17 Oct The Trend of the Indian Automobile Industry: The fastest growing sector
In the era of globalization, understanding the rise of capitalist economy can be seen in the trans-national corporations, the liberalization of trade regimes, and the near elimination of barriers to international currency and equity trading is so evident. In this light let us examine the Indian automobile industry. The industry has been witnessing an impressive growth since the country’s economic liberalization in the early 1990s. In contrast to the 1.5 million units produced in the year 1993-94, the production of vehicles in the country crossed a historic landmark of 10 million units in the year 2006-07, which has been growing further.
India is currently the world’s second largest market for 2-wheelers (IBEF 2008) and is considered to be one of the fastest growing passenger car markets (GOI 2006a). In the year 2007, India ranked 8th in the production of commercial vehicles and 9th in the production of passenger cars worldwide, moving up from a rank of 13th and 15th respectively in the year 2000 (OICA 2008a). Indian automotive industry, which comprises of the automobile and the auto-component industries, is one of the largest sectors in the country. It has been identified by the Government of India as an important industry with a high potential to increase the share of manufacturing in gross domestic product, exports and employment. Be it market-seeking or low-cost sourcing, India has emerged as an attractive automotive location to offer (global) automotive sector firms strategic advantages.
The industrious efforts of Indian auto manufacturers are earning acclaim worldwide. For example, the world’s cheapest car recently unveiled by the Indian 4-wheeler manufacturer Tata Motors received attention of auto manufacturers around the world (Time 2008). The Indian automotive industry with its large number of domestic and foreign players is operating in terms of the dynamics of an open market. On examination of the sales of small cars (mini & compact) dominate other sub-segments; see for instance SIAM (2008b). Such a nature of demand specific to the Indian consumers is explained by the country’s demographic (e.g. highest number of people below the age of 35 years) and socio-economic (e.g. rising middle class) factors.
The market for auto-components in India has grown along the lines of the automobile market. The domestic sales and imports of auto-components serve the rising demands of both the original equipment manufacturers (OEM) and the replacement market.
For foreign investors there are barriers to entry into automobile manufacturing activity that require attention. The initial investors in this sector were Suzuki, a brand from Japan. Since 1983, they worked in Joint Venture with Maruti Udhyog. They were market leaders and captured the segment. They set an example for foreign investors to enter the country in this sector. Some of the barriers that need to be overcome by a new entrant include: the cost of developing high volume production facilities, in order to benefit from economies of scale; and the ability to gain access to technology of major operators, as the present incumbents include some of the largest multinationals, that have considerable claims to new technology.
With the opening of 100% Foreign Direct Investment route in this sector has made this sector easily accessible. Europe considered as the biggest importer of cars from India.
The plan envisaged for growth of this sector as resources reveal are a tax holiday for the industry on investments exceeding $225,000, 100% tax deductions of export profits, and deductions of 50% on foreign-exchange earnings. It also calls for a one-stop clearance for foreign-direct-investment proposals in the sector and deductions of 30% of net income for 10 years for new industrial undertakings. With the implementation of such a proposal it would be an easy road for the foreign investors