Posted by: qmaxim | October 7, 2010

Automotive sector on fire – again

Automotive sector in India  continues to see blistering growth. Almost all the players  reported good growth in last few quarters, most reporting over 30%. Leading players  made flurry of announcements  perhaps displaying signs of nervousness. The reason for the nervousness could be many.

Leading player Maruti-Suzuki (MS) which ships  1.1 million cars /year  (has about 50% market share) made several moves. Recently it commissioned a new engine plant –so that all the vehicles now onwards will be fitted with upgraded engines . There were two more interesting announcements – firstly, MS decided to use higher strength   (Microalloyed types possibly) Steels in majority of the models by 2012. This results in reduction of  at least  170 kg in the weight of the car on an average. This  results in improved fuel consumption  and reduction in Carbon emission. Secondly, there was a abrupt announcement  of  building  a brand new plant to double production  capacity. Management claimed to be surprised by the strength  in the  demand.  Another interesting move was the  diversion of  export (mainly to Europe) units  to  the  local market. Third move was the alliance between Volkswagen and Suzuki for  co production and sharing of technology. Fourth move was the proposal of (denied so far)  producing stripped down version of  a existing popular model to compete with  super low priced Tata-Nano.

Second largest maker Hyundai motors made announcements as well.  So far significant portion of production was exported to Europe. Abruptly it has decided to shift most of the production to Indian market. In spite of intermittent labour troubles, it has announced possibility of one more build-up in the production capacity. So far it had steered clear of  producing cars in the Tata Nano range – now it appears that it might target production of cars priced slightly above Tata-Nano’s  price range.

Now the possible reason for this frenzy. Weakening of Euro could be one reason & downturn in that region could be another reason. However, this may not  be the only reason. Imminent  start of production of Toyota Etios from brand new factory near Bangalore is probably the main reason & all the competitors are waiting with bated breath. This car was designed  from scratch for markets like India and promises to be high quality but low cost but actual specification yet to be announced. Toyota so far has steered clear of mass market cars in India. Another possible reason for the nervousness is  the increasing popularity of Tata-Nano whereby it  may become the 3rd or 4th largest selling car by next year according to some experts.

Indian market for cars is likely to be 5 million per  year by 2015 according most projections. Though the size of opportunity is indeed big , it won’t be cake walk for any one of the players . Innovation is called for in all aspects of designing, building , selling and servicing of cars. There are  many possibilties. One obvious way as already mentioned above is the reduction of weight of car by using high strength Steel which however results in 15-20% increase in material cost. Indian Steel producers are already gearing up capabilities for producing  higher quality automotive grades (Presently 50% of the Steel for automotive sector is imported).  Another possibility is the extensive use of Aluminium as a construction material. Some of the upmarket cars are built that way even now.   But, significantly  higher cost  and relative difficulty in fabrication are  hindrances.Locally produced parts are mostly used in majority of models. Rapid ramp up  is putting  enormous pressure on car parts industry  . Third innovation is the trend of  cars being co- developed   in India instead of earlier trend of gradual transfer of parent company’s  technology. Forth possibility which is already happening to some extent  is the  implementation of  lean techniques  like Kanban. This is  increasingly becoming viable   due to improving road infrastructure in many parts of India.

Now the question is whether these  innovations are  sufficient for companies to prosper in markets like India?  Considering that low cost cars are likely to dominate in most markets in coming years,   perhaps  low cost hybrids are called for?

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