Where’s the auto industry headed?

The global auto industry is witnessing a two-speed world. The triad of the US, western Europe and Japan is experiencing volatile growth, with volumes still below 2008 pre-crisis levels. Emerging markets are providing impetus to automotive volumes, with China, Brazil and India recording double-digit growth rates in the previous years.

The importance of the Indian auto market is well established, with almost all leading auto firms across segments now having established a presence. It’s become one of the leading small car markets, with several players having established India as a global hub for small car production. Global centres in sourcing and R&D are also present, though in some cases they have not reached their full potential.

The fundamental trends for the domestic market—income movement, low penetration, rising mobility needs, etc.—remain steady and are expected to continue to drive strong growth in the local market. It is expected, for instance, that the passenger car market from 3 million units in 2011 will reach 9 million units in 2020, continuing to show double-digit growth. This growth envisages a capital expansion of over $10 billion across the value chain.

As we reflect on the future direction of the auto industry, let me describe five probable themes:

Incumbents versus challengers

Over the last decade, market structure and leadership positions across all auto segments—passenger cars, commercial vehicles, two-wheelers—has remained relatively constant. Today, we are at interesting point of time where over the next five years these strongholds will get severely challenged.

Maruti Suzuki, which so far was relatively insulated in the small car segment, is faced with increasing competition from Hyundai (Eon) and the new Toyota and Honda small car launches.

Tata Motors​ in the commercial vehicle segment is faced with a flood of international firms such as from Daimler, Navistar and Volvo, which aim to create a so-called modern truck segment and shift the market towards a superior TCO (Total Cost of Ownership) proposition. In two-wheelers, Hero MotoCorp will face attack from Honda in its independent avatar through HMSI and a resurgent Bajaj, which would attempt to reclaim its earlier market leadership position. These battles will form the pivot around which some of these segments would see shifts in market structure, creating spaces for new companies and new leaders.

Profits from passenger cars

In the passenger car market, the top three firms constitute 80% of the market and about 12 companies constitute the remaining 20%. While the high intensity of product launches and increasing micro-segmentation of the market had led to high double-digit growth, several companies have not experienced commensurate returns along with this growth cycle.

The stated capacity expansions will add a further 3 million units to the existing capacity, which currently is at 4 million units, creating further pressure on margins.

As market reaches so-called hyper-competition with several of the late entrants attempting to reach 5-10%+ market shares, the profit pool in this industry is expected to further get squeezed and will force several auto makers to question the India business case. We should expect some market structure consolidation and select exits, and equally important, a sharper focus on defining brand identities and target segmentation.

Rise of the modern truck

Taking a drive from Delhi towards Rajasthan, when one is moving up the hills, one often encounters trucks struggling to make the climb. The picture is of an overloaded truck, relatively underpowered for the new infrastructure that has been created over the past decade.

Over the coming years, this image will change. We will increasingly see trucks which have a higher power and top speed and offer a superior TCO proposition to the existing fleet operators. Both new entrants such as Daimler (BharatBenz) as well as the incumbents such Tata Motors (Prima) are launching a slew of products in this category.

This shift as it comes about will bring a change to the logistics landscape and go one further step in reducing the turnaround times, and potentially saving on transactions costs and easing supply-side bottlenecks.

If further initiatives, which have been on the legislative table, such as the commercial fleet renewal programme, were to be implemented, this pace of change would be significantly accelerated.

Two-wheeler champions

The global two-wheeler market represents an interesting landscape. The big markets outside India are Southeast Asia, Latin America, and increasingly, parts of Africa are seeing tremendous growth. Europe is much more typical of a cottage industry, where the primary purpose remains recreation as opposed to commuting in emerging markets.

The market is dominated in most countries with the Japanese, with Indian firms such as Bajaj, TVS, and in the coming years, Hero MotoCorp, experiencing strong growth. China represents a weaker competitor, given lower level of regulations, a ban on petrol products in major cities and the fragmented nature of competition in the local market.

This is one of the few industries where Indian companies are structurally positioned extremely well. They have significant scale, low-cost product development and operations capabilities and products that have absorbed the latest technologies.

In several markets, one will see a clash between Japanese and Indian firms in almost a parallel of what happened over 50 years ago in Europe as the Japanese original equipment makers took over the mass bike product category from European manufacturers.

Urban impact

Over the last 20 years, India has steadily experienced urbanization. However, there is a catch. India’s urbanization rate remains slow (0.9% versus China at 2.8%), and more importantly, the growth continues to be centred on larger economic centres (over the last decade, seven out of the top 10 districts by GDP growth were around large cities), unlike China, where the growth spread from the coast to the hinterland and there are now over 200 cities with over a 1 million population (compared with 40 for India).

The implication of this bipolar urbanization pattern is two-fold. One, the presence of emerging cities with population less than a 1 million people but with high average income levels, which will require firms to spot these opportunities, penetrate deeper with sales and service infrastructure and given the scale rethink the cost structure of the operating model. Two, the mega cities and their suburban districts will still remain strong growth centres, the challenge we will face is of severe congestion, and this may spark regulatory moves around congestion tax, limited registration and increasing taxes. In particular as public transport in the form of metro services get established in our leading cities. The five themes are quite varied in their description and impact, and point to the underlying strength of the automotive business in India and a reminder for more exciting times ahead in the future of the industry.