automobile mgm whitepaper

8/8/2019 Automobile MGM Whitepaper

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White Paper

On

Automobile Sector

Submitted by

Manikanda Bharathi S (10314)

Sudip Kar (10343)

Nidhish Agrawal (10319)


2/16

White Paper on Automobile Sector

09-12-2009

Table of Contents

Page No.

Executive Summary

1. Outlook 2

1

2. Financial Statistics 6

3. Industrial Statistics 7

4. Key Domestic Players 10

5. International Players in Indian Market 11

6. Regulations and Policiesz 12

7. Market Segments and strategies 13

8. References 15

Executive Summary

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The report consists of an analysis of automobile sector on four wheelers segment focusing on

passenger vehicles, Light commercial vehicles and Medium & Heavy commercial vehicles. The paper briefly

describes history and the dynamics of Indian automobile sector. The attractiveness of the industry is

analyzed with the help of Porters Five Forces during recession and post recession. Financial analysis ispresented with the help of key financial ratios of the industry. The industrys growth pattern and behavior is

also interpreted with the help of these ratios. The raw material consumption, employee rate and sales

growth pattern of the industry are described in Industrial analysis. The key players and new entrants of the

Indian automobile industry are described in domestic key players. An overview of Governments regulations

and policies which has affected the automobile industry both in the long run and short run has been

presented. The role of the government during recession and the after effects of the measures have been

presented. Finally various strategies and measures adopted by the auto majors after recession have been

discussed in detail.

Outlook

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Automobile industry is one of the important contributors to the growth of Indian economy. It

currently contributes about 6% to Indian GDP. Over the last few decades Indian automotive industry has

witnessed many challenges, transitions and restructuring owing to factors like 1992 liberalization, favorable

government policies, change in FDI policies, emerging technologies, globalization and others. Over the lasttwo decades, India has witnessed sustained growth and turned out to be one of the most promising and

highly potential markets of the world. In the last decade India has witnessed double figure growth for most

of the years. India is one among the few markets who have surpassed the recession effectively. 1

In this report we will present the post-recession outlook of Indian four-wheeler auto industry basically

covering the three market segments: Passenger vehicles, Light commercial vehicles and Medium & Heavy

commercial vehicles.

India follows more of an open market dynamics with ever increasing amount of FDI investment, joint

ventures, technological collaboration with foreign entities and set-up of production as well as assembly

facilities in India. 2

Automotive industry contributes 6% to the countrys GDP which leaves a huge scope for further improvement

in this sector. Also India provides one of the biggest consumer markets for the industry to target upon. India

is the seventh largest vehicle manufacturer, largest producer of motorcycle, fourth largest exporter of

automobiles, and the fifth largest manufacturer of commercial vehicles in the world.3

Porters Five Forces Model can be used to analyze the automobile market in the country. The five forces are

given as:

Bargaining Power of Suppliers: With the increased competition and costs involved, the auto manufacturers

are outsourcing many of the assembly and manufacturing jobs. Also many auto majors launch new products

in different countries at the same time. So they expect their suppliers to be present at different locations at

the same time. Also in current scenario the direct suppliers are big global firms specialized in complexsystems or other important activities. They are an active part of the designing and engineering process. The

growing importance of suppliers among the manufacturer leads to higher bargaining power of the suppliers

and OEMs. Although during recession bargaining power of the suppliers are reduced because of slump in

demand.

Bargaining Power of Consumers: With increased awareness, fierce competition and high customer

expectations, the bargaining power of consumers is quite high. Also slowdown forces the price sensitivity for

the product among consumers and customer loyalty decreases. As the market has emerged as an attractive

destination after recession, more companies are entering which is resulting in price war thereby further

increasing the bargaining power of the consumer.

Threat of New Entrants: Automotive market is an expensive market and is adequately concentrated.Investment requirement is high and brand identity plays an important role. Also reach is important which

requires high infrastructure investment. So threat of new entrants is low. During slowdown many countries

face huge decline. So companies are going for internationalization to countries which are more robust. Also

some companies look to diversify in new fields taking the advantage of downturn either through acquisition

or through joint ventures. This increases the threat of new entrants for the growing economy like India.

Threat of Substitutes: Substitutes for automobile would constitute trains, planes, buses and other such

public transports. Also fuel costs could play an important role. However, these are not threatening enough as

the services provided by automobiles are far different than these other transports such as home to home

delivery, all-time service availability and others. So threat of substitutes is low. During slowdown the people

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purchasing capacity reduces. This may affect the demand pattern for the automobiles. The above public

transport may hurt the automobile industry in such instances.

Rivalry among Competing Firms: It is an oligopolistic market with considerable variation in price andproducts. However in last few years increased competition and recession has prompted the price war among

competitors to attract more consumers. So although Indian automotive market is oligopolistic in nature the

competition is intense.4

The automobile industry has been facing various challenges because of factors like recession, uncertain

economic climate, rising fuel prices, government emission policies (owing to global warming), increasing raw

material costs, stringent labor laws, basic infrastructure of the country, power, logistics facilities and

others.

To overcome these uncertainties companies are adopting various measures:

Special focus given to logistics and supply chain management

Cost cutting especially at production level including layoffs, use of Kaizen production

technology for extracting incremental gains.

Reducing uncertainties by broadening their operation base in other countries like M&M

becoming the first Indian company to launch its commercial vehicle in the U.S., Maruti

looking for exports to Africa, South America, the Middle East and Australia and Tata Motors

targeting other Asian and African markets

Technological advancements through joint ventures and acquisitions such as M&M acquiring

70% stakes in Sangyong Motor Company Limited (SYMC) in 2010, JV between Ashok Leyland

and Nissan

Broadening the customer base targeting the rural market in India such as Tata Motors launch

of Nano, GM special focus in improving the rural sales, Ashok Leyland planning to launch the

products compatible with rural India

Exploring for low emission cars powered by renewable or bio-fuels as in case of M&M and

Tata motors

Joint R&D activities with auto component suppliers

Financial Statistics5

The exhibits show the key financial ratios of the passenger cars sector and LCV/HCV sectors of the

Indian automobile industry for the last 10 years. The total sales and YOY growth of all these sectors

combined is also displayed separately.

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The GAGR from Mar-01 to Mar-08 for the Industry is 13.72%. This steady growth is mainly

attributed to the growth in Indian economy and the huge urban market it had.

During FY2008-09 and later part of FY2007-08, the automobile industry was hit by recessionand there is a decrease in total sales of the industry compared to the previous years.

The industry recovered from the slowdown which is evident from the percentage growth in

sales of 33% during FY2009-10. This growth in sales in mainly due to the marketing and

promotional strategy of the industry.

The PAT of the industry reduced from above 5% to 1.83% during recession. As the top line

could not be increased due to recession, most of the companys were involved in cost cutting

to save itself from losses.

Before recession, there was a gradual change in capital structure of the industry for the past

eight years. The industrys dependence on equity has increased which are evident from thedebt to equity ratio. This change was mainly due to the growth in Indian stock market.

The industry has generated and maintained interest among the shareholders. The dividend

ratio on an average is 13% over the past years. Except for the recession period, the industry

has an average of around 20% return on equity.

It can be seen that there is a sudden increase in debt to equity ratio during recession. This is

because that the industry could not sustain itself due to slowdown and had to get financial

help from external resources.

The industry is working with a current ratio of one on an average. This could be attributed to

the lean manufacturing that all the companies are practicing, their control over thesuppliers and better inventory management.

Exhibit: 1 Exhibit: 2

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Exhibit 3

Industrial Statistics

The exhibits show the number of units produced, sales, value of exported units and Herfindahl index

for Medium and Heavy vehicle industry, passenger cars industry and Light commercial vehicle industry for

the past 10 years.

Among these three sectors, on an average 62% of sales is contributed by passenger car industry, 27%

by Medium and Heavy vehicle industry and 11% by LCV industry. The contribution of passenger car

industry to total sales has increased in recent years. This is one of the reasons for many global

players entering into Indian passenger car industry.

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The LCV and MV/HV industry on an average has got 5.5% of their revenue through exports whereas

passenger cars industry export on an average contributes for only 2% of their revenue. These data

shows that Indian automobile industry is mainly dependent on domestic supplies.

Among the three sectors, Medium and Heavy vehicle industry is the worst hit by recession. Its sales

dropped by 28% in 2008-09 compared to previous year.

The competition has increased in all the three sectors which are evident from the decrease in

Herfindahl index over the years.

Exhibit 4 Exhibit 5

Exhibit 6 Exhibit 7

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Below exhibit shows the contribution of raw material, employee cost and total expenditure as a percentage

of sales.

Raw material is the main constituent of cost of unit. It contributes around 71% of total sales of

LCV/HCV industry and 76% of sales of passenger cars industry. This is one of the reasons for

value addition/value engineering (VA/VE) projects being given more importance in automobile

industry. The success of VA/VE projects is evident from the reduction of raw material as a

percentage of sales in passenger car industry. It was reduced from 80% in 2001 to 70% by 2007.Then because of the steep rise in price of steel and other raw material in 2008, the raw

material as a percentage of sales increased again.

The employee cost as a percentage of sales has decreased for automobile industry during

past 10 years. This percentage has decreased from 9.8% in 2001 to 5.9% in 2010 for LCV/HCV

industry and from 4% in 2001 to 2% in 2010 for passenger car industry. This decrease in

employee cost as a percentage of sales is attributed to various measures taken by the

automobile companies to increase its production efficiency. The industrial engineering

department has played an important role in companies to achieve increase in productivity by

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implementing some advanced production techniques, total quality management, kaizen and

other manufacturing techniques to improve productivity.

The total expenditure as a percentage of sales has decreased from 97% to 94% in the past 10years. As explained earlier, this decrease in percentage is due to decrease in raw material

cost and employee cost of the industry.

Exhibit 8

Key domestic players

The exhibit below shows the market share of key players of MUV & HCV, LCV and passenger car

sector for the past 10 years.

Exhibit9 Exhibit 10

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Exhibit 11

Medium and Heavy Utility Vehicle:

TATA motors is the market leader in this sector with a market share of 55.5% on March 2009. Ashok

Leyland is the second key player with market share of 27%. Eicher motor has a market share of 3%. There is a

decrease in market share of all the three key players in recent years. This is because of new entrants in thesector. M&M combined with Navistar Ltd (USA) to enter this sector and has a market share of 2.5% in March

2009. V E commercial vehicle which recently entered the market has captured 4.3% of market in a single

year.

Light Commercial Vehicle:

In LCV sector, TATA motors is the market leader with a market share of 52.37% followed by M&M

with share of 29.26%. There are new entrants to this sector in recent years. BMW India Pvt. recently started

their operations in LCV sector and has captured a market share of 9% within two years. V E commercial

vehicle has also entered LCV sector last year.

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Passenger Cars:

Passenger car sector in India is one of the industries with intense competition. With many big players

already involved, new global players are planning to enter the industry. Maruti Suzuki is the market leaderwith a market share of 38% followed by Hyundai with a market share of 30%. TATA motors and Honda Siel

Cars are also key players in this sector with a market share of 13% and 7.5 percent respectively.

International Players in Indian Market6

Many big players are entering the Indian market making the competition even more intense. The

European and American companies have predominantly captured the global automotive markets. The

companies of the likes of Toyota, General Motors, Volkswagen, Ford, Fiat, Daimler, Chrysler and BMW have

been on the top of the list for a while.8

Earlier most of their major operations where targeted towards European and American countries but

during recession they have faced huge slump in demand. Two of the big three auto makers have filed for

bankruptcy during recession. India and China turned out to be the first few countries overcoming recession

and reaching the double figure growth rate yet again. The big players are now targeting these countries and

making huge investments to make a dent in the market. In the recent years many big automobile players

have been making huge investments and also using India as their operational base to export vehicles to

different companies gaining cost advantages from the low cost labor and steel availability.

Toyota who has already invested Rs 3200 crore for setting up of its second small car manufacturing

plant is looking for land to go for further expansion of its operations in India.9

On the other hand GM is planning to invest $500 million to expand its operations in India over the next 12

months period.

Ford is already in process of expansion for its new plant and making plans for further expansion of its

production capacity.

Volkswagen is carrying out its investment strategy of about INR 3800 crore in India.10

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Source: http://oica.net/wp-content/uploads/ranking-2009.pdf

Regulations and Policies7

During and after the recession Indian government has extended its support for the Indian automotive

industry through various measures such as reduction in export tariffs, financial assistance, partnering with

Indian companies for research activities. This section will describe the various regulations and policies which

are conclusive to the growth or decline of this industry. Government played an important role in the

development of Indian automotive sector in many ways:

Reduction of export tariffs to enhance exports

Automotive Plan 2006-2016 with the intent of making India a manufacturing hub in the globalautomotive market space

Setting up of NATRiP for developing world class testing, homologation and certification facilities

Adaptation of Euro 3 emission norms considering the environmental and safety standards

Alignment of safety regulations with Economic Commission for Europe (ECE) regulation

Reduction in Central Sales Tax from 4% to 3%

The excise duty on passenger cars has been reduced from 66% in 1992 to 24% in 2009

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Going for green initiative for developing fuel efficient vehicles as evident from the M&M investment

in sustainable mobility initiative and acquisition of major stakes in Reva Electric Car Co Ltd. in 2010,

Tatas R&D investments for the development of fuel efficient commercial vehicles in India

Launching range of products in smaller time frame has been seen as the most commonly adopted

strategy among the leading auto players. M&M planning to launch 7 new products in a span of 15-18

months, Ashok Leyland launched about 10 models of tippers and tractor trailers, GM planning to

launch six new vehicles in 2011, Renault planning to launch five cars between 2011-13.

References:

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1. http://www.ficci-b2b.com/sector-overview-pdf/sector-automotive.pdf

http://www.asci.org.in/journals/v22/Indian_Automobile_Industry.pdf

http://www.tradechakra.com/indian-economy/industries/automobile-industry.html

2.http://trak.in/tags/business/2007/06/06/indian-automotive-industry-the-sector-that-is-creating-waves-globally/http://www.automotiveuniverse.net/reports/indiaanalysis.pdf

3. http://www.rushlane.com/india-is-worlds-7th-largest-vehicle-manufacturer-%E2%80%93-government-of-india-127915.html

4.http://www.2indya.com/2010/05/26/automobile-industry-in-india/http://elib.kkf.hu/edip/D_14581.pdf

http://www.bizresearchpapers.com/26.%20SturatOrr-FINAL.pdf

5.http://www.autofocusasia.com/management/indian_automotive_industry.htmhttp://www.dsir.gov.in/reports/ittp_sme/AutoCompReport.pdf

http://www.autofocusasia.com/automotive_components/interview_auto_components.htm

http://acmainfo.com/docmgr/Status_of_Auto_Industry/Status_Indian_Auto_Industry.pdf

6.http://top-10-list.org/2010/09/19/top-ten-automakers-2010/

7.http://www.global-innovation.net/publications/PDF/Working_Paper_57.pdfhttp://www.siamindia.com/

8.http://top-10-list.org/2010/09/19/top-ten-automakers-2010/

9. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aRfqFMhlj5lk

http://www.imap.com/imap/media/resources/AutoIndustryReport_WEB_0E7D3D1839347.pdf

http://www.bsmotoring.com/news/toyota-seeks-land-for-expansion/2301/1

10.http://www.cardekho.com/india-car-news/Ford-India-expansion-plans-281.htmhttp://www.thehindubusinessline.com/2010/10/29/stories/2010102952110300.htm

http://www.cartradeindia.com/car-bike-news/volkswagen-india-marks-the-roll-out-of-the-10+000th-car-from-its-chakan-plant-112565.html

Exhibits:

1. Data collected from CapitalNeoline Database

2. Data collected from EIS Database

3. Data collected from CapitalNeoline Database





8. Data compiled with the help of Aggregated Balance sheet and P&L collected from CapitalNeoline Database

9. Data collected from EIS Database10. Data collected from EIS Database


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