ICCK

Swelling domestic demand and low wage costs make India logical base for global production

When Koo Young-key arrived in India as a sales executive for Hyundai Motor, the country was an afterthought for most in the automotive industry.

During his first full year there in 1998, fewer than 400,000 cars were sold in India, with his South Korean employer, which started production in Chennai that year, shifting just 8,447.

But Mr Koo, who now leads Hyundai’s Indian operation, has witnessed a market explosion.

The Indian car market is the world’s fifth-largest by sales, generating $35bn in financial year 2016, according to CLSA. It is set to overtake Japan and Germany to become the world’s third-biggest car market by 2020, according to analysts at IHS. With sales slowing in key markets such as China, global carmakers now see India as a vital source of growth.

“The industry is going to virtually double every three to five years,” says Anurag Mehrotra, executive director of Ford’s operation in India.

Hyundai alone sold more than 500,000 vehicles in India last year, making it the second-ranked player by volume in a passenger car market where total sales hit 2.8m. Last month, its affiliate Kia Motors announced plans to invest $1.1bn in building its first Indian factory in the eastern state of Andhra Pradesh.

“India is the key country, with sustainable growth every year,” Mr Koo says, noting that Hyundai last year sold more cars there than in the whole of Europe.

And with uncertainty hanging over the two biggest markets — China, where the tax break that drove huge growth in 2016 is to expire, and the US, where higher import tariffs are being considered — the Indian market is starting to look a surer bet.

Executives portray investment in the Indian car market as a long-term bet on the rising spending power of an upper-middle class that has snowballed in size since the liberalising reforms of the 1990s.

The single biggest beneficiary has been Suzuki Motor, which in 1982 set up a joint venture with the Indian government. Using the latest Japanese production techniques, Maruti Suzuki swiftly seized a dominant share of the small Indian car market from lumbering state-controlled players. 

It continues to benefit from that first-mover advantage, with 47 per cent of Indian passenger car unit sales in the fiscal year ending in March. Its market capitalisation of Rs1.9tn ($30bn) is more than a third larger, in dollar terms, than that of Suzuki itself, which retains a 56 per cent stake in the company.

But with about one car sold last year for every 450 people in the country — compared with one for every 18 people in the US — other groups are seeing opportunities to take market share.

India’s huge cultural and economic heterogeneity makes its car market much more fragmented than China’s, says Arun Malhotra, country head for Nissan, who says that the growth opportunities will be strongest in smaller Indian cities where car ownership remains lower than in Mumbai or Bangalore.

Nissan is one of a growing number of carmakers that is viewing India, with its swelling domestic demand and low wage costs, as a logical base for global production. It announced in February that it had exported 700,000 Indian-made cars to 106 countries since opening its Chennai plant in 2010. 

Ford, which last year overtook Hyundai to become the country’s biggest car exporter, now views India as its global hub for production of smaller vehicles, Mr Mehrotra says. Small cars have long dominated the Indian market, and global trends suggest they are set to be the main driver of international growth for the industry, he adds.

Industry executives say they are heartened by Prime Minister Narendra Modi’s Make in India drive, which aims to boost manufacturing investment through infrastructure investment.

Accelerated highway construction under Mr Modi bodes well for India’s still tiny sports car market, which requires “roads where you can really drive”, says Pavan Shetty, head of Porsche’s India business. But growth in luxury car sales has not yet recovered from a 125 per cent import duty imposed in 2013, he adds. Porsche sold 401 cars last year in India, compared with 65,246 in China. 

Even after Mr Modi took power in 2014 promising an end to erratic policy decisions, there is still the occasional unwelcome surprise, Mr Mehrotra says, noting last month’s abrupt withdrawal of subsidies for some hybrid vehicles.

And the carmakers still face the challenge of luring Indians away from their longstanding attachment to motorcycles and scooters, which are typically purchased for well under $1,000, and outsold passenger cars by nearly six to one last year.

The most heralded effort to wean this cost-conscious demographic from two wheels to four came nearly a decade ago. Tata Motors’ Nano was billed as the world’s cheapest car, with a launch price of Rs100,000 ($1,560). Tata built a factory with an annual production capacity of 250,000 vehicles — but sold only 9,054 units last year, and has been weighing a termination of the project, according to people close to the company.

“As an engineering project it was marvellous,” says Anil Sharma, an analyst at IHS. “But nobody wants to be seen as driving a cheap car — cars are aspirational buys here.”

Other carmakers have duly taken note of the need to link car ownership with the bursting ambition of India’s expanding middle class. In speaking of Nissan’s budget Datsun brand, Mr Malhotra is careful not to refer to it in terms of cost, but as the choice of “rising India”.

“If you own a car in India, you’ve arrived in life,” he says.

https://www.ft.com/content/fc5b5b62-2bdf-11e7-9ec8-168383da43b7