THE INDIAN AUTOMOBILE INDUSTRY :
SPEEDING INTO THE FUTURE ?

INTRODUCTION
	Peter Drucker called the automobile industry as "the industry of industries". During the last few years, the production and management systems have been revolutionized in the automobile industry (Karmokolias, 1990). One of the major changes in the industry has been the opening up and growth of several emerging markets. India is one of the most important emerging car economies in the world today. 
	
	In 1991, the Government of India embarked on an ambitious structural adjustment programme aimed at economic liberalization, based on the pillars of Delicensing, Decontrol, Deregulation and Devaluation. Post-liberalization, the Government of India's new automobile policy announced in June 1993 contained measures, such as delicensing, automatic approval for foreign holding of 51% in Indian companies, abolition of phased manufacturing programme, reduction of excise duty to 40% and import duties of CKD to 50% and of CBU to 110%, and commitment to indigenization schedules.

	The Government of India's new automobile policy attracted a large number of automobile companies to India. These include General Motors and Ford, and two Japanese, seven European and two Korean companies. Toyota and Chrysler are also seeking to enter the country with suitable Indian partners. In addition, there are three existing Indian companies, Hindustan Motors, Premier Automobiles and Telco, and one Indo-Japanese venture, Maruti already in the passenger car market. Maruti is by far the biggest player with about 70% of the market share. As of April 1997, a total of 7 Automobile companies (Daewoo, Peugeot, Fiat, Ford, General Motors, Merc, Audi) have already started selling cars, while another 8 companies (Honda, Mitsubishi, Renault, VW, BMW, Toyota, Hyundai, Chrysler) have either begun operations in India or plan to start soon. Some Indian companies like Telco and Kinetic are also working on introducing small car models. 

	The number of new entrants and the level of investment within a very narrow time window of two to three years is unprecedented and seems unique to India. Compared to three major models available in the Indian market until recently, customers can now choose from a wide variety of products.

	Some of the entry barriers faced by automobile companies in India are relatively high levels of import duties, a nascent ancillary industry, and product modifications required for relatively poor road conditions and high levels of heat and dust. On the other hand, a rapidly growing middle class, rising per capita income, and high levels of latent unsatisfied demand with customers starved of world class options promise enormous opportunities. For instance, from current sales of around 300,000 passenger cars in 1996-97, sales are expected to rise to anywhere between 50,000 to 1.7 million vehicles by the year 2000. Automobile companies have announced plans to installl capacity of around 900,000 vehicles by the year 2000. The number of cars sold over the next four years is going to be anywhere between 2 and 3.5 million vehicles. It is not certain how exactly demand will grow and on what factors it will depend, and whether there is room for so many players.

	The supplier industry also faces enormous challenges to keep pace with rapid growth. Manufacturing practices will have to change considerably to come closer to lean production. 

	It is also possible that some companies will increasingly use India as a base for exporting vehicles to other countries. These issues will become clear as the future unfolds.

	The Indian automotive industry has been growing for the third year in succession at over 25%. The number of persons per car is 200, which is very large compared to other emerging markets like Korea and Brazil which have about 12 persons per car.

	There is therefore a very huge untapped market. Compared to three major models available in the Indian market until recently, customers can now choose from a wide variety of products. Mukherjee and Sastry (1996) provide an analysis of the entry strategies of the new entrants.

	The future looks promising since the economy has been growing at nearly 6% in real terms, inflation is relatively low at less than 6%, consumption is growing at 11%, and deregulation and market liberalization are now difficult to reverse.

Table 1. – Prospects in the Automobile Industry 

	Cumulative Investment	Turnover	
	1996	2000	1996	2000	
Automobile Industry	80*	280	225	1200	
Auto Components	35	135	70	700	
Transportation Industry	300	900	2000	5000	
*All the figures are in billion rupees

	As the data shows, the automobile industry does not dominate the transportation industry. Out of $17 billion fresh investments in the transportation industry up to the year 2000, only $5.7 billion will be in the automotive industry. Turnover figures include sales for trucks, cars, utility vehicles like jeeps, and two wheelers.

	The share of passenger cars is much lower and is expected to rise from 11% currently to the 15% to 20% range by the year 2000. Some of the strengths of the industry are low labor costs, supportive government policies and trained manpower. Major weaknesses are a small and fragmented ancillary industry, poor infrastructure, low level of diffusion of lean manufacturing, improvements needed in quality and productivity, and lack of product development capabilities.

	The opportunities that the industry offers are a large untapped market, and a possible production base for exports. Some MNCs like Maruti-Suzuki have already started using their Indian plant for exports.

DEMAND ESTIMATES
A rapidly growing middle class, rising per capita income, and high levels of latent unsatisfied demand promise enormous opportunities. For instance, from current sales of 312,000 cars in 1994-95, sales are expected to rise to anywhere between 850,000 to 1.5 million vehicles by the year 2000. It is worth noting that in the past 15 years, all demand projections have been exceeded. It remains to be seen if this will be true of current projections also. The following table summarizes industry performance in the past five years.

Table 2. – Industry Performance in 1991-1995

	1991-92	1992-93	1993-34	1994-95	1995-96
(First 9 Months)	Average Growth since 1992-93	
Production
Sales
Exports	198 000
202 000
25 600	202 500
206 000
16 000	257 500
260 000
19 000	323 000
312 000
22 900	N/A
287 000
N/A	26%
23%
20%	

	Even though growth rates are impressive, uncertainty about the extent of demand growth persists for several reasons. The price to income ratio for the middle class consumer is too high. Currently the price of a car is about 18 to 24 months salary, and therefore price is perhaps one of the most important variables determining demand. However, incomes are rising rapidly and inflation seems to be under control. Car prices are also likely to remain fairly steady as companies indigenize component production. Excise duties are high at 40%. If these are reduced, it is likely to spur growth. On the downside, infrastructure in roads is very poor, and traffic congestion in many cities is very high.

	Of the total of 170 million families in India, effective purchasing power is estimated to be with 24 million families, which includes 4 million families which are in the top income bracket, and can buy luxury and premium cars. These figures are rising rapidly since the economy is growing steadily at 5% to 6%. Rural incomes compared to urban incomes are lower, but disposable incomes are higher because of lower house rents and cost of living, and because agricultural incomes are exempt from tax. The current state of rural roads is very poor. The government has allowed private parties to build international class highways and collect tolls in some areas. If roads in rural areas are developed, then car sales are likely to grow very fast since these areas have very low market penetration.

	In addition to price, duties and taxes, economic growth and availability of adequate road kilometers, another factor affecting demand is availability and cost of credit. Vehicle financing has boomed, and currently is around $1.6b, covering 25% of industry sales. This figure includes credit for all vehicles including two wheelers, trucks and buses. Many companies also provide new cars or soft loans for buying cars to its executives as perks. The following table shows the credit made available to customers over the last two years.

Table 3. – Credit to Customers, 1994-1996

Car Financers	Credit Offered (Rs. billions)	
	1994-95	1995-96	
Citibank
Kotak Mahindra
Apple
SRF Finance
GLFL	3.0
2.25
2.25
1.98
1.90	N/A
3.75
N/A
2.2
3.8	

Table 4. – Capacities Planned by Major Companies
Company	93/94	94/95	95/96	96/97	97/98	98/99	
HM
PAL
MUL
TELCO
PAL-PEUGEOT
DCM DAEWOO M&M FORD
GM-OPEL
FIAT UNO
MERC TELCO
HM MITSUB
SIEL HONDA
GROWTH RATE (%)	26137
25002
152539
3994
-
-
-
-
-
-
-
-
28.6	26115
27807
199150
12540
-
-
-
-
-
-
-
-
26.1	26000
11000
250000
25000
14000
20000
-
3500
-
2000
-
-
32.3	25000
11000
300000
40000
30000
30000
5000
7500
5000
5000
-
2000
31.0	24000
11000
360000
82000
45000
37500
15000
12500
12500
7500
5000
7500
34.5	23000
11000
420000
205400
55000
45000
20000
17500
17500
10000
10000
10000
36.3	
TOTAL	210672	265612	351500	460500	319500	844400	

	Automobile companies have announced plans to install capacity of around 900,000 vehicles by the year 2000. It is estimated that the number of cars sold over the next five years is going to be anywhere between 2 and 3.5 million.

	The demand estimates do not include utility vehicle (jeep) sales, which are classified as "off road vehicles". Separate figures have been furnished for cars and for all vehicles including trucks, buses, utility vehicles and two wheelers.

Table 5. – Demand Estimates

Report	Passanger Car Demand
(2000 AD) in ‘000s	Total Vehicle Demand
(2000 AD) in ‘000s	
DRI/McGraw - Hill 
McKinsey - EU 
Association of Indian Automobile Manufacturers (AIAM) 
INFAC 
Morgan Stanley 
Manufacturers' estimates
Based on mobility trends	502
833
600
580
576
N/A
1,500	5,100
4,700
5,000
3,900
5,500
5,400
7,000	
Source : Shah, S.G. "Shaping the Indian Automobile Industry," Association of Indian Automobile Manufacturers, 1996 ; Business Standard Corporate Bureau report "Demand for cars to zoom to 1.5 m : survey," Feb 1995.
	
Car sales are expected to be in the region of 600,000 to 1.5 million vehicles by the year 2000.
The sales of lower end luxury cars is expected to account for 26% of the total market, i.e., 200,000 cars by 2000 AD. The industry will have to live with uncertainty for the next two years before things become clear.

The Industrial Structure:
	Suzuki was the first MNC to enter India in 1981 through a joint venture with the Government of India and set up Maruti Udyog Limited. Currently, Maruti has around 70% of market share, and the Maruti 800 in the small ar segment is the best selling model. Since 1995, the industry is witnessing a sea change with the introduction of several new models by MNCs coming into India through joint ventures with Indian partners. In the super-premium segment there is the Mercedes Benz's E-class sedan. BMW and Audi are also considering plans to sell cars. New introductions in the premium segment are General Motor's Opel Astra, PAL Peugeot's 309, Maruti's Esteem, Telco's Sumo, Estate and Sierra, DCM Daewoo's Cielo and Sipani's Montego. In the economy car segment, Fiat Uno and Telco are expected to produce 60,000 cars each per annum.

	The power relationship between automobile companies, dealers and customers is going to change substantially as the industry moves from a supply constrained sellers' market to a demand driven buyers' market. Thus dealers and customers are going to acquire greater power.

Adoption of Lean Production:
	Since the Indian industry started mass production only in the mid 1980s with the arrival of Maruti Udyog Limited, the transition to lean production is likely to take time.
	With so many MNCs entering the growing Indian market, here will be a push towards lean production. Maruti has implemented JIT for some of its major suppliers. Some thers are in the process of doing so. There is a stress on quality in the highly competitive industry. However, the success of lean production at the industry level depends not only on the efforts of the assemblers, but also on the suppliers and on institutional and cultural factors. The bargaining power of suppliers of some components is high, because of capacity constraints. This makes them accept only large orders, and therefore makes it difficult for assemblers to implement JIT.

Government Regulations:
The Indian government has made significant shifts in its policy towards the automobile industry. Ever since independence, the government considered the passenger car to be a luxury item, and imposed very high tariffs. Since the economic liberalization launched in 1991, the Government of India's automobile policy announced in June 1993 has changed. The excise duty varied as follows over the last five years.

Table 6. – Duty Variations, 1984-1994

1984-85	1990-91	1991-92	1992-93	1993-94	
15%	42%	66%	56%	40%	

	The import duty on car components increased from 40% to 75% during 1984-91 and then came down to 50% recently. Thus duties and taxes continue to be high by international standards. These might be brought down in future as the industry becomes more competitive.

	The Government of India has reduced its direct control on the automobile industry following the announcement of the new automobile policy. Entry of MNCs is permitted, either as joint ventures or on their own. However, the indirect impact of government policies on the industry till remains far from insignificant. The government has levied 110% customs duty on completely built units (CBU) and 50% on CKD and parts. There are several areas where there is ambiguity. At the moment, the duty on both CKD kits and components is 50%. However, though component imports do not require any license, CKD imports need a license. The difference between CKD and component imports has not been specified. This has helped companies to take advantage of the ambiguity. The phased manufacturing program (PMP) which was in force till 1993, and required component imports to be brought down within a fixed time-frame has been withdrawn. However, the licensing required by CKD assemblers from phase to phase and for capacity expansions puts pressure on companies to indigenize.

Suppliers

	There are about 6,350 small and large component manufacturers in India, out of which about 350 are in the organized sector and are registered with the Automotive Components Manufacturers Association. There is a sizeable replacement market for parts and components, but this market is heavily dominated by manufacturers who sell unbranded products at very low prices. The component manufacturers therefore have to rely on assemblers in the domestic market. The industry had a turnover of about $2.7 billion in 1995-96. Although this is not impressive, industry sales have been growing at nearly 35% since 1992-93, and turnover is projected to reach about $6.4 billion by the year 2000. Exports are projected to reach $565 million by the year 2000.

	Tooling costs for suppliers remain the same for 10,000 units or for 100,000 units. Till assemblers achieve volumes, it is not profitable for suppliers to accept orders. Assemblers are thus forced to import components. This pushes up costs and currently prices as well, which in turn affects sales and growth. Maruti developed a quality vendor base over a period of 10 years. However, new entrants can expect to develop a supplier base faster.

	The Indian auto component industry has had some success in developing parts and components including collapsible steering columns, brake linings, power steering, catalytic converters and central locking systems. Current technology upgradation is in plastics, trims, electronics, anti locking braking systems, and environment and safety related items and materials. International supplier firms are looking for Indian partners in a variety of areas. Thirteen new joint ventures were formed in 1995, and many more technical collaborations are being finalized.

	A large business delegation from CLEPA, the Liaison Committee for the European Automotive Components and Equipment Industry, visited India in February 1996. Further collaboration between Indian and European suppliers is likely to take place. Industry analysts expect that products made by new joint ventures will not only serve the Indian market, but would also be exported. Export focus is shifting from traditional markets in Asia, the Middle East and Africa to North America, Europe and Australia.

Distribution Channels

	The distribution environment for automobiles in India is quite different from that of most advanced countries. Such differences exist in type and size of dealers, number of dealers, car supermarkets, vertical integration, functions of dealer, bookings, financing, manufacturer-dealer relationship, number of cars sold per dealer, margins, and market environment. Having operated for years in a supply-constrained industry, most car dealers in India would need to adjust to a situation where the customer has a wide choice.

	In the current auto marketing system, the dealer orders cars in advance in a `push' system driven by the automakers' agendas, and in turn the dealer has to bend the customer's requirements to existing stock. The typical Indian auto dealer has traditionally confined his role to collecting payments from customers and supplying the car to the customer after he receives it from the factory. However, with wider consumer options, auto retailing in India is set to change. The new multinational companies are trying to revolutionize the concepts of car delivery and after-sales service in India, and are coming out with several innovative retailing ideas to win customers. Customers are demanding more voice in the options they want and the cars they buy. This in turn will force dealers to be more customer oriented. The emerging system of `customer pull' translates to empowering the customer and creating a genuine symbiosis between the customer, the dealer, and the automaker. Technology is playing a major, possibly revolutionary role in this new thinking and is increasingly expressing the voice of the consumer. Dealers would need to change to address the new market conditions. These factors would require even better coordination between the manufacturer and the dealer. With greater competition, the Indian car manufacturers and dealers are also likely to adopt advanced country practices, like large dealer groups, multiple outlets per dealer, company-owned dealers, higher sales per dealer, higher margin to dealers, changing role of the dealer as a retailer, etc.

THE MARKETING QUESTIONS

Market Segmentation

	The Indian automobile market is still in its evolutionary or early growth stage. Therefore, no fixed or widely accepted method of segmenting the market has evolved as yet. Segmentation has mostly been done on product types or price ranges. There has hardly been any kind of segmentation on psychographic or behavioral parameters as seen in developed car markets. The segmentation provided in this paper is based on an understanding of the current state of the industry.

	These segments are quite different from the segments known in the US, European or Japanese markets. The following four segments based on price and type of car have been identified:
•	Off-road or utility vehicles e.g., Maruti Gypsy,Mahindra Armada, Tata Sumo.
•	Economy segment, comprising cars priced atless than $ 13,333, e.g., Ambassador, Premier Padmini, Maruti 800.
•	Luxury segment, comprising cars in the $13,333 to $ 33,333 price bracket, e.g., Maruti Zen, Premier 118NE, Contessa, Maruti Esteem, Tata Sierra, Peugeot 309, Opel Astra, Cielo, Ford Escort, VW Golf, Mitsubishi Lancer, Rover Montego.
•	Super-luxury segment, comprising cars priced at higher than $ 33,333, e.g., Mercedes-Benz,BMW, Audi.

There is a significant variation in demand in the four geographical regions of India. North India is the larges market for cars in India currently with 43% market share. Next come west with 27% and south with 22%. East has the lowest market share at 8%.

Table 7. – Characteristics of the Different Segments on Selected Parameters 

Segments	Economy	Luxury	Super Luxury	
Market Share(1994-95)	79.6%	5.4%	15%	
Buyer Profile	Households	Households	Corporate	
Key Attributes Influencing Choice	Price,
Operating Costs,
Driving ease	Power,
Comfort	Safety	
Driven by	Owner	Owner mainly	Chauffer	
Models	Ambassadors
Premier
Maruti 800	Zen
118 NE
Contessa
Esteem
Sierra
Peugeot
Astra
Cielo
Ford Escort
VW
Mitsubishi Lancer
Rover Montego	Mercedes Benz
BMW
Audi
	
Growth Rate p.a.(last 3 years)	16%	140%	65%	
Demand Drivers	Household incomes
New products
Corporate executive
perks	Status symbol
New models
Financing schemes
Income distribution	Rising affluence	
Owner Profile	Small businessmen
Corporate middle-level
executives	Senior corporate
executives	Businessmen
Diplomats and expatriate managers	
Basis of Competition	Product features,
Price,
Distribution/spares
Network,
Mfg. expertise,
Funding schemes	Product features,
Price,
Distribution and services	Positioning,
Spares network	
Source: INFAC Report on Cars

Positioning
The positioning of the brands in the Indian passenger car market can be understood from the price-power map given in the next page. This map gives an idea of competition in different segments. Since the Indian car market is in a state of flux, the positioning of most companies in the consumer's mind appears to be confused. However, the companies have developed image-based positioning strategies for their brands. Some of them are :
•	Hindustan Motors (HM) - enduring, sturdy
•	General Motors Opel (GM) - German engineering
•	Daewoo - Family car
•	Honda - superior aftersale service
•	Peugeot - sound-free diesel engine
•	Ford Esteem - smooth drive
	Ambassador car of HM is being mostly targeted for the taxi segment and for institutional purchases like the Government. 40-45% of the taxi segment in the country and as much as 55% of this segment in the South is accounted for by Ambassador cars. The Contessa Classic is a luxury car and is primarily targeted at corporate sector clients. Only 10-15% of the total purchases of Contessa is by individuals.

	Opel Astra, the 1995 Opel model, is a leader in the European car market and the largest selling car in Europe. This model is being produced in the GM India facility at Halol. Astra is positioned as a reliable family sedan in the European market, which has been modified to suit the Indian market where it is an upmarket vehicle given the underdeveloped market.

	Around 60 to 70% of Astra's European market is in the taxicab segment and is regarded as the reliable second car for a family. In contrast, the Opel Astra positioning in India is - "German engineered luxury car with safety features unmatched by others".

Table 8. – Price and Power Characteristics of Cars in the Indian Market

		A	B	C	D	E	
Price
(in Rs.’000)	2000

1500

1000

500

100	

Omni
Maruti 800	

Zen

Uno	

Esteem
Maruti 1000
PAL 118NE
Ambassador	

BMW

Rover
Civic Opel
Cielo

Tata Estate
Tata Sierra

	Merc E220

Contessa	
POWER	
A :<800 CC, B: 800 to 1000 CC, C:1000 to 1500 CC, D: 1500 to 2000 CC, E: >2000 CC	

Advertising & Communication

	Advertising in the Indian passenger car industry hardly existed till the onset of competition. Today however, the industry is one of the highest spenders on advertising among consumer durables. A sizeable bulk of this has been spent by the new entrants to create brand awareness. An interesting aspect to not is that the advertising strategies for most of the new entrants have changed several times within a short period of one year. The advertising strategies of some of the companies are given below as illustrative examples:

	Hindustan Motors (HM) has traditionally put in advertising efforts for the low-selling Contessa Classic, and not so much for the good old Ambassador. But with a plethora of new brands in the Indian market, HM has stepped up its advertising budget significantly. The company feels that the importance of advertising is set to further increase in this market with greater competition.The company is also introducing several promotion strategies like Contessa Campaign Scheme, free servicing, shields for noproblem performance and customer gifts. Advertising has been concentrated to the print media. The company also recognises that effectivePR exercises would be a critical component of its marketing efforts in future.

	The advertising communication for General Motor's Opel Astra handled by McCann-Erichson India has seen some discernible shifts. Initially, it talked of a rare combination of German engineering, American management and Indian values. Then, there was a delay in its product launch, and it showed ads showing a pregnant woman and saying: "All good things are worth the wait". Finally, when the car was launched, GM advertised its launch and announced the opening of an Astra club (of customers). Its ads now subtly point to European uppitiness and product superiority.

	Daewoo's Cielo is positioned as a mid-size family car with a `value-for-money' proposition. It should be noted that inspite of being in the luxury segment of the Indian market, Cielo is not positioned as a premium car. This positioning strategy is in line with the brand's positioning in world markets. The advertising of Cielo has perhaps seen the maximum changes till now. Initially, the theme of advertising for Cielo had stressed on the image of the company and the brand in international markets, in order to generate awareness. Once awareness was created, they stressed on product features. The campaign described the ownership as a `state of mind' on the triple benefits of comfort, safety and power. The agency was also changed. Initially, Ogilvy and Mather was handling the advertising for the brand. Now, the job has been given to a new agency, called Equus. Other than frequent advertising on television and print, the company also sends direct mails to prospective customers. Next, the company launched some ads with witty and cerebral headlines (e.g., `left brain appeal, right hand drive') and detailed technical specifications in the body copy. Now, the company is showing `slice of life' ads, showing the Cielo as a part of a family of a man, a woman and a child. The brand's TV commercial features a young wife's testimonial of how gear-free drives can be romantic. Maruti's luxury brand Esteem have also been using `slice of life' ads, with the family as focus.

	Ford initially talked of their market leadership in US, European and Japanese markets. They then talked of Ford's new face on the global map - India. In the next stage, their corporate values like customer care and safety were highlighted. Now, the ads are showing the product, with stress on a `pulse racing' feeling and the endorsement of Indian tennis star Leander Paes.

	Peugeot has advertised on TV, and mainly shows slice of life ads. One of its commercials stresses on reliability of the car, as is manifested by a man reaching in time to his wife on the verge of delivering a baby. The brand has been positioned as `reliable', highlighting its endurance.

	Mercedes-Benz car has been positioned as a super-luxury car. Their ads in the print media have been consistent with the universal positioning of the product.

Quality, Technology and R&D

	With increased competition, established automobile manufacturers in India are becoming more conscious about technology and quality. These companies are incorporating ISO 9000 certification and Total Quality Management as explicit corporate goals. R&D expenditure in Maruti, Hindustan Motors, Premier Automobiles
and Mahindra & Mahindra, the four companies with over 95% of the market currently, is very low and in 1994-95, the combined budget of these four companies was $1 million or 0.38% of sales. However, Telco has been building product development capabilities in trucks, light commercial vehicles, and jeeps over the past fifteen years and has launched the Tata Sumo and Sierra in the market. It has plans to increase exports of these models.

	Most of the MNCs entering the Indian automobile market are bringing in modern technology. Emission control techniques like catalytic converters and injection technology are present in most models. The fuel efficiency of these cars is higher than that of domestic models. Foreign models are equipped with vehicle safety gadgets which have never been seen in Indian cars. In fact, some brands in the luxury and super-luxury segments are positioning themselves on the basis of safety and engineering excellence.

	Some European car manufacturers have even expressed an interest in introducing technologies for improving mobility, such as traffic management, planning and control to manage traffic flow in metropolitan areas.

Vehicle Emissions

	AIAM in collaboration with industry leaders is trying to bring emission standards in India up to international levels. The Ministry of Environment and Forests and the Ministry of Petroleum and Natural Gas have introduced unleaded petrol in the metro cities from 1st April, 1995.

	Catalytic converters are now fixed on passenger cars sold in metropolitan cities, without imposing the increased cost on customers. The Indian automobile industry will soon see better quality fuel and lubricants.

Infrastructure
	
The total length of roadways in India was estimated at 2,037,000 Km in 1990-91 by the Economic Survey 1994-95. However only 49% is surfaced.

Table 9. – India and other Countries, Compared Roadways Capacities

	Country		Total Length in Km.
(Million)	Density
Km/Sq. Km.	Density
Km. /Million Person	
India (1991)
China (1998)
Brazil (1988)
USA (1990)	2.04
0.95
1.67
6.24	0.56
0.10
0.20
0.67	2180
854
13842
25060	
Source: EIU country report, 1991: MVMA Facts & Figures, 1991

Table10. – Roadways Capacity in India

	1989-90	1990-91	1991-92	
Length of Roads ( ‘000 kms)
          Total
          Surfaced	
1970
960	
2037
1001	
N/A	
Length of National Highways(‘000 kms)
          Total
          Surfaced	
33.7
33.7	
33.7
33.7	
33.7
33.7	
Length of State Highways
          Total
          Surfaced	
127
127	
127
127	
N/A	
Number of Registered Vehicles (‘000)
          Total
          Goods Carriers
          Buses	
19177
1290
313	
21310
1411
333	
23462
1528
377	

The National highway network was 34,058 km at the end of 1993-94, comprising less than 2% of total road kilometers, but carrying nearly 40% of total road traffic. It is estimated that road traffic which accounts for 80% passenger traffic and 60% of goods traffic will account for 87% of passenger traffic and 65% of goods traffic by the year 2000. To meet traffic expansion of such magnitude, the National Highway network needs considerable improvement. In the past, roads have been financed from budgetary support and constructed by the Public Welfare Department. Since budget allocations are not adequate, the National Highway Act has been amended to allow the private sector to construct highways and collect toll in selected areas.

	Delays caused by traffic congestion are increasing in Indian cities. The problem is aggravated since roads accommodate cars, trucks, buses, two wheelers and bicycles. The shift in traffic from the railways to roads is evident from the following table.
Table 11.- Railway and Road, 1950-1986

Year	Passenger Kilometers	
	Road	Rail	
50-51
60-61
70-71
73-74
76-77
77-78
78-79
81-82
85-86	26
42
59
60
59
59
58
69
80	74
58
41
40
41
41
42
31
20	
Source: Kothari Industrial Directory of India, 1994

CHALLENGES FACING NEW ENTRANTS AND MARKET INCUMBENTS

The type of products in each company's portfolio is interesting to examine. The market leader, Maruti Udyog Limited (MUL), has a small 800 cc car in the economy segment (Maruti 800), a family van (Maruti Omni), an off-road vehicle (Maruti Gypsy), a 1000 cc notchback car (Maruti Zen), and a luxury car (Maruti Esteem). Thus, Maruti has now got a product in each segment except the super-luxury segment. GM currently has only one brand in the Indian market - the Opel Astra. Astra is the third largest selling car in the world. Ford is currently in the market with the Ford Esteem, and will soon introduce a second brand - the Ford Fiesta. Daewoo has currently only one brand on the Indian roads - the Cielo in the luxury segment. Honda is entering the Indian car market with its Honda City, which the company claims has been `developed' and not adapted for India.

	While in India, the main market seems to be in the sub-compact economy segment for quite some time to come, hardly any company is entering this segment. Therefore, while MUL's Maruti 800 and Maruti Omni continue to dominate the largest segment unchallenged, the smaller luxury segment is witnessing heavy competition with several foreign players and well-known brands. There could be several reasons for this. First, while the economy segment is the largest, MUL's sales volumes in this segment and its highly competitive cost structure act as effective entry barriers for new entrants. Economies of scale in the sub-compact range occur at volumes greater than 150,000 cars per year. Maruti already has a capacity of 250,000 cars which could be a deterrent for new entrants in this segment. However, for a firm with an established portfolio of automobiles, the addition of a sub-compact line could be attractive. Telco has plans to move into this range. This option is not open to a foreign player planning to introduce a single model. Since none of the foreign companies can match the price of Maruti 800 for a similar car, they are preferring to operate in a segment which values attributes other than just price. With the higher end of the market likely to generate high margins, these companies plan to slowly move down the scale to a smaller car in course of time to take MUL head-on on price. This explains to some extent the fact that all new entrants are avoiding the sub-compact car segment. Secondly, the used or second-hand car market in India is likely to become more organized in future. The car dealers will themselves deal with used cars. It is expected that a used Cielo or Astra will be priced close to a new Maruti 800. This could put a question mark on the prevalent assumption that a large number of current two-wheeler users in India will graduate to a Maruti 800 in future with higher incomes. Consumer behavior studies of Indian buyers seem to suggest that the car is the ultimate status symbol, and particularly a sedan signifies higher status than a small car. Therefore, if the price of a new Maruti 800 is the same as that of a used Cielo or Astra, the demand for the luxury cars could grow higher than expected. However, the third reason seems to be the most plausible. An analysis of the world car market shows that no car company in the world, with the expection of the Japanese, has a car in its range, which is directly comparable to the Maruti 800. Contrary to popular belief, the Ford Fiesta, Opel Corsa and the VW Golf would compete with Maruti Esteem or Maruti Zen, and not with Maruti 800. All these cars, though small by Western standards, are high-power cars which would be priced in India in the luxury range.

	Given that only 30% of the market is estimated for cars above 1000cc and with so many companies already in the Indian market, the industry seems to be heading for a shake out. The firms that would be able to design and properly implement sound marketing strategies are likely to be the winners. With every company trying to woo the Indian car buyer as never before, the industry is undergoing a shift from a supply-constrained market to a buyers' market, with different car brands competing on different strategies. Alternately, India could emerge as a manufacturing base for exports. Maruti's experience with the Indian customer gives it a better understanding of product and service needs. Moreover Indian firms have established suppliers, and are better at liaising with the government. Joint ventures will help but there will be pressure in the initial stages. The availability of a vendor base is a critical factor in the success of an automobile firm. Given high import duties on components, it could mean the difference between breaking even in the first or second year of operation or in the fifth year of operation, depending on the level of indigenization achieved. Given that product life cycles range between 4 and 7 years, it raises the question of survival. However, the example of Brazil suggests that product life cycles in India could be much longer. Companies with a developed vendor base might try to create entry barriers by putting pressure on their suppliers not to work with new entrants. In developed markets, customers look for and appreciate various advanced features in a car. Often there is a loyal set of customers. The markets are structured on sharply differentiated and clearly positioned models. This is not the case with India. Here, cars enhance social status and there may be a strong association of price with quality and status. The market may take time to mature and understand the value of advanced features.

	Given the poor condition of roads, the management of distribution is a critical function. The recent industry trend has been to set up exclusive dealerships. However this could be an expensive proposition. For instance, a showroom in a large city could cost as much as $ 85,000. Since car prices are high compared to incomes, the life of automobiles tends to be longer than in developed countries. This means a high cost of switching for the consumer, and this represents a significant entry barrier. However as the used car market develops, this factor might not be so significant.

	An interesting feature of car sales in India is the use of 'bookings', i.e., getting customers to deposit $500 to $1000 for a car that will be supplied a few months from the date of booking. This method of trying to tie in customers is possible because of the large amount of unsatisfied pent up demand, severe capacity shortages, and the initial glamour for foreign cars.

	These bookings are so successful currently that a company's entire capacity is booked within a month. In anticipation of new product launches by competitors, companies with established products could create artificial shortages of their product for some time, and make it available off the shelf when the competitor goes for bookings.

IMPLICATIONS

	The market is growing at about 25% for the last three years. In the highly price sensitive market, reduction of prices because of lower duties and taxes and progressive indigenization, and rising middle class incomes are likely to further increase industry growth rate. Penetration in rural and semi urban areas is extremely low and could provide fresh markets. New entrants will have to deal with uncertainty of demand, different and evolving customer needs, a relatively poor supplier base, a market crowded with competition and industry wide capacity shortages. However, if there is a shake out as many analysts expect, further opportunities for survivors will open up. Another implication is that India could emerge as a significant manufacturing base for exports. The supplier industry is also going through massive growth, although from a small initial base.

	Except for Telco, product development capabilities are very low among established indigenous assemblers and suppliers, and the industry has some way to go before it becomes world class. 

BIBLIOGRAPHY
Bhaktavatsala Rao.C." Structural Configuration and Strategic Investments : Indian Automobile Industry,"
Economic and Political Weekly, Feb 20-27, 1993, pp.M21-M32.

Bhaktavatsala Rao.C. "Indian Automobile Industry:Patterns of Expansion, Entry and Performance,"
MDIManagement Journal, Vol.5, No.2, July, 1992, pp. 97-111.

Bhaktavatsala Rao.C."Structural analysis of the Indian Automobile Industry,"
Decision, Vol.21, Nos. 1&2, Jan-June 1994.

INFAC Cars Industry Report on Indian passenger car market ,December 1995, 52 pp.

Mukherjee, A ; and Sastry, T. "Entry Strategies in Emerging Economies: The Case of the Indian Automobile Industry,"
IMVP Sponsors' Meet at Brazil,1996.

O'Brien, Peter ; and Karmokolias, Yannis. "Radical Reform in the Automotive Industry," International Finance Corporation Discussion Paper No. 21, The World Bank, Washington D.C., 1994, 46 pp.

Prasad, S.K. "Changing Structure of the Automobile Sector in India and Prospects for Luxury Car Market,"
Unpublished Independent Project submitted to Indian Institute of Management, Ahmedabad, March 1995, 89 pp.

Womack, James P. ; Jones, Daniel T. ; and Roos, Daniel. The Machine That Changed The World, New York : Rawson Associates, 1990, 323 pp.