Started in the form of a joint venture model in the 1980s, the Indian auto industry has witnessed remarkable growth over the last three decades. The initial ‘cautious’ phase involved the setting up of businesses mainly by Indian players with minority investments/ technology tie-ups with global players. There was a brief ‘optimistic’ phase when several global players increased their stakes in Indian auto businesses. This is followed by the ‘aggressive’ phase, wherein several Indian and global players have decided to set up/expand auto businesses independently without partners–a phase which is witnessing participation from auto players across the globe.
Representing aspirations of a billion-plus Indians, the Indian auto industry currently generates revenues of $70 billion and accounts for 22 percent of India’s manufacturing GDP. India’s world ranking in each of the segments (along with annual volumes) is as follows:
- Two-wheeler – 2nd (16 Mln units)
- Three-wheeler – 1st (0.5 Mln units)
- Passenger vehicles – 6th (2.6 Mln units)
- Commercial vehicles – 8th overall and 2nd in buses (0.6Mln units)
Interestingly, in spite of several Indian and global players’ presence, each segment has a dominant market player commanding more than 40 percent of the market share:
- Hero – Over 55 percent in bikes
- Honda – More than 50 percent in scooters
- Piaggio – In excess of 40 percent in three-wheelers followed by Bajaj with 40 percent
- Maruti Suzuki – More than 45 percent in passenger vehicles
- Tata Motors – In excess of 60 percent in commercial vehicles.
With increasing competition, market shares are expected to realign in the coming years.
Over the past three years, the sector has witnessed nominal growth rates which are in line with overall economic activity. With a new, stable and growth-oriented government at the Centre, industry is expecting a rebound. Some of the factors which could contribute to growth are:
- Demographic changes (growing middle-class population, rising income levels)
- Falling interest rates, fuel prices and inflation control
- Better finance penetration (with focussed efforts from OEMs)
- Increasing penetration in rural areas (OEMs are focusing on untapped rural market for growth)
- New launches by almost all players in every segment
- Focus on infrastructure development, including road network
- Regulatory changes and ‘Make in India’ campaign promoting India as a global export hub (policy initiatives, low cost base, skilled work force, etc).
India’s low vehicular penetration makes it one of the most attractive auto markets in the world – 15 cars per thousand persons – while this number for the US, Brazil and China is 800, 200 and 60 respectively. This is a major factor contributing to increasing investments and capacity expansion in India by almost all leading Indian and global auto players. Key sub-sectors of auto industry i.e. auto-component sector and auto-finance sectors are also witnessing healthy growth and attracting global interest.
Further, most of the large Indian auto players are pursuing global aspirations by expanding geographic coverage and making strategic investments outside India. Tata Group’s acquisitions of Jaguar and Land Rover and Mahindra’s acquisition of Ssangyong & Piaggio’s two-wheeler business helped these group’s transition from the image of a local single segment vehicle manufacturer to that of a global diversified product portfolio auto player.
From a fiscal and regulatory developments perspective:
- Excise duty concession for auto-sector was rolled back in December 2014 which resulted in price increases by almost all players. Contrary to industry expectations, Budget 2015 provided limited tax incentives for the industry.
- GST – Though timing and rates for GST are not yet certain, upon implementation, GST is expected to create a uniform tax structure across all states and increase competitiveness. GST implementation would require the industry to re-look at its entire supply chain management and integrate the new framework in its business structures.
- Transfer pricing – In view of significant tax litigation on transfer pricing-related matters, Advance Pricing Agreements (APAs) are a useful tool to achieve certainty regarding transfer pricing/tax costs – this will provide more certainty to foreign players and should boost investment.
- Competition law-related litigation – Similar to cement industry, this sector too has faced accusations of cartelisation and judiciary pronouncements on ongoing litigation are keenly awaited. M&A opportunities:
- With increasing confidence in the Indian market, most auto-players have preferred independent green-field route. Limited M&A in the auto sector was in the nature of exchange of stakes between joint venture partners and the possibility of consolidations and M&A opportunities at this stage appears low.
- However, Indian auto component sector and auto finance sector witnessed healthy M&A activity. Auto component sector shows the following trend:
- Established Indian auto component players and global auto component players setting up joint venture in new segments which are expected to see localisation in medium term and also with the objective of setting-up global export hubs. This also allow Indian auto-component players to expand product portfolio/customer portfolio
- Established Indian auto component players acquiring other auto component players in overseas markets in order to access advanced technology
With the low level of current penetration, the Indian auto industry provides a huge market potential; competitive manufacturing costs can possibly make India an emerging export hub. In order to maintain cost competitiveness, there is a greater need for providing this sector a facilitative climate – this could be achieved by prudent fiscal policy and most importantly, certainty, labour reform and general ease of doing business. Auto sector is one of the key sectors for the success of ‘Make in India’ campaign and if we do things right, this sector alone can be a major contributor to India’s growth story and help India become a world leader.
[“source – forbesindia.com”]