Dream machine: It's inevitable that rising incomes will make four-wheelers affordable to a large number of Indians

By the time this issue hits the stands, India's biggest auto fest would have got underway in Delhi. Like every year, almost all the top automotive companies would have put on display some of their best cars for thousands of visitors, who will throng the six-day Auto Expo, to see and drool over. That's as close most of those curious visitors, representing a microcosm of the country, will get to owning a car. Yet, for the global automotive industry, they are its best hope.

In the us, car and light-truck sales showed no growth last year, remaining steady at 16.9 million units; in Europe, it was a marginally better year, with growth at just over a percentage point (despite a massive fall in UK car sales); and in Japan, sales tumbled 3 per cent. China was the one bright spot for the global industry, growing 18 per cent in 2005, but signs of a slowdown were evident in the last few months. In contrast, India crossed the 1-million mark for passenger cars (including utility vehicles) last year, and is projected to grow at 15 per cent till 2010. To put it another way, while it took about 10 years to double new car sales to a million units, it will take half that time to reach 2 million, perhaps even 2.5 million, by 2010. "The basic affordability of a car is increasing, which is why demographic groups that would never have bought cars earlier are buying cars now," points out Jagdish Khattar, Managing Director of India's largest car manufacturer, Maruti Udyog Ltd (MUL).

The huge untapped market has prompted carmakers to rev up their plans. MUL, along with its Japanese parent Suzuki Motor Corporation, is setting up a new plant not far from its existing facility in Gurgaon near Delhi that will roll out 250,000 cars a year by the end of 2006. At their full capacity, MUL's two plants will churn out 850,000 vehicles a year. MUL's bitter rival and #2 in the market, Hyundai Motor India (HMI), is mulling a second plant right behind the one it already has in Sriperambudur near Chennai. Tata Motors, which stoked car demand with its diesel-engined Indica way back in 1999, is working on an ultra low-priced car (Rs 1 lakh or so) that could revolutionise motoring in the country. Toyota Kirloskar Motor, a nominal joint venture that doesn't yet offer sub-compact cars, has openly set a 10 per cent market share target by 2010.

"The basic affordability is increasing. Demographic groups that would never have bought cars earlier are now buying" Jagdish Khattar Managing Director/Maruti Udyog

Even companies that don't have small cars (as understood by the Indian buyer) in their portfolio are wooing buyers with contemporary offerings. Ford India, for instance, made a global launch of its new sedan Fiesta in India, and cutting the ribbon was Ford CEO Bill Ford himself. General Motors, despite its precarious position in the us, plans to bring the Daewoo small car Spark to India. And as for those carmakers who thought India wasn't a big enough market and thus stayed out the past 10 years, they are now scrambling to get a foot in the door. BMW recently announced the setting up of a $39-million (Rs 175.5-crore) plant, albeit small, to manufacture its 3 and 5 series sedans. Volkswagen, despite an embarrassing scandal, has its sight set on India and, in fact, will be displaying its new Beetle, besides Touareg, Phaeton and Passat, at the Auto Expo. The cautious French company Renault-it refrained from entering China because it feared overcapacity-has set up a JV with Mahindra & Mahindra (M&M) to launch its sedan Logan in 2007.

So, finally it seems the promise that originally lured carmakers to India-a booming middle-class-is closer to delivering. In terms of aspiration, millions of Indian consumers are ready for their first four-wheeler. The question is, can carmakers manufacture to a price that will appeal to a nation where the per capita income is a bare $650 (Rs 29,250)?

It's The Price, Stupid

Don't let vehicle manufacturers have you believe otherwise, affordability is the single-biggest issue that keeps the market from exploding. Let's take a quick look at the passenger car market (including utility vehicles): In 2004-05, 1.06 million cars were sold. Out of these, 610,000 were in the A and B segments, which include the Maruti 800, Alto, Zen, Santro, WagonR, Indica, Getz, Swift and Palio. Almost half of the sales were in the top 10 cities. The annual market for pre-owned cars is estimated at another 7 lakh units. All told, there are about 10 million cars on Indian roads. Still, not a big enough number, considering that more than 27 million Indians paid income tax last year. All of them, according to MUL, are potential car buyers. Yet, at least 17 million of them aren't buying because either they can't afford it or they think-as MUL's Khattar suspects-they can't afford it. This magazine believes that the former may be the bigger reason, considering that 95 out of every 100 cars are bought on finance. "You have to make attractive vehicles at affordable prices, and if you make more options available in the A-segment, the market could boom," says Tata Motors' Ravi Kant, obviously referring to their proposed Rs 1-lakh car.

"Affordability is based on how much you can pay out in a month, and sometimes to just have a car you are willing to pay" B.V.R. Subbu President/Hyundai Motor India

Since affordability is the issue, companies need to offer cheaper cars. There are two broad ways in which they can do it: Either reduce the absolute price of a car (sell the 800 for, say, Rs 1.50 lakh instead of Rs 2.17 lakh) or make financing cheap enough to lower the impact of car ownership on household incomes. Expanding the reach of financiers to smaller towns-something that has been happening over the years-and lowering interest rates (possible because delinquency in car loans is just over 1 per cent, one of the lowest in the world) are things that could help stimulate demand.

But lowering the sticker price is a different ballgame. Tata Motors, for instance, is questioning every conventional car-making rule in a bid to make its dream small car at Rs 1 lakh or so. That's because incremental cost-cutting will not result in a new pricing paradigm. If that were possible, MUL would have long ago cut the 800 price to Rs 1 lakh and decimated competition. But fortunately, or unfortunately, for carmakers, one of their biggest cost components is government tax. Excise alone accounts for 24 per cent of a car's cost. It's unlikely that the government will cut excise rates too steeply, especially when it is not sure if the resulting demand will make up for the revenue loss. Still, it's a possibility and one that can straightaway make cars cheaper, triggering a cascading effect down the market. As buyers of small cars graduate to bigger cars, pre-owned cars will become cheaper still, allowing millions of two-wheeler owners to buy their first set of four wheels. Eventually, they too will turn buyers of new cars. Says B.V.R. Subbu, President, HMI: "Affordability is based on how much you can pay out in a month, and sometimes to just have a car you are willing to pay for the privilege."

Possibly because it makes the cheapest car in the world (the 800), MUL has been working on convincing consumers that they can indeed afford a car. Under a "2ka4" scheme, it has been going out into small towns to sell its cars to school teachers, public sector employees, state government staff and even railway foremen and getting them to switch over from motorcycles and scooters. Since the pilot scheme (targeting school teachers) was launched in early 2005, MUL has sold 22,000 cars to such consumers. "Our sales teams have visited teachers in over 500 schools; that's how seriously we take reach and distribution," points out Khattar.

Buyers Graduate

Nobody is disputing the fact that for a long time to come, India will be a small car market. Yet, there are some interesting shifts taking place in the market. Increasingly it seems, the buyer is focussing on value rather than price. A telling sign: MUL 800's sales have been shrinking over the past three years. The Alto, which costs about Rs 50,000 more than the non-ac 800, is the preferred entry car. In fact, the B-segment today accounts for a good 50 per cent of the overall sales. That's one reason why manufacturers like Ford, gm and Toyota are licking their chops. "In the last few years, the segment growing the fastest has been the entry-level mid-sized segment (like the Ikon)," says Arvind Mathew, Ford's India boss. Adds Rajeev Chaba, gm's man in India: "I believe that in the next five years, we can easily double our domestic sales to two million."

Toyota Kirloskar's Managing Director A. Toyoshima doesn't deny that a presence in the small car segment is crucial to volumes, but he feels that there are opportunities in bigger cars too. "India is not just a small car market, it has a market for the full line-up-from compact cars to luxury sports cars," he says. For Toyota, the small car market in India might be an important battle in its global war to defend itself from Hyundai, since Toyota executives have acknowledged the Korean challenger as a bigger worry than either gm or Ford.

"India is not just a small car market, it has a full line-up-from compact cars to luxury sports cars" A. Toyoshima Managing Director/Toyota Kirloskar Motor

What seems to reinforce the shift theory is MUL's experience with its new premium compact car, Swift. Wedged in between the Esteem on top and WagonR and Zen below, the Swift has surprised MUL with its brisk sales. Initially expected to sell around 3,000 units a month, the car is doing over 6,000, sending MUL scrambling to up production. Not surprisingly, other manufacturers are taking it as a good omen. Says Pawan Goenka, President of M&M's automotive business: "By the time we introduce the Logan in India (by 2007), there will be a substantial number of people who want to move up from a small car." He believes that there are huge opportunities emerging in the sedan and utility segments.

"In the last few years, the segment growing the fastest has been the entry-level mid-sized segment, like the Ikon" Arvind Mathew Managing Director/Ford India

A Global Small Car Hub

There's something else carmakers are banking on to keep their businesses viable in India: exports. Without the 24 per cent excise duty, India-made cars are highly price competitive in other markets. Besides, few manufacturers make elsewhere the kind of small cars they do in India. Take HMI. Unlike Ford or gm, its Korean parent doesn't have factories all over the world. That allowed the Indian subsidiary to ship out almost 1 lakh units last calendar, with the number expected to touch 1.30 lakh this year. MUL, too, can potentially become India's other large exporter. "Once their additional capacity comes on-stream, I don't see why Suzuki will not allow Maruti to export," says HMI's Subbu. "Look at it this way," explains MUL's Khattar, "India, with 6 lakh small cars last year, is the world's second-largest producer of small cars after Japan, which produced 1.2 million." His argument: Just the sheer numbers should make India a small-car hub, once the local market demand is met.

At the moment, capacity is a constraint, besides which tax on components makes cars that much more expensive to export. Says Pankaj Gupta of vehicle manufacturers' association, SIAM: "If automobile exports are to boom, we have to make sure that we don't export any taxes." Exports are of more strategic importance to companies like Tata Motors and M&M. For the other multinational carmakers, it's the Indian market that is the main attraction. To be sure, there will be the odd dip to deal with. For example, growth in car sales for calendar 2005 was just 7 per cent compared to 24.6 per cent the previous year. But as Maruti's Khattar asks with a smile, "Aur kahan jayenge (where else will the carmakers go)?". Indeed, all roads in the global auto industry today lead to India.