PV Industry 201103

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INDIAN PASSENGER VEHICLE INDUSTRY: GROWTH MOMENTUM TO

CONTINUE

SUMMARY- With expected sales of ~2.5 million passenger vehicles in FY11e,

Indias passenger vehicle market ranks as worlds seventh largest;

larger than markets like United Kingdom, France and Spain by

volume

- India has been one of the few markets globally to buck therecessionary trend and record a strong 25.6% volume growth in

FY10. The growth momentum continues to be on track with first

eleven months of FY11 registering a growth of 29.8% over the

corresponding period in the previous year

- Strong economic growth, rising disposable income levels, favorabledemographics, easy financing environment and relatively low car

penetration have been the prominent growth drivers for the

industry

- While at the one end, the growing domestic market is attractingforeign OEMs, on the other, established players are positioning

themselves as strong contenders to offer low-cost car

manufacturing capabilities to the world

- So far, most foreign car makers, barring Hyundai have focused onthe sedan and premium segment cars, shying away from the highly

competitive small-car segment; with these players now launching

small-cars that too designed keeping in mind specifically the Indian

consumer, the small-car segment, which has so far been dominated

by three players commanding over 80% of the volumes is likely to

see increase in competitive intensity

- Some of the newly launched models have had good initial responseand have been aggressively priced, indicating new entrants

strategy to grab market share while sacrificing profitability

- Large established incumbents in the Indian passenger vehiclemarket derive strength from their low-cost manufacturing

capabilities (especially in the small-car segment), strong brand

recognition and wide distribution & servicing reach, something

which can be difficult to replicate

- We believe, while the incumbents will have these competitiveadvantage over newer entrants, these are likely to diminish in thelong-run as new players with global experience gain brand

recognition and expand their network and product offerings

- Superior small-car portfolio, a wide distribution and servicenetwork and competitive pricing on the back of locally sourced

auto components are going to be the key factors in determining the

success of a foreign OEM in the Indian market

g

March2011

Contacts:

Anjan Ghosh

[email protected]

+91-22-3047 0006

Subrata Ray

[email protected]

+91-22-30470027

Shamsher Dewan

[email protected]

+91-124-4545328

www.icra.in
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]://www.icra.in/http://www.icra.in/http://www.icra.in/mailto:[email protected]:[email protected]:[email protected]

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ICRA Rating Feature Indian Passenger Vehicle Industry: An ICRA Perspective

ICRA Rating Services Page 2

0.3 0

.40.5

0.5 0

.5 0.7

0.7

0.7

0.7 0

.9 1.1

1.1 1

.4 1.5 1

.61.9

2.330% 32%

2% -5%

49%

-6% -2% 5%

28%

18%

8%

21%12% 0%

26%30%

-20%

-10%

0%10%

20%

30%

40%

50%

60%

-

0.5

1.0

1.5

2.0

2.5

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

11M

FY11

Trend in Domestic Passenger Vehicle Volumes

Domestic Passenger Vehicles (in Millions) Growth (%)

- While competitive pressures are likely to intensify, we believe that strong GDP growth, risingdisposable income levels, easy availability of finance and more particularly Indian consumers

aspiration to own cars, especially given the state of public transport, would ensure that the

industry will experience strong growth in the foreseeable future

- We estimate the Indian passenger vehicle industry will reach ~4.85 million in annual sales byFY16, representing a growth of 10.8% CAGR over the next five years

- Notwithstanding the strong long-term outlook, the industry faces certain near term challenges inform of rising commodity prices, interest rates, tightening liquidity scenario and increased

competitive intensity- We believe that rising labour costs is also likely to see cost increases across the supplier network,

though it is likely to be mitigated by greater scale economies and higher degree of automation

- Within the lower priced segment (mini/compact), the price band is widening, with higher pricedbut better value products achieving higher volumes than some of the lower priced models. The

price range may widen further depending on the success of the Nano segment

Strong growth drivers augur favourable prospects for the Indian passenger vehicle market

The domestic passenger vehicles industry has been on a relatively steady growth phase over most of the

last decade and has registered a 10 years CAGR of 10.3% during the period. It has been one of the fewmarkets worldwide which saw growing passenger car sales during the liquidity crisis and recessionary

phase witnessed during FY09. Buoyant economic growth, rising disposable income levels, favourable

demographics, strong growth from tier II/III cities and rural India, together with improving availability

of vehicle financing at competitive interest rates have been the key factors fuelling growth in the Indian

passenger vehicle market. Among the emerging markets, India continues to have one the lowest car

density, estimated at 13 cars per 1,000 people compared to other markets such as China (45), Brazil

(160), and Indonesia (42). The growth has also been supported by OEM led initiatives like whole host of

new model offerings from both from existing companies as well as new entrants in the market.

Furthermore, in India, the car prices have remained relatively flat over the years (adjusted for the

decline in duties) compared to steadily rising per capita income levels.

In addition to the strong domestic demand, the OEMs have also been positioning themselves ascompetitive small-car makers, benefitting from Indias technological capabilities in the manufacturing

small-cars, scale economies and a well-established component supplier base. Over the past 10 years,

export of vehicles have grown at a CAGR of 31.7% to achieve volumes of 0.45 million units in FY10. ICRA

expects overall growth momentum to be sustained driven by strong domestic demand and increased

thrust on exports.

Source: SIAM, ICRAs estimates

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734

691

675

707

902

1,0

62

1,1

43

1,3

80

1,5

50

1,5

53

1,9

50

6.4%

4.4%

5.8%

3.8%

8.5% 7.5%

9.5%9.7% 9.2%

6.7%

7.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

-

500

1,000

1,500

2,000

2,500

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

Passenger Vehicle Sales and GDP Growth

Indian PV Sales (in '000s) Real GDP Growth Rate (%)

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

Trend in average borrowing rates

1,5

74

1,6

67

1,7

31

1,8

88

2,0

72

2,3

08

2,5

73

2,8

78

3,0

51

3,2

70

3,4

99

-

500

1,000

1,500

2,0002,500

3,000

3,500

4,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010e

Trend in India's per capita GDP

GDP per capita, PPP (in US$)

Growth drivers in place to supportdemand

Source: Indian Planning Commission, World Bank, IRF, SIAM, Industry, ICRAs estimates

Steady economic growth and favourable demographic profile Barring marginal blips during the

last couple of years, the Indian economy has moved into higher growth (8.5%+) trajectory which islikely to be sustained over the medium term. In addition to steady economic growth, the passenger

vehicle industry is also benefitting from Indias favourable demographic profile, which is reflected by its

very young population (50% of population under the age of 25), steadily improving dependency ratio,

growing urbanization and trend towards smaller, nuclear families. These trends in turn results in higher

savings and increased ability to purchase vehicles, as well as explaining the preference for smaller-cars.

In addition to favourable demographic profile, rising per capita GDP levels is also resulting in

improvement in vehicle affordability in India, which is estimated to amongst the lowest when compared

to other major automotive market. In India, the per capita GDP has almost doubled to US$ 3,270

between 2000 and 2009, while car prices (adjusting for the decline in duties) have remained almost at

the same level as they were five years back, thereby increasing flexibility to own cars.

Relatively low-penetration levels In terms of current market size (estimated at ~2.5 million units in

FY11e), the Indian passenger vehicle market is relatively small compared to other emerging auto

markets like China, South Korea and Brazil. Despite strong growth witnessed for a nearly a decade,

penetration of cars in India continues to remain the lowest (refer to table above) among emerging

markets. As growth in passenger vehicle has been more secular in nature, supported by both major

cities and tier II/III cities, we expect that car penetration levels would continue to improve mirroring the

Current EstimatePassenger vehicle density

(per 1,000 persons)

Germany 500

U.K. 463

USA 1,200Japan 445

South Korea 246

Russia 188

Brazil 158

Turkey 85

China 45

India 13

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33%

56%73%

78% 79% 78%86% 90%

94% 94% 92%

0%

20%

40%

60%

80%

100%

-50,000

100,000150,000200,000250,000300,000350,000400,000450,000

500,000

FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 YTD FY10

YTD FY11

Total Exports Small Car Exports % of small car exports

trend witnessed by some of the other markets, particularly China, which witnessed 5x increase in car

density between 2002 and 2009.

Availability of finance at competitive rates With over 65-70% of cars being financed in India,

availability of financing options at competitive rates has also been one of factors driving growth. In

India, the vehicle financing penetration has been steadily rising over the years, facilitated by competition

amongst banking and NBFC participants. In comparison to China, where vehicle penetration rates aremuch lower (~10-15%), India scores in terms of higher vehicle financing availability, which combined

with increasing disposable income levels provides an ideal platform for strong growth going forward.

Barring few instance of rise in interest rates, vehicle financing cost has declined over a longer period of

time supported by favourable interest rate regime and relatively healthy performance of the asset class

amongst various consumer finance categories. This has also encouraged lengthening of tenure of

financing and LTVs, further facilitating consumer flexibility.

Favourable demand scenario from smaller towns and rural areas In addition to demand from

urban areas, smaller towns and rural India have been incrementally driving demand for passenger

vehicles in India. For instance, the share of sales from top-10 cities has fallen to 40-45% from 60%-65%

over the last five-to-six years. Maruti Suzuki, also for instance now generates nearly 19% of its salesfrom non-urban areas compared to just 4-5% about five years back. This has largely been prompted by

rising disposable income levels in smaller towns and rural areas, improving road connectivity and

higher no. of earning members in the family. Industry estimates suggest that approximately 60% of the

rural economy now depends on non-agricultural income such as trading, remittances from cities,

employment in the manufacturing sector etc. That apart, substantial increase in crop prices, which has

been moving up over the past three years, has also resulted in higher disposable income. Additionally,

the increase in land prices across the country, and the implementation of the sixth pay commission has

collectively helped in supporting the growth in the rural and semi-urban cities/tier III cities. The OEMs

have also helped expand demand by targeting these markets with greater financing availability and

better service & distribution reach.

India is likely to emerge as a small-car production hubIn addition to strong domestic demand, India is well on its path of becoming a global production hub for

small-cars. In 2009, it surpassed Japan to become the largest small-car market in the world, accounting

for the sale of around 900,000 small-cars, as compared to 700,000 sold in Japan. India is also now the

second-largest exporter of small cars, behind only Japan. In FY10, India shipped out nearly 450,000

vehicles, registering a CAGR (%) of 26% between FY06-10. Exports now form a considerable part of the

Indian industry, accounting for 18.6% of the total PVs sold in FY10, compared to 7.3% in FY02, with

small cars comprising over 90% of total passenger car exports in FY10.

Chart 3: Trend in export volumes, reflecting increasing share of small-cars

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Attractive domestic market& proximity to other

markets

Political & BusinessEnvironment

Low production cost &efficient supply chain

Technological capabilitiesin a particular class of

vehicles

in becoming aauto hub

6% 13%10%

54%33%

0%

10%

20%

30%

40%

50%

60%

-

100,000

200,000

300,000

400,000

500,000

FY 06 FY 07 FY 08 FY 09 FY 10

Passenger Vehicles Growth Y-o-Y (%)

Maruti

Suzuki,33.1%

Hyundai,

64.0%

Tata

Motors,1.5%

M&M, 0.7%

Others,

0.7%

The growth in export volumes was particularly strong in FY09 and FY10, benefitting from the demand

arising largely from scrappage schemes offered by most European nations. While the export growth in

the current year has the affected by higher base effect and repeal of scrappage scheme, the long-term

prospects continue to remain strong. While Hyundai Motors and Maruti Suzuki are leading exporter

accounting for over 90% of export volumes, other global players who have recently marked presence in

India are pursuing opportunities set-up India as their manufacturing hub. Nissan is expected to start

exporting Micra to Europe. India has become the largest export hub for Hyundai (outside Korea) withover 40% of its small car production catering to export demand from India.

Chart 4: Trend in export volumes Chart 5: OEM-wise market share in exports segment

Source: SIAM, ICRAs estimates

What it takes to become a global automotive production hub?

In addition to low-cost manufacturing

capabilities, other factors that determine a

countrys competitiveness in emerging as a

global production hub include an attractive

domestic market, its governments favourable

trade policies, presence of an established andtechnologically-advanced component supplier

base, an efficient supply chain and movement

in exchange rates. In terms of cost

competitiveness, India has built up the scale

and significant competencies and cost

advantages in the production of small cars. It

benefits from lower development and labour costs, and improving auto component manufacturing base.

However, poor infrastructure, resulting in higher logistics costs and changes in international duty

agreements (i.e. FTA between Korea and EU) with competing manufacturing locations remain a

significant factor in determining export potential from India. However, increased focus on fuel efficiency

and international demand moving towards small-cars also augurs well for India. The industry is also

witnessing a trend towards alliances or platform sharing in the exports segment.

Considering the auto makers quest for lower production cost, we expect India to compete increasingly

with countries across markets that offer lower production costs and benefit from favourable

government policies. Some of examples of nations that are likely to compete with India are Thailand and

Indonesia (for exports to Asian markets), Czech Republic, Slovakia and Poland (for European markets)

and Mexico (for North American markets).

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9 14 1

7 23 2

6 31 3

5

-5

10152025303540

FY 07 FY 08 FY 09 FY 10 FY 11 FY 12eFY 13e

Number of Small Car Offerings

Interestingly, China which has emerged as the worlds largest automotive markets in the last decade is

yet to establish itself as a global production hub, something that Japan achieved during the 1970s and

South Korea in 1990s when these markets witnessed an upsurge in automotive production. In contrast

to India, ownership restrictions in China make its less attractive for foreign OEMs to develop it as an

export base though Chinas robust domestic market has attracted a large number of joint ventures and

contributes to ~50% of domestic capacity. However several local Chinese manufacturers are now fast

acquiring global scale and skill levels and have aspirations to establish strong presence in the developedmarkets.

Competition set to rise in the small car segment; higher priced small-cars gaining traction

The strong growth reported by the industry and critical mass that achieved by the domestic market has

attracted most of the global OEMs to the Indian market. Most global OEMs targeting India now have

strong local strategies, India specific platforms/models, and view to establish India as one of their

sourcing hubs. In terms of product launches in India, OEMs are now developing models specifically to

meet Indian consumers preferences and market conditions compared to the past, where most global

majors have chosen models from their existing platforms. Toyotas Etios and Hondas Brio (to be

launched) are some of models that have been developed clearly keeping the Indian consumer in mind.

Over the past two years, nearly 50% of the capacity addition has been by international OEMs. BarringHyundai, foreign OEMs such as Toyota, Honda, Ford and General Motors have so far been present largely

in the mid and upper end segment cars while shying away from the highly competitive small-car

segment. However, recognizing the significance of entry level in India, now almost of all the OEMs

including the recent entrants such as Volkswagen and Nissan are focusing on tapping the high volume

small car segment in India.

The number of new model launches has increased substantially, particularly in the higher

priced/premium end of the segment. Being the largest segment by volumes, the small-car segment has

witnessed the highest numbers i.e. 11 new launches in the last three years (of which five were launched

in 2010) with major ones being Ritz, A-Star, Zen Estilo (from Maruti Suzuki), i10, i20 (from Hyundai),

Indica Vista (from Tata Motors), Ford Figo, ChevroletBeat, Polo (from VW) and Etios (from Toyota). In

the near term, Honda is also expected to enter the small-car segment (with launch of Brio) and Toyota isexpected to launch the hatchback version ofEtios.

Chart 6: Small car offerings in Indian market Table 1: Planned launches in the small car segment

Source: ICRA Research

The new models viz. FordsFigo, VWs Polo, and GMs Beathave made some inroads in the market with

good initial response, while other players such as Nissan and Toyota with their recent launches are in

the ramp-up phase. More importantly, the new models have been priced at fairly aggressive price points

and as new entrants ramp-up their volumes and other players enter the market, we expect that the

Impending launches in the small carsegment

Expected in

Honda Brio 2011

Toyota Etios (Hatchback) 2011

Hyundai New small car 2011

Maruti Suzuki - Swift Refresh 2011

General Motors - (through SAIC JV) 2012

Renault Nissan 2012

Bajaj Renault Small car 2012

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95.5% 94.5% 91.9%86.0%

4.5% 5.5% 8.1%14.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

FY 08 FY 09 FY 10 11M FY11

Top 3 Players Other Players

small car segment is likely to see some fragmentation with incumbent players likely to face competitive

pressures. Further, General Motors plans to introduce cars from its Chinese JV with SAIC also marks the

beginning of a new trend, which could result in more Chinese players enter the Indian market in the

long-run. Apart from SAIC (along with GM), BYD, Chery International, JAC and Brilliance Auto are some

of the other Chinese auto-makers that have announced plans of exploring opportunities of entering the

Indian market.

Small car portfolio and extensive marketing & servicing network key to succeed in India

Typically during the initial launch phase, new

models gain market share owing to heightened

interest among buyers but we expect that

sizeable market share gain for new entrants

will only be in the long-run as these players go

through a phase of establishing recognition for

their brand, expanding their distribution and

service network. We believe that a wide

product portfolio, competitive pricing,

expectation of high fuel efficiencies, presenceof diesel versions and modern designing have

been some of the factors that have helped

players to compete successfully in this segment. The market share of the new players in this segment

has been steadily increasing; in the current year, barring the top three players, the share of other players

now stands at 14.0%.

Supported by efforts to increase localisation

Interestingly most of the international OEMs, barring the established ones have had volatile earnings

profile in India. Low economies of scale, high import content and exposure to foreign currency

fluctuation have been the key factors affecting profitability. Now, with most OEMs targeting the highly

competitive small-car segment, thrust on localisation of key components forms an integral part ofinternational OEMs strategy to compete on cost. More particularly in the small car segment, where

competitive pressures are relatively higher compared to other segments. Typically, localization levels

are low (during the launch phase) and increases gradually over the years with pick-up in volumes. While

localisation appears to be a straightforward route in achieving cost competitiveness, it is only

meaningful at large volumes, involving large investments in capacity building. M&M-Renault JV in

contrast had adopted a low investment (higher import dependence) strategy with its initial launch,

enabling it to test the market response with limited investments. Besides cost advantage arising from

Everyones eyeing a pie of the Indian market some announcements by OEMs

Volkswagen

- Aims at achieving 10% market share in IndiaGeneral Motors

- Aims at scripting its success in China with Shanghai group in the Indian markets- Has plans to introduce some of its already established models from its Chinese JV

Renault

- Plans to launch five models between 2011-13Nissan

- Plans to expand its offering to nine models by 2012; aims to capture 10% of the market- Targeting India a global hub for outsourcing small cars as well auto components

Toyota

- Plans to double its sales volume b next ear with the launch of its small car Etios

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63%70%

72% 74%73%

60%

64%

68%

72%

76%

-5.0

10.015.020.025.030.035.040.045.050.0

FY09 FY10 FY11e FY12e FY13e

Source: ICRA Estimates

Chart 8: Tr end in Capacity Utilisation

Installed Capacity (in Lacs) Utilisat ion (%)

lower duties and logistics costs, localization also helps in reducing fluctuation arising on account of

currency volatilities.

In terms of technological positioning, although the Indian auto component manufacturers may lack

design know-how in certain product categories, their overall capability in manufacturing auto

components, with consistent quality and reliability is now well acknowledged by global OEMs and

component manufacturers alike. This is evident from the trend of increased localisation levels in mostnew models. Additionally, most auto global players are setting up capacities to locally develop and

manufacture engines & transmissions in India with vendor development forming a key part of their

strategy. Some of the international auto suppliers by virtue of their established vendor relationship with

international OEMs have also set-up JVs with local players, benefitting the domestic auto suppliers with

new technologies/platforms. Some of the OEMs have also set up their R&D centres in India, which are at

present confined to providing basic localisation of imported components and research services.

New small car entrants also have aggressive dealership expansion plans

Most of the new small car

entrants have aggressive plans to

expand dealerships in comingyears. However, we believe that

incumbents wide distribution

and service network will act as

their competitive advantage for

some time to come as attracting

new dealers for new players will

not be easy. Typically, a dealer

generates 60-70% of its income

from car servicing and spares and

with current vehicle population in

favour of the top three players, OEMs will have to structure their sales commissions appropriately to

attract investments by dealers.

Demand Supply Scenario: managing

constraints at suppliers end and finding

enough skilled labour gaining priority

over anything else

In line with the strong growth witnessed by the

industry and strong prospects, capacity creation

has been at the core of each OEMs strategy for

the Indian market. In fact at this stage, OEMs

have been more concerned about managing

production levels amid bottlenecks at suppliers

end and labour shortages. Given the capacityexpansion plans, we expect capacity addition in

excess of 50% between FY09-13e. Between FY09-11e over 50% of the incremental capacities have been

added by international OEMs who have entered the Indian market over the last 2-3 years. Although

manufacturing capacities are fairly flexible, majority of the capacity creation has been keeping in mind

opportunities in the small car segment and exports market. In the medium-to-long run, although strong

domestic demand and export potential is likely to keep capacity utilization over ~70%, we expect

Table 2: Dealership addition plans by various OEMs

Company

Cities

covered

Existing Dealer

Network

Network Expansion

PlansMaruti Suzuki 805 869 N.A

Hyundai 290 300 320

Tata Motors 250 N.A

General Motors 210 250

Honda 71 120 150 (by 2012)

Toyota N.A 117 150 (by 2012)

Ford 100 159 N.A

Volkswagen 56 67 N.A

Nissan 23 23 N.A

Source: company releases, media articles, ICRA Research

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increasing competitive intensity to restrict the pricing power with OEMs and subsequently put pressure

on their profitability indicators particularly in the current inflationary scenario.

Trends in JVs/ collaborationsGlobally, the automobile industry is going through a phase of consolidation and collaboration, triggeredby stagnating demand, industry-wide overcapacity, increasing commoditization/ reducing pricing

power and rising cost of implementing safety features and emission norms. As more global players enterthe Indian market, the impact of this trend of partnership would be increasingly visible in this markettoo. Some of the active alliances in India include Fiat-TML (manufacturing JV and distribution sharingarrangement); Renault-Nissan (proposed facility share); SAIC-GM (Indian operation under JV, to bringproducts from SAIC stable), VW-Suzuki (likely collaboration in small car), Renault-Bajaj (small car). Thenumber and scope of such alliances are expected to increase going forward as OEMs aim to rationalisetheir investments and maximise reach through alliances spanning technology, manufacturing anddistribution.

Unlike the Chinese automotive market, where leading passenger vehicle players are mostly Joint

Ventures (JVs) between global OEMs and local players due to ownership constraints, in the Indian

context most of the JVs in the passenger vehicle space have not been able to make meaningful presence

in the Indian market. These JV entities have either parted ways or restructured their product portfolioand business plans to meet Indian consumers preferences. In contrast however most of the Global OEMs

now have a direct presence in India.

In addition to contract manufacturing, the industry is also witnessing other collaborative arrangements

such as sharing engines/platforms and distribution and service network. For instance, Fiats diesel

engines are being used in some of Maruti Suzukis and Tata Motors cars. Similarly, Tata Motors

manages the service and distribution facilities for Fiat in India. Furthermore, developments at global

level, such as acquisition by Volkswagens of 20% stake in Suzuki reflect some further potential

collaborative arrangements given Volkswagens increasing focus and Suzukis strong presence in the

Indian market. We expect such alliances to gain momentum driven largely by the need to access

technology (as we move towards developing hybrid vehicles) and distribution and service network.

However, at the same time, consolidation in the form of entire companies being acquired as has beenseen globally is unlikely.

GST roll-out to benefit the industry with reduced outgo

In addition to the fundamental

factors driving demand, the likely

roll-out of Goods and Services Tax

(GST) would create one time

spurt in passenger car volumes as

the average duties would come

down substantially (refer to

table). At present, the effective

tax rates (including excise duty,

CST, and VAT) applicable on

passenger vehicles range

between 21-38% depending on the size of the car. With implementation of GST, we expect OEMs to pass

on the benefit of lower taxes at least some extent to induce higher volumes.

Table 3: Impact of implementation of GST on vehicle prices

Under VAT Under GST

Assuming Average Car Price at OEM 400,000 400,000

Add: Excise Duty @ 10% 40,000 -

Add: Central Sales Tax @ 2% 8,800 -

Add: VAT @ 12.5% 56,100

Add: Expected GST @ 16% - 64,000

Tax Component in the final prices 104,900 64,000

Tax as a % of Final Price 21% 14%

Source: ICRAs estimates

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Utility Vehicles Segment: New model launches likely to pick-up

With volumes of 275,556 units in FY10, the Utility Vehicles (UVs) accounted for little over 13% of the

total market with growth averaging around 9% over the past five years. In India, the UV segment is

primarily dominated by SUVs priced in the Rs. 7-11 lacs range. In line with the passenger car segment,

top three players in the UV segment account for over 85% of the market, of which two are domestic

players. A sizeable part of the UV market also caters to the people mover segment, which has also been

one of the key growth drivers striving on demand from the growing IT/ITES sector. In this segment, theindustry is witnessing an increasing preference towards smaller MUVs such as Maru ti Suzukis Eeco for

intra-city movement. More players are expected to launch models in this segment with major ones being

Tata Motors (Venture) and GM (through its collaboration with SAIC).

Table 4: M&M dominates the market with presence in the mass segment

FY 06 FY 07 FY 08 FY 09 FY 10 YTD FY10 YTD FY11

M&M 43.2% 40.8% 42.4% 47.1% 55.2% 55.8% 52.6%

Toyota 18.9% 19.8% 19.7% 17.0% 19.7% 19.6% 20.3%

Tata Motors 19.5% 21.8% 20.3% 18.5% 13.0% 12.9% 13.4%

Others 18.4% 17.7% 17.7% 17.4% 12.1% 11.7% 13.7%

Source: SIAM Data; * Till February 2011

With the acquisition of Land Rover (by Tata Motors) and Ssangyong (by M&M), we expect Indian OEMs

to consolidate their position in the UV segment with launches in the premium segment, leveraging on

the platforms and technological expertise of the acquired entities. While Land Rover would largely cater

to high-end segment, given the product profile, synergies with M&Ms existing models, Ssangyong is

likely to compete in the upper-end segment, which is currently dominated by GMs (Capitva), Fords

(Endeavour) and Hondas (CR-V). Both Tata Motors and M&M have expressed intentions not just to

launch models from the foreign acquisitions in the domestic market but also pursue opportunities to

locally assembly the vehicles. Similar to the passenger car segment, the premium SUV segment has also

been of interest to the international OEMs with nine players entering the premium segment over the

past six years.

Competitive pressures and cost-based headwinds to restrict profitability indicators

The profitability indicators of passenger cars OEMs is influenced by a confluence of factors with

predominant ones being fluctuation in input material prices, manpower costs, competitive intensity in

the underlying market impacting the ability to pass on cost increases, and volatilities in foreign

exchange. For OEMs in India, in addition to fluctuation in key commodity prices, fluctuation in foreign

exchange movement has also impacted profitability indicators of OEMs as almost all the players have

some import content and some of them significant export dependence. In India, leading OEMs derive

cost competitiveness from their economies of scale and relatively high localisation content backed by

efficient supply chain system. The profitability of OEMs without a meaningful presence in the entry level

segment has been particularly volatile due to poor scale economies. In this context, some of the foreign

players have had volatile earnings profile in their Indian operations driven largely by foreign exchange

exposure, large one-time costs (related to platform development, marketing/launch expense) not beingspread over large volumes and high import content. Now, with most OEMs targeting the highly

competitive small-car segment, thrust on localisation of key components forms an integral part of

international OEMs strategy to compete on cost.

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3,000

6,000

9,000

12,000

15,000

18,000

21,000

J

- r-

Jl-

ct-

J

- r-

Jl- -

J

- r-

Jl- -

J

- r-

Jl- -

J

-

Trend in Domestic Rubber Prices

Rubber Prices (Rs./Quintal)

30,000

35,000

40,000

45,000

50,000

1,000

1,500

2,000

2,500

3,000

3,500

J

- - -

J

- - -

J

- - -

J

- - -

J

-

Trend in Key Commodities - Steel & Aluminium

LME Prices of Aluminium (Average) HR+CR Average Prices

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Trend in RMC/OI (%)

Maruti Suzuki Tata Motors M&M

0.0%

3.0%

6.0%

9.0%12.0%

15.0%

18.0%

21.0%

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Trend in OPBDIT Margins (%)

Maruti Suzuki Tata Motors M&M

Chart 9: Trend in prices of key material prices and profitability indicators of OEMs

Source: Industry analysis services, company releases

Given the commodity-based headwinds being witnessed at present, rising labour cost (which results in

cost increases across the supplier network) and limited flexibility to raise prices owing to increasing

competitive pressures, we expect the profitability indicators of OEMs to remain under pressure.

Although the impact of some these cost-based headwinds could be mitigated by greater economies of

scale and higher degree of automation.

Outlook

The passenger vehicle market size in India is now comparable to some of the developed economies of

the world and ranks seventh globally. The presence of global players, introduction of global

platforms/technologies and stricter emission norms indicate that the market is gradually attaining

maturity. A buoyant economic growth, growing middle class population, rising disposable income levels,

relatively low penetration of cars and adequate availability of financing are likely to provide an ideal

backdrop for a sustained long term demand growth for the sector. However, with increasing interest

from foreign players, competitive intensity is likely to become a key challenge for OEMs.

With mostmajor markets facing excess capacity and demand saturation, the Indian market is likely to remain a key

destination for global majors over the medium term. With most of the international players eyeing the

small car market, we expect the competitive intensity to increase in this segment resulting in greater

fragmentation of market share, especially over the long-term. Apart from pricing pressure that is likely

to increase with competition, the rising quality expectations and tightening regulatory norms on

emission and safety are likely to push up cost pressures on OEMs. We estimate the Indian passenger

vehicle industry will reach 4.86 million in annual sales by FY16, representing a growth of 10.8% CAGR

over the next five years.

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With global demand shifting to smaller cars, global players are likely focus on strategies of producing

cars of the same platforms in low-cost countries like India, Thailand and Mexico. In terms of cost

competitiveness, India has built up the scale and significant competencies and cost advantages in the

production of small cars. It benefits from lower development and labour costs, and improving auto

component manufacturing base. Maruti Suzuki and Hyundai have already establish meaningful presence

in exports out of India, and now many other global players including Renault-Nissan, VW, Ford have

either adopted strategy or are in the process of exploring opportunities to develop India as part of theirglobal manufacturing hub. Interestingly, China despite being known for its low-cost manufacturing

capabilities and large automotive market supported by presence of international players is yet to

establish a meaningful presence in exporting cars, though the situation may change over the medium

term, especially considering rising capabilities and aspirations of its large local players.

With most of the global players targeting the most competitive, small car segment, increasing

localization remains critical for OEMs to establish profitable business given the competitive intensity in

the small car segment. As a result, most OEMs are focused on increasing localization content to reduce

costs and thereby compete with market leaders. Additionally, auto ancillaries will have to ramp-up their

capital investment as OEMs continue to develop new platforms and increase their localization contents.

Besides localisation of components, key challenges facing new entrants would be establishing a strong

service/ distribution network, which has become increasingly prohibitive due to rising real estate costs

in many markets. Going forward sharing and co-operation on distribution network and service facilities

could play a significant role in rationalising cost structures. In terms of product launch, while most

global majors are likely to choose from their existing portfolio for launch in India, key to success would

be the ability to incorporate changes necessary to meet Indian preferences and market conditions.

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82%

82%

77%

75%

75%

77%

77%

77%

78%

78%

16%

17%

20%

21%

21%

18%

19%

20%

18%

18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 YTD FY11

Passenger Car Volumes: Segm ent-wise concentration

A4- A6: Executiv e, Pr emium, Luxur y A3 Segment: Mid-Size A1-A2 Segment: Small Car

Annexure I: Industry Composition

Passenger cars and utility vehicles are the main segments of the Indian passenger vehicle industry with

the former accounting for 78% of total volumes. India has primarily been a small-car market, mainly due

to the high demand for a cost-effective mode of transportation. Within the passenger car segment, small

cars comprising A1 and A2 segment account for almost 80% of total volumes.

Source: SIAM, ICRAs estimates; YTD till February 2011

Unlike some of the other emerging markets where market shares are more fragmented, the Indian

passenger vehicle industry has been dominated by three major players Maruti Suzuki, Hyundai Motors

and Tata Motors, which collectively accounted for over 80% of total volumes in FY 2010. These players

with their strong product portfolio, particularly in the small car segment, extensive distribution and

servicing reach and strong brand franchise (created over several years) have maintained their market

position for years together. However, as the Indian market has attracted several international OEMs, this

trend is likely to undergo a change especially as most of the OEMs are now targeting the small car

segment, the largest segment by volumes. Most OEMs are launching models keeping the Indianconsumer in mind. In fact, most of the models being launched in India are either being launched for the

first time in the world, or simultaneously in some other markets. Despite concentrated market share, the

industry has been highly competitive, especially in the small car segment where incumbent players by

virtue of their large volumes, facilitating economies of scale and established vendor base have

competitively priced their models.

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Annexure II: Industry Statistics

Table 5: Trend in market share of leading OEMs in the domestic passenger vehicle market

OEMs FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10YTD*FY 11

Maruti Suzuki 50.4% 46.7% 46.7% 45.9% 46.1% 46.1% 45.9% 46.5% 44.7% 44.9%

Hyundai Motors 13.0% 14.6% 14.4% 13.4% 13.9% 14.1% 14.0% 15.7% 16.2% 14.4%Tata Motors 13.2% 14.7% 15.5% 16.9% 16.5% 16.4% 14.7% 14.9% 14.7% 14.0%

M&M 6.6% 7.4% 7.6% 7.5% 7.4% 6.5% 8.4% 7.7% 8.0% 7.2%

General Motors 1.3% 1.2% 2.0% 2.7% 2.7% 2.8% 4.3% 4.0% 4.5% 4.3%

Ford 2.2% 2.2% 2.4% 2.6% 2.5% 3.0% 2.2% 1.8% 1.9% 3.9%

Toyota Motors 3.7% 4.3% 4.7% 4.1% 4.1% 3.7% 3.6% 3.0% 3.3% 3.1%

Honda Motors 1.6% 1.9% 2.4% 3.5% 3.7% 4.4% 4.1% 3.4% 3.2% 2.5%

Source: SIAM, ICRAs estimates; Note: Passenger vehicle volumes includes UVs and MPVs; * Till February 2011

Table 6: Trend in market share of leading OEMs in the export segment

OEMs FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10YTD

*FY 11

Hyundai Motors 10.2% 12.4% 32.6% 49.3% 58.1% 58.2% 66.1% 75.5% 64.0% 52.0%

Maruti Suzuki 23.0% 44.8% 39.6% 29.4% 19.8% 19.8% 24.3% 20.9% 33.1% 31.5%

Nissan 10.4%

Ford 57.2% 38.3% 18.6% 13.6% 9.2% 11.6% 1.1% 0.2% 0.3% 2.6%

Tata Motors 8.7% 3.7% 8.6% 6.6% 11.4% 9.1% 6.8% 2.1% 1.5% 1.9%

Source: SIAM, ICRAs estimates; * Till February 2011

Table 7: Trend in segment-wise growth

Segment-wiseYoY growth (%)

FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10YTD*FY 11

A1 + A2 Segment - Small 5.5% 21.3% 14.1% 8.1% 25.7% 11.6% 0.7% 27.4% 30.2%

A3 Segment - Mid 10.1% 50.8% 26.4% 5.8% 5.7% 14.6% 7.1% 14.2% 33.3%

A4 Segment - Executive 133.0% 553.2% 78.9% 7.3% 49.0% 2.9% -20.3% 37.8% 14.3%

A5 Segment - Premium -7.1% 29.5% 8.7% 7.4% -3.5% 2.8% 45.8% 26.7% 38.3%A6 Segment - Luxury 14.5% 35.2% 61.5% -41.3% 361.5% 105.2% 26.8% 15.7% 37.6%

Passenger car 6.4% 28.6% 17.8% 7.6% 22.0% 11.8% 1.4% 25.1% 30.3%

Utility vehicles 9.0% 28.8% 20.5% 10.3% 13.3% 11.3% -8.0% 20.9% 19.7%


Table 8: Trend in composition of domestic passenger car market

Composition FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10YTD*

FY 11

A1+A2 Segment - Small 82% 82% 77% 75% 75% 77% 77% 77% 78% 78%

A3 Segment - Mid 16% 17% 20% 21% 21% 18% 19% 20% 18% 18%

A4 Segment - Executive 0% 0% 2% 3% 3% 4% 4% 3% 3% 3%

A5 Segment - Premium 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%

A6 Segment - Luxury 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%


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