Automobile Sector – The Indian Scenario

8 Mins read


  • During the early 60s & 70s, automobiles came mainly in twos.
  • In scooters, you had a Lambretta or a Vespa.
  • In motorcycles, you had a Bullet or a Java.
  • In cars, you had to choose between an Ambassador and a Fiat.
  • In trucks, it was either an  Ashok Leyland or a Tata.
  • In tractors, it was between a Swaraj and a Mahindra.

This situation reflected the India of Vlogger Faire yesteryears. Economic reforms and deregulation have transformed that scene. The automobile industry has written a new inspirational tale. It is a tale of exciting multiplicity, unparalleled growth, and amusing consumer experience – all within a few years. India has already become one of the fastest-growing automobile markets in the world. This is a tribute to leaders and managers in the industry and, equally, to policy planners. The automobile industry has the opportunity to go beyond this remarkable achievement. It is standing on the doorsteps of a quantum leap.

The Indian people automobile industry is going through a technological change where each firm changes its processes and technologies to maintain its competitive advantage and provide customers with optimized products and services. From two-wheelers, trucks, and tractors to multi-utility, commercial, and luxury vehicles, the Indian automobile industry has achieved splendid achievements in recent years.


“The opportunity is staring in your face. It comes only once. If you miss it, you will not get it again.” On the canvas of the Indian people’s economy, the auto industry maintains a high-flying place. Due to its deep frontward and rearward linkages with several key segments of the economy, the automobile industry has a strong multiplier effect. It is capable of being the driver of economic growth. A sound transportation system is essential to the country’s rapid economic and industrial development. The well-developed Indian people automotive industry skillfully fulfills this catalytic role by producing a wide variety of vehicles: passenger cars, light, medium, and heavy commercial vehicles, multi-utility vehicles such as jeeps, scooters, motorcycles, mopeds, three-wheelers, tractors, etc.


The automotive sector is one of the core industries of the Indian economy, whose prospect reflects the country’s economic resilience. Continuous economic liberalization over the years by India’s government has made India one of the prime business destinations for many global automotive players. The automotive sector in India is growing at around 18 percent per annum.

“The auto industry is just a multiplier, a driver for employment, for investment, for technology.” The Indian automotive industry started its new journey in 1991 by licensing the sector and opening up for 100 percent FDI through the automatic route. Since then, almost all the global majors have set up their facilities in India, taking the production of a vehicle from 2 million in 1991 to 9.7 million in 2006 (nearly 7 percent of global automobile production and 2.4 percent of four-wheeler production).

The cumulative annual growth rate of the automotive industry products from 2000-2001 to 2005-2006 was 17 percent. The cumulative annual growth rate of exports during 2000-01 to 2005-06 was 32.92 percent. The automotive industry’s production is expected to grow over 20 percent in 2006-07 and about 15 percent in 2007-08. The export during the same period is expected to grow by 20 percent.

The automobile sector has been contributing its share to the shining economic performance of India in recent years. With the Indian people’s middle class earning higher per capita income, more people are ready to own private vehicles, including cars and two-wheelers. Product movements and operated services have boosted medium and sized commercial vehicles for passenger and goods transport. Side by side with fresh vehicle sales growth, the automotive components sector has witnessed significant change. The domestic auto components consumption has crossed rupees 9000 crores and an export of one-half size of this figure.

Eye-Catching FDI Destination – INDIA!

India is at the peak of the Foreign Direct Investment wave. FDI flows into India trebled from $6 billion in 2004-05 to $19 billion in 2006-07 and is expected to quadruple to $25 billion in 2007-08. By AT Kearney’s FDI Confidence Index 2006, India is the second most attractive FDI destination after China, pushing the US to the third position. It is commonly believed that soon India will catch up with China. This may also happen as China attempts to cool the economy and its protectionism measures that are eclipsing the Middle Kingdom’s attractiveness. With rising wages and high land prices in the eastern regions, China may lose its edge as a low-cost manufacturing hub. India seems to be a natural choice.

India is an up-and-coming significant manufacturer, especially of electrical and electronic equipment, automobiles, and auto parts. During 2000-2005 of the total FDI inflow, electrical and electronic (including computer software) and car accounted for 13.7 percent and 8.4 percent, respectively. In the services sectors, the lead players are the US, Singapore, and the UK. During 2000-2005, these three countries’ total investments accounted for about 40 percent of the FDI in the services sector. In automobiles, the key player in Japan. During 2000-2005, Japan accounted for about 41 percent of the automobile’s total FDI, surpassing all its competitors by a significant margin.

India’s vast domestic market and the large pool of technically skilled workforce were the magnetism for foreign investors. Hitherto, known for knowledge-based industries, India is also emerging as a powerhouse of conventional manufacturing. The manufacturing sector in the Index for Industrial Production has grown at an annual rate of over 9 percent over the last three years. Korean automakers think India is a better destination than China. Though China provides a bigger automobile market, India offers the potential for higher growth. Manufacturing and service-led development and increasing consumerization make India one of the most important destinations for FDI.

Automotive Mission Plan 2016

The bumper-to-bumper traffic of global automobile biggies on India’s passage has finally made the government sit up and take notice. To drive more significant investments into the sector, the Ministry of heavy industries has put together a 10-year mission plan to make India a global hub for the automotive industry. “The ten-year mission plan will also set the roadmap for budgetary fiscal incentives.”

The Government of India is drawing up an Automotive Mission Plan 2016 to make India a global automotive hub. The idea is to draw an innovative plan of action with the stakeholders’ full participation and implement it in mission mode to meet the challenges coming in the way of the growth of an industry. Through this Automotive Mission Plan, Government also wants to provide a level playing field to the players in the sector and to lay a predictable future direction of growth to enable the manufacturers to make a more informed investment decision.

Major players in the automobile sector are:

  • Tata
  • Mahindra
  • Ashok Leyland
  • Bajaj
  • Hero Honda
  • Daimler Chrysler
  • Suzuki
  • Ford
  • Fiat
  • Hyundai
  • General Motors
  • Volvo
  • Yamaha
  • Mazda

Foreign Companies in the Indian people’s auto sector

Until the mid-1990s, India’s automobile industry consisted of just a handful of local companies with small capacities and obsolete technologies. Nevertheless, some global majors moved in after the sector was thrown open to foreign direct investment in 1996. By 2002, Hyundai, Honda, Toyota, General Motors, Ford, and Mitsubishi had established their manufacturing bases.

Over the past four to five years, the country has seen the launch of several domestic and foreign models of passenger cars, multi-utility vehicles (MUVs), commercial vehicles, and two-wheelers, and robust growth in the production of all kinds of cars. Moreover, due to its low-cost, high-quality manufacturing, India has emerged as a significant outsourcing hub for auto components and engineering design, rivaling Thailand. German automaker Volkswagen AG, too, is looking to enter India. India is expected to be the small car hub for Japanese central Toyota. The car, a hot hatch like the Swift or Getz, will likely be exported to markets like Brazil and other Asian countries. This global car is crucial for Toyota, looking to improve its sales in the BRIC (Brazil, Russia, India, and China) markets.

Two multi-national car majors, Suzuki Motor Corporation of Japan and Hyundai Motor Company of Korea — have indicated that their manufacturing facilities will be a global source for small cars. The spurt in in-house product development skills and the uniquely high concentration of small vehicles will influence the country’s ability to become a sourcing hub for sub-compact cars. A heartening feature of India’s changing automobile scene over the past five years is domestic manufacturers’newfound success and confidence  They are no longer afraid of competition from the international auto majors.

For instance, today, Tata Motor’s Indigo leads the popular customer category. At the same time, India is neck-to-neck with Hyundai’s Santro in the race for the top slot in the B category. Meanwhile, M&M’s Scorpio has beaten back the challenge from Toyota’s Qualis to lead the SUV segment. Similarly, a few Indian winners have emerged in the motorbike market, the 150 and 180 cc Pulsar from Bajaj and 110 ccs Victor from the TVS stable. The 93 cc Bike from Bajaj and the 110 cc Freedom bike from LML have also emerged as winners.

Indian players have learned from past mistakes and developed the skills to build cheaper automobiles using `appropriate’ technologies. TVS, for instance, paid an overseas source $100,000 to fine-tune home-grown engines rather than $1.5 million to import the entire machine. Similarly, M&M adapted available systems and off-the-shelf components from global suppliers to keep costs down and go for aggressive pricing.

True, Indian people players still lack in a scale of operation. While economies of scale undoubtedly play an important role in the auto sector, a few Indian manufacturers relied on innovation rather than the scale of operation for competitive advantage. For instance, Sundram Fasteners directly supplied radiator caps to General Motors purely on the strength of innovation in product quality. The domestic tooling industry bagged the order for the Toyota Kirloskar transmission plant in the face of stiff competition from multinational corporations. The cost of the entire job turned out to be only a fraction of the original estimate.

As the automobile industry has matured over the past decade, the auto components industry has grown rapidly. It is fast achieving global competitiveness both in terms of cost and quality. Industry observers believe that while the automobile market will grow at a measured pace, the components industry is poised for take-off, for it is among the few sectors where India has a distinct competitive advantage. International automobile majors, such as Hyundai, Ford, Toyota, and GM, established their bases in India in the 1990s, and persuaded some overseas component suppliers to set up manufacturing facilities in India.

Consequently, the cumulative output of the auto components industry rose rapidly to Rs 30,640 crore at the end-2003-04 from just Rs 11,475 crore in 1996-97. Foreign companies such as Delphi, which followed General Motors in 1995, and Visteon, which followed Ford Motors in 1998, soon realized the substantial cost advantage of India’s manufacturing components. Finding the cost lower by about 30 percent, they began exploring exporting these low-cost, high-quality components to their global factories and reducing their overall costs. Not surprisingly, the industry’s exports registered a more than four-fold jump to Rs 4,800 crore in 2003-04 from just Rs 1,033 crore in 1996-97.

Automobile majors such as Maruti Udyog, Toyota, and Hyundai have now finalized their plans to invest in some critical auto components. According to the Automotive Component Manufacturers Association of India (ACMA) officials, auto component manufacturers are expected to invest about Rs 10,000 crore over the next five years at Rs 2,000 crore per annum. Analysts say the auto component industry could emerge as the next success story after software, pharmaceuticals, BPO, and textiles. The global auto component industry is estimated at $1 trillion and is set to grow further. Against this backdrop, McKinsey’s latest report has estimated that the sector could increase its exports to $25 billion by 2015 from $1.1 billion in 2004.

The threat to the Dream!

India’s expedition to become a global auto manufacturing hub could be seriously challenged by its inability to uphold its low-cost production base. A survey conducted by the research KMPMG firm reveals that the Indian people’s auto components are increasingly becoming skeptical about sustaining the low-cost base as overheads, including labor costs and complex tax regimes, are constantly rising. The survey said many executives believe India’s cost advantage is grinding down fast as labor costs continually increase and retaining employees is becoming more difficult. The country’s increased presence of global automotive companies was cited as one reason for the high erosion rate.

Indian auto businesses will only flourish if they boost investments in automation. In the longer term, cost advantage will only be retained if Indian people’s capital can develop low-cost automation in manufacturing. This is the way to preserve our low cost. Global auto majors are also cynical about India’s low-cost manufacturing base. India’s taxation remains a significant disadvantage. This is not about tax rates; it is just about unnecessary complexity. But some companies also believe there is scope for reducing business costs.

Despite this, there are opportunities to exploit lower costs across the board. Indeed, labor costs are increasing, but they are still five percent of the total operational costs. The labor costs can be further reduced if companies successfully bring down other prices like lowering power costs. The low-cost base can never last long. The company said the Indian people industry has relied on a very labor-intensive model, but it would have to switch to a more capital-intensive model.

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