MUMBAI // One morning a few years ago, while stuck in a Mumbai traffic snarl, Ratan Tata noticed from his car window an old puttering scooter hauling a family of four.
That is not an unusual sight on the city's gridlocked streets, but that family's plight caught the tycoon's imagination. Amid the honking traffic, Mr Tata had an epiphany: that one family's situation represented the vast transport needs of the millions of Indians for whom four-wheel vehicles were out of reach. And he could do something to meet the need. Less than two years ago, Tata Motors, the car-manufacturing giant headed by Mr Tata, brought that vision to fruition. It rolled out the Nano, a bubble-shaped car, the world's cheapest, available for an attractive launch price of about US$2,200 (Dh8,080).
The Nano, marketed as the "people's car", would herald a motoring revolution in India, it was widely thought. The family-on-a-scooter phenomenon might disappear from India's roads as millions of people with two-wheelers upgraded to micro cars. But with India's swift economic growth and rising disposable incomes, and with the launch of a slew of car models, the transport revolution is spreading beyond the low-cost car market created by the Nano.
Sales of passenger cars might have slowed in developed economies, but they are soaring in India. In the April-August period, car makers in India produced 7,063,063 vehicles, against one million vehicles in the entire 2004-2005 financial year. Vehicle production in the April-August period this year was 32 per cent higher than in the same period last year, according to the Society of Indian Automobile Manufacturers (SIAM), a trade organisation based in New Delhi. The passenger-car segment grew by 34 per cent in the same period.
Last year, India's vehicle sector, which employs 10 million people, achieved a turnover of more than 2 trillion rupees (Dh165.65 billion), according to an economic survey that the government presented in parliament. This year, India emerged as the world's seventh-largest vehicle producer, six years ahead of the government's target date for reaching that goal, the ministry of heavy industry said last month.
India's vehicle sector grew the second fastest globally in the financial year ending in March. With a compound annual growth rate of 14 per cent in the vehicle sector, India is expected to roar ahead of China, growing at 6 per cent, to become the world's fastest-growing car market between now and 2020, according to a recent report prepared jointly by the global consultancy Ernst & Young and the Automotive Component Manufacturers Association of India (ACMA).
Per capita, the number of passenger-car owners is very low in India compared with the level in developed economies. Only eight in every 1,000 own cars, according to Crisil, a credit-rating agency based in Mumbai. At the current rate of expansion, experts predict, by 2050 every sixth car in the world will be produced for the Indian market. "We remain positive on the Indian auto sector," Vaishali Jajoo, a car industry analyst at Angel Broking in Mumbai, wrote in a recent report. "Over the long term, comparatively low penetration levels, a healthy economic environment and favourable demographics supported by higher per-capita income levels are likely to help auto companies in sustaining their top-line growth."
Last month, most vehicle manufacturers posted double-digit sales growth for the fourth consecutive month on the heels of rising consumer confidence and the onset of the festival season, which will last until the beginning of next year. "Demand for vehicles continues to surpass supply, despite the price hike by most auto majors," Ms Jajoo said in her report. Maruti Suzuki, India's leading car maker, which is 54.2 per cent owned by Japan's Suzuki Motors, reported its highest monthly sales last month, an increase of 3.1 per cent from August. Last month's sales volume of 108,006 units was 29.6 per cent more than in September last year.
Hyundai Motor, the country's second-largest car marker, also recorded last month its highest monthly sales since entering the Indian market in 1998. The company said it sold 31,751 units, an increase of 14.2 per cent from September last year. Hyundai reported its previous monthly sales record of 31,501 units in March. "It is heartening to see the market on a growth trajectory, and this has reflected in our sales. Hopefully, the festive season will further consolidate the growth," said Arvind Saxena, the director of marketing and sales at Hyundai Motor India.
Tata Motors posted a 23.1 per cent year-on-year growth in total volumes last month, with the passenger-vehicle segment increasing by 32.4 per cent. As India emerges as a centre of vehicle production, the small-car segment is increasingly dominating the market. "The auto market in India is all about the price game," says Rohit Singh, the director of CarSingh, an online car mart. "Better the price, the better the sales."
It is a reality best illustrated, he says, by the fact that the Maruti Alto and Wagon R, mid-size hatchbacks that cost between 300,000 and 400,000 rupees, are India's best-selling passenger cars. "India has become the hatchback hub of the world," Mr Singh says. But the high small-car sales are not just about price. Only small cars can easily navigate on potholed roads packed with handcarts, bicycles, pedestrians and livestock.
India, which, unlike China, allows foreign car makers to fully own domestic subsidiaries, encourages small-car production with tax incentives. With this inducement, car makers such as Ford, Nissan, General Motors and Volkswagen are pumping hundreds of millions of dollars into India. In January 2008, Ford invested $500 million in its manufacturing plant in Chennai in southern India to increase annual production to about 200,000 units.
While sales are expected to rise, there are concerns about perceived impediments to growth. "Increasing input costs and interest rates are the anticipated headwinds that could affect the sector's volume and earnings growth," Ms Jajoo wrote in her report. "We expect rising input costs to restrict profitability, despite having a positive view." It is not clear whether those factors will slow production. India's vehicle-parts industry, though, is expected to achieve an annual turnover of $110bn by 2020, a fivefold increase over the current $22bn, according to ACMA.
The parts industry will contribute 3.6 per cent to India's GDP by 2020, up from the current 2.1 per cent. By then, growing investments will create 1 million jobs, ACMA says.
