A grand plan for Indian
automobiles By Sudha
Ramachandran
BANGALORE - India's
automobile industry is set to shift to high gear.
The government has unveiled an Automotive Mission
Plan (AMP) that aims to transform the country into
a global center for automobiles and auto spare
parts in the coming decade.
The plan is
ambitious. It proposes to make India the
manufacturing and export hub for small cars,
multi-utility vehicles, two- and three-wheelers,
tractors and components.
It envisages a
turnover of US$145 billion by 2016 in the
automobile sector, an almost
fourfold increase over the current turnover of $35
billion. And it has its eyes firmly fixed on the
world market. It aims at increasing exports, which
stand at $4.1 billion at present, to $35 billion
in the next 10 years.
If targets are
achieved, then in 2016 the value of exports alone
will be equal to that of the total turnover today
of India's automobile industry. The increased
turnover will account for 10% of gross domestic
product (up from 5% currently) and provide
employment to an additional 25 million people.
A few years ago, the AMP would have been
dismissed as delusional, the goals that it sets
out for the auto industry as mere dreams. But
today, with the auto sector expanding at a robust
pace, the plan, while ambitious, seems achievable.
The Indian automobile industry has
witnessed double-digit growth for the past three
years in a row. In 2006, the industry produced
10.9 million vehicles, a increase of 16.22% over
2005. In 2005, production grew 14.5% over the
previous year. Close to 1.3 million passenger
vehicles rolled out in 2006, 19% higher than 2005,
according to the Society of Indian Automobile
Manufacturers.
The cumulative growth in
sales of passenger vehicles was 18.45% in 2006.
This was almost three times the growth witnessed
in 2005. Sale of passenger cars expanded by 20.0%,
compared with 12.4% for utility vehicles.
The export market for Indian automobiles
has also grown at a scorching pace. In 2006,
automobile exports registered a 29% growth over
the previous year. Export of passenger vehicles
increased by 12.9% and that of two-wheelers,
commercial vehicles and three-wheelers at a rate
of 24%, 26% and 72% respectively.
It is
not just the figures but also the brands that have
entered the Indian industry that are fueling the
optimism over the mission plan's goals.
Among the car companies that are investing
in India are US auto makers General Motors and
Ford, Germany's BMW and DaimlerChrysler AG,
France's Renault, Japan's Suzuki, Toyota and
Honda, and South Korea's Hyundai.
German
auto companies that have hitherto trained their
sights on China are increasingly turning their
attention to India. Although they only have a
market share of about 1% in India, it is growing
rapidly.
"The Indian car market has huge
growth potential," said Thomas Becker, deputy head
of the German Car Industry Association. German car
makers in India saw growth rates of more than 33%
in 2006, double that of the Indian market as a
whole.
Volkswagen is building a $539
million plant in Maharashtra - already home to
factories of Tata, Renault and Fiat SpA - to
produce some 110,000 cars by 2009. While it is the
local market that Volkswagen will aim at
initially, exporting at some point is not being
ruled out.
And DaimlerChrysler, which
controls more than 80% of the market share in the
luxury segment, is investing $57 million in an
assembly plant in Maharashtra.
And then
there is the boom in auto ancillary companies.
India is an attractive outsourcing destination for
global auto companies because of its strong
engineering skills and low costs. Sourcing parts
from India is 10-20% cheaper for US auto makers
and about 50% cheaper for their European
counterparts.
Gabriel India recently
signed a global supply contract with Arvin Meritor
of the US to supply 2 million shock absorbers
valued at about $12 billion to $15 million per
annum. And Exide Industries, whose exports at
present account for only 4% of its business, plans
to take them to at least 10% in the next three to
four years.
But the AMP needs more than
market confidence and optimism for its goals to be
achieved. The industry would have to invest $35
billion to $40 billion over the next 10 years. The
bulk of this investment is expected to come from
expansion of capacities by existing manufacturers
operating in India and from global auto giants
seeking to make India their manufacturing base.
The plan does propose steps to raise this
money over the coming decade. It envisages a tax
holiday for the industry on investments exceeding
$225,000, 100% tax deductions of export profits,
and deduction of 50% on foreign-exchange earnings.
Even more, it calls for a one-stop clearance for
foreign-direct-investment proposals in the sector
and deduction of 30% of net income for 10 years
for new industrial undertakings.
To bring
down the cost of power and fuel, which accounts
for 6% of the manufacturing costs in the auto
sector, captive power generation would be
encouraged to enable industries to access
reliable, quality and cost-effective power.
While the AMP has been welcomed by the
industry, its mission could be thwarted by the
government itself. Car manufacturers are
complaining that the government's frequent change
in policies is not encouraging.
The
industry is currently caught in a spat between the
government and Maruti Udhyog Ltd (MUL) on the one
hand and other car manufacturers on the other over
the definition of a small car.
India's
2006-07 budget defined small cars as those with a
maximum length of 4,000 millimeters and an engine
size of 1.2 and 1.5 liters for gasoline and diesel
cars respectively. Currently, small cars are
charged a 16% duty while other cars attract 24%
duty.
This definition is now likely to
change and will restrict small cars to a maximum
length of 3,800mm. Only Maruti's Alto, Zen Estillo
and the Maruti-800 will then be eligible for the
concessional duty, giving MUL an unfair advantage,
complain other manufacturers such as Hyundai Motor
India (HMI), Honda Siel Cars India Ltd (HSCI) and
General Motors India.
"Changing the
policies and guidelines frequently severely hurt
our plans. It also affects investment decisions in
the country," Heung Soo Lheem, managing director
and chief executive officer of HMI, has said. That
view has been echoed by other car manufacturers as
well.
"The change in the definition of
'small car' would affect our ongoing project.
Inconsistent government policy would also impact
[the] company's investment decision in the
country," said Masahiro Takedagawa, president and
chief executive officer of HSCI.
Small
cars account for more than 70% of the Indian
market. Car companies, Indian and multinational,
are rushing in to invest in small-car projects. At
a time when investment in small cars is poised to
grow exponentially, the Indian government's move
to provide concessions to some cars over others is
seen as sending out the wrong signals.
Laying out a grand plan for the auto
industry is not enough. Frequent changes in policy
could put a brake on achievement of goals laid out
by the plan.
Sudha Ramachandran
is an independent journalist/researcher based in
Bangalore.
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