Indian auto cos in China in high spirits despite slowdown

Written by Shweta Bhanot | MG Arun | Mumbai | Updated: Aug 8 2011, 06:35am hrs
While many Indian companies like Larsen and Toubro find it difficult to compete in China due to rising wages and cultural/language barriers, conglomerates like Tata Group and Mahindras have seen reasonable increase in their business in the country in the past two-three years, thanks mainly to consumer-demand driven growth in sectors like automobiles.

While Tata Group's overall revenues from China grew from $1 billion in 2007-08 to around $3.7 billion in 2010-11, Mahindra saw 18% growth in tractor sales in the country in 2010-11, and expects 12% growth over that this year. Although regulatory hurdles are a problem, Tata Group still sees China as a market potentially as big, if not bigger, for the Jaguar and Land Rover (JLR) brands than home turf UK.

China, which had emerged as an attractive business destination with double-digit growth over the previous years, is slowing down a bit. But the country is still way ahead of traditionally large automotive markets in Europe and the US.

Industry experts also say that although the change in China's growth trajectory may surprise those who have been used to its high growth rates, it would also call for creativity in business to tap the rising potential in the region.

Said Laura Brannan of JLR's corporate affairs division: China remains one of JLR's top three markets by volume and is continuing to grow. For us, demand continues to increase across both marquees. China will receive new vehicles like the Range Rover Evoque as they are launched. Wholesale volumes of JLR in China for 2010-11 grew by 11%, from 9.7% reported in 2009-10.

China has emerged as the worlds largest automobile producer, producing 13.8 million cars in 2010 that accounted for 24% of world production, surpassing the US, which produced only 2.7 million cars. It is also the worlds largest domestic market for automobiles. In 2010, Chinese buyers bought about 18 million automobiles, against 11.7 million in the US.

But its economy has slowed down amid inflation concerns. Its central bankers have, time and again, raised interest rates to counter inflation. There's, however, no need for any grave concerns yet.

Mahindra & Mahindra (M&M), which has a presence in the Chinese market through its two joint venture companies including Mahindra (China) Tractor Company Limited and Mahindra Yueda (Yancheng) Tractor Company Limited, is still betting big on the second largest tractor market in the world after the US.

Pravin Shah, chief executive international operations, automotive and farm equipment sectors, M&M, said: The Chinese tractor market has been growing at a healthy rate for the last six to seven years. The major reason for this has been supportive government policies promoting agricultural mechanisation. M&M has a market share of 9-10% in the sub-75 hp tractor segment in the Chinese market.

Professor Nirmalya Kumar of the London Business School is of the view that as long as India and China are growing, the potential for business will exist. There is no need for panic buttons, as both India and China are growing, and especially fast compared to the developed countries. Yet, there is a relative slowdown in both countries and this will force companies to have to find sales elsewhere in the world in order to sustain their own revenue growth of the recent past, he told FE.

M&Ms Shah added that there is a substantial subsidy on agricultural related equipment, including tractors that boost demand.

There is a 25-30% subsidy on product prices, including tractors in the Chinese market, thanks to the government policies, he said. However, in 2010, this growth slowed down to 10% as against 25-30% earlier.

Last year, subsidy disbursements were delayed, missing the major season, which affected tractor retails, resulting in just 4% domestic tractor market growth for M&M. Exports from China, which had slumped last year, posted a smart recovery, propelling Mahindra China export volumes to grow by 31%, thus achieving the third position in Chinese tractor exports, according to M&Ms annual report 2010-11. Shah also pointed to the growing budgetary allocation towards agricultural sector over the years. The last government budgetary allocation has been 13 billion Chinese yaun or R8,957 crore.

V Sumantran, executive vice chairman, Hinduja Automotive had been quoted in an earlier interview that although the China market is attractive, the disincentive is that companies need to form a 50:50 JV with a Chinese firm to operate there, unless it is 100% export-oriented. In fact, Tata Motors JLR is said to be in talks with potential JV partners for setting up a production base there. Asked about the concerns over a slowdown in the Chinese market, M&Ms Shah said: There has been some saturation in the market due to advance buying and lack of rush for products since the subsidiaries have been existence from a while and easily available.

The fundamentals of the Chinese market remain strong. Robust government plans and the inherent strength of the economy and growing disposable income in the hands of the Chinese people showcase the ongoing growth potential in the market. Though the number may settle down a bit lower than the earlier, it will continue to grow in the coming years, Shah added.

Professor Kumar says people tend to project current trends forever and therefore, are left surprised when things change in trajectory. Yet, whilst growth in both countries has to come down to more normal levels at some stage, it does not mean that companies will be unable to grow sales in these countries as the untapped potential numbers of customers, especially for MNCs is still large in China and India. But it will require more creativity than in the past, when anyone could generate sales and profits growth in India.