The Indian car market looks one happy and happening place. Surging sales, up 61% in November, have caught the industry by surprise. Many component suppliers are reportedly running short of parts, and carmakers are unable to keep pace with demand, with the waiting period for popular models running into months. Exports too have boomed, fuelled by the cash-for-clunkers schemes run by governments on both sides of the Atlantic to spur demand in the wake of the economic crisis of the past year or so.
With the world economy on the mend, and credit lines easing, there seems to be a rush amongst global auto majors to revive their investment plans and get their India strategy right, which is no surprise given the country?s status as the world?s second fastest growing auto market after China.
Volkswagen AG?s 20% stake buy in Suzuki Motors has the clear rationale of leveraging Suzuki?s small car expertise and strong India footprint?two critical gaps in the German carmaker?s portfolio. General Motors? equal joint venture with Shanghai Automotive Investment Corporation for selling light commercial vehicles and cars too taps into bringing its China strength to bear on its far-from-successful India foray. Existing relationships between global and Indian carmakers are deepening or being subject to a quick redo?Tata Motors-Fiat, Renault-M&M, and Bajaj Auto-Nissan-Renault?to adapt to the realities of the Indian market.
Underscoring all the action in mototown, from runaway sales to global spotlight, are the two fundamental trends of demographics and outsourcing??one feeding into another.
A three-year old National Council of Applied Economic Research study on car ownership patterns in India revealed that the average annual household income of a car-owning Indian family was Rs 2 lakh, and over two-thirds live in urban areas. It is at this income level that households start thinking of buying a car, once other basic household goods, like television, fridge etc have been catered to. And less than 5% of Indian households own a car, according to the report.
Remember, this is an early 2006 study, and we have had strong, over 9% economic growth for three years starting 2005-06, before it hit a relatively low 6.7% last fiscal. A quiet, though epochal, change is under way in India?s income demographics. For the first time, the number of households with income over Rs 2.85 lakh per annum (46.7 million) will overtake the number of poor households (41 million), those with income less than Rs 71,000 per annum in 2009-10, according to a recent Ncaer analysis. Car ownership even among this relatively well-off segment is around 20%, providing huge headroom for growth. With income catching up with aspirations, millions of new households are entering the car market looking for their first four wheels.
Equally, a slow but sure demographic shift is underway in large parts of urban India??nuclear families, young workers, double-income households??and that has fuelled replacement demand and multiple car-owning households. Car sales are almost equally split between first-time buyers and replacement/multiple car owners.
Prosperity has trickled down to rural India, too, something smart marketers like Maruti tapped into to sell cars in villages by simply reaching out and engaging with rural consumers in a friendly manner. Almost a fifth of Maruti?s sales are now in rural areas, up from under 5% two years ago. Such a major shift in the sales pattern of a dominant market leader??every second car sold in the country is a Maruti??is a significant pointer to where the market is headed.
No wonder the who?s who of the global auto mart??Volkswagen, General Motors, Ford, Toyota, etc??have lined up to launch small cars in the country in the next year or two. Interestingly most carmakers are targeting these 46.7 million households, with price tags that typically vary between one to two years of household income. Even Tata Nano and in-the-works ultra-low cost car from the Bajaj-Nissan-Renault stable will draw some of their potential customers from this income segment.
It is now clear that the sales dip that started late last year and continued right up to the middle of 2009 was a short-term aberration, brought about by huge uncertainty amongst consumers because of the severe, perhaps once-in-a-century global economic maelstrom of the past year or so. With sentiment improving in the last three-four months, sales came back with a bang.
The 6% excise cut that the government extended as part of the stimulus and one-off measures like the pay commission arrears had surely helped push car sales, but with core constituents of the demand??huge consumer base with means to buy??growing, it is unlikely the demand is going to tank once these sops are withdrawn.
Exports may dip a bit with the winding down of cash-for-clunkers schemes, but a more fundamental shift is under way in developed markets towards small, more fuel-efficient cars, something that plays to India?s strength??cost competitive innovation and manufacturing.
Global car biggies, grappling with eroding margins and issues around emissions, fuel-efficiency and anaemic sales in the developed US, Europe and Japanese markets, are desperately looking at partners and new markets, like India, to mitigate these costs and technology risks. The country?s big and growing domestic market provides the bedrock for a robust sourcing base, especially for small cars, where scale equals cost competitiveness.
General Motors is collaborating with Bangalore-based Reva Electric Car Company for sourcing electric vehicle technology to launch electric variants of its small car Spark, initially for India and may even look at extending the partnership to other global markets. Germany?s Bosch is leveraging its learning from the Tata Nano relationship to pitch itself as a low-cost supplier globally, and the Volkswagen-Suzuki combine too intends to outsource a significant part of its hybrid and electric R&D to India.
Maruti already produces 50,000 cars (A-Stars) for Nissan, which sells those in Europe, and indications are that the recent Volkswagen-Suzuki partnership may well go down that road, not just for Europe but in other emerging markets too. India is emerging as the critical piece in the global auto industry?s new business model, much like in information technology and pharmaceuticals.