Road quality, growth of satellite towns & finance key to auto sector growth

Written by R Ravichandran | Updated: Dec 30 2009, 04:25am hrs
The quality of roads will determine the growth of the auto industry in India. Growth of satellite towns around large metros is likely to create demand for low capacity transport of cargo, small cars and two-wheelers. Initial estimates show that passenger cars may see 8-10% growth overall in the domestic sale but it may be difficult to sustain the export volumes of 2009. I will not be surprised even to see some degrowth, says Kumar Kandaswami, senior director, Deloitte Touche Tohmatsu India, in an interview with FEs R Ravichandran. Excerpts:

Whats your take on the overall auto industry in calender 2009 vis-a-vis 2008

There has been a marginal growth in 2009 over 2008 on an overall basis. The export of passenger cars grew quite substantially and India overtook China in car exports. These exports were supported by strong demand for small, fuel-efficient cars from Europe as a part of the cash for clunkers programme. Commercial vehicle (CV) sales dropped down as there was an over supply during the year and there were fears of industrial activity flattening.

In your opinion, what are the industrys prospects in 2010

Depending on how much industry growth is sustained, the CV sales may just about return to positive growth. It is probably very early to talk about growth bigger than that. Passenger cars may see 8-10% growth overall in the domestic sale. However, it may be difficult to sustain the export volumes of 2009. It wont be even surprising to see some degrowth during the year.

With most of the auto majorsboth domestic and global oneslining up small cars for a 2010 launch, where do you see the domestic market heading for

Going by what one sees in most other markets, there is room for one or two more volume players in India. At present, the market is highly concentrated with three major players. With the prospect of reasonable growth over the next decade or more, this is quite conceivable.

Do you see a full recovery on the commercial vehicles front, including LCVs, HCVs and buses

This would be determined by how the consuming industries grow. If the present growth pattern is maintained and construction shows signs of picking up, the first milestone would be to reach close to the 2008 levels. It is a little difficult to envisage a growth beyond this in the next 12 months. Further, credit availability is likely to be a factor in CV buying. If access to easy credit is not going to improve, the number of buses is not likely to grow rapidly. Buses would be driven by stimulus buying by the government-owned transport corporations. Otherwise the growth driver is going to be the expansion of roads, which is a long-term issue.

What is the growth prospects of the auto ancillaries industry

In the medium or long-term the sector is likely to do well. In the near future, the sector is likely to be challenged by some level of capacity under-utilisation. Exports of components may be under pressure for the next 2-3 years in terms of not achieving high growth rates.

What are the major challenges before the industry

Eventually, the quality of roads will determine the growth of the industry. And this is in the governments domain. The speed with which the road quality improves will determine the growth and mix of cars. Growth of satellite towns around large metros is likely to create demand for low capacity transport of cargo, small cars and two-wheelers.

Rural market growth on account of affluence will drive some volume. The industry has to find ways of serving these customers both from a sales and service perspective. Retirement of vehicles, if enforced, will drive growth in CV volumes and at the same time result in lower pollution.

As the age of the vehicle population goes down apart from the cost of fuel and maintenance, the cost of financing vehicles will go down. The cost of fuel is likely to be a challenge. Introducing highly fuel efficient cars will drive market share and volumes for manufacturers. Similarly, the cost of ownership is likely to be a key selling factor.

Managing customer perception of brands and the ownership experience, particularly in the context of the cyber space is likely to be critical in the passenger car segment. Companies will have to deliver on the promise of experience to maintain brand credibility.

The auto component sector is low on innovation and IP. This would mean they would be constantly under cost pressures from imports and peers. Owning IP and pushing up innovation would improve long term attractiveness of firms.

Are the Indian customers actually ready to absorb high-cost hybrid- technology-based vehicles

Based on our research, the emerging markets are likely to stay largely with the current fuel options over the next 10-15 years. While there will be sale of alternate technologies, the volumes are likely to be low.

Due you think the domestic market will be flooded with new vehicles on the lines of western countries

The new additions are not likely to mean more off-take in the domestic market. It is likely that most of the manufacturers are planning a significant export basket from India.

Will there be any consolidation, mergers and acquisitions in the near future

Globally there is likely to be more consolidation which would have an impact in the domestic market as well. We have already seen transactions like Volkswagen-Suzuki and both companies are present in India. Fiat and Tata also collaborate.

What do you think of the overall picture of the auto sector

Given the current penetration of automobiles the sector is attractive in the long-term. In the short-term, it will go through relatively difficult periods as a consequence of over capacity and slow down in rate of consumption of cars.