B Kanishwarya

All over the world, performance of the automobile industry, especially the passenger car segment, is considered as an index of economic development. In terms of importance it is next only to housing sector. This is mainly due to the fact that these two products are the highest value purchases a typical middle-income household and above prefer to own. India is no exception to this, since the middle-income population is one of the largest in the world. Further, automobile industry has strong linkages, both forward and backward, to other major industries, such as, iron and steel, aluminum, tyre, etc.

Thanks to the favourable economic policies of the Indian Government, almost all the global players in the automobile industry have set up/are in the process of setting up their facilities in India: Ford, General Motors, Peugeot, Daewoo, Mercedes-Benz, Honda, Hyundai, Mitsubishi, Toyota, Audi, BMW, etc. This has resulted in the market being witnessing not only more choice of models with increased production capacities, but also more competition.

One major question pertaining to the Indian automobile industry is that, whether it will be possible for India to absorb the huge jump in capacity in a short span of time without considering several factors such as road net work and socio-economic aspects.

According to a Business Today-CRISIL study, the car segment is expected to grow at a compounded annual rate of growth of 20 per cent till the end of this century. The demand for economy and medium segment is estimated at 510000 cars and this will be comfortably met without resulting idle capacity. However, in the luxury car segment, an over supply position is estimated. Contradicting these estimates, the growth rate has declined to about 7 per cent during 1996-97.

Thus, initial estimates on the Indian passenger car market size was between 8 to 10 lakh cars per annum. However, in reality it is estimated around 4.5 lakh cars per annum, working out to only about 10 per cent growth rate compared to the forecasted growth rate of 20 per cent.

Indian automobile sector is an example for the great Say's Law: 'Supply creates its own demand'. Maruti has vindicated this. Further, at the entry level, the demand for passenger cars will keep increasing due to several factors such as increasing income levels and easy availability of car finance.

Currently there are around 3 million car owners in India. Since many of these existing car owners should have risen in the social strata, demand for medium and premium range of vehicles is also expected to grow significantly. The future entry-level demand for cars in India will arise from Rs 2 lakh and above income category, which is estimated to be around 2.6 million by the turn of the century. Further, there are about 21 million two-wheeler populations in India, the owners of which predominantly belong to the middle income group. A major portion of them is likely to graduate themselves into car owners.

Car finance also plays a vital role in augmenting demand. At present, more than two-thirds of cars are sold through this route. Car finance companies are on the rise. Most of the auto manufacturers have set up car financing companies and some of them in collaboration with global car finance players. Major Indian public sector banks have also started financing cars in a big way, making the car finance market more attractive to the borrowers. This has resulted in reduction of interest rates. At present, there are multiple finance options available for a car buyer. The interest rates vary from 10 per cent to 19 per cent. In some cases, car manufacturers offer interest-free loan, if the installments are paid within a shorter period, say, less than a year. In future car finance companies have to shift their focus from metros to small towns and cities where there is a sizeable pent-up demand. Thus, with increasing car finance facilities, the purchase decision of Indian buyer is executed earlier, which helps to boost the car demand in the country.

Thus, the potential of Indian automobile sector cannot be dismissed as ghost potential.

The car segment is sub-divided into economy, medium, premium and super premium. In India, the economy models alone constitute dominant 66 per cent (during 1996-97), with medium segment emerging as a distant second with 19.5 per cent. Premium segment is 14 per cent and the super premium segment is a paltry 0.5 per cent. Realising the scope for economy models, major players are planning to focus on this segment in the coming years.

Moreover, automobile players can use India as a manufacturing base not only to meet Indian demand, but also as a sourcing point for their global operations. This will enable them to enjoy cost advantages owing to comparatively cheaper Indian labour and a range of infrastructure facilities offered by various state governments in order to industrialise their states quicker. Further the government also no longer view automobiles as a luxury product. This is reflected in the continuous reduction of excise and customs duties for passenger cars, particularly, the economy models.

Also, there is purchasing power, in the rural markets. But, the need has not been felt and/or created. Players in the industry can in fact design exclusive models for the rural Indian market, parallel to the urban-based small car models.

Thus, there can be found great scope in the Indian market for passenger cars, both in the urban and rural markets. With prudent product selection and marketing-cum-communication strategy an automobile manufacturer will not only be able to reach his goals, but also expand the market.