Automobiles

Executive Summary

The industry is highly capital intensive in nature. Though three-wheelers and tractors have low barriers to entry in terms of technology, other segments are capital and technology intensive. Costs involved in branding, distribution network and spare parts availability increase entry barriers.

The industry has a high fixed cost component. This is the key reason why operating efficiency through increased localization of components and maximizing output per employee is of significance.

While volumes remained low during the first half of the year, they picked up in the second half with motorcycles accounting for bulk of the sales. Strong economic growth and attractive finance schemes continued to drive volumes.

Domestic manufacturers acting as a global hub for exports of certain products is gaining acceptance. Passenger car exports have grown at a healthy CAGR of 38% in the last five years. Though exports are not necessarily lucrative, it will enable domestic players to increase exposure and maintain capacity utilisation at a healthy level.

Analysts expect Indian auto majors to increase capital expenditure budget at an average of 4%-5% of revenues in 2005 as against around 2%-3% historically. This would be towards product development and complying with new environmental regulations.

Overview

Demand is linked to economic growth and rise in income levels. To highlight the co-relation, while GNP per capita (gross national product) grew at a CAGR of 11% between FY71-FY01, passenger car production increased by 9%. Per capita penetration across all categories is among the lowest in the world (including other developing economies like Pakistan in segments like cars).

The industry is highly capital intensive in nature. Though three-wheelers and tractors have low barriers to entry in terms of technology, other segments are capital and technology intensive. Costs involved in branding, distribution network and spare parts availability increase entry barriers. With the Indian market moving towards complying with global standards, capital expenditure will rise to attune to future safety regulations.

The industry is highly fragmented in nature. In the last ten years, supply has outstripped demand, as multinationals and domestic players have set up large-scale manufacturing facilities to meet future needs. As a result, there is an absence of pricing power with manufacturers. Competition is expected to increase further, as global majors are planning to enter India either through direct investment or imports.

Automobile majors increase profitability by selling more units. As number of units sold increases, average cost of selling incremental unit comes down when demand recovers. This is because the industry has a high fixed cost component. This is the key reason why operating efficiency through increased localization of components and maximizing output per employee is of significance.

Key Players (Indian)

Ashok Leyland Limited

Atul Auto Limited

Bajaj Auto Limited

Bajaj Tempo Limited

Eicher Limited

Eicher Motors Limited

Escorts Limited

Hero Honda Motors Limited

Hindustan Motors Limited

Hira Automobiles Limited

Kinetic Engineering Limited

Kinetic Motor Company Limited

L M L Limited

Maestro Motors Limited

Maharashtra Scooters Limited

Mahindra & Mahindra Limited

Majestic Auto Limited

Maruti Udyog Limited

Punjab Tractors Limited

Sai Service Station Limited

Scooters India Limited

Sunku Auto Limited

Swaraj Mazda Limited

T V S Motor Company Limited

Tata Motors Limited

V C C L Limited

V S T Tillers Tractors Limited

Current Trends

While volumes remained low during the first half of the year, they picked up in the second half with motorcycles accounting for bulk of the sales. Strong economic growth and attractive finance schemes continued to drive volumes.

Motorcycles -Volume growth: 17.2%

Continues to eat into the market share of geared scooters, mopeds and step-thrus. Slew of new model launches, attractive finance schemes and price discounts resulted in this segment increasing its share in the two-wheeler sector to 78% in FY04 (74% in FY03). Hero Honda regained its market share from rivals such as Bajaj Auto and TVS courtesy its two new variants in the executive segment in the latter half of year.

Scooters (geared & ungeared)Volume growth: 9.3%

After four lackluster years, the segment finally saw a robust volume growth of 9%, led mainly by growth in ungeared scooter segment. With lot of sophisticated models on offer, this segment has emerged as the second most attractive segment among all two-wheelers.

Mopeds Volume growth: -8.6%

Manufacturers shifted focus from this segment realising its limited growth potential. TVS continued to be the dominant player.

Three wheelers Volume growth: 22.5%

Has seen a sharp spurt in 2004 on the back of increased demand for six-seaters and goods carrier segment. The three-seater segment is dominated by Bajaj Auto with more than 80% share. Bajaj also launched LPG based models in 2003.

M/HCVs Volume growth: 39.7%

For third year in a row, the segmented notched up robust growth in volumes. Within segment, Tractor-Trailer recorded highest growth of nearly 140%. Persistent availability of freight and low cost retail finance continued to provide growth momentum.

LCVs Volume growth: 32.4%

After witnessing a significant fall in volumes in the 1990s, the segment recorded second straight year of strong growth. Factors that contributed to the HCV segment growth also helped the LCV growth momentum.

Tractors Volume growth: 10.0%

After witnessing 12% fall in volumes in FY03, tractor demand picked up on the back of good monsoons and registered a growth of 10%, its first in four years. Inventory with the dealers also fell down drastically. However, capacity utilisation still continues to remain low.

Utility Vehicles Volume growth: 24.5%

2004 saw strong demand from both rural as well as urban areas, thus resulting in a healthy growth of 25%. While M&M continued to lead the segment, it lost marginal market share to Tata Motors, that gained ground on the back of new variants of Sumo and Safari.

Passenger Cars Volume growth: 34.3%

Helped by strong 78% growth in exports, passenger cars witnessed 34% growth in sales. Domestic demand also remained robust and grew by 29%. Attractive finance schemes and strong growth in the economy continued to drive the demand.

People Challenges

Managing Teams: The Automobile industry requires interacting with a lot partners in the manufacturing and distribution field. This includes managing vendors and distributors. Managing external partners and stakeholders is critical for the auto industry.

Leadership: Increasingly companies in the auto sector will look at employees providing leadership at all levels to face off competition and when the market plateaus after the surge in growth rates.

Innovation: Will be the name of the game as the industry faces up to increased competition, plateauing growth rates and threatening fuel prices. Innovation will drive profitability and constant revenue growth.

People & Business Skills Inventory

Based on the trends and the outlook of the pharmaceutical sector, the people and business skill inventory (apart from product knowledge) looks like

1. Communication / Presentations

2. Sales (generic/solution selling)

3. Leadership
a. Innovation
b. Motivation
c. Managing teams / conflict
d. Managing relationships

4. Customer service

5. Change Management

Outlook

The government spending on infrastructure in roads and airports and higher GDP growth in the future could benefit the auto sector in general. This combined with a softer interest rate environment will play a vital role in providing a fillip to demand. Industry experts foresee a slew of launches in the Segment 'B' of passenger cars. Utility vehicle segment is expected to grow at around 8% in 2005.

In the two-wheeler sector, motorcycle segment is expected to witness a flurry of new model launches that will result in fragmentation of market share. Though the market size is expected to grow by 12% -15%, competitive pressure could keep prices and margins under control. While geared scooter and moped segments could see a fall in volumes, TVS, Honda and Kinetic are poised to benefit from higher demand for ungeared scooters in the urban market.

After three years in the wilderness, tractor industry seems to have finally come out of the trough as it grew by 10% during 2004. While good monsoon is a positive for the sector, given the fact that the country has had erratic rainfall in the past, volumes may not recover sharply. But the longer-term picture is impressive in light of poor mechanisation levels in the country.

With an estimated 39% of CVs plying on the roads 10 years old, demand for HCVs is expected to grow by 8% in FY05. Also adding the positives are higher crop output, industrial sector growth and favorable interest rate environment. While the industry is cyclical in nature, we expect this factor to weaken in the medium term arising out of structural changes in the industry. The privatization of select state transport undertakings and hiking of bus fares bodes well for the bus segment as well.

The reduction in peak customs duty from 30% to 25% in the budget will result in savings on the raw material front as well. Since raw material costs account for almost 50% of revenues of auto companies in general, this is a positive. Also, steel prices have shown some signs of softening and this is likely to have a positive impact on the margins of the players.

Analysts expect Indian auto majors to increase capital expenditure budget at an average of 4%-5% of revenues in 2005 as against around 2%-3% historically. This would be towards product development and complying with new environmental regulations. With MNCs willing to sacrifice profitability for growth in the short-term, it has become imperative for domestic players to spruce up R&D efforts. At the same time, cash flow position is much stronger now given that most manufacturers have reduced working capital and debt. This would mean financing bulk of incremental capex from internal accruals.

Domestic manufacturers acting as a global hub for exports of certain products is also gaining acceptance. Passenger car exports have grown at a healthy CAGR of 38% in the last five years. Tata Motors, Bajaj Auto and Maruti have met with success in the past. Though exports are not necessarily lucrative, it will enable domestic players to increase exposure and maintain capacity utilisation at a healthy level.