Small cars, big haul

Written by Yogima Seth | Simran Arora | Updated: Nov 1 2009, 04:56am hrs
Small cars from India are making it big in European markets where people are moving from gas guzzlers to fuel-efficient cars and taking the scrappage incentives being doled out by various European governments. The key growth markets include the UK, the Netherlands, Germany, Italy and Spain.

Moreover, global auto giants like Ford Motors, Toyota Motors, Renault and Nissan are making India a hub for overseas sales of small cars. Also the availability of cheap labour and a growing local market have in fact helped India to overtake China in auto exports and even assisted it to challenge Thailand and South Korea as an alternative production destination.

According to the Society of Indian Automobile Manufacturers (SIAM), the total export of small cars from India increased by 53% between April and September at 1,97,249 units as compared with 1,29,090 units during the corresponding period last year. Of the total exports, Hyundai Motor India (HMIL), the largest exporter of small cars from the country, sold 1,31, 744 cars during April to September this year and its nearest competitor Maruti Suzuki India exported 63, 140 units in the same period. Hyundai Motors exports i10 and i20 to European counties and Santro and Accent to non-European countries. Maruti Suzuki exports models like Alto, Zen Estilo and Ritz to South Africa, Australia, and New Zealand and A-star to the European market.

Considering that the April-September 2009 export numbers were simply encouraging, HMIL and MSIL are betting big on their new products and have even set up high growth targets for the current year.

While Hyundai Motor is expected to close 2009 (as the company follows the calendar year) with 2,80,000 units as against 2,44,000 units exported in 2008, an estimated growth of 14.8%, with robust demand for i10 and i20 in European countries, Maruti Suzuki is largely banking on A-star and expects to register close to 106% growth in 2009-10 with 1,30,000 units vis-a- vis over 70,000 units last year.

In fact, while Hyundai Motor is looking at exporting 1,00,000 units of i10 and another 80,000 units of i20 out of India, Maruti Suzuki is eyeing export of 1,00,000 units of A-star alone and that too when the market for small cars is really small and there are over dozen players, including Toyota, Honda, Nissan, Ford and Volkswagen, vying for bigger market share.

According to European Automobile Manufacturers Association, the total passenger car market in Europe is currently pegged at over 14 million units. Estimating the small car market to be nearly 2-3%, the total market size for small cars in Europe is pegged at nearly 5,00,000 units, out of which over 80% would be met by auto companies Hyundai and Maruti alone.

Currently, the small car market is 2-3% of the total passenger cars sold in Europe and there is huge segmentation within the compact car segment with local players being equally aggressive. However, the market is growing fast, especially after the slowdown in the market had set in, with people moving away from gas guzzlers to smaller and more fuel-efficient vehicles, thus, boosting demand for smaller cars. Consequently, 80% of our total export is now to western Europe, says Mayank Pareek, executive officer (sales and marketing), Maruti Suzuki India. He adds the scrappage incentives in Europe have further escalated the demand.

The scrappage scheme in the UK, which was introduced in April this year, gives owners of cars, which are more than 10-year old, a discount of 2,000 pounds in exchange for cleaner, new models. In January, the Germany announced 2,500 euros under the scrappage policy and this led to a 30% jump in car sales in March. France and Spain, too, have similar programmes that have boosted the sales of small cars.

The story is no different in the US. Nearly 75% of the total vehicles sold in the US earlier were bigger cars and trucks. Now 40% of the US population is moving towards more fuel efficient cars and this has forced players like Ford Motors to think of introducing its small car Fiesta into the US market for the first time, says Stephen R DArcy, global head (automotive practices), PricewaterhouseCoopers.

In September alone, the total small car export went up by 30.8% at 36,498 units as compared to 27,906 units. While Hyundai exported 24,484 units in September vis--vis 21,059 units during the same month last year, registering a growth of 16.3%, exports of Maruti Suzuki India went up by 85.8% in September at 11,521 units as against 6,201 units in the corresponding month in the year 2008.

But what makes India an attractive destination vis--vis China for all these global players to set up their base in the country for small cars According to Arvind Saxena, senior vice-president, Hyundai Motor India, the product becomes price competitive overseas with economies of scale in India. Domestic market is huge and there is a lot of local demand as the penetration levels is still very low in India. Consequently, it makes sense for all global players to set up manufacturing bases in India and export their small cars from here while simultaneously meeting the local demand, he says.

No wonder, global players like Ford Motors, Toyota Motors, Renault, Nissan and even Honda are setting up plants in India to meet the domestic demand as well as export small cars from the country.

The small car segment is expected to double in next 10 years and our focus would be to ensure accelerated development of fuel-efficient small cars that will help us develop India as export hub for Ford globally, Alan Mulally, president and CEO of Ford Motor Company, had said during his recent visit to India.

Apart from huge potential in the domestic market, India has an added advantage of being a low cost country and is close to Europe. There is a huge opportunity for Indian manufacturers in export markets as Indian companies are more advanced in designing and made in India cars are more acceptable in developed markets, thanks to their low-cost manufacturing capabilities, DArcy of PwC added.

Rakesh Batra, national head (automotive practices), Ernst & Young, says India is locally well positioned as compared to China for exports. Logistics cost of shipping the vehicle from India makes the car more competitive vis--vis China. Moreover, China is mainly a medium-to-big car market. So, despite the fact that almost all global auto giants have bases in China as well, they prefer to develop small cars in India where the compact cars constitutes nearly 80% of the total passenger car segment in India, he says.

There are not many players in the global automotive world that have expertise for small cars and Hyundai Motor Corporation of Korea as well as Suzuki Motor Corporation of Japan are making the best of their expertise in the small car domain through their Indian subsidiary, says an analyst who is based in Mumbai.