeavor in India is to manufacture a car which meets Toyota’s stringent standards. We are not in a hurry to capture market share, and we are in India for the long haul. We now have evolved from being a small-volume player to a mass-volume player in the Indian market.”
So why didn’t the majors see the opportunity earlier? “Everyone tries to transpose the learning from different markets,” Bhargava says. “Over time, one realizes that India is different. It is an acutely cost-conscious market where after-sales service and spare parts are a critical component. This lack of knowledge about India, its people and customer behavior is primarily responsible for the [majors’] failure.”
The South Asian market is unique, IIT’s Mohan adds. The proportion of small cars is high, and, unlike in the United States, large SUVs function primarily as high-capacity taxis. The aspirational theme of graduating from small cars to larger cars or sedans is overdone, he says, because per capita incomes remain low, and less than 20% of the population can afford a car or two-wheeler.
But now the herd has arrived. Gyaneshwar Sen, vice president of marketing for Honda Siel in India, believes that sentiment has improved dramatically over the last few months. A recovery from the unease of the economic crisis coupled with lower interest rates and pump-primed liquidity have gone a long way in coaxing customers to return to auto showrooms. The B-plus segment, which starts with Maruti Suzuki’s Swift and ends with Honda’s Jazz, is thriving. New launches have deepened the market. Maruti Suzuki’s Ritz, Hyundai’s i20 and Fiat’s Punto have done their bit in bringing back some cheer. According to Sen, there’s no reason for the mood to ebb. “The Indian stock markets have rebounded, doubling quickly as foreign institutional investors have pumped in US$10 billion” so far this year, he says. “Realty rates have also begun to climb back. So discretionary incomes are coming back into the system again, freeing up money to buy cars.”