Amazed by stellar show, Honda weighing third car plant in India for entry-level small car

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Honda's new third plant is expected to cater to an all-new model, a new entry-level small car in the Rs 3-4 lakh range. Honda's new third plant is expected to cater to an all-new model, a new entry-level small car in the Rs 3-4 lakh range.
SummaryUnit, likely in Sanand, to cater to new small car in R3-4 L bracket as co fine-tunes strategy

Though the domestic car market is witnessing a slowdown, Honda is betting big on growth from India, encouraged by the success of its first diesel model, the Amaze entry sedan. The Japanese carmaker has started a feasibility study for building a third plant and is considering Gujarat (Sanand) as a base, even before its second new plant in Tapukara, Rajasthan, begins production by early-2014, multiple sources told FE.

These plans were reportedly discussed at a top-level meeting in New Delhi last month, where Honda Motor Company global chairman Fumihiko Ike and global president Takanobu Ito were present.

This new third plant is expected to cater to an all-new model, a new entry-level small car in the Rs 3-4 lakh range positioned below its current entry model Brio (starts at R4.13 lakh). The new small car will target high monthly volumes, competing with Hyundai Santro and Eon, and market leader Maruti Suzuki's Alto, the largest-selling car in India with monthly volumes of about 20,000 units.

“Last month, Honda's global meet was held in India with a focus on gaining share in the country's car market. A feasibility study has been started for a new plant, for which several locations are being considered. This plant will make a new car below the Brio by 2017, called the World A-entry hatch,” a source close to the development said.

Honda is looking at a new plant as the new small car will target the high-volume belly of the Indian market — the mini car segment that currently accounts for 23% of passenger vehicle (PV) sales and 32% of passenger car sales. The mini segment saw 11.21% growth in April-August FY14 at 2.22 lakh units, even though total PV sales fell 5.30% to 9.84 lakh units in the period.

“We have to run fast to get volumes in India because we are very small today. Honda feels that to maintain and grow its global market share by 2020, increased capacity will be needed in emerging markets like India, from where the growth will actually come, since developed markets are near saturation. Talks are on for various products, but nothing has been frozen. But only when we are sure of utilising the new capacity at Tapukara, can we ask the headquarters for more investment,” a Honda Car India official said.

"This is a very key pillar of Honda's new growth strategy. With such a move, Honda will be going for the volume car market and competing with Maruti Suzuki and Hyundai for the first time. For such volumes, they will need a new plant, or an extra line," said Gaurav Vangaal, senior analyst, automotive forcasting, at IHS Global.

The development comes on the back of an aggressive growth target set by the company. Honda is targeting a market share close to 10% with four new models planned for launch by 2015-16 — a new City, new Jazz, completely new compact MPV on the Brio platform and a small SUV based on the Jazz. With volumes up 65% to 49,263 units in April-August this year on the back of strong demand for the Amaze, Honda's market share in the PV segment has almost doubled to 5% from 2.73% in FY13. Currently, Maruti leads with a 40% share of PV sales, followed by Hyundai (15%) and Mahindra (10.6%).

Honda global chairman Ike recently told FE in an interview that expansion at Tapukara beyond the current plans would prove tough, but the company is looking at other regions within the Delhi-Mumbai Industrial Corridor. “We are very much interested in DMIC, but we need infrastructure. There are some bottlenecks in terms of infrastructure. For example, if we want to expand our volumes in Tapukara (existing two-wheeler and upcoming car plant), we cannot, because of limited supply of water. So we have to find another place. There are problems in logistics. So, even if expand capacities to meet the demand, the problem is how to deliver these vehicles to people in time,” he said.

Sources said Sanand could be the most likely site for this third plant as Honda's domestic two-wheeler arm, Honda Motorcycle & Scooter India, has already bought a plot of land in the region for its own facility. This is because Honda follows a strategy of keeping group affiliates close by. For example, in Tapukara, where a car plant is expected to start next year, the two-wheeler arm already runs

a plant.

This development comes soon after Honda announced (in April this year) an investment of R2,500 crore for the second car plant at Tapukara with a 1.2-lakh unit initial annual capacity, apart from a forgings unit and diesel engine plant at the same site. Currently, the company operates a single car plant in Greater Noida with annual output of over 1.2 lakh units. The plant makes the Brio, Amaze, City models and assembles the CR-V and Accord.

Responding to queries, Honda Car India said, "As a standard practice, we refrain from commenting on market speculation and rumours. Our current focus is to meet the deadline for our Tapukara Plant and begin car assembly operations there by next year".

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