Cars State Of Industry

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CRIS INFAC CARS AND UTILITY VEHICLES ANNUAL REVIEW: OCTOBER 2003, 102 PAGES

ii

Charts

...continued

Figures

continued...

5 .0 Domestic players

01 Bajaj Tempo Ltd 69

02 Daewoo Motors India Ltd 69

03 DaimlerChrysler India Pvt Ltd 70

04 Fiat India Pvt Ltd 71

05 Ford India Ltd 72

06 General Motors India Ltd 73

07 Hindustan Motors Ltd 74

08 Honda SIEL Cars India Ltd 75

09 Hyundai Motors India Ltd 7610 Mahindra & Mahindra Ltd 77

11 Maruti Udyog Ltd 78

12 Tata Motors Ltd 79

13 Toyota Kirloskar Motors Ltd 80

14 SkodaAuto India Pvt Ltd 81

4.0 Internat ional markets

01 China: Passenger car sales (1998-2002) 61

02 China: Increase in no of car models 62

03 Profile of passenger car users in China 62

04 China: Region-wise dominance (2002) 64

05 China: Company-wise market share (2002) 64

06 Western Europe: Passenger car sales and export trends 66

07 Japan: Passenger car production, sales and export trends 66

08 Thailand: Sales volume of passenger cars 67

09 Malaysia: Passenger car sales 68

Tables

1 .0 Supply and finance

01 Capacity utilisation 2002-03 33

02 Car finance market 35

03 Car finance players (Disbursements) 35

04 Passenger cars: Car finance market projections 36

05 Second hand car markets 37


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CRIS INFAC CARS AND UTILITY VEHICLES ANNUAL REVIEW: OCTOBER 2003, 102 PAGESiii

...continued

2.0 Regulations and policies

01 Engine technologies for compliance of emission norms 4502 Tariffs applicable on cars and utility vehicles 49

03 Effective customs tariffs on cars and utility vehicles 49

3.0 Technology

01 Price comparison of CNG with petrol and diesel 54

02 Main components/sub-assemblies of a car 59

03 Technology trends 60

04 International markets

01 China: Model-wise market share of passenger cars (2002) 63

02 China: Capacity expansion plans by auto manufacturers 65

03 US: Light vehicle sales 65

6.0 Internat ional players

01 General Motors 83

02 Ford Motors 84

03 DaimlerChrysler Motors 86

04 Volkswagen 87

05 Fiat Group 88

06 Toyota Motors 89

07 Honda Motors 90


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CRIS INFAC CARS AND UTILITY VEHICLES: OCTOBER 2003, 102 PAGES33

1.0Supply and finance

Supply

Player capacities and utilisation

The total capacity of the cars and utility vehicles industry in India is around 1.24 million vehicles.

However, capacity utilisation in 2002-03 was only 60 per cent. Among individual manufacturers,

only Maruti Udyog Limited and Hyundai Motors operate at high utilisation levels (over 100 and

75 per cent, respectively). With the launch of its passenger car model, the Corolla, Toyota Kirloskar

Motors Ltd has achieved capacity utilisation levels of around 60 per cent. Tata Motors increased

its capacity utilisation levels substantially to around 67 per cent due to the launch of the Indigo

in the mid-sized segment.

The industrys total capacity includes the capacity of Daewoo Motors India Ltd, which has been

lying idle for the last three years. To reduce fixed overheads, Daewoo Motors may restart production

of the Matiz on a contract basis for General Motors India Ltd, which is planning to re-launch

the model under the Chevrolet Spark brand, in the last quarter of 2003-04.

Capacity utilisation 2002-03 Table 1

A few players to increase capacities

Capacity expansion in the short- to medium-term is expected to be moderate, as the capacities

of most players are still underutilised. However, companies operating at a high capacity will

undertake capacity upgradation and expansion. In addition, players like Ford Motors, General Motors,

Honda Motors, and Toyota Kirloskar Motors India, who are planning to enter the small car segment,

are expected to invest in production platforms for new models.

Future investment plans

The following manufacturers have announced plans to increase investments in India to expand

capacities and launch new models:

Player

(nos)

Bajaj Tempo Ltd 55,000 3,760 6.8

Daewoo Motors India Ltd 72,000 - -DaimlerChrysler India Pvt. Ltd 10,000 1,057 10.6

Fiat India Ltd 50,000 25,932 51.9

Ford India Ltd 100,000 15,899 15.9

General Motors India Ltd 25,000 7,801 31.2

Hindustan Motors Ltd 64,000 20,001 31.3

Honda Siel Cars India Ltd 30,000 13,723 45.7

Hyundai Motors India Ltd 150,000 112,527 75.0

Mahindra & Mahindra Ltd 125,000 52,199 41.8

Maruti Udyog Ltd 350,000 357,010 102.0

Tata Motors Ltd 160,000 107,314 67.1

Toyota Kirloskar Motors Ltd 50,000 29,929 59.9

Total of passenger cars and UVs 1,241,000 747,152 60.2

Note

Sales figures for Fiat India Ltd have been taken as a proxy

Source: CRIS INFAC

Capacity Product ion apacity utilisat ion (%)
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CRIS INFAC CARS AND UTILITY VEHICLES: OCTOBER 2003, 102 PAGES

34

! Honda SIEL Cars India Ltd is expected to gradually invest around Rs 2,000 million till 2005, for upgrading

its production facilities for the new City and Accord models. The investment may also include the setting

up of a new assembly line for its entry into the small car segment (with a 1,000 cc offering) in 2004-05.

! Hyundai Motors India Ltd is expected to invest Rs 10,000 million to expand its capacity from the current

150,000 units to 250,000 units by September 2004. This expansion is aimed at meeting the domestic

and export demand for the Santro as well as for the launch of its new model, the Getz, in the second half

of 2003-04.

! General Motors is investing around Rs 1,800 million to increase its capacity from the current 25,000 units

per annum to 50,000 units per annum till 2005. The company will also invest around $ 60 million over

the next three years to set up a research and development and technical centre in Bangalore, which will

carry out online work for the engineering services of its US operations.

! Ford India is investing in product development for two India-specific models. The B-226 is being developed

for the high-end compact segment and may be launched towards the end of 2003-04, whereas the B-

376 is being developed for the mid-sized segment and will be launched in 2005.! SkodaAuto India is investing in a CKD assembly plant near Aurangabad in Maharashtra, which will be

operational by February 2004. The company will use the plant to manufacture Skoda models from

imported CKD kits.

! Toyota Motors is planning to invest Rs 2,000 - Rs 3,000 million over the next two years to increase its

capacity from the current 50,000 units to 75,000 units.

! Maruti Udyog Ltd is likely to invest in upgrading its plant to launch the Liana, its new offering in the mid-

sized segment, in the second half of 2003-04. It will also invest in a research and development centre at

its Gurgaon plant, to cater to Asian markets. The company also plans to spend Rs 3,580 million in

increasing its automation levels and introducing minor modifications in its models and workshops for the

same.

Car and utility vehicle finance

Evolution

Organised auto finance dates back to 1984, when Citibank entered the car finance market. In

1987, Citibank introduced its first branded scheme called Citimobile'. Subsequently, other non-

banking finance companies (NBFCs), including co-operative banks, entered the car finance market.

Review

From 1995-96 to 2002-03, the car finance market is estimated to have grown at a CAGR of

24 per cent, to around Rs 150 billion. Growth in the car finance market can be attributed

to the growth in the car market, lower financing rates, easy availability of loans, and improved

services by financiers. While the volumes of car sales increased at a CAGR of around 10 per

cent during this period, the growth in the car finance market was higher due to an increase

in the average realisations of cars (a combination of normal price increases and an improved

sales mix comprising sales of higher value cars) and the increase in penetration rates (the proportion

of cars financed as a percentage of the total car sales volume). With private banks such as

ICICI and HDFC, foreign banks, and nationalised banks entering the car finance market, competition

has increased significantly. The cost of finance to customers has declined from around 24 per

cent in 1997-98 to 10-12 per cent. As a result, profitability in the car finance business decreased

significantly. The profitability of players in the car finance market depends largely on the total

volumes of cars purchased through financing options.


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Key players

Since the late 1990s, the car finance market has witnessed significant consolidation. Many NBFCs

such as Alpic Finance, Apple Finance, Gujarat Lease Finance, and Garden Finance, have stopped

operations. At present, foreign banks, financial institutions, and large NBFCs dominate the car

finance market in the organised sector.

The key players in the car finance market are ICICI Bank, Kotak Mahindra Finance, Citibank,

and Standard Chartered Bank. Till the late 1990s, this market was led by Kotak Mahindra and

Citibank. However, in the last two years, ICICI Bank has taken over this position.

Car finance market Table 2

1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 CAGR2

Car sales volumes1 309,928 370,727 385,873 384,544 613,993 572,423 576,484 597,043 9.8

Growth Y-o-Y (per cent) - 19.6 4.1 -0.3 59.7 -6.8 0.7 3.6 -

Total value of car sales (Rs billion) 78.2 101.6 117.9 124.9 196.2 208.0 209.7 223.7 16.2

Avg price of a car (Rs 000) 252.2 274.0 305.7 324.8 319.6 363.4 363.8 374.7 5.8

Growth Y-o-Y (per cent) - 8.6 11.6 6.3 -1.6 13.7 0.1 3.0 -

Volume penetration (per cent) 60 63 65 68 70 72 75 79 4.0

Percentage of price financed 70 70 70 75 75 80 80 85 2.8

Total finance penetration (per cent) 42 44 46 51 53 58 60 67 6.9

Total car finance market (Rs billion) 32.8 44.4 53.7 63.2 103.0 119.8 125.8 150.2 24.3

Growth Y-o-Y (per cent) - 35.4 20.8 17.8 62.9 16.3 5.0 19.4 -1

Car sales volumes include sales for Maruti Omni.2CAGR from 1995-96 to 2002-03

Source: CRIS INFAC

Car finance players (Disbursements) Table 3

(Rs million) 2000-01 2001-02 2002-03

ICICI Group 11,000 24,000 45,000

Citibank 10,000 14,000 na

Kotak Group (including Ford Credit) 11,000 12,500 11,900

StanChart Group (including ANZ) 9,000 11,000 na

Sundaram Finance 4,000 10,000 6,154

ABnamro Bank 4,000 8,000 na

HDFC Bank 3,000 8,000 12,000

Maruti Countrywide Finance 6,000 4,500 na

GMAC 2,000 3,000 na

American Express 2,000 2,500 na

HSBC Group 3,000 2,000 na

Tata Finance 3,500 na 2,419

Ashok Leyland Finance 3,000 na 2,700

Cholamandalam Finance 2,500 na 1,613

na: Not available

Source: Industry
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36

Product offerings and player strategies

Players in the car finance sector have been focussing on improving services, by reducing paper

work and providing assistance in selling used cars and procuring new cars.

Financiers have also been trying to lower EMIs or extend loan tenures to increase their volumes.

The average loan tenure ranges from three to seven years, with three-year loans being the

most popular.

Some aggressive players have begun offering 100 per cent finance, which covers the complete

on-road price of the car, inclusive of insurance, tax, and registration.

Outlook

The new car finance market is likely to grow at a CAGR of around 17 per cent till 2007-

08, led by a 12 per cent growth in sales volumes. Declining interest rates and higher repaymenttenures are expected to reduce EMIs, which will increase the sales volumes of cars, and consequently,

the car finance business.

Players like ICICI have converted their operations into banking entities. This reduces the cost

of retail deposits and allows them to offer lower rates of interest.

However, the profitability in the car finance markets will continue to be low due to severe

price competition.

Passenger cars: Car f inance market projections Table 4

2002-03 2007-08 CAGR2

Car sales volumes1 597,043 1,036,486 11.7

Total value of car sales (Rs billion) 223.7 450.2 15.0

Avg price of a car (Rs 000) 374.7 434.4 3.0

Volume penetration 79 85 -

Percentage of price financed 85 85 -

Total finance penetration 67 72 -

Total car finance market (Rs billion) 150.2 325.3 16.7

1Car sales volumes include sales of Maruti Omni.

2CAGR from 2001-02 to 2006-07

Source: CRIS INFAC

Used car and utility vehicle market

The development of a vibrant used car market will drive the growth for the sales of new

cars and utility vehicles by

! helping owners dispose their old cars easily and realise gains to upgrade to new cars;

! creating a potential customer for new cars, when used car owners will want to upgrade; and

! meeting the demand from owners of two wheelers who want to upgrade to used cars, thus increasing

the population of car owners.

With most car manufacturers entering the organised used car market, the proportion of this market

will increase. In order to enter this segment, manufacturers must have a sizeable number of

models on the road, which can be traded in for upgrading to a new car. Manufacturers will

be able to buy used cars from owners seeking a fair price, value the car on a transparent
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and scientific basis, refurbish it and sell it to used car customers at reasonable prices, with a

company-backed quality guarantee. Currently, car manufacturers comprise only 2-3 per cent of

the organised used car market. Among the compact car manufacturers, only Maruti Udyog Ltd

has a sizeable car population, which has prompted it to aggressively promote its used car venture,

True Value'. The company has increased its True Value dealerships to 70 and plans to raise

the number to 100 by the end of the financial year 2003-04. Hyundai Motors and Tata Motors

are expected to enter the used car business in the next two years, once the number of their

models on the road increases to sizeable levels.

Evolution

Since 1996-97, the market for used cars has increased significantly, driven by the reduction in

the holding period of vehicles and the increase in the variety of models available in the used

car market. However, uncertainty over the valuation of a car, ownership, documentation, and

the quality of available cars hampered the purchase of used cars. To overcome these limitations,large brokers (offering good quality cars) and car manufacturers (through their subsidiaries) entered

the used car market with exchange schemes. They introduced concepts like the scientific valuation

of used cars, guarantee of legal ownership, refurbishment, and short-term warranty. Financing of

used cars also increased, which resulted in a substantial growth in the sale of used cars in

India.

Size and value

The size of the used car market in India, with a volume of around 8-9 lakh cars in 2002-

03, is estimated to be around 1.1-1.3 times the size of the new car and utility vehicle market.

The total sale in value terms is expected to be around Rs 160-180 billion. The mini and compactsegments account for around 80 per cent of the total used car volumes. However, the proportion

of compact segment models in the used car market is rapidly increasing, and is expected to

form the largest segment in the used car market over the next two years. Mid-sized cars, like

the Honda City, the Mitsubishi Lancer, the Maruti Esteem, and the Opel Astra, contribute to

only 10 per cent of the used cars sales. These are less popular because of faster depreciation

in value, lower fuel economy, and higher maintenance costs. Utility vehicles form only 5 per

cent of the total used car market, as most of them are used for commercial purposes and

undergo considerable wear and tear due to which their resale price is negligible.

Second hand car markets Table 5

Organised v/s unorganisedIt is estimated that only around 15-20 per cent of the used car market is organised. Organised

players include manufacturers, high quality used car dealers (Sai Automobiles, Automart India),

and high quality used car brokers (Classic Cars). However, within the organised market, the proportion

Volumes (numbers) 785,000-930,000

Percentage share

Mini segment 35-40

Compact segment 35-40

Mid-size segment 8-10

Executive, premium and luxury segments 5

UVs 5

Source: CRIS INFAC
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of manufacturers is estimated to be very marginal, at around 2-3 per cent. The unorganised

market consists of small brokers and used car dealers.

In the next few years, the need for transparency is expected to increase the proportion of

the organised used car business. In the medium term, the growth of the organised used car

market will facilitate the sale of new cars. Manufacturers will be able to offer customers value-

added facilities like buying back an old model after a particular period and at a pre-decided

price, and offering easy finance options for exchanging an old car with a new model of the

same manufacturer, thus retaining customers. As a result, the used car market is expected to

be one of the main drivers for the growth of new car sales. Most manufacturers have already

entered the used car business to exploit this business opportunity.

Customer profile

The customer profile of the used car market is as follows:! Salaried customers form around 60-70 per cent of the buyers, as they have limited resources and the low

prices of used cars suit their budgets. Most of them make cash purchases due to the high interest rates

charged by used car financiers.

! Self-employed businessmen form around 20 per cent of the customers. These customers purchase used

cars as a second car for their wives or children. Most of these customers avail of loans from finance

companies.

The remaining 5-10 per cent of the customers are made up of:

! New entrants into the car market, who are upgrading from two wheelers, and

!

Customers within the used car market, who are upgrading from a lower segment used car to an uppersegment used car.

Factors driving growth

The following are the factors that spur growth in the Indian organised used car market:

! Transparency: The entry of car manufacturers through ventures like Ford Assured, Maruti True Value,

and M&M's Automart has introduced fairness and transparency in the process of selling and purchasing

used cars. It has also broadened the avenues for selling used cars (through exchange schemes) and by

ensuring a fair valuation for them.

! Availability of many models: As a result of the introduction of a large number of models in the new car

market and a reduction in the holding period of cars, many recently introduced models are available in

the used car market. The choice in the used car market has thus increased. This is expected to lead the

demand growth of used cars.

! Increase in customer aspirations: An increase in income levels in the urban and rural areas has led to an

increase in aspirations. Middle class customers who are deterred by the high price of new cars opt for

used cars that are in good condition.

! Easier finance availability: The entry of organised players in this segment has been followed by the

entry of car financiers. An increase in competition and a drop in interest rates have caused financing rates

for used cars to fall from 18 per cent in 2001-02 to 13-15 per cent. These are expected to decline further

in the short- to medium-term on account of the increase in volumes through organised channels and

higher competition amongst financiers.

Geographical concentration

Around 60-70 per cent of the used car sales are from cities, like the four metros and Bangalore,

Hyderabad, and Pune. An organised market for used cars has not yet developed in semi-urban


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and rural areas, as the average replacement period is higher than that in urban markets. The

major demand for used cars in the higher-priced compact and mid-size segment comes from

urban centres, whereas the demand for mini segment cars comes mainly from semi-urban and

rural markets.

Margins

Margins in the used car business are currently higher than those in the new car business. As

there are only a few organised players in the used car market, they charge a high premium

for services. Financiers also earn a high interest on the financing of used cars. However, these

margins are expected to decrease once the market matures.

Finance

Financing for used cars is still in the nascent stage due to the following reasons:

! Only an estimated 15-20 per cent of the used car market is organised, of which 35-40 per cent isdominated by financiers like ICICI Bank, Kotak Mahindra Finance, and Standard Chartered Bank, though

they do not finance cars sold by unorganised players. The recent entry of public sector banks like SBI will

increase the penetration of used car financing.

! The lower resale value of used cars results in a higher risk of loan recovery, due to which interest rates

are high. Currently, the interest rate for used cars is around 15 per cent, while that on new cars is 10 per

cent.

Used car finance also entails the following risks:

Ownership risk: The car being sold could have been stolen from another state, its number plates

could have been changed, and the original documents could have been tampered with.

Quality risk: The car could have been involved in an accident. It could have been refurbished

to make it look attractive. Previous owners might also have used spurious spares for replacement,

which may affect the operational efficiency and resale value of the car.

Depreciation risk: Used cars depreciate faster than new cars, which is why financiers incur considerable

losses if they have to resell cars repossessed due to non-repayment of loans.

However, higher margins and the expectation of higher growth rates have prompted financiers

to enter the used car market. The increase in the proportion of organised players in used car

operations will reduce these risks. Additionally, increasing competition among financiers will reduce

interest charges on used car financing.

Exports of used cars

Many car manufacturers are planning to export used cars, in order to increase sales. The markets

identified for this purpose include Nepal, Sri Lanka, and countries in the African continent, which

import most of their cars. Manufacturers have proposed that the government draft separate guidelines

for the export of good quality used cars and offer incentives like graded excise duty benefits

on the basis of the age of the car, and duty entitlement passbook (DEPB) scheme benefits.

This could reduce the price of Indian cars in these markets, enabling them to compete with

imported cars from other countries.


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In the Union Budget 2001-02, the government imposed a high customs duty on the imports

of new and used vehicles to counter the unrestricted import of vehicles into India, and protect

the domestic automobile industry. A peak customs duty of 35 per cent was imposed on imports

of new cars and utility vehicles in the form of CKD and SKD units. A few months later, the

basic customs duty on new CBUs were revised to 60 per cent, while the basic customs duty

for the import of CKD and SKD units was left unchanged at 35 per cent. In the Union Budget

2003-04, basic customs duty on CKD units has been reduced to 30 per cent, while that on

SKD units has been raised to the level of CBUs at 60 per cent.

Regulations for the import of cars

Since the removal of QRs allowed the import of used cars, the government, in its Export-Import

Policy of 2001-02, imposed various non-tariff barriers to protect the domestic automobile industry.

Under this policy, imports of used automobiles are subject to the following conditions:

! The automobiles must not be over three years old.! Left-hand drive vehicles cannot be imported.

! Pre-shipment and post-shipment certification would be mandatory to ensure compliance with the above

requirements.

! The imported automobiles must have a minimum residual life of five years, and the importer must

ensure the supply of spares and servicing during this period.

! Imports will be allowed only through the customs port at Mumbai.

Similarly, imports of new automobiles are subject to the following conditions:

! Automobiles can be imported only from the country of manufacture.

!

Left-hand drive vehicles cannot be imported.! Imported vehicles must conform to the provisions of the Motor Vehicles Act, 1988.

! A prototype of the vehicle to be imported must be approved by notified agencies in India.

Given the stiff conditions, not many used cars are imported into India. In addition, most large

global manufacturers, who have set up manufacturing bases in India, would not like their own

second hand models to compete with new models manufactured for the Indian market. Therefore,

almost none of the manufacturers have initiated used car imports of their own models into India.

Auto Policy 2002

Even after the abolition of QRs, the Indian government continued to impose regulations on minimum

investments, compulsory indigenisation, and export commitments. Many foreign car manufacturers,

who had made significant investments in India, filed an appeal with the WTO against these

policies. Foreign car manufacturers felt they were being discriminated against. Subsequently, in

January 2002, the WTO rejected the restrictions imposed by India on foreign car manufacturers.

In March 2002, in order to comply with the new WTO ruling, the cabinet committee of the

Central Government announced the New Auto Policy, which did away with most of the clauses

in the earlier auto policy. The main highlights of the policy are:

! Removal of the ruling on indigenisation. However, since most companies have already achieved over 70

per cent indigenisation due to the cost advantages arising out of sourcing components locally (as compared

to paying high customs duty for the import of the same), this is not expected to benefit the companies

in India. However, it may benefit new companies who are likely to enter India in the future.

! Removal of the export commitment clause for all companies (including those who had signed agreements

with DGFT in 1997) in September 2002. The removal of this clause is expected to benefit manufacturers


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like Daewoo Motors, Honda SIEL, and Hindustan Motors (which is involved in a technical collaboration

with Mitsubishi for the Lancer model), as some of them have large outstanding export obligations.

! Automatic approval of foreign equity of up to 100 per cent for the manufacture of automobiles and

components.! Announcement of specific fiscal incentives for cars less than 3.8 metres in length, in order to establish

India as the Asian centre for exports of small cars and multi-utility vehicles (MUVs).

! Proposal for an increase in weighted deduction, from the existing level of 125 per cent, for research and

development (R&D) activities under the IT Act, 1961. Introduction of a rebate on the applicable excise

duty for every 1 per cent of the gross turnover spent on R&D.

! Provision of tax incentives, automatic approvals, and import of equipment under the concessional import

duty to encourage the setting up of independent auto design firms.

The New Auto Policy has the following implications:

! Most major global car manufacturers have a presence in the Indian market. The market is already

competitive with the existing players. Hence, in the short- to medium-term, competition is not expected

to increase with an increase in the number of players. However, some current players are likely to

introduce models in the compact and the niche SUV segment, which have a high demand potential.

! The policy has not specified reductions in the excise duty for small cars and MUVs. In addition, there has

been no reduction in the excise duty for small cars and MUVs in the Union Budget 2002-03. As a result,

in the short term, prices of cars and UVs are not expected to drop, which implies that demand would not

be affected significantly.

! In accordance with its commitment to the WTO, the government has to lower import duties within a

stipulated timeframe. Thus, in the Union Budget 2002-03, the government has indicated the gradual

lowering of import duties on components, CKDs, and SKDs from the current level of 30 per cent to

around 20 per cent by 2004-05, which, in turn, will reduce the costs of these components.

! Fiscal incentives offered by auto manufacturers on R&D are expected to have a marginally positive

impact on their profits, as R&D costs account for around 1-2 per cent of sales. The incentives for setting

up auto design firms, combined with India's software skills, can result in the development and rapid

growth of these skills in India.

Environmental regulations

Environmental regulations, especially with respect to the emission of pollution, are increasingly

driving technological innovation in the passenger car market. There is continued pressure on

automobile manufacturers from environmental lobbies, consumers, judiciary and international agreements

(such as the Kyoto Protocol), to reduce vehicular emission.

The Indian government has been gradually strengthening the regulatory framework related to

vehicular pollution through a phased introduction of emission norms.

Environmental policy

Under the New Auto Policy, the government has announced an Environmental Policy for automobiles.

Some of the key provisions of the policy, with respect to environment, are

! Approval of Dr Mashelkar Committee provisions, which provide the time schedule for the phased

implementation of vehicular emission norms.

!

Encouragement for manufacturing automobiles using alternative fuel technologies, like compressed naturalgas (CNG) and electric batteries.

! Adopting the international system of levying road tax, based on the principle of higher tax for older

vehicles, to discourage the use of old vehicles. At present, road taxes are levied at the time of purchase

and are based on the type of the vehicle.


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These clauses are likely to encourage manufacturers to launch cars and UVs with improved technology

and using alternative fuels that are low-priced and cleaner. Sales of new cars are also likely

to increase since customers will be deterred from buying older cars due to the higher road

tax on older vehicles.

Incentives for the upgradation of auto ancillary units to international standards are expected to

result in the availability of good quality and competitively-priced components in the domestic

market.

Mashelkar Committee recommendations

On September 1, 2001, the government constituted the Mashelkar Committee to

! recommend an 'Auto Fuel Policy' for major cities and the rest of the country;

! devise a road map for its implementation; and

! recommend suitable auto fuels, automobile technologies, and fiscal measures.

In October 2003, the government accepted the committee's report, which included the following

recommendations:

! The government should only stipulate vehicular emission standards and corresponding fuel specifications,

without specifying vehicle technology and the type of fuel to be used.

! A roadmap for the implementation of vehicular emission norms and auto fuel quality.

(i) Bharat Stage-II (equivalent to Euro-II) norms, which are in place in 11cities, - Delhi, Mumbai, Kolkata,

Chennai, Bangalore, Hyderabad, Ahmedabad, Pune, Surat, Kanpur, and Agra - will be applicable to all

passenger cars and utility vehicles (petrol and diesel) throughout the country by April 1, 2005.

(ii) Euro-III equivalent emission norms for all cars and utility vehicles (petrol and diesel) will be introducedin the 11 cities mentioned above from April 1, 2005.

(iii) Euro-III equivalent emission norms for all cars and utility vehicles (petrol and diesel) will be

extended to other parts of the country from April 1, 2010.

iv) Euro IV norms will be applicable to all cars and utility vehicles (petrol and diesel) for the 11 cities

mentioned above by April 1, 2010.

! Matching quality of petrol and diesel, as detailed by the committee, should be simultaneously made

available.

! In addition to petrol and diesel, the government has permitted the use of CNG and liquefied petroleum

gas (LPG) as auto fuels. The committee has recommended that alternative fuels like di-methyl ether, bio-

diesel, hydrogen, electric and fuel cell, should be encouraged, giving customers the choice of fuel and

vehicle technology. Also, any combination of fuel and vehicle technology, which meets the prescribed

emission norms, should be acceptable.

! Other cost-effective measures such as a comprehensive inspection and certification system for in-use

vehicles, fitting of emission reduction devices in the existing vehicles, traffic management, and the

construction of bypasses should be established with private sector participation.

! In order to meet the new emissions norms, substantial investments are required to produce the appropriate

quality of fuel and vehicles. As per the report, domestic oil companies will have to invest an additional Rs

180 billion by 2005 and another Rs 120 billion by 2010 for upgrading their refineries to produce Bharat

III and Bharat IV specification auto fuels (petrol and diesel). Similarly, automobile companies will need to

invest Rs 250 billion till 2010 to manufacture car and utility vehicle engines, which meet these norms.

Also, the test facilities currently available in the country are inadequate to meet the new regulations.

SIAM estimates that the cost of setting up additional facilities to test vehicles as per the new regulations

would be around Rs 10.4 billion (excluding the cost of setting up inspection and certification centres).

Hence, the committee has recommended that preferential treatment be given to the oil and auto industry


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in matters relating to

(a) customs duty on imported capital goods, equipment, and machinery needed for the upgradation of

technology/facilities,

(b)excise duty on indigenously manufactured capital goods, equipment, and machinery needed for

upgradation,

(c) 100 per cent depreciation on plant and machinery set up for upgradation,

(d) soft loans for technology modernisation or upgradation projects, and

(e) adequate incentives, such as tariff differentials and other measures, to enable the domestic industry to

compete with imports.

! Government should provide fiscal and financial incentives to the manufacturers and users of electric

vehicles, in order to make these vehicles competitive.

Engine technologies for compliance of emission norms Table 1Level of emission Technology options for Technology options for Incremental vehicle

norms compression ignition engine spark ignition engine cost of technology

upgradation

Euro I / India 2000 Retarded injection timing Intake, exhaust, combustion na

Open/re-entrant bowl optimisation

Intake, exhaust and combustion optimisation Carburettor optimisation

FIP~700-800 bar, low sac injectors

High swirl

Naturally aspirated

Euro II / Turbocharging Fuel injection na

Bharat Stage II Injection pressure > 800 bar, moderate swirl Catalytic converter

High pressure inline / rotary pumps, Fixed EGRinjection rate control Multi-valve

VO nozzles CNG/LPG

Re-entrant combustion chamber

Lube oil consumption control

Inter-cooling (optional, depends on specific power)

EGR (may be required for high speed car engines)

Conversion to CNG with catalytic converter

Euro III / Multi valve Fuel injection + catalytic converter Rs 0.5 lakh

Bharat Stage III Low swirl high injection pressure > 120 bar Variable EGR

Rotary pumps, pilot injection rate shaping Variable valve timing

Electronic fuel injection Multi-valve

Critical lube oil consumption control On-board diagnos tic system

Variable geometry turbocharger (VGT) CNG/LPG

Inter-cooling

Oxycat & EGR

CNG/LPG

High specific power output

Euro IV / Particulate trap Direct cylinder injection Cannot be predicted

Bharat Stage IV NOx trap Multi-brick catalytic converter at present

On board diagnostics system On-board diagonisties system

Common rail injection-injection pressure>1600 bar

Fuel Cell

CNG/LPGna: not available

Compiled by CRIS INFAC
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In compliance with the emission requirements, all new models being launched are Euro-II or Euro-III compliant. Forexisting models, vehicle manufacturers have been modifying engines largely through changes in the fuel injection pump

to burn fuel more efficiently. Some of the modifications being made in the petrol and diesel engines are listed below.

For diesel vehicles, modifications would involve introducing

! high pressure fuel injection pumps

! turbo chargers with inter-coolers

! exhaust air re-circulation

! catalytic converters

For petrol vehicles, modifications would involve introducing

! multi-point fuel injection engines to control the air-to-fuel ratio and ensure the efficient functioning of the catalytic

converter

! advanced three-way catalytic converters

! exhaust air re-circulation

Most manufacturers have discontinued the production of non-Euro compliant variants of all passenger cars, and introduced

multi-point fuel injection (MPFI) engines in their models. The subsequent increase in costs has been passed on to

customers in the form of price increases in the range of Rs 3,000 - Rs 20,000 for different segments.

Given that the regulations governing vehicular emissions are becoming increasingly stringent, automobile manufacturers

are experimenting with alternate fuels, such as CNG and LPG (CNG has the lowest toxic gas emission levels). Several

automobile manufacturers such as Fiat India, Hindustan Motors, and Tata Motors, have begun manufacturing cars

operating on CNG and LPG.

The government is promoting alternate fuels such as CNG and LPG, as these gaseous fuels do not contain lead, sulphur

and benzene, which can cause toxic pollutants and affect the efficient functioning of the engine. However, in India, the

infrastructure for the distribution of these fuels is not adequate to cater to the large vehicle population.

Responses to emission norms Box 1

In August 2001, the government approved the use of LPG as an automotive fuel. Domestic LPG is subsidised, while LPG

for automotive use is likely to be priced on the basis of import parity. To prevent the misuse of domestic LPG as automotive

fuel the use of replaceable cylinders is not permitted in vehicles. LPG-driven vehicles are likely to have fixed storage

tanks, which would be refuelled. (However, in several countries, replaceable cylinders are permitted.)

Petrol pumps are required to maintain a mandatory distance between liquid fuel dispensing facilities and the auto LPG

facility. Hence, only pumps having adequate space can have LPG-dispensing facilities.

Use of LPG in India Box 2


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Fiscal regulations

One of the key determinants of the demand for automobiles is acquisition cost, which is largely

determined by the sale price (ex-showroom price) and the current income levels. In India, various

taxes and levies account for around 43 per cent of the acquisition cost of a passenger car.Levies and taxes include excise duty (25 per cent), central sales tax (4 per cent), uniform

state sales tax (12 per cent), and road and registration tax (1-2 per cent). Rationalisation of

the tax structure could reduce prices. This is expected to result in increased demand. The government

may reduce the excise duty on passenger cars and utility vehicles from the current 25 per

cent to 16 per cent.

The three key fiscal tariffs, which influence car prices and hence, demand, include

Excise duty

Excise duty rates directly affect the price of vehicles, and hence, demand. From 1994 to 2001,the excise duty on cars and utility vehicles remained constant at 40 per cent. In the Union

Budget 2003-04, excise duty was reduced to 24 per cent. The New Auto Fuel Policy has indicated

that the government may provide fiscal incentives for the manufacture of cars less than 3.8

metres in length, in order to establish India as the global hub for sourcing small cars. Hence,

excise duties may be reduced in the near future to encourage the manufacture, sales, and export

of small cars.

Customs duty

The basic customs duty on cars and utility vehicles was reduced gradually from 65 per cent

in 1994-95 to 35 per cent in 2000-01. However, with the removal of QRs on imports in April

2001, the basic customs duty on CBUs was increased to 60 per cent (import duty was at

30 per cent for the import of CKD and SKD units), in order to protect the domestic industry.

The basic customs duties on auto components vary between 19 and 35 per cent, and that

on project imports vary between 15 and 25 per cent. According to India's commitment to the

WTO, the customs duties on CKD and SKD kits are likely to be reduced to 20 per cent by

2004-05. This will result in some reduction in the operating costs of manufacturers.

In the Union Budget 2003-04, the customs duty on cars and utility vehicles in CKD form was

reduced to 30 per cent, whereas the duty on CBUs has been left unchanged at 60 per cent.

However, the customs duty on SKD has been increased to 60 per cent. The total effective

duties applicable to cars and utility vehicles are given in the table below.


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Sales taxBefore May 2000, different state governments levied different rates of sales tax ranging from

4 to 12 per cent. This created disparity in the price of the same model of a car across different

states, encouraging the purchase of vehicles in states with lower sales tax. To prevent this,

the government fixed the sales tax on cars in all states at a uniform rate of 12 per cent,

with effect from May 1, 2000.

Impact of Value Added Tax (VAT) on the automobile industry

VAT is a broad-based tax covering the value added on a product at each stage of production

and distribution. It was proposed to be levied across India with effect from April 1, 2003, but

has been postponed since all states could not implement the same.

The automobile industry involves multi-tiered supply chains with components and sub-assemblies

moving from different states to the final assembly plant. Here, the vehicle is manufactured and

sold to dealers all over India. In this process, various central and state taxes get embedded

Tariffs applicable on cars and utility vehicles Table 2

Tariffs (per cent)

Customs Excise

2002-03 2003-04 2002-03 2003-04

New cars

- CKDs 35.2 30.0 32.0 24.0

- SKDs 35.2 66.4 32.0 24.0

- CBUs 66.4 66.4 32.0 24.0

Second-hand cars 113.2 113.2 32.0 24.0

Passenger transport

- 6-12 seater1 35.2 30.0 32.0 24.0

- 12 seater and above1 35.2 30.0 16.0 16.0

Steel items 30.0-35.2 30.0 16.0 16.0

Engines and engine parts 35.2 30.0 16.0 16.0

Other components 30.0-35.2 30.0 16.0 16.0

CBU: Completely built unit; CKD: Completely-knocked down; SKD: Semi-knocked down1

Excluding driver

Source: CRIS INFAC

Effective customs tariffs on cars and utility vehicles Table 3

CKD

(per cent)

SKDs/New CBUs Used CBUs

Basic customs duty 30.0% 60.0% 105.0%

Special additional customs duty 4.0% 4.0% 4.0%

Basic and SACD 35.2% 66.4% 113.2%Countervailing duty

124.0% 24.0% 24.0%

Effective import duty 67.6% 106.3% 164.4%

Countervailing duty2

16.0% 16.0% 16.0%

Effective import duty 56.8% 93.0% 147.3%

1Countervailing duty for cars and utility vehicles with seating capacity between 6-12 persons

(excluding driver)2

Countervailing duty for utility vehicles with seating capacity of over 12 persons

(excluding driver)

Source: CRIS INFAC
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into the product cost and have a cascading effect on the final price of the vehicle.

The introduction of VAT will ensure that the cascading effect of taxes is avoided, as a simple

rate will be collected on value addition. This will result in a marginal reduction in the final

price and increase export competitiveness.


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3.0Technology

Product technology

Since the mid-1990s, cars have changed drastically in terms of technology, and are now equipped

with several new features. The drivers for this change are

! increased customer expectations - they look for improved vehicle performance, and features that ensure

safety, comfort, convenience, connectivity, and economy;

! stricter environmental regulations; and

! intense competition among players.

Changes in product technology aim to meet the following requirements:

Customer expectations

In the international market, the following improvements are being undertaken to meet customer

expectations:

Safety

In this sphere, technology focuses on reducing the probability of accidents, and the impact of

accidents on passengers. Some commonly used features are advanced safety interiors (such as

airbags), collision avoidance systems, anti-lock braking systems (ABS), and disc brakes for all wheels.

Safety-related technological features are also being introduced in some Indian models. For instance,

all models of the Mercedes Benz India, and other premium cars like the Honda Accord, HyundaiSonata, and Ford Mondeo have air bags and ABS. Rear seat belts have been introduced in the

Maruti 800. More safety features are likely to be introduced in Indian vehicles in the next 2-

3 years.

Comfort, convenience, and connectivity

Electric power steering (EPS) systems are increasingly used to reduce effort and fatigue for the

driver. Use of improved suspension systems provides increased riding comfort.

There has also been an increase in the demand for information, communication, entertainment,

and comfort in a vehicle. As a result, technologies such as one-touch adjustable steering columns,integrated navigation radios, power sliding doors, power lift gates, and mobile multimedia systems

are being developed. Advanced entertainment systems such as rear seat audio/video (RSAV) deliver

high-quality movies, music, and games.

An evolving concept in the area of communication and connectivity is telematics, the convergence

of wireless and vehicle-location technologies [geographical positioning system (GPS)]. This technology

enables wireless communication from vehicles.

Fuel economy

Fuel economy, which is of primary concern to most car manufacturers, is achieved through various

measures, including the production of lightweight cars using alternative materials such as aluminium

and plastics. (Volkswagen and other car manufacturers are researching the manufacture of ultra-

light cars in the European Union. The project aims at providing technology for reducing the

body weight of a car using low-cost carbon composite structures. This would also reduce carbon


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Compliance with environmental regulations

Vehicles are equipped with features such as advanced engine management and thermal management

systems to decrease environmental pollution. Technologies for reducing exhaust emissions, introduced

in certain models in India, include multi-point fuel injection (MPFI) and catalytic converters. Indian

oil refineries have also been working towards improving the quality of available fuel.

Alternative fuels

The use of alternative fuels reduces fuel costs and pollution. Alternative Fuel Vehicles (AFVs)

operate on fuels other than petroleum fuel products. These vehicles can be either original equipment

manufacturers (OEM) vehicles or conversions. Of late, the use of alternative fuels is becoming

more common.

The benefits of alternative fuels are

! lower dependence on oil imports, which saves foreign exchange;! lower air pollution from the emission of various types of harmful gases, like carbon monoxide;

! renewable fuels; and

! lower cost of operation of vehicles.

Some of the these fuels are:

Compressed natural gas (CNG)

Among the hydrocarbon fuels, CNG is the most environment-friendly. It is free from lead, sulphur

and particulate matters, which ensure the lowest level of emission of toxic gases. The cost of

CNG is 59 per cent lower than petrol, and 30 per cent lower than diesel.

CNG's high knock-resistance property allows the use of a compression ratio that is higher than

that of petrol, thus increasing power output and fuel economy. Hence, CNG engines are more

fuel-efficient than petrol engines. However, the compression ratio for CNG engines is lower than

that of diesel engines. As a result, the fuel efficiency of CNG engines is 10-20 per cent lower

than that of diesel engines.

The cost of a CNG kit for a new vehicle ranges between Rs 55,000 and Rs 60,000. It can

be used for a distance of 250 km for cars. The cost of a conversion kit for old cars is estimated

to be around Rs 36,000.

CNG vehicles are expected to be almost as safe as petrol-operated vehicles, as the cylinders

are built according to stringent quality standards. The sudden release of CNG from a vehicle

cylinder will not form a vapour cloud on the ground; as natural gas is lighter than air the

gas cloud will disperse. Hence, the risk of fire from the uncontrolled release of CNG is much

lower than in the case of petrol.


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In India, the use of CNG as an automotive fuel was allowed in April 2000. However, sincethe government has prescribed strict safety norms for dispensing CNG, very few dispensing stations

have been set up. Hence, CNG as an alternative auto fuel has not gained widespread usage

in the country.

Liquefied petroleum gas (LPG) or propane

LPG is a mixture of petroleum and natural gases that exist in a liquid state under moderate

pressure. LPG has been used as a vehicular fuel for over 60 years. It has the largest market

share among alternative fuels in the international market.

LPG is priced lower than petrol, diesel and CNG, and is the least polluting fuel. LPG offerstwice the mileage that a petrol or diesel car provides, and its cost is estimated to be 60 per

cent lower than petrol (around the same price as diesel). Both private and public sector oil

companies have shown willingness to set up the necessary infrastructure for supplying LPG through

retail outlets. The cost of an LPG kit is around Rs 15,000 - Rs 20,000.

However, LPG is likely to be more hazardous than CNG, since LPG vapours are heavier than

air. Hence, leaks from the fuel system tend to accumulate at the ground level, where they

may come into contact with ignition sources.

In India, the regulation allowing the use of LPG as an auto fuel was passed in August 2001.

Currently, the LPG used in vehicles is largely imported. In addition, the cylinders used have

to be fixed in the vehicles and have to be refilled at dispensing stations. Since the infrastructure

for dispensing LPG is inadequate, the use of LPG has not yet gained widespread usage in the

country.

Electricity

Electricity can be used as a transportation fuel to power electric battery and fuel cell vehicles.

When used to power electric vehicles (EVs), electricity is stored in an energy storage device

such as a battery. EVs use electricity as fuel, instead of petrol or some other combustible fuel.

The electric motor in an EV converts electricity, usually from a battery pack, into mechanical

power, in order to turn the wheels.

EV batteries have a limited storage capacity and must be replenished by plugging the vehicle

into a recharging unit. At present, a fully charged battery can be used for around 80 kilometers.

Price comparison of CNG with petrol and diesel Table 1

Cost of CNG Rs/kg as on October 2003 19.7

Price of CNG equivalent to 1 litre of petrol Rs/litre 14.2

Pr ice of petrol Rs/kg as on October 2003 37.4

Percentage by which CNG is priced lower than petrol 62.1

Price of CNG equivalent to 1 litre of diesel Rs/litre 16.7

Price of diesel Rs/litre as on October 2003 25.8

Percentage by which CNG is priced lower than diesel 35.1

Conversion:

I kg of CNG = litres of petrol 1.39

I kg of CNG = litres of diesel 1.18

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Also, the price of the battery is high (the battery cost is around one-third the cost of the

EV). This is the main constraint for the widespread use of EVs in India.

The cost of an equivalent amount of fuel for EVs is significantly less than the price of petrol.

Also, the maintenance cost for EVs is lower as they have fewer moving parts to service and

replace. In India, Reva Auto India Ltd launched its Reva electric car in August 2001. The cost

of operation of the Reva electric car is around Rs 0.40 per km (as compared with Rs 3.13

per km for a petrol-operated car, based on a price of Rs 34.42 per litre, at a fuel efficiency

of 11 km to a litre; the cost of operation of a diesel car is around Rs 1.84 per litre, based

on a price of Rs 23.97 per litre, at fuel efficiency of 13 km to a litre).

The Electric Vehicles Association of India has sought financial support for the EV industry from

the government.

Ethanol

Ethanol is an alcohol-based alternative fuel, produced by fermenting and distilling starch crops,

which have been converted into simple sugars. Feedstocks for this fuel include corn, barley,

and wheat. Ethanol is most commonly used to improve the emission quality of gasoline. In

some cases, ethanol is blended with gasoline to form an E10 blend (10 per cent ethanol and

90 per cent petrol), but it can be used in higher concentrations, such as E85 or E95.

Methanol

Methanol, also known as wood alcohol, has been used as an alternative fuel in flexible fuel

vehicles that run on M85 (a blend of 85 per cent methanol and 15 per cent gasoline). Currently,it is not commonly used because auto manufacturers are no longer producing methanol-powered

vehicles. In future, methanol could be used for providing the hydrogen necessary to power fuel

cell vehicles. Neat methanol or M-100 may also be used in the future.

Biodiesel

Biodiesel (fatty acid alkyl esters) is a cleaner burning fuel, made from natural, renewable sources

such as new and used vegetable oils and animal fats. Like petroleum diesel, biodiesel, which

is a diesel replacement, operates in combustion-ignition engines. Blends of up to 20 per cent

of biodiesel (mixed with petroleum diesel fuels) can be used in nearly all diesel equipment,

and are compatible with most storage and distribution equipment.

Hydrogen

Hydrogen gas is expected to play an important role in developing sustainable transportation,

because it can be produced in virtually unlimited quantities using renewable resources. Pure hydrogen

and hydrogen mixed with natural gas (hythane) have been used effectively to power automobiles.

However, in the future, hydrogen is expected to be used as a fuel for fuel cell vehicles. Hydrogen

and oxygen fed into a proton exchange membrane (PEM) fuel cell produces enough electricity

to power an electric automobile, without producing harmful emissions. Currently, there are no

transportation and distribution systems for hydrogen. However, the ability to create the fuel from

a variety of resources and its clean burning property make it a desirable alternative fuel.

Solar energy

Solar energy technologies use sunlight to produce heat and electricity. Electricity produced by

solar energy through photovoltaic technologies can be used in conventional electric vehicles. Currently,


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solar energy powered vehicles are used in competitions and demonstrations. Also, the market

for pure solar powered vehicles is very limited and none of the vehicle manufacturers are planning

to manufacture these vehicles on a commercial scale.

Current status of alternative fuel vehicles in India

In India, since most of the transportation infrastructure is designed for supplying petroleum-based

fuels, fuel needs are met through such fuels (diesel and petrol). However, this has caused a

substantial increase in air pollution in metropolises. The country also has to spend large amounts

of its foreign exchange reserves for importing crude oil. Some manufacturers have started producing

vehicles that can run on LPG and CNG. Currently, the infrastructure for making fuels like CNG

and LPG available to users is inadequate, thus hampering the widespread use of these fuels.

However, the use of alternative fuel vehicles is expected to increase with an increase in the

outlets dispensing these fuels and stricter emission norms.

Current technologies

Multi-point fuel injection systems:

In India, till the mid-1990s, the carburettor was used to regulate the supply of fuel to the

engine. However, since this was ineffective in controlling pollution, the use of catalytic converters

(CC) was made mandatory in all vehicles sold after April 1, 1995.

With further technological advancement, CCs were replaced with single-point or central fuel injection

systems, which incorporated electrically controlled fuel-injector valves into the engine. In these

systems, the accelerator pedal is connected to the throttle valve, which opens to allow air into

the engine when the accelerator is depressed. The engine control unit that monitors the intakeof air increases the release of fuel into the engine to meet the air to fuel ratio in real time.

Gradually, as new engines were designed, single-point fuel injection was replaced by multi-point

fuel injection systems. These systems have a fuel injector for each cylinder, usually located such

that they spray fuel precisely at the intake valve. The fuel injectors are tiny nozzles that spray

fuel in very tiny droplets, allowing the fuel to burn completely and increasing the engine's

fuel efficiency. In India, most manufacturers have started using this technology in petrol-engine

cars, to meet the government's strict emission control norms.

Future technologies

Hybrid vehicles

A hybrid vehicle is an emerging technology, which combines two or more sources of power,

such as a gasoline engine (for long distance driving) and a battery-powered electric motor (for

ignition and low-speed driving within the city). It results in greater fuel efficiency and lower

emission of toxic gases. Hybrid technology improves fuel usage by automatically switching off

the engines in an idle state, capturing energy when the brakes are applied, and providing extra

power while accelerating. Hybrid engine cars offer 1.5-2 times more fuel efficiency than gasoline-

based cars of the same size, and reduce carbon dioxide emissions. However, this technology

is very expensive. For instance, Toyota Estima hybrid costs around $ 4,000 more than the same

model fitted with a gasoline engine.

Toyota was the first automaker to launch a hybrid vehicle, the Prius, in 1997. To date, Toyota

has sold around 100,000 hybrid cars worldwide, which includes the Estima and Crown luxury

sedans. Honda Motors is the only other manufacturer that has sold around 13,000 models of


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the 2-seater Insight and a hybrid version of its Civic compact model. General Motors and Ford

are expected to offer hybrid vehicles by 2003-04. Hybrid vehicles are not available in India

at present.

Fuel cell

Fuel cell technology is an evolving concept, which uses an electrochemical process to create

electricity, by mixing hydrogen with oxygen, and emitting only water and heat. Fuel cells run

on hydrogen and have a zero-pollution factor. Although hydrogen is a renewable source of energy,

it is difficult to store and the cost of the storage equipment used is high. Most large automakers

such as General Motors, Ford, Toyota Motors, and Honda Motors, are researching fuel cell technology

and are trying to make it commercially viable in the next 3-5 years. Countries like USA and

Japan are offering tax incentives for increasing the acceptance of such cars.

Manufacturing technologyThe manufacture of cars is an assembly operation of around 20,000 separate components. A

car comprises a frame or body shell (which forms the skeleton of the vehicle), an engine,

a transmission system, a suspension system, a steering, brakes, and an electrical system. The

manufacturing technique used to assemble a car depends on its design and volume. Some manufacturing

techniques are listed below.

Steel paneled monocoque design: Most cars are manufactured by the steel-paneled monocoque

design, where the body acts as the chassis, and all the parts are mounted onto the welded

body. This technique is capital intensive since several large dies and presses are required to

build the body of a model. These account for around 40 per cent of the project cost. The

minimum viable volumes in the manufacture of a car using this technique are estimated at around

100,000 cars per annum. In India, most new car projects use this technique.

Resin transfer moulding: In this technique, body panels are fixed onto pressed (steel) or extruded

(aluminium) space frames that act as the chassis. The dies and presses required are smaller

in size and fewer in number. The resin transfer moulding (RTM) technique is viable at volumes

of 25,000-30,000 cars per annum.

Hand-beaten body: Cars manufactured under this technique have a separate frame or chassis,

and a hand layered or beaten body. However, only specialised vehicles, such as sports cars,

are manufactured by this technique. Volumes as low as 500 cars per year are also viable.

Stages in the manufacturing process

A car's manufacturing process involves the following main operations:

Press shop: The body shell is manufactured using steel sheets, which are cut to the required

size. Subsequently, each sheet is pressed between various dies, in order to give it the required

shape, such as that of doors, roofs, or bonnets. An anti-rust coating is applied at this stage.

In general, the investments needed to set up a press shop are the highest. This stage is important,

as it determines the exterior of the vehicle and its appearance.

Body shop: In the body shop stage, the various press metal components manufactured in the

previous stage are welded together to form the body shell. The various parts, such as floor

panel, side panel, doors, and bonnet, are sub-assembled. Subsequently, the assembled parts undergo


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final welding. The welded body is sent to the paint shop through a conveyer.

Paint shop: In the paint shop, the body undergoes various pre-treatment and painting processes.

This provides high corrosion resistance and complete water proofing to the body. The car body

is given an intermediate or primer coat before the top paint coat is applied. The final coat

is applied using automatic electrostatic spray painting, followed by a baking and cooling process.

Final assembly: The painted bodies are sent to the final assembly line, where various trims,

such as overhead lining, windshield glass, and other parts, such as suspension, are added. The

car is then transferred to an overhead conveyer carrier, where the drive train, consisting of the

engine, the gearbox, and the front and rear axles, are assembled onto the body. The underbody

operations and wheel alignment are performed at this stage. The vehicle is then taken off the

conveyor, and items, such as seats, steering wheel, and battery are fitted. The investment required

for this stage is high, due to the expense incurred on the conveyer belt and other machinery.

Some car manufacturers also have a die or machine tools shop, for fabricating various dies, jigs

and tools, which are required for manufacturing components or the car body. These dies and

machine tools are made according to specifications, which depend on the design of the car

and its parts.

Raw material

Raw material costs account for around 70-75 per cent of a car's cost of production. The main

raw materials required for the manufacture of cars are steel, components, tyres and tubes.

Steel

Steel sheets, plates and flats, and steel coils comprise 5-10 per cent of the cost of raw materials.

Cold rolled (CR) steel products can be categorised as ordinary drawn (OD), deep drawn (DD)

and extra deep drawn (EDD). EDD steel is used in the manufacture of the car's body panel.

This variety is of high quality, does not crack under pressure, and also has a surface finish

suitable for the high quality body paint used in cars.

Manufacturers largely import EDD sheets and plates, as the imported EDD sheets are of better

quality. As a result, international prices of steel have a significant impact on a manufacturers

cost.

In April 2000, Tisco set up a new CR mill, which has started producing auto-grade steel. Auto-

grade steel is expected to meet the quality standards required by car manufacturers. However,

CR steel imports by car manufacturers are not expected to reduce significantly in the short

term.

Substitutes for steel

Plastic and aluminium have substituted steel in the manufacture of certain car parts. Moulded

plastic is used in the manufacture of components such as dashboards, fenders, interiors and door

handles. Since aluminium is lighter than steel, it has a high strength to weight ratio, which results

in a reduction in weight, thereby, improving fuel efficiency. According to industry estimates, a

mid-sized car using 1,000 pounds of aluminium would be 25 per cent lighter and 20 per cent

more fuel efficient than a car manufactured using steel. Some manufacturers have started using

engines made of aluminium, instead of steel.


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According to a report by the American Metal Market (a metal trades journal), the average aluminium

content in cars and light trucks is expected to increase from 255 pounds per vehicle in 2000

to 268 pounds per vehicle in 2002.

Components

Auto ancillaries form an integral part of the passenger car industry. Manufacture of cars is essentially

an assembly of various modules and components, which are largely outsourced from vendors.

The table below gives the share of various components and sub-assemblies in the total cost,

and the schedule of indigenisation adopted by most car manufacturers.

Main components/sub-assemblies of a car Table 2

In the domestic component industry, technological development has been inadequate due to the

absence of global players, the small size of the car market, and the small-scale nature of the

component industry. However, the entry of multinational players in 1993 has increased technological

improvements. Global suppliers who have set up plants in India, such as Delphi, Visteon, and

Magneti Marelli, have introduced the latest technologies in their Indian plants.

Globally, the research and development (R&D) expenditure of component manufacture as a percentage

of turnover is at around 6.5-7 per cent, while for Indian players, it is less than 2 per cent.

However, a large number of Indian players have initiated technological developments, largely

in the areas of product engineering and reverse engineering, new materials (such as aluminium

Component Share in total Sequence of Time required

sub-assembly material cost indigenisation for indigenisation

(per cent)

Phase I

Tyre 2.70 1 Minimal

Battery 1.40 1 Minimal

Nuts and bolts - 2 Minimal

Wheel rim 4.10 2 Minimal

Phase II

Doors and windows 2.70 3 5-6 months

Electricals 6.80 4 5-6 months

Trim 0.70 5 Minimal

Seats 2.70 5 na

Body 16.20 5 na

Phase III

Brakes 5.40 6 14-16 months

Front axle 4.10 6 14-16 months

Rear axle 8.10 6 14-16 months

Suspension 2.00 6 14-16 months

Steering system 4.10 6 14-16 months

Glass (front and rear) 5.40 6 14-16 months

Phase IV

Transmission 13.50 Final na

Engine 20.30 Final na

Total 100.00

na: Not available

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alloys), and value engineering. Most technological improvements by the Indian companies are

through technical tie-ups with overseas players.

Technology trends Table 3

Vehicle part Component Technological improvements

Engine components Pistons, piston rings, piston pins, Increased usage of steel rings instead of cast iron rings

engine valves, gaskets

Exhaust systems Mufflers, pipes, catalytic converters Introduction of more stringent emission norms has made

the use of catalytic converters compulsory in metros

Fuel delivery systems Carburettors, fuel injection pumps, In petrol engines, electronically controlled direct fuel

petrol injection system, common rail injection is replacing the conventional carburetted engines,

direct injection diesel systems. in order to meet fuel efficiency and emission norms.

In diesel engines, direct injection of fuel into the combustion

chamber results in better fuel efficiency and lower emissionlevels

Gears Gears, bevel gears, crown Automatic transmission is increasingly being offered in

wheel/pinion various higher-end models

Clutch Clutch casings, c lutch plate, fr ic tion Increased penetration of diaphragm type c lutches, in place

material of spring type clutches. Though clutchless automatic

transmission systems are being introduced in western

countries, in India their penetration is mainly in the luxury car

segment

Brakes Actuation sys tem, fric tion material Disc brakes are increas ingly being used in passenger

vehicles. Anti-lock braking systems (ABS) are being

introduced in some models in the Indian marketWheels Wheel rims , wheel covers, wheel Penetration of cas t aluminium alloy wheels is inc reas ing in

drums developed markets, due to the consequent reduction in

vehicle weight

Suspension Shock absorbers, s truts , forks, Increased used of s truts in the front suspension instead of

springs shock absorbers

Steering gears Mechanical steering gear, power Power steering is increasingly replacing mechanical

steering, rack and pinion steering in cars

steering, power steering pump

Steering wheel/column Steering wheel, steering column Polyurethane steering wheels are replacing moulded plastic

steering wheels. With increased consideration for safety

and comfort, demand for adjustable and collapsible steeringcolumns is expected to grow

Electronics Engine management systems, In developed countr ies, the value of electronic components

sensors, navigation systems, in passenger cars is about $ 1,000 - $ 1,500 per vehicle.

safety systems These are chiefly used in engine management systems,

various sensors (crash sensors, traction control, c limate

sensors), ABS and navigation systems

Interiors and equipment Seats, seat belts, ACs, plastic Use of air bags to increase with an emphasis on safety

Cas tings Cylinder block, cylinder head, Press ure die casting is inc reasingly used, es pecially for

casings manufacturing aluminium components

Sheet metal components Skin panels, internal panels, chassis Special steels for s trength and weight reduction, use of

parts , s tructural par ts computer -aided design/manufacturing (CAD/CAM) fordesigning components and designing and manufacturing

sheet metal dies and tools

Source: Industry and CRIS INFAC
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4.0

International markets

In 2002, passenger cars reported declining to flat sales in the US and in Europe, whereas they

improved marginally in Japan. However, most of Asia, excluding Japan, saw a high sales growth

in passenger cars due to strong economic recovery, low interest rates, and price reduction due

to increased competition. In China, car sales continue to surge on the back of higher incomes,

reduction in car prices, and the launch of new models. Growth in passenger car sales will continue

to remain weak in the US, European and Japanese markets. However, Asia will drive the demand

for passenger cars with countries like China, Thailand and South Korea posting double-digit growth

rates.

China

In the first five months of 2003, despite the outbreak of SARS, car sales in China grew by

a phenomenal 83 per cent over the same period last year. This is in addition to the 60 per

cent growth posted in 2002 to reach 1.2 million cars. From 1998-2002, passenger car sales in

China have grown at a CAGR of 19 per cent.

China: Passenger car sales (1998-2002) Figure 1


The stupendous growth in sales in 2002 was on account of

! the reduction in car prices due to price cuts driven by intense competition;

! the launch of a variety of new models, resulting in increased choice for the customer;

! continued economic growth and increase in personal disposable incomes in China; and

! favourable government policies.

Reduction in car prices

Passenger car sales in 2002 were fuelled by demand from private customers led by a reduction

in car prices. China's entry into the WTO in December 2001 led to a slash in import dutiesfrom 70 to 44 per cent, which, in turn, led to a drop in prices. Increasing competition also

forced manufacturers to lower prices. While the prices of mini-cars were reduced by an average

15 per cent, the prices of sedans were reduced by an average 7 per cent.

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1998 1999 2000 2001 2002

Years

(Unit Sales)
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Increased product range

The availability of a variety of new models increased the choice available to the customers,

resulting in higher sales. Some of the new models introduced in 2002 were Bora (FAW-VW),

Sail (General Motors), Palio (Fiat), Polo (Shanghai VW), Bluebird (Nissan), Vios (Toyota), and Sonata

(Hyundai). The sale of new models represented almost 50 per cent of the increase in passenger

car sales, indicating the vital role played by these new models in the growth of the industry.

China: Increase in no of car models Figure 2

36

18

1312

57

3

0

5

10

15

20

25

30

35

40

1989 1994 1999 2000 2001 2002 2003

Years

(Number of models)

Car models

Note

New models launched in 2003 are upto May 2003


Economic growth

Since 1991, China has maintained an economic growth rate of around 7 per cent, with an 8

per cent growth rate in 2002. China's per capita income has increased from around 1,000 yuan

in 1991 to over 8,000 yuan in 2001. The steady increase in the purchasing power of consumers

has resulted in an enormous increase in passenger car sales, which coupled with an increase

in roads and expressways, has encouraged the surge in private ownership of vehicles.

Profile of passenger car users in China Figure 3


Users in 1997

60

20

20

Government Agencies/ Companies Taxi Individuals

(per cent)

Users in 2002

30

1258

Government Agencies/ Companies Taxi Individuals

(per cent)
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Government policies

Apart from the reduction in import duties that came into effect when China joined the WTO,

the Chinese government also all

Cars State Of Industry

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