Final Marketing Project on Automobile Industry

8/14/2019 Final Marketing Project on Automobile Industry

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1.1: The Beginning of New Era

With the invention of the wheel in 4000 BC, mans journey on the road of mechanized

transport had begun. Since then he continually sought to devise an automated, labor saving

machine to replace the horse. Innumerable attempts reached conclusion in the early 1760s with

the building of the first steam driven tractor by a French Captain, Nicolas Jacob Cugnot. It was

however left to Karl Benz and Gottlieb Damlier to produce the first vehicles powered by the

internal combustion engine in 1885. It was then that the petrol engine was introduced, which

made the car a practical and safe proposition. Then onwards, it has been one big journey...on the

roads

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1.2: History of Automobile Industry

The automobile as we know it was not invented in a single day by a single inventor. The history

of the automobile reflects an evolution that took place worldwide. It is estimated that over

100,000 patents created the modern automobile. However, we can point to the many firsts that

occurred along the way. Starting with the first theoretical plans for a motor vehicle that had been

drawn up by both Leonardo da Vinci and Isaac Newton.

In 1769, the very first self-propelled road vehicle was a military tractor invented by French

engineer and mechanic, Nicolas Joseph Cugnot (1725 - 1804). Cugnot used a steam engine to

power his vehicle, built under his instructions at the Paris Arsenal by mechanic Brezin. It was

used by the French Army to haul artillery at a whopping speed of 2 1/2 mph on only three

wheels. The vehicle had to stop every ten to fifteen minutes to build up steam power. The steam

engine and boiler were separate from the rest of the vehicle and placed in the front (see

engraving above). The following year (1770), Cugnot built a steam-powered tricycle that carried

four passengers.

In 1771, Cugnot drove one of his road vehicles into a stone wall, making Cugnot the first

person to get into a motor vehicle accident. This was the beginning of bad luck for the inventor.

After one of Cugnot's patrons died and the other was exiled, the money for Cugnot's road vehicle

experiments ended.

Steam engines powered cars by burning fuel that heated water in a boiler, creating steam

that expanded and pushed pistons that turned the crankshaft, which then turned the wheels.
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During the early history of self-propelled vehicles - both road and railroad vehicles were being

developed with steam engines. (Cugnot also designed two steam locomotives with engines that

never worked well.) Steam engines added so much weight to a vehicle that they proved a poor

design for road vehicles; however, steam engines were very successfully used in locomotives.

Historians, who accept that early steam-powered road vehicles were automobiles, feel that

Nicolas Cugnot was the inventor of the first automobile.

The automotive industry has certain trends it has to follow, just like fashion designers and

musical composers. In times of recession and decreasing sales there is less room to take chances

and manufacturers are prone to follow the common pattern as a safer bet rather than releasing a

controversial product or idea that might or might not be successful. However throughout the

automotive industry's history, great innovators have "boldly gone where no man has gone before"

to set new trends which have dynamically altered the industry as a whole.

1880's & early 1900's

About hundred years ago

-The first motor car was imported

-Import duty on vehicles was introduced.

-Indian Great Royal Road (Predecessor of the Grand Trunk Road) was conceived.

First car brought in India by a princely ruler in 1898.

Simpson & Co established in 1840.

-They were the first to build a steam car and a steam bus, to attempt motor car

manufacture, to build and operate petrol driven passenger service and to import American

Chassis in India.

Railways first came to India in 1850's

In 1865 Col. Rookes Crompton introduced public transport wagons strapped to and

pulled by imported steam road rollers called streamers. The maximum speed of these

buses was 33 kms/hr.

From 1888 Motors Spirit attracted a substantial import duty.

In 1919 at the end of the war, a large number of military vehicles came on the roads.

In 1928 assembly of CKD Trucks and Cars was started by the wholly owned Indian

subsidiary of American General Motors in Bombay and in 1930-31 by Canadian Ford
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Motors in Madras, Bombay and Calcutta In 1935 the proposals of Sir M Visvesvaraya to

set up an Automobile Industry were disallowed.

1942 Hindustan Motors Ltd incorporated and their first vehicle was made in 1950.

In 1944 Premier Automobiles Ltd incorporated and in 1947 their first vehicle was

produced.

In 1947 the Government of Bombay accepted a scheme of Bajaj Auto to replace the cycle

rickshaw by the auto and assembly started in a couple of years under a license from

Piaggio. Manufacturing Programme for the auto and scooter was submitted in 1953 to the

Tariff Commission and approved by the Government in 1959.

In 1953 the Government decreed that only firms having a manufacturing programme

should be allowed to operate and mere assemblers of imported CKD units be asked to

terminate operations in three years.

Only seven firms namely Hindustan Motors Limited, Automobile Products of India

Limited, Ashok Leyland Limited, Standard Motors Products of India Limited., Premier

Automobiles Limited, Mahindra & Mahindra and TELCO received approval. M&M was

manufacturing jeeps. Few more companies came up later.

Government continued with its protectionism policies towards the industry.

In 1956, Bajaj Tempo Ltd entered the Indian market with a programme of manufacturing

Commercial Vehicles, and Simpson for making engines.1960's

In sixties 2 and 3 Wheeler segment established a foothold in the industry.

Escorts and Ideal Jawa entered the field in the beginning of sixties.

Association of Indian Automobile Manufacturers formally established in 1960.

Standard Motors Products of India Ltd. moved over to the manufacture of Light

Commercial Vehicles in 1965.

1970's

Major factors affecting the industry's structure were the implementation of MRTP Act,

FERA and Oil Shocks of 1973 and 1979.

During this decade there was not much change in the four wheeler industry except the

entry of Sipani Automobiles in the small car market.


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Oil Shock of 1973 quickened the process of dieselization of the Commercial Vehicle

segment.

Three other companies, namely, Kirloskar Ghatge Patil Auto Ltd, Indian Automotive Ltd

and Sen & Pandit Engg products Ltd entered the market during 1971-75. They ultimately

withdrew in early eighties.

During the seventies the economy was in bad shape. This and many specific problems

affected the Automobile Industry adversely.

1980's - The period of liberalized policy and intense competition

First phase of liberalisation announced.

Unfair practices of monopoly, oligopoly etc slowly disappeared. Liberalisation of the protectionism policies of the Government.

Lots of new Foreign Collaborations came up in the eighties. Many companies went in for

Japanese collaborations.

Hindustan Motors Ltd. in collaboration with Isuzu of Japan introduced the Isuzu truck in

early eighties.

ALL entered into collaboration with Leyland Vehicles Ltd. for development of integral

buses and with Hino Motors of Japan for the manufacture of W Series of Engines.

TELCO after the expiry of its contract with Daimler Benz, indigenously improved the

same Benz model and introduced it in the market.

Government approved four new firms in the LCV market, namely, DCM, Eicher, Swaraj

and Allwyn. They had collaborations with Japanese companies namely, Toyota,

Mitsubishi, Mazda and Nissan respectively.

In 1983 Maruti Udyog Ltd was started in collaboration with Suzuki, a Japanese firm.

Other three Car manufacturers namely, Hindustan Motors Ltd., Premier Automobiles

Ltd., Standard Motor Production of India Ltd. also introduced new models in the market.

At the time there were five Passenger Car manufacturers in India - Maruti Udyog Ltd.,

Hindustan Motors Ltd., Premier Automobiles Ltd., Standard Motor Production of India

Ltd. and Sipani Automobiles.

Ashok Leyland Ltd. and TELCO were strong players in the Commercial Vehicles sector.


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In 1983-84 Bajaj Tempo Ltd. entered into a collaboration with Daimler-Benz of Germany

for manufacture of LCVs.

Important policy changes like relaxation in MRTP and FERA, delicensing of some

ancillary products, broad banding of the products, modifications in licensing policy,

concessions to private sector (both Indian and Foreign) and foreign collaboration policy

etc. resulted in higher growth / better performance of the industry than in the earlier

decades.

1990's

Mass Emission Norms were introduced for in 1991 for Petrol Vehicles and in 1992 for

Diesel Vehicles.

In 1991 new Industrial Policy was announced. It was the death of the License Raj and the

Automobile Industry was allowed to expand.

Further tightening of Emission norms was done in 1996.

In 1997 National Highway Policy has been announced which will have a positive impact

on the Automobile Industry.

The Indian Automobile market in general and Passenger Cars in particular have

witnessed liberalisation. Many multinationals like Daewoo, Peugeot, General Motors,

Mercedes-Benz, Honda, Hyundai, Toyota, Volvo and Fiat entered the market. Various companies are coming up with state-of-art models of vehicles.

TELCO has diversified in Passenger Car segment with Indica.

Despite the adverse trend in the growth of the industry, it is resolutely trying to meet the

challenges. Various issues of critical importance to the industry are being dealt with

forcefully.

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1.3: Preview of Automobile Industry

The automobile industry, one of the core sectors, has undergone metamorphosis with the

advent of new business and manufacturing practices in the light of liberalization and

globalization. The sector seems to be optimistic of posting strong sales in the next couple of

years in view of a reasonable surge in demand.

The Indian automobile market is gearing towards having international standards to meet

the needs of the global automobile giants and become a global hub. Players are strategizing to

consolidate their position and gradually increase market penetration with the launch of new

models, targeting different segments. Since the sector is price driven, huge investment is

envisaged to remain competitive through cost advantage, for which indigenization is highly

important. The product becomes dearer if it is manufactured using imported parts. IT in the

automobile sector plays a crucial role.. Some players are working towards development of

efficient production systems that control the entire production process with high precision and

accuracy. Such systems working on real time operating systems allow efficient control of

different parts of manufacturing and production. It is essential to leverage skills of different

engineering disciplines to build these kinds of integrated systems.

Analysts foresee high scope in the electronics for auto sector and expect the retailing of

such electronics products to contribute a major chunk of future revenues. The government is

increasing the research and development (R&D) fund for the automobile industry over and above

the Rs 1400 crores earmarked for eight years. All laboratories in the country researching on

automobile technology, such as BHEL which is developing cell technology as alternative fuel,


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have also been brought together through the setting up of a national R & D working group. The

group is working out a plan to link all major laboratories across the country to give a thrust to

automotive research.

Indian automobile sector being a driver of product and process technologies, and has become a

excellent manufacturing base for global players, because of its high machine tool capabilities,

extremely capable component industry, most of the raw material locally produced, low cost

manufacturing base and highly skilled manpower Not only a large number of world

manufacturers have set up production bases in India but also a large number of foreign

companies are collaborating with the auto component suppliers and vendors.

Indian Automobile Components Industry has been making rapid strides towards

achievement of world-class Quality Systems by imbibing ISO 9000/QS 9000 Quality Systems

whereby the Indian Automotive industry has become more competitive in the export market due

to its technological and quality advances, so much so that in quality conscious markets such as

Europe and America, it is emerging as a major player, based on its performance. India today

exports: Engine and engine parts, electrical parts, drive transmission & steering pats, suspension

& braking parts among others.

The sector is striding inroads into the rural middle class after its inroads into the urban

markets and rural rich. It is trying to bring in varying products to suit requirements of different

class segments of customers.

States like Rajasthan, Uttar Pradesh, Maharashtra, Andhra Pradesh and West Bengal are

vying to woo global players with proposals including heavy tax exemptions and to create a more

investor friendly regime, each state is proposing to provide all regulatory clearances at express

speed.

The Government should promote Research & Development in automotive industry by

strengthening the efforts of industry in this direction by providing suitable fiscal and financial

incentives.

The current policy allows Weighted Tax Deduction under I.T. Act, 1961 for sponsored

research and in-house R&D expenditure. This will be improved further for research and

development activities of vehicle and component manufacturers from the current level of 125%.

In addition, Vehicle manufacturers will also be considered for a rebate on the applicable

excise duty for every 1% of the gross turnover of the company expended during the year on

Research and Development carried either in-house under a distinct dedicated entity, faculty or


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division within the company assessed as competent and qualified for the purpose or in any other

R&D institution in the country. This would include R & D leading to adoption of low emission

technologies and energy saving devices.

Government will encourage setting up of independent auto design firms by providing

them tax breaks, concessional duty on plant/equipment imports and granting automatic approval.

Allocations to automotive cess fund created for R&D of automotive industry shall be

increased and the scope of activities covered under it enlarged.

1:4 Automobile industry Wheels of Change

India had its date with this wonderful vehicle first time in 1898. Then for the next fifty

years, cars were imported to satisfy domestic demand. Between 1910 and 20's the automobile

industry made a humble beginning by setting up assembly plants in Mumbai, Calcutta and

Chennai. The import/assembly of vehicles grew consistently after the 1920's, crossing the 30,000

mark in 1930. In 1946, Premier Automobile Ltd (PAL) earned the distinction of manufacturing

the first car in the country by assembling 'Dodge DeSoto' and 'Plymouth' cars at its Kurla plant.

Hindustan Motors (HM), which started as a manufacturer of auto components graduated to

manufacture cars in 1949. Thanks to the Licence Raj which restricted foreign competitors to

enter the Indian car market, Indian roads were ruled by Ambassador Car from Hindustan Motors

and the Fiat from Premier Auto Ltd. for many of the initial years.


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In 1952, the GOI set up a tariff commission to devise regulations to develop an

indigenous automobile industry in the country. After the commission submitted its

recommendations, the GOI asked assembly plants, which did not have plans to set up

manufacturing facilities, to shut operations. As a result General Motors, Ford and other

assemblers closed operations in the country. The year was 1954 and this decision of the

government marked a turning point in the history of the Indian car industry. The GOI also had a

say in what type of vehicle each manufacturer should make. Therefore, each product was safely

cocooned in its own segment with no fears of any impending competition. Also, no new entrant

was allowed even though they had plans of a full-fledged manufacturing program. The restrictive

set of policies was chiefly aimed at building an indigenous auto industry. However, the

restrictions on foreign collaborations led to limitations on import of technology through technical

agreements. In the absence of adequate technology and purchasing power, the car industry grew

at a snail's pace in the 60s. The demand for cars in 1960 was to the tune of 15,714. In the next

two decades the number increased to 30,989 i.e. a CAGR of only 3.5 per cent.

The other control imposed on carmakers related to production capacity and distribution.

The GOI control even extended to fixation of prices for cars and dealer commissions. This

triggered the start of a protracted legal battle in 1969 between some carmakers and GOI. Simply

put, the three decades following the establishment of the passenger car industry in India and

leading upto the early 1980s, proved to be the 'dark ages' for the consumer, as his choice

throughout this period was limited to two models viz. Ambassador and Padmini. It was only in

1985, after the entry of Maruti Udyog, that the car makers were given a free hand to fix the

prices of cars, thus, effectively abolishing all controls relating to the pricing of the end product.

In the early 80's, a series of liberal policy changes were announced marking another

turning point for the automobile industry. The GOI entered the car business, with a 74% stake in

Maruti Udyog Ltd (MUL), the joint venture with Suzuki Motors Ltd of Japan. The very face of

the industry was changed for ever in 1983 with the entry of public sector Maruti Udyog in a joint

venture with the Suzuki Corporation of Japan. Car sales grew by 42 per cent yoy in 1985 after

Maruti 800 was launched. Thanks to MUL car sales registered a CAGR of 18.6 per cent i.e. from

1981 to 1990.

In 1985, the GOI announced its famous broadbanding policy which gave new licenses to

broad groups of automotive products like two and four-wheeled vehicles. Though a liberal move,

the licensing system was still very much intact. MUL introduced 'Maruti 800' in 1983 providing


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a complete facelift to the Indian car industry. The car was launched as a "peoples car" with a

price tag of Rs 40,000. This changed the industry's profile dramatically. Maruti 800 was well

accepted by middle income families in the country and its sales increased from 1,200 units in

FY84 to more than 200,000 units in FY99. However in FY2000, this figure came down due to

rising competition from Hyundai's 'Santro', Telco's Indica and Daewoo's 'Matiz'.

MUL extended its product range to include vans, multi-utility vehicles (MUVs) and mid-

sized cars. The company has single handedly driven the sales of cars in the country cornering

around 79.6% market share. With increasing competition from new entrants, this market share

has plummeted to almost 62% in FY2000.

A brief 3-year downturn till 1993 and car sales bounced back to register a 17 per cent

growth rate in 1997.Since then, the economy slumped into recession and sales of cars remained

quite stagnant FY97 and FY99. The Financial year 2000 has, however, been the turnaround year

for the Auto industry with the economy looking up. The automobile industry, crossed the half

million mark for the first time in FY2000.

Overwhelmed by newer models from new and existing players had led to an impressive shift

from a constrained supply situation to a surplus one. Within the past decade, about 30 models

have entered the Indian market with a number of models still awaiting launch. The de-licensing

of auto industry in 1993 opened the gates to a virtual flood of international auto makers into the

country with an idea to tap the large population. Also the lifting of quantitative restrictions on

imports by the recent policy is expected to add up to the flurry of foreign cars in to the country.

The Indian Automobile industry registered one of the strongest growth rates in FY04.

Aided by sustained economic recovery, the industry registered high growth rates in all major

segments.

The growth story was led by Medium and Heavy Commercial Vehicles (M&HCVs)

registering a 40% growth while Light Commercial Vehicles (LCVs) recorded a 32% jump in

total sales. Passenger cars also registered an impressive 34% growth in FY04 and total sales

volume crossed the 1 million mark for the first time. Interestingly, two wheelers registered the

lowest but healthy growth rate of 13% in FY04. While motorcycle volumes tripped on a high

base, scooters registered a 10%

growth after 4 years of continuous decline. Three wheelers grew by 23% in FY04.


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Apart from strong economic growth in all sectors, low interest rate regime, normal

monsoon, continued infrastructure investment, fiscal measures like cut in excise duty (in case of

cars), etc provided impetus for the growth. The year also saw a sharp 56% rise in export volumes

with all the sectors registering more than 40% growth, signalling the

rising international competitiveness of the industry.

Profitability improvements were recorded in companies across segments driven by rise in

volumes and lower interest costs to some extent, notwithstanding the rise in prices of certain

inputs like steel.

Though the peak customs duty had been reduced to 20% in January 2004 and Special

Additional Duty was abolished, the domestic industry still enjoys adequate protection, with no

import threats. The potential borne by the industry is well exhibited by the growing number of

international players setting up base in India and increasing

competitivenessin the industry.

Many companies have entered the car manufacturing sector, to tap the middle and

premium end of car industry.

1.5: Background of Automobile Industry

The automobiles industry for many years operated in a seller's market. In such a scenario the

manufacturer could offer outdated models and also raise prices at will. Little or no attempt


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was made to control costs or to offer new products. Lack of innovation restricted the

consumers options to the models offered by these companies.

The number of manufacturers (domestic and foreign) increased dramatically after the de-

licensing of the sector. Increased competition has forced companies to focus on cutting costs,

improve technology and styling through research. It has also constrained them to limit price

increases.

Availability of easy credit facilities also resulted in creating demand for automobiles. The car

financing market has boomed from a turnover of Rs 7,000 m in FY95 to nearly Rs 35,000 m

in FY97.

Structure

The Indian automobile industry can be broadly classified into:

2 /3 Wheelers

Passenger Cars

Commercial Vehicles (LCV/HCV/MCV)

UV (Utility vehicles)

Tractors

The models in the car market can be fitted to different segments as given below:

Category Models


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Economy segment (upto Rs 0.25mn) Maruti Omni, Maruti 800 etc.

Mid-size segment (Rs 0.25-0.45 mn) Fiat Uno, Hyundai Santro, tata Indica,Maruti Alto etc.

Luxury car segment (Rs 0.45- 1mn) Tata Indigo, Honda City, Mitsibushi

Lancer, Ford Ikon, Opel Astra, HyundaiAccent & others

Super luxury segment (above Rs 1mn) Mercedes Benz & other imported models

The economy segment has a very large foothold over the Indian automobile market as comparedto the mid-size and luxury segment.

Segment Market Share (%)

Economy 90.2Mid-size and luxury 9.8

Source: SIAM/ Auto Car India

Increased urbanisation, low pricing policies, improvement in products and technology have

fuelled demand for 4-wheelers. The markets are clearly segmented between economy models

and premium models. The easy availability of finance and increased levels of disposable

incomes has led to higher demand for premium models. Rural areas have also become an

exciting market to cater to.

The growth of the economy has also resulted in a shift in consumer preferences in each of the

segment. Gradual shift can be seen in buyers from mopeds to economy scooters, from

economy scooters to premium and from premium to motorcycles

Figure -Structure of Passenger Vehicle Market (India)


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Trends in Passenger Car / Utiltity Vehicle Sales


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The passenger car segment has seen rapid growth on the back of rise in disposable income,

increased availability of consumer finance, and reduction in excise and customs duties. Post-

1991, this segment has seen maximum foreign investment. There is a clear segmentation of

passenger cars based on price and size. While the lower and medium range cars (Maruti,

Ford, Cielo) have been moderately successful, luxury cars such as Mercedes have found the

going tough.

The CV segment is directly linked to industrial production and foreign trade and is therefore

subject to cyclical fluctuations of the economy. The demand for CVs is related to growth in

movement of goods transported and freight rate levels, both of which are linked to level of

production.

Commercial Vehicle Sales Growth v/s IIP Growth

Demand for utility vehicles and tractors come from rural India. These vehicles have

witnessed steady demand growth over the past few years due to successive monsoons, better

procurement prices, improved irrigation facilities, and availability of finance.


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A strong in-house R&D capability allows a manufacturer to develop and introduce products

at lower prices, thus saving costs of importing technology. However, Indian companies spend

very little on R&D.

Availability of quality components is another factor that determines smooth production without

bottlenecks. High rejection rate of auto components has prompted several global majors like

Ford, to get their international suppliers


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1. A foreign investor may directly set up its operations in India through a branch office or a

representative office or liaison office or project office of the foreign Company ; or

2. It may do so through an Indian arm i.e. through a subsidiary company set - up in India

under Indian laws.

Generally, setting up operations through an Indian arm is advisable, especially if the

quantum of investment is huge.

The impact of Indias initiatives in economic liberalization and globalization (post 1991)

is most apparent in the automotive sector. Automotive industry is a key driver of economic

growth contributing around four to five percent to the Indian GDP. Introduction of reforms and

entry of international companies has intensified competition in the Indian automotive sector. This

has resulted in the transformation of a sellers market (created mainly due to the Indian

governments protectionist policies) into a buyers market. The changing structure of this industry

has posed many challenges and opportunities to the market participants.

Previously, Indian automotive market was characterized by weak air pollution

regulations. In addition, low labor cost of maintenance and the psyche of Indian consumer to

delay the discarding of the old vehicle reduced the scrap rate. All these factors resulted in

prolonged operational existence of vehicle on Indian roads. The benefit of this practice is the

comparatively higher revenues for automotive component suppliers, due to increased demand in

the aftermarket. But recent pronouncement of GoI to prohibit polluting vehicles in the National

Capital Region (NCR) is likely to force the old polluting vehicles off road. This will reduce the

average life span of vehicles on road and the overall impact would be reduced per vehicle parts

consumption.

Two wheelers generate the highest volumes and are more popular in rural and semi

urban markets primarily due to lower income levels and poor road conditions. Therefore, these

could be classified as entry-level vehicles. Within two wheeler segments, progressively mopeds

are likely to be replaced by motorcycles. With the growth in the family income of these rural and

semi-urban buyers and the option of numerous used cars, it is expected that a significant shift

would take place from two wheelers (mainly scooters) to four wheelers. Lucrative finance

schemes have made the purchase of mid-sized cars really affordable. The present owners of the

small car are likely to graduate to mid-size cars mainly due to declining importance of small car

as status symbol and the marginal increment in repayment installment in the finance options.


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Good performance of the economy has led to higher all round growth leading to high

GDP growth of 8%. Excise duty reduction on passenger vehicles helped to reduce the ultimate

price to the customer. Brisk activities on infrastructural development will give a boost to the

automobile industry. Softening of interest rates and improved financing of second hand vehicles

have made the purchasing of cars financially viable. Availability of finance in rural and semi-

urban areas have led the low-end customers to put money in the purchase of vehicles. Emergence

of India as a manufacturing hub for the automobile industry is a good sign for the countrys

future prospects.

The automotive industry performance is closely linked to industrial growth. It is hoped

that industrial growth would be around 7 per cent during the year 2003-04 as against around

6.5% last year. Agriculture output during the year 2003-04 increased by over 10% as compared

to (-)3.2% in the previous year. Today we are fourth largest economy (USD 2.5 trillion) in the

world after USA, Japan and China in terms of purchasing power parity. The outlook for the year

2004-05 is promising and it is expected that the current growth rates of GDP and industrial

output will be sustainable, which would ensure robust growth in the automotive sector.

Good performance of the economy has led to higher all round growth leading to high

GDP growth

1.7: The landmarks along the way...

1928- The first imported car was seen on Indian roads

1942- Hindustan Motors incorporated

1944- Premier automobiles started

1948- First car manufactured in India

1953- The Government of India decreed that only those firms which have a manufacturing

program should be allowed to operate

1955- Only seven firms, namely, Hindustan Motors Limited, Automobile Products of India

Limited, Ashok Leyland Limited, Standard Motors Products of India Limited. Premier

Automobiles Limited, Mahindra & Mahindra and TELCO received approval.

1960 - 1970 - The two, three wheeler industries established a foothold in the Indian scenario.


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2.1: Auto policy of the Government of India

VISION

To establish a globally competitive automotive industry in India and to double its contribution to

the economy by 2010.

POLICY OBJECTIVES

This policy aims to promote integrated, phased, enduring and self-sustained growth of the Indian

automotive industry. The objectives are to:-

Exalt the sector as a lever of industrial growth and employment and to achieve a high

degree of value addition in the country;

Promote a globally competitive automotive industry and emerge as a global source for

auto components;

Establish an international hub for manufacturing small, affordable passenger cars and a

key center for manufacturing Tractors and Two-wheelers in the world;


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Ensure a balanced transition to open trade at a minimal risk to the Indian economy and

local industry;

Conduce incessant modernization of the industry and facilitate indigenous design,

research and development;

Steer India's software industry into automotive technology;

Assist development of vehicles propelled by alternate energy sources;

Development of domestic safety and environmental standards at par with international

standards.

SIAM welcomed the announcement of Auto Policy, and feels that the policy would serve as a

reference document for all stake holders and other interested parties.

The Auto Policy has spelt out the direction of growth for the auto sector in India and addresses

most concerns of the automobile sector, including-

Promotion of R&D in the automotive sector to ensure continuous technology

upgradation, building better designing capacities to remain competitive;

Impetus to Alternative Fuel Vehicles through appropriate long term fiscal structure to

facilitate their acceptance;

Emphasis on low emission fuel auto technologies and availability of appropriate auto

fuels and

encouragement to construction of safer bus/truck bodies - subjecting unorganised sector

also to 16% excise duty on body building activity as in case of OEMs

The policy has rightly recognised the need for modernising the parc profile of vehicles to arrest

degradation of air quality. The terminal life policy for commercial vehicles and move toward

international taxing policies linked to age of vehicles, are steps in the right direction.

SIAM has always been advocating encouragement of value addition within the country against

mere trading activity. However, this aspect has not been fully addressed. The Auto Policy allows

automatic approval for foreign equity investment upto 100% in the automotive sector and does

not lay down any minimum investment criteria.

The recommendation of promoting passenger cars of length upto 3.8 meters through excise

benefits is not in line with the free market concept and may lead to market distortion.

However, with the Auto Policy in place, the automotive industry would get further fillip to

become vibrant and globally competitive. The industry would get the required support from other


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further tightened under the Motor Vehicle Act. For meeting these norms, unleaded petrol was

also introduced in metropolitan cities from 1995, which enabled fitments of catalytic convertors

on new petrol driven vehicles. The norms are being further tightened from April,2000 when

Indias stage one norm equivalent to Euro-I will become effective. For 2-wheelers, India has

announced one of the tightest norms in the entire world. In the national capital territory region of

Delhi, Indias stage 2 norms equivalent to Euro-II norms, will be effective from April, 2000, as

per the order of Honble Supreme Court. This would apply to passenger cars.

The government seems most keen to hand over a huge replacement market on a platter to

the automobile industry without ensuring that manufacturers take responsibility of the emission

performance of the vehicles they produce for its useful life. In fact the most important action

point that was recorded after the ministerial consultation was that manufacturers would have to

give emissions warranty for two- wheelers from But ultimately, the government could not musterenough courage to push the mighty automobile industry and enforce it.

Government will encourage and assist establishment of specialized training institutes for

the automobile sector through the active association of interested automobile industries. These

institutes will be set up in Bidadi Industrial area and Dharwad Growth center. The Institute will

be managed by the participating automobile industries and will train skilled category of auto

workers, in specified skill areas such as painting, welding, auto mechanical, etc. It also is making

an effort abe to enlist the support of multilateral aid institutions to provide part of the funding for

this project, which promises tremendous environment-improvement benefits for the vehicle,

which create pollution.

The policy of broadbanding capacities in the eighties led to increased utilization of

capacity for four-wheelers in the industry.

The liberal policy on foreign participation through technical and financial collaboration in

early eighties led to substantial product upgradation and introduction of new models. But it was

alleged that the policy was discriminatory in favor of MUL, while others like Telco, PAL, HM

were denied permission to produce cars in collaboration with Japanese companies.

The GOI controls the car sector by way of framing policies on depreciation norms, import

duty on cars and parts used in it, petrol prices and import duty of steel.


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During the era of socialist inspired controls, the government protected the car industry

from new entrants by making effective use of licenses. However, after liberalization and with the

consequent opening up of the auto sector in 1992-93, the license raj ceased to exist .

The perception of a car as a luxury good lead to heavy excise duty on cars. The excise

duty doubled from 25% in FY87 to 55% in FY91. Till 1987, the GOI followed a discriminatory

policy so as to charge lower duty on fuel efficient car with engine capacity of less than 1000cc.

This helped MUL to price its car at a lower price in comparison to others. But with lobbying

from PAL and HM government withdrew the provision in 1987.

But with the onset of the liberalization process in the early nineties, the government has

continually rationalized the excise duty regime. Presently, there is a duty of 40% (16% + 24%)

on motor vehicles, designed for transport of not more than six persons (excluding the driver). On

vehicles designed for transport of more than six persons, but not more than 12 persons, the duty

is 32% (16% + 16%). Over and above the excise duty, cess by the Central Government, states are

now charging a uniform sales tax of 12%. This came in being after the 15th of May 2000. Earlier,

states used to charge sales tax varying from 3 to 14%. But MUL vehicles receive favorable

treatment in terms of sales tax as well.

In line with its treatment for luxury items import duties for car have been maintained

high. In the 80's, import duties varied between 150 to 200% based on the engine capacity of a

car. The import duty on cars and components has come down in the last few years in line with

general reduction in import tariffs. In the FY98 budget, the import duty on cars has also been

further brought down from 50% to 40% ad valorem. Substantial reduction in import duty has

been extended in the budget FY98 for import of certain items which would help the industry to

reduce the emission level of vehicles. The import duty on catalytic converters and parts thereof

has been reduced from 25% to 5%. The duty on CNG kits and parts thereof have been reduced

from 10% to 5%.

The import duty on auto components will be a key factor in deciding the final pricing of

cars as new ventures start with about 50% indigenisation levels. The reduction in import duty on

steel in the last few years has helped the industry in reducing raw material costs as major steel

requirement of car industry was imported. Even today, all CKD/SKD imports include metal

pressed body panels.


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2.3: Impact of union Budget 2004-05

Budget Proposals / Measures

No change in basic excise duty on automobiles other than tractors

Peak rate of customs duty to be maintained at 20%

Automobile companies entitled to 150% deduction of expenditure on in-house R&D

facilities

Reduction in customs duty for alloy and non alloy steel to 15% and 10% respectively.

Excise duty on steel increased to 12% from 8%.

Indications of continuing benign interest rate regime.

Educational cess of 2% on excise, customs duties and Income Tax.

Likely implementation of VAT from April 1, 2005

Strong thrust towards sustainable rural economic growth.

Reduction in customs duty on copper as well as some other metals to 15%.


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3: Demand

The demand for cars in the past was supply driven as demand did not match supply. This led to

high premium and long waiting periods for the cars. But change in government policies coupled

with aggressive capacity additions and upgradation of models by MUL in the early nineties led to

increase in supply and subsequently reduced the waiting periods for economy cars.

The demand for cars was suppressed by various supply constraints. The demand for cars

increased from 15,714 in FY60 to 30,989 in FY80 at a CAGR of only 3.5%. The entry of Maruti

Udyog Ltd (GoI-Suzuki JV) in 1983 with a "peoples" car and a more favorable policy framework

resulted in a CAGR of 18.6% in car sales from FY81-FY90.

After witnessing a downturn from FY90 to FY93, car sales bounced back to register 17% growth

rate till FY97. Since then, the economy slumped into recession and this affected the growth ofthe automobile industry as a whole. As a result car sales remained almost stagnant in the period

between FY97 and FY99. CAGR recorded during the FY94-FY99 period was 14.4%, reaching

sales of 409,624 cars in FY99. However, during FY2000, with the revival of economy, the

segment went great guns posting a sales growth of 56%yoy. The table below indicates the past

sales trend for cars -

Cars FY94 FY95 FY96 FY97 FY98 FY99 FY2000

Volume 209,203 264,822 345,486 410,992 417,736 409,624 638,815

Growth %yoy 27.0 27.0 30.0 19.0 2.0 -2.0 55.8

Source : SIAM

The demand for cars is dependent on a number of factors. The key variables are per capita

income, introduction of new models, availability & cost of car financing schemes,


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