Perspective Vikas Sehgal

Matthew Ericksen
Sunil Sachan

Revving the
Growth Engine
India’s Automotive
Industry Is on a
Fast Track
Contact Information

Beirut
Ramez Shehadi
Partner
+961-1-336433
[email protected]

Chicago
Vikas Sehgal
Partner
+1-312-578-4828
[email protected]

Matthew Ericksen
Partner
+1-312-578-4610
[email protected]

Sunil Sachan
Senior Associate
+1-312-578-4859
[email protected]

Munich
Joerg Krings
Partner
+49-89-54525-574
[email protected]

Tokyo
Kazutoshi Tominaga
Principal
+81-3-3436-8598
[email protected]

Ganesh Panneer also contributed to this Perspective.

Booz & Company

EXECUTIVE As India’s economy continues to grow at a rapid pace, the
automobile industry will be a key beneficiary. This is widely true
SUMMARY
across automotive markets—from those serving customers with
two-wheelers and four-wheelers to those offering commercial
vehicles. This Booz & Company Perspective provides an
analysis of growth prospects in the Indian automotive industry.
The main factors behind such growth are the increasing
affluence of the average consumer, overall GDP growth, the
arrival of ultra-low-cost cars, and the increasing maturity of
Indian original equipment manufacturers (OEMs). However,
India’s path to mass motorization will be very different from
that of developed countries; it must first develop the new
technologies, business models, and government policies that
will pave the way to increased automobile penetration. Other
challenges—for example, the current global economic crisis
and high commodity prices—may slow down the country in the
short term, but they will not be able to stop it.

Booz & Company 1

INDIA’S The Indian economy is booming.
From 1998 through 2008, its GDP
and international banks, well aware
of the opportunities, have increased
INCREASING has grown at an average of more consumer credit available to middle-
AFFLUENCE than 7 percent per year. Moreover, its
contribution to world GDP is expected
class borrowers. Even in the current
global recession, India’s middle
to increase from 2 percent in 2007 class has been less affected than its
to 17 percent in 2050. Tremendous counterparts in developed countries.
growth in wealth will produce In the second quarter of 2009, India’s
significant increases in spending economy grew by 6 percent while
on discretionary items and GDP in the U.S., Japan, Germany,
consumer durables. and other countries declined. This
is spurring a new wave of consumer
As in all emerging markets, a spending unprecedented in India’s
growing middle class fuels economic history. In fact, by looking at such
advancement. In India today, 13 macroeconomic indicators as GDP
million households earn US$10,000 and foreign direct investment growth
to $50,000 a year; that segment is for parallel markets, one could
forecast to more than triple by 2012, conclude that India is tracking the
to 40 million. Meanwhile, income path of China, albeit with a 10-year
for average middle-class households lag (see Exhibit 1).
will approximately double. Local

GDP GROWTH SINCE LIBERALIZATION

Exhibit 1
GDP Growth of China and India

$3,500 China

$3,000

$2,500
GDP ($ Bn)

$2,000

$1,500
India
$1,000

$500

$0
1 3 5 7 9 11 13 15 17 19 21 23 25 27
Years Since Liberalization

Source: IMF

2 Booz & Company

THE STATE OF India’s auto industry is growing fast,
but it remains a two-wheel nation.
we expect the number sold to nearly
double, to 15 million units per year.
INDIA’S AUTO More than 78 percent of motor
INDUSTRY vehicles on the road are two-wheelers,
their popularity driven by low price,
But even as the market grows,
motorbikes face a pack of ultra-
high fuel mileage, and an ability to low-cost four-wheel challengers:
maneuver deftly through India’s dense the “Sub-A” segment automobiles
traffic. For the last eight years, the exemplified by Tata Motors Ltd.’s
two-wheeler market has grown at a $2,500 Nano. The recently launched
compounded annual growth rate of Nano bridges the gap between $1,000
13 percent; in 2007, 8 million units motorbikes and $5,000 cars (see
were sold. Over the next seven years, Exhibit 2). With the Nano and similar

Exhibit 2
Automotive Economic Ladder – From 2-Wheelers to Cars

$60,000
55,000

$50,000

157%
$40,000
35,000
Prices ($)

NANO’S ENTRY
$30,000
175%
20,000
$20,000
100%
10,000
$10,000
5,022 100%
1,111 450%
$0
New 2-W New A Segment New B Segment New C Segment New D Segment New E Segment
(Hero Honda) (Maruti 800) (Tata Indica) (Honda City) (Honda Accord) (Audi A4)

Note: Percentages indicate increase in price from one segment to the next

Booz & Company 3

cars from Tata and Bajaj Auto Ltd., million units in 2008 to 2.4 million transport once dominated the people-
the industry is walking the market units by 2013, surpassing the markets moving business. No more. Roadway
down the demand curve; the low in Italy and Spain. By 2012, annual passenger traffic is expected to
prices will quadruple the number of car sales worldwide will increase by increase from 40 percent of the total
potential new-car buyers. about 11 million units per year, with in 2007 to 55 percent by 2020.
India expected to account for 20
While the Sub-A segment gains percent of the increase. At that point, Meanwhile, an expected increase in
traction, India’s auto market India will become the world leader in defense spending will prompt new
remains dominated by cars in the A small-car market growth. demand for commercial vehicles
(small) and B (compact) segments, intended for military use. Domestic
which together account for about 65 The economic underpinnings of manufacturers such as Tata and Ashok
percent of sales. this growth are strong. A historic Leyland Ltd. dominate the military–
structural shift in the Indian economy commercial market with a diverse
Global small-car players like Hyundai, will continue to generate great wealth. product portfolio, while foreign
Suzuki (including Maruti), and Back in 1950, agriculture accounted manufacturers like Daimler and AB
Honda, traditionally the leaders in for more than 50 percent of India’s Volvo remain niche players. The
India, now face stiff competition from GDP; today, agriculture accounts for small commercial vehicle segment is
local manufacturers such as Tata and only 15 percent and that share will growing most quickly, attracting new
Bajaj. Renault has partnered with shrink further. Rapid urbanization players both foreign and domestic.
local players Mahindra and Bajaj. In drives the need for commercial
the D segment (midsize) and higher, transportation. Consider the need Today, India boasts the world’s third-
the market has been dominated by to keep food cold: 30 percent of largest market for new commercial
global manufacturers like Toyota, agricultural produce in India now vehicles. Because it is also the world’s
Volkswagen, Daimler, and BMW. perishes en route to the market due second-fastest-growing commercial
to refrigeration gaps in the supply market, its future looks even brighter.
The overall passenger vehicle market chain; hence, there is a nationwide
in India is expected to grow from 1.7 need for refrigerated trucks. Rail

4 Booz & Company

OPPORTUNITIES A growth spurt in any industry
presents an opportunity to shape
The four-wheel passenger vehicle
market has grown impressively at
IN THE INDIAN a market for long-term prosperity. the hands of the new middle class,
MARKET Motorbikes, the prime driver of
two-wheeler growth, carry fairly
although market penetration remains
low. Four-wheel automobiles are still
high margins in a rapidly growing too expensive for the vast majority
market. High-value sports and luxury of Indian motor vehicle buyers,
motorbikes boast fat margins, too, yet although the Tata Nano and other
global market leaders such as Harley- Sub-A segment automobiles will
Davidson, BMW, and Ducati are not bridge a significant gap in the
aggressively investing in the Indian automotive ladder.
market, which leaves an opening
for domestic manufacturers. Sales While the small-car market continues
of lower-margin scooters have to develop, local players like Tata and
increased somewhat, whereas sales Maruti are also aggressively pushing
of mopeds, with the thinnest margins, into the compact and entry midsize
have declined. segments. The entry midsize market
represents particularly fertile ground,
Mainstream consumers use two- expected to grow 27 percent over the
wheelers for personal or family next five years. At present, the Honda
transport. New engine technologies City, Hyundai Accent, and Maruti
that increase horsepower while Esteem are the leading models in this
maintaining the high fuel efficiency segment.
of the four-stroke engine have strong
potential to further boost sales. To To become a global player in small
sustain sales growth, manufacturers, cars for both domestic and export
dealers, and consumer finance markets, Indian manufacturers will
groups must work together to build need new innovations in power-train
innovative financing options for and manufacturing technologies to
consumers. drive down costs and compete with

The four-wheel passenger vehicle

market has grown impressively at the
hands of the new middle class, although
market penetration remains low.

Booz & Company 5

two-wheelers. There are opportunities nation’s commercial vehicles are in Ace presents an opportunity to
on the cost side of the entry midsize fleet ownership, compared with about export small trucks to other emerging
segments as well, as automakers utilize 70 percent in the Western markets. An markets and will serve as a model
India’s world-class engineering and increase in fleet ownership will make that prompts other manufacturers
low-cost manufacturing labor. Global the market more regulated, more to begin building and exporting
OEMs now have an opportunity consolidated, less price sensitive, and similar vehicles.
to develop cars in India and even more apt to be driven by economics
manufacture them for export to the than by emotion. Refrigerated trucks represent a
Western markets. Even in a moderate segment that will grow naturally
economic scenario, we expect the At the segment level, small with increasing GDP. Such trucks
four-wheel passenger market to reach commercial vehicles like the Tata Ace must be economically attractive and
at least 2.5 million units by 2015 have changed the industry landscape. environmentally friendly; development
(see Exhibit 3). Combining high utility with low of fuel-efficient technologies in this
prices and low maintenance costs, area will further increase the market
India’s commercial vehicle industry, these vehicles allow consumers to size. In the meantime, high-end
although one of the largest in trade up from load-carrying three- trucks and ultra luxury buses present
the world, is nascent by Western wheelers. India is already the second- opportunities for the domestic market
standards. Only 20 percent of the largest exporter of small cars. The and for export.

Exhibit 3
Four Wheel Passenger Vehicle Sales Projections (2001–2015)

3.2 Germany Car Sales 2008 - 3.1 M Units

Aggressive
2.8 Strong Growth

2.4 Growth
Conservative
Million Units/Year

2.0 Italy Car Sales 2008 - 1.9 M Units

Spain Car Sales 2008 - 1.6 M Units

1.6

1.2

0.8

0.4

0.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Global Insight; Economist Intelligence Unit; Booz & Company analysis

6 Booz & Company

INDIAN MARKET growth, far below the historic 14
percent CAGR, but a healthy level
industry growth, it must address
several challenges. Emissions and
CHALLENGES nonetheless. As noted above, the news safety standards in India are not up
is not so good for the commercial to European or North American
vehicle sector—sales are expected standards; without reform in these
to decline by 35 percent for FY09. areas, India won’t be taken seriously
With support for financing from the as a vehicle exporter. At the same
In addition to its many opportunities, government, sales should recover time, the commercial vehicle industry
the Indian automotive industry in FY10. The two-wheeler segment in India faces legislation that would
presents challenges for all players. has shown some resistance to the mandate anti-lock braking (ABS)
Political and economic stability in global crisis; however, in a broader and anti-skid technologies; with a
India and stable global financial market collapse, this segment will high personal-ownership rate for
markets are the keys to meeting suffer as well. commercial vehicles, it will be difficult
predicted growth rates; however, to pass on the increased cost of such
stability has been hard to come by. Commodity Prices safety mandates to price-sensitive
As discussed, the two-wheeler industry consumers.
Global Economic Crisis faces homegrown competition from
For the short term at least, the global ultra-low-cost cars priced at $2,500 Infrastructure development in India
economic crisis has slowed India’s and less. A return to high steel prices must keep pace with the growth of
economy and the commercial vehicle will challenge these inexpensive four- small cars on the road. Impediments
market. The medium and heavy wheelers. Manufacturers have little to the construction of the Golden
commercial vehicle markets have option but to pass cost hikes on to Quadrilateral, the highway connecting
been affected more than light low-wage consumers. Oil and other the country’s major metropolitan cities
commercial vehicles. Consumer commodity price increases will also in a giant ring, would directly affect
lending has been severely affected. challenge the four-wheel passenger commercial segment sales. Currently
Although interest rates have been market. Commodity prices may be India has only 3,700 miles of highway,
reduced, the percentage of loan depressed in a slowing worldwide compared to 25,000 miles in China
approvals has also declined. Customer economy, but they’re in for another and 46,000 miles in the United States.
trade-downs mean lower trim levels rapid rise once global economic Given this underdevelopment in
and lower-end models. growth recovers. infrastructure, India needs to redefine
the normal commercial truck pyramid
Despite all this, the four-wheel Infrastructure and Technology by emphasizing sales of small and
passenger vehicle market is expected If India is to achieve the full light commercial vehicles.
to reach approximately 6 percent potential offered by motor vehicle

Booz & Company 7

CONCLUSION The automotive industry is at the core
of India’s manufacturing economy.
campaign for better infrastructure,
further reduce the total cost of car
India is positioned to become one of ownership, and bring financing and
the world’s most attractive automotive insurance models up to modern
markets for both manufacturers and global standards. To beat rising input
consumers. The resulting benefits costs, manufacturers must improve
to society—in economic growth, their net cost position by increasing
increased jobs, and stability for productivity and performance.
families employed by the automotive Indian auto manufacturers such as
industry—are considerable. Tata must increase their global sales
for faster recovery of their fixed
What does this mean for motor costs and match the product cycle
vehicle businesses? The total cost of times of international manufacturers
ownership of two-wheelers over the like Hyundai.
past few years has increased while
that of entry-level passenger cars has The government can help by
declined, primarily due to rising fuel mandating higher fuel efficiencies
prices and lower prices for Sub-A for passenger vehicles and by setting
segment vehicles. This shift will result antipollution policies that take older
in increased entry-level passenger cars off the road. The government
vehicle sales in urban areas. Hence, can also address the heavy blow
the two-wheeler manufacturers should dealt by the economy to the motor
focus on penetration of sales in vehicle industry by providing funds to
rural markets where infrastructure is improve credit availability, especially
relatively underdeveloped. Motorbikes for noncommercial vehicle buyers.
will still be attractive to younger To further promote the market,
consumers as a primary mode of manufacturers must adopt new
transport; the product strategy must technologies that improve comfort,
be focused on that segment. The safety, and durability.
two-wheeler manufacturers must
also work to further improve fuel By promoting fuel efficiency, India
efficiency. can reduce its dependence on foreign
oil. By reducing its fuel subsidies, the
Automobile penetration in India is government could direct that spending
only seven or eight per 1,000 people, to social programs. But to ensure that
compared with nearly 500 per 1,000 the benefits come to fruition, India
people in mature markets. To increase and its automakers must act now.
this ratio, manufacturers should

8 Booz & Company

Reference
“Six Factors That Will Shape the Future of Two-Wheelers in
India,” by Sachin Mathur, CRISIL Research, presented at annual
SIAM [Society of Indian Automobile Manufacturers] conference,
New Delhi, September 2008.

About the Authors

Vikas Sehgal is a partner

with Booz & Company in
Chicago. He specializes in
product strategy, innovation,
emerging markets strategy, and
globalization for automotive,
transportation, and industrial
companies.

Matthew Ericksen is a
Booz & Company partner in
Chicago. For over 20 years he
has been working with industrial
companies to define winning
strategies and the organizational
and transformational programs
required for success.

Sunil Sachan is a senior

associate with Booz & Company
in Chicago. He specializes in
innovation, emerging markets
strategy, and engineering
globalization for automotive,
transportation, and industrial
companies.

Booz & Company 9

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