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India is becoming key to the growth plans of global auto makers as its emerging market and low-cost manufacturing base offer an alternative to rival China. To cite just one example, Japan's Suzuki Motor Corp has said it would build a new compact car in India for Nissan Motor Co to sell in Europe. India's passenger vehicle market is only a fifth of China's, but is forecast to nearly double to two million units by 2010. After China, the Indian auto industry is the second fastest growing in the world, currently producing about 8 million vehicles annually. Industry experts believe that low-cost manufacturing base in India makes it an attractive place for the global auto majors. Until recently, only China was considered as a manufacturing base, but people are waking up to India's growing domestic auto market, its large pool of engineers and skilled labour, and the well-established vendor base. South Korea's Hyundai Motor Co., which aims to be the world's number-five auto maker with Kia by 2010, has positioned India as its export hub for compact cars. Hyundai India exported cars worth $390 million last year and is building a second plant which will double capacity to 600,000 a year. Also France's Renault, which has said it would make its no-frills Logan sedan with partners around the world, has a joint venture for it in India with Mahindra, India's largest utility vehicle maker. In addition, Toyota-Kirloskar Motor (TKM), a joint venture between Kirloskar Group and Toyota Motor Corp (TMC) based near Bangalore, has announced plans to enter the small-car segment around 2010. US-German giant Daimler Chrysler is assembling Mercedes S-Class, E-Class, and C-Class models in the country; production could be expanded if demand grows from the current modest level of 2,000 units in 2005. BMW AG is in the process of establishing an assembly plant with an investment of $23 million, and is expected to begin assembly of 3-series and 5-series vehicles in the first quarter of 2007. BMW's facility will have a similar capacity to the existing Daimler Chrysler plant. In India's emerging auto industry, profitability is strongest among Indian auto makers, aided by good production efficiency and strong profits from purchase financing. The industry-average profit margin before depreciation, interest and taxes has grown to about 12 per cent, from below 10 per cent, over the past six years. Indian companies have established close links with Japan and South Korea, two major global car hubs. India is still mostly a small-vehicle market, while China is becoming more focused on bigger and higher-margin vehicles. But strong growth lies in both countries' future. China and India have populations of 1.3 billion and 1.1 billion, respectively, and in both, fewer than 10 in 1,000 driving-age inhabitants currently own a car. Yet purchasing power in these two countries continues to rise, as shown by 2006-20 annual gross domestic product (GDP) growth forecasts of 5.5 per cent in India and 5.2 per cent in China. But there is still some way to go. There are basic problems like infrastructure, including power and water and the ports in India. Also, Indian streets are still dominated by motorcycles (India is the largest manufacturer-exporter of two-wheeled vehicles in the world), but passenger cars represent a high-growth segment. After double-digit growth in 2003 and 2004, passenger-car sales expanded by a more modest 5.2 per cent between April and November 2005. Market forecasts, however, suggest a rate of about 10-12 per cent for 2006. Analysts point out that India will have to invest more than $5 billion every two years to achieve optimum growth. Indian companies need to cut costs further to turn into enterprises able to take on global competition. The government will have to make more changes, including further reduction in excise taxes. Indeed, Indian auto sector has come a long way, but there is still a long road that needs to be travelled.
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