ANALYSIS OF THE AUTOMOBILE MARKET

AND DEMAND

By:

ANJANA C

BBA LLB (2021-26)

Under the Guidance of

Dr. Y. Kishore Kumar

Symbiosis Law School, Hyderabad

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 TABLE OF CONTENTS

Sl. No. PARTICULARS Page No.

1. Introduction 2

2. Need for the Study and Statement of the Problem 5

3. Scope and Limitations of the Study 5

4. Review of Literature 6

5. Objectives of the Study 7

6. Research Methodology 8

7. Analysis and Findings 9

8. Suggestions 13

9. Bibliography 15

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 INTRODUCTION

With respect to both volume of sales and manufacturing, the Indian automobile market is
among the largest in the world. When it comes to the historical foundations of the Indian
automobile sector, the very first automobile on the street was in 1897. Until 1930, India
lacked a production facility and had to import vehicles from other nations. The 1940s were a
watershed moment in the production process when Indian businesses like Hindustan Motors
and Premier began to produce automobiles made by foreign companies. During the same
decade, Mahindra & Mahindra began manufacturing utility vehicles.

As the production process gained pace in the early 2000s, automobile exports were fairly
slow during that time period. Maruti Suzuki was one of the earliest automobile manufacturers
to begin delivering vehicles to major European markets. During this decade, the Indian
government imposed obligatory emissions regulations in an attempt to minimize pollution
caused by automobiles. The upgraded requirements, dubbed as 'Bharat Stage,' went into force
in big cities since they were founded on tough European standards. Bharat Stage IV is now
being implemented in 13 cities, including Delhi (NCR), Mumbai, Kolkata, Chennai,
Bangalore, Hyderabad, Ahmedabad, Pune, Surat, Kanpur, Lucknow, Solapur, and Agra, with
the rest of the country being on Bharat Stage III.

The automotive industry in India has experienced significant growth over the years, with
nearly all major automakers having a presence in the nation. India seems to have become a
center for automobile manufacturers establishing operations to manufacture automobiles for
both domestic and overseas markets. The three principal areas of the Indian automobile
industry are located in the south, west, and north. Chennai is the southern region's automotive
production powerhouse, followed by the Mumbai and Pune belt. In terms of the concentration
of manufacturing facilities in the north, the NCR has a fair share.

To name a few notable achievements of the Indian automobile industry, it was the fourth-
largest exporter of passenger automobiles in 2009, trailing only Japan, South Korea, and
Thailand. In 2010, India surpassed its previous year's record to become Asia's third-
largest automobile exporter. The biggest prize came for the Indian car market in 2011, when
it became the world's sixth-largest producer.

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In the Financial Year 2021, India’s total automobile output was 22.65 million units.

Due to an increasing middle-income population and a large proportion of India's population

being youths, the two-wheeler sector holds the largest market share in terms of volume.
Furthermore, the increased interest of firms in investigating rural areas boosted the sector's
expansion. The growing middle-class population and the urge for companies to explore and
produce for the rural market are two of the major reasons for the increased sales of 2-wheeler
vehicles in the country.

The most prominent automobile clusters in India are as follows:

a) Mumbai-Pune-Nashik-Aurangabad
b) Chennai-Bengaluru-Hosur
c) Delhi-Gurgaon-Faridabad
d) Kolkata-Jamshedpur
e) Sanand-Hansalpur-Vithalpur

SWOT ANALYSIS OF THE INDIAN AUTOMOBILE INDUSTRY:

Strengths:
a) Availability of cheap labor
b) Large domestic market
c) Government assistance in terms of money for manufacturing units
d) Industry that is constantly evolving along with advancements in innovation and
technology

Weaknesses:
a) Lower productivity
b) Setbacks arising due to poor infrastructure
c) Heavy taxes levied on companies by the government that increase the cost of
production
d) Lack of funding for Research and Development

Opportunities:
a) Rising rural demand
b) Lower excise duty
c) Steady rise in income taxes

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 d) Introduction of fuel-efficient vehicles
Threats:

a) Rises rates of interest

b) Stiff competition
c) Expensive raw material
d) Skyrocketing fuel prices
e) Snail-paced economy
f) Economic recessions

India was the fifth-largest automobile market in the year 2020. India is a growing economy
and is a lucrative opportunity for investors. The automobile industry in India is a growing
industry that shows promise and is necessary for the nation’s economic and technological
advancement. The availability of low-cost skilled labour, various research and development
centres, and easy cheap steel production all help make India the viable choice

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 NEED FOR THE STUDY AND STATEMENT OF THE
PROBLEM
It is of great importance to understand the automobile sector in India. India is the fourth
largest exporter of automobiles in the world. This means that the contribution of this industry
to the GDP of this country is immense. It has been a really fruitful sector since the
introduction of the New Industrial Policy of 1991. It has seen a booming growth in the
consequent years and continued to see that kind of growth, especially given that India
provides the perfect environment for this industry with the availability of cheap labor, which
is an essential part of automobile manufacturing. However, this sector saw a sudden decline
in demand and was also faced with numerous challenges in production due to the COVID-19
pandemic and the governmental restrictions that came with it. Understanding this sudden
decline on the graph and the consequent repercussions of the same is pertinent.

SCOPE AND LIMITATIONS OF THE STUDY

This study is focused largely on India and how the sector was affected by the pandemic.
Although this study will glance at the industry in various economic conditions, it will be a
more centered study on how the COVID-19 pandemic affected this sector. Every sector of
business was affected by this pandemic and it is important to understand what effects it had
on one of the biggest industries contributing to India’s GDP. Therefore, in this paper, you
will see an analysis of all such factors that led the industry to be in its current state.

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 REVIEW OF LITERATURE

1. The Market for "Lemons": Quality Uncertainty and the Market Mechanism (Akerlof,
1970)

This journal article talks about the various uncertainties with respect to the automobile
industry and the quality differences in it. It also works to give some structure to the statement,
“Business in underdeveloped countries is difficult”. Insurability, liquidity of durables and
brand-name goods are also discussed in this paper. The demand and how exactly it affects the
quality of the products that are produced is also discussed in this paper. It gives a very
different perspective of the automobile industry, shedding light on the less popular angles that
ought to be discussed.

2. The Automobile Industry (Fieleke, 1982)

This Journal Article gives a thorough overview of the entire automobile industry. It slowly
moves on to explain the various reasons due to which the United States’ automobile industry
decline in the past and how policy makers intend to bring about change in order to bring the
industry to flourish once again. It also talks about how foreign automobile producers profited
from the U.S. market.

3. A National Customer Satisfaction Barometer: The Swedish Experience (Fornell, 1992)

In this article, the author discusses the elaborate effort taken by Sweden to measure the total
consumption process as consumer satisfaction. This was done by examining the equation
between market share and consumer satisfaction by a location model. It was said that
satisfaction should be lower where markets are homogenous and demand is heterogenous,
whereas satisfaction must be higher where supply matches the homogenous or heterogeneous
demand.

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 4. Competition and Collusion in the American Automobile Industry: The 1955 Price
War (Bresnahan, 1987)

This research investigates the concept that the shock was caused by a temporary shift in
industry behaviour, such as a pricing war. The primary components of the exam are
oligopolistic equilibrium models with product differentiation. Explicit cost and demand
hypotheses are preserved, while the oligopoly behavioural hypothesis is switched from
collusive to competitive equilibrium.

5. Automobile Industry: Shifting Strategic Focus (Piplai, 2001)

The purpose of this paper is to critically analyze the influence of liberalisation, — in

particular on the Indian automobile sector, specifically in the realm of production, marketing,
export, technology tie-up, product modernisation, and profitability, as well as structural
changes in organizational focus to satisfy the market's fierce competition and cater to
consumers' values and wants.

OBJECTIVES OF THE STUDY

The objective of this study is to:

a) Understand what the position of the automobile industry was prior to the COVID-19
pandemic,
b) Understand how COVID-19 impacted the industry, and
c) Understand how the industry coped with the pandemic and whether or not it was able
to recover from the effects of the pandemic.

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 RESEARCH METHODOLOGY

In the present study, the primary foundation is laid on the principles of doctrinal research.
The concept of referring to and studying existing facts, like laws and statistics, is associated
with doctrinal research. As per the researcher, the present study is significantly impacted by
existing rules and the manner in which they interact with one another in a variety of contexts
and situations. In order to do an effective study on such a subject, it is recommended that you
conduct a doctrinal investigation and evaluate the many relevant laws currently in operation.

The researcher also thinks that research technique should not be limited to analytical and
prescriptive tools, but should also combine secondary and tertiary empirical data, which will
aid in the subsequent critical examination of the study issue, as well as qualitative data. As a
result, in the researcher's opinion, the techniques used in the present investigation are
appropriate for the issue under consideration.

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 ANALYSIS AND FINDINGS

Analysis of the automobile industry in the purview of the COVID-19 pandemic

and how it impacted demand

New Industrial Policy in 1991 led to delicensing A new automobile policy was initiated in
1993, which strengthened the sector’s growth by facilitating the entry of global assemblers.
Big companies such as Tata Motors, Ashok Leyland, Bajaj Auto, Maruti Suzuki, Hyundai
and many others contributed to bringing dynamism and competition in the sector. The
industry is an important pillar of the Indian economy, accounting for a sizable portion of
GDP. Government assistance aided the sector's expansion. The Covid-19 epidemic
exacerbated the situation, which is still ongoing.
The fiscal year after COVID-19 hit has been severe and tough for the vehicle sector due to
the coronavirus outbreak. During the last several years, the sector has progressed in lockstep
with the Indian economy, and it was already contending with slow capacity, low demand, and
high production costs. Despite the fact that the epidemic has had a detrimental impact on the
automobile sector, it still has a very significant positive influence and relevance in the Indian
economy.
In spite of the pace being extremely slow, vehicle retailing reached a steady double-digit in
May 2022. In the last several years, the purchase of two-wheelers has increased by 20%. This
has already created a dent in the demand curve. It is also highly worth noting that private
consumption and discretionary expenditure have also seen an increase. Rural India is a
serious issue for the automobile manufacturing sector since demand for autos from this
industry has only just recently recovered, even after the epidemic has subsided.
Entry-level automobiles and two-wheelers are not moving adequately. Waiting times for
high-end vehicles have grown significantly, which may generate consumer unhappiness.
However, this has had little effect on demand.
The increase in gasoline prices has had little effect on higher-end automobiles but has had a
significant influence on the market interest for entry-level vehicles.

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While demand for passenger vehicles remained high, a global scarcity of semi-conductors
persisted to have an influence on supply. Supplies are anticipated to be disrupted as a result
of the Russia-Ukraine war and Chinese lockdowns.
High fuel prices, its impact on demand, alternatives:
Another factor that would deter the sales of automobiles at this point is the highly-priced fuel.
People may refrain from purchasing vehicles as it comes with the obvious, additional cost of
fuel. With these really high prices, people may prefer other modes of transport such as public
transport, carpools, etc., that are way more feasible to them as it costs them significantly
lesser than the cost of fuel, excluding the amount spent on purchasing this new vehicle. A lot
of families are also only just recovering from the financial strains that they were faced with
due to the COVID-19 pandemic hitting the world. Hence, it is safe to say that fuel price
increases are projected to decrease demand. The ethanol solution would work in favor of the
industry and would also help boost the demand for automobiles.

ALTERNATIVE OPTED?
In the Indian market, the rate of electric car adoption has outpaced most forecasts. Consumers
are flocking to EVs in large numbers, forcing support systems such as charging
infrastructures and renewable energy supply to play catch-up. This is particularly true for
two- and three-wheeled electric vehicles. The battery is anticipated to be the most expensive
component of an EV, however by 2030, that cost will have dropped dramatically,
accelerating EV adoption. The consequence of a nation's carbon footprint would be enormous
if electrical vehicles adoption reached 30% by 2030. The eventual aim of a cleaner, brighter,
and greener future must be welcomed, and this change in frequency will be simply a blip on
the radar in the grand scheme of things.

Shortage of semi-conductors and its impact on the industry:

The worldwide semiconductor scarcity that has slowed the auto industry for over two years is
beginning to ease, at least for the time being. The triumph came quicker than anticipated and
represents a bright light for an industry dealing with a failing economy and inflation while
navigating a significant shift to battery-powered automobile manufacturing. Although this
has caused great celebrations and thanksgiving among automobile manufacturers, there has
been no official victory announcement as of yet. Everybody stays patient until a complete
analysis is complete and things are certain as after the tough period caused by the COVID-19
pandemic, no premature victories are wanted by the manufacturers. Even as demand for
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automobiles increased, automakers were forced to reduce output due to a global shortage of
essential semiconductors for increasingly sophisticated vehicles. Because of the severity of
the outages, worldwide passenger car output has hardly recovered to pre-pandemic levels.

Pre v. Post pandemic automobile industry:

The automobile industry is still struggling to recapture its pre-pandemic highs, but it is
looking for legislative support to help it develop. The car sector contributes 7.1% of India's
overall GDP and 49% of the manufacturing GDP. Consumption-led demand is required for
growth resurgence. Continuous cost constraints from escalating prices of raw materials
spanning multiple vehicle categories, as well as regular price hikes, impacted demand. In the
face of global semiconductor shortages, automobile OEMs expected investments in the
industry to alleviate such supply chain concerns and boost commodity localization. Higher
allocations are frequently sought as a result of commodity price increases.

Demand for 2-wheelers post lockdown:

Demand for two-wheelers has surged since lockout limits have been relaxed. While sales
were hampered in the second wave, the damage was minimised due to governments enacting
regionalized lockdowns while allowing factories to operate. The majority of scooter sales
take place in metropolitan areas that have been under lockdown for an extended period of
time.

Auto Ancillaries Predictions:

Revenues from auto ancillaries are predicted to expand 8-10% in 2022-23, owing to
consistent demand and the likely alleviation of supply-chain problems in the second half of
the year. As per the announcement, the exceptional rise in cost of raw materials and shipping
expenses in H2 FY2022 (October-March) and failure to pass on the same totally and in a
timely way harmed profit margins in the previous financial year. The estimated revenue
growth for the sample in FY2022 was constrained by factors like semiconductor shortage
issues, muted two-wheeler and tractor demand, and the impact of geopolitical developments
on international business.

How did the Russia-Ukraine crisis affect the industry?

Russia's invasion of Ukraine has forced Indian auto component producers to change their
business strategies in order to obtain more components from within the nation. Auto
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component manufacturers have already begun processing additional components in-country,
in addition to stockpiling more parts, generating buffer stockpiles, and entering into long-
term contracts. Instead of storing up for a single day, car component manufacturers are now
stocking up for up to a week.

Ethanol and its benefit to the environment and the automobile industry
Ethanol is a byproduct of the sugar industry and is utilized in industries such as cosmetic
products, alcoholic drinks, pharmaceuticals, and polymers. It is made from cane sugar or
syrup and molasses, as well as cereals such as rice, wheat, sorghum, and corn to a lesser
extent. Even potatoes and other starchy crops are used to produce ethanol in some areas.
Currently, roughly 10% ethanol is mixed with gasoline in numerous states. The government
expects to save approximately Rs 40,000 crore on petroleum import expenditures as a result
of this. Sugar businesses would have to increase output, oil companies would have to build
infrastructure to store and distribute ethanol, and automakers would have to tune engines for
this combined fuel. If the government keeps to its target, ethanol consumption might reach
1,016 crore litres. India's ethanol blending programme began in 2003, but as time passed and
global oil prices fell, the government's emphasis on ethanol blending diminished. One may
essentially cut their use of fossil fuels by blending ethanol with gasoline. Emissions of
greenhouse gases are minimal since most ethanol is produced utilising biological processes
such as fermentation. In the future, blending ethanol with gasoline may result in somewhat
cheaper fuel. Even when EVs are extensively utilised, petrol - and hence ethanol-blended
gasoline - will continue to be important.

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 SUGGESTIONS
1. Concentrating on domestic, international, and downstream expansion
a) Domestic:
- If manufacturers wish to focus on returning customers, they must devise
innovative techniques to enable the resale of existing vehicles across all segments.
- Indian automakers must also take the opportunity to get value-seeking clientele to
return to the market. Auto manufacturers could consider starting on the latest
influx of productivity revolution to reduce the upfront expense of buying an
automobile. Automobile manufacturers may innovate by offering potential
consumers alternative ownership alternatives.
- At the same time, they can provide more channels for new clients to enter the
market. Automobile manufacturers must develop direct-to-customer solutions as
internet platforms reach a wider audience across India's purchasing groups.
b) International:
- Indian auto manufacturers will enhance growth and revenue growth while
diversifying risks and decreasing demand fluctuations in the economy by growing
internationally.
- Automobile manufacturers in India would not have to start from the beginning.
Their brands already have a significant worldwide presence in specific areas, such
as 2W and 3W, and they have learnt from this.
- Global automakers are seeking for sourcing centres outside of China as they
restructure their supply networks. Simultaneously, the Indian government is
paying $7.5 billion in manufacturing bonuses over the next 5 years to stimulate
exporting. Automobile manufacturers should explore international expansion and
capitalize on recent tailwinds by using their strengths, such as low pricing, process
knowledge, high quality, and innovation emphasis.
c) Downstream Value Chain:
- Prime adopters in this field have the potential to establish a digitally connected
downstream economy that offers a one-stop resolution for a variety of consumer
demands, such as scheduled servicing, breakdown service, resale, and the
purchase of customised accessories. Such all-encompassing solutions would result
in a best-in-class ownership experience.

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2. Achieving greater resilience in operations, especially the product, manufacturing, and
supply-chain dimensions
- Operational resistance must always be balanced with operational effectiveness.
- Automakers should undergo a comprehensive review of their market segments to
render them more customer-centric, decrease the number of different products to
become far more concentrated, reevaluate their product platform architecture, and
try to minimise ambiguity by highlighting integrated designs in order to boost
adaptability.
3. Becoming a leader by promoting disruptive trends, especially within emerging
markets
- The changing landscape offers an excellent opportunity for Indian
automobile manufacturers to spearhead disruptive innovations across categories
and achieve a competitive edge.
- Industrial interruptions also present a significant potential for automobile
manufacturers to strengthen their position in the international EV distribution
chain. This would assist suppliers acquire extra income, which is a significant
factor given that most have begun to explore potential in the domestic Indian
market. Moving to EV would also assist manufacturers broaden their inventories
and lessen market demand concerns.
4. Reimagining the partnership ecosystem
- Firms may also discover that by collaborating with other companies offering
complementary goods in sectors which their present range does not include, they
can get access to additional client segments. Similarly, automobile manufacturers
might gain from collaborating with partners that have complementary skills or
from sharing the risks involved with specific endeavours.
5. Transforming the organization through digital and analytics
- It should be user-centered in style and require strategic investments in vital skills,
such as technical staff. Companies should employ an evolutionary strategy when
designing and evaluating technological and analytic use cases to
minimize needless delays.

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 BIBLIOGRAPHY

Bibliography
1.

Akerlof, G. A. (1970). The Market for "Lemons": Quality Uncertainty and the
Market Mechanism. The Quarterly Journal of Economics, 488-500.

2. Bresnahan. (1987). Competition and Collusion in the American Automobile

Industry: The 1955 Price War. The Journal of Industrial Economics, 457-
482.

3. Fieleke, N. (1982). The Automobile Industry. The Annals of the American

Academy of Political and Social Science, 83-91.

4. Fornell. (1992). A National Customer Satisfaction Barometer: The Swedish

Experience . Journal of Marketing , 6-21.

5. Piplai, T. (2001). Automobile Industry: Shifting Strategic Focus. Economic

and Political Weekly, 2892-2897.

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